UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Amendment No. 5
XFONE, INC.
(Name of small business issuer in its charter)
Nevada 7389 11-3618510
(State of (Primary Standard Industrial (I.R.S. Employer
Incorporation) Classification Code Number) Identification Number)
c/o Swiftnet Ltd. Britannia House
960 High Road
London, United Kingdom N12 9RY
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 011.44.845.1087777
Britannia House
960 High Road
London, United Kingdom N12 9RY
(Address of principal place of business)
Incorporation Services, Inc.
6075 South Eastern Avenue, Suite 1
Las Vegas, Nevada 89119-3146
(702) 866-2500
(Name, address and telephone number of agent for service)
3,110,211 SHARES ARE BEING OFFERED BY SELLING SHAREHOLDERS, WHICH INCLUDES
2,123,474 SHARES TO BE ISSUED UPON THE EXERCISE OF WARRANTS A AND WARRANTS B
Approximate date of commencement of proposed sale to the public: From time to
time after this Registration Statement becomes effective.
If any of the Securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box: |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, please check the following box
and list the Securities Act of 1933 registration number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, check the following box and list the Securities Act
of 1933 registration statement number of the earlier effective registration
statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, check the following box and list the Securities Act
of 1933 registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE (1)(2)(3)
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Proposed maximum Proposed maximum Amount of
Title of each class of securities Amount to be offering price aggregate offering registration
to be registered registered per share price fee
-------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value(1) 986,737 $4.50(1) $4,440,316.50 $562.59
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Common Stock, $.001 par value
underlying Warrants A to Purchase
Common Stock (2) 1,136,737 $5.50(2) $6,252,053.50 $792.14
-------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value
underlying Warrants B (3) to
Purchase Common Stock 986,737 $3.50(3) $3,453,579.50 $437.57
-------------------------------------------------------------------------------------------------------
Total 3,110,211 $14,145,949.50 $1,792.30
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(1) Estimated solely to calculate the registration fee pursuant to Rule 457 of
the Securities Act. We have based the fee calculation on the average of the last
reported bid and ask price for our common stock on the OTC Bulletin Board on
February 20, 2004.
(2) Represents shares of common stock issuable upon the exercise of Warrants A.
Each warrant entitles the Holder to purchase shares of common stock at an
exercise price of $5.50 per share.
(3) Represents shares of common stock issuable upon the exercise of Warrants B.
Each warrant entitles the Holder to purchase shares of common stock at an
exercise price of $3.50 per share.
This Registration Statement shall also cover any additional shares of common
stock which become issuable by reason of any stock dividend, stock split,
recapitalization or other similar adjustment to the warrants.
Selling shareholders hold all of the shares that we are registering. Our common
stock shares are quoted on the OTC Bulletin Board under the symbol "XFNE". There
is currently only a limited market in our common stock and we do not know
whether an active market in our common stock will develop. We will not receive
proceeds from the sale of shares by the selling shareholders. We will receive
proceeds from the exercise of Warrants A and Warrants B, if and to the extent
that any of the Warrants A and B are exercised.
We hereby amend this registration statement on such date or dates as may be
necessary to delay its effective date until we shall file a further amendment
which specifically states that this Registration Statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933
or until this Registration Statement shall become effective on such date as the
Commission, acting pursuant to Section 8(a), may determine.
PROSPECTUS
XFONE, INC.
986,737 SHARES OF OUR COMMON STOCK ARE BEING OFFERED BY SELLING SHAREHOLDERS;
1,136,737 SHARES OF OUR COMMON STOCK ARE ISSUABLE IN CONNECTION WITH THE
EXERCISE OF WARRANTS A; AND 986,737 SHARES OF OUR COMMON STOCK ARE
ISSUABLE IN CONNECTION WITH THE EXERCISE OF WARRANTS B.
This prospectus relates to the resale by certain selling shareholders of our
common stock of up to 3,110,211 shares of our common stock in connection with
the resale of: (a) up to 986,737 shares of our common stock which we issued in
our private placement; (b) up to 1,136,737 shares of our common stock which may
be issued upon the exercise of Warrants A issued in connection with our private
placement; and (c) up to 986,737 shares of our common stock which may be issued
upon the exercise of Warrants B issued in connection with our private placement.
The selling shareholders may offer to sell the shares of common stock being
offered in this prospectus at fixed prices, at prevailing market prices at the
time of sale, at varying prices or at negotiated prices. The selling
shareholders will pay all brokerage commissions and discounts attributable to
the sale of the shares plus brokerage fees. We are responsible for all other
costs, expenses and fees, including filing, legal, accounting and miscellaneous
fees incurred or expected to be incurred of approximately $238,287 in
registering the shares offered by this Prospectus. Selling shareholders will pay
no offering expenses. Our common stock is traded on the National Association of
Security Dealers OTC Bulletin Board under the symbol "XFNE." On October 31 2004,
the closing bid price of our common stock was $3.00.
OUR BUSINESS IS SUBJECT TO MANY RISKS AND AN INVESTMENT IN OUR COMMON STOCK WILL
ALSO INVOLVE A HIGH DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO
CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be changed. Our
selling shareholders may not sell these securities until the Registration
Statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
The date of this Preliminary Prospectus Statement is November 1, 2004.
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The following table of contents has been designed to help you find information
contained in this prospectus. We encourage you read the entire prospectus.
TABLE OF CONTENTS
PART I - INFORMATION REQUIRED IN PROSPECTUS
Front of Registration Statement and Outside Front Cover of Prospectus .......
Inside Front and Outside Back Cover Pages of Prospectus......................
Summary Information..................................................... 4
Risk factors............................................................ 7
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. WE CANNOT
ASSURE PROSPECTIVE INVESTORS THAT WE WILL CONTINUE OPERATIONS OR MAKE A PROFIT
IN THE FUTURE. NO PURCHASE OF THE COMMON STOCK SHOULD BE MADE BY ANY PERSON WHO
CANNOT AFFORD A TOTAL LOSS OF HIS OR HER INVESTMENT.
IF ANY OF OUR AGREEMENTS WITH SERVICE PROVIDERS THAT PROVIDE US WITH TELEPHONE
ROUTING AND SWITCHING SERVICES ARE TERMINATED, OR IF ANY OF THE SERVICE
PROVIDERS CEASE DOING BUSINESS, OUR OPERATIONS, REVENUES, AND POTENTIAL
PROFITABILITY MAY BE ADVERSELY AFFECTED.
WE ARE SUBJECT TO EXTENSIVE REGULATION IN THE UNITED KINGDOM AND FOREIGN
COUNTRIES WHICH MAY LEAD US TO INCUR INCREASED BUSINESS COSTS AND NEGATIVE
EFFECTS UPON OUR REVENUES AND POTENTIAL PROFITABILITY.
IF OUR INFORMATION AND BILLINGS SYSTEMS ARE UNABLE TO FUNCTION PROPERLY AS OUR
OPERATIONS GROW, WE MAY EXPERIENCE SYSTEM DISRUPTIONS, REDUCED LEVELS OF
CUSTOMER SERVICE, AND A DECLINING CUSTOMER BASE AND REVENUES.
TERRORIST ATTACKS, WAR, OR ARMED CONFLICT OR POLITICAL/ECONOMIC EVENTS OR
UPHEAVALS IN FOREIGN COUNTRIES WHERE WE CONDUCT BUSINESS MAY NEGATIVELY AFFECT
OUR REVENUES AND RESULTS OF OPERATIONS.
IF WE ARE NOT ABLE TO OBTAIN FINANCING AS WE GROW OUR BUSINESS, WE WILL HAVE TO
CURTAIL THESE PLANS AND THE VALUE OF YOUR INVESTMENT MAY BE NEGATIVELY AFFECTED.
SHOULD OUR AGREEMENTS WITH STORY TELECOM, WORLDNET OR BRITISH TELECOM BE
CANCELLED, OUR REVENUES WILL BE NEGATIVELY IMPACTED.
2
OUR REVENUES AND OUR POTENTIAL PROFITABILITY MAY BE NEGATIVELY AFFECTED BECAUSE
WE DO NOT HAVE A CONTROLLING INTEREST OR MANAGEMENT CONTROL OF STORY TELECOM
AND/OR IF OUR JOINT VENTURE WITH STORY TELECOM IS TERMINATED.
THE DEMAND FOR OUR SERVICES FLUCTUATES DURING CERTAIN PERIODS WHICH WILL
NEGATIVELY AFFECT OUR REVENUES AND MAKE IT DIFFICULT FOR YOU TO DETERMINE
WHETHER OUR BUSINESS WILL BE SUCCESSFUL.
U.S. INVESTORS MAY INCUR INCREASED LEGAL FEES AND HAVE DIFFICULTY
ENFORCINGLIABILITIES OR BRINGING ACTIONS AGAINST US BECAUSE OUR OPERATING
SUBSIDIARY IS NOT A U.S. CORPORATION.
OUR MANAGEMENT DECISIONS ARE MADE BY OUR FOUNDER AND CHAIRMAN OF OUR BOARD OF
DIRECTORS, ABRAHAM KEINAN, AND OUR PRINCIPAL EXECUTIVE OFFICER/PRESIDENT, GUY
NISSENSON; IF WE LOSE THEIR SERVICES, OUR OPERATIONS WILL BE NEGATIVELY
IMPACTED.
WE DO NOT HAVE INDEPENDENT DIRECTORS OR AN AUDIT COMMITTEE WHICH MAY HARM OUR
MINORITY STOCKHOLDERS AND NEGATIVELY AFFECT OUR FINANICAL CONDITION.
OUR OPERATIONS ARE SUBJECT TO POSSIBLE CONFLICTS OF INTEREST REGARDING
SWIFTNET'S AGREEMENTS WITH CAMPBELTOWN BUSINESS, LTD. AND ABRAHAM KEINAN WHICH
MAY NOT BE RESOLVED IN A MANNER FAVORABLE TO OUR MINORITY SHAREHOLDERS.
OUR COMMON STOCK IS THINLY TRADED AND AN ACTIVE TRADING MARKET FOR OUR COMMON
STOCK MAY NEVER DEVELOP.
THE PRICE OF OUR COMMON STOCK IS SUBJECT TO DILUTION AND ILLIQUIDITY, AND THE
RESALE OF THE SHARES BEING REGISTERED IN THIS PROSPECTUS MAY NEGATIVELY AFFECT
THE PRICE OF OUR COMMON STOCK.
WE ARE SUBJECT TO SECURITIES AND EXCHANGE COMMISSION PENNY STOCK RULES AND NASD
SALES PRACTICE REQUIREMENTS WHICH MAY LIMIT YOUR ABILITY TO BUY AND SELL OUR
COMMON STOCK.
SHOULD WE BREACH TERMS OF OUR AGREEMENTS WITH THE SELLING SHAREHOLDERS, WE MAY
BE SUBJECT TO PENALTIES OR OTHER LIABILITIES WHICH MAY REDUCE THE VALUE OF OUR
COMMON STOCK AND NEGATIVELY AFFECT OUR POTENTIAL PROFITABILITY.
YOU SHOULD EXERCISE EXTREME CAUTION IN UTILIZING THE FINANCIAL PROJECTIONS AND
"BUY" RATINGS INCLUDED IN THIS PROSPECTUS IN CONNECTION WITH ANY INVESTMENT
DECISION.
3
Forward Looking Statements ................................................. 16
Use of Proceeds ............................................................ 16
Determination of Offering Price ............................................ 17
Dilution ................................................................... 17
Selling Shareholders ....................................................... 17
Plan of Distribution ....................................................... 23
Legal Proceedings .......................................................... 26
Directors, Executive Officers, Promoters and Control Persons................ 27
Security Ownership of Certain Beneficial Owners and Management.............. 31
Description of Securities................................................... 35
Interest of Named Experts and Counsel....................................... 38
Disclosure of Commission Position on Indemnification........................ 38
Organization within Last Five Years......................................... 39
Description of Business..................................................... 39
Management's Discussion and Analysis or Plan of Operation................... 74
Description of Property..................................................... 94
Certain Relationships and Related Transactions.............................. 94
Market for Common Equity and Related Stockholder Matters.................... 101
Executive Compensation...................................................... 104
Financial Statements................................................. F-1 - F-52
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Indemnification of Directors and Officers...................................II-1
Other Expenses of Issuance and Distribution.................................II-1
Recent Sales of Unregistered Securities.....................................II-2
Exhibits
Undertakings
PROSPECTUS SUMMARY
HOW OUR COMPANY IS ORGANIZED
We were incorporated in the State of Nevada on September 1, 2000 to acquire
Swiftnet, Ltd. and to conduct Swiftnet's telecommunications business. Swiftnet
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was incorporated under the laws of the United Kingdom on February 12, 1990. On
October 4, 2000, we acquired all of Swiftnet's issued and outstanding stock in
exchange for 2.4 million newly issued shares of our common stock, which
represented 55% of our outstanding common stock at the time of the acquisition.
As a result, Swiftnet became our subsidiary, the members of Swiftnet's board of
directors were appointed to our board of directors, and Swiftnet's officers
became our officers. During 2004, we established 2 other subsidiaries: Xfone
Communication Ltd and Xfone USA, Inc. We are authorized to issue 25,000,000
shares of common stock, of which 6,111,155 shares were issued and outstanding as
of November 1, 2004. We are authorized to issue 50,000,000 shares of preferred
stock of which no shares are issued and outstanding. We currently have 500,000
options to purchase 500,000 shares of our common stock.
WHERE YOU CAN FIND US
Our principal executive offices are located at Britannia House, 960 High Road,
London, United Kingdom N12 9RY. Our telephone number is 011.44.845.1087777
ABOUT OUR BUSINESS
We provide international long distance voice and data communications services
through our subsidiary, Swiftnet, Ltd, which has conducted communications
service operations in the United Kingdom since 1990. Our customers are located
in over 75 countries in Europe, Australia, North America, South America, Asia,
and Africa. As of June 30, 2004, approximately 90% of our revenues were derived
from our customers located in the United Kingdom; however, due to a management
contract and a merger agreement that we have with a United States based entity
and our telecom license to conduct business in Israel, we expect that this
percentage will decrease due to more of our business being conducted in the
United States and Israel.
Our services include home and business telephone services utilizing access
numbers and calling cards. We also provide e-mail and facsimile messaging
services, including multiple facsimile distributions, e-mail to facsimile and
facsimile to e-mail services.
On April 15, 2004, we established an Israel based subsidiary, Xfone
Communication Ltd. On July 4, 2004 the Ministry of Communications of the state
of Israel granted Xfone Communication a license to provide international telecom
services in Israel. We plan to start providing services in Israel through Xfone
Communication by November 15, 2004.
On May 28, 2004, we entered into an agreement to acquire WS Telecom Inc., a
Mississippi corporation, and its two wholly owned subsidiaries, eXpeTel
Communications, Inc. and Gulf Coast Utilities, through the merger of WS Telecom
into our wholly owned subsidiary, Xfone USA, Inc.
ABOUT THE OFFERING:
This prospectus relates to the resale by certain security holders of up to
3,110,211 shares of our common stock in connection with the resale of:
o up to 986,737 shares of our common stock which were issued
in our January/February 2004 private placement;
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o up to 1,136,737 shares of our common stock which may be
issued upon the exercise of certain Warrants A issued in
connection with our January/February 2004 private
placement; and
o up to 986,737 shares of our common stock which may be
issued upon the exercise of certain Warrants B issued in
connection with our January/February 2004 private
placement.
We will not receive any proceeds from the resale of the common stock by the
selling shareholders; however, we will receive proceeds from the exercise of the
Warrants A and B if and to the extent that any of the warrants are exercised. We
have agreed to pay all offering expenses. The selling shareholders are offering
986,737 shares of common stock which they already own and an additional
2,123,474 shares of common stock that may be held by them if and to the extent
that they exercise Warrants A and B which they currently hold. We are
registering the common stock covered by this Prospectus in order to fulfill the
obligations we have under agreements with the Selling Shareholders as detailed
on page 17 of this Prospectus.
ABOUT WARRANTS OUTSTANDING
In connection with our January/February 2004 private placement, we currently
have 1,136,737 Warrants A outstanding which are exercisable into 1,136,737
shares of common stock and 986,737 Warrants B outstanding which are exercisable
into 986,737 shares of our common stock. In connection with a February 12, 2004
Financial Consulting Agreement, we are obligated, as of August 12, 2004, to a
monthly retainer payment of 1,500 warrants without a class designation, such as
A or B, the underlying shares of our common stock of which are not being
registered in this offering.
Our common stock is quoted on the OTC Bulletin Board under the symbol ("XFNE").
On October 31, 2004, the closing bid price of our common stock was $3.00.
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Selected Historical Financial Information
Because this is only a financial summary, it does not contain all the financial
information that may be important to you. Therefore, you should read all the
information in this prospectus, including the financial statements and their
explanatory notes before making an investment decision.
December 31
2003 2002 2001 2000
Audited Audited Audited Audited
IN POUNDS:
- --------------------------------------------------------------------------------------------------------------
REVENUES ............... (pound)7,282,181 (pound)3,741,436 (pound)2,658,905 (pound)1,354,746
OPERATING PROFIT ....... (pound) 666,367 (pound) 315,602 (pound) 235,336 (pound) 97,687
NET INCOME ............. (pound) 421,445 (pound) 240,981 (pound) 145,606 (pound) 69,559
BASIC EPS .............. (pound) 0.08 (pound) 0.05 (pound) 0.03 (pound) 0.02
TOTAL ASSETS ........... (pound)3,290,227 (pound)2,169,816 (pound)1,569,336 (pound) 968,544
LONG TERM LIABILITY..... (pound) 125,838 (pound) 66,193 (pound) 50,488 (pound) 40,676
Three months ended June 30 Six Months Ending June 30
2004 2003 2004 2003
Unaudited Unaudited Unaudited unaudited
IN POUNDS:-
-------------------------------------------------------------------------------------------------------------------
REVENUES ............... (pound)2,232,495 (pound)1,410,947 (pound)4,539,710 (pound)2,485,609
OPERATING PROFIT ....... (pound) 99,627 (pound) 104,659 (pound) 234,228 (pound)220,199
NET INCOME ............. (pound) 70,859 (pound) 78,196 (pound) 173,928 (pound)172,535
BASIC EPS .............. (pound) 0.01 (pound) 0.01 (pound) 0.03 (pound)0.03
TOTAL ASSETS ........... (pound) 4,737,875 (Pound) 3,485,790
LONG TERM LIABILITY..... (pound) 146,109 (pound) 101,361
CONVENIENCE TRANSLATION
Three Months ended Six months ended
June 30, 2004 June 30, 2004
--------------- ------------
IN DOLLARS $1.81 = (pound) 1:
Revenues ............... $4,040,816 $8,216,875
Operating profit ....... $ 180,325 $ 423,953
Net Income ............. $ 128,255 $ 314,810
Basic EPS .............. $ 0.02 $ 0.05
Total Assets ........... $ 8,575,550 $8,575,550
Long Term Liability .... $ 264,452 $ 264,452
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. WE CANNOT
ASSURE PROSPECTIVE INVESTORS THAT WE WILL CONTINUE OPERATIONS OR MAKE A PROFIT
IN THE FUTURE. NO PURCHASE OF THE COMMON STOCK SHOULD BE MADE BY ANY PERSON WHO
CANNOT AFFORD A TOTAL LOSS OF HIS OR HER INVESTMENT.
In addition to the other information provided in this prospectus, you should
carefully consider the following risk factors in evaluating our business before
purchasing any shares of our common stock.
7
IF ANY OF OUR AGREEMENTS WITH SERVICE PROVIDERS THAT PROVIDE US WITH TELEPHONE
ROUTING AND SWITCHING SERVICES ARE TERMINATED, OR IF ANY OF THE SERVICE
PROVIDERS CEASE DOING BUSINESS, OUR OPERATIONS, REVENUES, AND POTENTIAL
PROFITABILITY MAY BE ADVERSELY AFFECTED.
Should any of our agreements with our primary service providers, WorldCom
International, Ltd., Teleglobe, British Telecom, Openair and ITXC be terminated
or any such companies cease doing business, we would attempt to secure new
agreements with providers or we would have to reprogram the systems for our
direct access customers, from our service provider switches to another provider;
however, the occurrence of either event may cause disruptions in service,
prolonged interruptions, or a cessation of our customer services, all of which
could negatively affect our operations, revenues and potential profitability.
WE ARE SUBJECT TO EXTENSIVE REGULATION IN THE UNITED KINGDOM AND FOREIGN
COUNTRIES WHICH MAY LEAD US TO INCUR INCREASED BUSINESS COSTS AND NEGATIVE
EFFECTS UPON OUR REVENUES AND POTENTIAL PROFITABILITY.
Our business operates in at least 75 countries, all of which have different
regulations, jurisdictions, and standards and controls related to licensing,
telecommunications, import/export, currency and trade. Regulatory changes
pertaining to future regulatory classification of Internet related telephone
services, otherwise known as VoIp telephony, may lead to burdensome regulatory
requirements and fees, as well as additional interconnection fees to carriers
and changes in access charges, universal service, and regulatory fee payments,
which would affect our long distance services related costs, may have a material
impact upon our ability to conduct business, as well as our revenues. Our
compliance with foreign rules and regulations may lead to increased costs of
doing business or reduced revenues from having to decrease or eliminate our
business in certain foreign countries, all of which may negatively affect our
potential profitability. For more detailed information regarding our foreign
business, please see our "Description of Business" Section beginning at page 27.
IF OUR INFORMATION AND BILLINGS SYSTEMS ARE UNABLE TO FUNCTION PROPERLY AS OUR
OPERATIONS GROW, WE MAY EXPERIENCE SYSTEM DISRUPTIONS, REDUCED LEVELS OF
CUSTOMER SERVICE, AND A DECLINING CUSTOMER BASE AND REVENUES.
Over the past two years, our business revenues and operations have more than
doubled. We now handle at least 3,000,000 transactions on a daily basis with
over 10,000 customers located in 75 countries. Accordingly, our information and
8
billing systems are under increasing stress. We use internally developed systems
to operate our services and for transaction processing, including billing and
collections processing. We must continually improve these systems in order to
meet the level of use. Furthermore, in the future, we may add features and
functionality to our products and services using internally developed or third
party licensed technologies. Our inability to add software and hardware or
develop and upgrade existing technology, transaction processing systems and
network infrastructure to meet increased volume through our processing systems
or provide new features or functionality, may cause system disruptions, slower
response times, reductions in levels of customer service, decreased quality of
the user's experience, collection difficulties, and delays in reporting accurate
financial information. Any such failure could cause system disruptions, reduced
levels of customer service, and a declining customer base and revenues.
TERRORIST ATTACKS, WAR, OR ARMED CONFLICT OR POLITICAL/ECONOMIC EVENTS OR
UPHEAVALS IN FOREIGN COUNTRIES WHERE WE CONDUCT BUSINESS MAY NEGATIVELY AFFECT
OUR REVENUES AND RESULTS OF OPERATIONS.
Terrorist attacks in Great Britain or Great Britain's involvement in the war
with Iraq or other armed conflict or political/economic events in other
countries where we conduct business, may negatively impact consumer confidence
and spending in Great Britain, as well as spending in the other countries where
we conduct our business. Any such occurrences could lead to interruption in our
services and could negatively affect our revenues and results of operations.
IF WE ARE NOT ABLE TO OBTAIN FINANCING AS WE GROW OUR BUSINESS, WE WILL HAVE TO
CURTAIL THESE PLANS AND THE VALUE OF YOUR INVESTMENT MAY BE NEGATIVELY AFFECTED.
Our future business will involve substantial costs, primarily those costs
associated with marketing, business development, and possible acquisitions. If
our revenues are insufficient to fund our operations as we grow our business, we
may need traditional bank financing or financing from debt or equity offerings.
However, if we are unable to obtain financing when needed, we may be forced to
curtail our operations, which could negatively affect our revenues and potential
profitability and the value of your investment.
SHOULD OUR AGREEMENTS WITH STORY TELECOM, WORLDNET OR BRITISH TELECOM BE
CANCELLED, OUR REVENUES WILL BE NEGATIVELY IMPACTED.
During 2003, we were dependent upon the revenues of:
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o our affiliate, Story Telecom, which represented 37% of our
total revenues;
o our largest reseller, Worldnet, which represented 6% of our
revenues; and
o our largest customer, British Telecom, which represented
approximately 18% of our total revenues.
Should our agreements involving Story Telecom, Worldnet or British Telecom be
cancelled, our revenues will be negatively affected.
OUR REVENUES AND OUR POTENTIAL PROFITABILITY MAY BE NEGATIVELY AFFECTED BECAUSE
WE DO NOT HAVE A CONTROLLING INTEREST OR MANAGEMENT CONTROL OF STORY TELECOM
AND/OR IF OUR JOINT VENTURE WITH STORY TELECOM IS TERMINATED.
Our subsidiary, Swiftnet, established a joint business with Mr. Nir Davison to
develop, sell, market, and distribute telecommunications products bearing the
name of Story Telecom Ltd. Our joint venture with Story Telecom accounted for
approximately 36% of our revenues during 2003, and, and we expect it to continue
to account for a significant percentage. If for any reason our joint venture
with Story Telecom is terminated, our revenues and potential profitability may
be adversely affected. In addition, under our agreement with Story Telecom Ltd.,
our subsidiary, Swiftnet, has a 40% interest in Story Telecom while Nir Davison
has a 60% interest and is Story Telecom's Managing Director. Because we do not
have a controlling interest in or management control of Story Telecom, our
strategic objectives may be impeded, which also may negatively affect our
revenues and potential profitability.
THE DEMAND FOR OUR SERVICES FLUCTUATES DURING CERTAIN PERIODS WHICH WILL
NEGATIVELY AFFECT OUR REVENUES AND MAKE IT DIFFICULT FOR YOU TO DETERMINE
WHETHER OUR BUSINESS WILL BE SUCCESSFUL.
Our business is characterized by a lower demand for our services during the
10
months of April, August and December. Because our revenues correspond to the
demand for our services, our revenues will be lower during those months and will
reflect lower earnings, and make it difficult for you to assess whether our
business will be successful.
U.S. INVESTORS MAY INCUR INCREASED LEGAL FEES AND HAVE DIFFICULTY ENFORCING
LIABILITIES OR BRINGING ACTIONS AGAINST US BECAUSE OUR OPERATING SUBSIDIARY IS
NOT A U.S. CORPORATION.
Most of our operations are conducted through our subsidiary, Swiftnet, Ltd.,
which is incorporated and located in the United Kingdom, and all of our assets
are located outside the United States. In addition, our executive officers,
other than our Chief Financial Officer, and all of our directors are foreign
citizens. As a result, it may be expensive, difficult or impossible for United
States investors to obtain service of process upon us within the United States
or to enforce or collect judgments against us for civil liabilities in United
States courts.
OUR MANAGEMENT DECISIONS ARE MADE BY OUR FOUNDER AND CHAIRMAN OF OUR BOARD OF
DIRECTORS, ABRAHAM KEINAN, AND OUR PRINCIPAL EXECUTIVE OFFICER/PRESIDENT, GUY
NISSENSON; IF WE LOSE THEIR SERVICES, OUR OPERATIONS WILL BE NEGATIVELY
IMPACTED.
The success of our business is dependent upon the expertise of our Chairman of
the Board, Abraham Keinan, and our Principal Executive Officer/President, Guy
Nissenson. Because Messrs. Keinan and Nissenson are essential to our operations,
you must rely solely on their management decisions. Messrs. Keinan and Nissenson
will continue to control our business affairs after the offering. We have not
entered into any agreement with Messrs. Keinan or Nissenson that would prevent
them from leaving our company, nor have we obtained any "key man" life insurance
relating to them. There is no assurance that we would be able to hire and retain
another Chairman of the Board or President/Principal Executive Officer with
comparable experience. As a result, the loss of either Mr. Keinan's or Mr.
Nissenson's services would have a materially adverse affect upon our business,
financial condition, and results of operation.
WE DO NOT HAVE INDEPENDENT DIRECTORS OR AN AUDIT COMMITTEE WHICH MAY HARM OUR
MINORITY STOCKHOLDERS AND NEGATIVELY AFFECT OUR FINANICAL CONDITION.
We have no independent directors or audit committee to oversee or make decisions
regarding our auditors, audit procedures, investments, or executive
compensation. Accordingly, our executive officers determine their own executive
11
compensation and our investments, which may be harmful to our minority
stockholders. We have a 47 1/2% interest and 40% interest in two business
ventures, Auracall Limited and Story Telecom, respectfully, from which we
receive substantial revenues; however, to date we have only net losses from such
operations. Our management receives a bonus and success fee or other
compensation based on certain targeted revenue levels, including such revenues
that are derived from Auracall. In addition, our Chairman of the Board and Chief
Executive Officer are directors of Auracall and our Chief Executive Officer is a
director of Story Telecom. Because our executive officers determine their own
compensation, including such bonus and success related fees, a conflict of
interest between our executives officers' interest and our stockholder's
interest exists, which may favor the interests of our executives over that of
our minority stockholders and our long term financial and operational interests.
In addition, because we do not have such independent oversight or an audit
committee, our financial record keeping, financial reporting and disclosure, and
our ability to maintain an effective use of our resources may be negatively
affected, all of which may negatively affect our financial condition.
OUR MANAGEMENT HAS SIGNIFICANT CONTROL OVER STOCKHOLDER MATTERS, WHICH MAY
AFFECT THE ABILITY OF MINORITY STOCKHOLDERS TO INFLUENCE OUR ACTIVITIES.
Our Chairman of the Board, Abraham Keinan, beneficially owns 59.6% of our common
stock. In addition, our Principal Executive Officer/President, Guy Nissenson has
significant influence over an additional 11.8% of our common stock, which is
owned by Campbeltown Business, Ltd., an entity controlled by Mr. Nissenson and
his family. Also, as a result of irrevocable Proxies signed by the Selling
Shareholders identified in this Prospectus, Mr. Nissenson has an additional
969,237 shares that he may vote, representing an additional 15.9% of our common
stock. Therefore, our officers/directors potentially may vote 87.3% of our
common stock, without giving effect to the issuance of any shares upon the
exercise of outstanding warrants or options. As such, our officers/directors and
their family members control the outcome of all matters submitted to a vote of
the holders of our common stock, including the election of our directors,
amendments to our certificate of incorporation and approval of significant
corporate transactions. Additionally, our officers/directors could delay, deter
or prevent a change in our control that might be beneficial to our other
stockholders.
In addition to the foregoing, our Chairman of the Board, Abraham Keinan, and our
President/Chief Executive Officer/Director, Guy Nissenson, exercise significant
control over stockholder matters through a September 28, 2004 Voting Agreement
between Mr. Keinan, Mr. Nissenson and Campbeltown Business Ltd, an entity owned
and controlled by Mr. Nissenson and his family. This agreement, which is for a
term of 10 years, provides that: (a) Messrs. Keinan and Nissenson and
Campbeltown Business, Ltd. agree to vote any shares of our common stock
controlled by them only in such manner as previously agreed by all these
parties; and (b)in the event of any disagreement regarding the manner of voting,
a party to the agreement will not vote any shares, unless all the parties have
settled the disagreement.
12
OUR OPERATIONS ARE SUBJECT TO POSSIBLE CONFLICTS OF INTEREST BECAUSE OF
SWIFTNET'S AGREEMENTS WITH CAMPBELTOWN BUSINESS LTD. AND ABRAHAM KEINAN, WHICH
MAY NOT BE RESOLVED IN A MANNER FAVORABLE TO OUR MINORITY SHAREHOLDERS.
Since May 2000, Swiftnet, Ltd., our subsidiary, has a consulting agreement with
Campbeltown Business Ltd., a privately held company that is owned and controlled
by our Principal Executive Officer/President, Guy Nissenson, and his family.
This agreement expires in November 2004. This agreement provides for cash
payments of 2,000 UK Pound Sterling each month to Campbeltown Business, Ltd. for
consulting services and an additional monthly performance bonus based upon
Swiftnet attaining certain revenue levels. During June 2000, Swiftnet, Ltd.
entered into a Stock Purchase Agreement with our Chairman of the Board, Abraham
Keinan, and Campbeltown Business, Ltd. This agreement provides for compensation
to Campbeltown Business Ltd., in the form of options and stock, including an
outstanding option to acquire a 10% interest in us for $200,000. In addition,
this agreement also prohibits us from issuing additional shares or equity rights
without a written agreement from Campbeltown Business, Ltd., and grants them
under certain conditions a right of first refusal on any securities offering we
conduct until December 31, 2005. These agreements were not negotiated at "arms
length" and are subject to potential conflicts of interest that may not be
resolved in a manner favorable to our minority shareholders. These agreements
will enable Campbeltown Business, Ltd. to exert significant influence over our
future operations, including our future equity financing transactions. You
should be aware that any stock issuances to Campbeltown Business, Ltd. will
dilute your percentage stock ownership. For more detailed information regarding
these agreements and other potential conflicts of interest please see our
"Certain Relationships and Related Transactions" Section beginning on page 94.
OUR COMMON STOCK IS THINLY TRADED AND AN ACTIVE TRADING MARKET FOR OUR COMMON
STOCK MAY NEVER DEVELOP
Trading in stocks quoted on the OTC Bulletin Board is often thin and
characterized by wide fluctuations in trading prices, due to many factors that
may have little to do with a company's operations or business prospects.
Moreover, the OTC Bulletin Board is not a stock exchange, and trading of
securities on the OTC Bulletin Board is often more sporadic than the trading of
securities listed on a quotation system like the Nasdaq Small Cap or a stock In
the absence of an active trading market: (a) investors may have difficulty
buying and selling or obtaining market quotations; (b) market visibility for our
common stock may be limited; and (c) a lack of visibility for our common stock
may have a depressive effect on the market price for our common stock. Our
common stock is quoted on the OTC Bulletin Board.
Accordingly, you may have difficulty reselling any of the shares you purchase
from the selling shareholders.
13
THE PRICE OF OUR COMMON STOCK IS SUBJECT TO DILUTION AND ILLIQUIDITY, AND THE
RESALE OF THE SHARES BEING REGISTERED IN THIS PROSPECTUS MAY NEGATIVELY AFFECT
THE PRICE OF OUR COMMON STOCK.
As a result of the shares which we are registering for the selling stockholders,
you may have difficulty selling your shares at the current trading price of our
common stock. When this registration statement is declared effective, the
selling shareholders may be reselling up to an additional 3,110,211 shares of
our common stock, assuming the selling shareholders resell the 2,123,474 shares
of our common stock from the exercise of all of the A and B warrants. As a
result, a substantial number of our shares of common stock will be available for
immediate resale, which could have an adverse effect on the price of our common
stock. Any such decreases in the price of our common stock, may cause purchasers
who acquire shares from the selling stockholders, to lose some or all of their
investment. To the extent any of the selling stockholders exercise any of their
warrants, and then resell the shares of common stock issued to them upon such
exercise, the price of our common stock may decrease even further due to the
additional shares of common stock in the market. The exercise of the warrants
and outstanding options into common stock will substantially dilute existing
stockholders and likely have a negative affect on the market price of our common
stock. We have outstanding options of 500,000 to purchase shares of our common
stock. We have 2,123,474 Warrants A and B to acquire as many as 2,123,474
shares of our common stock, which exclusively represent the warrants held by the
selling shareholders to acquire shares of common stock. We lack control over
the timing of any exercise or the number of shares offered or sold if the
selling shareholders exercise all or a portion of the Warrants A and B.
WE ARE SUBJECT TO SECURITIES AND EXCHANGE COMMISSION PENNY STOCK RULES AND NASD
SALES PRACTICE REQUIREMENTS WHICH MAY LIMIT YOUR ABILITY TO BUY AND SELL OUR
COMMON STOCK
Because our common stock is a penny stock, it is covered by the penny stock
rules, which impose stringent sales practice requirements on broker-dealers who
execute sales of our common stock to persons other than established customers or
"accredited investors." The penny stock rules require that a broker-dealer must
determine if the potential purchaser is suitable to invest in our common stock
prior to selling our common stock to the potential purchaser. The broker-dealer
must also obtain the written consent of all purchasers to purchase our common
stock. In addition, the broker-dealer must disclose the best bid and offer
prices available for our stock and price at which the broker-dealer last
purchased or sold our common stock. In addition, NASD sales practice
14
requirements require a broker-dealer to have reasonable grounds for believing
that an investment is suitable for a customer and requires it to obtain
information about the customer's financial status, tax status, and investment
objectives. These additional SEC and NASD requirements discourage brokers from
effecting transactions in our common stock, which make it difficult for
stockholders to their shares. These requirements may restrict trading of our
common stock and/or limit a stockholder's ability to buy and sell our common
stock. Therefore, SEC and NASD rules may discourage investor interest in our
common stock and limit the marketability and tradability of our common stock.
SHOULD WE BREACH TERMS OF OUR AGREEMENTS WITH THE SELLING SHAREHOLDERS, WE MAY
BE SUBJECT TO PENALTIES OR OTHER LIABILITIES WHICH MAY REDUCE THE VALUE OF OUR
COMMON STOCK AND NEGATIVELY AFFECT OUR POTENTIAL PROFITABILITY.
In connection with our January/February 2004 private placement, we entered into
agreements with selling shareholders which subject us to possible monetary
penalties if we fail to remove the restrictive legends on the selling
shareholder's certificates when the shares represented by the certificates are
eligible for resale. In addition, if we conduct other financing where we sell
shares of our common stock at prices of less than $3.00 per share, we may be
required to adjust the selling shareholder's purchase price to the any lower
price by issuing the selling shareholders additional shares of our common stock.
Additionally, there are certain provisions in our agreements with selling
shareholders that provide if our registration statement is not effective within
a certain period of time, we will have to issue additional shares to them equal
to a maximum of approximately 157,878 shares of our common stock. Because our
registration statement has not been declared effective as of November 1, 2004,
we are now obligated to issue to our selling shareholders a total of 81,227
additional shares of our common stock in connection with these provisions of the
selling shareholder agreements. We are not subject to any additional penalties
under the terms of these selling shareholders agreements. Should we incur cash
penalties, our liabilities will be increased. Should we be required to issue
additional shares of our common stock, our stockholders interests in our common
stock will be diluted.
YOU SHOULD EXERCISE EXTREME CAUTION IN UTILIZING THE FINANCIAL PROJECTIONS AND
"BUY" RATINGS INCLUDED IN THIS PROSPECTUS IN CONNECTION WITH ANY INVESTMENT
DECISION.
We have included on page 93 of this prospectus, certain financial projections
and "buy" ratings that were included in a publicly available research report and
virtual road show, which were prepared by Spelman Research Associates, LLC., a
third partyinvestment research firm.Investors should use extreme caution in
reviewing or utilizing these financial projections in making an investment
decision because:
o The financial projections and the "buy" ratings made were not included in
a prospectus at the time they were originally made and therefore were
presented without the benefit of information included in any prospectus;
o We are unaware of the base assumptions or historical information that was
utilized by Spelman Research Associates to formulate the financial
projections and "buy" ratings, and whether the assumptions and historical
information used by it form a reasonable or accurate basis for the
projections or "buy" ratings;
o There is no assurance that the financial projections and "buy" ratings and
the assumptions that may have been used in support of the projections and
"buy" ratings are or will be correct and/or accurate;
o Any inaccuracies in the financial projections or "buy" ratings or
assumptions that may have been used in making the projections or "buy"
ratings could result in: (a) the projections being materially different
from our actual performance or results of operations pertaining to any of
our reporting periods; and (b) the "buy" ratings being removed; and
o The projections may not conform to the Securities and Exchange
Commission's policy on projections. Accordingly, you should use extreme
caution in considering these projections and "buy" ratings in any
consideration of whether to invest in our common stock. Additionally, any
consideration given to such projections or "buy" ratings should be made in
conjunction with the review of all information contained in this
prospectus, including our financial statements. For further information
pertaining to these projections and "buy" ratings and their preparation,
please see page 93 of this prospectus.
15
SPECIAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS
The discussion contained in this prospectus contains "forward-looking
statements" that involve risk and uncertainties. These statements may be
identified by the use of terminology such as "believes," "expects," "may,"
"should," or "anticipates," or expressing this terminology negatively or similar
expressions or by discussions of strategy. The cautionary statements made in
this prospectus should be read as being applicable to all related
forward-looking statements wherever they appear in this prospectus. Our actual
results could differ materially from those discussed in this prospectus.
