UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO.2
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
Commission File No. 333-67232
XFONE, INC.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
11-3618510
(I.R.S. Employer Identification Number)
960 High Road
London, United Kingdom N12 9RY
(Address of principal executive offices) (Zip Code)
011.44.2084469494
(Registrant's telephone number, including area code)
Registrant has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months and has been
subject to such filing requirements for the past 90 days.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practical date:
On June 30, 2003, the issuer had 5,101,154 shares of common stock outstanding,
no par value per share.
Xfone, Inc. and Subsidiary
FORM 10-QSB/A
QUARTERLY PERIOD ENDED JUNE 30, 2003
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance Sheets As of June 30, 2003 (Unaudited)
and as of December 31, 2002......................................5 - 6
Statements of Operations (Unaudited) for the Three Months
Ended June 30, 2003 and Year end at December 31, 2002.............7
Statement of Changes in Shareholders' Equity For the Three
Months Ended June 30, 2003........................................8
Statements of Cash Flow (Unaudited) For the Three Months
Ended June 30, 2003 and Year end at December 31, 2002...........9 - 10
Notes to Consolidated Financial Statements.......................11 - 23
Item 2 - Management's Discussion and Analysis and Plan of
Operations.......................................................24
Item 3 - Controls and Procedures...................................27
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.........................................28
Item 2 - Changes in Securities and Use of Proceeds.................28
Item 3 - Default Upon Senior Securities............................28
Item 4 - Submission of Matters to a Vote of Security Holders.......28
Item 5 - Other Information.........................................28
Item 6 - Exhibits and Reports on Form 8-K..........................29
Signatures.........................................................30
2
PART I - FINANCIAL INFORMATION
Forward-Looking Statements
This quarterly report for the period ended June 30, 2003 on Form 10-QSB/A
contains forward looking statements. The words or phrases "would be," "will
allow," "intends to," "will likely result," "are expected to," "will continue,"
"is anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements". Actual results could differ materially
from those projected in the forward looking statements as a result of a number
of risks and uncertainties. Statements made herein are as of the date of the
filing of this Form 10-QSB with the Securities and Exchange Commission and
should not be relied upon as of any subsequent date. Unless otherwise required
by applicable law, we do not undertake, and we specifically disclaim any
obligation, to update any forward-looking statements to reflect occurrences,
developments, unanticipated events or circumstances after the date of such
statement.
3
FINANCIAL REPORTS
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiary
--------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
as of June 30, 2003
4
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiary
--------------------------------------------------------------------------------
BALANCE SHEET
June December June December
2003 2002 2003 2002
(Unaudited) (Unaudited)
----------- ----------- ----------- ------------
Convenience translation
into U.S.$
------------------------
Current assets
Cash £ 747,775 £ 471,963 $ 1,233,829 $ 755,141
Accounts receivable, net 1,086,645 960,729 1,792,964 1,537,166
Prepaid expenses and other
receivables (Note 4) 176,088 180,585 290,545 288,936
Loan to shareholder (Note 5) 63,924 45,558 105,475 72,893
Total Current Assets 2,074,432 1,658,835 3,422,813 2,654,136
----------- ----------- ----------- -----------
Loan to shareholder (Note 5) 232,666 257,572 383,899 412,115
----------- ----------- ----------- -----------
Investments (Note 6) 515 515 850 824
Fixed assets (Note 6)
Cost 738,892 559,471 1,219,172 895,154
Less - accumulated depreciation -345,087 (306,577) -569,394 -490,523
----------- ----------- ----------- -----------
Total fixed assets 394,320 253,409 650,627 405,454
----------- ----------- ----------- -----------
Total assets £ 2,701,418 £ 2,169,816 $ 4,457,339 $ 3,471,706
=========== =========== =========== ===========
5
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiary
--------------------------------------------------------------------------------
BALANCE SHEET
June December June December
2003 2002 2003 2002
(Unaudited) (Unaudited)
----------- ----------- ----------- ------------
Convenience translation
into U.S.$
------------------------
Current liabilities
Dividend payable £ - £ 63,261 $ 0 $ 101,218
Notes payable - current
portion (Note 8) 4,000 4,000 6,600 6,400
Trade payables 1,473,746 1,176,183 2,431,682 1,881,893
Other liabilities and accrued
expenses (Note 7) 219,699 197,053 362,503 315,285
Obligations under capital
leases - current portion 62,204 21,530 102,637 34,448
----------- ----------- ----------- ------------