Important factors that could cause or contribute to such differences include
those discussed under the caption entitled "Risk Factors," as well as those
discussed elsewhere in this prospectus. We undertake no obligation to update or
revise any forward-looking statements in this document to reflect any future
events or developments.
USE OF PROCEEDS
We have registered these shares because of registration rights granted to the
investors in our recent private equity financing and the other selling
shareholders. We will not receive any proceeds from the shares of the common
stock offered hereby that are being registered for the selling shareholders
named in this prospectus. As a result, we will not receive any proceeds from the
resale of the common stock by selling shareholders. We have received proceeds of
approximately $2,907,700 from the sale of restricted shares of common stock to
the selling shareholders and we could receive up to a gross of $9,705,633, from
the exercise of the Warrants A and B when and if all were exercised. The gross
proceeds received form the exercise of the warrants will be used as set forth in
the table below.
The following table represents estimates only. The actual amounts may vary from
these estimates.
-------------------------------------------------------------------------
Use of Funds Funds Received from Exercise of
Warrants A and B (Assuming all
warrants are exercised)
-------------------------------------------------------------------------
Working capital* and/or investment
in equipment** and/or acquisitions
and/or business development*** $9,705,633
-------------------------------------------------------------------------
* Working capital use of funds would be used for possible growth in our
business, including general corporate purposes, general and administrative
expenses, salaries, and financing additional receivables.
** Investment in equipment would be used for telecommunications equipment,
such as a switch to expand out capacity.
16
*** Business development would be used to expand activities and operations in
existing countries where we do business and additional countries by
seeking the following business arrangements of companies or other entities
that provide telecom services similar to those that we provide: (a)
establishing local companies; or (b) acquiring existing United States or
foreign companies; or (c) through joint ventures within the United States
or foreign countries. Except as detailed in this prospectus, we currently
have no informal or formal agreements, understandings, or plans pertaining
to any of these type business arrangements or for specific acquisitions or
product lines.
DETERMINATION OF OFFERING PRICE
Not applicable
DILUTION
Not Applicable. We are not offering any shares in this Registration Statement.
All shares are being registered on behalf of our selling shareholders.
SELLING SHAREHOLDERS
Transaction Overview
On February 12, 2004, we closed an offering of 986,737 shares of common stock,
with 1,136,737 Warrants A and 986,737 Warrants B. We sold 969,237 shares of
common stock with a Warrant A and B attached for aggregate proceeds of
$2,907,700. Each Warrant A, which is not freely transferable, entitles the owner
to purchase one share, until not later than January/February 2009 at an exercise
price of $5.50. Each Warrant B, which is not freely transferable, entitles the
owner to purchase one share, until not later than until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange. The Warrants B
are exercisable at an exercise price of $3.50. We sold shares with attached
Warrants A and B to a total of 16 persons and 8 entities whom we had reasonable
grounds to believe were accredited investors. Each of the investors: (a) had
access to business and financial information concerning us, (b) represented that
it was acquiring the securities for investment purposes only and not with a view
towards distribution or resale except in compliance with applicable securities
laws and (c) had such knowledge and experience in business and financial matters
that he or she was able to evaluate the risks and merits of an investment in our
common stock. Therefore each investor was also sophisticated within the meaning
of Federal securities laws. In addition, the certificates evidencing the shares
17
and warrants that were issued contained a legend restricting their
transferability absent registration under the Act or the availability of an
applicable exemption therefrom. The issuance of these securities was exempt from
the registration requirements of the Act by reason of Section 4(2) and/or the
rules and regulations thereunder including Rule 506 of Regulation D.
In addition, we issued the following for services rendered to us: (a) 17,500
shares, Warrants A to purchase 17,500 shares of our common stock and Warrants B
to purchase 17,500 shares of our common stock to Stern and Company in exchange
for business consulting type services rendered to us; and (b)100,000 Warrants A
to our attorneys, Hamilton, Lehrer & Dargan, P.A. for legal services rendered to
us; (c) In connection with our January/February 2004 private placement of
securities we utilized the assistance of The Oberon Group, LLC as a finder. The
Oberon Group is a limited liability company registered in New York, which is
owned, managed and controlled by Adam Breslawsky, a selling shareholder, Elad
Epstein and Nicole Schmidt. On February 11, 2004, we paid The Oberon Group a
total of $162,800 as a finders fee and on February 26, we granted to The Oberon
Group Warrants A to purchase 50,000 shares of our common stock for its finder
services. The Warrants A and B will be exercisable at the same prices and under
the same term as described above.
The selling shareholders may offer and sell, from time to time, any or all of
the common stock issued and the common stock issuable to them upon exercise of
the Warrants A and B. Because the selling shareholders may offer all or only
some portion of the 3,110,211 shares of common stock to be registered, no
estimate can be given as to the amount or percentage of these shares of common
stock that will be held by the selling shareholders upon termination of the
offering.
The following table sets forth certain information regarding the beneficial
ownership of shares of common stock by the selling shareholders as of February
23, 2004, and the number of shares of common stock covered by this prospectus.
The number of shares in the table represents an estimate of the number of shares
of common stock to be offered by the selling stockholder.
None of the selling shareholders has any position, office or material
relationship with us. Except as otherwise, indicated, all securities are owned
directly by each selling shareholder.
Notwithstanding the foregoing, the following table assumes that the warrants
issued in our private placement will be exercised upon the effectiveness of this
registration statement.
18
-----------------------------------------------------------------------------------------------------------
Number of Shares
Owned by Selling
Warrant A Warrant B Security holder After
Name of Selling Common Shares Warrants Warrants Offering and Percent
Security Holder owned by owned by owned by of Total Issued and
and Position, the Selling the Selling the Selling Total Outstanding (1a)(2a)
Office or Material Security Security Security Shares Number of Shares
Relationship with us. holder(2a) holder(2a) holder(2a) Registered(3a) Percent of Class
-----------------------------------------------------------------------------------------------------------
Ecker, Arik(1) .......... 5,000 5,000 5,000 15,000 <1%/0
-----------------------------------------------------------------------------------------------------------
Ecker, Zwi(2) ........... 8,500 8,500 8,500 25,500 <1%/0
-----------------------------------------------------------------------------------------------------------
Langbart, Simon(3) ...... 13,000 13,000 13,000 39,000 <1%/0
-----------------------------------------------------------------------------------------------------------
Langbart, Robert(4) ..... 5,000 5,000 5,000 15,000 <1%/0
-----------------------------------------------------------------------------------------------------------
Derman, Michael ......... 3,000 3,000 3,000 9,000 <1%/0
-----------------------------------------------------------------------------------------------------------
Derman, Errol(5) ........ 7,000 7,000 7,000 21,000 <1%/0
-----------------------------------------------------------------------------------------------------------
Sobel, Yuval Haim(6) .... 8,000 8,000 8,000 24,000 <1%/0
-----------------------------------------------------------------------------------------------------------
Sobel, Zvi(7) ........... 8,000 8,000 8,000 24,000 <1%/0
-----------------------------------------------------------------------------------------------------------
Tenram Investments,
Ltd.(8) ................. 8,400 8,400 8,400 25,200 <1%/0
-----------------------------------------------------------------------------------------------------------
Zinn, Michael ........... 10,000 10,000 10,000 30,000 <1%/0
-----------------------------------------------------------------------------------------------------------
Weiss, Michael .......... 20,000 20,000 20,000 60,000 <1%/0
-----------------------------------------------------------------------------------------------------------
Countrywide Partners,
LLC(9) .................. 50,000 50,000 50,000 150,000 2.45%/0
-----------------------------------------------------------------------------------------------------------
WEC Partners, LLC(10) ... 16,667 16,667 16,667 50,001 <1%/0
-----------------------------------------------------------------------------------------------------------
19
-----------------------------------------------------------------------------------------------------------
Platinum Partners
Value Arbitrage Fund
LP(11) .................. 100,000 100,000 100,000 300,000 4.9%/0
-----------------------------------------------------------------------------------------------------------
Levy, Oded .............. 16,667 16,667 16,667 50,001 <1%/0
-----------------------------------------------------------------------------------------------------------
Crestview Capital
Master LLC(12) .......... 500,000 500,000 500,000 1,500,000 24.5%/0
-----------------------------------------------------------------------------------------------------------
Southridge Partners,
LP(13) .................. 66,667 66,667 66,667 200,001 3.3%/0
-----------------------------------------------------------------------------------------------------------
Breslawsky, Adam (14) ... 5,000 5,000 5,000 15,000 <1%/0
-----------------------------------------------------------------------------------------------------------
Epstein, Michael ........ 6,667 6,667 6,667 20,001 <1%/0
-----------------------------------------------------------------------------------------------------------
Frank, Stephen .......... 13,334 13,334 13,334 40,002 <1%/0
-----------------------------------------------------------------------------------------------------------
Southshore Capital
Fund LTD(15) .... 66,667 66,667 66,667 200,001 3.3%/0
-----------------------------------------------------------------------------------------------------------
Stern & Co.(16) ......... 17,500 17,500 17,500 52,500 <1%/0
-----------------------------------------------------------------------------------------------------------
Hamilton, Lehrer
& Dargan(17) ............ 0 100,000 0 100,000 1.6%/0
-----------------------------------------------------------------------------------------------------------
Lobel, Joshua ........... 3,334 3,334 3,334 10,002 <1%/0
-----------------------------------------------------------------------------------------------------------
Kazam, Joshua ........... 8,334 8,334 8,334 25,002 <1%/0
-----------------------------------------------------------------------------------------------------------
The Oberon Group,
LLC(18) ................. 20,000 70,000 20,000 110,000 <1%/0
-----------------------------------------------------------------------------------------------------------
Total ................... 986,737 1,136,737 986,737 3,110,211
-----------------------------------------------------------------------------------------------------------
The number of shares indicated includes shares acquired directly from us by the
Selling Shareholders as well as shares which are issuable upon the exercise of
warrants held by the Selling Shareholders.
20
We intend to seek qualification for sale of the shares in those states where the
shares will be offered. That qualification is necessary to resell the shares in
the public market in the states in which the selling shareholders or proposed
purchasers reside. There is no assurance that the states in which we
seekqualification will approve re-sales of the shares.
We may require the selling security holders to suspend the sales of the
securities offered by this prospectus upon the occurrence of any event that
makes any statement in this prospectus or the related registration statement
untrue in any material respect or that requires the changing of statements in
these documents in order to make statements in those documents not misleading.
-----------
(1a) Assumes all of the shares of common stock offered in this prospectus are
sold and no other shares of common stock are sold or issued during this offering
period. Based on 6,111,155 common shares issued and outstanding on November 1,
2004.
(2a) The number of shares of common stock listed as beneficially owned by such
selling shareholder represents the number of shares of common stock currently
owned and potentially issuable upon exercise of all A and B warrants.
(3a) The total of 3,110,211 shares registered represents the total amount that
may be sold by the selling shareholders and includes: (a) the total common stock
shares which are now owned by the selling shareholders; (b) 1,136,737 shares of
common stock issuable upon exercise of the A warrants purchased in our private
placement which are exercisable at $5.50 per share and are exercisable until
January/February 2009; and (c)986,737 shares issuable upon exercise of the B
warrants which are exercisable until the earlier of 10 days after the
registration statement is declared effective or 10 days after our common stock
will be trading on NASDAQ Small Cap or the American Stock Exchange.
21
exercisable at $3.50 per share. The A warrants are exercisable until
January/February 2009. The B warrants (1) Arik Ecker is the son of Zwi Ecker.
(2) Zwi Ecker is the father of Arik Ecker.
(3) Simon Langbart is the son of Robert Langbart.
(4) Robert Langbart is the father of Simon Langbart.
(5) Errol Derman is the father of Michael Derman and the father-in-law of Simon
Langbart.
(6) Yuval Haim Sobel is the son of Zvi Sobel
(7) Zvi Sobel is the father of Yuval Haim Sobel
(8) Tenram Investments, Ltd. Ltd is incorporated in Israel and is owned,
managed, and controlled by Dr. Ariel Halperin.
(9) Countrywide Partners, LLC is incorporated in Delaware and is owned, managed,
and controlled by Mr. Harry Adler.
(10) WEC Partners, LLC is a Delaware limited liability which is owned and
controlled by Ethan Benovitz, Daniel Saks, and Jaime Hartman.
(11) Platinum Partners Value Arbitrage Fund LP is a Cayman Islands based limited
partnership; Mark Nordlicht is the Managing Member of the General Partner,
Platinum Management Fund LP, which is a limited liability company registered in
New York.
(12) Crestview Capital Master LLC is a limited liability company registered in
Delaware controlled by Richard Levy and Stuart Flink. The fund is affiliated
with Dillon Capital, a registered broker-dealer owned by Mr. Flink.
(13) Southridge Partners, LP is registered as a limited partnership in Delaware
and is located in Ridgefield, Connecticut; Stephen Hicks is the President of the
limited partnership's General Partner, Southridge Capital Management.
(14) Adam Breslawsky is one of three owners, managers and control persons of The
Oberon Group, LLC., a selling shareholder. As of April 12, 2004, Mr. Breslawsky
became affiliated with Dragonfly Capital Partners, LLC. as a Registered
Representative. Dragonfly Capital Partners is a North Carolina limited liability
company registered as a broker-dealer with the National Association of Security
Dealers and the Securities and Exchange Commission.
(15) Southshore Capital Fund LTD is a corporation registered in the Cayman
Islands; Navigator Management is the Corporate Director of Southshore Capital
Fund LTD. The Director and control person of Navigator Management is David Sims.
22
(16) 17,500 shares of our common stock are being offered by Selling Shareholder
Stern and Company that were issued to Stern and Company on or about January 9,
2004 in exchange for services rendered by Stern and Company and, upon the
exercise of A and B warrants issued to Stern and Company, an additional 35,000
shares of our common stock. Stern and Company is a Limited Liability company
registered in the state of New York which is owned, managed, and controlled by
Mr. Shai Stern. We have an agreement with Stern and Company to provide us with
business consulting type services.
(17) 100,000 shares of our common stock upon exercise of 100,000 A warrants
issued to Hamilton, Lehrer & Dargan, P.A. on or about January 22, 2004. Brenda
Lee Hamilton is the sole shareholder, officer and director of Hamilton, Lehrer &
Dargan, P.A. Hamilton, Lehrer & Dargan, P.A. is our corporate and securities
counsel.
18) The Oberon Group, LLC is a limited liability company registered in New York,
which is owned, managed, and controlled by Adam Breslawsky, a selling
shareholder, Elad Epstein and Nicole Schmidt. The Oberon Group was our finder
for a portion of our January/February 2004 private placement. In addition, we
had an agreement with The Oberon Group, LLC, which provided that it will assist
us in exploring, structuring, and negotiating financial alternatives, such as
acquisitions, mergers, or otherwise. As of September 27, 2004, as more fully
detailed on page 60 of this Prospectus, the rights and obligations of the
agreement were transferred to Dragonfly Capital Partners, LLC, a North Carolina
limited liability company registered as a broker-dealer with the National
Association of Security Dealers and the Securities and Exchange Commission. The
Oberon Group paid Spelman Research Associates, Ltd., an independent investment
research firm, a fee of $12,500 to conduct and generate a research report
regarding us.
PLAN OF DISTRIBUTION
The selling shareholders may, from time to time, sell all or a portion of the
shares of common stock on any market where our common stock may be listed or
quoted (currently the National Association of Securities Dealers OTC Bulletin
Board in the United States and the Berlin, Germany stock market ), in privately
negotiated transactions or otherwise. Such sales may be at fixed prices
prevailing at the time of sale, at prices related to the market prices or at
negotiated prices. The shares of common stock being offered for resale by this
prospectus may be sold by the selling security holders by one or more of the
following methods:
(a) block trades in which the broker or dealer so engaged will attempt to
sell the shares of common stock as agent but may position and resell a portion
of the block as principal to facilitate the transaction;
(b) purchases by broker or dealer as principal and resale by the broker or
dealer for its account pursuant to this prospectus;
(c) an exchange distribution in accordance with the rules of the
applicable exchange;
23
(d) ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
(e) privately negotiated transactions;
(f) market sales (both long and short to the extent permitted under the
federal securities laws);
(g) at the market to or through market makers or into an existing market
for the shares;
(h) through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise); and
(i) a combination of any of the aforementioned methods of sale.
In the event of the transfer by any of the selling shareholders of its warrants
or common shares to any pledgee, donee or other transferee, we will amend this
prospectus and the registration statement of which this prospectus forms a part
by the filing of a post-effective amendment in order to have the pledgee, donee
or other transferee in place of the selling stockholder who has transferred his,
her or its shares.
Selling Shareholder Crestview Capital Master LLC, which is controlled by Richard
Levy and Stuart Flink, is affiliated with Dillon Capital, a registered
broker-dealer owned by Mr. Flink. Selling Shareholder Crestview Capital Master
LLC purchased our shares of common stock in the ordinary course of business and
at the time of purchasing these securities to be resold, it had no agreements or
understandings, directly or indirectly, with any person to distribute the
securities.
Selling Shareholder Adam Breslawsky is one of three owners, managers and control
persons of The Oberon Group, LLC, a selling shareholder. As of April 12, 2004,
Mr. Breslawsky became affiliated with Dragonfly Capital Partners, LLC. as a
Registered Representative. Dragonfly Capital Partners is a North Carolina
limited liability company registered as a broker-dealer with the National
Association of Security Dealers and the Securities and Exchange Commission.
Selling Shareholder Adam Breslawsky purchased our shares of common stock in the
ordinary course of business and at the time of purchasing these securities to be
resold, he had no agreements or understandings, directly or indirectly, with any
person to distribute the securities.
In effecting sales, brokers and dealers engaged by the selling shareholders may
arrange for other brokers or dealers to participate. Brokers or dealers may
receive commissions or discounts from a selling shareholder or, if any of the
broker-dealers act as an agent for the purchaser of such shares, from a
purchaser in amounts to be negotiated which are not expected to exceed those
customary in the types of transactions involved. Broker-dealers may agree with a
24
selling stockholder to sell a specified number of the shares of common stock at
a stipulated price per share. Such an agreement may also require the
broker-dealer to purchase as principal any unsold shares of common stock at the
price required to fulfill the broker-dealer commitment to the selling
stockholder if such broker-dealer is unable to sell the shares on behalf of the
selling stockholder. Broker-dealers who acquire shares of common stock as
principal may thereafter resell the shares of common stock from time to time in
transactions which may involve block transactions and sales to and through other
broker-dealers, including transactions of the nature described above. Such sales
by a broker-dealer could be at prices and on terms then prevailing at the time
of sale, at prices related to the then-current market price or in negotiated
transactions. In connection with such resales, the broker-dealer may pay to or
receive from the purchasers of the shares commissions as described above.
The selling security holders and any broker-dealers or agents that participate
with the selling stockholders in the sale of the shares of common stock may be
deemed to be "underwriters" within the meaning of the Securities Act in
connection with these sales. In that event, any commissions received by the
broker-dealers or agents and any profit on the resale of the shares of common
stock purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
From time to time, any of the selling security holders may pledge shares of
common stock pursuant to the margin provisions of customer agreements with
brokers. Upon a default by a selling security holder, their broker may offer and
sell the pledged shares of common stock from time to time. Upon a sale of the
shares of common stock, the selling security holders intend to comply with the
prospectus delivery requirements under the Securities Act by delivering a
prospectus to each purchaser in the transaction. We intend to file any
amendments or other necessary documents in compliance with the Securities Act
which may be required in the event any of the selling stockholders defaults
under any customer agreement with brokers.
To the extent required under the Securities Act, a post effective amendment to
this registration statement will be filed disclosing the name of any
broker-dealers, the number of shares of common stock involved, the price at
which the common stock is to be sold, the commissions paid or discounts or
concessions allowed to such broker-dealers, where applicable, that such
broker-dealers did not conduct any investigation to verify the information set
out or incorporated by reference in this prospectus and other facts material to
the transaction.
25
We and the selling security holders will be subject to applicable provisions of
the Exchange Act and the rules and regulations under it, including, without
limitation, Rule 10b-5 and, insofar as a selling stockholder is a distribution
participant and we, under certain circumstances, may be a distribution
participant, under Regulation M. All of the foregoing may affect the
marketability of the common stock.
All expenses of the registration statement including, but not limited to, legal,
accounting, printing and mailing fees are and will be borne by us. Any
commissions, discounts or other fees payable to brokers or dealers in connection
with any sale of the shares of common stock will be borne by the selling
security holders, the purchasers participating in such transaction, or both.
Any shares of common stock covered by this prospectus which qualify for sale
pursuant to Rule 144 under the Securities Act, as amended, may be sold under
Rule 144 rather than pursuant to this prospectus.
Finders
In connection with our January/February 2004 private placement we paid the
following total finders fees to The Oberon Group, LLC: (a) On February 11, 2004,
we paid The Oberon Group a total of $162,800; and (b) on February 26, we granted
The Oberon Group Warrants A to purchase 50,000 shares of our common stock which
are exercisable until February 2009 at an exercise price of $5.50 per share. The
Oberon Group, LLC is a selling shareholder and is a limited liability company
registered in New York, which is owned, managed and controlled by Adam
Breslawsky, a selling shareholder, Elad Epstein and Nicole Schmidt. The Oberon
Group conducted no negotiations on our behalf with the selling shareholders.
Additional information pertaining to the finders fees that we paid to The Oberon
Group is contained in our Recent Sales of Unregistered Securities Section.
LEGAL PROCEEDINGS
In August 2002, we filed a summary procedure lawsuit in the court of Tel - Aviv,
Israel against MG Telecom Ltd. and its Chief Executive Officer, Mr. Avner Shur.
In this lawsuit, we allege an unpaid debt due to us in the amount of $50,000
from MG Telecom for services rendered by us to MG Telecom. The debt arose from
an agreement between us and MG Telecom, a provider of calling card services, in
which traffic originating from MG Telecom calling cards was delivered through
our system in London, England. Mr. Shur signed a personal guarantee agreement to
secure MG Telecom's obligations under the agreement. During October 2002, Mr.
Shur filed a request for leave to defend. The court has not rendered a judgment
in the matter and we are unable to determine the future disposition of this
matter. The court session for the hearing of the evidence was scheduled for
26
February 24, 2004, but postponed to March 22, 2004, at which time an evidentiary
hearing was held. A second evidentiary hearing was held on September 6 ,2004.
An additional evidentiary hearing will be held on December 6, 2004.
Other than the above, we are not a party to any material pending legal
proceeding, nor is any of our property the subject of such a legal proceeding.
However, we may become subject to dispute and litigation in the ordinary course
of our business. None of these matters, in the opinion of our management, is
material or likely to result in a material effect on us based upon information
available at this time.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
Our Board of Directors elects our executive officers annually. A majority vote
of the directors who are in office is required to fill vacancies of our Board of
Directors. Each director shall be elected for the term of one year, and until
his successor is elected and qualified, or until his earlier resignation or
removal. Our bylaws provide that we have at least one director. Our directors
and executive officers are as follows:
----------------------------------------------------------------------------------------------------------
Name Age Position Term of Office
----------------------------------------------------------------------------------------------------------
Abraham Keinan 54 Chairman of the Board of Directors One Year (or until replaced by a
new Director)
----------------------------------------------------------------------------------------------------------
Guy Nissenson 29 President, Principal Executive Officer,
and One Year (or until replaced by a
Director new Director)
----------------------------------------------------------------------------------------------------------
Eyal Harish 51 Director One Year (or until replaced by a
new Director)
----------------------------------------------------------------------------------------------------------
Shemer Schwartz 29 Director One Year (or until replaced by a
new Director)
----------------------------------------------------------------------------------------------------------
Tommy R. Ferguson 46 Chief Financial Officer
Principal Accounting Officer Not Applicable
----------------------------------------------------------------------------------------------------------
27
Mr. Abraham Keinan has been our Chairman of the Board of Directors since our
inception. Abraham Keinan founded Swiftnet, Ltd., our subsidiary, in February
1990. From 1991 to October 2003, Mr. Keinan was Swiftnet's Managing Director. In
or about January 2002, Mr. Keinan became a Director of Auracall, Ltd. In 1975,
Mr. Keinan received a Bachelor of Science Degree in Mechanical Engineering from
Ben-Gurion University, Beer-Sheeva - Israel.
Mr. Guy Nissenson has been our President, Chief Executive Officer, Principal
Accounting Officer, Principal Financial Officer and a Director since our
inception. Mr. Nissenson joined Swiftnet, Ltd. in October 1999, became a
director of Swiftnet, Ltd. in May 2000, and its Managing Director in October
2003. In October 2002, Mr. Nissenson became a Director of Story Telecom, Ltd. In
or about January 2002, Mr. Nissenson became a Director of Auracall, Ltd. He was
a marketing manager of RADA Electronics Industries in Israel from May 1997 to
October 1998. Mr. Nissenson was an audit and control officer with the rank of
Lieutenant of the Israeli Defense Forces - Central Drafting Base and other posts
from March 1993 to May 1997. In July 2000, Mr. Nissenson received a Bachelor of
Science Degree in Business Management from Kings College - University of London.
In September 2001, Mr. Nissenson received a Master of Business Administration in
International Business from Royal Holloway at the University of London in
London, United Kingdom.
Dr. Eyal Harish has been a member of our Board of Directors since December 19,
2002. From 1980 to present, Dr. Harish has maintained a private practice in
Israel as a dentist. Prior to becoming a dentist, from 1974 to 1980, Dr. Harish
was an Administration Manager with Consortium Holdings, an Israel based
communication company. Dr. Harish is the brother-in-law of Mr. Keinan, our
Chairman of the Board.
28
Mr. Shemer Schwartz has been a member of our Board of Directors since December
19, 2002. From March 2003 to present, Mr. Schwartz has been the co-founder and
research and development expert of XIV Ltd., a data storage start up company
located in Tel-Aviv, Israel. From November 2001 to March 2003, Mr. Schwartz has
been an Application Team Leader of RF Waves, an Israel based high technology
company in the field of wireless communication. From 1996 to 2001, Mr. Schwartz
was a Captain in the Research and Development Center of the Israeli Defense
Forces Intelligence. In July 1995, Mr. Schwartz received a BSc degree in Physics
and Mathematics from the Hebrew University in Jerusalem. In September 2003, Mr.
Schwartz received an MSc degree in Computer science from the Tel-Aviv University
in Tel-Aviv, Israel.
Mr. Tommy R. Ferguson has been our Chief Financial Officer since August 30,
2004. From July 2001 to September 2003, Mr. Ferguson was employed as Chief
Financial Officer with NewSouth Communications Corp., a communications provider
based in Greenville, South Carolina, that recently merged with NuVox
Communications. From March 2000 to June 2001, Mr. Ferguson was employed as Chief
Financial Officer with NFUSEN, a start-up Internet connectivity management
company located in Jackson, Mississippi. From August 1991 to February 2000, Mr.
Ferguson was employed as a Vice President - Finance and Treasurer with SkyTel
Communications, Inc., a telecommunications company based in Jackson, Mississippi
that was a Securities and Exchange Commission reporting company and which traded
on NASDAQ. In October 1999, MCI Worldcom acquired SkyTel Communications,
Inc.Mr. Ferguson received a Bachelor of Accountancy Degree from the University
of Mississippi in December 1979. Mr. Ferguson is a member of the American
Society of Certified Public Accountants.
SIGNIFICANT EMPLOYEES
Mrs. Bosmat Houston, 41 years of age, has been our Research and Development
Manager since our inception. She joined Swiftnet, Ltd., in September 1991 as its
Research and Development Manager. Mrs. Houston received a Bachelor of Science
Degree in Computer Science from the Technion - Institution of Technology, Haifa
- Israel in 1986.
Mr. Bryan Franks, 60 years of age, has been the Marketing Manager of Swiftnet,
Ltd's Partner Division since April 2001. As our Marketing Manager, he has been
responsible for recruiting and managing Swiftnet's resellers and agents. In May
2003, Mr. Franks became Swiftnet's Director of Sales and Marketing. From April
1998 to April 2001, Mr. Franks was employed as a Director of Sales and Marketing
with Specialist DIY, Ltd., an import and distributor of a do it yourself
products firm located in Manchester, United Kingdom.
Mr. Rafael Dick, 50 years of age, has been the Managing Director of our Israel
based subsidiary, Xfone Communication Ltd., since its inception. From October
2001 to April 2004, Mr. Dick was employed as a Director of Sales and Marketing
with "Hertz" - Kesher Rent a Car Ltd., a rental and leasing firm located in
Israel. From December 2000 to September 2001, Mr. Dick was employed as a
Director of Sales and Customers Relations with Artnet Ltd., an Outsourcing
Services firm located in Israel. From October 1996 to November 2000, Mr. Dick
was employed as a Director of Sales and Customers Relations with 012 Golden
Lines Ltd., an international telecommunication firm located in Israel.
Other than as identified above, we have no significant employees.
COMMITTEES OF THE BOARD OF DIRECTORS
We presently do not have an audit committee, compensation committee, nominating
committee, an executive committee of our board of directors, stock plan
committee or any other committees. However, our board of directors is
considering establish various committees during the current fiscal year.
Currently, our Board of Directors makes the decisions regarding compensation,
our audit, the appointment of auditors, and the inclusion of financial
statements in our periodic reports. Because our Chairman of the Board, Abraham
Keinan, and our Chief Executive Officer, Guy Nissenson, collectively through
their direct/indirect ownership of our shares of common stock, may vote shares
29
equivalent to a majority of our outstanding voting shares, they have the
authority to determine their own compensation.
FAMILY RELATIONSHIPS
Dr. Harish, one of our directors, is the brother-in-law of Mr. Abraham Keinan,
our Chairman of the Board.
Guy Nissenson, our Chief Executive Officer/Director and other members of the
Nissenson family own and control Campbeltown Business, Ltd. We have a consulting
agreement with Campbeltown Business, Ltd. and have issued stock and options to
Campbeltown.
Xfone Communication Ltd., one of our subsidiaries, is owned 26% by H.S.N.
Communication Investments Ltd, an Israel based company, that is owned: (a) 40%
by Mrs. Naama Harish, the wife of Dr. Harish, one of our directors; and (b) 40%
by Dionysos Investments Ltd, a company owned by members of the family of Mr. Guy
Nissenson, our Chief Executive Officer/Director.
Other than this family relationships, there are no other family relationships
among our officers, directors, promoters, or persons nominated for such
positions.
LEGAL PROCEEDINGS
No officer, director, or persons nominated for such positions, promoter or
significant employee has been involved in legal proceedings that would be
material to an evaluation of our management.
Our directors, executive officers and control persons have not been involved in
any of the following events during the past five years:
1. any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time;
2. any conviction in a criminal proceeding or being subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses);
3. being subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activities; or
4. being found by a court of competent jurisdiction (in a civil
action),the Commission or the Commodity Futures Trading Commission to have
violated a federal or state securities or commodities law, and the judgment has
not been reversed, suspended, or vacated.
30
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables sets forth, as of November 1, 2004, certain information
with respect to the beneficial ownership of our common stock by each stockholder
known by us to be the beneficial owner of more than 5% of our common stock and
by each of our current directors and executive officers. Each person has sole
voting and investment power with respect to the shares of common stock, except
as otherwise indicated. Information relating to beneficial ownership of common
stock by our principal stockholders and management is based upon information
furnished by each person using "beneficial ownership" concepts under the rules
of the Securities and Exchange Commission. Under these rules, a person is deemed
to be a beneficial owner of a security if that person has or shares voting
power, which includes the power to vote or direct the voting of the security, or
investment power, which includes the power to vote or direct the voting of the
security. The person is also deemed to be a beneficial owner of any security of
which that person has a right to acquire beneficial ownership within 60 days.
Under the Securities and Exchange Commission rules, more than one person may be
deemed to be a beneficial owner of the same securities, and a person may be
deemed to be a beneficial owner of securities as to which he or she may not have
any pecuniary beneficial interest. We are unaware of any contract or arrangement
which could result in a change in control of our company.
The following table assumes, based on our stock records, that there are
6,111,155 shares issued and outstanding as of November 1, 2004.
The following tables set forth the ownership of our Common Stock as of the date
of this Registration Statement by:
o Each shareholder known by us to own beneficially more than 5%
of our common stock;
o Each executive officer;
o Each director or nominee to become a director; and
o All directors and executive officers as a group.
31
Security Ownership of Beneficial Owners
--------------------------------------------------------------------------------------------------------
Title of Name & Address of Amount of Beneficial Nature of Percent of
Class Beneficial Owner Ownership Ownership Class
--------------------------------------------------------------------------------------------------------
Common Abraham Keinan 3,644,664 Direct*/**** 59.64
Chairman of the Board
4 Wycombe Gardens
London Nw11 8al
United Kingdom
--------------------------------------------------------------------------------------------------------
Common Crestview Capital 500,000 Direct 8.18**
Master LLC**
95 Revere Drive, Suite F
Northbrook, Illinois 60062
--------------------------------------------------------------------------------------------------------
Common Guy Nissenson 1,220,336 Direct/Indirect***/**** 19.97
Principal Executive Officer
President/Director
3A Finchley Park
London N12 9JS
United Kingdom
--------------------------------------------------------------------------------------------------------
Total 5,365,000 87.79
* Until June 23, 2004, Mr. Keinan indirectly held 1,302,331 shares of our
common stock through Vision Consultants Limited, a Nassau, Bahamas
incorporated company that is 100% owned by Mr. Keinan. On June 23, 2004,
the shares held by Vision Consultants Limited were transferred to Mr.
Keinan as an individual. On August 21, 2003, we issued 400,000 options to
Mr. Keinan, but on March 1, 2004, our Board of Directors cancelled these
options.
32
** Crestview Capital Master LLC, a selling shareholder, owns 500,000 shares of
our common stock; however, upon the exercise of Warrants A and B issued to
Crestview Capital Master, it will offer an additional 1,000,000 shares of
our common stock. With a total of 1,500,000 shares that Crestview Capital
Master LLC will offer, its beneficial ownership would be 24.5%.
*** Guy Nissenson, our Principal Executive Officer/President, has beneficial
ownership of 19.97% or 1,220,336 shares of our common stock, which consists
of the following: (a) 720,336 shares of our common stock owned by
Campbeltown Business Ltd., a British Virgin Islands corporation, in which
Mr. Nissenson owns 20% and his family are also shareholders; (b) 500,000
options to purchase shares of our common stock that Campbeltown Business
Ltd has the right to acquire in accordance with a Stock Purchase Agreement,
clarified on July 30, 2001 in which Campbeltown Business, Ltd. has an
option to 500,000 shares of our outstanding stock if we become listed on
the OTC Bulletin Board before December 31, 2005. We became listed on the
OTC Bulletin Board on March 25, 2002. Campbeltown Business, Ltd. has not
exercised its option as of November 1, 2004, and Campbeltown Business, Ltd.
has until December 31, 2005 to exercise its option. Campbeltown Business,
Ltd. also has a first right of refusal on any of our securities offerings
until December 31, 2005, so long as Campbeltown Business, Ltd. owns more
than 4% of our outstanding stock. To the extent that we issue any shares to
Abraham Keinan. Campbeltown Business, Ltd. has the right to purchase or
acquire such number of our shares on the same terms and conditions as
Abraham Keinan such that the relative percentage ownership of Abraham
Keinan and Campbeltown Business, Ltd. remains the same. On August 21, 2003,
we issued 200,000 options to acquire our shares to Mr. Nissenson, but on
March 1, 2004 these options were cancelled by our Board of Directors.
**** Our Chairman of the Board, Abraham Keinan, and our President/Chief
Executive Officer/Director, Guy Nissenson, exercise significant control
over stockholder matters through a September 28, 2004 Voting Agreement
between Mr. Keinan, Mr. Nissenson and Campbeltown Business Ltd, an entity
owned and controlled by Mr. Nissenson and his family. This agreement is for
a term of 10 years and provides that: (a) Messrs. Keinan and Nissenson and
Campbeltown Business, Ltd. agree to vote any shares of our common stock
controlled by them only in such manner as previously agreed by all these
parties; and (b)in the event of any disagreement regarding the manner of
voting, a party to the agreement will not vote any shares, unless all the
parties have settled the disagreement.
33
Security Ownership of Management:
----------------------------------------------------------------------------------------------------------------
Title of Name & Address of Amount of Beneficial Nature of Percent of
Class Beneficial Owner Ownership Ownership Class
----------------------------------------------------------------------------------------------------------------
Common Abraham Keinan 3,644,664 Direct*/*** 59.64
Chairman of the Board
4 Wycombe Gardens
London NW11 8AL
United Kingdom
----------------------------------------------------------------------------------------------------------------
Common Guy Nissenson 1,220,336 Direct/Indirect**/*** 19.97
Principal Executive Officer
President/Director
3A Finchley Park
London N12 9JS
United Kingdom
----------------------------------------------------------------------------------------------------------------
Common Eyal Harrish 15,000 Direct 0.25
Director
3 Moshe Dayan Street
Raanana, Israel
----------------------------------------------------------------------------------------------------------------
Common Shemer Schwartz 0 Not Applicable 0.0
Director
8 Haamoraim Street
Tel-Aviv, Israel
----------------------------------------------------------------------------------------------------------------
Common All directors and
executive officers 4,880,000 79.86
as a group
----------------------------------------------------------------------------------------------------------------
* Until June 23, 2004, Mr. Keinan indirectly held 1,302,331 shares of our
common stock through Vision Consultants Limited, a Nassau, Bahamas
incorporated company that is 100% owned by Mr. Keinan. On June 23, 2004,
the shares held by Vision Consultants Limited were transferred to Mr.
Keinan as an individual. On August 21, 2003, we issued 400,000 options to
Mr. Keinan, but on March 1, 2004, our Board of Directors cancelled these
options.
34
** Guy Nissenson, our Principal Executive Officer/President, has beneficial
ownership of 19.97% or 1,220,336 shares of our common stock, which
consists of the following: (a) 720,336 shares of our common stock owned by
Campbeltown Business Ltd., a British Virgin Islands corporation, in which
Mr. Nissenson has a 20% and his family are also shareholders; (b) 500,000
options to purchase shares of our common stock that Campbeltown Business
Ltd has the right to acquire in accordance with a Stock Purchase
Agreement, clarified on July 30, 2001 in which Campbeltown Business, Ltd.
has an option to 500,000 shares of our outstanding stock if we become
listed on the OTC Bulletin Board before December 31, 2005. We became
listed on the OTC Bulletin Board on March 25, 2002. Campbeltown Business,
Ltd. has not exercised its option as of November 1, 2004, and Campbeltown
Business, Ltd. has until December 31, 2005 to exercise its option.
Campbeltown Business, Ltd. also has a first right of refusal on any of our
securities offerings until December 31, 2005, so long as Campbeltown
Business, Ltd. owns more than 4% of our outstanding stock. To the extent
that we issue any shares to Abraham Keinan. Campbeltown Business, Ltd. has
the right to purchase or acquire such number of our shares on the same
terms and conditions as Abraham Keinan such that the relative percentage
ownership of Abraham Keinan and Campbeltown Business, Ltd. remains the
same. On August 21, 2003, we issued 200,000 options to acquire our shares
to Mr. Nissenson, but on March 1, 2004 these options were cancelled by our
Board of Directors.
*** Our Chairman of the Board, Abraham Keinan, and our President/Chief
Executive Officer/Director, Guy Nissenson, exercise significant control
over stockholder matters through a September 28, 2004 Voting Agreement
between Mr. Keinan, Mr. Nissenson and Campbeltown Business Ltd, an entity
owned and controlled by Mr. Nissenson and his family. This agreement is
for a term of 10 years and provides that: (a) Messrs. Keinan and Nissenson
and Campbeltown Business, Ltd. agree to vote any shares of our common
stock controlled by them only in such manner as previously agreed by all
these parties; and (b)in the event of any disagreement regarding the
manner of voting, a party to the agreement will not vote any shares,
unless all the parties have settled the disagreement.
We are unaware of any contract or arrangement which could result in a change in
control of our company.
DESCRIPTION OF SECURITIES
Common Equity
We are authorized to issue 25,000,000 shares of common stock, par value $.001
per share. As of November 1, 2004, there were 6,111,155 common shares issued
and outstanding held by 146 shareholders of record. All shares of common stock
outstanding are, and the common stock to be outstanding upon completion of this
offering will be, validly issued, fully paid and non-assessable.
35
We have outstanding 1,136,737 Warrants A to purchase 1,136,737 shares of our
common stock, which are exercisable until January/February 2009. These warrants
are exercisable at $5.50 per share and were issued in our January/February 2004
private placement. We have outstanding 986,737 Warrants B to purchase 986,737
shares of our common stock, which are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange. These warrants
are exercisable at $3.50 per share and were issued in our January/February 2004
private placement. Both Warrants A and B are not freely transferable.
We have 500,000 options held by Campbeltown Business, Ltd., which are
exercisable at $0.40 until December 31, 2005.
Until February 29, 2004, we had 600,000 options to purchase our common stock,
which consisted of: (a) 400,000 options held by Abraham Keinan, our Chairman of
the Board, which were exercisable at $0.475 until August 21, 2008; (b) 200,000
options held by Guy Nissenson, our President/Principal Executive Officer, which
were exercisable at $0.475 until August 21, 2008; however, as of March 1, 2004,
our Board of Directors cancelled the options granted to Messrs. Keinan and
Nissenson.
Except for these warrants and options, there are no outstanding options,
warrants, or rights to purchase any of our common stock.
Material Rights of Common stockholders
Each share of our common stock entitles the holder to one vote, either in person
or by proxy, at meetings of shareholders. The holders are not permitted to vote
their shares cumulatively. Accordingly, the shareholders of our common stock who
36
hold, in the aggregate, more than fifty percent of the total voting rights can
elect all of our directors and, in such event, the holders of the remaining
minority shares will not be able to elect any of the such directors. The vote of
the holders of a majority of the issued and outstanding shares of common stock
entitled to vote thereon is sufficient to authorize, affirm, ratify or consent
to such act or action, except as otherwise provided by law.
Holders of our common stock have no preemptive rights or other subscription
rights, conversion rights, redemption or sinking fund provisions. Upon our
liquidation, dissolution or winding up, the holders of our common stock will be
entitled to share ratably in the net assets legally available for distribution
to shareholders after the payment of all of our debts and other liabilities.
Common stock purchase warrants
In connection with our private placement of shares and warrants, in January and
February 2004, we issued an aggregate of 986,737 shares of common stock, common
stock warrants A for the purchase of 1,136,737 additional shares and common
stock warrants B for the purchase of 986,737 additional shares.
Each Warrant A, which is not freely transferable, entitles the owner to purchase
one share, until not later than January/February 2009 at an exercise price of
$5.50. Each Warrant B, which is not freely transferable, entitles the owner to
purchase one share, until not later than until the earlier of 10 days after this
registration statement is effective or 10 days after our common stock is traded
on the NASDAQ Small Cap or the American Stock Exchange or until the date that is
375 days following the date of the purchase. The Warrants B are exercisable at
an exercise price of $3.50. The shares, including those issuable upon exercise
of the Warrants A and B, are being registered herein for resale on behalf of the
holders. To date, none of the warrants have been exercised.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Transfer Online, Inc.
located in Portland, Oregon.
Preferred Stock
We are authorized to issue 50,000,000 shares of $.001 value par preferred stock.
There are no preferred shares outstanding and we currently do not have plans to
issue any shares of our preferred stock. However, preferred stock may be issued
with preferences and designations as the Board of Directors may from time to
37
time determine. The Board may, without stockholders approval, issue preferred
stock with voting, dividend, liquidation and conversion rights that could dilute
the voting strength of our common stockholders and which may assist our
management in impeding an unfriendly takeover or attempted changes in our
control.
INTEREST OF NAMED EXPERTS AND COUNSEL
Our financial statements as of December 31, 2003 and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended included in this prospectus are in reliance on the report of Chaifetz and
Schreiber, P.C., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
LEGAL MATTERS:
The validity of the common stock being offered hereby will be passed upon for us
by Hamilton, Lehrer & Dargan, P.A. who received $30,000 from us in exchange for
legal services rendered to us in the preparation of this registration statement
on Form SB-2 and 100,000 Class A Warrants which are exercisable until
January/February 2009 at a price of $5.50 per share.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES LIABILITIES
Our Bylaws, subject to the provisions of Nevada Law, contain provisions which
allow us to indemnify any person against liabilities and other expenses incurred
as the result of defending or administering any pending or anticipated legal
issue in connection with service to us if it is determined that person acted in
good faith and in a manner which he reasonably believed was in our best
interest.
38
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers and controlling persons, we
have been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable.
ORGANIZATION IN LAST FIVE YEARS
We have not entered into any material transactions with any promoter within the
last five years.
DESCRIPTION OF BUSINESS
General
We were incorporated in the State of Nevada on September 1, 2000 to acquire our
wholly owned subsidiary, Swiftnet, Ltd. and to conduct Swiftnet's
telecommunications business. Swiftnet was incorporated under the laws of the
United Kingdom on February 12, 1990. We completed the acquisition of Swiftnet on
October 4, 2000 whereby we acquired all of Swiftnet's issued and outstanding
stock in exchange for 2.4 million shares of our newly issued common stock. At
the time of the acquisition, the 2.4 million shares represented 55% of our
issued and outstanding common stock. As a result, Swiftnet became our
subsidiary, the members of Swiftnet's board of directors were appointed to our
board of directors and Swiftnet's officers became our officers. We are
authorized to issue 25,000,000 shares of common stock. As of November 1, 2004,
there are 6,111,155 shares of common stock issued and outstanding. We are
authorized to issue 50,000,000 shares of preferred stock, no shares of which are
issued and outstanding.
We have never been the subject of a bankruptcy, receivership or similar
proceeding.
Our principal executive offices are located at Britannia House, 960 High Road,
London, United Kingdom N12 9RY. Our telephone number is 011.44.845.1087777
BUSINESS
We provide international long distance voice and data communications services
through our subsidiary, Swiftnet Ltd., which has conducted communications
service operations in the United Kingdom since 1990. Swiftnet's business
consists of selling various telecommunication related services, including
telephone, facsimile, e-mail, calling cards, and Internet driven applications.
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Our customers are located in 75 countries in Europe, Australia, North America,
South America, Asia, and Africa. As of June 30, 2004, approximately 90% of our
revenues were derived from our customers located in the United Kingdom; however,
due to a management contract and a merger agreement that we have with a United
States based entity and our telecom license to conduct business in Israel, we
expect that this percentage will decrease due to more of our business being
conducted in the United States and Israel.
On April 15, 2004, we established an Israel based subsidiary, Xfone
Communication Ltd. On July 4, 2004 the Ministry of Communications of the state
of Israel granted Xfone Communication a license to provide international telecom
services in Israel. We plan to start providing services in Israel through Xfone
Communication by November 15, 2004.
On May 28, 2004, we entered into an agreement to acquire WS Telecom Inc., a
Mississippi corporation, and its two wholly owned subsidiaries, eXpeTel
Communications, Inc. and Gulf Coast Utilities, through themerger of WS
Telecominto our wholly owned subsidiary Xfone USA, Inc.
Our future business plans, as detailed below, include accelerating our program
of recruiting resellers and agents, promoting additional services, purchasing
new equipment and technology, attempting to negotiate lower rates with carriers,
upgrading our database, and creating new marketing initiatives.
Our Principal Services and their Markets:
Although we have our own switch which connects to other telephone operators, our
long distance voice and data communications services require the services of
other telephone operators that operate switches, which are electronic devices
that receive calls from customers on one side and move them on to their
destination on the other side. We use the network switching and transport
facilities of long distance providers in which calls are transferred either by
more established large telephone operators or smaller telephone operators. The
more established large telephone operators typically provide a better quality of
communications, such as better sound, less interference, and less sudden
disconnections; however, the large telephone operators are more expensive
compared with small telephone operators which have lower cost prices, but
typically less service quality in these areas.
We operate a live customer service center that operates 24 hours a day, 7 days a
week.
We provide the following telecommunication services:
o Indirect telephone service: Using a four digit access code we
resell telephone services provided by other carriers or
through the use of our own platform. This four digit access
code is used so that that people in Great Britain can dial in
order to reach certain other carriers. This enables us to take
calls originated by customers and route them to different
destinations.
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o PIN access using 0800 free numbers: Using 0800 free numbers
and PIN access codes for client identification, our customers
can call from almost any phone, including British Telecom pay
phones, to access our platform and make calls to any
destination.
o Mobile access using 0800 free numbers: This service is similar
to our PIN access service but uses mobile telephone devices.
The identification of the client is automatic and PIN
identifier numbers are not required.
o Email to Facsimile service: Our Email2Fax service allows
customers with an Internet Email account to send facsimiles at
a discounted cost. The email arrives at our Internet server
which we send via facsimile through high-speed facsimile
modems to the proper destination. We issue a confirmation
every 15 minutes indicating: (a) all successful or failed
facsimile transmissions; and (b) a complete list of
transmissions, including date and time of delivery,
destination number, pages, duration, subject, and answerback
of the transmission. Email2Fax will send a facsimile based on
a pre-defined table of retries. If a facsimile does not go
through within the pre-defined time, Email2Fax will cancel the
facsimile and a report of the failed transmission will be
included in the next status report.
o Print to Facsimile service: Similar to our Email2Fax service,
anyone with Windows 95 and an Internet browser will be able to
utilize our Print2Fax service to send a facsimile through
their printer driver, usually at a discounted cost. Using any
Windows application that supports printing, the user selects
the printer driver to receive a dialog box that allows entry
of: (a) the recipient name and fax number (including multiple
recipients, sent directly "To" or copied "CC"; (b) the
sender's name; and (c) the subject.
o Facsimile to Email or Cyber Number: This service allows the
user to receive facsimile messages directly to an email
address through the use of a personal identification number.
o Facsimile Broadcast: This service enables our business
customers to quickly send thousands of facsimiles to various
destinations.
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o Nodal Services: This service enables our business customers to
use a small platform located in their respective country, to
establish their own messaging services within that country,
including sending and receiving customer facsimiles.
o Auracall: This is a service that was introduced in
approximately March 2002, which permits any individual with a
British Telecom line to make international calls at a lower
cost and without prepayment for setting up an account with
another carrier. The Auracall service can be accessed by any
business or residential user through our website at
www.auracall.com. When customers need to make an international
or national call they can dial the appropriate designed number
for that country and save on calling rates over the current
British Telecommunications published rates by gaining access
to our switch and providing savings on a per minute basis.
o Story Telecom: Initiates, markets and distributes prepaid
calling cards that are served by our switch and systems. Story
Telecom supplies the prepaid calling cards to retail stores
through its network of dealers. These cards are sold in 5, 10,
and 20 United Kingdom pound denominations. The calling card
enables the holder to call anywhere in the world by dialing a
toll free number from any telephone that routes the holder's
call to our Interactive Voice Response System that
automatically asks for the holder's private pin code,
validates the code dialed by the customer, and tells the
credit balance of the card. The holder is then instructed to
dial to his or her desired destination, at which time our
Interactive Voice Response System tells the holder how long he
or she can speak according to the balance on the card and what
the cost per minute is. The holder of the card can use the
card repeatedly until the balance is zero.
o International Toll Free Calling Card Service: We began
offering international toll free calling card service during
approximately June 2002 from the United States, Canada,
France, Germany, Greece, Israel, Chile, Columbia, Japan,
Thailand, Hong Kong, Indonesia, Australia, New Zealand,
Belgium, Netherlands, Austria, Italy, Switzerland, Spain,
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Poland, Hungary, Ireland, Norway, Philippines, South Korea and
Sweden. We also offer Story Telecom Ltd.'s branded calling
cards.
o Internet Based Customer Service and Billing Interface. In June
2002, we completed the creation of our Internet based customer
service and billing interface at www.xfone.com, which includes
on-line registration, full account control, and payment and
billing functions and information retrieval. To complete our
Internet based customer service and billing interface, we
enhanced our Internet operations by, among other things,
fine-tuning our website which consisted of integrating and
adding more services, perfecting our billing system, and
launching our Internet operations in beta format.
Carrier Pre Select Service - British Telecom is our main local
service provider that manages our local telecom related
infrastructure, which represents the lines from our customers
to our switch. Therefore, when a customer dials "00" for
international access, the call, by default, is channeled
through British Telecom, and the customer pays British Telecom
for that call. Prior to offering our Carrier Pre-Select
Service, the customer would have to dial a special four digit
code in order that British Telecom would address the call to
our switch. Because many businesses and customers prefer not
to dial a special code, we either programmed the customer's
switchboard or installed a special add on box so that when
dialing "00", it dials our four digit code. This need for this
process was eliminated for customers that choose to register
for our pre select service offered to our existing as well as
our new customers without any additional charge. We initiated
this service in October 2003. With this service, we instruct
our main local service provider, British Telecom, to route the
customer's telephone number when the customer dials "00" to
our switch, so to Swiftnet, which allows customers to route
their telephone calls through a carrier without dialing a
special 4 digit access code, and without our having to program
an existing switchboard or install a smart box. For instance,
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if our customers want to dial the United States, they can dial
the standard 011, rather than having to also dial a special 4
digit access code.
Discontinued Service:
From approximately 1990 until January 2002, we offered an Email2telex service
which allowed a user with an Internet email account to send telexes to anywhere
in the world at a discounted cost. In January of 2002, we discontinued offering
this service due to low demand.
Our Platforms:
A platform generally could be any personal computer with telecommunications
applications, such as calling cards and transferring call applications. We
operate the following platforms in our business:
o Telesis Switch that enables us to interconnect with other
telephone carriers;
o Calling cards and prepay platforms that enable us to use voice
prompts and to accept pin numbers; and
o Messaging platform that manages facsimile broadcasts and
messaging applications.
Revenues:
The percentage of our revenues are derived from the following:
o Approximately 60% from our telephone services;
o Approximately 10% from our messaging services, including
facsimile, nodal and e-mail related services; and
o Approximately 30% from our calling cards, including 0800 and
pin access.
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Discount Telephone Rates:
As indicated below, some of our services offer discount rates compared to some
other telecom operators, such as United Kingdom's largest telecom operator,
British Telecom. For instance:
o For a call from the United Kingdom to South Africa, we charge
7 United Kingdom pence ($0.13) per minute while British
Telecom charges 25 United Kingdom pence ($0.45) per minute;
o For a call from the United Kingdom to Australia, we charge 3
United Kingdom pence ($0.054) per minute while British Telecom
charges 7 United Kingdom pence per minute ($.0126).
This information was obtained from our website at www.xfone.com and British
Telecom's website at www.bt.com. We have many competitors, however, that also
offer discounted rates.
Our Customers:
We have four major types of customers:
o Residential - These customers either must dial a four digit
access code or acquire a box that dials automatically.
o Commercial - Smaller businesses are treated the same as
residential customers. Larger businesses have the need for a
Private Branch Exchange Unit, otherwise known as a PBX Unit,
which is a centralized answering and calling System also known
as a switchboard. We program the PBX Unit of our customers so
that all of their calls are routed to us directly, and to save
the customer the need to dial a four digit access code.
o Government Agencies - Includes the United Nations World
Economic Forum, the Argentine Embassy, and the Israeli
Embassy.
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o Resellers, such as WorldNet and VSAT - We provide them with
our telephone and messaging services for a wholesale price.
For WorldNet, we also supply the billing system.
Our Billing Practices:
We charge our customers based on usage by full or partial minutes. Our rates
vary with distance, duration, time, and type of call, but are not dependent upon
the facilities selected for the call transmission. The standard terms for our
regular telephone customers require that payments are due 21 days from the date
of the invoice. Our prepay telephone services represent around 37 percent of our
revenues. Our supplier's standard terms are payment within 30 days from invoice
date; however, some new suppliers ask for shorter payment terms.
Divisions:
We operate the following divisions:
o Partner Division - Our Partner Division operates as a separate
profit center by attempting to recruit new resellers and
agents to market our products and services and to provide
support and guidance to resellers and agents. We currently
have 20 active resellers and 21 active agents.
o Operations Division - Our Operations Division provides the
following operational functions to our business: (a) 24 hour/7
day a week technical support; (b) inter-company network; (c)
hardware and software installations; and (d) operating switch
and other platforms.
o Administration Division - Our Administration Division provides
the billing, collection, credit control, and customer support
aspects of our business.
o Research and Development - The function of our Research and
Development Division is to develop and improve our billing
system, switch and telephony platforms, websites and special
projects.
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o Retail - Our Retail Division is responsible our marketing and
selling campaigns that target potential and existing retail
customers.
Geographic Markets:
Our primary geographic market is the United Kingdom. We also have customers in
Angola, Australia, Austria, Bangladesh, Belgium, Benin, Brazil, Bulgaria,
Cambodia, Cameroon, Canada, China, Congo, Croatia, Cyprus, Czech Republic,
Denmark, Egypt, Finland, France, Germany, Gibraltar, Greece, Guinea, Hong Kong,
India, Indonesia, Iran, Irish Republic, Israel, Italy, Ivory Coast, Japan, North
Korea, South Korea, Kuwait, Latvia, Lebanon, Liberia, Lithuania, Malawi,
Malaysia, Maldives Isles, Mauritius, Nepal, Netherlands, New Zealand, Niger,
Nigeria, Norway, Oman, Pakistan, Panama, Philippines, Poland, Portugal, Qatar,
Russia, Saudi Arabia, Sierra Leone, Singapore, Slovak Republic, South Africa,
Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Tanzania, Thailand, Togo, Turkey,
U.A.E, Uganda, USA and Vietnam.
Our Distribution and Marketing Methods:
We use the following distribution methods to market our services:
o We actively recruit independent contractor agents and
resellers who purchase telephone traffic directly from us at
an approximately 25% discount, and who then resell this
telephone traffic to their customers at a mark-up according to
their own price lists;
o We use direct marketing, primarily using facsimile broadcasts
and newspaper advertisements;
o We utilize agents that sell our services directly to customers
at our established prices; these agents receive a commission
of approximately 10% of the total sale amount less any bad
debts;
o We attend telecommunications trade shows in the United Kingdom
to promote our services;
o We advertise on a monthly basis in "Comms Dealer", a
telecommunications agents/resellers trade magazine; and
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o We utilize the Internet as an additional distribution channel
for our services. We utilize Xfone.com as our brand name for
our new e-commerce telecommunications operations. We plan to
build a brand name with "xfone.com" by advertising our
Internet services, partnering with other websites, and
offering attractive rates and quality of lines.
We do not have in-house sales personnel.
Future Business Plans
Recruitment
We are continuing to recruit new agents and resellers by:
o advertising in telecoms trade publications;
o an on-going targeted email campaign supported by telephone
marketing by our in-house staff to potential re-sellers who
have been identified as ideal candidates to become reseller
partners;
We estimate that our recruitment related costs will be approximately $5,000 per
month.
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New Products
Swiftnet Dial Direct
Swiftnet Dial Direct is a new service where residential and small business
clients can immediately have access to low cost international calls without
setting up an account, prepayment, or the purchase of a calling card. As this
service is totally automatic and requires no billing or account maintenance, we
can offer low prices coupled with low cost to us. Since approximately June 2004,
we have recruited agents to market this service on our behalf. We estimate that
our costs pertaining to this new service will be approximately $3,000 per month.
Wholesale Line Rental
We are now able to take over British Telecom's BT line, which is the telephone
line supplied by British Telecom that connects the client with the national
telephone network. We purchase the BT line at wholesale rates and then resell
the line to our clients. We will bill our customers with one bill for their
telephone line and their calls. This gives us complete control of the client,
who only has one place to go to order additional lines and services, as well as
calls. This will also give us the opportunity to offer bundled packages which
for a fixed amount per month will offer line rental, a mobile phone handset, and
inclusive mobile and fixed line minutes.
There are two additional advantages in offering line rental:
o Line rental agreements are for a minimum of 12 months, which
obligate our clients to this length of time in connection with
the fees that we charge for their telephone calls; and
o As we will own the line, we can terminate service for clients
if they are late in paying their bills, so we have greater
leverage in ensuring that clients pay on time.
We estimate that our costs associated with the wholesale line rental will be
approximately $8,000 per month.
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New Marketing Initiatives
We are continuing to recruit affinity partners where we produce bills and
associated marketing material in joint names with the affinity partner, enabling
them to market their product while we look after the back office. We have signed
up several new affinity partners in the past quarter, mainly in the charity and
football club market.
Carriers and Negotiating Lower Rates
Our increased sales in 2003 have enabled us to negotiate significantly lower
rates with the carriers we use to carry our international call traffic, which
gives us the opportunity to increase our margins or offer significant reductions
to secure deals with major clients. If our sales increase, we will continue
to negotiate for lower rates.
Information Technology and Software Development
In September 2004, our new database, which is the core of our client maintenance
and billing system, began operating in a test mode basis. When fully
operational, our new database will give us daily access to sales and
profitability per client and enable us to check carrier rates on a daily basis.
We estimate that our Information Technology and software development related
costs will be approximately $30,000, which we plan to fund from our operations.
Residential Packages
In November 2004 we plan to launch our new inclusive residential packages where
clients will be able to make unlimited calls to United Kingdom landlines for a
fixed monthly payment. With this residential package, clients will have a
choice, with different monthly payments, to have these unlimited calls at the
evening and weekend only, or also including daytime. United Kingdom national
calls, especially during the evening and weekend, have a very low cost to us,
and in monetary terms represent a small portion of an average phone bill. The
major cost of a typical bill comprises calls to mobiles, calls to non-geographic
numbers (0845 and 0870), and international calls, for which we will of course
charge our normal rates.
Connections to the Vodafone Network
For the last 18 months, we have offered our clients mobile connections to the
network of "O2", a provider of mobile services, where we bill client's mobile
calls on the same bill as their fixed line calls. In November 2004, we plan to
offer connections to the network of "Vodafone", another provider of mobile
services.
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Material Agreements:
RESELLER AGREEMENTS
We have agreements with approximately 40
resellers, 20 of which are currently active.
The following agreements represent our principal reseller agreements.
Worldnet Reseller Services Agreement
Our wholly owned subsidiary, Swiftnet, Ltd, has a March 8, 2000 reseller
agreement with Worldnet Global Communications, Ltd., which is located in London,
United Kingdom. In this agreement, Worldnet agrees to sell the
telecommunications services supplied by Swiftnet and to use its best endeavors
to promote Swiftnet's services, but agrees not to refer directly or indirectly
to Swiftnet or use any of Swiftnet's trade names or literature or hold it out to
be in any way connection to Swiftnet. The agreement further provides that
Swiftnet reserves the right to reject any customer and the right to use any
carrier and/or subcontractor to perform some or all of its obligations. Swiftnet
may without prejudice terminate the agreement immediately by serving written
notice to the reseller if Worldnet becomes Insolvent or fails to make any
payment when due under the agreement after having received 7 days written notice
to do so from Swiftnet. Worldnet may terminate this agreement immediately by
serving written notice on Swiftnet if Swiftnet becomes Insolvent or its license
is revoked or altered so that it is not permitted by law to provide the
services.
Story Telecom Ltd. Agreement
Our subsidiary, Swiftnet, owns a 40% interest in Story Telecom Ltd. This 40%
interest was conveyed to Swiftnet in accordance with the terms of a September
30, 2002 agreement. The parties to the agreement, us, Swiftnet, Ltd., and Mr.
Nir Davison who is the Managing Director of Story Telecom, Ltd, agreed to
establish a joint business to develop, sell, market, and distribute
telecommunications products bearing the name of Story Telecom Ltd.
Under the agreement, Swiftnet will supply Story Telecom Ltd. with:
(a) Cost plus 6% prices (to cover certain costs) with the base cost plus
percentage for the first three months of operations at 4%;
(b) Its technological backbone, which includes Swiftnet's hardware and
software capabilities, including its switch and billing system;
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(c) Technical help service (24 Hours/7 Days a week); and
(d) Use of relevant software and hardware, including switch, billing,
and an Interactive Voice Response System. An Interactive Voice
Response System is a voice recognition system that allows the
customer to listen to the amount of minutes remaining on an
individual's calling card and dial a desired telephone number
without the need for an operator.
Under the agreement, Nir Davison will supply Story Telecom Ltd. with the
following:
(a) Marketing and sales;
(b) Distribution channels; and
(c) Management in which Nir Davison will function as the Managing
Director of Story Telecom Ltd.
In addition, the agreement provides that Nir Davison will have the right to
receive options to purchase our shares of common stock if by September 2003, the
Story Telecom project meets the sales and profit formula specified in paragraph
28 of the agreement. Because Story Telecom failed to meet the sales and profit
criteria, on September 30, 2003, the right for the options was cancelled.
Separate and apart from this agreement, because Story Telecom achieved growth
since its inception, which has enabled us to attain certain achievements in our
business plan, our Board of Directors issued a resolution on September 3, 2003
which provided that we or our major shareholders, Mr. Keinan, who is our
Chairman of the Board, Vision Consultants Limited, an affiliated entity, and
Campbeltown Business Ltd., also an affiliated entity, in order to provide an
incentive to Mr. Davison and to enhance his loyalty to us, will grant him
options to purchase 500,000 shares of common stock. The September 3, 2003
resolution further provides that these major shareholders have the first right
to sell to Mr. Davison their own shares or a portion of them at the same terms,
rather than our issuing such shares. Immediately after the September 3, 2003
resolution was passed, the major shareholders, Vision Consulting and/or Abraham
Keinan and/or Campbeltown Business, Ltd., notified Mr. Davison and us that they
decided to exercise their first right by granting Mr. Davison the options to
purchase the 500,000 shares from their own shares of our common stock.
Therefore, as of the date of this notice we were no longer under the obligation
to grant an option or issue shares of common stock to Mr. Davison under this
resolution.
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Newco Agreement
Our wholly owned subsidiary, Swiftnet, Ltd., has an October 16, 2001 agreement
titled "Formation of Newco" which became Auracall Limited. The agreement
provides that Dr. Nissim Levy and Swiftnet, will establish a company, Newco, for
the purpose of developing telecommunication business based on non-geographic
numbers, which are identified in the agreement as using Swiftnet premium numbers
bands for customers to call international or national destinations paying
British Telecom directly while British Telecom pays Newco through Swiftnet.
Swiftnet premium numbers bands are special numbers, such as "0870" that
Switftnet can provide for Auracall's customers to call international or national
destinations in which such customers pay British Telecom directly while British
Telecom pays Swiftnet and Swiftnet pays Auracall. The agreement further provides
that:
a) The first stage of the budget for the company will not
exceed 100,000 United Kingdom pounds;
b) Dr. Levy will finance by way of a loan, 75% of the ongoing expenses
for 100% of the shares in Auracall;
c) Swiftnet will finance by way of a loan, 25% of the ongoing expenses
and provide cost plus prices as well as management advice and
technical support, for an option to be exercised at any time to
receive 50% of the shares of Newco or in case of a dilution, to
receive the same amount of shares as Dr. Levy;
d) Newco will repay the loans only from net profits. In case Swiftnet
does not exercise its options, it will be entitled to management
fees equal to the monies that Dr. Levy will be entitled to receive
from Newco. Once the loans are repaid, Swiftnet and Dr. Levy (or
assignees) will be entitled to the exact same amounts as a
fee/profit share.
e) Newco will receive 10% of the paid turnover of customers that it
will introduce to Swiftnet, except for mobile phones where the
percentage will be 7.
f) Newco will have the right to sell other services and products that
Swiftnet offers or will offer in the future for the beset wholesale
price available.
In May 2002, Swiftnet exercised its option to receive 50% of the shares of
Auracall and both Swiftnet and Dr. Levy agreed to give 5% of Auracall's shares
to Mr. Kirschner; therefore, the shares of Auracall were allocated as follows:
(a) Swiftnet, Ltd - 475 shares, representing 47.5% of Auracall's shares;
(b) Dr. Nissim Levy - 475 shares, representing 47.5% of Auracall's
shares; and
(c) Dan Kirschner, acting as Auracall's Managing Director - 50 shares,
representing 5.0% of Auracall's shares.
In practice, Dr. Levy, and Swiftnet each provided a loan to Auracall to the
level of about 45,000 and 15,000 United Kingdom pounds, respectively.
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Agreement between Dan Kirschner and Swiftnet, Ltd.
On August 21, 2003, Dan Kirschner, the Managing Director of Auracall, Ltd.
completed an agreement with Swiftnet providing that Swiftnet will not object
that Dr. Nissim Levy will sell all of his shares in Auracall to Mr. Kirschner
once the current agreement between Swiftnet and Dr. Levy concerning the payout
of profits to cover debt/investments and other conditions are fulfilled.
Kirschner and Swiftnet agreed to accept the following conditions which were
affirmed in the original agreement between Dr. Levy and Swiftnet:
a) Any increase in Auracall's budget will require the approval of
Kirscher and Swiftnet;
b) Swiftnet will provide cost plus prices as well as management advice
and technical support. Swiftnet will sell the service to Auracall
and will be responsible for the technical side. Swiftnet undertakes
to exhibit to Auracall all licenses, price lists, or other
permissions/documents necessary for the operation of its business;
c) Any decision about payments of loans, dividends, salaries, grants or
similar expenses will have to be decided by the board of directors
with veto rights to both sides;
d) Auracall will receive ten percent of the paid turnover of customers
that it will introduce to Swiftnet, except for mobile phones where
the percentage will be seven;
e) Auracall will have the right to sell other services and products
that Swiftnet offers or will offer in the future for the best
wholesale price available;
f) Auracall's board of directors will be comprised of 4 members: 2
nominated by Swiftnet and 2 by Mr. Kirschner;
g) Auracall will operate according to an agreed business plan and
decide on each investment and expense based on the viability of the
opportunity; and
h) Both parties will make available their contacts, connections and
influence for the success of Auracall.
The agreement further provides that once the current agreement between Swiftnet
and Dr. Levy concerning the payout of profits to cover debt/investments is
fulfilled, Kirschner's salary will be reinstated to 50,000 pounds and Swiftnet
will receive 24,000 pounds as management/consultancy fees. Further salary/fees
will be agreed together mutually.
The agreement further provides that as a bonus, Auracall will issue to Mr.
Kirschner further shares from treasury to the level that Mr. Kirschner will hold
67.5% of Auracall and Swiftnet will hold only 32.5% of Auracall.
This bonus is subject to the following pre-conditions:
(a) Mr. Kirschner will purchase from Dr. Levy his shares of Auracall.
(b) Mr. Kirschner will still act as Auracall's Managing Director.
(c) Mr. Kirschner will hold no less than 40% of Auracall's shares.
(d) Auracall will reach a monthly turnover of 150,000 pounds within two
years from the date that the arrangement between Swiftnet and Dr.
Levy will be finalized.
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The agreement between Mr. Kirschner and Swiftnet also provides that it will take
effect only after the arrangement between Mr. Kirschner and Dr. Levy will be
finalized.
In January 2004, Dr. Levy sold all of his 475 shares to Mr. Dan Kirschner.
Therefore, Mr. Kirschner now owns 52.5% of Auracall's shares and Swiftnet owns
47.% of Auracall's shares.
SUPPLIER AGREEMENTS
We have approximately 10 agreements with suppliers of telephone routing and
switching services. The following represent material supplier agreements.
Wholesale Master Services Agreement with WorldCom International, Ltd.
Swiftnet has a 1998 agreement with Worldcom International, Ltd. in which
Worldcom provides telephone connection services to Swiftnet as its customer.
Such services are provided by Swiftnet providing Worldcom with service orders in
the form proscribed by Worldcom. Swiftnet is required to pay the invoices
submitted by Worldcom to Swiftnet within one month. Swiftnet is prohibited under
the agreement with: (a) referring to Worldcom in any marketing or services
literature, unless it obtains the written consent of Worldcom; (b) purport to
act on behalf of or represent itself as acting on behalf of Worldcom; or (c)
seek to resell the services of Worldcom to other Worldcom customers. Our
agreement with WorldCom International, Ltd. may be terminated by either party
with thirty days notice. In addition, the contract may be terminated immediately
if either other party has committed a material breach of the agreement that is
incapable of remedy. Any breach capable of remedy must becorrected within 15
days. We do not have an exclusive agreement with WorldCom International, Ltd.;
Worldcom International, Ltd. provides these same services to our competitors.
Open Air Agreement
Swiftnet has an April 2, 2003 agreement with Easyair Limited which is located in
London, United Kingdom, and is otherwise known as Openair. In this agreement,
OpenAir agrees to sell and Swiftnet agrees to purchase goods and services that
Swiftnet orders according to OpenAir's price list. In practice, this price list
has changed on a daily or weekly basis. OpenAir reserves the right, by written
notice to Swiftnet, to increase the price of goods or services to reflect any
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increase in OpenAir's cost. Swiftnet is required to pay OpenAir's invoices
within 45 days of the date of the invoice. If Swiftnet fails to pay the invoice
within that 45 day period, OpenAir may charge Swiftnet interest on the
outstanding amount at 4% per annum of the Yorkshire Bank Plc base rate and may
suspend delivery of goods and services. The agreement further provides that
Swiftnet is required to perform certain obligations to OpenAir, including: (a)
use its reasonable endeavors to promote the resale of goods and services to
customers; (b) conform and adhere to OpenAir's manual for the soliciting and
processing of orders from customers; (c) inform OpenAir of any changes in
Swiftnet's ownership or organization or methods of doing business which might
affect the performance of or financial ability to comply with Swiftnet's
obligations under the agreement; and (d) cooperate fully with OpenAir to resolve
any complaints from customers. Swiftnet and OpenAir are required to use their
best endeavors to keep secret and confidential all confidential information. The
terms of the agreement is one year and continues thereafter unless written
notice is provided.
British Telecommunications Agreement
Swiftnet has an August 8, 2000 agreement with British Telecommunications, a
public limited company registered in the United Kingdom. This agreement provides
that British Telecommunications, as a Schedule 2 Public Operator, which permits
it to sell local and national telephone connection services, will connect its
systems to our operator system to furnish us with telecom related services and
facilities. We are required to pay to British Telecommunications charges
specified in their carrier price list. If Swiftnet or British Telecommunications
are in receipt of any confidential information regarding the other party, such
information is required to be kept confidential.
Teleglobe International Agreement
Swiftnet has a May 13, 1996 agreement with Teleglobe International (United
Kingdom) Ltd., a company located in London, England. In this agreement, Swiftnet
and Teleglobe agree to connect and keep connected their respective
telecommunication systems allowing Swiftnet to convey international outbound
calls via Teleglobe. Teleglobe agrees to convey calls received from Swiftnet's
telecommunications system to the telephone number called or to another
telecommunications system connected to Teleglobe's system. The term of the
agreement is for an initial term of 6 months and continues in effect unless
terminated in writing by Swiftnet or Teleglobe by giving notice of not less than
6 months. The rates payable by Swiftnet to Teleglobe may vary upon thirty days
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written notice to Swiftnet. The billing of the services is based on the total
call seconds per month per destination. Teleglobe and Swiftnet are required to
keep in confidence all confidential information. Teleglobe and Swiftnet may
terminate the agreement without prejudice to the other party by written notice
in the case of a material breach of the agreement, any license of either party
is revoked or is terminated, or if there is an arrangement or composition with
creditors generally or by a court application or bankruptcy order.
ITXC Corporation Services Agreement
Swiftnet has a February 20, 2003 agreement with ITXC Corporation, a Delaware
corporation, in which ITXC at its sole cost, is required to purchase and furnish
to Swiftnet equipment necessary to assist it in the performance of Switfnet's
telecom services, including IP telephony gateways. ITXC is also required under
the agreement to provide Swiftnet with remote management, maintenance, operation
and support of the ITXC equipment. ITXC is required to route subscribers
Internet Telephony to be routed over ITXC.net. The current ITXC prices for
exchange rates are to be provided by Swiftnet by written notice and ITXS has the
sole discretion in setting the rates.
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Swiftnet is responsible under the agreement to provide all end-user or caller
related services to its subscribers, such as billing, collections and customer
care and is required to independently operate gateways for use by its
subscribers and charge its subscribers such rates as Swiftnet deems appropriate.
Swiftnet is required to pay for the services furnished by ITXC in connection
with the equipment or as otherwise provided in the agreement. Swiftnet is
required to meet a minimum monthly commitment of 75,000 minutes of use per month
and if it fails to achieve this monthly requirement, Swiftnet is required to pay
ITXC a monthly service charge in the amount of $1,000. The agreement further
provides that title to the equipment will remain with ITXC. The term of the
agreement is 1 year with successive 90 days terms renewed automatically.
CONSULTING AGREEMENT
Stern & Company Consulting Agreement
On January 9, 2004, we executed an agreement with Stern and Company, a business
consultant, to provide us with the following services: (a) become familiar with
our business and operations and review and analyze our formal and informal
strategic, marketing, financial and business plans; and (b) advise us in
strategic planning matters and assist in the implementation of short and long
term strategic planning initiatives to enhance and accelerate the
commercialization of our business objectives. The term of the agreement is 6
months from the date of acceptance by us. In return for the services furnished
by Stern and Company to us, we agree to issue Stern and Company: (a) 17,500
shares of our common stock; (b) 17,500 warrants at $3.50 which expire 10 days
after our commencement of trading on NASDAQ small cap or the AMEX; (c) 17,500
warrants at $5.50 which expire in 5 years. As further provided in the agreement,
the shares and warrant shares have anti-dilution provisions, piggy-back
registration rights and cashless exercise rights.
FINDERS AGREEMENT
November 24, 2003 Agreement with The Oberon Group, LLC
We have a November 24, 2003 Finders Agreement with The Oberon Group, LLC, which
is identified in the agreement as a "Finder". The agreement provides that in
consideration for The Oberon Group introducing an investor to us which
culminates in the execution of a partial acquisition/investment/financing
agreement, we agree to compensate it with a cash fee equal to 8% of the total
transaction value in cash as well as 8% of the total transaction value in
warrants priced at 100% of the market at closing. The term of the agreement is 6
months and will be automatically renewed for continuous consecutive terms,
unless either party sends a written notice with a 60 day notice period,
indicating the intent to terminate the agreement.
September 28, 2004 Novation Agreement
On September 28, 2004, we entered into an agreement with The Oberon Group and
Dragonfly Capital Partners, LLC, a North Carolina limited liability company
registered as a broker-dealer with the National Association of Security Dealers
and the Securities and Exchange Commission. The agreement provides that all of
Oberon Group's rights and obligations under the November 24, 2003 agreement we
had with The Oberon Group, as described immediately above, are transferred to
Dragonfly Capital Partners. The agreement further provides that we and The
Oberon Group mutually release each other from obligations arising from the
November 24, 2003 agreement and that Dragonfly Capital Partners agrees to
perform the duties under the original November 24, 2003 agreement as if it had
been a party to that agreement.
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FINANCIAL CONSULTING AGREEMENT
February 12, 2004 Agreement with The Oberon Group, LLC
We have a February 12, 2004 agreement with The Oberon Group, LLC thatis not an
NASD registered broker dealer, which provides that The Oberon Group will assist
us in exploring, structuring, and negotiating financial alternatives,
particularly in the United States, such as acquisitions, mergers, or
otherwise.The term of the agreement is one year and may be terminated by either
The Oberon Group or us at any time after an initial six-month period, with or
without cause, upon 30 day written notice.Aggregate consideration is defined in
the agreement as the total amount of cash and the fair market value on the date
that is five days prior to the consummation of the transaction of all other
property paid or payable directly or indirectly to us or a counter party or any
of its security holders in connection with a transaction.