Total current liabilities 1,759,650 1,462,027 2,903,423 2,339,243
Deferred taxes 25,000 25,000 41,250 40,000
Notes payable (Note 8) 5,166 7,167 8,525 11,467
Obligation under capital lease 88,136 34,026 145,425 54,442
----------- ----------- ----------- ------------
Total liabilities 1,877,952 1,528,220 3,098,622 2,445,152
----------- ----------- ----------- ------------
Shareholders' equity (Note 9)
Preferred stock - 50,000,000
shares authorised, none issued
Common stock:
25,000,000 shares authorised,
£.0006896 par value;
5,101,154 issued and
outstanding 3,518 3,490 5,803 5,584
Contributions in excess
of shares 189,526 180,219 312,718 288,350
Receipt on account of shares 0 0
Retained earnings 630,422 457,887 1,040,196 732,619
----------- ----------- ----------- ------------
Total shareholders' equity 823,466 641,596 1,358,717 1,026,554
----------- ----------- ----------- ------------
Total liabilities and
shareholders' equity £ 2,701,418 £ 2,169,816 $ 4,457,339 $ 3,471,706
=========== =========== =========== ============
6
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiary
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Six Months Three Months Six Months Three Months Year Ended
Jun-03 Jun-03 Jun-02 Jun-02 Dec-02
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------ ------------
Revenues £ 2,485,609 £ 1,410,947 £ 1,719,290 £ 805,370 £ 3,761,147
Cost of revenues - 1,430,717 - 856,742 - 1,044,177 - 469,995 - 2,194,792
------------ ------------ ------------ ------------ ------------
Gross profit 1,054,892 554,205 675,113 335,375 1,566,355
------------ ------------ ------------ ------------ ------------
Operating expenses: (Note 13)
Research and development - 19,000 - 10,000 - 15,000 - 7,500 - 32,000
Marketing and selling - 449,523 - 211,616 - 98,436 - 37,988 - 320,418
General and administrative - 366,170 - 214,563 - 363,803 - 192,722 - 878,335
------------ ------------ ------------ ------------ ------------
Total operating expenses - 834,693 - 436,180 - 477,239 - 238,210 - 1,230,753
------------ ------------ ------------ ------------ ------------
Operating profit 220,199 118,025 197,874 97,165 335,602
Financing expenses - net
(Note 13) - 10,864 - 3,509 - 19,118 - 8,752 - 12,837
Other income 200 - 2,954 4,925 3,652 11,029
------------ ------------ ------------ ------------ ------------
Income before taxes 209,535 111,562 183,681 92,065 333,794
Taxes on income - 37,000 - 20,000 - 45,920 - 23,016 - 92,813
------------ ------------ ------------ ------------ ------------
Net income £ 172,535 £ 91,562 £ 137,761 £ 69,049 £ 240,981
============ ============ ============ ============ ============
Earnings Per Share:
Basic 0.03 0.01 0.01 0.01 0.05
============ ============ ============ ============ ============
Diluted 0.03 0.01 0.01 0.01 0.04
============ ============ ============ ============ ============
7
Six Months Three Months Six Months Three Months Year Ended
Jun-03 Jun-03 Jun-02 Jun-02 Dec-02
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------ ------------
Convenience translation into U.S.$
------------ ------------ ------------ ------------ ------------
Revenues $ 4,101,255 $ 2,328,063 $ 2,630,514 $ 1,232,216 $ 6,017,835
Cost of revenues - 2,360,684 - 1,413,625 - 1,597,590 - 719,092 - 3,511,667
------------ ------------ ------------ ------------ ------------
Gross profit 1,740,572 914,438 1,032,924 513,124 2,506,168
------------ ------------ ------------ ------------ ------------
Operating expenses: (Note 13)
Research and development - 31,350 - 16,500 - 22,950 - 11,475 - 51,200
Marketing and selling - 741,712 - 349,167 - 150,607 - 58,122 - 512,669
General and administrative - 604,180 - 354,030 - 556,618 - 294,865 - 1,405,336
------------ ------------ ------------ ------------ ------------
Total operating expenses - 1,377,243 - 719,696 - 730,175 - 364,461 - 1,969,205
------------ ------------ ------------ ------------ ------------
Operating profit 363,329 194,742 302,749 148,662 536,963
Financing expenses - net
(Note 13) - 17,926 - 5,790 - 29,250 - 13,391 - 20,539
Other income 330 - 4,874 7,534 5,588 17,646
------------ ------------ ------------ ------------ ------------
Income before taxes 345,733 184,078 281,033 140,860 534,070
Taxes on income - 61,050 - 33,000 - 70,258 - 35,214 - 148,501
------------ ------------ ------------ ------------ ------------
Net income $ 284,683 $ 151,078 $ 210,775 $ 105,645 $ 385,570
============ ============ ============ ============ ============
Earnings Per Share:
Basic $ 0.05 $ 0.02 $ 0.02 $ 0.01 $ 0.08
============ ============ ============ ============ ============
Diluted $ 0.05 $ 0.02 $ 0.02 $ 0.01 $ 0.06
============ ============ ============ ============ ============
7-(continued)
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiary
--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Number of Contributions Total
Ordinary in excess of Retained Shareholders'
Shares Share Capital par value Earnings Equity
---------- ------------- ------------- ---------- -------------
Balance at January 1, 2002 £5,000,000 £3,448 £140,865 £ 280,167 £ 424,480
Issuance of shares 60,889 42 39,354 - 39,396
Net income - - - 240,981 240,981
Dividend payable - 63,261 - 63,261
---------- ------------- ------------- ---------- -------------