The agreement provides that we agree to pay The Oberon Group an initial retainer
fee of $60,000 in cash for a 6 month period ending August 12, 2004, which is
payable upon the signing of the agreement. Instead of receiving the $60,000
payment and upon The Oberon Group's request, on February 12, 2004, The Oberon
Group purchased 20,000 restricted shares of our common stock, 20,000 A warrants,
and 20,000 B warrants, as more fully detailed on page II-13 of our form SB-2
Registration Statement. Thereafter, we agree to pay The Oberon Group a monthly
retainer payment of: (a) $5,000 per month in cash, the first such payment of
which commences on March 1, 2004; and (b) 1,500 five year warrants with a strike
price of $5.50 per share. Additionally, the agreement provides that in
conjunction with any transaction with any United States counter party, we agree
to pay The Oberon Group: (a) 7% of the first $1 million of aggregate
consideration; plus (b) 6% of the 2nd $1 million of aggregate consideration;
plus (c) 5% of the 3rd $1 million of aggregate consideration; (d) 4% of the
fourth $1 million of aggregate consideration; plus (e) 3% of the remaining
aggregate consideration. The agreement further provides that for any given
transaction, the consideration paid to The Oberon Group will mirror the
consideration paid to any seller. For instance, if The Oberon Group is due a fee
of $120,0900 and the consideration paid to the seller in a transaction is 1/3
cash, 1/3 debt (with an 8% annual coupon and a 2 year maturity) and 1/3 of our
common stock, Oberon Group's fee will be $40,000 cash, $40,000 debt (with an 8%
annual coupon and a 2 year maturity) and $40,000 in our common stock.
In addition, upon closing of a transaction, we will issue The Oberon Group, or
its assigns, a warrant, valid for five years post closing, entitling its holder
to purchase a total of: (a) 7% of the first $1 million of aggregate
consideration; plus (b) 6% of the second $1 million of aggregate consideration;
plus (c) 5% of any additional aggregate consideration.The warrants will have an
exercise price equal to the market price of our common stock shares on the date
of closing of the transaction.Any common stock shares throughout the agreement
of any shares underlying the warrants throughout this agreement will entitle
their holder to one-time piggyback registration rights. All warrants may be
exchanged without the payment of any additional consideration for our stock
based upon the values of the warrant and the stock at the time of the exchange.
The agreement further provides that for any revenues paid to us from parties
introduced by The Oberon Group to us during the period of three years from the
entry into the first agreement or purchase order with such third party, The
Oberon Group will receive 1.5% of such revenues, which is referred to in the
agreement as a "referral fee". Such referrals will include any revenues derived
from the sale of products or services to such parties, any revenues derived from
the sale of our product or services through the sales force of such parties, or
any revenues derived by us from joint selling efforts with such parities to a
third party.
The agreement also contains other standard terms and conditions.
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September 27, 2004 Novation Agreement
On September 27, 2004, we entered into an agreement with The Oberon Group and
Dragonfly Capital Partners, LLC, a North Carolina limited liability company
registered as a broker-dealer with the National Association of Security Dealers
and the Securities and Exchange Commission. The agreement provides that all of
Oberon Group's rights and obligations under the February 12, 2004 agreement with
us as described above are transferred to Dragonfly Capital Partners. The
agreement further provides that we and The Oberon Group mutually release each
other from obligations arising from the February 12, 2004 agreement and that
Dragonfly Capital Partners agree to perform the duties under the original
February 12, 2004 agreement as if it had been a party to that agreement.
AGREEMENT AND PLAN OF ACQUISITION
On May 28, 2004, we entered into an Agreement to acquire WS Telecom Inc., a
Mississippi corporation, through the statutory merger of WS Telecom Inc. with
and into our wholly owned subsidiary Xfone USA, Inc. For the purposes of the
acquisition, WS Telecom, Inc. includes its wholly owned subsidiaries eXpeTel
Communications, Inc. and Gulf Coast Utilities, Inc. The terms and conditions of
the Agreement provide that:
1) all of WS Telecom's issued and outstanding capital stock will be
acquired and converted into the right to receive from us certain
shares of our restricted common stock and warrants convertible into
shares of our common stock;
2) we will issue a number of shares of our restricted common stock with
an agreed market value of $2,200,000, which will be determined using
the weighted average price of our common stock for the ten trading
days preceding the trading day immediately prior to the date we and
WS Telecom Inc. enter into a Management Operating Agreement;
3) the weighted average price of our common stock, as referred to in 2)
immediately above, will in no event be less than $3.30 per share or
greater than $4.30 per share;
4) we will issue a number of warrants with a value of $1,300,000, the
value of which will be calculated as of the date we and WS Telecom
Inc. enter into a Management Operating Agreement, assuming 90%
volatility of the underlying share of common stock of the Registrant
in accordance with the Black Scholes option - pricing model;
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5) each share of MS Telecom, Inc.'s Preferred Stock issued and
outstanding immediately prior to the effective time of the
Acquisition will be canceled and extinguished and be converted
automatically into the right to receive upon surrender of
certificate(s) representing MS Telecom, Inc.'s Preferred Stock, as
follows: (i) an amount of our stock consideration equal to the
product of our stock consideration times 28.6% divided by total of
MS Telecom, Inc.'s Preferred Stock; and (ii) an amount of our
warrant consideration equal to the product of MS Telecom, Inc.'s
warrant consideration times 28.6% divided by the total of MS
Telecom, Inc.'s Preferred Stock;
6) each share of MS Telecom, Inc.'s common stock issued and outstanding
immediately prior to the effective time of the Acquisition will be
canceled and extinguished and be converted automatically into the
right to receive upon surrender of certificate(s) representing MS
Telecom, Inc's common stock, as follows: (i) an amount of our stock
consideration equal to the product of the Our stock consideration
times 71.4% divided by the total of MS Telecom, Inc.'s common stock;
and (ii) an amount of our warrant consideration equal to the product
of our warrant consideration times 71.4% divided by the total of MS
Telecom, Inc.'s common stock;
7) completion of the Acquisition is subject to certain conditions,
including: (a) approval of the Agreement and the Acquisition by
shareholders; (b) receipt of regulatory approvals; and (c) certain
other customary conditions; and
8) concurrent with the execution of the Agreement and as material
inducements to us and WS Telecom, Inc. as the acquired company, the
following agreements will be entered into, the terms of which are
described below: (a) employment agreement between Xfone USA, Inc.
and Wade Spooner; (b) employment agreement between Xfone USA, Inc.
and Ted Parsons; and (c) escrow agreement among us, Xfone USA, Inc.,
Wade Spooner, Ted Parsons, and the escrow agent.
Employment Agreement between Xfone, USA, Inc. and Wade Spooner
The employment agreement between Xfone, USA, Inc. and Wade Spooner, as an
executive of WS Telecom, provides that Xfone USA, Inc., otherwise known as
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"Employer" in the employment agreement, will pay Wade Spooner: (a) $192,000 for
the first year of his employment; (b) $197,760 for the second year of his
employment; and (c) 203,693 for the third year of his employment.
The employment agreement further provides that Wade Spooner will be eligible to
earn additional incentive compensation, for Employment Years 1, 2, and 3, as set
forth below:
o Employment Year 1. Employer shall pay the Executive within 90 days
of the end of Employment Year 1 Incentive Compensation equal to the
greater of the following: (i) $100,000 if during Employment Year 1,
Net Sales Revenue of the Employer exceed by $2,000,000 or more the
Net Sales Revenue for the twelve month period prior to the Effective
Date and there is at least $150,000 of Pre-Tax Income for Employment
Year 1; OR (ii) $200,000 if during Employment Year 1, Net Sales
Revenue of the Employer exceed by $4,000,000 or more the Net Sales
Revenue for the twelve month period prior to the Effective Date and
there is at least $400,000 of Pre-Tax Income for Employment Year 1;
OR (iii) an amount equal to one-third (1/3) of the Excess Profit for
Employment Year 1 if during Employment Year 1 the Net Sales Revenue
(excluding Net Sales Revenue attributable to acquisitions occurring
on and after the Effective Date) of the Employer exceed by
$7,000,000 or more the Net Sales Revenue for the twelve month period
prior to the Effective Date.
o Employment Year 2. Employer shall pay the Executive within 90 days
of the end of Employment Year 2 Incentive Compensation equal to the
greater of the following: (i) $200,000 if during Employment Year 2,
Net Sales Revenue of the Employer exceed by $4,000,000 or more the
Net Sales Revenue for Employment Year 1 and there is at least
$400,000 of Pre-Tax Income for Employment Year 2; OR (ii) an amount
equal to one-third (1/3) of the Excess Profit for Employment Year 2
if during Employment Year 2 the Net Sales Revenue of the Employer
exceed by $7,000,000 or more the Net Sales Revenue for Employment
Year 1.
o Employment Year 3. The Employer shall pay the Executive within 90
days of the end of Employment Year 3 Incentive Compensation equal to
the following: (i) An amount equal to one-third (1/3) of the Excess
Profit for Employment Year 3 if during Employment Year 3 the Net
Sales Revenue of the Employer exceed by $7,000,000 or more the Net
Sales Revenue for Employment Year 2.
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The employment agreement further provides that on the first business day of
Employment Year 1, Wade Spooner will be granted and issued options for 600,000
shares of our restricted common stock, of which: (a) 100,000 will be
attributable to Employment Year 1; (b) 200,000 will be attributable to
Employment Year 2; and (c) 300,000 of which shall be attributable to Employment
Year 3. The options will vest as follows: (a) options for 100,000 shares of the
our restricted common Stock will vest 3 years from the grant date; (b) options
for 200,000 shares of our restricted common stock will vest 4 years from the
grant date; and (c) options for 300,000 shares of our common stock will vest 5
years from the grant date. The stock options will provide for a five (5) year
term from the vesting date, a strike price that is 10% above the closing price
of the Registrant's common stock on the date of issue of the Options.
The employment agreement further provides that for any acquisition of an
existing business made by Employer during the Employment Period, then Wade
Spooner will receive upon closing of the acquisition warrants for our restricted
common stock with a value equal to 1.333% of the Aggregate Transaction
Consideration of the acquisition. The value of the warrants shall be calculated
one day prior to the closing of the acquisition assuming a 90% volatility of our
underlying common stock pursuant to the Black Scholes option - pricing model and
shall vest six months from the date of issue. The warrants shall be convertible
on a one-to-one basis into common stock with a term of five years, a strike
price that is 10% above the closing price of the Parent Common Stock one day
prior to the closing date of the acquisition
In the event of any Executive Termination Without Cause, the Executive agrees to
pay as liquidated damages to the Employer an amount equal as follows:
(a) If the Executive Termination Without Cause occurs during Employment
Year 1, then the Executive shall immediately pay to the Employer an
amount equal to $1,329,000.00.
(b) If the Executive Termination Without Cause occurs during Employment
Year 2, then the Executive shall immediately pay to the Employer an
amount equal to $886,000.00.
(c) If the Executive Termination Without Cause occurs during Employment
Year 3, then the Executive shall immediately pay to the Employer an
amount equal to $443,000.00.
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Employment Agreement Between Xfone, USA, Inc. and Ted Parsons
The employment agreement between Xfone, USA, Inc. and Ted Parsons, as an
executive of WS Telecom, provides that Xfone USA, Inc., otherwise known as
"Employer" in the employment agreement, will pay Ted Parsons: (a) $100,800 for
the first year of his employment; (b) $103,825 for the second year of his
employment; and (c) $106,940 for the third year of his employment. The
employment agreement further provides that Ted Parsons will be eligible to earn
additional incentive compensation, for Employment Years 1, 2, and 3, as set
forth below:
o Employment Year 1. Employer shall pay the Executive within 90 days
of the end of Employment Year 1 Incentive Compensation equal to the
greater of the following: (i) $50,000 if during Employment Year 1,
Net Sales Revenue of the Employer exceed by $2,000,000 or more the
Net Sales Revenue for the twelve month period prior to the Effective
Date and there is at least $150,000 of Pre-Tax Income for Employment
Year 1; OR (ii) $100,000 if during Employment Year 1, Net Sales
Revenue (excluding Net Sales Revenue attributable to acquisitions
occurring on and after the Effective Date) of the Employer exceed by
$4,000,000 or more the Net Sales Revenue for the twelve month period
prior to the Effective Date and there is at least $400,000 of
Pre-Tax Income for Employment Year 1; OR (iii) an amount equal to
one-sixth (1/6) of the Excess Profit for Employment Year 1 if during
Employment Year 1 the Net Sales Revenue (excluding Net Sales Revenue
attributable to acquisitions occurring on and after the Effective
Date) of the Employer exceed by $7,000,000 or more the Net Sales
Revenue for the twelve month period prior to the Effective Date.
o Employment Year 2. Employer shall pay the Executive within 90 days
of the end of Employment Year 2 Incentive Compensation equal to the
greater of the following: (i) $100,000 if during Employment Year 2,
Net Sales Revenue of the Employer exceed by $4,000,000 or more the
Net Sales Revenue for Employment Year 1 and there is at least
$400,000 of Pre-Tax Income for Employment Year 2; OR (ii) an amount
equal to one-sixth (1/6) of the Excess Profit for Employment Year 2
if during Employment Year 2 the Net Sales Revenue of the Employer
exceed by $7,000,000 or more the Net Sales Revenue for Employment
Year 1.
o Employment Year 3. The Employer shall pay the Executive within 90
days of the end of Employment Year 3 Incentive Compensation equal to
the following: (i) An amount equal to one-sixth (1/6) of the Excess
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Profit for Employment Year 3 if during Employment Year 3 the Net
Sales Revenue of the Employer exceed by $7,000,000 or more the Net
Sales Revenue for Employment Year 2.
The employment agreement further provides that on the first business day of
Employment Year 1, Ted Parsons will be granted and issued options for 300,000
shares of our restricted common stock, of which: (a) 50,000 will be attributable
to Employment Year 1; (b) 100,000 will be attributable to Employment Year 2; and
(c) 150,000 of which shall be attributable to Employment Year 3. The options
will vest as follows: (a) options for 50,000 shares of the Our restricted common
Stock will vest 3 years from the grant date; (b) options for 100,000 shares of
our restricted common stock will vest 4 years from the grant date; and (c)
options for 150,000 shares of our common stock will vest 5 years from the grant
date. The stock options will provide for a five (5) year term from the vesting
date, a strike price that is 10% above the closing price of our common stock on
the date of issue of the Options.
The employment agreement further provides that for any acquisition of an
existing business made by Employer during the Employment Period, then Ted
Parsons will receive upon closing of the acquisition warrants for our restricted
common stock with a value equal to 0.666% of the Aggregate Transaction
Consideration of the acquisition. The value of the warrants shall be calculated
one day prior to the closing of the acquisition assuming a 90% volatility of our
underlying common stock pursuant to the Black Scholes option - pricing model and
shall vest six months from the date of issue. The warrants shall be convertible
on a one-to-one basis into common stock with a term of five years, a strike
price that is 10% above the closing price of the Parent Common Stock one day
prior to the closing date of the acquisition
In the event of any Executive Termination Without Cause, the Executive agrees to
pay as liquidated damages to the Employer an amount equal as follows:
(a) If the Executive Termination Without Cause occurs during Employment
Year 1, then the Executive shall immediately pay to the Employer an
amount equal to $171,000.
(b) If the Executive Termination Without Cause occurs during Employment
Year 2, then the Executive shall immediately pay to the Employer an
amount equal to $114,000.
(c) If the Executive Termination Without Cause occurs during Employment
Year 3, then the Executive shall immediately pay to the Employer an
amount equal to $57,000.
Management Agreement with WS Telecom
In conjunction with the merger agreement between WS Telecom and our subsidiary,
Xfone USA, Inc., Xfone USA, Inc. has a July 1, 2004 agreement with WS Telecom
and its subsidiaries, eXpeTel Communications, Inc. and Gulf Coast Utilities, and
Ted Parsons and Wade Spooner. Ted Parsons and Wade Spooner are identified in the
agreement as "guarantors" and they jointly and severally, unconditionally
guarantee the prompt payment when due of certain manager loans described below.
The agreement provides that WS Telecom; hires and appoints Xfone USA as Manager
to be responsible for the operation and management of all of WS Telecom's
business operations, including:
o Personnel - Supervising the current employees and independent
contractors of WS Telecom with the Manager having the
authority to hire, discharge and direct personnel for the
conduct of the business;
o Accounting - Supervision and administration of all accounting
and the maintenance of all books and records for the business;
o Contracts - Maintain all existing contracts necessary for the
operation of the business and the authority to enter into or
renew contract in WS Telecom's name;
o Policies and procedures - Preparation of all policies and
procedures for the operation of the business; and
o Budgets - Preparation of all operating, capital or other
budgets.
In consideration of these management services, WS Telecom assigns and transfer
to the Manager, Xfone, USA, Inc., all revenues generated from the operations of
the business and the Manager agrees to pay from the revenues the normal
operating, maintenance, administrative and similar expenses of the business.
Further, WS Telecom designates the Manager as the controlling party of the
current operating accounts of the business. In addition, the Manager in its
discretion, will have the right to make advances or loans to WS Telecom payable
on demand (or if no demand payable in equal quarterly installments of principal
and interest) for an amount up to $500,000, with interest at 7% per annum from
the date advanced until paid for the payment of any amounts due during the term
of the management agreement under any of the "special liabilities" defined in
the management agreement. WS Telecom grants to the Manager a security interest
in all of the assets of WS Telecom, Inc. and its subsidiaries, eXpeTel
Communications, Inc. and Gulf Coast Utilities, Inc..
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SELLING SHAREHOLDER RELATED AGREEMENTS
In connection with our January/February 2004 private placement, we entered into
the following agreements with the Selling Shareholders:
o Shares and Warrant Purchase Agreement;
o Registration Rights Agreement;
o Warrant A Agreement; and
o Warrant B Agreement
These agreements contain standard representations and warranties by us to the
selling shareholders. Additionally, each selling shareholder that purchased our
common stock was required to sign an Irrevocable Proxy which appointed our Chief
Executive Officer, Guy Nissenson, as proxy for each selling shareholder, and
which grants to our Chief Executive Officer an aggregate of 969,237 shares that
he may vote for the selling shareholders. These agreements further provide, as
follows:
Shares and Warrant Purchase Agreement
In connection with a private placement we conducted during January and February
2004, we sold to the selling shareholders an aggregate of 969,237 shares of our
common stock at a purchase price of $3.00 per share. Each selling shareholder
who purchased common stock was also granted one Warrant A and one Warrant B for
each share of common stock purchased. This agreement also provides for the
following under A-C below:
A. Successors and Assigns
We may not assign the common stock purchase agreement, or any of our rights or
obligations under the agreement without the prior written consent of the
Purchasers. The Purchasers may assign any or all of its rights under the common
stock purchase agreement to any party. Accordingly, the assignee will have the
benefit of the provisions of the common stock purchase agreement that are
intended to protect Purchaser until the underlying common stock may lawfully be
resold to the public in compliance with applicable securities laws.
B. Governing Law
The Shares and Warrant Purchase Agreement, and the related transaction
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documents, are governed by the internal laws of the State of New York, and all
legal proceedings in connection with the common stock purchase agreement must be
commenced exclusively in the state and federal courts sitting in the City of New
York. Thus, all questions concerning the validity, enforcement and
interpretation of the common stock purchase agreement and the related
transaction documents, will be determined by reference to New York law.
C. Liquidated Damages
This agreement provides for varying terms which vary based upon the negotiations
we conducted with each respective selling shareholders, as described below under
A and B:
A. Legend Removal Failure - We agreed to remove the restrictive legends on the
selling shareholder certificates in compliance with state and federal laws. The
penalties vary among the selling shareholders, but are either:
o Within 12 months of the purchase date, if we fail to cause the
legend to be removed as of the 14th business day after the
selling shareholder has made a request for the legend removal,
the selling shareholder may require us to pay him or her an
amount equal to 130% of his purchase price for all or a
portion of the shares and warrant shares he or she purchased;
o Within 24 months of the purchase date, if we fail to remove
the restrictive legend after 3 trading days following delivery
of the certificate to either our transfer agent or to us (the
Legend Removal Date), the shareholder may require us to pay
him either: (i) $10 per trading day per $1000 worth of
purchased shares and/or warrant shares, the worth being based
upon the stock's closing price on the Legend Removal Date, and
after 5 trading days, $20 per trading day per $1000 worth of
purchased shares and/or warrant shares; or (ii) an amount
equal to 130% of his purchase price for all or a portion of
the shares and warrant shares he purchased.
B. Rights of Participation in Additional Financing
- We may be required to allow
selling shareholders the right to participate in any subsequent financings that
we may offer. The terms vary as to the maximum percentage of the financings in
which each selling shareholder may participate, and, if our subsequent financing
We are not subject to any additional penalties under the terms of this
agreement.
67
has the effect of issuing shares below the $3.00 per share price paid by the
selling shareholders, we may be required to adjust the selling shareholder's
purchase price to that same lower price.
Registration Rights Agreement
This agreement obligates us to register the common stock covered by this
Prospectus and contains certain mutual indemnification provisions indemnifying
us and the selling shareholders and any officers, directors, agents and
employees associated with us or the selling shareholders.
This agreement provides that if our registration statement is not declared
effective within a certain period of time, we will have to issue additional
shares to the selling shareholders equal to a maximum of approximately 157,878
shares of our common stock. Because our registration statement has not been
declared effective as of November 1, 2004, we are now obligated to issue to our
selling shareholders a total of 81,227 additional shares of our common stock. We
are not subject to any additional penalties under the terms of this agreement.
Warrant A Agreement
This agreement provides that each Warrant A grants the shareholder the right to
purchase our common stock at a price of $5.50 per share. The Warrant A is
exercisable until five years after the purchase date, which is January or
February 2009.
Warrant B Agreement
This agreement provides that each Warrant B grants the shareholder the right to
purchase our common stock at a price of $3.50 per share. The Warrant B is
exercisable until the earlier of: (i) 10 days after our registration statement
is effective or 10 days after the Company's common stock is traded on the NASDAQ
Small Cap or the American Stock Exchange; or (ii) the date that is 375 days
following the date of the purchase date.
VOTING AGREEMENT
On September 28, 2004, Abraham Keinan, the Chairman of our Board of Directors,
Guy Nissenson, our President/Chief Executive Officer/Director, and Campbeltown
Business Ltd., a related party consultant, entered into a Voting Agreement which
provides as follows:
1) each of the parties to the Voting Agreement agree to vote any shares
of our common stock controlled by the parties only in such manner as
previously agreed by all parties;
2) In the event of any disagreement regarding the manner of voting, a
party to the agreement will not vote any shares, unless all the
parties have settled the disagreement;
3) The agreement applies to any and all of our common stock that is
currently owned, directly or indirectly, by any party to the
agreement and to any of our common stock in which any party to the
agreement has voting power, directly or indirectly;
4) If any additional of our shares of common stock are at any time
during the term of the agreement issued to a party to the agreement,
such shares will be voted in accordance with the other
terms to this agreement;
5) The agreement applies to any and all of our common stock which will
be issued upon exercise of any options and/or warrants;
6) The term of the Voting Agreement is ten years.
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Competitive Business Conditions
The communications and information services industry is highly competitive and
varied. We have only approximately 0.3% of the market share of the United
Kingdom based long distance and international telecom market, based on our
revenues of $12,962,282 (approximately 7.3 United Kingdom pounds) during 2003,
compared with a $4.1 billion dollar long distance and international telecom
market in the United Kingdom (approximately 2.3 billion United Kingdom pounds),
according to the United Kingdom regulatory oversight of these companies, the
Office of Communications - United Kingdom, otherwise known as Ofcam, the website
of which may be accessed at www.ofcom.org.uk. Many of our existing and potential
competitors, including approximately 160 licensed telecom carriers in the United
Kingdom, have greater financial, personnel, marketing, customer bases and other
financial resources significantly greater than ours. Our competitors include:
o Large regional carriers in the United Kingdom such as British
Telecom;
o Other regional carriers in the United Kingdom such as OneTel,
Telediscount, Alpha, and Primus;
o Smaller regional carriers such as Quip.com;
o Wireless telecommunications providers such as Vodafone, T-Mobile,
and Orange; and
o International carriers.
Many of our competitors have the flexibility to introduce new service and
pricing options that may be more attractive to our existing as well as our
future potential customers. As a result: (a) these competitors have greater
growth and profit potential than us; (b) competition may adversely affect our
telecommunications related market share; (c) our competition may lead to a
decrease in the rate at which we add new customers; and (d) price competition or
promotional incentives offered by our competitors may lead to decreases in the
rates that we charge, which may adversely affect our potential profitability.
We will attempt to overcome the competitive advantages of our competitors by:
o Enhancing our personal contact with our customers and local
agents;
o Providing our customers with the option to control and see
their account over the Internet;
o Negotiating volume discounts with our underlying carriers; and
o Increasing our ability to direct customer call traffic over
the transmission networks of more than one carrier.
Principal Suppliers:
Our principal suppliers of telephone routing and switching services according to
the percentage that each provides are:
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o Teleglobe International -- 35%
o British Telecommunications -- 24%
o Worldcom -- 20%
o ITXC Corporation -- 15%
Dependence on Major Customers:
During 2003, there were two customers that accounted for more than 10% of our
revenues: (a) our affiliate, Story Telecom, represented approximately 36% of our
total revenues; and (b) British Telecom represented approximately 18% of our
total revenues. Collectively, the United Kingdom accounts for approximately 90%
of our revenues. We do not anticipate that any other customers will account for
more than 10% of our revenues during 2004.
Patents, trademarks and licenses:
On January 9, 2004, we received notification from the Trademarks Registry Office
of Great Britain that as of August 8, 2003, our trademark, "Xfone", was
registered by that government agency. We do not have any other patents or
trademarks, nor have we filed any other applications for patents or trademarks.
Our subsidiary, Swiftnet, Ltd., is licensed in the United Kingdom as an
international telecommunication carrier. Our subsidiary, Xfone Communication
Ltd., is licensed in Israel as an international telecommunication carrier.
Regulatory Matters:
In 1996, our subsidiary, Swiftnet, Ltd., was granted a license to operate a
telecommunications system from the Secretary of State for Trade and Industry of
the United Kingdom. The license may be revoked by this agency upon thirty days
notice in the event of certain conditions such as misconduct or breach of
various telecommunications laws.
We are affected by regulations introduced by Secretary of State for Trade and
Industry of the United Kingdom. Since the break up of the United Kingdom
telecommunications duopoly consisting of British Telecom and Mercury in 1991 it
70
has been the stated goal of Secretary of State for Trade and Industry to create
a competitive marketplace. Secretary of State for Trade and Industry has imposed
mandatory rate reductions on British Telecom in the past, which are expected to
continue for the near future. We do not believe that any regulations introduced
by Secretary of State for Trade and Industry will interfere with or
substantially hurt our business.
Our business operates in at least 75 countries, all of which have different
regulations, standards and controls related to licensing, telecommunications,
import/export, currency and trade. We believe that we are in substantial
compliance with these laws and regulations.
Since only messaging services, but no calls by our customers originate in the
United States, we do not believe that we are subject to any telecommunications
laws or regulations in the United States; However, upon consummation of the
merger of WS Telecom, a Mississippi based telecom operator, into our wholly
owned subsidiary, Xfone USA, Inc.,we will become subject to applicable state and
federal telecommunications laws and regulations. Compliance with such laws will
involve higher costs than we now have in Europe.
On April 15, 2004, we established an Israel based subsidiary, Xfone
Communication Ltd. On July 4, 2004 the Ministry of Communications of the state
of Israel granted Xfone Communication Ltd. a license to provide international
telecom services in Israel. The license may be revoked by this agency in the
event of certain conditions such as breach of telecommunication laws and
regulations or breach of certain provisions of the license.
We plan to start providing services in Israel through Xfone Communication by
November 15, 2004.
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Cost of Compliance with Environmental Laws
We currently have no costs associated with compliance with environmental
regulations. We do not anticipate any future costs associated with environmental
compliance; however, there can be no assurance that we will not incur such costs
in the future.
Research and Development:
Other than developing and expanding our telecommunications applications and our
website, we do not intend to undertake any significant research and development
activities. During fiscal year 2002, we spent $51,200 US on research and
development. During 2003 we spent 44,553 UKP on research and Development. During
the first two quarters of 2004, from January 1, 2004 to June 30, 2004, we spent
20,000 UKP on research and Development.
Employees
We have 22 full-time employees consisting of:
o 1 Chief Executive Officer/President that directs our overall
operations;
o 1 Chairman of the Board, whose duties apart from being our
Chairman of the Board, are to initiate and assist with telecom
related projects;
o 1 Chief Financial Officer that directs our financial
operations;
o 1 Managing Director that directs our Israel based subsidiary
operations;
o 1 Research and Development Manager that directs and initiates
various technological and software related projects;
o 1 Marketing Manager, that directs our marketing initiatives,
including marketing pertaining to resellers and agents,
advertising and direct marketing;
o 1 Operational Manager, that directs the technical and
operational aspects of all telecom related matters pertaining
to our business;
o 2 Financial Controllers;
o 1 Network Operation Center Manager;
o 1 Legal Adviser, that acts as our in-house lawyer; and
o 11 employees in our administration department that perform
secretarial, filings, and other administrative duties and
provide our customers with technical and billing information
and support.
72
Our subsidiary, Xfone Communication Ltd., plans to recruit by the end of 2004
approximately 20 new employees.
Reports to Security Holders
We are subject to the informational requirements of the Securities Exchange Act
of 1934. Accordingly, we file annual, quarterly and other reports and
information with the Securities and Exchange Commission. You may read and copy
these reports and other information we file at the Securities and Exchange
Commission's public reference rooms in Washington, D.C. Our filings are also
available to the public from commercial document retrieval services and the
Internet world wide website maintained by the Securities and Exchange Commission
at www.sec.gov.
MANAGEMENTS DISCUSSION AND ANALYSIS
The following discussion provides information that we believe is relevant to our
financial condition and results of operations and should be read in conjunction
with our financial statements and related notes appearing elsewhere in this Form
SB2/A. This discussion contains forward-looking statements based on our current
expectations, assumptions, and estimates. 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 business. The terms "we," our" or "us" are used
in this discussion refer to Xfone, Inc. Statements made herein are as of the
date of the filing of this Form SB2/A 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.
73
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview.
We are a holding company that as of July 2004 operated entirely through our
subsidiary, Swiftnet, Ltd., a United Kingdom based telecommunication service
provider and international licensed telecommunication carrier. As of June 30
2004, Swiftnet, Ltd. has been our source of income. Through Swiftnet, we sell
and develop telecommunication services, including telephony, fax messages,
calling cards, and Internet driven applications and mainly in the United Kingdom
and Europe. In addition, Swiftnet provides services and telecom solutions to
resellers and partners worldwide.
On October 4, 2000, we acquired Swiftnet which had a business plan to provide
comprehensive telecommunication services and products by integrating new and old
products, services and ideas through one website. Swiftnet was incorporated in
1991 under the laws of the United Kingdom. Until 1999, the main revenues for
Swiftnet were derived from messaging and fax broadcast services. During the year
2000, Swiftnet shifted its business focus and our focus has remained on
telephony voice services offering comprehensive support packages to resellers
and new services. Utilizing automation and proprietary software packages,
Swiftnet's strategy is to grow without the need of heavy investments and with
lower expenses for operations and registration of new customers.
As of June 30, 2004, approximately 90% of our revenues were derived from our
customers located in the United Kingdom. Our integrated revenue approach led to
revenue from each source as described below and is partially driven by the
activities of other revenue sources. Our revenues are dependent upon the
following factors:
o Price competition in telephone rates;
o Demand for our services;
o Individual economic conditions in our markets
o Our ability to market our services
We have four major types of customers:
o Residential - These customers either must dial a special 4
digit code to access our switch or acquire a box that dials
automatically.
o Commercial - Smaller business are treated the same as
residential customers. Larger businesses' PBX (Telephony
system) units are programmed to dial the 4 digit code
automatically.
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o Governmental agencies - Includes the United Nations
World Economic Forum, the Argentine Embassy and the Israeli
Embassy.
o Resellers, such as WorldNet - We provide them with
our telephone and messaging services for a wholesale price,
calling cards are treated by resellers . For WorldNet we also
provide the billing system.
Our revenues are derived from the following:
o 55% from our telephone minute billing plus messaging
services, including facsimile, nodal, and e-mail related
services.
o 7% from our mobile phone services.
o 38% from calling cards.
The breakdown of our revenues for the year ended December 31, 2003 is reflected
in the table below:
Amounts in UK sterling
Telephone &
messaging services Mobile phones Calling cards Total
---------------------- --------------------- ---------------------- --------------
Commercial and Residential
Customers 2,981,802.00 36,1517.00 0.00 3,343,319.00
Story Telecom 2,715,231.00 2,715,231.00
Government agencies 5,663.00 5,663.00
Resellers 1,009,317.00 141,958.00 66,693.00 1,217,968.00
---------------------- --------------------- ---------------------- --------------
Totals 3,996,782.00 503,475.00 2,781,924.00 7,282,181.00
====================== ===================== ====================== ==============
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Because both have similar economic characteristics, such as prices that we
charge and the nature of the services, we have combined residential and
commercial customers as one segment.
Financial Information - Percentage of Revenues
Year ended December 31
-------------------------------------------------
2003 2002 2001 2000
------- ------- ------- -------
Revenues 100.0% 100.00% 100.00% 100.00%
Cost of Revenues -60.8 -58.66% -61.29% -64.90%
Gross Profit 39.2% 41.34% 38.71% 35.10%
Operating Expenses:
Research and Development -0.6% -0.86% -1.16% -2.15%
Marketing and Selling -15.0% -8.56% -8.24% -8.29%
General and Administrative -14.5% -23.48% -20.46% -17.45%
Total Operating Expenses -30.0% -32.90% -29.86% -27.89%
Income before Taxes 8.6% 8.39% 7.72% 6.34%
Net Income 5.8% 6.44% 5.48% 5.13%
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In October 2004, we plan on introducing our Wholesale Line Rental services;
however, we do not expect our revenues to be materially impacted with the
introduction of this service until 2005, if ever.
Years ended December 31, 2003 and 2002
Consolidated Statement of Operations
Revenues. Revenues for the year ended December 31, 2003 increased 95% to
(pound)7,282,181 from (pound)3,741,436 for the same period in 2002. The increase
in our Revenues is primarily attributable to the revenues that derive from the
usage of calling cards sold by our affiliate, Story Telecom. All traffic
generated by the Story Telecom calling cards is delivered through our systems.
The following table reflects a breakdown of our Revenues according to cost of
revenues characteristics and major resellers:
2003 2002
Regular telephony voice service
and others: (pound)4,015,448 (pound)3,737,720
Story Telecom (pound)2,715,231 (pound) 3,716
Worldnet (pound)551,502 (pound) 567,694
Total Revenues (pound)7,282,181 (pound)3,741,436
Story Telecom started its operations in September 2002 and contributed only
(pound)3,716 during fiscal year 2002. The 22% growth in the regular telephony
services is mainly attributable to an increase of approximately 450 customers in
fiscal year 2003.
For the year ended December 31, 2003 approximately 4.4% of our revenues were
generated by our affiliated entity, Auracall, as compared with 3.2% for the year
ended December 31, 2002.
Our revenues attributable to our affiliated Story Telecom amounted to 37% of our
revenues during the year ended December 31, 2003 as compared with 0.1% for the
year ended December 31, 2002. This increase is due to Story Telecom starting its
operations at the end of 2002.
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In the year ended December 31, 2003, the percentage of our revenues is derived
from the following:
o 55% from our telephone minute billing plus messaging services,
including facsimile, nodal, and e-mail related services.
o 7% from our mobile phone services.
o 38% from calling cards.
We believe that during the year 2004 same type of services and customers will
continue to generate most of our Revenues. We will offer some new services and
billing alternatives to stronger the connection with our registered customers
and to enable easy usage of our services to non registered users. Our agreement
with resellers can be terminated within a relatively short notice of 7-60 days.
Our largest non affiliated reseller is Worldnet that generated approximately 6%
of our Revenues in 2003, Worldnet can terminate the agreement with a 7 days
notice, which would adversely affect our Revenues. We have approximately 20
additional active resellers, none of which generated more that 3% of our annual
revenues. We anticipate that Worldnet will continue to contribute approximately
the same amount of UK Pounds to our Revenues.
Cost of Revenues. Cost of revenues consists primarily of traffic time purchased
from telephone companies and other related charges. Cost of revenues increased
101% to (pound)4,427,939 for the year ended December 31, 2003, from
(pound)2,194,792 for the year ended December 31, 2002, representing 60.8% and
58.7% of the total revenues for the year ended December 31, 2003 and December
31, 2002, respectively. The increase in the cost of revenues as a percentage of
revenues is attributable to the increase of our revenues that derive from the
Story Telecom project that currently focuses on Calling Cards services. The
Story Telecom Project, which accounts for approximately 37% of our Revenues in
the year ended December 31, 2003 and less than 1% in the year ended December 31,
2002, our cost of revenues as a percentage of revenues in the Story Telecom
project is approximately 94% and for Worldnet is 55%, while the cost of revenues
as a percentage of the rest of our revenues was 39% for the year ended December
31, 2003 and 58.6% for the year ended December 31, 2002. This decrease of the
cost of revenues as a percentage of revenues for non Story Telecom related
revenues is mainly attributable to lower prices negotiated with our new and old
suppliers and to the fact that we haven't reduced the prices for our services
proportionally.
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Cost of revenues breakdown:
2003 2002
Regular Telephony Services and others 1,563,293 2,191,287
Story Telecom 2,561,320 3,505
Worldnet 303,326 (a)
Total: (pound)4,427,939 (pound)2,194,792
(a) We do not have the cost of revenues related to Worldnet for the year ended
December 31, 2002.
Cost of Revenues attributable to our affiliated entity, Auracall, Ltd. were
approximately 2.8% of the total cost of revenues for the year ended December 31,
2003 as compared with approximately 1.9% for the year ended December 31, 2002.
Cost of revenues attributable to Story Telecom accounted for 58% of our total
cost of revenues as compared with 0.15% for the year ended December 31, 2002.
This increase is attributable to the growth in the revenues related to Story
Telecom.
Should Story Telecom calling cards related revenues or Worldnet generated
revenues grow faster than our other business segments, our Cost of Revenues as a
percentage of Revenues will continue to increase. If market conditions, such as
lower prices proposed by competitors in the market, forces us to lower the
prices that we charge our customers, our cost of revenues as percentage of
revenues will increase.
Research and Development. Research and development expenses were (pound)44,553
and (pound)32,000 for the year ended December 31, 2003 and 2002, respectively.
Which Represents 0.6% and 1% of revenues for the years ended December 31, 2003
and 2002, for the same periods, respectively. These expenses consist of labor
costs of our research and development manager and other related
79
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
(pound)1,091,012 from (pound)320,418 for the year ended December 31, 2003 and
2002, respectively. Marketing and selling expenses as percentage of revenues
were 15% and 8.6% for the year ended December 31, 2003 and 2002, respectively.
The increase in marketing expenses is attributable to the increasing revenues
derived from commission related activities, including commissions for agents
that promote, through our customer British Telecom, the usage of non
geographical numbers similar to 1-800 or 1-900 with no specific geographical
place.
For the year ended December 31, 2003 we paid commissions to our affiliated
company Auracall in the amount of UKP165,389 that represent 17% of the total
commissions paid during the year ended December 31, 2003. For year ended
December 31, 2002 commissions paid to Auracall represented 42% of total
commissions. The decrease in the percentage of total commissions is attributable
to growth in commission related Revenues that are related to Auracall.
General and Administrative Expenses. General and administrative expenses
increased by (pound)173,685 to (pound)1,052,310 for the year ended December 31,
2003 from (pound)878,624 from (pound)878,624 for the year ended December 31,
2002. As a percentage of revenues, general and administrative expenses decreased
to 14.5% for the year ended December 31, 2003 from 23.5% for the year ended
December 31, 2002. The increase in our General and Administrative Expenses is
mainly attributable to: (a) an increase of (pound)141,140 in the salaries and
benefits paid to our management and related employees; and (b) an increase of
(pound)81,224 in the professional fees related to the growth in our operations,
our status as a public company and legal fees. Our bad debt decreased by
(pound)117,452 to (pound)109,532 from (pound)226,984 in the year ended December
31, 2002, the decrease of which is attributable to two of our customers having
filed for bankruptcy during 2002, which caused the increased bad debt figures
for December 31, 2002. The decrease in total General and Administrative expenses
as a percentage of revenues is mainly attributable to: (a) our 95% growth in
revenues; and (b) to the lesser increase of 20% in our General and
Administrative expenses, which was achieved from improvements in our credit
controls, controlling expenses and the usage of automation and computers.
80
Financing Expenses. Financing expenses, net, increased to (pound)44,284 for the
year ended December 31, 2003 from (pound)12,837 for the year ended December 31,
2002.
Income before Taxes. Income before taxes for the year ended December 31, 2003
increased by 103% to (pound)637,901 from (pound)313,794 for the year ended
December 31, 2002. The increase of the income before taxes is attributable
primarily to the increase of 95% in our revenues. Income before taxes as a
percentage of revenues was 8.6% for the year ended December 31, 2003 and 8.4%
for the year ended December 31, 2002.
Taxes on Income. United Kingdom companies are usually subject to income tax at
the corporate rate of 20%-30%. Taxes on income for the year ended December 31,
2003, amounted to (pound)216,456 which represents 34% of the income before taxes
as compared with (pound)72,813 for the year ended December 31, 2002 that
represents 23% of the income before taxes. The increase in the percentage of
taxes on such income before taxes is attributable primarily to the higher tax
brackets that we are due to pay for our income in the year ended December 31,
2003 and the lower Net operating loss carry forward in the year ended December
31, 2003.
Net Income. Net income for the year ended December 31, 2003 increased by 75% to
(pound)421,445 as compared to (pound)240,981 for the year ended December 31,
2002. Net income as percentage of revenues were 5.8% and 6.4% for the years
ended December 31, 2003 and 2002 respectively.
Earning per share
The earning per share of common stock for the year ended December 31, 2003 was
(pound)0.08 for the basic weighted average 5,089,286 Shares and (pound)0.08 for
diluted number of shares, including the options to buy 500,000 shares. Earning
per share for the year ended December 31, 2002 was (pound)0.05 for the basic
weighted average 5,030,444 shares and (pound)0.04 for the diluted 5,530,444
shares.
Balance Sheet
Current Assets. Current assets amounted to (pound)2,635,846 as of December 30,
2003 as compared to (pound)1,658,835 as of December 31, 2002. This increase in
our current assets is mainly attributable to the growth of (pound)303,095 in the
account receivables and to the (pound)501,200 growth in our cash positions.
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As of December 31, 2003 34% of our account receivables are attributable to our
affiliated company, Story Telecom as compared with less than 1% for December 31,
2002. The 34% of our receivables is due to the fact that 37% of our revenues are
generated by Story Telecom.
We provided Story Telecom a shareholder loan that balanced UKP15,960 and
UKP14,725 for years ended December 31, 2003 and 2002 respectively.
As of December 31, 2003 our Affiliated Auracall owed us UKP4,533 as compared
with UKP16,196 for December 31, 2002, this debt is due to a shareholders loan
provided to Auracall for operations.
Loan to Shareholder. Loan to the shareholder, Mr. Keinan our Chairman of the
Board of Directors amounted to (pound)286,736 as of December 31, 2003, as
compared to (pound)303,130 as of December 31, 2002. The decrease represents a
repayment of (pound)16,394. There was an increase in the loan amount that
occurred after September 30, 2003 which was due to an expense advance provided
to Mr. Keinan, which was later expensed out of that account when Mr. Keinan
submitted his expense report to us. We no longer permit expense advances to be
temporarily assigned to the Loan to Shareholder account. Out of the total
amount, (pound)54,070 are classified as current assets as Mr. Keinan agreed with
the company to repay this amount during fiscal year 2004. On March 2004 Mr.
Keinan signed a note to repay his loan in four installments:
2004 (pound) 54,070
2005 (pound)116,333
2006 (pound)116,333
Fixed assets. Fixed assets after accumulated depreciation increased to
(pound)421,715 as of December 31, 2003 as compared with (pound)252,894 as of
December 31, 2002. Growth in fix assets reflects investments in equipment and
systems to enhance our efficiency and throughput.
Current Liabilities. As of December 31, 2003, current liabilities increased to
(pound)2,174,283 as compared with (pound)1,462,027 as of December 31, 2002. The
increase in our current liabilities results mainly from an increase of
(pound)461,247 in our trade payables attributable to the growth in our revenues.
As of December 31, 2003 and 2002, trade payables to our affiliated entity,
Auracall, Ltd., accounted for 1% of the total trade payables.
Liquidity and Capital resources December 31 2003.
Cash as of December 31, 2003 amounted to (pound)977,008 as compared
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with (pound)471,963 for the year ended December 31, 2002 an increase of
(pound)505,045, the increase was generated by net cash provided by operating
activities.
Net cash provided by operating activities for the Twelve month ended December
31, 2003 was (pound)719,604. The cash provided by operating activities was
mainly attributable to the (pound)180,464 increase in our net income, the
(pound)461,247 increase in trade payables and (pound)183,271 increase in other
trade payables that mainly consists Income Taxes.
During fiscal year 2003 we used (pound)108,270 for the purchase of capital
equipment and (pound)55,862 for the repayment of capital lease obligations. In
the year ended December 31, 2002 we used (pound)152,757 for the purchase of
equipment.
We have lease commitments to pay (pound)78,091 during fiscal year 2004 and
additional (pound)99,488 till the end of 2007. Our capital investments are
primarily for the purchase of equipment and software for services that we
provide or intend to provide.
In the fiscal year 2004 we may procure additional equipment to enhance our
capacity in the UK for the amount of app (pound)100,000. In case that we manage
to establish or acquire an operation in a new country, we anticipate an
investment of approximately (pound)600,000 in equipment, infrastructure and
software.
We shall continue to finance our operations in the United Kingdom and fund the
current commitments in the United kingdom for capital expenditures mainly from
the cash provided from operating activities. During January and February 2004 we
completed a private placement in which we raised gross proceeds that amounted to
$2,907,711. Net new cash proceeds of the Financing, approximately $2.7 million
are used and are expected to be used for general working capital and/or
investment in equipment and/or for acquisitions and/or business development.
On April 15, 2004, we established an Israel based subsidiary, Xfone
Communication Ltd. We own 74% of Xfone Communication. On July 4, 2004 the
Ministry of Communications of the state of Israel granted Xfone Communication a
license to provide international telecom services in Israel. We plan to start
providing services in Israel through Xfone Communication by November 15, 2004.
We anticipate a budget of $1,000,000 for equipment, $1,000,000 for working
capital and $2,200,000 for a bank guarantee in favor of the Government of
Israel.
On May 28, 2004, we entered into an agreement to acquire WS Telecom Inc., a
Mississippi corporation, and its two wholly owned subsidiaries, eXpeTel
Communications, Inc. and Gulf Coast Utilities, through themerger of WS
Telecominto our wholly owned subsidiary Xfone USA, Inc. We anticipate that this
acquisition will require approximately $1,000,000 for working capital.
On July 1, 2004, we entered into a management agreement which provides that
Xfone USA will provide management services to WS Telecom pending the
consummation of the merger. The management agreement provides that all revenues
generated from WS Telecom's business operations will be assigned and transferred
to Xfone USA.
83
We believe that our future cash flow from operations together with our current
cash will be sufficient to finance our operation activities through the years
2004 and 2005.
Our Israel based subsidiary, Xfone Communication Ltd., received a credit
facility from Bank Hapoalim B.M. in Israel to finance its activities. The credit
facility includes a 10 Million NIS (New Israeli Shekel) Bank Guarantee in favor
of the Government of Israel, a revolving credit line of 1 million NIS and an on
call short term credit line of 850,000 NIS. In addition, the bank made available
for Xfone Communication a long term facility of 3,150,000 NIS to procure
equipment. As of November 1, 2004, we secured the credit facility with a cash
deposit of $1,000,000, a floating charge on Xfone Communication's assets, a
fixed charge on Xfone Communication's switch and a personal collateral by Mr.
Keinan. In addition, we, Swiftnet Limited and H.S.N. Communication Investments
Ltd. issued a Letter of Guarantee, unlimited in amount, in favor of the bank,
guaranteeing all debt and indebtedness of Xfone Communication towards the bank.
As of November 1, 2004 we used the Bank Guarantee and approximately $3,700,000.
We will consider raising additional capital through a public or private
placement to fund possible acquisitions and business development activities.
Impact of Inflation and Currency Fluctuations.
As of December 31, 2003 our functional currency remains the U.K. Pound, we do
business also with U.S. 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. Major part of our cash is in U.S.
Dollars.
Our cost of revenues is all in British Pounds, most of our liabilities,
operating and financing expenses are in U.K. 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 growing expenses caused by inflation.
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.
84
Six months and Quarter ended June 30, 2004 and 2003.
Financial Information - Percentage of Revenues
Quarter ended June 30 Six months ended
2004 2003 2004 2003
----------------------- -----------------
Revenues 100% 100% 100% 100%
Cost of Revenues -72% -62% -70% -58%
Gross Profit 28% 38% 30% 42%
Operating Expenses:
Research and Development -- -1% - -1%
Marketing and Selling -14% -15% -15% -18%
General and Administrative -8% -14% -9% -14%
Total Operating Expenses -23% -30% -25% -33%
Income before Taxes 5% 8% 6% 8%
Net Income 3% 6% 4% 7%
The US Dollars amounts for 2004 are presented herein for convenience only, at
the current rate as of June 30, 2004: (pound)1 to $1.81.
Consolidated Statement of Operations
Revenues. Revenues for the six months ended June 30, 2004 increased by 83% to
(pound) 4,539,710 ($8,216,875). The increase is attributable to an increase of
(pound) 1,733,526 in the revenues derived from calling cards services, which are
primarily generated by our affiliate company, Story Telecom Limited. Revenues
for the quarter ended June 30, 2004 increased by 58% to (pound)2,232,495
($4,040,816) from (pound)1,410,947 for the same period in 2003. Main growth for
the quarter was generated by the increase in our calling card activities that
increased to (pound)1,104,642 for the quarter ended June 30, 2004 from (pound)
361,493 for the comparable 2003 period.
85
Segments of Revenues:
The following table reflects a breakdown of our Revenues according to our
segments of services as of June 30, 2004 and 2003:
Three Months ended June 30, Three months Six Months ended June 30, Six Months
Ended Ended
June 30 June 30,
2004 2003 2004 2004 2003 2004
---------------- --------- --------- --------- --------- ---------
Revenues: convenience convenience
translation translation
into US$ into US$
Telephone & Messaging 1,061,198 997,589 1,920,768 2,162,866 1,867,761 $3,914,787
Mobile 66,655 51,865 120,645 186,215 160,745 337,049
calling cards 1,104,642 361,493 1,999,402 2,190,629 457,103 3,965,038
--------------- ---------- ---------- ---------- ---------- ----------
Total Revenues (pound)2,232,495 1,410,947 4,040,816 4,539,710 2,485,609 8,216,875
The percentage of the Company's revenues is derived from the following segments:
Three Months Six Months
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
Telephone & messaging 48% 70% 48% 76%
Mobile phone services 3% 4% 4% 6%
Calling cards 49% 26% 48% 18%
------------- ------------- ------------- -------------
100% 100% 100% 100%
============= ============= ============== =============
The 16% growth in the regular telephony services is mainly attributable to the
increase in the revenues generated by our affiliate company, Auracall Limited.
Revenues from affiliated entities Story Telecom and Auracall (in UK Sterling):
Quarter ended June 30 Six Months ended June 30
2004 2003 2004 2003
--------- --------- --------- -------
Story Telecom 993,398 340,588 1,980,193 394,938
Auracall 211,177 23,491 369,899 82,501
Others 1,027,920 1,046,868 2,189,618 2,008,170
--------- --------- ---------- ----------
Total 2,232,495 1,410,947 4,539,710 2,485,609
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Percentage of Revenue from affiliate entities, Story Telecom and Auracall:
Quarter ended June 30 Six months ended June 30
2004 2003 2004 2003
-------- --------- --------- ------
Story Telecom 44% 24% 44% 16%
Auracall 10% 2% 8% 3%
Others 46% 74% 48% 81%
--------- --------- -------- ------
Total 100% 100% 100% 100%
Story Telecom related revenues of our total revenues increased from 24% in the
six months ended June 30, 2003 to 44% for the six months ended June 30, 2004.
This increase is attributable to the time period involved in Story Telecom
gaining market share, since it began its operations at the end of 2002.
Auracall related Revenues for the six months ended June 30, 2004 increased by
345% compared with the six months ended June 30, 2003. Auracall related revenues
as a percentage of total revenues increased to 8% for the six months ended June
30, 2004 as compared with 3% for the six months ended June 30,2003. During the
quarter ended June 30, 2004, Auracall related Revenues continued to grow and its
percentage of total revenues increased to 10%. The increase is attributable to
successful marketing efforts of Auracall combined with more competitive prices
offered to users of the service.
We believe that during the remainder of Fiscal Year 2004, our current business
base in the United Kingdom for the same type of services and customers will
continue to generate most of our revenues; however, we plan to offer some new
services and billing alternatives to stronger the connection with our registered
customers and to enable easy usage of our services to non registered users.
Cost of Revenues. Cost of revenues consists primarily of traffic time purchased
from telephone companies, depreciation of relevant equipment, and other related
charges. Cost of revenues increased by 118% to (pound)3,177,035 ($5,750,434) for
the six months ended June 30, 2004, from (pound)1,452,333 for the six months
ended June 30, 2003, representing 70% and 58% of the total revenues for the six
months ended June 30, 2004 and June 30, 2003, respectively.
For the three months ended June 30, 2004, cost of revenues as a percentage of
revenues was 72% compared with 62% for the same 2003 period. The increase in
cost of revenues as a percentage of revenues is attributable to the increase of
our revenues that derive from the Story Telecom project that currently focuses
on calling cards services.
87
The Story Telecom Project accounts for approximately 44% of our Revenues in both
the six and three months ended June 30, 2004 and approximately 16% and 24% in
both the six and three months ended June 30, 2003, respectively. Our cost of
revenues as a percentage of revenues in the Story Telecom project is
approximately 94% while the cost of revenues as a percentage of the rest of our
revenues was 52% for the six months ended June 30, 2004 and the six months ended
June 30, 2003.
Our cost of revenues as a percentage of revenues related to our affiliate
company, Auracall was 45% for the six months ended June 30, 2004 and 37% for the
six months ended June 30, 2003. The increase reflects adaptation of the market
prices to the Auracall services.
Cost of Revenue breakdown
Three months ended June 30 Six months ended June 30
2004 2003 2004 2003
---- ---- ---- ----
Non affiliated regular services
And others 584,745 536,912 1,142,638 1,048,451
Story Telecom 939,398 321,309 1,868,107 372,583
Auracall 91,654 11,888 166,290 31,299
--------- --------- --------- ---------
Total 1,615,797 870,109 3,177,035 1,452,333
Should Story Telecom calling cards related revenues continue to grow faster than
our other business segments, our Cost of Revenues as a percentage of Revenues
will continue to increase. If market conditions, such as lower prices proposed
by competitors in the market, forces us to lower the prices that we charge our
customers, our cost of revenues as percentage of revenues will increase.
88
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, 2004 and 2003, respectively, gross profit was
(pound)1,363,674 ($2,466,440) and (pound)1,033,276, which represents a 32%
increase. The gross profit as a percentage of revenues decreased to 30% for the
six months ended June 30, 2004, from 42% for the six months ended June 30, 2003.
The gross profit for the three months ended June 30, 2004 was (pound) 606,698,
an increase of 14% over the same period of 2003. Gross profit as a percentage of
revenues for the three months ended June 30, 2004 dropped to 28% as compared to
38% for the three months ended June 30, 2003.
Our project with our affiliate, Story Telecom, reduced our gross profit margin
because of the low margins involved in the project and its high volume.
Research and Development. Research and development expenses were (pound)20,000
($36,200) and (pound)19,000 for the six months ended June 30, 2004 and 2003,
respectively. Such expenses represent less than 1% of our revenues for both
periods. These expenses consist of labor costs of our research and development
manager and other related costs. Main developments relate to the development of
our 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 by 52%
or $237,275 to (pound)686,798 ($1,243,104) from (pound)449,523 for the six
months ended June 30, 2004 and 2003, 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 area. Our agreement with resellers
can be terminated within a relatively short notice of 7-60 days. Our largest non
affiliate reseller is Worldnet that generated approximately 6% of our Revenues
during the six and three months ended June 30,2004. Worldnet can terminate its
agreement with us with a 7 days notice; should Worldnet decide to terminate this
agreement our Revenues will be negatively affected. Marketing and selling
expenses as a percentage of revenues were 15% and 18% for the six months ended
June 30, 2004 and 2003, respectively. For the three months ended June 30, 2004
and 2003, marketing expenses as a percentage of revenues were 14% and 15%
respectively.
For the six months ended June 30, 2004, we paid commissions to our affiliate
Company, Auracall, in the amount of UKP180,920 ($327,465) that represent 29% of
the total commissions paid during the period as compared with UKP36,650 that
represent 10% of total commissions paid on the six months ended June 30, 2003.
The increase in the percentage of total commissions is attributable to growth in
the revenues generated by Auracall.
General and Administrative Expenses. General and administrative expenses
increased to (pound)421,648 ($763,183) from (pound)344,554 for the six months
ended June 30, 2004 and 2003 respectively. As a percentage of revenues, general
and administrative expenses decreased to 9% for the six months ended June 30,
2004 from 14% for the three months ended June 30, 2003. The increase in our
General and Administrative Expenses is mainly attributable to: (a) an increase
of (pound)33,879 ($61,321) in the salaries and benefits paid to our management
and related employees; and (b) an increase of (pound)44,016 ($79,668) in rent
and maintenance expenses. The decrease in total General and Administrative
expenses as a percentage of revenues is mainly attributable to: (a) our 83%
growth in revenues; and (b) to the lesser increase of 22% in our General and
Administrative expenses, which was achieved by controlling expenses and the
usage of automation and computers.
89
Financing Expenses. For the six months ended June 30, 2004, we had net income
from financing of (pound) 7,228 ($13,082). This income derives from changes in
rate of exchange since we completed the private placement on February 2004.
Income before Taxes. Income before taxes for the six months June 30, 2004
increased by 19% to (pound)248,478 ($449,746) from (pound)209,535 for the six
months ended June 30, 2003. The increase of the income before taxes is
attributable primarily to the increase of 6% in our operational profit and the
income from financing and other. Income before taxes as a percentage of revenues
was 5% for the three months ended June 30, 2004 and 8% for the three months
ended June 31, 2003.
Taxes on Income. United Kingdom companies are usually subject to income tax at
the corporate rate of 20%-30%. Taxes on income for the six months ended June 30,
2004, amounted to (pound)74,550 ($134,935) which represents 30% of the income
before taxes as compared with (pound)37,000 for the six months ended June 30,
2003 that represents 18% of the income before taxes. The increase of the
percentage of tax is due to a higher tax bracket and the lack of carry forward
tax benefits in the six months ended June 30, 2004.
Net Income. Net income for the six months ended June 30, 2004 increased by 1% or
(pound) 1,393 ($2,521) to (pound)173,928 ($314,809) as compared to
(pound)172,535 for the six months ended June 30, 2003. Net income as a
percentage of revenues was 4% and 7% for the six months ended June 30, 2004 and
2003 respectively. Net income for the three months ended June 30, 2004 was
(pound) 70,859 as compared with (pound) 91,563 for the same period of 2003. The
22% or %20,704 (pound)decrease is due to the higher taxes rates that we are
required to pay for the three months ended June 2004.
Earning per share
The earning per share of common stock for the six months ended June 30, 2004 was
(pound)0.03 ($0.05) for the basic weighted average 5,868,942 shares and
(pound)0.02 ($0.04) for diluted weighted average 7,836,547 shares, including the
options and warrants to buy 2,623,474 shares. Earning per share for the six
months ended June 30, 2003 was (pound)0.03 for the basic weighted average
5,030,444 shares and (pound)0.03 for the diluted 5,530,444 shares. Earning per
share for three months ended June 30, 2004 was (pound) 0.01 ($0.02) for the
basic 6,115,626 average weighted shares and (pound) 0.01 for 8,739,100 diluted
average weighted shares. Earning per share for the same period of 2003 was 0.01
for basic and diluted number of shares.
90
Balance Sheet
Current Assets. Current assets amounted to (pound)3,893,330 ($7,046,925) as of
June 30, 2004 as compared to (pound)2,635,847 as of December 31, 2003. This 47%
or (pound) 1,257,483 increase in our current assets is mainly attributable to
the increase of (pounds) 613,253 in accounts receivables and growth of
(pound)468,786 ($848,503) in the cash balance attributable to the funds we
raised during the quarter.
As of June 30, 2004, we had net account receivables from our affiliate company,
Story Telecom, of (pound)783,863 ($1,418,792) representing 42% of our total
account receivables compared with (pound) 429,604 for December 31, 2003
representing 34% from the total account receivables. As of June 30, 2004, our
affiliate company, Auracall, owes us a net amount of (pound) 49,097 ($88,865)
compared with a trade payable to Auracall of (pound) 18,040 for the year ended
December 31, 2003.
Loan to shareholder. Loan to the shareholder, Mr. Keinan, our Chairman of the
Board of Directors, amounted to (pound) 275,555 ($498,754) as of June 30, 2004,
as compared to (pound)286,736 as of December 31, 2003. The decrease represents a
repayment of (pound)11,181 ($20,238). Out of the total amount, (pound)42,889
($77,630) is classified as current assets since Mr. Keinan agreed to repay us
this current assets amount during fiscal year 2004. In March 2004, Mr. Keinan
signed a note to repay his loan in four installments:
2004 (pound)54,070 ($96,245)
2005 (pound)116,333 ($207,073)
2006 (pound)116,333 ($207,073)
Fixed assets. Fixed assets after accumulated depreciation increased to
(pound)611,878 ($1,107,500) as of June 30, 2004 as compared with (pound)421,715
as of December 31, 2003. Growth in fixed assets reflects investments in
equipment and systems to enhance our efficiency and capacity.
Current Liabilities. As of June 30, 2004, current liabilities decreased to
(pound)2,049,582 ($3,709,745) as compared with (pound)2,174,284 as of December
31, 2003. The decrease in our current liabilities results mainly from the
(pound) 86,270 ($156,149) dividend that was paid and a decrease of (pound)89,196
($161,445) in our `other liabilities and accrued expenses' due to the decrease
in corporate taxes liabilities.
Liquidity and Capital resources June 30, 2004.
Cash as of June 30, 2004 amounted to (pound) 1,445,794 ($2,616,887) as compared
with (pound)977,008 for the year ended December 31, 2003. Since December 31,
2003, our operations used a net cash amount of (pound)791,139. This usage is
mainly attributable to the increase of (pound) 622,527 in trade receivables.
Financing activities, including the private placement that we completed during
the quarter ended June 30, 2004 generated proceeds in the amount of
(pound)1,343,735 ($2,432,157).
91
During the six months ended June 30, 2004 we used (pound)83,809 ($151,694) for
the purchase of capital equipment. We have lease obligations to repay
(pound)115,147 ($208,416) during fiscal year 2004 and an additional
(pound)123,522($223,575) till the end of 2007. Our capital investments are
primarily for the purchase of equipment and software for services that we
provide or intend to provide. In the fiscal year 2004, we may procure additional
equipment, such as Switch modules and other Telecom systems and equipment, to
enhance our capacity in the United Kingdom for the amount of approximately
(pound)100,000 ($181,000).
We shall continue to finance our operations in the United Kingdom and fund the
current commitments in the United Kingdom for capital expenditures mainly from
the cash provided from operating activities.
During January and February 2004, we completed a private placement in which we
raised gross proceeds of $2,907,711. Net new cash proceeds of the financing,
approximately $2.5 million, have been used and are expected to be used in the
future for general working capital and/or investment in equipment and/or for
acquisitions and/or business development.
On April 15, 2004, we established an Israel based subsidiary, Xfone
Communication Ltd. We own 74% of Xfone Communication. On July 4, 2004 the
Ministry of Communications of the state of Israel granted Xfone Communication a
license to provide international telecom services in Israel. We plan to start
providing services in Israel through Xfone Communication during the fourth
quarter of 2004. We anticipate a budget of $1,000,000 for equipment, $1,000,000
for working capital and $2,200,000 for a bank guarantee in favor of the
Government of Israel.
On May 28, 2004, we entered into an agreement to acquire WS Telecom Inc., a
Mississippi corporation, and its two wholly owned subsidiaries, eXpeTel
Communications, Inc. and Gulf Coast Utilities, through the merger of WS Telecom
into our wholly owned subsidiary Xfone USA, Inc. We anticipate that this
acquisition will require approximately $1,000,000 for working capital.
On July 1, 2004, we entered into a management agreement which provides that
Xfone USA will provide management services to WS Telecom pending the
consummation of the merger. The management agreement provides that all revenues
generated from WS Telecom's business operations will be assigned and transferred
to Xfone USA.
We believe that our future cash flow from operations together with our current
cash will be sufficient to finance our operation activities through the years
2004 and 2005.
Our Israel based subsidiary, Xfone Communication Ltd., received a credit
facility from Bank Hapoalim B.M. in Israel to finance its activities. The credit
facility includes a 10 Million NIS (New Israeli Shekel) Bank Guarantee in favor
of the Government of Israel, a revolving credit line of 1 million NIS and an on
call short term credit line of 850,000 NIS. In addition, the bank made available
for Xfone Communication a long term facility of 3,150,000 NIS to procure
equipment. As of November 1, 2004, we secured the credit facility with a cash
deposit of $1,000,000, a floating charge on Xfone Communication's assets, a
fixed charge on Xfone Communication's switch and a personal collateral by Mr.
Keinan. In addition, we, Swiftnet Limited and H.S.N. Communication Investments
Ltd. issued a Letter of Guarantee, unlimited in amount, in favor of the bank,
guaranteeing all debt and indebtedness of Xfone Communication towards the bank.
As of November 1, 2004 we used the Bank Guarantee and approximately $3,700,000.
We will consider raising additional capital through a public or private
placement to fund possible acquisitions and business development activities.
92
Certain Financial Projections
On May 19, 2004, Spelman Research Associates, Ltd., an independent investment
research firm, issued a research report regarding us.The Spelman Research
Associates report included certain 2004 and 2005 financial projections
pertaining to us and a "buy" rating regarding our common stock. Spelman Research
Associates received a fee of $12,500 for the preparation of this report from The
Oberon Group, LLC, a selling shareholder, consultant and our finder for locating
investors for a portion of our January/February 2004 private placement.
On June 16, 2004, Financial Relations, Inc. issued a press release and virtual
road show presentation, which contained a portion of the Spelman Research
Associates projections. The press release and virtual road show were published
by Financial Relations in order to demonstrate to us the services it could
provide to us in the future. Neither we nor our directors, officers, or advisors
paid any compensation to Financial Relations for the press release or the
virtual road show. As per our instructions, on or about July 22, 2004, Financial
Relations removed the virtual road show from the Internet.
The following are the financial projections that were included in the virtual
road show.
2004 2005
Annual revenues (in millions of US dollars) $19.7 $24.3
Annual earnings (in millions of US dollars) $0.9 $1.0
In addition to the above, on October 18, 2004, Spelman Research Associates
reiterated a "buy" rating regarding our common stock.
We did not prepare, or review or approve the base assumptions or underlying data
that mayhave supported the financial projections or the "buy" ratings prior to
their release, nor do we know to date what those assumptions or data were when
used by the party preparing the report. Investors should use extreme caution in
utilizing these financial projections or "buy" ratings prior to making an
investment decision and should review all of the information included in this
prospectus, including the material risks that exist in connection with utilizing
these projections and "buy" ratings, as summarized in the Risk Factor on page 15
of the Prospectus.
Impact of Inflation and Currency Fluctuations.
As of June 30, 2004 our functional currency remains the United Kingdom Pound, we
do business also with U.S. Dollars. Even when we do business in other countries
rather than the United Kingdom or the United States we sell and buy in either
United Kingdom Pounds or United States Dollars.
Most of our revenues and current assets are in British Pounds, the long-term
loan to a shareholder is all in United Kingdom Pounds. Major part of our cash is
in United States Dollars.
Our cost of revenues is all in British Pounds; most of our liabilities,
operating and financing expenses are in United Kingdom Pounds. The remainder of
the assets, liabilities, revenues and expenditures are in U.S. Dollars.
A devaluation of the United Kingdom Pound in relation to the United States
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 United Kingdom Pound in relation to
the Dollar has the effect of increasing the Dollar value of all United Kingdom
Pounds assets and the Dollar amounts of any United Kingdom liabilities and
expenses.
Inflation would affect our operational results if we shall not be able to match
our Revenues with growing expenses caused by inflation.
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.
93
DESCRIPTION OF PROPERTY
Our corporate headquarters are located at 960 High Road, London N12 9RY - United
Kingdom. This 3,000 square foot facility has seven offices, one board room, one
computer room, one operation room that controls the computer room, entrance
hall, main hall, accounting, secretarial and administration and 2 kitchens. Our
office is located on the fifth floor of a six floor building with a concierge,
two elevators and parking facilities. Our premises were leased on a 5 year term,
which was due to expire on December 12, 2001. The yearly lease payments are
approximately $23,421.00 (15,900 Pound Sterling). On December 20, 2002, we
renewed our lease for a period of 10 years, with a five year cancellation
option. Our current lease expires on December 20, 2012. The yearly lease
payments have been increased to $34,320 (24,000 Pound Sterling).
Our offices are in good condition and are sufficient to conduct our operations.
We do not own any property nor do we have any plans to acquire any property in
the future. We do not intend to renovate, improve or develop any properties. We
are not subject to competitive conditions for property and currently have no
property to insure. We have no policy with respect to investments in real estate
or interests in real estate and no policy with respect to investments in real
estate mortgages. We have no policy with respect to investments in securities of
or interests in persons primarily engaged in real estate activities.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ABRAHAM KEINAN
Keinan Share Issuance
On September 1, 2000, we issued 1,730,000 shares of our common stock to our
founder and Chairman of the Board, Abraham Keinan for services rendered to us in
our corporate formation. Mr. Keinan's services consisted of the establishment of
our business concept and providing us with technical expertise. We valued Mr.
Keinan's services at $247,390.
Keinan Stock Ownership Through Vision Consultants Limited
Until June 23, 2004, Our Chairman of the Board, Mr. Abraham Keinan indirectly
held 1,302,331 shares of our common stock through Vision Consultants Limited, a
Nassau, Bahamas incorporated company that is 100% owned by Mr. Keinan.On June
23, 2004, the shares held by Vision Consultants Limited were transferred to Mr.
Keinanas an individual.
Vision Consultants Limited is entitled to receive 1% of all of our revenues if
and when monthly revenues exceed $485,000; however, in April 2003, Vision
Consultants Limited and Campbeltown Business Limited waived their right with
regard to revenues derived from Story Telecom.
Keinan Loan
Since our inception in September 2000 through December 31, 2000, we along with
our subsidiary, Swiftnet, Ltd. loaned Abraham Keinan, our Chairman of the
Board, a total of 216,133 Pound Sterling or approximately $322,586 based upon
the exchange rate at December 31, 2000, $202,433 of which was loaned to Mr.
Keinan on September 29, 2000. This loan originally was reflected in a September
94
29, 2000 promissory note payable in ten equal installments of $,20,243 beginning
January 1, 2002 and ending on January 1, 2011. This note is non-interest
bearing. We provided the loan to Mr. Keinan to promote his loyalty and continued
service as our Chairman of the Board of Directors. As of December 31, 2003,
286,736 pounds remain outstanding regarding this loan. On March 2004 Mr. Keinan
signed a note to repay his loan in four installments:
2004 (pound) 54,070 ($96,245)
2005 (pound) 116,333 ($207,073)
2006 (pound) 116,333 ($207,073)
Keinan Bonus and Success Fee
As indicated in more detail below, on October 15, 2002, our Board of Directors
approved a bonus and success fee whereby if we receive monthly revenues in
excess of $485,000 then Mr. Keinan and our consultant, Campbeltown Business,
Ltd. will receive 1% of the revenues for each month where our revenues reach
$485,000 up to a maximum of one million dollars.
On June 28, 2004, our Board of Directors approved a bonus of (pound) 5,000 to
Mr. Keinan for his efforts in connection with obtaining the license to become an
international telecom service provider in Israel by our Israel based subsidiary,
Xfone Communication Ltd..
GUY NISSENSON
Campbeltown Business, Ltd.
On May 11, 2000, Swiftnet, Ltd., which is now our wholly owned subsidiary, and
our Chairman of the Board of Directors ,Abraham Keinan, entered into an 18-month
renewable consulting agreement with Campbeltown Business, Ltd., a private
company incorporated in the British Virgin Island which is owned by Guy
Nissenson, our Principal Executive Officer/President and Director and four other
relatives of Mr. Nissenson. This agreement provides that Swiftnet hires
Campbeltown Business, Ltd. as its financial and business development Consultant
and will pay Campbeltown Business, Ltd. 2,000 UK Pound Sterling per month, along
with an additional monthly performance bonus based upon Swiftnet, Ltd.,
attaining the following revenue levels for consulting services in the area of
business development and management activities:
--------------------------------------------------------------------------------
TARGET AMOUNT OF ADDITIONAL MONTHLY BONUS
REVENUES PER MONTH
--------------------------------------------------------------------------------
Less than 125,000 Pounds (UK) 0 Pounds (UK)
--------------------------------------------------------------------------------
Between 125,000 - 150,000 Pounds (UK) 1,250 Pounds (UK)
--------------------------------------------------------------------------------
Between 150,000 - 175,000 (UK) 2,500 Pounds (UK)
--------------------------------------------------------------------------------
Over 175,000 Pounds (UK) 2,750 Pounds (UK)
--------------------------------------------------------------------------------
95
This agreement with Campbeltown Business, Ltd. involving this monthly payment of
2000 United Kingdom Pound, along with an additional monthly performance bonus,
is separate from a bonus and success fee arrangement that we may pay in
accordance with an October 15, 2002 approval by our Board of Directors to pay
such a bonus and success fee, as discussed below.
The May 11, 2000 agreement is for 18 months, but the agreement provides that the
agreement will be renewed by mutual agreement of Swiftnet and Campbeltown
Business, Ltd.
On November 5, 2001 and May 11,2003, we renewed this agreement for additional 18
month periods. We plan to renew this agreement for an additional 18 month term
after the expiration of the current term on November 11, 2004. Under the terms
of the (date) agreement, Campbeltown agreed to provide the following services to
us:
o analysis of proposed acquisitions;
o seek markets for our telecommunications services in additional
countries;
o formulate strategies for our future growth plans; and
o introduce potential customers to our business.
On June 19, 2000, Swiftnet, Ltd. entered into a Stock Purchase Agreement with
Abraham Keinan and Campbeltown Business, Ltd., a company owned by Guy Nissenson
and his family. This agreement provides that:
o Abraham Keinan confirmed that all his businesses activities
and initiatives in the field of telecommunications are
conducted through Swiftnet, and would continue for at least 18
months after the conclusion of this transaction.
96
o Campbeltown declared that it is not involved in any business
that competes with Swiftnet and would not be involved in such
business at least for 18 months after this transaction is
concluded. This agreement term has been satisfied by
Campbeltown.
o Campbeltown would invest $100,000 in Swiftnet Ltd., in
exchange for 20% of the total issued shares of Swiftnet, Ltd.;
o Campbeltown would also receive 5% of our issued and
outstanding shares following our acquisition with Swiftnet.
In June 2000, Campbeltown Business Ltd. invested the $100,000
in Swiftnet. We acquired Swiftnet, Ltd. and Campbeltown
received 720,336 shares of our common stock for its 20%
interest in Swiftnet, Ltd.
o Swiftnet, Ltd., and Keinan would guarantee that Campbeltown's
20% interest in the outstanding shares of Swiftnet would be
exchanged for at least 10% of our outstanding shares and that
Campbeltown would have in total at least 15% of our total
issued shares after our acquisition occurred.
o Campbeltown would have the right to nominate 33% of the
members of our board of directors and Swiftnet's board of
directors. When Campbeltown ownership in our common stock was
less than 7%, Campbeltown would have the right to nominate
only 20% of our board members but always at least one member.
In the case that Campbeltown ownership in our common stock was
less than 2%, this right would expire.
o Campbeltown would have the right to nominate a vice president
in Swiftnet and/or our common stock. Mr. Guy Nissenson was
nominated as of the time of the June 19, 2000 agreement. If
for any reason Guy Nissenson will leave his position,
Campbeltown and Abraham Keinan will agree on another
nominee. The Vice President will be employed with
suitable conditions.
o Campbeltown has the option to purchase additional shares of
Swiftnet that will represent 10% of all issued shares after
97
the transaction for $200,000 US. This transaction can be
executed either by Swiftnet issuing new shares, or by Abraham
Keinan selling his private shares (as long as he has an
adequate amount of shares), as Abraham Keinan will decide.
This option will expire on Dec 31, 2005. Campbeltown can
exercise this option in parts.
o Campbeltown will have the right to participate under the same
terms and conditions in any investment or transaction that
involve equity rights in Swiftnet or us conducted by Abraham
Keinan at the relative ownership portion.
o In the event that Swiftnet or we will seek for money in a
private placement for equity or any other rights, Campbeltown
will have the right of first refusal on any transaction or
part of it until Dec 31, 2005 or as long as it owns over 7% of
Swiftnet equity or 4% of our common stock.
o Keinan and Campbeltown have signed a right of first refusal
agreement for the sale of their shares.
o Until we conduct a public offering or are traded on a stock
market, we are not permitted to issue any additional shares or
equity rights without a written agreement from Campbeltown.
This right expires when Campbeltown no longer owns any equity
interest or shares in our company or our subsidiary, Swiftnet.
On October 15, 2002, our Board of Directors approved a bonus and success fee
whereby if we receive monthly revenues in excess of $485,000 then Mr. Keinan and
our consultant, Campbeltown Business, Ltd. shall receive 1% of the revenues for
each month where our revenues reach $485,000 up to a maximum of one million
dollars. This bonus and success fee is separate from our agreement with
Campbeltown Business, Ltd. involving a monthly payment of 2000 United Kingdom
Pound, along with an additional monthly performance bonus. The business purpose
of the bonus and success fee is to further motivate our Chairman of the Board,
Mr. Keinan, and our consultant, Campbeltown Business Ltd. to develop our
business by providing them with additional compensation if and when our revenues
grow. During 2003, we paid Mr. Keinan, through Vision Consultants, and
Campbeltown each 55,000 pounds as a bonus and success fee according to the
formula described above. During 2003 we paid Campbeltown consultancy related
fees of 41,237 pounds.
98
On April 10, 2003, Mr. Keinan and Campbeltown Business Ltd waived their right to
receive 1% of the revenues generated that are derived from Story Telecom.
Voting Agreement
Our Chairman of the Board, Abraham Keinan, and our President/Chief Executive
Officer/Director, Guy Nissenson, exercise significant control over stockholder
matters through a September 28, 2004 Voting Agreement between Mr. Keinan, Mr.
Nissenson and Campbeltown Business Ltd, an entity owned and controlled by Mr.
Nissenson and his family. This agreement, which is for a term of 10 years,
provides that: (a) Messrs. Keinan and Nissenson and Campbeltown Business, Ltd.
agree to vote any shares of our common stock controlled by them only in such
manner as previously agreed by all these parties; and (b)in the event of any
disagreement regarding the manner of voting, a party to the agreement will not
vote any shares, unless all the parties have settled the disagreement. The terms
of this agreement are further detailed in the Material Agreements section, at
page 68.
Guy Nissenson Employment Agreement
On May 11, 2000, Swiftnet, Ltd. and our Chairman of the Board of Directors,
Abraham Keinan, entered into an employment agreement with Guy Nissenson, our
Principal Executive Officer/ President. This agreement does not expire. Under
the terms of the agreement, Swiftnet employed Mr. Nissenson to provide business
development and sales and marketing services, at a base rate of 1000 pounds (UK)
per month. When Swiftnet reaches average sales of 175,000 pounds (UK) per month
for a consecutive three month period, Mr. Nissenson's salary will increase to
2,000 pounds per month. In addition, Mr. Nissenson will receive an unspecified
number of options to acquire our stock that is limited to 50% of the options
that Abraham Keinan receives. As such, the agreement protects Mr. Nissenson's
rights to have at least 50% of the options rights that Mr. Keinan will have. Mr.