Balance at December 31, 2002 £5,060,889 £3,490 £180,219 £ 457,887 £ 641,596
---------- ------------- ------------- ---------- -------------
Balance at January 1, 2003 5,060,889 £3,490 £180,219 £ 457,887 £ 641,596
Issuance of shares 40,265 28 9,307 - 9,335
Net income - - - 172,535 172,535
Dividend payable - -
---------- ------------- ------------- ---------- -------------
Balance at March 31, 2003 £5,101,154 £3,518 £189,526 £ 630,422 £ 823,466
========== ============= ============= ========== =============
Convenience translation into U.S.$:
Balance at January 1, 2003 $5,060,889 $5,759 $297,361 $ 755,514 $ 1,058,633
Issuance of shares 40,265 45 15,357 - 15,357
Net income - - - 284,683 284,683
Change of currency rates - -
Dividend payable - -
---------- ------------- ------------- ---------- -------------
Balance at March 31, 2003 $5,101,154 $5,803 $312,718 $1,040,196 $ 1,358,673
========== ============= ============= ========== =============
8
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiary
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Six months Year Six months Year
Jun-30 Dec-31 Jun-30 Dec-31
2003 2002 2003 2002
Convenience translation into U.S.$
----------------------------------
(Unaudited) (Unaudited)
Cash flow from operating activities
Net income £ 172,535 £ 240,981 $ 284,683 $ 385,570
Adjustments to reconcile net cash -
provided by (used in) operating
activities 196,348 107,169 323,975 171,470
----------- ----------- ----------- -----------
Net cash provided by operating activities 368,883 348,150 608,658 557,040
----------- ----------- ----------- -----------
Cash flow from investing activities
Investments made in year - (515) - - 824
Purchase of equipment -179,421 -152,757 - 296,045 - 244,411
----------- ----------- ----------- -----------
Net cash used in investing activities -179,421 -153,272 - 296,045 - 245,235
----------- ----------- ----------- -----------
Cash flow from financing activities
Repayment of long term debt 52,109 - 9,970 85,981 - 15,952
Proceeds from issuance of long term debt 24,906 - 41,095 -
Proceeds from issuance of common stock 9,335 7,812 15,403 12,499
----------- ----------- ----------- -----------
Net cash provided by financing activities 86,350 - 2,158 142,479 - 3,453
----------- ----------- ----------- -----------
Net increase in cash 275,812 192,720 455,091 308,352
Cash, beginning of year 471,963 279,243 778,739 446,789
----------- ----------- ----------- -----------
Cash at end of year 747,775 471,963 $ 1,233,830 $ 755,141
=========== =========== =========== ===========
9
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiary
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS (Cont.)
(1) Adjustments to reconcile net income to net cash provided by operating
activities
Six months Year Six months Year
Jun-30 Dec-31 Jun-30 Dec-31
2003 2002 2003 2002
Convenience translation into U.S.$
----------------------------------
(Unaudited) (Unaudited)
Depreciation £ 38,511 £ 58,300 $ 63,544 $ 93,280
----------- ----------- ----------- -----------
Stock issued for professional services - 31,546 - 50,474
----------- ----------- ----------- -----------
Changes in assets and liabilities:
(Increase) in trade receivables (125,916) (233,770) - 207,761 - 374,032
(Increase) decrease in other receivables 4,497 (65,570) 7,420 - 104,912
(Increase) in shareholder loans (18,366) (20,783) - 30,304 - 33,253
(decrease ) In Dividend payable (63,261) - 104,381
Increase in trade payables 297,563 214,607 490,979 343,371
(Decrease) in other payables 63,320 117,839 104,478 188,542
Increase in deferred taxes 5,000 - 8,000
----------- ----------- ----------- -----------
Total adjustments 157,837 17,323 260,431 27,717
----------- ----------- ----------- -----------
£ 196,348 £ 107,169 $ 323,975 $ 171,470
=========== =========== =========== ===========
10
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiary
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organisation and Nature of Business
A. Xfone, Inc. ("Xfone") was incorporated in Nevada, U.S.A. in September,
2000 and is a provider of long distance voice and data
telecommunications services, primarily in the United Kingdom. The
financial statements consolidate the operations of Xfone and Swiftnet
Limited. ("Swiftnet") (the "Predecessor"), its wholly owned U.K.
subsidiary, (collectively the "Company") from January 1, 2000 through
December 31, 2002 (see Note 3).
B. The financial statements of the company have been prepared in Sterling
("£") since this is the currency of the prime economic environment, the
U.K., in which the operations of the Company are conducted.
Transactions and balances denominated in Sterling are presented at
their original amounts. Transactions and balances in other currencies
are translated into Sterling in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 52 of the U.S. Financial Accounting
Standards Board ("FASB"). Accordingly, items have been translated as
follows: Monetary items - at the exchange rate effective at the
balance sheet date. Revenues and expense items - at the exchange rates
in effect at the date of recognition of those items. Exchange gains
and losses from the aforementioned translation are included in
financing expenses, net.
C. The financial statements have been translated into U.S. dollars using
the rate of exchange of the U.S. dollar at December 31, 2002. The
translation was made solely for the convenience of the readers. It
should be noted that the £ figures do not necessarily represent the
current cost amounts of the various elements presented and that the
translated U.S. dollars figures should not be construed as a
representation that the £ currency amounts actually represented, or
could be converted into, U.S. dollars. The representative rate of
exchange of the £ at December 31, 2002 was £1 = 1.60 U.S.$ and 1.65 at
June 30, 2003.
11
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiary
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 2 - Significant Accounting Policies
The financial statements are prepared in accordance with generally accepted
accounting principles in the United States. The significant accounting
policies followed in the preparation of the financial statements, applied
on a consistent basis, are as follows:
A. Principles of Consolidation and Basis of Financial Statement
Presentation - The consolidated financial statements have been
prepared in conformity with accounting principles generally accepted
in the United States of America (GAAP) and include the accounts of the
Company and its wholly-owned subsidiary. All significant inter-company
balances and transactions have been eliminated in consolidation.
B. Allowance for Doubtful Accounts
The allowance is determined based upon management's evaluation of
receivables doubtful of collection on a specific basis. Such
allowances for doubtful accounts are as follows:
£
December 31, 2002 190,550
June 30, 2003 51,274
C. Equipment
Equipment is stated at cost. Depreciation is calculated by the
declining balance method over the estimated useful lives of the
assets. Annual rates of depreciation are as follows.
Method Useful Life
Switching equipment straight line 10 years
Machinery and equipment reducing balance 4 years
Furniture and fixtures reducing balance 4 years
Motor vehicles reducing balance 4 years
D. Revenue Recognition
The Company's source of revenues results from charges to customers for
the call minutes they use while on the Company's telecommunications
system. Such revenues are recognized at the time this service is
rendered.
12
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiary
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 2 - Significant Accounting Policies (Cont.)
E. Revenue Recognition (cont.)
Management believes that the Company's revenue recognition policies
are in accordance with the Securities and Exchange Commission Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101).
F. Use of Estimated
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reports amounts of revenues
and expenses during the reported period. Actual results could differ
from those estimates.
G. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143 "Accounting For Asset Retirement Obligations2 which
addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs; SFAS No. 141 "Business
Combinations", which addresses the financial accounting and reporting
for business combinations; SFAS No. 142 "Goodwill and Other Intangible
Assets", which addresses the financial accounting and reporting of
acquired goodwill and other intangible assets. In August 2001, the
FASB issued SFAS No. 144 "Accounting for the Impairment of Disposal of
Long-Lived Assets" which addresses financial accounting and reporting
for the impairment of long-lived assets. The adoption of these
statements are not expected to have a material effect on the Company's
financial condition, results of operations or cash flows.
H. Earnings Per Share
Earnings per share are calculated and reported in accordance with
Statement of Financial Accounting Standards No. 128, Earning Per Share
("EPS") ("SFAS 128"). Basic EPS is computed by dividing income
available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock
that then shared in the earnings of the entity.
13
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiary
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 2 - Significant Accounting Policies (Cont.)
I. Income Taxes
Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109, "Accounting forIncome Taxes," which is an asset
and liability approach that requires the recognition of deferred tax
assets for the expected future tax consequences of events that have
been recognized in the Company's financial statements or tax returns.
Note 3 - Pooling of Interests
On October 4, 2000 Xfone acquired Swiftnet Ltd. ("Swiftnet") in a
business combination accounted for as a pooling of interests.
Swiftnet, which engages in the telecommunications industry, became a
wholly owned subsidiary of Xfone through the exchange of 2,400,000
shares of the company's common stock for all of the outstanding stock
of Swiftnet. From September 7, 2000, date of formation, through
October 4, 2000, date of combination, the Company had minimal
operating activity. The accompanying financial statements for 2000 are
based on the assumption that the companies were combined for the full
year and financial statements of prior years have been restated to
give effect to the combination.
14
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 4 - Prepaid Expenses and Other Receivables
June 30, June 30,
--------------- ---------------
2003 2003
--------------- ---------------
Convenience
translation
into US$
---------------
Due from Swiftglobal, Ltd. (non-affiliated entity) 50,275 82,953
Other prepaid expenses 62,557 103,220
Due from Story Ltd (affiliated entity) 28,736 47,415
Others receivables 34,519 56,957
--------------- ---------------
£176,088 $290,545
=============== ===============
Note 5 - Loan to Shareholders
The Company has a non-interest bearing demand loan of £63,924 due
from a shareholder, our chairman of the board Mr. Abraham Keinan. In
addition, the Company has a non-interest bearing loan of £232,666
due from such shareholders which has been classified as due in over
one year.