Nissenson can transfer the right of these options to another company or person
at his discretion. Swiftnet may only cancel these options if : (1) Mr. Nissenson
no longer works with Swiftnet; or (2) if within twelve months of Mr. Nissenson's
employment with the company, Swiftnet and any other companies that may buy or
merge into Swiftnet in the future, do not reach average revenues (over a three
consecutive month period) of at least 120,000 pounds (UK). Because the average
sales per month have exceeded 120,000 pounds within a twelve month period of Mr.
Nissenson's employment, Swiftnet cannot cancel the options.
XFONE COMMUNICATION, LTD.
On April 15, 2004, we established an Israel based subsidiary, Xfone
Communication Ltd. On July 4, 2004 the Ministry of Communications of the state
of Israel granted Xfone Communication a license to provide international telecom
services in Israel.
In accordance with Israel government regulations and the license, at least 26%
of Xfone Communication holdings are to be owned by Israeli citizens who reside
in Israel. Xfone Communication is owned 74% by us and 26% by H.S.N.
Communication Investments Ltd., an Israel based company, that is owned: 40% by
Mrs. Naama Harish, the wife of Dr. Eyal Harish, a member of our Board of
Directors, 40% by Dionysos Investments Ltd., a company owned by members of the
family of Mr. Guy Nissenson, our Chief Executive Officer, and 20% by Margo Sport
Ltd., a company owned by Mr. Giora Spigel and his wife.
Xfone Communication Ltd. received a credit facility from Bank Hapoalim B.M. in
Israel to finance its activities. The credit facility includes a 10 Million NIS
(New Israeli Shekel) Bank Guarantee in favor of the Government of Israel, a
revolving credit line of 1 million NIS and an on call short term credit line of
850,000 NIS. In addition, the bank made available for Xfone Communication a long
term facility of 3,150,000 NIS to procure equipment. As of November 1, 2004, we
secured the credit facility with a cash deposit of $1,000,000, a floating charge
on Xfone Communication's assets, a fixed charge on Xfone Communication's switch
and a personal collateral by Mr. Keinan. In addition, we, Swiftnet Limited and
H.S.N. Communication Investments Ltd. issued a Letter of Guarantee, unlimited in
amount, in favor of the bank, guaranteeing all debt and indebtedness of Xfone
Communication towards the bank. As of November 1, 2004 we used the Bank
Guarantee and approximately $3,700,000.
We plan to start providing services in Israel through Xfone Communication by
November 15, 2004.
99
AURACALL LIMITED
We have an investment in and own 47.5% of a joint business venture, Auracall
Limited. Auracall Limited's services were introduced in approximately March
2002. Our Chairman of the Board, Abraham Keinan, and our Chief Executive
Officer/Director, Guy Nissenson, are both directors of Auracall Limited. Our
management will indirectly benefit from revenues generated by Auracall Limited
activities, to the extent that Vision Consultants, Inc., which is solely owned
by Abraham Keinan, and Campbeltown Business Limited, which is partially owned by
our Chief Executive Office, Guy Nissenson, receives 1% of all our revenues,
except revenue generated by Story Telecom activities, if our entire monthly
revenue, except revenue generated by Story Telecom activities, exceeds $485,000.
Auracall accounted for 4.4% and 8% of our revenues for the 12 month period
ending December 31, 2003 and the six months period ending June 30, 2004,
respectively. Auracall Limited accounted for 2.8% and 5.2% of our total cost of
revenues for the 12 month period ending December 31, 2003 and the six months
period ending June 30, 2004, respectively. Commissions paid to Auracall
accounted for 17% and 29% of the total commissions that we paid out for the 12
month period ending December 31, 2003 and the six months period ending June 30,
2004, respectively. We have made no guarantee or any other commitment on behalf
of Auracall, Ltd. and we are not committed to provide Auracall, Ltd. with any
further support.
STORY TELECOM
We have an investment in and own 40% of a joint business venture, Story Telecom
Limited, which is a calling card service we offer. Story Telecom purchases their
telecommunications services from us. Our Chief Executive Officer/Director, Guy
Nissenson, is a director of Story; our Chairman of the Board, Abraham Keinan, is
not a director of Story Telecom. Our management does not benefit from revenues
generated by Story Telecom activities. Story Telecom accounted for 37% and 44%
of our total revenues for the 12 month period ending December 31, 2003 and the
six months period ending March 31, 2004, respectively. Story Telecom accounted
for 58% and 59% of our total cost of revenues for the 12 month period ending
December 31, 2003 and the six months period ending June 30, 2004, respectively.
We have made no guarantee or any other commitment on behalf of Story Telecom and
we are not committed to provide Story Telecom with any further support.
XFONE USA, INC.
Xfone USA, Inc. was incorporated in the State of Mississippi on May 28, 2004
especially for the purpose of becoming the surviving corporation upon the
consummation of the merger. We are the sole shareholder of Xfone USA, Inc. Xfone
USA, Inc., upon completion of the acquisition, will continue to be our wholly
100
owned subsidiary and no change in our control will occur as a result of the
acquisition. Mr. Abraham Keinan, our Chairman of the Board, and Mr. Guy
Nissenson, our President/Chief Executive Officer/Director, are the directors of
Xfone USA, Inc. Our President/Chief Executive Officer/Director, Guy Nissenson,
is also the President/Secretary/Treasurer of Xfone USA, Inc.
On July 1, 2004, we entered into a management agreement which provides that
Xfone USA will provide management services to WS Telecom pending the
consummation of the merger. The management agreement provides that all revenues
generated from WS Telecom's business operations will be assigned and transferred
to Xfone USA.
Other than the above transactions, we have not entered into any material
transactions with any director, executive officer, and nominee for director,
beneficial owner of five percent or more of our common stock, or family members
of such persons within the last five years and we have not other than the above
transactions entered into any material transactions with any promoter within the
last five years.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Below is the market information pertaining to the range of the high and low bid
information of our common stock for each quarter since our common stock has been
quoted on the OTC Bulletin Board. Our common stock is quoted under the symbol
XFNE on the OTC Bulletin Board and on the Berlin (Germany) Stock Exchange. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
2004 Low High
---- --- ----
Third Quarter $2.90 $3.75
Second Quarter $2.80 $3.90
First Quarter $3.35 $5.75
2003 Low High
---- --- ----
Fourth Quarter $3.15 $6.25
Third Quarter $0.51 $3.60
Second Quarter $0.30 $0.64
First Quarter $0.30 $0.77
2002 Low High
---- --- ----
Fourth Quarter $0.66 $1.45
Third Quarter $0.70 $1.33
Second Quarter $0.70 $3.65
First Quarter $0.00 $0.00
101
The source of the above information is www.OTCBB.com Data Products, Historical
Data Service.
There is a limited trading market for our common stock. There is no assurance
that a regular trading market for our common stock will develop, or if developed
will be sustained. A shareholder in all likelihood, therefore, will not be able
to resell their securities should he or she desire to do so when eligible for
public resales. Furthermore, it is unlikely that a lending institution will
accept our securities as pledged collateral for loans unless a regular trading
market develops.
Penny Stock Considerations.
Our Shares are "penny stocks" as that term is generally defined in the
Securities Exchange Act of 1934 as equity securities with a price of less than
$5.00. Our shares are subject to rules that impose sales practice and disclosure
requirements on broker-dealers who engage in certain transactions involving a
penny stock.
Under the penny stock regulations, a broker-dealer selling a penny stock to
anyone other than an established customer or "accredited investor" must make a
special suitability determination regarding the purchaser and must receive the
purchaser's written consent to the transaction prior to the sale, unless the
broker-dealer is otherwise exempt. Generally, an individual with a net worth in
excess of $1,000,000 or annual income exceeding $200,000 individually or
$300,000 together with his or her spouse is considered an accredited investor.
In addition, under the penny stock regulations the broker-dealer is required to:
o Deliver, prior to any transaction involving a penny stock, a
disclosure schedule prepared by the Securities and Exchange
Commission relating to the penny stock market, unless the
broker-dealer or the transaction is otherwise exempt;
102
o Disclose commission payable to the broker-dealer and its
registered representatives and current bid and offer
quotations for the securities;
o Send monthly statements disclosing recent price information
pertaining to the penny stock held in a customer's account,
the account's value and information regarding the limited
market in penny stocks.
o Make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction, prior to
conducting any penny stock transaction in the customer's
account.
Because of these regulations, broker-dealers may encounter difficulties in their
attempt to sell shares of our common stock, which may affect the ability of
selling shareholders or other holders to sell their shares in the secondary
market and have the effect of reducing the level of trading activity in the
secondary market. These additional sales practice and disclosure requirements
could impede the sale of the securities being registered herein, if such
securities become publicly traded. In addition, the liquidity for our securities
may be adversely affected, with a corresponding decrease in the price of our
securities. Our shares are subject to such penny stock rules and our
shareholders will, in all likelihood, find it difficult to sell their
securities.
Holders.
At November 1, 2004, there were 146 holders of record of our common stock. We
have one class of common stock outstanding.
Dividends.
On December 19, 2002, we declared our first cash dividend in the amount of $0.02
per common share. The cash dividend was payable on January 15, 2003 to our
common stockholders of record at the close of business on December 31, 2002. On
December 30, 2003, we declared a cash dividend of $.03 per shares on our common
stock for all shareholders of record of our common stock at the close of
business on December 31, 2003. We paid this dividend on February 16, 2004.
Apart from this dividend, we have not declared any cash dividends on our common
stock since our inception and we do not anticipate at the present time paying
further dividends in the foreseeable future. Currently, we plan to retain future
earnings, if any, for use in our business. Any decisions as to future payment of
dividends will depend on our earnings and financial position and such other
factors, as the Board of Directors deems relevant.
103
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the compensation
received for services rendered to it during the current year and the years ended
December 31, 2001 and 2002, and 2003 respectively by our Chairman of the Board,
Abraham Keinan who is the managing director of Swiftnet, and Guy Nissenson, who
is our Principal Executive Officer/ President. Abraham Keinan is our only
executive officer who received aggregate compensation during our last fiscal
year which exceeded, or would exceed on an annualized basis, $100,000.
---------------------------------------------------------------------------------------------------------------------------------
Summary Compensation Chart
---------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
---------------------------------------------------------------------------------------------------------------------------------
Name & Year Salary (Pounds) Bonus (Pounds) Other (Pounds) Restricted Options L/Tip All
Position Stock Awards Other
---------------------------------------------------------------------------------------------------------------------------------
Abraham Keinan 2003 40,622 (1) 63,245 55,000 (2) 400,000 (3)
Chairman
2002 30,000 6,372 45,000 0 0 0 0
2001 30,000 0 0 0 0 0 0
Guy Nissenson 2003 43,500 (4) 96,237 (5) 200,000 (6)
Principal
Executive
Officer 2002 33,000
2001 21,000
---------------------------------------------------------------------------------------------------------------------------------
(1) On April 15, 2003, our Board of Directors approved of a salary increase
for our Chairman of the Board from 1,473 pounds to 4,000 pounds per
month. Abraham Keinan's total salary of 40,622 pounds for 2003, as
reflected above, is composed of: (a) 1,473 pounds per month from
January 2003 to March 2003; and (b) 4,000 pounds per month from April
2003 to December 2003.
(2) This amount represents a success fee paid to Vision Consultants, which
is solely owned and controlled by A. Keinan, and is further discussed
in the second paragraph following this table.
(3) The options were issued on August 21, 2003. On March 1, 2004, the
options were cancelled by our Board of Directors. Mr. Keinan currently
owns no options to purchase shares of our common stock.
(4) On April 15, 2003, our Board of Directors approved of a salary increase
for our Principal Executive Officer from 2,500 pounds to 4,000 pounds
per month. Guy Nissenson's total salary of 43,500 pounds for 2003, as
reflected above, is composed of: (a) 2,500 pounds per month from
January to March 2003; and (b) 4,500 pounds per month from April 2003
to December 2003.
(5) This amount represents consultant fees of 41,237 pounds, and a success
fee of 55,000 pounds, paid to Campbeltown Business, Ltd., which is
owned and controlled by Guy Nissenson and other members of the
Nissenson family.
(6) The options were issued on August 21, 2003. On March 1, 2004, the
options were cancelled by our Board of Directors. Mr. Nissenson
currently owns directly no options to purchase shares of our common
stock.
104
Our chairman of the Board of Directors, Mr. Abraham Keinan, also receives salary
pension benefits and a company car. Mr. Keinan does not have a written
employment agreement with us.
On October 15, 2002,our Board of Directors approved a bonus and success fee
whereby if we receive monthly revenues in excess of $485,000 then Mr. Keinan and
our consultant, Campbeltown Business, Ltd. shall receive 1% of the revenues for
each month where our revenues reach $485,000 up to a maximum of one million
dollars. On April 10, 2003, Mr. Keinan and Campbeltown Business Ltd waived their
right to receive 1% of the revenues generated from calling cards sold by Story
Telecom.
Our research and development manager, Mrs. Bosmat Houston, has an employment
agreement with us which provides that we pay her a salary of 2266 Pounds per
month. She is not subject to a covenant not to compete. We may terminate Mrs.
Houston's agreement with 8 weeks notice. She may terminate the agreement with
one week notice.
Our Chief Financial Officer, Tommy R. Ferguson, has a August 19, 2004 Letter
Agreement with an accompanying Confidentiality Agreement and Executive
Inventions Agreement with us which provides that we pay Mr. Ferguson a monthly
salary of $12,088. The Letter Agreement further provides that it will be
recommended to our Board of Directors that Mr. Ferguson receive a stock option
for 300,000 shares of our common stock as part of our 2004 Stock Option Plan. We
anticipate that our Board of Directors will approve a Stock Option Plan for the
year 2004 during the fourth quarter of 2004.
Options/SAR Grants 2003
-------------------------------------------------------------------------------
% of Total
Number Options
Name and Securities Granted To
Principle Underlying Employees Exercise Expiration
Position Options in 2003 Price Date
-------------------------------------------------------------------------------
Abraham Keinan* 400,000 66.7% $0.475 August 31, 2008
Chairman common stock
of the Board shares
-------------------------------------------------------------------------------
Guy Nissenson** 200,000 33.3% $0.475 August 31, 2008
Principal common stock
Executive shares
Officer/Director
-------------------------------------------------------------------------------
TOTAL 100.00%
-------------------------------------------------------------------------------
* On August 21, 2003, we issued 400,000 options to acquire shares of our
restricted common stock to Abraham Keinan. These options were issued to
Abraham Keinan for services rendered by Mr. Keinan as the Chairman of
our Board of Directors. On March 1, 2004, the options were cancelled by
our Board of Directors. Mr. Keinan currently owns no options to
purchase shares of our common stock.
** On August 21, 2003, we issued 200,000 options to acquire shares of our
restricted common stock to Guy Nissenson. These options were issued to
Guy Nissenson for services rendered by Mr. Nissenson as our President
and Principal Executive Officer. On March 1, 2004, the options were
cancelled by our Board of Directors. Mr. Nissenson currently owns
directly no options to purchase shares of our common stock.
105
This table is based on information from our stock records. All of the above
shareholders reflect the ownership of our shares of common stock, either
directly or indirectly, of our executive officers and directors. Unless
otherwise indicated in the footnotes to this table, we believe that each of the
shareholders named in this table have sole or shared voting and investment power
with respect to the shares indicated as beneficially owned. Except as otherwise
noted, herein, we are not aware of any arrangements which may result in a change
in our control.
Aggregate Option/SAR Exercises in 2003 and Fiscal Year End Option/SAR Values
Number of Securities Underlying Value of Unexercised In-the
Unexercised Options/SARs at FY-End Money Options/SARs at FY-End
Shares Value (#) ($)
Acquired on Realized ---------------------------------- ----------------------------
Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
------------------------ -------------- ---------- ------------------------- -------------------------
Guy Nissenson,
Principal Executive Not
Officer, President Not Applicable Applicable 700,000 / 0 (1) $3,891,000 / $0 (2)
Abraham Keinan, Not
Chairman of the Board Not Applicable Applicable 400,000 / 0 (3) $2,202,000 / $0 (4)
(1) Of the 700,000 share options, 200,000 were issued to Guy Nissenson, our
Principal Executive Officer and President, on August 21, 2003. On March
1, 2004, these 200,000 share options were cancelled by our Board of
Directors and since that time Mr. Nissenson has not directly owned any
options to purchase shares of our common stock. Campbeltown Business
Ltd., a private company incorporated in the British Virgin Islands
which is owned by Guy Nissenson and other members of the Nissenson
family, own options to purchase 500,000 shares of our common stock for
$0.40 per share or an aggregate of $200,000. Guy Nissenson owns 20% of
Campeltown Business Ltd. Options to purchase shares of our common stock
are shown in the table above as owned by Guy Nissenson due to Guy
Nissenson's 20% ownership of Campbeltown Business Ltd.
(2) Based on the December 31, 2003 per share closing price of $5.98 and the
exercise prices of $0.475 per share for 200,000 share options, and
$0.40 per share for 500,000 share options.
(3) The options to purchase 400,000 shares of our common stock were issued
to Abraham Keinan, our Chairman of the Board, on August 21, 2003, and
on March 1, 2004, all 400,000 share options were cancelled by our Board
of Directors. Abraham Keinan currently owns no options to purchase
shares of our common stock.
(4) Based on the December 31, 2003 per share closing price of $5.98, and an
exercise price of $0.475 per share.
106
Board Compensation
Other than provide above our directors do not receive any compensation for their
services as directors, although some directors are reimbursed for reasonable
expenses incurred in attending board or committee meetings.
107
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003
CONTENTS
PAGE
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1
Balance Sheet F-2 - F-3
Statements of Operations F-4
Statement of Changes in Shareholders' Equity F-5
Statements of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Xfone, Inc. and Subsidiary
---------------------------
We have audited the accompanying consolidated balance sheet of Xfone, Inc. and
Subsidiary as of December 31, 2003 the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the two
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used in
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Xfone, Inc. and Subsidiary as
of December 31, 2003 and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 2003 in conformity
with accounting principles generally accepted in the United States of America.
CHAIFETZ & SCHREIBER, P.C.
21 Harbor Park Drive N.
Port Washington, NY 11050
March 31, 2004
F-1
--------------------------------------------------------------------------------
XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
----------------
2003
----------------
CURRENT ASSETS
Cash (pound)977,008
Accounts receivable, net 1,263,824
Prepaid expenses, other receivables and deposits 340,944
Loan to shareholder 54,070
----------------
TOTAL CURRENT ASSETS 2,635,846
----------------
Loan to shareholder 232,666
----------------
FIXED ASSETS
Cost 559,786
Less - accumulated depreciation (138,071)
----------------
TOTAL FIXED ASSETS 421,715
----------------
TOTAL ASSETS (pound)3,290,227
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
--------------------------------------------------------------------------------
XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
----------------
2003
----------------
CURRENT LIABILITIES
Trade payables (pound)1,637,430
Dividend payable 86,270
Notes payable - current portion 4,000
Other liabilities and accrued expenses 379,809
Obligations under capital leases - current portion 66,774
----------------
TOTAL CURRENT LIABILITIES 2,174,283
Deferred taxes 36,109
Notes payable 3,166
Obligation under capital leases 86,563
----------------
TOTAL LIABILITIES 2,300,121
----------------
SHAREHOLDERS' EQUITY
Preferred stock - 50,000,000 shares authorized,
none issued
Common stock:
25,000,000 shares authorized,(pound).0006896 par value;
5,117,684 issued and outstanding 3,530
Contributions in excess of shares 193,514
Retained earnings 793,062
----------------
TOTAL SHAREHOLDERS' EQUITY 990,106
----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (pound)3,290,227
================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
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XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED
-------------------------------
DECEMBER 31,
-------------------------------
2003 2002
-------------------------------
Revenues (pound)7,282,181 (pound)3,741,436
Cost of revenues (exclusive of depreciation
shown separately in Note (13)) (4,427,939) (2,194,792)
-------------- --------------
2,854,242 1,546,644
-------------- --------------
OPERATING EXPENSES:
Research and development (44,553) (32,000)
Marketing and selling (1,091,012) (320,418)
General and administrative (1,052,310) (878,624)
-------------- --------------
Total operating expenses (2,187,875) (1,231,042)
-------------- --------------
315,602
Operating profit 666,367 315,602
Financing expenses - net (44,283) (12,837)
Other income 15,817 11,029
-------------- --------------
Income before taxes 637,901 313,794
Taxes on income (216,456) (72,813)
-------------- --------------
Net income (pound)421,445 (pound)240,981
============== ==============
EARNINGS PER SHARE:
Basic (pound)0.08 (pound)0.05
=========== ===========
Diluted (pound)0.08 (pound)0.04
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
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XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NUMBER OF CONTRIBUTIONS TOTAL
ORDINARY SHARE IN EXCESS OF RETAINED SHAREHOLDERS'
SHARES CAPITAL PAR VALUE EARNINGS EQUITY
----------- ----------- ------------- ----------- --------------
Balance at January 1, 2002 5,000,000 (pound)3,448 (pound)140,903 (pound)280,167 (pound)424,518
Issuance of shares 60,889 42 39,316 -- 39,358
Net income -- -- -- 240,981 240,981
Dividend -- -- -- (63,261) (63,261)
----------- ----------- -------------- -------------- --------------
Balance at December 31, 2002 5,060,889 (pound)3,490 (pound)180,219 (pound)457,887 (pound)641,596
----------- ----------- -------------- -------------- --------------
Balance at January 1, 2003 5,060,889 3,490 180,219 457,887 641,596
Issuance of shares 56,795 40 13,295 -- 13,335
Net income -- -- -- 421,445 421,445
Dividend -- -- -- (86,270) (86,270)
----------- ----------- -------------- -------------- --------------
Balance at December 31, 2003 5,117,684 (pound)3,530 (pound)193,514 (pound)793,062 (pound)990,106
=========== =========== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
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XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED
-------------------------------
DECEMBER 31,
-------------------------------
2003 2002
-------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net income (pound)421,445 (pound)240,981
Adjustments to reconcile net income to net cash
provided by operating activities 298,159 48,145
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 719,604 289,126
-------------- --------------
CASH FLOW FROM INVESTING ACTIVITIES
Investments -- (515)
Purchase of equipment (108,270) (71,553)
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (108,270) (72,068)
-------------- --------------
CASH FLOW FROM FINANCING ACTIVITIES
Repayment of long term debt (4,001) (34,921)
Repayment of capital lease obligation (55,862) --
Proceeds from sale of fixed assets 3,500 --
Proceeds from issuance of common stock 13,335 10,583
Dividend paid (63,261) --
-------------- --------------
NET CASH USED IN FINANCING ACTIVITIES (106,289) (24,338)
-------------- --------------
Net increase in cash 505,045 192,720
Cash, beginning of year 471,963 279,243
-------------- --------------
Cash, at end of year (pound)977,008 (pound)471,963
============== ==============
Supplement disclosures of cash flow information:
NET CASH PAID DURING THE YEAR FOR:
Income taxes (pound)14,044 (pound)41,723
============== ==============
Interest (pound)11,213 (pound)12,816
============== ==============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
For the year ended December 31:
2003 2002
-------------------------------
Acquired equipment under capital lease obligation (pound)86,316 (pound)26,002
Issuance of 45,014 shares of common stock for -- 28,775
Compensation for professional services
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
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XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
(1) ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
YEARS ENDED
-------------------------------
DECEMBER 31,
-------------------------------
2003 2002
-------------------------------
Depreciation (pound)89,592 (pound)58,300
Bad debt expense 109,532 226,984
Stock issued for professional services -- 28,775
------------ ------------
199,124 314,059
------------ ------------
CHANGES IN ASSETS AND LIABILITIES:
Increase in accounts receivable (412,627) (460,754)
Increase in other receivables (160,359) (65,570)
Decrease (increase) in shareholder loans 16,394 (20,783)
Increase in trade payables 461,247 214,607
Increase in other payables 183,271 61,586
Increase in deferred taxes 11,109 5,000
------------ ------------
Total adjustments 99,035 (265,914)
------------ ------------
(pound)298,159 (pound)48,145
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
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XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION 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"), its wholly owned
U.K. subsidiary, (collectively the "Company") .
B. The financial statements of the Company have been prepared in
Sterling ("(pound)") 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.
F-8
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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 of America. 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. Accounts Receivable
Accounts receivable are recorded at net realizable value
consisting of the carrying amount less the allowance for
uncollectible accounts.
The Company uses the allowance method to account for
uncollectible accounts receivable balances. Under the allowance
method, an estimate of uncollectible customer balances is made
using factors such as the credit quality of the customer and
the economic conditions in the market. Accounts are considered
past due once the unpaid balance is 90 days or more
outstanding, unless payment terms are extended. When an account
balance is past due and attempts have been made to collect the
receivable through legal or other means, the amount is
considered uncollectible and is written off against the
allowance balance.
At December 31, 2003 accounts receivable had a net balance in
the amount of (pound)1,263,824, net of an allowance balance of
(pound)142,993 .
C. Investments
Investments in companies in which the Company has a 20% to 50%
interest are carried at cost, adjusted for the Company's
proportionate share of their undistributed earnings or losses.
F-9
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XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
D. 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
E. 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. Amounts prepaid by customers are
deferred and recorded as a liability and then recorded as
revenue when the customer utilizes the service. Messaging
services customers are being charged on a per minute basis, per
fax page or email. Commissions to agents are accounted as
marketing costs for the Company.
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. Reclassification
Certain reclassification of 2002 amounts have been made to
conform to the 2003 presentation.
G. Use of Estimates
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 reported amounts of revenues and expenses during the
reported period. Actual results could differ from those
estimates.
F-10
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XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
H. Earnings Per Share
Earnings per share are calculated and reported in accordance with
Statement of Financial Accounting Standards No. 128, Earnings 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 or resulted in the issuance of common stock that
then shared in the earnings of the entity.
I. Income Taxes
Income taxes are accounted for under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which
is an asset and liability approach that requires the recognition
of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's
financial statements or tax returns.
J. Stock-Based Compensation
The Company accounts for equity-based compensation arrangements in
accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations, and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." All equity-based awards to non-employees are
accounted for at their fair value in accordance with SFAS No. 123.
Under APB No. 25, compensation expense is based upon the
difference, if any, on the date of grant, between the fair value
of the Company's stock and the exercise price.
K. New Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation - "Transition and Disclosure" which
provides alternative methods of transition for a voluntary change
to fair value based method of accounting for stock-based employee
compensation. The Company does not have any formal equity based
compensation arrangements. However, when it does issue equity as
compensation it continues to account for such transactions in
accordance with provisions of APB No. 25 as permitted under the
provisions of SFAS No. 123 (see item J above). The effect of this
statement is not expected to have a material impact on the
Company's financial condition, results of operations or cash
flows.
The FASB issued Interpretation No. 46 (FIN 46), "Consolidation of
Variable Interest Entities," in January 2003 and amended the
Interpretation in December 2003. FIN 46 requires an investor with
a majority of the variable interests (primary beneficiary) in a
variable interest entity (VIE) to consolidate the entity and also
requires majority and significant variable interest investors to
provide certain disclosures. A VIE is an entity in which the
voting equity investors do not have a controlling financial
interest or the equity investment at risk is insufficient to
finance the entity's activities without receiving additional
subordinated financial support from the other parties.
Development-stage entities that have sufficient equity invested to
finance the activities they are currently engaged in and entities
that are businesses, as defined in the Interpretation, are not
considered VIEs. The provisions of FIN 46 were effective
immediately for all arrangements entered into with new VIEs
created after January 31, 2003. Intel has completed a review of
its investments to determine whether Xfone is the primary
beneficiary of any such VIEs. The review did not identify any VIEs
that would require consolidation or any significant exposure to
VIEs that would require disclosure.
F-11
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XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 3 - PREPAID EXPENSES, OTHER RECEIVABLES AND DEPOSITS
DECEMBER 31,
----------------
2003
----------------
(pound)37,687
Due from Swiftglobal, Limited
(nonaffiliated entity)
Other prepaid expenses 117,650
Due from Story Telecom Limited ("Story")
(affiliated entity) 15,960
Others receivables 169,647
--------------
(pound)340,944
==============
NOTE 4 - LOAN TO SHAREHOLDER
The Company has a non-interest bearing demand loan of (pound)54,070
due from a shareholder. In addition, the Company has a non-interest
bearing loan of (pound)232,666, due from such shareholder. Which has
been classified as noncurrent and is to be repaid as follows.:
2004 (pound) 54,070
2005 116,333
2006 116,333
---------
(pound)286,736
F-12
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XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 5 - FIXED ASSETS
DECEMBER 31,
----------------
2003
----------------
COST
Equipment held under capital lease 364,577
Office furniture and equipment 26,593
Development costs 32,060
Computer equipment 136,556
-----------
559,786
===========
ACCUMULATED DEPRECIATION UNDER CAPITAL LEASE
Equipment held under capital lease 61,869
Office furniture and equipment 9,730
Development costs 16,030
Computer equipment 50,442
-----------
138,071
===========
NOTE 6 - INVESTMENTS
The Company has investments in two business ventures of approximately
47 1/2% of Auracall Limited and 40% of Story, both start up entities
in the U.K. Through December 31, 2003, these entities cumulative
respective net losses have exceeded the Company's investments therein,
respectively. Accordingly, such investments have been reduced to zero.
Story and Auracall Limited buy their telecommunications services from
the Company.
F-13
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XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
DECEMBER 31,
----------------
2003
----------------
NOTE 7 - OTHER LIABILITIES AND ACCRUED EXPENSES
Corporate taxes 289,777
Professional fees 29,545
Payroll and other taxes 48,452
Due to Auracall Limited (Affiliated entity) 275
Others 11,760
------------
379,809
============
NOTE 8 - NOTES PAYABLE
DECEMBER 31,
----------------
2003
----------------
First National Finance - maturity 2005, annual
Interest rate 7.16% 4,000
Newcourt - maturity 2005, annual interest rate
7.16% 3,166
------------
7,166
Less: current portion (4,000)
------------
Notes payable - non current 3,166
============
F-14
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XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 8 - NOTES PAYABLE (cont.)
B. MATURITIES OF NOTES PAYABLE ARE AS FOLLOWS:
December 31
2004 (pound)4,000
2005 3,166
--------------
(pound)7,166
==============
NOTE 9 - CAPITAL LEASE OBLIGATIONS
The Company is the lessee of switching equipment under capital
leases expiring in various years through 2007. 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 expense for 2003.
Minimum future lease payments under capital leases as of December
31, 2003 for each of the next four years are:
December 31
2004 (pound)78,091
2005 67,987
2006 15,688
2007 15,813
--------------
Total minimum lease payments 177,579
Less: amount representing interest (24,242)
--------------
Present value of net minimum lease payment (pound)153,337
==============
Interest rates on capitalized leases vary up to 9.6%, per annum.
F-15
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XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
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. The Company does not file consolidated tax
returns.
The following table reflects the Company's deferred tax liabilities
at December 31, 2003:
Accelerated tax writeoff of fixed assets (pound)36,109
--------------
Deferred tax liability (pound)36,109
==============
The provision for income taxes differs from the amount computed by
applying the statutory income tax rates to income before taxes as
follows:
YEARS ENDED
-------------------------------
DECEMBER 31,
-------------------------------
2003 2002
-------------------------------
Income tax computed at statutory rate 160,550 73,066
Effect of tax authority adjustments 12,435 --
Other 1,638 --
Effect of permanent differences (including
effect of nonconsolidated tax filings) 42,656 6,663
Utilization of net operating loss (823) (6,916)
---------- ----------
Provision for income taxes 216,456 72,813
========== ==========
F-16
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XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 11 - CAPITAL STRUCTURE, STOCK OPTIONS AND DIVIDEND
In connection with a Stock Purchase Agreement, clarified on July 30,
2001, Campbeltown Business Limited ("Campbeltown"), an entity owned
by the Nissenson family including the Company's President and
Principal Executive Officer, a shareholder, holds options from the
Company and one of its directors to purchase 500,000 additional
shares of the Company for the amount of $200,000. This transaction
can be executed either by the Company 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.
In 2002, the Company issued 45,014 shares of common stock at a value
of (pound)28,775 as compensation for professional services rendered
to the Company.
On August 21, 2003, the Company issued 400,000 and 200,000 options
to acquire shares of its restricted common stock, respectively, to
its Chairman of the Board and to its President and Principal
Executive Officer exercisable as at $0.475 per share. Each option
convertible into one share of common stock. The options are
cancelable at the sole discretion of the Company for a period of 210
days from the date of issuance. On March 1, 2004 these options were
cancelled by the Company. No related compensation cost was
recognized by the Company due to this unilateral cancellation
clause.
On December 30, 2003, the Company declared a dividend of $0.03 per
share , totaling $153,561, to stockholders of record on December 31,
2003, payable on February 16, 2004.
F-17
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XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 11 - CAPITAL STRUCTURE, STOCK OPTIONS AND DIVIDEND (CONTINUED)
The following restricted stock was issued, in U.S. dollars, to
WorldNet Global.com Limited during 2003 for a total of
(pound)13,335 as follows:
Month Issued Number of Shares Price Per Share Total Issue Price
------------ ---------------- --------------- -----------------
January 5,000 $0.50 $2,500
February 5,650 0.44 2,500
April 20,000 0.25 5,000
May 9,615 0.26 2,500
August 11,750 0.43 5,000
September 4,780 0.52 2,500
--------- ---------
56,795 $20,000
========= =========
F-18
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XFONE, INC. AND SUBSIDIARY
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NOTE 12 - EARNINGS PER SHARE
2003
----------------------------------------------------
Weighted Average
----------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS
----------------------------------------------------
Net Income (pound) 421,445
BASIC EPS:
Income available to common stockholders (pound) 421,445 5,089,286 (pound)0.08
Effect of dilutive securities:
Options -- 500,000 --
DILUTED EPS:
Income available to common stockholders (pound) 421,445 5,589,286 (pound)0.08
2002
----------------------------------------------------
Weighted Average
----------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS
----------------------------------------------------
Net Income (pound) 240,981
BASIC EPS:
Income available to common stockholders (pound) 240,981 5,030,444 (pound)0.05
Effect of dilutive securities:
Options -- 500,000 --
DILUTED EPS:
Income available to common stockholders (pound) 240,981 5,530,444 (pound)0.04
F-19
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XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 13 - SELECTED STATEMENT OF OPERATIONS DATA
YEARS ENDED
-------------------------------
DECEMBER 31,
-------------------------------
2003 2002
-------------------------------
A. MARKETING & SELLING:
Advertising (pound)25,365 (pound)22,401
Consultancy 83,970 59,372
Commissions 964,623 174,835
Others 17,054 63,810
---------------- --------------
(pound)1,091,012 (pound)320,418
================ ==============
B. GENERAL & ADMINISTRATIVE:
Salaries & benefits (pound)410,024 (pound)268,884
Rent & maintenance 84,121 90,916
Communications 4,830 11,539
Professional fees 224,087 142,863
Bad debts 109,532 226,984
Depreciation 89,592 58,300
Others 130,124 79,138
---------------- --------------
(pound)1,052,310 (pound)878,624
================ ==============
F-20
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XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 13 - SELECTED STATEMENT OF OPERATIONS DATA (cont.)
YEARS ENDED
-------------------------------
DECEMBER 31,
-------------------------------
2003 2002
-------------------------------
C. FINANCING EXPENSES, NET:
Bank charges and interest (pound)31,013 (pound)1,607
Interest on capital lease 9,578 8,476
Foreign currency exchange 2,305 21
Other interest and charges 1,387 2,733
------------- -------------
(pound)44,283 (pound)12,837
============= =============
F-21
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XFONE, INC. AND SUBSIDIARY
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NOTE 14 - RELATED PARTY TRANSACTIONS
Refer to notes 4 and 11 for additional related party activity.
YEARS ENDED
-------------------------------
DECEMBER 31,
-------------------------------
2003 2002
-------------------------------
Shareholders' salaries (pound)147,407 (pound) 63,448
Campbeltown Business Limited.:
(pound)55,000 (pound) 25,000
Fees
Consultancy (pound)41,237 (pound)34,372
Trade payables (pound)6,950 --
Vision Consultants Limited:
Fees (pound) 55,000 (pound) 25,000
Story Telecom Limited :
Accounts receivable, net (pound)429,604 (pound) 3,606
Due from related entities (pound)15,960 (pound)14,725
Conversion expense (pound)38,930 --
Revenues (pound)2,715,231 (pound) 3,716
Trade payables (pound)22,771 --
Auracall Limited :
Due from related entities (pound)4,533 (pound)16,196
Revenues (pound)318,774 --
Trade payables (pound)18,040 (pound)12,362
Commission expense (pound)171,234 (pound)73,661
F-22
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XFONE, INC. AND SUBSIDIARY
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NOTE 15 - FINANCIAL COMMITMENTS
The Company has annual rent commitments under a non-cancellable
operating lease of (pound)38,200, which terminates in December
2012. Rent expense for the two years ended December 31, 2003 and
2002, were (pound)49,500 and (pound)69,100, respectively.
The Company has a performance based incentive agreement with its
Chairman of the Board and Campbeltown for which sets an amount due
to such person/entity amounting to 1% of the Company's revenues
exclusive of revenues resulting from Story.
The Company has an 18 month renewable consulting agreement with
Campbeltown, which is to expire on November 11, 2004 and is
expected to be renewed. Under this agreement Campbeltown agrees to
provide (a) analysis of proposed acquisitions; (b) such markets
for the Company's telecommunications services in additional
countries; (c) formulate strategies for the Company's future
growth plans; and (d) introduce potential customers to the
Company's business. The Company is obligated to pay Campbeltown
(pound)2,000 per month plus an additional performance
bonus based upon monthly revenue targets as follows:
Target Monthly Revenue Monthly Bonus
---------------------- --------------
Up to(pound)125,000 (pound)--
From(pound)125,000 to(pound)150,000 (pound)1,250
From(pound)150,000 to(pound)175,000 (pound)2,500
Over(pound)175,000 (pound)2,750
The Company has commission agreements with various resellers that
are entitled to 10% of the revenues that they generate.
The Company anticipates annual maintenance of equipment to be
approximately(pound)50,000.
F-23
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XFONE, INC. AND SUBSIDIARY
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On February 12, 2004, the Company closed an offering of 986,737
restricted shares of common stock, with 1,136,737 Warrants A and
986,737 Warrants B. Each Warrant A, which is not freely
transferable, entitles the owner to purchase one share, until not
later than January/February 2009 at an exercise price of $5.50. Each
Warrant B, which is not freely transferable, entitles the owner to
purchase one share, until not later than until the earlier of 10
days after this registration statement is effective or 10 days after
our common stock is traded on the NASDAQ Small Cap or the American
Stock Exchange. The Warrants B are exercisable at an exercise price
of $3.50 and expire 375 days from the date of purchase of the
attached shares of restricted common stock. The Company sold shares
with attached Warrants A and B to a total of 16 persons and 8
entities.
During January 2004, the Company granted for services additional
17,510 restricted shares of its common stock with 17,510 each of
Warrants A and B attached. During January and February 2004, the
Company granted a total of additional 150,000 Warrants A for
services.
NOTE 16 - ECONOMIC DEPENDENCY AND CREDIT RISK
Approximately, 36% and 18% of total 2003 revenues were derived,
respectively, from two customers and approximately 14% and 13% of
total 2002 revenues were derived, respectively, from two
customers.
Approximately, 12% and 11% of the total accounts receivable at
2003 were due from two customers.
Approximately, 31%, 24%, 20% and 15% of the Company's purchases
are from four suppliers for the year ended December 31, 2003, and
75% and 19% are from two suppliers for the year ended December 31,
2002.
The Company may periodically maintain cash balances at a
commercial bank in excess of the Federal Deposit Insurance
Corporation insurance limit of $100,000.
NOTE 17 - SEGMENT INFORMATION
The percentage of the Company's revenues is derived from the
following segments. The Company's operations were not segmented in
2002.
Telephone minute billing plus messaging services,
including facsimile, nodal, and e-mail related services 55%
Mobile phone services 7%
Calling cards 38%
------
100%
======
The Company has four major types of customers:
o Residential - These customers either must dial "dial 1
service" or acquire a box that dials automatically.
o Commercial - Smaller business are treated the same as
residential customers. Larger businesses' PBX units are
programmed.
o Governmental agencies - Include the United Nations World
Economic Forum, the Argentine Embassy and the Israeli
Embassy.
o Resellers, such as WorldNet and Vsat - We provide them with
our telephone and messaging services. For WorldNet we also
provide the billing system.
F-24
--------------------------------------------------------------------------------
XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
NOTE 17 - SEGMENT INFORMATION (CONTINUED)
Revenues and operating profit:
YEARS ENDED
-------------------------------------
DECEMBER 31,
-------------------------------------
2003 2002
-------------------------------------
Telephone & Messaging 3,996,732
Mobile 503,475
calling cards 2,781,974
Total Revenues (pound)7,282,181 (pound)3,741,436
Direct Operating expenses
Telephone & Messaging 2,370,941
Mobile 416,918
calling cards 2,604,703
Total expenses 5,392,562 2,369,627
Direct Operating Profit
Telephone & Messaging 1,625,791
Mobile 86,557
calling cards (pound)177,271
Total Profits 1,889,619 1,371,809
Corporate and common operating
expenses. 1,223,252 1,056,207
Operating profit 666,367 315,606
============== ================
Assets
The assets of the company are for common usage for all reportable segments.
F-25
--------------------------------------------------------------------------------
XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
NOTE 18 - SUBSEQUENT EVENTS
On February 12, 2004, the Company closed an offering of 986,737
restricted shares of common stock, with 1,136,737 Warrants A and
986,737 Warrants B. The Company sold 969,237 shares of common
stock with a Warrant A and B attached for aggregate proceeds of
$2,907,700. Each Warrant A, which is not freely transferable,
entitles the owner to purchase one share, until not later than
January/February 2009 at an exercise price of $5.50. Each Warrant
B, which is not freely transferable, entitles the owner to
purchase one share, until not later than until the earlier of 10
days after this registration statement is effective or 10 days
after our common stock is traded on the NASDAQ Small Cap or the
American Stock Exchange. The Warrants B are exercisable at an
exercise price of $3.50 and expire 375 days from the date of
purchase of the attached shares of restricted common stock. The
Company sold shares with attached Warrants A and B to a total of
16 persons and 8 entities. During January 2004, the Company
granted 17,510 restricted shares of its common stock with 17,500
each of Warrants A and B attached. During January and February
2004, the Company granted a total of 150,000 Warrants A.
F-26
--------------------------------------------------------------------------------
XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
AS OF June 30, 2004
F-27
--------------------------------------------------------------------------------
XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
AS OF June 30, 2004
CONTENTS
PAGE
----
Balance Sheet F-29-F-30
Statement of Operations F-31
Statement of Changes in Shareholders' Equity F-32
Statement of Cash Flows F-33-F-34
Notes to Consolidated Financial Statements F-35-F-52
F-28
--------------------------------------------------------------------------------
XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
BALANCE SHEET
June December June
2004 2003 2004
---------------- ---------------- ----------
(Unaudited) (Audited)
Convenience translation into U.S.$
----------------------------------
Current assets
Cash (pound)1,445,794 (pound)977,008 $2,616,887
Accounts receivable, net 1,877,077 1,263,824 3,397,509
Prepaid expenses and
other receivables (Note 3) 527,569 340,944 954,899
Loan to shareholder (Note 4) 42,889 54,070 77,630
---------------- ---------------- ----------
Total Current Assets 3,893,330 2,635,846 7,046,925
---------------- ---------------- ----------
Loan to shareholder (Note 4) 232,666 232,666 421,125
---------------- ---------------- ----------
Fixed assets (Note 5)
Cost 801,256 559,786 1,450,272
Less - accumulated depreciation -189,376 -138,071 -342,772
---------------- ---------------- ----------
Total fixed assets 611,880 421,715 1,107,500
---------------- ---------------- ----------
Total assets (pound)4,737,875 (pound)3,290,227 $8,575,550
================ ================ ==========
F-29
--------------------------------------------------------------------------------
XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
BALANCE SHEET
June December June
2004 2003 2004
---------------- ---------------- ----------
(Unaudited) (Audited) Convenience translation
into U.S.$
Current liabilities
Dividend payable (pound) - (pound) 86,270 $ -
Notes payable - current portion (Note 8) 4,000 4,000 7,240
Trade payables 1,656,611 1,637,430 2,998,469
Other liabilities and accrued expenses (Note 7) 290,613 379,809 526,010
Obligations under capital leases - current portion 98,358 66,774 178,027
---------------- ---------------- ----------
Total current liabilities (pound)2,049,582 (pound)2,174,283 $3,709,745
Deferred taxes 36,109 36,109 65,352
Notes payable (Note 8) 1,166 3,166 2,111
Obligation under capital lease 108,834 86,563 196,989
---------------- ---------------- ----------
Total liabilities (pound)2,195,691 (pound)2,300,121 $3,974,198
---------------- ---------------- ----------
Minority Interest (Note 2) $0
Shareholders' equity
Preferred stock - 50,000,000 shares authorised, none issued
Common stock:
25,000,000 shares authorised,(pound).0006896 par value;
6,126,832 issued and outstanding 4,210 3,530 7,619
Contributions in excess of shares 1,570,984 193,514 2,843,481
Retained earnings 966,990 793,062 1,750,252
---------------- ---------------- ----------
Total shareholders' equity 2,542,184 990,106 4,601,352
---------------- ---------------- ----------
Total liabilities and shareholders' equity (pound)4,737,875 (pound)3,290,228 $8,575,550
================ ================ ==========
F-30
--------------------------------------------------------------------------------
XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
-----------------------
Convenience translation
into U.S.$
-----------------------
Three Months Three Months Six Months Six Months Three Months Six
Months
June'04 June '03 June '04 June'03 June'04 June '04
---------------- ---------------- ---------------- ---------------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
(Unaudited)
Revenues (pound)2,232,495 (pound)1,410,947 (pound)4,539,710 (pound)2,485,609 $4,040,816 $8,216,875
Cost of revenues - 1,615,797 -870,109 -3,177,036 -1,452,333 -2,924,592 -$5,750,435
Gross profit 616,698 540,838 1,362,674 1,033,276 1,116,224 2,466,440
---------------- ---------------- ---------------- ---------------- ---------- ----------
Operating expenses: (Note 13)
Research and development -10,000 -10,000 -20,000 -19,000 -18,100 -36,200
Marketing and selling -319,591 -211,616 -686,798 -449,523 -578,460 -1,243,104
General and administrative -187,480 -214,563 -421,648 -344,554 -339,339 -763,183
---------------- ---------------- ---------------- ---------------- ---------- ----------
Total operating expenses -517,071 -436,179 -1,128,446 -813,077 -935,899 -2,042,487
---------------- ---------------- ---------------- ---------------- ---------- ----------
Operating profit 99,627 104,659 234,228 220,199 180,325 423,953
Financing expenses - net (Note 13) 18,073 -3,509 7,228 -10,864 32,712 13,082
Other income 1,709 -2,954 7,022 200 3,093 12,711
---------------- ---------------- ---------------- ---------------- ---------- ----------
Income before taxes and
minority Interest 119,409 98,196 248,478 209,535 216,130 449,746
Minority Interest 0
---------------- ---------------- ---------------- ---------------- ---------- ----------
Income Before taxes 119,409 98,196 248,478 209,535 216,130 449,746
Taxes on income -48,550 -20,000 -74,550 -37,000 -87,876 -134,936
---------------- ---------------- ---------------- ---------------- ---------- ----------
Net income (pound)70,859 (pound)78,196 (pound)173,928 (pound)172,535 $128,255 $314,810
================ ================ ================ ================ ========== ==========
Earnings Per Share:
Basic (pound)0.01 (pound)0.01 (pound)0.03 (pound)0.03 $0.02 $0.05
================ ================ ================ ================ ========== ==========
Diluted (pound)0.01 (pound)0.01 (pound)0.02 (pound)0.03 $0.01 $0.04
================ ================ ================ ================ ========== ==========
Exchange rate 1.81 Dollar per Pound
F-31
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Number of Contributions Total
Ordinary in excess of Retained Shareholders'
Shares Share Capital par value Earnings Equity
--------- ------------ -------------- -------------- --------------
Balance at January 1, 2003 5,060,889 (pound)3,490 (pound)180,219 (pound)457,887 (pound)641,596
Issuance of shares 56,795 40 13,295 - 13,335
Net income - - - 421,445 421,445
Dividend payable -86,270 -86,270
--------- ------------ -------------- -------------- --------------
Balance at December 31, 2003 5,117,684 (pound)3,530 (pound)193,514 (pound)793,062 (pound)990,106
--------- ------------ -------------- -------------- --------------
Balance at January 1, 2004 5,117,684 3,530 193,514 793,062 (pound)990,106
Issuance of shares 1,009,148 680 1,377,470 - (pound)1,378,150
Net income - - - 173,928 (pound)173,928
--------- ------------ -------------- -------------- --------------
Balance at June 30, 2004 6,126,832 (pound)4,210 (pound)1,570,984 (pound)966,690 (pound)2,542,184
========= ============ ============== ============== ==============
Convenience translation into U.S.$:
Balance at January 1, 2004 5,117,684 $6,495 $356,066 $1,459,234 $1,821,795
Issuance of shares 1,009,148 1,231 2,493,220 - $2,494,451
Net income - - - 314,810 $314,810
Change of currency rates -107 -5,805 -23,792 -$29,704
--------- ------------ -------------- -------------- --------------
Balance at June 30, 2004 6,126,832 $7,619 $2,843,481 $1,750,252 $4,601,352
========= ============ ============== ============== ==============
F-32
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Six months Six months Year Six months
Jun-30 Jun-30 Dec-31 Jun-30
2004 2003 2003 2004
(Unaudited) (Unaudited) (Audited) (Unaudited)
Convenience
translation into
U.S.$
------------------
Cash flow from operating activities
Net income (pound)173,928 (pound)172,535 (pound)421,445 $ 314,810
Adjustments to reconcile net cash
provided by (used in) operating activities -965,068 259,609 234,898 -1,746,776
---------------- -------------- -------------- -----------------
Net cash provided by operating activities -791,140 432,144 656,343 -1,431,966
---------------- -------------- -------------- -----------------
Cash flow from investing activities
Investments made in year -- -- -- --
Purchase of equipment -83,809 -179,421 -108,270 -151,694
---------------- -------------- -------------- -----------------
Net cash used in investing activities - 83,809 -179,421 -108,270 -151,694
---------------- -------------- -------------- -----------------
Cash flow from financing activities
Repayment of long term debt -2,000 52,109 -4,001 -3,619
Repayment of capital lease obligation 53,856 -- -55,862 97,475
Proceeds from issuance of long term debt -- 24,906 -- --
Proceed from sale of fixed assets -- -- 3,500 --
Proceed from issue of Capital stock -- -- 13,335 --
Dividend paid -86,270 -63,261 -- -156,149
Proceeds from issuance of common stock 1,378,150 9,335 -- 2,494,451
---------------- -------------- -------------- -----------------
Net cash provided by financing activities 1,343,736 23,089 -43,028 2,432,158
---------------- -------------- -------------- -----------------
Net increase in cash 468,786 275,812 505,045 848,498
Difference rates of exchange -29,306
Cash, beginning of year 977,008 471,963 471,963 1,797,695
---------------- -------------- -------------- -----------------
Cash at end of quarter (pound)1,445,794 (pound)747,775 (pound)977,008 $ 2,616,887
================ ============== ============== =================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
For the period ended June 30, 2004
Six months Six months Year Six months
Jun-30 Jun-30 Dec-31 Jun-30
2004 2003 2003 2004
(Unaudited) (Unaudited) (Audited) (Unaudited)
Convenience
translation into
U.S.$
------------------
Acquiring equipment under capital lease
obligation (pound)157,660 -- (pound)86,316 $ 285,364
Issuance of shares of common stock for
Compensation for professional services
Number of shares 52,500 -- 45,014 52,500
Amount (pound)28,533 -- (pound)28,775 $ 51,645
F-33
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS (Cont.)
(1) Adjustments to reconcile net income to net cash provided by operating
activities
Six months Six months Year Six months
Jun-30 Jun-30 Dec-31 Jun-30
2004 2003 2003 2004
(Unaudited) (Unaudited) (Audited) (Unaudited)
Convenience
translation into
U.S.$
------------------
Depreciation (pound)51,305 (pound)38,511 (pound)89,592 $ 2,861
Bad debt expense 9,274 -- 109,532 16,785
Stock issued for professional services 28,533 -- -- 51,644
---------------- -------------- -------------- -----------------
89,112 38,511 199,124 161,290
Changes in assets and liabilities:
Increase in equipment held under capital lease -157,660
-285,365
Increase in trade receivables -622,527 -125,916 -412,627 -1,126,774
(Increase)decrease in other receivables & prepaid expenses -186,625 4,497 -160,359 -337,791
Decrease (Increase) in shareholder loans 11,181 -18,366 16,394 20,237
Dividend payable -63,261 0
Decrease (Increase) in trade payables 19,180 297,563 461,247 34,716
Decrease (Increase) in other payables -117,729 63,320 183,271 -213,089
Minority Interest 0
Increase in deferred taxes -- -- 11,109 --
---------------- -------------- -------------- -----------------
Total adjustments -1,054,180 221,098 35,774 -1,908,066
---------------- -------------- -------------- -----------------
(pound)-965,068 (pound) 259,609 (pound)234,898 $ 1,746,776
================ ============== ============== =================
The accompanying notes are an integral part of these
consolidated financial statements
F-34
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization 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 During the period the Company
has made an investment in Xfone Communication Ltd, a company located
in Israel, and owns 74%. The remaining 26% is shown as a Minority
Interest. The financial statements consolidate the operations of
Xfone, Swiftnet Limited. ("Swiftnet"), its wholly owned U.K.
subsidiary and Xfone Communication Ltd. (collectively the
"Company").
B. The financial statements of the company have been prepared in
Sterling ("(pound)") 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 June 30, 2004. The
translation was made solely for the convenience of the readers. It
should be noted that the (pound) 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 (pound) currency amounts actually
represented, or could be converted into, U.S. dollars. The
representative rate of exchange of the (pound) at June 30, 2004 was
(pound)1 = 1.81 U.S.$.
F-35
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
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 subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.
A minority interest in the loss of a subsidiary will cease to be
recorded when it's respective equity interest is reduced to zero and
below. Such unrecorded minority losses will only be recorded as the
respective subsidiary's future profits exceed such cumulative
unrecorded losses.
B. Accounts Receivable
Accounts receivable are recorded at net realizable value consisting
of the carrying amount less the allowance for uncollectible
accounts.
The Company uses the allowance method to account for uncollectible
accounts receivable balances. Under the allowance method, and
estimate of uncollectible customer balances is made using factors
such as the credit quality of the customer and the economic
conditions in the market. Accounts are considered past due once the
unpaid balance is 90 days or more outstanding, unless payment terms
are extended. When an account balance is past due and attempts have
been made to collect the receivable through legal or other means the
amount is considered uncollectible and is written off against the
allowance balance.
At June 30, 2004 and at December 31, 2003 the accounts receivable
are presented net of an allowance for doubtful accounts of
(pound)152,266 and (pound)142,993, respectively.
C. Investments
Investments in companies in which the company has a 20%
to 50% interest are carried at cost, adjusted for the Company's
proportionate share of their undistributed earnings or losses.
D. 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
F-36
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
Note 2 - Significant Accounting Policies (Cont.)
E. 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. Amounts prepaid by customers are deferred
and recorded as a liability and then recorded as revenue when the
customer utilizes the service. Messaging services customers are
being charged on a per minute basis, per fax page or email.
Commissions to agents are accounted as marketing costs for the
Company.
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. Reclassification
Certain reclassification of 2003 amounts have been made to conform
to the 2004 presentation.
G. Use of Estimates
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.
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.
I. Income Taxes
Income taxes are accounted for under Statement of Financial
Accounting Standards No. 109, "Accounting for Income 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.
F-37
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
Note 2 Significant Accounting Policies (Cont.)
J. Stock-Based Compensation
The Company accounts for equity-based compensation arrangements in
accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations, and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." All equity-based awards to non-employees are
accounted for their fair value in accordance with SFAS No. 123.
Under APB No. 25, compensation expense is based upon the difference,
if any, on the date of grant, between the fair value of the
Company's stock and the exercise price.
K. New Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148 "Accounting For
Stock-Based Compensation - "Transition and Disclosure" which
provides alternative methods of transition for voluntary change to
fair value based method of accounting for stock-based employee
compensation. The Company does not have any formal equity based
compensation arrangements. However, when it does issue equity as
compensation it continues to account for such transactions in
accordance with provisions of APB No. 25 as permitted under the
provisions of SFAS No. 123 (see item J above). The effect of this
statement is not expected to have a material impact on the Company's
financial condition, results of operations or cash flows.
The FASB issued Interpretation No 46 (FIN 46), "Consolidation of
Variable Interest Entities," in January 2003 and amended the
Interpretation in December 2003. FIN 46 requires an investor with a
majority of the variable interests (primary beneficiary) in a
variable interest entity (VIE) to consolidate the entity and also
requires majority and significant variable interest investors to
provide certain disclosures. A VIE is an entity in which the voting
equity investors do not have a controlling financial interest or the
equity investment at risk is insufficient to finance the entity's
activities without receiving additional subordinated financial
support from the other parties. Development-stage entities that have
sufficient equity invested to finance the activities they are
currently engaged in and entities that are businesses, as defined in
the Interpretation, are not considered VIE'S. The provisions of FIN
46 were effective immediately for all arrangements entered into with
new VIE's created after January 31, 2003. Intel has completed a
review of its investments to determine whether Xfone is the primary
beneficiary of any such VIE's. The review did not identify any VIE's
that would require consolidation or any significant exposure to
VIE's that would require disclosure.
F-38
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
Note 3 - Prepaid Expenses and Other Receivables
Jun-30 Dec-31 Jun-30
-----------------------------------------------------
2004 2003 2004
-----------------------------------------------------
Convenience
translation into
US$
Due from Swiftglobal, Ltd.
(non-affiliated entity) (pound)28,687 (pound)37,687 $51,923
Other prepaid expenses 153,810 117,650 278,396
Due from Story Ltd (affiliated entity) 15,960 15,960 28,888
Due from Auracall Ltd (affiliated entity) 70,000 126,700
Due from WS Telecom (see Note 18) 51,289 92,833
Others receivables 207,823 169,647 376,159
----------------------------- ----------
(pound)527,569 (pound)340,944 $954,899
============================= ==========
Note 4 - Loan to the Chairman of the Board and Shareholder
The Company has a non-interest bearing demand loan of (pound)42,889
due from shareholders. In addition, the Company has a non-interest
bearing loan of (pound)232,666 due from such shareholders. Which has
been classified as nonrcurrent and is to be repaid as follows:
2004 (pound)42,889
2005 116,333
2006 116,333
--------------
(pound)275,555
==============
F-39
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
Note 5 - Fixed Assets
June 30, Dec 31, June 30,
---------------------------------- -----------------
2004 2003 2004
---------------------------------- -----------------
Convenience
translation
into US$
-----------------
Cost
Equipment held under capital lease (pound)522,237 (pound)364,577 $ 945,249
Office furniture and equipment 27,978 26,593 50,639
Development costs 60,060 32,060 108,709
Computers Equipment 190,981 136,556 345,675
---------------------------------- -----------------
(pound)801,256 (pound)559,786 $ 1,450,272
================================== =================
Accumulated Depreciation
Equipment held under capital lease (pound)90,198 (pound)61,869 $ 163,259
Office furniture and equipment 12,011 9,730 21,739
Development costs 23,538 16,030 42,603
Computers Equipment 63,629 50,442 115,171
Motor Vehicle --
---------------------------------- -----------------
(pound)189,376 (pound)138,071 $ 342,772
================================== =================
Note 6 - Investments
The Company has investments in two business ventures of approximately 47
1/2% of Auracall Limited and 40% of Story, both start up entities in the
U.K. Through June 30, 2004, these entities cumulative respective net
losses have exceeded the Company's investments therein, respectively.
Accordingly, such investments have been reduced to zero. Story and
Auracall Limited buy their telecommunications services from the Company.
F-40
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
Note 7 - Other Liabilities and Accrued Expenses
June 30, Dec 31, June 30,
---------------------------------- -----------------
2004 2003 2004
---------------------------------- -----------------
Convenience
translation
into US$
------------
Corporate taxes (pound)182,767 (pound)289,777 $ 330,808
Professional fees 81,902 29,545 148,243
Payroll and other taxes 14,837 48,452 26,856
Due to Auracall Ltd. (Affiliated entity) 275 0
Others 11,107 11,760 20,103
---------------------------------- -----------------
(pound)290,613 (pound)379,809 $ 526,010
================================== =================
Note 8 - Notes Payable
June 30, Dec 31, June 30,
---------------------------------- -----------------
2004 2003 2004
---------------------------------- -----------------
Convenience
translation
into US$
------------
First National Finance - maturity 2004-5,
annual interest rate 7.16% (pound)4,000 (pound)4,000 $ 7,240
Newcourt - maturity 2004-5, annual interest 1,166 3,166 2,111
Rate 7.16% --------------------------------- -----------
5,166 7,166 9,351
Less: current portion -4,000 -4,000 -7,240
--------------------------------- -----------
Notes payable - non current (pound)1,166 (pound)3,166 $ 2,111
================================ ==========
F-41
-------------------------------------------------------------------------------
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 (pound)4,000 $7,240
Year 2 1,166 2,111
------------ ------
(pound)5,166 $9,351
============ ======
Note 9 - Capital Lease Obligations
The Company is the lessee of switching equipment under capital leases
expiring in various years through 2007. The assets and liabilities under
capital leases are recorded at the lower of the present value of the
minimum lease payments or the fair value of the asset. The assets are
depreciated over their estimated productive lives. Depreciation of assets
under capital leases is included in depreciation expenses for 2004.
Minimum future lease payments under capital leases as of June 30, 2004 for
each of the next five years are:
Convenience
translation
into U.S.$
-----------
Jun-30
------
Year 1 (pound)115,147 $208,415
Year 2 80,355 145,442
Year 3 43,167 78,132
Year 4
-------------- --------
Total minimum lease payments 238,669 431,989
Less: amount representing interest -31,477 -56,973
-------------- --------
Present value of net minimum lease payment (pound)207,192 $375,016
============== ========
Interest rates on capitalized leases vary up to 9.6%, per annum.
F-42
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Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 10 - INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS
109. SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences between the
financial statement and tax basis of assets and liabilities, and for
the expected future tax benefit to be derived from tax loss and tax
credit carry forward. The Company does not file consolidated tax
returns.
The following table reflects the Company's deferred tax liabilities at
June 30, 2004:
The following table reflects the Company's deferred tax assets and
(liabilities) at June 30, 2004:
Convenience
translation into U.S.$
----------------------
Accelerated tax writeoff of fixed assets (pound)36,109 $65,352
------------- -----------------
Deferred Tax liability (pound)36,109 $65,352
============= =================
F-43
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 11 - CAPITAL STRUCTURE, STOCK OPTIONS AND DIVIDEND
In connection with a Stock Purchase Agreement, clarified on July 30,
2001, Campbeltown Business Limited ("Campbeltown"), an entity owned by
the Nissenson family including the Company's President and Principal
Executive Officer, a shareholder, holds options from the Company and
one of its directors to purchase 500,000 additional shares of the
Company for the amount of $200,000. This transaction can be executed
either by the Company 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 January 2004, the Company issued 17,500 shares and 17,500
warrants A, and 17,500 warrants B for consulting services. In
addition the Company granted 100,000 warrants A for legal services.
During February, 2004 the Company granted 50,000 warrants A for
finder services.
On February 12, 2004, the Company closed an offering of 986,737
restricted shares of common stock, with 1,136,737 Warrants A and
986,737 Warrants B. The Company sold 969,237 shares of common stock
with a Warrant A and B attached for aggregate proceeds of
(pound)1,580,278. Costs associated with this funding were
(pound)202,128 from the proceeds of the offering and an additional
150,000 Warrant A, valued at 33,179. Each Warrant A, which is not
freely transferable, entitles the owner to purchase one share, until
not later than January/February 2009 at an exercise price of $5.50.
Each Warrant B, which is not freely transferable, entitles the owner
to purchase one share, until not later than until the earlier of 10
days after this registration statement is effective or 10 days after
our common stock is traded on the NASDAQ Small Cap or the American
Stock Exchange. The Warrants B are exercisable at an exercise price of
$3.50 and expire 375 days from the date of purchase of the attached
shares of restricted common stock. The Company sold shares with
attached Warrants A and B to a total of 16 persons and 8 entities.
The offering agreement requires the Company to issue additional shares
for nil consideration to the participants of the offering under
certain conditions, as defined. Accordingly, during June 2004 the
Company recognised it's obligation to issue 22,411 shares.
F-44
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 12 - EARNINGS PER SHARE
SIX MONTHS JUNE 2004
-------------------------------------------------------------------
Weighted Average
INCOME SHARES PER SHARE PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS AMOUNTS
------------ -------------- ---------- ----------------------
Convenience
translation into U.S.$
----------------------
Net Income (pound)173,928
BASIC EPS:
Income available to common stockholders (pound)173,928 5,863,339 (pound)0.03 $0.05
Effect of dilutive securities:
Options and warrants 1,967,605
DILUTED EPS:
Income available to common stockholders (pound)173,928 7,830,944 (pound)0.02 $0.04
THREE MONTHS JUNE 2004
-------------------------------------------------------------------
Weighted Average
INCOME SHARES PER SHARE PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS AMOUNTS
------------ -------------- ---------- ----------------------
Convenience
translation into U.S.$
----------------------
Net Income (pound)70,859
BASIC EPS:
Income available to common stockholders (pound)70,859 6,115,626 (pound)0.01 $0.02
Effect of dilutive securities:
Options and warrants 2,623,474
DILUTED EPS:
Income available to common stockholders (pound)70,859 8,739,100 (pound)0.01 $0.01
F-45
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 13 - SELECTED STATEMENT OF OPERATIONS DATA
Six Months Six Months Three Months Three Months Three Months Six Months
JUNE JUNE JUNE JUNE JUNE JUNE
2004 2003 2004 2003 2004 2004
----------------------------- ------------------------------ ------------------------
A. MARKETING & SELLING: Convenience translation into U.S.$
Advertising (pound)26,093 (pound)15,355 (pound)7,327 (pound)10,269 $13,260 $47,227
Consultancy 33,138 57,223 19,539 45,653 35,371 59,984
Commissions 616,843 376,945 282,000 155,694 510,418 1,116,483
Others 10,725 -- 10,725 0 19,411 19,410
------------------------------------------------------------- --------------------
(pound)686,798 (pound)449,523 (pound)319,591 (pound)211,616 $578,460 $1,243,104
============================================================= ====================
B. GENERAL & ADMINISTRATIVE:
Salaries & benefits (pound)188,316 (pound)154,437 (pound)94,433 (pound)88,529 $170,924 $340,853
Rent & maintenance 83,706 39,690 50,849 17,376 92,039 151,507
Communications 17,973 52,410 15,100 43,876 27,331 32,531
Professional fees 95,868 91,121 10,109 48,956 18,297 173,522
Bad debts 9,274 -10,000 0 -10,000 0 16,785
Depreciation 19,682 16,896 10,159 18,697 18,388 35,625
Others 6,830 0 6,830 7,129 12,360 12,360
------------------------------------------------------------- --------------------
(pound)421,648 (pound)344,554 (pound)187,480 (pound)214,563 $339,339 $763,183
============================================================= ====================
F-46
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 13 - SELECTED STATEMENT OF OPERATIONS DATA (cont.)
Six Months Six Months Three Months Three Months Three Months Six Months
JUNE JUNE JUNE JUNE JUNE JUNE
2004 2003 2004 2003 2004 2004
----------------------------- ------------------------------ ----------------------
C. FINANCING EXPENSES, NET: Convenience translation
into U.S.$
Bank charges (pound)2,152 -(pound)317 -(pound)2,861 -(pound)4,438 $3,895 -$5,178
Interest on capital leases 6,428 3,650 3,931 2,682 11,635 $7,115
Foreign currency exchange -24,605 -1,357 -23,083 1,863 -44,535 -$41,780
Other interest and charges 8,797 8,887 3,940 3,402 15,923 $7,131
------------------------------------------------------------- ----------------------
-(pound)7,228 (pound)10,864 -(pound)18,073 (pound)3,509 -$13,082 -$32,712
============================================================= ======================
F-47
--------------------------------------------------------------------------------
Xfone, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTE 14 - RELATED PARTY TRANSACTIONS
Refer to notes 4 and 11 for additional related party activity
Three Months Six Months Year ended Three months Six Months
---------------------------- ---------------------------- ---------- ------------------------
JUNE '04 JUNE '03 JUNE '04 JUNE '03 DEC '03 JUNE '04 JUNE '04
---------------------------- ---------------------------- ---------- ------------------------
Convenience translations into
U.S. Dollar
Shareholder's salaries (pound)24,000 (pound)24,000 (pound)48,000 (pound)39,000 (pound) -- $43,440 $ 86,880
Bonus 5,000 5,000 9,050
CAMBELTOWN BUSINESS LIMITED:
Fees 12,133 9,467 25,355 20,906 219,561 45,892
Consultancy 14,250 14,250 28,500 23,106 25,792 51,586
Trade payables 6,472 6,472 6,950 11,714 11,714
VISION CONSULATANTS LIMITED:
Fees 13,222 11,439 25,355 20,906 23,932 45,892
STORY TELECOM LIMITED:
Revenues 993,398 340,588 1,980,193 394,938 1,798,050 3,584,149
Cost of Revenues 939,244 321,309 1,868,107 372,583 1,700,031 3,381,273
Due from Story Telecom (net) 783,863 783,863 422,793 1,418,792 1,418,792
AURACALL LIMITED:
Revenues 211,177 23,491 369,899 82,501 382,230 669,517
Cost of Revenues 91,654 11,888 166,290 31,229 165,894 300,985
Commissions 106,278 7,348 180,920 36,650 192,363 327,465
Due from Auracall (net) 49,097 49,097 88,866 88,866
Trade payable 18,040
F-48
NOTE 15 - FINANCIAL COMMITMENTS
The Company has annual rent commitments under a non-cancelable
operating lease of (pound)38,200, which terminates in December 2012.
Rent expense for the two quarters ended June 30, 2004 and 2003, was
(pound)27,396 & (pound)26,267
The Company has a performance based incentive agreement with its
Chairman of the Board and Campbeltown for which sets an amount due
to such person/entity amounting to 1% of the Company's revenues
exclusive of revenues resulting from Story.
The Company has an 18 month renewable consulting agreement with
Campbeltown, which is to expire on November 11, 2004 and is expected
to be renewed. Under this agreement Campbeltown agrees to provide
(a) analysis of proposed acquisitions; (b) such markets for the
Company's telecommunications services in additional countries; (c)
formulate strategies for the Company's future growth plans; and (d)
introduce potential customers to the Company's business. The Company
is obligated to pay Campbeltown (pound)2,000 ($3,620) per month plus
an additional performance bonus based upon monthly revenue targets
as follows:
Target Monthly Revenue Monthly Bonus Convenience Translation US$
---------------------- -------------- ---------------------------
Up to (pound)125,000 -- --
From (pound)125,000 to (pound)150,000 (pound)1,250 $2,263
From (pound)150,000 to (pound)175,000 (pound)2,500 $4,525
Over (pound)175,000 (pound)2,750 $4,978
The Company has commission agreements with various resellers that
are entitled to 10% of the revenues that they generate.
The Company anticipates annual maintenance of equipment to be
approximately (pound)50,000 ($90,050).
During January 2004, the Company issued 17,500 shares and 17,500
warrants A, and 17,500 warrants B for consulting services. In
addition the Company granted 100,000 warrants A for legal services.
During February, 2004 the Company granted 50,000 warrants A for
finder services.
On February 12th, 2004, the Company closed an offering of 986,737
restricted shares of common stock, with 1,136,737 Warrants A and
986,737 Warrants B. Each Warrant A, which is not freely
transferable, entitles the owner to purchase one share, until not
later than January/February 2009 at an exercise price of $5.50. Each
Warrant B, which is not freely transferable, entitles the owner to
purchase one share, until not later than until the earlier of 10
days after this registration statement is effective or 10 days after
our common stock is traded on the NASDAQ Small Cap or the American
Stock Exchange. The Warrants B are exercisable at an exercise price
of $3.50 and expire 375 days from the date of purchase of the
attached shares of restricted common stock. The Company sold shares
with attached Warrants A and B to a total of 16 persons and 8
entities.
In February 2004 the Company issued 986,737 shares in a private
placement. According to the agreement the Company is committed to
issue additional 2% of the shares issued, for every month or
proportionally for part of a month, up to twelve months, that
exceeds 120 days from the closing of the transaction, while the
registration statement is not declared effective by the SEC. As of
August 16, 2004 the registration statement is not effective. If the
registration statement is not declared effective until February 11,
2005, the maximum number of shares that the company might issue
under this agreement is 236,816.
F-49
NOTE 16 - ECONOMIC DEPENDENCY AND CREDIT RISK
Approximately, 44% of total half year ended June 2004, revenues and
43% of Accounts Receivable are derived from one customer Story
Telecom.
The Company may periodically maintain cash balances at a commercial
bank in excess of the Federal Deposit Insurance Corporation
insurance limit of $100,000.
NOTE 17 - SEGMENT INFORMATION
The percentage of the Company's revenues is derived from the
following segments.
Three Months Three Months Six Months Six Months
JUNE '04 JUNE '03 JUNE '04 JUNE '03
------------ ------------ ---------- ----------
Telephone minute billing plus messaging services,
including facsimile, nodal, and e-mail related services 48% 70% 48% 76%
Mobile phone services 3% 4% 4% 6%
Calling cards 49% 26% 48% 18%
----- ----- ----- -----
100% 100% 100% 100%
===== ===== ===== =====
The Company has four major types of customers:
o Residential - These customers either must dial "dial 1 service" or
acquire a box that dials automatically.
o Commercial - Smaller business are treated the same as residential
customers. Larger businesses' PBX units are programmed.
o Governmental agencies - Include the United Nations World Economic
Forum, the Argentine Embassy and the Israeli Embassy.
o Resellers, such as WorldNet and Vsat - We provide them with our
telephone and messaging services. For WorldNet we also provide the
billing system.
F-50
NOTE 17 - SEGMENT INFORMATION (CONTINUED)
Three Months Three Months Three Months Six Months Six Months Six Months
JUNE '04 JUNE '03 JUNE '04 JUNE '04 JUNE '03 JUNE '04
--------------- ------------- -------------- -------------- ------------- -------------
Convenience Convenience
Translation Translation
into USD into USD
Revenues
Telephone & Messaging (pound)1,061,198 (pound)997,589 $1,920,768 (pound)2,162,866 (pound)1,867,761 $3,914,787
Mobile (pound)66,655 (pound)51,865 $120,645 (pound)186,215 (pound)160,745 $337,049
Calling Cards (pound)1,104,642 (pound)361,493 $1,999,402 (pound)2,190,629 (pound)457,103 $3,965,038
------------------------------------------------ ------------------------------------------------
Total Revenues (pound)2,232,495 (pound)1,410,947 $4,040,815 (pound)4,539,710 (pound)2,485,609 $8,216,874
------------------------------------------------ ------------------------------------------------
Direct Operating Expenses
Telephone & Messaging (pound)812,320 (pound)563,139 $1,470,299 (pound)1,599,153 (pound)1,139,724 $2,894,467
Mobile (pound)57,153 (pound)49,491 $103,447 (pound)160,111 (pound)149,380 $289,801
Calling Cards (pound)1,028,324 (pound)344,111 $1,861,266 (pound)2,034,614 (pound)424,267 $3,682,651
------------------------------------------------ ------------------------------------------------
Total Expenses (pound)1,897,797 (pound)956,741 $3,435,012 (pound)3,793,878 (pound)1,713,371 $6,866,919
------------------------------------------------ ------------------------------------------------
Direct Operating Profit
Telephone & Messaging (pound)248,878 (pound)434,450 $450,469 (pound)563,713 (pound)728,037 $1,020,321
Mobile (pound)9,502 (pound)2,374 $17,199 (pound)26,104 (pound)11,365 $47,248
Calling Cards (pound)76,318 (pound)17,348 $138,136 (pound)156,015 (pound)32,836 $282,387
------------------------------------------------ ----------------------------------------------
Total Profits (pound)334,698 (pound)454,172 $605,803 (pound)745,832 (pound)772,238 $1,349,956
------------------------------------------------ ----------------------------------------------
Corporate and common
operating expenses (pound)235,070 (pound)336,180 $425,477 (pound)511,603 (pound)552,038 $926,001
Operating Profit (pound)99,628 (pound)118,026 $180,327 (pound)234,229 (pound)220,199 $423,954
Assets
The assets of the company are for common usage for all reportable segments.
NOTE 18 - SUBSEQUENT EVENTS
On April 15, 2004, the Company established an Israel based
subsidiary, Xfone Communication Ltd. On July 4, 2004 the Ministry of
Communications of the state of Israel granted Xfone Communication a
license to provide international telecom services in Israel.
According to the Israeli government regulations and the license, at
least 26% of Xfone Communication holdings are to be owned by Israeli
citizens who reside in Israel. Xfone Communication is owned 74% by
the Company and 26% by H.S.N. Communication Investments Ltd., an
Israel based company, that is owned: 40% by Mrs. Naama Harish, the
wife of Dr. Eyal Harish, a member of the Company's Board of
Directors, 40% by Dionysos Investments Ltd., a company owned by
members of the family of Mr. Guy Nissenson, the Company's Chief
Executive Officer, and 20% by Margo Sport Ltd., a company owned by
Mr. Giora Spigel and his wife.
Xfone Communication Ltd. received a credit facility from Bank
Hapoalim B.M. in Israel to finance its activities. The credit
facility includes a 10 Million NIS (New Israeli Shekel) Bank
Guarantee in favor of the Government of Israel, a revolving credit
line of 1 million NIS and an on call short term credit line of
850,000 NIS. In addition, the bank made available for Xfone
Communication a long term facility of 3,150,000 NIS to procure
equipment. As of November 1, 2004, we secured the credit facility
with a cash deposit of $1,000,000, a floating charge on Xfone
Communication's assets, a fixed charge on Xfone Communication's
switch and a personal collateral by Mr. Keinan. In addition, we,
Swiftnet Limited and H.S.N. Communication Investments Ltd. issued a
Letter of Guarantee, unlimited in amount, in favor of the bank,
guaranteeing all debt and indebtedness of Xfone Communication
towards the bank. As of November 1, 2004 we used the Bank Guarantee
and approximately $3,700,000.
The Company plans to start providing services in Israel through
Xfone Communication by November 15, 2004.
F-51
On May 28, 2004, the Company entered into an agreement to acquire WS
Telecom Inc., a Mississippi corporation, and its two wholly owned
subsidiaries, eXpeTel Communications, Inc. and Gulf Coast Utilities,
through the merger of WS Telecom into the Company's wholly owned
subsidiary Xfone USA, Inc. The Company anticipates that this
acquisition will require approximately $1,000,000 for working
capital.