15
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
June 30, June 30,
--------------- ---------------
2003 2003
--------------- ---------------
Convenience
translation
into US$
---------------
Cost
Machinery and equipment £312,156 $515,057
Office furniture and equipment 68,083 112,336
Motor vehicle 27,500 45,375
Development costs 32,060 52,900
Property held under capital lease -
Switching equipment 299,093 493,503
--------------- ---------------
£738,892 $1,219,172
=============== ===============
Accumulated Depreciation
Machinery and equipment 219,482 362,142
Office furniture and equipment 48,935 80,744
Motor vehicle 27,500 45,376
Development costs 12,023 19,838
Property held under capital lease -
Switching equipment 37,147 61,294
--------------- ---------------
£345,087 $569,394
=============== ===============
Note 6 - Investments
Holdings of more than 20%
The company holds more than 20% of the share capital of the following companies:
Company Country of Incorporation Class Shares held %
Auracall Limited England and Wales Ordinary 47
Story Telecom Limited England and Wales Ordinary 40
16
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
June 30, June 30,
--------------- ---------------
2003 2003
--------------- ---------------
Convenience
translation
into US$
---------------
Note 7 - Other Liabilities and Accrued Expenses
Corporate taxes £105,000 $173,250
Professional fees 43,050 71,033
Payroll and other taxes 50,941 84,052
Others 20,708 34,168
--------------- ---------------
£219,699 $362,503
=============== ===============
Note 8 - Notes Payable
June 30, June 30,
--------------- ---------------
2003 2003
--------------- ---------------
Convenience
translation
into US$
---------------
First National Finance - maturity 2005, annual
interest rate 7.16% £5,000 $8,250
Newcourt - maturity 2005, annual interest
rate 7.16% 4,167 6,875
--------------- ---------------
9,167 15,125
Less: current portion -4,000 -6,600
--------------- ---------------
Notes payable - non current £5,167 $8,525
=============== ===============
17
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 8 - Notes Payable (cont.)
B. Maturities of notes payable are as follows
Convenience
translation
into U.S.$
-----------
June 30
Year 1 £4,000 $6,600
Year 2 1,166 1,924
----------- -----------
£5,166 $8,524
=========== ===========
Note 8 - Capital Lease Obligations
The Company is the lessee of switching equipment under capital leases
expiring in various years through 2005. The assets and liabilities
under capital leases are recorded at the lower of the present value of
the minimum lease payments or the fair value of the asset. The assets
are depreciated over their estimated productive lives. Depreciation of
assets under capital leases is included in depreciation expenses for
2003.
Minimum future lease payments under capital leases as of June 30,
2003 for each of the next five years are:
Convenience
translation
into U.S.$
-----------
June 30
Year 1 £62,204 $102,637
Year 2 62,204 102,637
Year 3 25,932 42,788
----------- -----------
Total minimum lease payments 150,340 248,061
Less: amount representing interest (16,398) -27,057
----------- -----------
Present value of net minimum
lease payment £133,942 $221,004
=========== ===========
Interest rates on capitalized leases vary up to 9.6%
18
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 10 - Income Taxes
The Company accounts for income taxes under the provisions of SFAS
109. SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences between the
financial statement and tax basis of assets and liabilities, and for
the expected future tax benefit to be derived from tax loss and tax
credit carryforward. SFAS 109, additionally requires the establishment
of a valuation allowance to reflect the likelihood of realization of
deferred tax assets.
The following table reflects the Company's deferred tax assets and
(liabilities) at June 30, 2003:
Convenience
translation
into U.S.$
-------------
Accelerated tax writeoff of fixed assets £25,000 $41,250
------------ -------------
Net deferred liability £25,000 $41,250
============ =============
19
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiary
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 11 - Capital Structure
Campbeltown Business Ltd., a shareholder, has the option from the
Company and one of its directors to purchase 500,000 additional shares
of Xfone for the amount of $200,000. This transaction can be executed
either by Xfone issuing new shares, or by the director selling his
private shares as long as he has an adequate amount of shares, as the
director will decide. This option will expire on December 31, 2005.
The holders of common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders.
The common stock has no pre-emptive or conversion rights or other
subscription rights. There are no sinking fund provisions applicable
to the common stock.
During November 2001, the Company issued 105,000 shares of common
stock to its attorneys as compensation for services rendered in
connection with the successful initial registration and offering of
the Companies' shares which was effective December 28, 2001. The value
of the stock at the time of its issuance was charged to professional
fees. During July 2001, the Company issued 95,000 shares of common
stock to the Swiftnet Management Fund to be distributed by such fund
at will.
20
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiary
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 12 - Earnings Per Share
2002
---------------------------------------------------------------
Weighted Average
Income Shares Per Share Per Share
(Numerator) (Denominator) Amounts Amounts
----------- ------------- ------------ -----------------------
Convenience translation
into U.S.$
-----------------------
Net Income 172,535
Basic EPS:
Income available to common stockholders 172,535 5,071,539 £0.03 $0.05
Effect of dilutive securities:
Options 0 500,000
Basic EPS:
Income available to common stockholders 172,535 5,571,539 £0.03 $0.05
2001
--------------------------------------------------------------
Weighted Average
Income Shares Per Share Per Share
(Numerator) (Denominator) Amounts Amounts
----------- ------------- ------------ -----------------------
Convenience translation
into U.S.$
-----------------------
Net Income 145,606
Basic EPS:
Income available to common stockholders 145,606 4,848,333 £0.03 $0.05
Effect of dilutive securities:
Options 0 500,000
Basic EPS:
Income available to common stockholders 145,606 5,348,333 £0.03 $0.04
21
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiary
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 13 - Selected Statement of Operations Data
Six Months Year Six Months Year
June December June December
---------- ---------- ---------- ----------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Convenience translation
into U.S.$
------------------------
A. Marketing & Selling:
Distribution costs £ - £ - $ - $ -
Salaries & benefits - - -
Advertising 15,355 £ 22,401 25,336 35,842
Consultancy 57,223 £ 59,372 94,419 94,995
Commissions 376,944 £ 174,835 621,958 279,736
Others - £ 63,810 - 102,096
---------- ---------- ---------- ----------
£ 449,522 £ 320,418 $ 741,712 $ 512,669
========== ========== ========== ==========
B. General & Administrative:
Salaries & benefits 154,437 £ 268,884 254,822 430,214
Rent & maintenance 39,690 £ 90,916 65,489 145,466
Communications 52,410 £ 11,539 86,477 18,462
Professional fees 91,121 £ 142,863 150,349 228,581
Bad debts -10,000 £ 226,984 - 16,500 363,174
Depreciation 38,511 £ 58,300 63,544 93,280
Others - £ 78,849 - 126,158
---------- ---------- ---------- ----------
£ 366,170 £ 878,335 $ 604,180 $1,405,336
========== ========== ========== ==========
22
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiary
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 13 - Selected Statement of Operations Data (cont.)
Six Months Year Six Months Year
June December June December
---------- ---------- ---------- ----------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Convenience translation
into U.S.$
------------------------
C. Financing Expenses, Net:
Bank interest & charges £ - 317 £ 1,607 $ -522 $ 2,571
Hire purchase interest 3,650 8,476 6,023 13,562
Foreign currency exchange -1,357 21 - 2,239 34
Other interest and charges 8,887 2,733 14,664 4,373
---------- ---------- ---------- ----------
£ 10,864 £ 12,837 $ 17,926 $ 20,539
========== ========== ========== ==========
Note 14 - Related Party Transactions
Six Months Year Six Months Year
June December June December
---------- ---------- ---------- ----------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Convenience translation
into U.S.$
------------------------
Shareholders' salaries £ 40,623 £ 42,000 $ 67,027 $ 67,200
Shareholders' pensions - -
Campbeltown Business Ltd.
Consulting fees £ 44,012 £ 59,372 $ 72,620 $ 94,995
Note 15 - Financial Commitments
The Company has annual rent commitments under a non-cancellable
operating lease of £38200, which terminates in 2012.
23
Item 2 - Management's Discussion and Analysis and Plan of Operations
The following and analysis provides information that we believe is relevant to
our results of operations and an assessment of our financial condition, and
should be read in conjunction with our financial statements and related notes
appearing elsewhere in this Form 10-QSB/A. This discussion and analysis contains
forward-looking statements based on our current expectations, assumptions,
estimates and projections overview. The words or phrases "believe," "expect,"
"may," "anticipates," or similar expressions are intended to identify "forward-
looking statements." Actual results could differ materially from those projected
in the forward-looking statements as a result of a number of risks and
uncertainties pertaining to our long distance, voice and data communications
services business. The terms "Company," "we," "our" or "us" are used in this
discussion to refer to Xfone, Inc. and its wholly owned subsidiary, Swiftnet.
Three Months Ended June 30, 2003 and 2002
Consolidated Statement of Operations
Revenues. Revenues for the six months ended June 30, 2003 increased by 44.6% to
(pound)2,485,609 ($4,101,255) from £1,719,290 ($2,836,828) for the same
period in 2002. The increase in revenues is attributed mainly to growth in
revenues generated from our voice telephony services and the new Story Telecom
project.
Cost of Revenues. Cost of revenues consists primarily of traffic time purchased
from telephone companies and other related charges. Cost of revenues was
correspondingly changed with the revenues, with £1,430,717 ($2,360,684) for
the six months ended June 30, 2003 and £1,044,177 ($1,722,892) for the six
months ended June 30, 2002, representing 57.6% and 60.7% of the total revenues
for the six months ended June 30, 2003 and June 30, 2002, respectively.
Gross Profit. Gross profit is total revenues less cost of revenues. Gross profit
excludes general corporate expenses, finance expenses and income tax. For the
six months ended June 30, 2003 and 2002, respectively, gross profit
was £1,054,892 ($1,740,572) and £675,113 ($1,113,936), which represents
a 56% increase. The gross profit as a percentage of revenues increased to 42.4%
for the six months ended June 30,2003, from 39.3% for the six months ended June
30, 2002. The increase of the gross profit as a percentage of revenues is
attributed to the lower rates that the Company paid in the six months ended June
30, 2003. Our new project with our affiliate, Story Telecom, will significantly
reduce our gross profit margin. Lower price rates have been agreed between the
companies. Xfone owns 40% of Story Telecom Ltd.
24
Research and Development. Research and development expenses were £19,000
($31,350) and £15,000 ($29,750) for the six months ended June 30, 2003 and
2002, respectively, representing 0.8% and 0.9% of revenues of the six months
ended June 30, 2003 and 2002, respectively. The expenses consist of labor costs
of the research and development manager and other related costs. Main
developments relate to the development of the Xfone web site and its
interconnections, the upgrade of software for our telephone platforms, billing
systems, messaging services, and the resellers support package.
Marketing and Selling Expenses. Marketing and selling expenses increased to
£449,523 ($741,712) from £98,436 ($162,419) for the six months ended
March 31, 2003 and 2002, respectively. Marketing and selling expenses as a
percentage of revenues were 18% and 5.7% for the six months ended June 30, 2003
and 2002, respectively. The increase in marketing expenses is attributable to
the increasing revenues derived from commission related activities, including
commissions for resellers of numbers similar to 1-800 or 1-900 with no specific
geographical place.
General and Administrative Expenses. General and administrative expenses
increased to(pound)366,170 ($604,180) for the six months ended June 30, 2003,
from £363,803 ($600,274) for the six months ended June 30,2002. As a
percentage of revenues general and administrative expenses decreased at 14.7%
for the six months ended June 30, 2003 and 21.6% for the six months ended June
30, 2002. The decrease in administrative expenses as a percentage of revenues is
attributable to our improved computerization efficiencies.
Financing Expenses. Financing expenses increased to £10,864 ($17,926) for
the six months ended June 30, 2003 from £19,118 ($31,544) for the same
period in 2002.
Income Before Taxes. Income before taxes for the six months ended June 30, 2003
increased by 4% to £209,535 ($345,733) from £183,681 ($303,074) for
the six months ended June 30, 2002. The increase of the income before taxes is
attributable primarily to the increase of our gross profit. Income before taxes
as a percentage of revenues was 8.4% for the six months ended June 30, 2003 and
10.7% for the six months ended June 30, 2002.
Taxes on Income. Taxes on income for the six months ended June 30, 2003 amounted
to(pound)37,000 ($61,050), which represents 17.6% of the income before taxes as
compared with(pound)45,920 ($75,768) for the six months ended June 30, 2002.
Net Income. Net income for the six months ended June 30, 2003 amounted to
£172,535 ($284,683) and represents 6.9% of the revenues, as compared with
£137,761 ($227,305) for the six months ended June 30, 2002 that represents
8% of the revenues.
25
Earning per share
The earning per share for the six months ended June 30, 2003 was £0.034
($0.05) for the basic 5,101,154 Shares and £0.03 ($0.05) for diluted number
of shares, including the option to buy 500,000 shares.
Balance Sheet
Current Assets. Current assets amounted to(pound)2,074,432 ($3,422,813) as of
June 30, 2003 as compared to(pound)1,658,835 ($2,737,077) as of December 31,
2002. This increase in our current assets is mainly attributable to the growth
in our revenues and cash positions.
Loan to shareholder. Loan to shareholder, Mr. Abraham Keinan, our chairman of
the board, amounted to £296,590 ($489,374) as of June 2003, as compared to
£303,130 ($500,164) as of December 31,2002. As of June 30, 2003
£63,924 ($105,475) of the loan is classified as a current asset.
Fixed assets. Fixed assets after accumulated depreciation increased to
£394,320 ($650,627) as of June 30, 2003 as compared with £253,409
($418,125) as of December 31, 2002.
Current Liabilities. As of June 30, 2003, current liabilities increased by
£297,623 ($564,180) to £1,759,650 ($2,903,423) as compared with
£1,462,027 ($2,412,344) as of December 31, 2002.
Liquidity and Capital resources June 30 2003.
Net cash provided by operating activities for the six months ended June 30, 2003
was £368,883 ($608,658). The cash provided by operating activities was
primarily attributable to our increase in trade payables and our net income.
Cash at June 30, 2003 amounted to £747,775 ($1,233,829), an increase of
£275,812 ($478,688) since December 31,2002.
Our commitments for capital expenditures as of December 31, 2002 were
£46,149 ($66,916). The purpose of the commitment was buying equipment.
We shall continue to finance our operations and fund the commitments for capital
expenditures mainly from the cash provided from operating activities. We believe
that our future cash flow from operations together with our current cash will be
sufficient to finance our activities through the years 2003 and 2004. We plan to
raise money through a public or private placement to fund the implementation of
an expanding operational plan.
26
Impact of Inflation and Currency Fluctuations.
As of June 30, 2003 we deal with only two currencies, British Pounds and United
States Dollars. Even when we do business in other countries rather than the
United Kingdom or the United States we sell and buy in either U.K. Pounds or
U.S. Dollars.
Most of our revenues and current assets are in British Pounds, the long-term
loan to a shareholder is all in U.K. Pounds.
Our cost of revenues is all in British Pounds, most of our liabilities,
operating and financing expenses are in British Pounds. The remainder of the
assets, liabilities, revenues and expenditures are in U.S. Dollars.
A devaluation of the U.K. Pound in relation to the U.S. Dollar will have the
effect of decreasing the Dollar value of all assets or liabilities that are in
U.K. Pounds.
Conversely, any increase in the value of the U.K. Pound in relation to the
Dollar has the effect of increasing the Dollar value of all U.K. Pounds assets
and the Dollar amounts of any U.K. liabilities and expenses.
Inflation would affect our operational results if we shall not be able to match
our Revenues with our expenses.
If rate of inflation will cause a raise in salaries or other expenses and the
market conditions will not allow us to raise prices proportionally, it will have
a negative effect on the value of our assets and on our potential profitability.
Item 3. Controls and Procedures
As of June 30, 2003, the end of the period covered by this report, an evaluation
was performed under the supervision and with the participation of our
management, including our Principal Executive Officer and Principal Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, our management, including our
Principal Executive Officer and Principal Financial Officer, concluded that our
disclosure controls and procedures were effective as of June 30, 2003.
There has not been any change in our internal control over financial reporting
during the last quarter, which ended June 30, 2003, that has materially affected
or is reasonably likely to materially affect our internal control over financial
reporting.
27
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
28
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits and Index of Exhibits
Exhibit
Number Description
2. Agreement and plan or reorganization between Xfone, Inc. and Swiftnet
Ltd. dated September 20, 2000*
3.1 Articles of Incorporation of Xfone, Inc.*
3.2 Bylaws of Xfone, Inc.*
3.3 Articles of Incorporation of Swiftnet Ltd.*
3.4 Bylaws of Swiftnet Ltd.*
4. Specimen Stock Certificate*
10.1 Agreement between Swiftnet Ltd. and Guy Nissenson dated May 11, 2000*
10.2 Employment Agreement with Bosmat Houston dated January 1, 2000*
10.3 Loan Agreement with Swiftnet Ltd., Guy Nissenson, and Nissim Levy dated
August 5, 2000*
10.4 Promissory Note executed between Xfone and Swiftnet Ltd. dated
September 29, 2000*
10.5 Stock Purchase Agreement between Swiftnet Ltd, Abraham Keinan, and
Campbeltown Business, Ltd. dated September 19, 2000*
10.6 Consulting Agreement between Swiftnet Ltd. and Campbeltown Business,
Ltd. dated May 5, 2000*
10.7 Agreement with Campbeltown Business Ltd. dated July 30, 2001*
10.8 Contract with WorldCom International Ltd. dated September 20, 1998*
10.9 Contract with VoiceNet Inc. dated April 11, 2000*
10.10 Contract with InTouchUK.com Ltd. dated April 25, 2000*
10.11 Letter of Understanding from Campbeltown Business Ltd. to Xfone, Inc.
dated July 30, 2001**
10.12 Agreement between Adar International, Inc./Mr. Sidney J. Golub and
Swiftnet Ltd. dated April 6, 2000**
10.13 Lease Agreement between Elmtree Investments, Ltd. and Swiftnet Ltd.
dated December 4, 1991**
10.14 Lease Agreement between Postwick Property Holdings Limited and Swiftnet
Ltd. dated October 8, 2001**
21. List of Subsidiaries*
23. Consent of Chaifetz & Schreiber, P.C.***
24. Consent of Hamilton, Lehrer & Dargan, P.A. included in Exhibit 5*
31. Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32. Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
---------------
* Denotes previously filed exhibits: filed on August 10, 2001 with Xfone,
Inc.'s SB-2 Registration Statement, File # 333-67232, hereby
incorporated by reference.
** Denotes previously filed exhibits: filed on October 16, 2001 with
Xfone, Inc.'s SB-2/Amendment 1 Registration Statement, File # 333-67232,
hereby incorporated by reference.
*** Denotes previously filed exhibit: filed on November 28, 2001 with
Xfone, Inc.'s SB-2/Amendment 2 Registration Statement, File # 333-67232,
hereby incorporated by reference.
We hereby incorporate the following additional documents by reference: (a) our
Forms 10-KSB for the year ended December 31, 2001 which was filed on March 27,
2002, and for the year ended December 31, 2002 which was filed on March 31,
2003; (b) our Registration Statement on Form SB-2 and all amendments thereto
which was filed on August 10, 2001 and amended on October 16, 2001, November 28,
2001, December 27, 2001, December 28, 2001, February 4, 2002, March 3, 2003, and
April 8, 2003; (c) our Forms 10-QSB for the periods ended March 31, 2002 which
was filed on May 14, 2002, June 30, 2002 which was filed on August 13, 2002 and
amended on August 20, 2002, September 30, 2002 which was filed on November
14, 2002, and March 31, 2003 which was filed on May 15, 2003.
b) Reports on Form 8-K
None
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: June 3, 2004 XFONE, INC.
By: /s/ Guy Nissenson
Guy Nissenson, President/Chief
Executive Officer/Chief Financial
Officer/Chief Accounting Officer
30