The terms and conditions of the Agreement provide that:
1) all of WS Telecom's issued and outstanding capital
stock will be acquired and converted into the right to receive from
the Company certain shares of the Company's restricted common stock
and warrants convertible into shares of the Company's common stock;
2) the Company will issue a number of shares of its
restricted common stock with an agreed market value of $2,200,000,
which will be determined using the weighted average price of the
Company's common stock for the ten trading days preceding the
trading day immediately prior to the date the Company and WS Telecom
Inc. enter into a Management Operating Agreement;
3) the weighted average price of the Company's common
stock, as referred to in 2) immediately above, will in no event be
less than $3.30 per share or greater than $4.30 per share;
4) the Company will issue a number of warrants with a
value of $1,300,000, the value of which will be calculated as of the
date the Company and WS Telecom Inc. enter into a Management
Operating Agreement, assuming 90% volatility of the underlying share
of common stock of the Company in accordance with the Black Scholes
option - pricing model;
5) each share of MS Telecom, Inc.'s Preferred Stock
issued and outstanding immediately prior to the effective time of
the Acquisition will be canceled and extinguished and be converted
automatically into the right to receive upon surrender of
certificate(s) representing MS Telecom, Inc.'s Preferred Stock, as
follows: (i) an amount of the Company's stock consideration equal to
the product of the Company's stock consideration times 28.6% divided
by total of MS Telecom, Inc.'s Preferred Stock; and (ii) an amount
of the Company's warrant consideration equal to the product of MS
Telecom, Inc.'s warrant consideration times 28.6% divided by the
total of MS Telecom, Inc.'s Preferred Stock;
6) each share of MS Telecom, Inc.'s common stock issued
and outstanding immediately prior to the effective time of the
cquisition will be canceled and extinguished and be converted
automatically into the right to receive upon surrender of
certificate(s) representing MS Telecom, Inc's common stock, as
follows: (i) an amount of our stock consideration equal to the
product of the Company's stock consideration times 71.4% divided by
the total of MS Telecom, Inc.'s common stock; and (ii) an amount of
the Company's warrant consideration equal to the product of the
Company's warrant consideration times 71.4% divided by the total of
MS Telecom, Inc.'s common stock;
7) completion of the Acquisition is subject to certain
conditions, including: (a) approval of the Agreement and the
Acquisition by shareholders; (b) receipt of regulatory approvals;
and (c) certain other customary conditions; and
8) concurrent with the execution of the Agreement and as
material inducements to us and WS Telecom, Inc. as the acquired
company, the following agreements will be entered into: (a)
employment agreement between Xfone USA, Inc. and Wade Spooner; (b)
employment agreement between Xfone USA, Inc. and Ted Parsons; and
(c) escrow agreement among the Company, Xfone USA, Inc., Wade
Spooner, Ted Parsons, and the escrow agent.
On July 1, 2004, the Company entered into a management agreement
which provides that Xfone USA will provide management services to WS
Telecom pending the consummation of the merger. The management
agreement provides that all revenues generated from WS Telecom's
business operations will be assigned and transferred to Xfone USA.
F-52
OUTSIDE COVER OF PROSPECTUS
Until 90 days after the date of this prospectus, or until _______________, 2004,
all dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealer's obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions. As
used in this prospectus the terms "we", "us", "our", and "Xfone" mean Xfone,
Inc., unless otherwise indicated.
PART II
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
Our officers and directors are indemnified as provided by the Nevada Revised
Statutes and our bylaws.
Our bylaws provide that we will subject to the provisions of Nevada Corporation
Law, indemnify any person against liabilities and other expenses incurred as the
result of defending or administering any pending or anticipated legal issue in
connection with service to the corporation if it is determined that person acted
in good faith and in a manner which he reasonably believed was in the best
interest of the corporation
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and control persons pursuant to the
foregoing provisions or otherwise, we have been advised that, in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy, and is therefore unenforceable
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table is an itemization of all expenses, without consideration to
future contingencies, incurred or expected to be incurred by our Corporation in
connection with the issuance and distribution of the securities being offered by
this prospectus. Items marked with an asterisk (*) represent estimated expenses.
We have agreed to pay all the costs and expenses of this offering. Selling
shareholders will pay no offering expenses.
ITEM EXPENSE
-------- -----------
SEC Registration Fee $ 1,792.30
Legal Fees and Expenses $ 48,500
Accounting Fees and Expenses $ 20,000
Miscellaneous* $ 5,000
-----------
Total** $75,292.30
===========
* Printing, administrative, and mailing costs
** Estimated Figure
II-1
RECENT SALES OF UNREGISTERED SECURITIES
On August 21, 2003, we issued 400,000 options to acquire shares of our
restricted common stock to Abraham Keinan. These options were issued to Abraham
Keinan for services rendered by Abraham Keinan as the Chairman of our Board of
Directors. These options are exercisable at a price of $0.475 per share. Each
option is convertible into one (1) share of stock. These options vested
immediately and expire on August 21, 2008. We relied upon Section 4(2) of the
Act for the offers and sales to Abraham Keinan. We believed that Section 4(2)
was available because the offer and sale did not involve a public offering. On
March 1, 2004, our Board of Directors cancelled these options. This cancellation
was in accordance with our August 21, 2003 board resolution signed by all
members of the Board of Directors, including Messrs Keinan and Nissenson, the
proposed recipients of the options, which states that the "options are
cancelable at the sole discretion of Xfone for a period not exceeding 210 days
from the date these options are granted.
On August 21, 2003, we issued 200,000 options to acquire shares of our
restricted common stock to Guy Nissenson. These options were issued to Guy
Nissenson for services rendered by Mr. Nissenson as our President and Principal
Executive Officer. These options are exercisable at a price of $0.475 per share.
Each option is convertible into one (1) share of stock. These options vested
immediately and expire on August 21, 2008. We relied upon Section 4(2) of the
Act for the offers and sales to Guy Nissenson. We believed that Section 4(2) was
II-2
available because the offer and sale did not involve a public offering. On March
1, 2004, our Board of Directors cancelled these options. This cancellation was
in accordance with our August 21, 2003 board resolution signed by all members of
the Board of Directors, including Messrs Keinan and Nissenson, the proposed
recipients of the options, which states that the "options are cancelable at the
sole discretion of Xfone for a period not exceeding 210 days from the date these
options are granted.
On September 30, 2002 we entered into an agreement with Nir Davison. Nir
Davison had the option to our shares of common stock 12 months after the
September 30, 2002 agreement, if the Story Telecom project generated a
sufficient amount of sales and profits according to a specified formula in the
agreement; however, the project failed to meet the profits criteria and on
September 30, 2003 the right for the options was cancelled.
Separate and apart from this agreement, because Story Telecom achieved growth
since its inception, which has enabled us to attain certain achievements in our
business plan, our Board of Directors issued a resolution on September 3, 2003
which provided that we or our major shareholders, Mr. Keinan, who is our
Chairman of the Board, Vision Consultants, an affiliated entity, and Campbeltown
Business Ltd., also an affiliated entity, in order to provide an incentive to
Mr. Davison and to enhance his loyalty to us, will grant him options to purchase
500,000 shares of common stock. The September 3, 2003 resolution further
provides that these major shareholders have the first right to sell to Mr.
Davison their own shares or a portion of them at the same terms, rather than our
issuing such shares. Immediately after the September 3, 2003 resolution was
passed, the major shareholders, Vision Consulting and/or Abraham Keinan and/or
Campbeltown Business, Ltd., notified Mr. Davison and us that they decided to
exercise their first right by granting Mr. Davison the options to purchase the
500,000 shares from their own shares of our common stock. Therefore, as of the
date of this notice we were no longer under the obligation to grant an option or
issue shares of common stock to Mr. Davison under this resolution.
On January 9, 2004, we granted 17,500 restricted shares of our common stock,
17,500 Warrants A, and 17,500 Warrants B to Stern & Company, a limited liability
company registered in New York which is owned, managed and controlled by Shai
Stern, in exchange for strategic planning related services. Each Warrant A is
exercisable into one share of common stock at an exercise price of $5.50 per
share. Each Warrant B is exercisable into one share of common stock at an
exercise price of $3.50 per share. We agreed to register the 17,500 shares of
common stock, the 17,500 shares underlying the Warrants A and the 17,500 shares
underlying the Warrants B. The Warrants A are exercisable at any time before
January 9, 2009. The Warrants B are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933. We believed Section 4(2) was available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. Stern and Company had a preexisting relationship with Guy
Nissenson, our Principal Executive Officer and President.
On January 9, 2004, we sold 16,667 restricted shares of our common stock, 16,667
Warrants A, and 16,667 Warrants B to WEC Partners, LLC, a Delaware limited
liability company owned and controlled by Ethan Benovitz, Daniel Saks, and Jaime
Hartman, in exchange for $50,000. Each Warrant A is exercisable into one share
of common stock at an exercise price of $5.50 per share. Each Warrant B is
exercisable into one share of common stock at an exercise price of $3.50 per
share. We agreed to register the 16,667 shares of common stock, the 16,667
shares underlying the Warrants A and the 16,667 shares underlying the Warrants
B. The Warrants A are exercisable at any time before January 9, 2009. The
Warrants B are exercisable until the earlier of 10 days after this registration
statement is effective or 10 days after our common stock is traded on the NASDAQ
Small Cap or the American Stock Exchange or up until the date that is 375 days
following the date of purchase. We relied upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933. We believed Section 4(2)
was available because:
II-3
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. WEC Partners had a preexisting relationship with Guy Nissenson, our
Principal Executive Officer and President.
On January 9, 2004, in exchange for $300,000, we sold 100,000 restricted shares
of our common stock, 100,000 Warrants A, and 100,000 Warrants B to Platinum
Partners Value Arbitrage, a Cayman Islands based limited partnership; Mark
Nordlicht is the Managing Member of Platinum Management LLC, the General Partner
of this limited partnership, which is a limited liability company registered in
new York. Each Warrant A is exercisable into one share of common stock at an
exercise price of $5.50 per share. Each Warrant B is exercisable into one share
of common stock at an exercise price of $3.50 per share. We agreed to register
the 100,000 shares of common stock, the 100,000 shares underlying the Warrants A
and the 100,000 shares underlying the Warrants B. The Warrants A are exercisable
at any time before January 9, 2009. The Warrants B are exercisable until the
earlier of 10 days after this registration statement is effective or 10 days
after our common stock is traded on the NASDAQ Small Cap or the American Stock
Exchange or up until the date that is 375 days following the date of purchase.
We relied upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. We believed Section 4(2) was available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. Platinum Management LLC had a preexisting relationship with Guy
Nissenson, our Principal Executive Officer and President.
On January 9, 2004, we sold 50,000 restricted shares of our common stock, 50,000
Warrants A, and 50,000 Warrants B to Countrywide Partners, LLC, a Delaware
limited liability company owned, managed, and controlled by Harry Adler, in
exchange for $150,000. Each Warrant A is exercisable into one share of common
stock at an exercise price of $5.50 per share. Each Warrant B is exercisable
into one share of common stock at an exercise price of $3.50 per share. We
agreed to register the 50,000 shares of common stock, the 50,000 shares
underlying the Warrants A and the 50,000 shares underlying the Warrants B. The
Warrants A are exercisable at any time before January 9, 2009. The Warrants B
are exercisable until the earlier of 10 days after this registration statement
is effective or 10 days after our common stock is traded on the NASDAQ Small Cap
or the American Stock Exchange or up until the date that is 375 days following
the date of purchase. We relied upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933. We believed Section 4(2) was
available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. Countrywide Partners had a preexisting relationship with Guy
Nissenson, our Principal Executive Officer and President.
II-4
On or about January 15, 2003, we sold 5,000 restricted shares of our common
stock to WorldNet Global.com Ltd., a United Kingdom corporation controlled by
Vic Chhabria, at a price of $0.50 per share or an aggregate purchase price of
$2,500. On or about February 17, 2003, we sold an additional 5,650 restricted
shares of our common stock to WorldNet Global.com Ltd. at a price of $0.44 per
share or an aggregate purchase price of $2,500. On or about April 24, 2003, we
sold an additional 20,000 restricted shares of our common stock to WorldNet
Global.com Ltd. at a price of $0.25 per share or an aggregate purchase price of
$5,000. On or about May 16, 2003, we sold an additional 9,615 restricted shares
of our common stock to WorldNet Global.com Ltd. at a price of $0.26 per share or
an aggregate purchase price of $2,500. On or about August 28, 2003, we sold an
additional 11,750 restricted shares of our common stock to WorldNet Global.com
Ltd. at a price of $0.425 per share or an aggregate purchase price of $5,000. On
or about September 3, 2003, we sold an additional 4,780 restricted shares of our
common stock to WorldNet Global.com Ltd. at a price of $0.523 per share or an
aggregate purchase price of $2,500. On or about October 27 2003, we sold an
additional 1,025 restricted shares of our common stock to WorldNet Global.com
Ltd. at a price of $2.43 per share or an aggregate purchase price of $2,500. We
relied upon Section 4(2) of the Act for the offers and sales to WorldNet
Global.com, Ltd. We believed that Section 4(2) was available because the sales
did not involve a public offering and there was no general solicitation or
general advertising involved in the sales. WorldNet Global.com Ltd. had a
pre-existing relationship with us as a reseller of our telecommunications
services. We placed legends on the stock certificates stating that the
securities were not registered under the Securities Act of 1933 and set forth
the restrictions on their transferability and sale.
On January 15, 2004, we sold 5,000 restricted shares of our common stock, 5,000
Warrants A, and 5,000 Warrants B to Arik Ecker in exchange for $15,000. Each
Warrant A is exercisable into one share of common stock at an exercise price of
$5.50 per share. Each Warrant B is exercisable into one share of common stock at
an exercise price of $3.50 per share. We agreed to register the 5,000 shares of
common stock, the 5,000 shares underlying the Warrants A and the 5,000 shares
underlying the Warrants B. The Warrants A are exercisable at any time before
January 15, 2009. The Warrants B are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933. We believed Section 4(2) was available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. Arik Ecker had a preexisting relationship with Guy Nissenson, our
Principal Executive Officer and President.
On January 15, 2004, we sold 8,500 restricted shares of our common stock, 8,500
Warrants A, and 8,500 Warrants B to Zwi Ecker in exchange for $25,500. Each
Warrant A is exercisable into one share of common stock at an exercise price of
$5.50 per share. Each Warrant B is exercisable into one share of common stock at
an exercise price of $3.50 per share. We agreed to register the 8,500 shares of
common stock, the 8,500 shares underlying the Warrants A and the 8,500 shares
underlying the Warrants B. The Warrants A are exercisable at any time before
January 15, 2009. The Warrants B are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933. We believed Section 4(2) was available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. Zwi Ecker had a preexisting relationship with Guy Nissenson, our
Principal Executive Officer and President.
II-5
On January 15, 2004, we sold 13,000 restricted shares of our common stock,
13,000 Warrants A, and 13,000 Warrants B to Simon Langbart in exchange for
$39,000. Each Warrant A is exercisable into one share of common stock at an
exercise price of $5.50 per share. Each Warrant B is exercisable into one share
of common stock at an exercise price of $3.50 per share. We agreed to register
the 13,000 shares of common stock, the 13,000 shares underlying the Warrants A
and the 13,000 shares underlying the Warrants B. The Warrants A are exercisable
at any time before January 15, 2009. The Warrants B are exercisable until the
earlier of 10 days after this registration statement is effective or 10 days
after our common stock is traded on the NASDAQ Small Cap or the American Stock
Exchange or up until the date that is 375 days following the date of purchase.
We relied upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. We believed Section 4(2) was available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. Simon Langbart had a preexisting relationship with Guy Nissenson,
our Principal Executive Officer and President.
On January 15, 2004, we sold 5,000 restricted shares of our common stock, 5,000
Warrants A, and 5,000 Warrants B to Robert Langbart in exchange for $15,000.
Each Warrant A is exercisable into one share of common stock at an exercise
price of $5.50 per share. Each Warrant B is exercisable into one share of common
stock at an exercise price of $3.50 per share. We agreed to register the 5,000
shares of common stock, the 5,000 shares underlying the Warrants A and the 5,000
shares underlying the Warrants B. The Warrants A are exercisable at any time
before January 15, 2009. The Warrants B are exercisable until the earlier of 10
days after this registration statement is effective or 10 days after our common
stock is traded on the NASDAQ Small Cap or the American Stock Exchange or up
until the date that is 375 days following the date of purchase. We relied upon
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933. We believed Section 4(2) was available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. Robert Langbart had a preexisting relationship with Guy Nissenson,
our Principal Executive Officer and President.
II-6
On January 15, 2004, we sold 3,000 restricted shares of our common stock, 3,000
Warrants A, and 3,000 Warrants B to Michael Derman in exchange for $9,000. Each
Warrant A is exercisable into one share of common stock at an exercise price of
$5.50 per share. Each Warrant B is exercisable into one share of common stock at
an exercise price of $3.50 per share. We agreed to register the 3,000 shares
ofcommon stock, the 3,000 shares underlying the Warrants A and the 3,000 shares
underlying the Warrants B. The Warrants A are exercisable at any time before
January 15, 2009. The Warrants B are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933. We believed Section 4(2) was available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. Michael Derman had a preexisting relationship with Guy Nissenson,
our Principal Executive Officer and President.
On January 15, 2004, we sold 7,000 restricted shares of our common stock, 7,000
Warrants A, and 7,000 Warrants B to Errol Derman in exchange for $21,000. Each
Warrant A is exercisable into one share of common stock at an exercise price of
$5.50 per share. Each Warrant B is exercisable into one share of common stock at
an exercise price of $3.50 per share. We agreed to register the 7,000 shares of
common stock, the 7,000 shares underlying the Warrants A and the 7,000 shares
underlying the Warrants B. The Warrants A are exercisable at any time before
January 15, 2009. The Warrants B are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933. We believed Section 4(2) was available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. Errol Derman had a preexisting relationship with Guy Nissenson, our
Principal Executive Officer and President.
On January 15, 2004, we sold 8,000 restricted shares of our common stock, 8,000
Warrants A, and 8,000 Warrants B to Yuval Haim Sobel in exchange for $24,000.
Each Warrant A is exercisable into one share of common stock at an exercise
price of $5.50 per share. Each Warrant B is exercisable into one share of common
stock at an exercise price of $3.50 per share. We agreed to register the 8,000
shares of common stock, the 8,000 shares underlying the Warrants A and the 8,000
shares underlying the Warrants B. The Warrants A are exercisable at any time
before January 15, 2009. The Warrants B are exercisable until the earlier of 10
days after this registration statement is effective or 10 days after our common
stock is traded on the NASDAQ Small Cap or the American Stock Exchange or up
until the date that is 375 days following the date of purchase. We relied upon
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933. We believed Section 4(2) was available because:
II-7
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. Yuval Haim Sobel had a preexisting relationship with Guy Nissenson,
our Principal Executive Officer and President.
On January 15, 2004, we sold 8,000 restricted shares of our common stock, 8,000
Warrants A, and 8,000 Warrants B to Zvi Sobel in exchange for $24,000. Each
Warrant A is exercisable into one share of common stock at an exercise price of
$5.50 per share. Each Warrant B is exercisable into one share of common stock at
an exercise price of $3.50 per share. We agreed to register the 8,000 shares of
common stock, the 8,000 shares underlying the Warrants A and the 8,000 shares
underlying the Warrants B. The Warrants A are exercisable at any time before
January 15, 2009. The Warrants B are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933. We believed Section 4(2) was available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. Zvi Sobel had a preexisting relationship with Guy Nissenson, our
Principal Executive Officer and President.
On January 15, 2004, we sold 8,400 restricted shares of our common stock, 8,400
Warrants A, and 8,400 Warrants B to Tenram Investments, Ltd. in exchange for
$25,200. Each Warrant A is exercisable into one share of common stock at an
exercise price of $5.50 per share. Each Warrant B is exercisable into one share
of common stock at an exercise price of $3.50 per share. We agreed to register
the 8,400 shares of common stock, the 8,400 shares underlying the Warrants A and
the 8,400 shares underlying the Warrants B. The Warrants A are exercisable at
any time before January 15, 2009. The Warrants B are exercisable until the
earlier of 10 days after this registration statement is effective or 10 days
after our common stock is traded on the NASDAQ Small Cap or the American Stock
Exchange or up until the date that is 375 days following the date of purchase.
We relied upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. We believed Section 4(2) was available because:
II-8
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. Tenram Investments, Ltd. had a preexisting relationship with Guy
Nissenson, our Principal Executive Officer and President.
On January 15, 2004, we sold 10,000 restricted shares of our common stock,
10,000 Warrants A, and 10,000 Warrants B to Michael Zinn in exchange for
$30,000. Each Warrant A is exercisable into one share of common stock at an
exercise price of $5.50 per share. Each Warrant B is exercisable into one share
of common stock at an exercise price of $3.50 per share. We agreed to register
the 10,000 shares of common stock, the 10,000 shares underlying the Warrants A
and the 10,000 shares underlying the Warrants B. The Warrants A are exercisable
at any time before January 15, 2009. The Warrants B are exercisable until the
earlier of 10 days after this registration statement is effective or 10 days
after our common stock is traded on the NASDAQ Small Cap or the American Stock
Exchange or up until the date that is 375 days following the date of purchase.
We relied upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. We believed Section 4(2) was available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. Michael Zinn had a preexisting relationship with Guy Nissenson, our
Principal Executive Officer and President.
On January 22, 2004, we granted 100,000 Warrants A to Hamilton, Lehrer & Dargan,
P.A. in exchange for legal services rendered to us. Each Warrant A is
exercisable into one share of common stock at an exercise price of $5.50 per
share. We agreed to register the 100,000 shares of common stock underlying the
Warrants A. The Warrants A are exercisable at any time before January/February
2009. We relied upon the exemption from registration provided by Section 4(2) of
the Securities Act of 1933. We believed Section 4(2) was available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. Hamilton, Lehrer & Dargan, P.A. had a preexisting relationship with
Guy Nissenson, our Principal Executive Officer and President.
On January 25, 2004, we sold 20,000 restricted shares of our common stock,
20,000 Warrants A, and 20,000 Warrants B to Michael Weiss in exchange for
$60,000. Each Warrant A is exercisable into one share of common stock at an
exercise price of $5.50 per share. Each Warrant B is exercisable into one share
of common stock at an exercise price of $3.50 per share. We agreed to register
the 20,000 shares of common stock, the 20,000 shares underlying the Warrants A
and the 20,000 shares underlying the Warrants B. The Warrants A are exercisable
at any time before January 25, 2009. The Warrants B are exercisable until the
earlier of 10 days after this registration statement is effective or 10 days
after our common stock is traded on the NASDAQ Small Cap or the American Stock
Exchange or up until the date that is 375 days following the date of purchase.
We relied upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. We believed Section 4(2) was available because:
II-9
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. Michael Weiss had a preexisting relationship with Guy Nissenson,
our Principal Executive Officer and President.
On January 30, 2004, we sold 16,667 restricted shares of our common stock,
16,667 A Warrants, and 16,667 B Warrants to Oded Levy in exchange for $50,000.
Each A Warrant is exercisable into one share of common stock at an exercise
price of $5.50 per share. Each B Warrant is exercisable into one share of common
stock at an exercise price of $3.50 per share. We agreed to register the 16,667
shares of common stock, the 16,667 shares underlying the A Warrants and the
16,667 shares underlying the B Warrants. The A Warrants are exercisable at any
time before January 30, 2009. The B Warrants are exercisable until the earlier
of 10 days after this registration statement is effective or 10 days after our
common stock is traded on the NASDAQ Small Cap or the American Stock Exchange or
up until the date that is 375 days following the date of purchase. In connection
with the sale, we paid a finders fee in the amount of $4,000 to The Oberon
Group, LLC, a limited liability company registered in New York, which is owned,
managed and controlled by Adam Breslawsky, a selling shareholder, Elad Epstein
and Nicole Schmidt. We relied upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933. We believed Section 4(2) was
available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment.
On January 30, 2004, we sold 66,667 restricted shares of our common stock,
66,667 A Warrants, and 66,667 B Warrants to Southridge Partners, LP, a limited
partnership registered in Delaware, in exchange for $200,000. Stephen Hicks is
the President of the limited partnership's general partner, Southridge Capital
Management. Each A Warrant is exercisable into one share of common stock at an
exercise price of $5.50 per share. Each B Warrant is exercisable into one share
of common stock at an exercise price of $3.50 per share. We agreed to register
the 66,667 shares of common stock, the 66,667 shares underlying the A Warrants
and the 66,667 shares underlying the B Warrants. The A Warrants are exercisable
at any time before January 30, 2009. The B Warrants are exercisable until the
earlier of 10 days after this registration statement is effective or 10 days
after our common stock is traded on the NASDAQ Small Cap or the American Stock
Exchange or up until the date that is 375 days following the date of purchase.
In connection with the sale, we paid a finders fee in the amount of $16,000 to
The Oberon Group, LLC, a limited liability company registered in New York, which
is owned, managed and controlled by Adam Breslawsky, a selling shareholder, Elad
Epstein and Nicole Schmidt. We relied upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933. We believed Section 4(2)
was available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. Southridge Partners, LP had a preexisting relationship with Guy
Nissenson, our Principal Executive Officer and President.
II-10
On January 30, 2004,we sold 5,000 restricted shares of our common stock, 5,000 A
Warrants, and 5,000 B Warrants to Adam Breslawsky in exchange for $15,000. Each
A Warrant is exercisable into one share of common stock at an exercise price of
$5.50 per share. Each B Warrant is exercisable into one share of common stock at
an exercise price of $3.50 per share. We agreed to register the 5,000 shares of
common stock, the 5,000 shares underlying the A Warrants and the 5,000 shares
underlying the B Warrants. The A Warrants are exercisable at any time before
January 30, 2009. The B Warrants are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. In connection with the
sale, we paid a finders fee in the amount of $1,200 to The Oberon Group, LLC, a
limited liability company registered in New York, which is owned, managed and
controlled by Adam Breslawsky, Elad Epstein and Nicole Schmidt. We relied upon
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933. We believed Section 4(2) was available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. Adam Breslawsky had a preexisting relationship with Guy Nissenson,
our Principal Executive Officer and President.
On January 30, 2004, we sold 6,667 restricted shares of our common stock, 6,667
Warrants A, and 6,667 Warrants B to Michael Epstein in exchange for $20,000.
Each Warrant A is exercisable into one share of common stock at an exercise
price of $5.50 per share. Each Warrant B is exercisable into one share of common
stock at an exercise price of $3.50 per share. We agreed to register the 6,667
shares of common stock, the 6,667 shares underlying the Warrants A and the 6,667
shares underlying the Warrants B. The Warrants A are exercisable at any time
before January 30, 2009. The Warrants B are exercisable until the earlier of 10
days after this registration statement is effective or 10 days after our common
stock is traded on the NASDAQ Small Cap or the American Stock Exchange or up
until the date that is 375 days following the date of purchase. In connection
with the sale, we paid a finders fee in the amount of $1,600 to The Oberon
Group, LLC, a limited liability company registered in New York, which is owned,
managed and controlled by Adam Breslawsky, a selling shareholder, Elad Epstein
and Nicole Schmidt. We relied upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933. We believed Section 4(2) was
available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment
On January 30, 2004, we sold 13,334 restricted shares of our common stock,
13,334 Warrants A, and 13,334 Warrants B to Stephen Frank in exchange for
$40,000. Each Warrant A is exercisable into one share of common stock at an
exercise price of $5.50 per share. Each Warrant B is exercisable into one share
of common stock at an exercise price of $3.50 per share. We agreed to register
the 13,334 shares of common stock, the 13,334 shares underlying the Warrants A
and the 13,334 shares underlying the Warrants B. The Warrants A are exercisable
at any time before January 30, 2009. The Warrants B are exercisable until the
earlier of 10 days after this registration statement is effective or 10 days
after our common stock is traded on the NASDAQ Small Cap or the American Stock
Exchange or up until the date that is 375 days following the date of purchase.
In connection with the sale, we paid a finders fee in the amount of $3,200 to
The Oberon Group, LLC, a limited liability company registered in New York, which
is owned, managed and controlled by Adam Breslawsky, a selling shareholder, Elad
Epstein and Nicole Schmidt. We relied upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933. We believed Section 4(2)
was available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment.
II-11
On January 30, 2004, we sold 66,667 restricted shares of our common stock,
66,667 Warrants A, and 66,667 Warrants B to Southshore Capital Fund LTD, a
Cayman Islands corporation, in exchange for $200,000. Navigator Management is
the Corporate Director of Southshore Capital Fund, Ltd. and the Director and
control person of Navigator Management is David Sims. Each Warrant A is
exercisable into one share of common stock at an exercise price of $5.50 per
share. Each Warrant B is exercisable into one share of common stock at an
exercise price of $3.50 per share. We agreed to register the 66,667 shares of
common stock, the 66,667 shares underlying the Warrants A and the 66,667 shares
underlying the Warrants B. The Warrants A are exercisable at any time before
January 30, 2009. The Warrants B are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. In connection with the
sale, we paid a finders fee in the amount of $16,000 to The Oberon Group, LLC, a
limited liability company registered in New York, which is owned, managed and
controlled by Adam Breslawsky, a selling shareholder, Elad Epstein and Nicole
Schmidt. We relied upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933. We believed Section 4(2) was available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment
On February 2, 2004, we sold 500,000 restricted shares of our common stock,
500,000 Warrants A, and 500,000 Warrants B to Crestview Capital Master, LLC, a
limited liability company registered in Delaware which is controlled by Richard
Levy and Stuart Flink, in exchange for $1,500,000. Each Warrant A is exercisable
into one share of common stock at an exercise price of $5.50 per share. Each
Warrant B is exercisable into one share of common stock at an exercise price of
$3.50 per share. We agreed to register the 500,000 shares of common stock, the
500,000 shares underlying the Warrants A and the 500,000 shares underlying the
Warrants B. The Warrants A are exercisable at any time before February 2, 2009.
The Warrants B are exercisable until the earlier of 10 days after this
registration statement is effective or 10 days after our common stock is traded
on the NASDAQ Small Cap or the American Stock Exchange or up until the date that
is 375 days following the date of purchase. In connection with the sale, we paid
a finders fee in the amount of $120,000 to The Oberon Group, LLC, a limited
liability company registered in New York, which is owned, managed and controlled
by Adam Breslawsky, a selling shareholder, Elad Epstein and Nicole Schmidt. We
relied upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. We believed Section 4(2) was available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment.
On February 11, 2004, we sold 3,334 restricted shares of our common stock, 3,334
Warrants A, and 3,334 Warrants B to Joshua Lobel in exchange for $10,000. Each
Warrant A is exercisable into one share of common stock at an exercise price of
$5.50 per share. Each Warrant B is exercisable into one share of common stock at
an exercise price of $3.50 per share. We agreed to register the 3,334 shares of
common stock, the 3,334 shares underlying the Warrants A and the 3,334 shares
underlying the Warrants B. The Warrants A are exercisable at any time before
February 11, 2009. The Warrants B are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. We paid a finders fee in
the amount of $800 in connection with the sale. We relied upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933. We
believed Section 4(2) was available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. Joshua Lobel had a preexisting relationship with Guy Nissenson, our
Principal Executive Officer and President.
On February 11, 2004, we sold 8,334 restricted shares of our common stock, 8,334
Warrants A, and 8,334 Warrants B to Joshua Kazam in exchange for $25,000. Each
Warrant A is exercisable into one share of common stock at an exercise price of
$5.50 per share. Each Warrant B is exercisable into one share of common stock at
an exercise price of $3.50 per share. We agreed to register the 8,334 shares of
common stock, the 8,334 shares underlying the Warrants A and the 8,334 shares
underlying the Warrants B. The Warrants A are exercisable at any time before
February 11, 2009. The Warrants B are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933. We believed Section 4(2) was available because:
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i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. Joshua Kazam had a preexisting relationship with Guy Nissenson, our
Principal Executive Officer and President.
On February 12, 2004, we sold 20,000 restricted shares of our common stock,
20,000 Warrants A, and 20,000 Warrants B to The Oberon Group, LLC, a limited
liability company registered in New York, which is owned, managed and controlled
by Adam Breslawsky, a selling shareholder, Elad Epstein and Nicole Schmidt, in
exchange for $60,000, which as more fully explained on page 59 of the
Prospectus, was to be paid as a cash fee to The Oberon Group in connection with
a February 12, 2004 agreement we had with The Oberon Group, but instead was used
to purchase the common stock shares and the A and B warrants. Each Warrant A is
exercisable into one share of common stock at an exercise price of $5.50 per
share. Each Warrant B is exercisable into one share of common stock at an
exercise price of $3.50 per share. We agreed to register the 20,000 shares of
common stock, the 20,000 shares underlying the Warrants A and the 20,000 shares
underlying the Warrants B. The Warrants A are exercisable at any time before
February 12, 2009. The Warrants B are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933. We believed Section 4(2) was available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. the Oberon Group, LLC had a preexisting relationship with Guy
Nissenson, our Principal Executive Officer and President.
In connection with our January/February 2004 private placement of securities we
utilized the assistance of The Oberon Group, LLC as a finder. The Oberon Group
is a limited liability company registered in New York, which is owned, managed
and controlled by Adam Breslawsky, a selling shareholder, Elad Epstein and
Nicole Schmidt. On February 11, 2004, we paid The Oberon Group a total of
$162,800 as a finders fee and on February 26, we granted to The Oberon Group
Warrants A to purchase 50,000 shares of our common stock for its finder
services. Each Warrant A is exercisable into one share of common stock at an
exercise price of $5.50 per share. We agreed to register the 50,000 shares of
common stock underlying the Warrants A. The Warrants A are exercisable at any
time before February 2009. We relied upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933. We believed Section 4(2)
was available because:
i. the offer and sale did not involve a public offering;
ii. all certificates were marked with restrictive legends;
iii. each investor represented they were sophisticated enough to
evaluate the merits of the investment; and
iv. the Oberon Group had a preexisting relationship with Guy Nissenson,
our Principal Executive Officer and President.
II-13
EXHIBITS
2. Agreement and plan or reorganization between Xfone, Inc. and Swiftnet
Ltd. dated September 20, 2000 (1)
3.1 Articles of Incorporation of Xfone, Inc.(1)
3.2a Bylaws of Xfone, Inc.(1)
3.2b Amended Bylaws of Xfone, Inc.(4)
3.3 Articles of Incorporation of Swiftnet, Ltd.(1)
3.4 Bylaws of Swiftnet, Ltd.(1)
3.5 Amended bylaws of Xfone, Inc.(3)
3.6 By-Laws of Xfone USA, Inc. (6)
3.7 Office of the Mississippi Secretary of State, Articles of Merger or Share
Exchange Profit Corporation (6)
4. Specimen Stock Certificate(1)
5. Opinion of Hamilton, Lehrer & Dargan, P.A.
10.1 Agreement between Swiftnet Ltd. and Guy Nissenson dated May 11, 2000(1)
10.2 Employment Agreement with Bosmat Houston dated January 1, 2000(1)
10.3 Loan Agreement with Swiftnet Ltd., Guy Nissenson, and Nissim Levy dated
August 5, 2000(1)
10.4 Promissory Note executed between Xfone and Swiftnet Ltd. dated September
29, 2000(1)
10.5 Stock Purchase Agreement between Swiftnet, Ltd, Abraham Keinan, and
Campbeltown Business, Ltd. dated June 19, 2000(1)
10.6 Consulting Agreement between Swiftnet, Ltd. and Campbeltown Business, Ltd.
dated May 11, 2000(1)
10.7 Agreement with Campbeltown Business Ltd. dated July 30, 2001(1)
10.8 Contract with WorldCom International, Ltd. dated June 20, 1998(1)
10.9 Contract with VoiceNet Inc. dated April 11, 2000(1)
10.10 Contract with InTouchUK.com Ltd. dated April 25, 2000(1)
10.11 Letter of Understanding from Campbeltown Business, Ltd. to Xfone, Inc.
dated July 30, 2001 (2)
10.12 Agreement between Adar International, Inc./Mr. Sidney J. Golub and
Swiftnet dated April 6, 2000 (2)
10.13 Lease Agreement between Elmtree Investments, Ltd. and Swiftnet, Ltd. dated
December 4, 1991 (2)
10.14 Lease Agreement between Postwick Property Holdings Limited and Swiftnet,
Ltd. dated October 8, 2001.(2)
10.15 Agreement between Xfone, Inc., Swiftnet, Ltd., and Nir Davison dated
September 30, 2002 (5)
10.16 As to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,
Warrant A, Warrant B and Registration Rights Agreement of Selling
Shareholders Platinum Partners Value Arbitrage Fund LP, Countrywide
Partners LLC and WEC Partners LLC. [3 investors]
10.17 As to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,
Warrant A, Warrant B and Registration Rights Agreement of Selling
Shareholders Simon Langbart, Robert Langbart, Arik Ecker, Zwi Ecker,
Michael Derman, Errol Derman,Yuval Haim Sobel, Zvi Sobel, Tenram
Investment Ltd., Michael Zinn, Michael Weiss. [11 investors]
10.18 As to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,
Warrant A, Warrant B and Registration Rights Agreement of Selling
Shareholders Southridge Partners LP and Southshore Capital Fund Ltd. [2
investors]
10.19 As to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,
Warrant A, Warrant B and Registration Rights Agreement of Selling
Shareholders Crestview Capital Master LLC. [1 investors]
10.20 As to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,
Warrant A, Warrant B and Registration Rights Agreement of Selling
Shareholders Adam Breslawsky, Oded Levy, Michael Epstein, Steven Frank,
Joshua Lobel, Joshua Kazan and The Oberon Group LLC. [7 investors]
10.21 Newco (Auracall Limited) Formation Agreement.
10.22 Agreement with ITXC Corporation
10.23 Agreement with Teleglobe International
10.23.1 Amendment to Agreement with Teleglobe International
10.24 Agreement with British Telecommunications
10.25 Agreement with Easyair Limited (OpenAir)
10.26 Agreement with Worldnet
10.27 Agreement with Portfolio PR
10.28 Agreement with Stern and Company
10.29 December 31, 2003 letter to Xfone from A. Keinan
10.30 Agreement between Swiftnet, Ltd. and Dan Kirschner
10.31 Agreement and Plan of Acquisition (6)
10.32 Escrow Agreement (6)
10.33 Release Agreement (6)
10.34 Employment Agreement between WS Telecom, Inc. and Wade Spooner (6)
10.35 Employment Agreement between WS Telecom, Inc. and Ted Parsons (6)
10.36 First Amendment to Agreement and Plan of Merger (WS Telecom, Inc./Xfone,
Inc./Xfone USA, Inc.)
10.37 Finders Agreement with The Oberon Group, LLC
10.38 Agreement with The Oberon Group, LLC
10.39 Management Agreement (WS Telecom, Inc. and Xfone USA, Inc.)
10.40 Engagement Letter to Tommy R. Ferguson, Confidentiality Agreement,
and Executive Inventions Agreement dated August 19, 2004.
10.41 Voting Agreement dated September 28, 2004 (7)
10.42 Novation Agreement executed September 27, 2004 (7)
10.43 Novation Agreement executed September 28, 2004 (7)
21.1 List of Subsidiaries (Amended)
23. Consent of Chaifetz & Schreiber, P.C.
24. Consent of Hamilton, Lehrer & Dargan, P.A. included in Exhibit 5
-----------
(1) Denotes previously filed exhibits: filed on August 10, 2001 with Xfone,
Inc.'s SB-2 registration statement, file # 333-67232.
(2) Denotes previously filed exhibits: filed on October 16, 2001 with Xfone,
Inc.'s SB-2/Amendment 1 registration statement, file # 333-67232.
(3) Denotes previously filed exhibit: filed on November 28, 2001 with Xfone,
Inc.'s SB-2/Amendment 2 registration statement, file # 333-67232.
(4) Denotes previously filed exhibit: filed on December 5, 2002 with Xfone,
Inc.'s Form 8-K.
(5) Denotes previously filed exhibit: filed on March 3, 2003 with Xfone,
Inc.'s SB-2/Post Effective Amendment No. 2 registration statement, file #
333-67232
(6) Denotes previously filed exhibit: filed on June 1, 2004 with Xfone, Inc.'s
Form 8-K
(7) Denotes previously filed exhibits: filed on October 4, 2004 with Xfone,
Inc.'s Form 8-K
II-14
UNDERTAKINGS
The undersigned Registrant hereby undertakes:
1. To file, during any period a post-effective amendment to this
registration statement is required to:
a) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
b) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement;
c) Include any additional or changed material information on the
plan of distribution; and
(d) To remove from registration any of the securities that remain
unsold at the end of the offering.
2. That, for determining liability under the Securities Act of 1933, to
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
3. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable.
4. In the event that a claim for indemnification against such liabilities,
other than the payment by the Registrant of expenses incurred and paid by
a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding, is asserted by such
director, officer or controlling person in connection with the securities
being registered hereby, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of
such issue.
II-15
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in London, England / Mississippi, USA on
November 1, 2004.
XFONE, INC.
Title Name Date Signature
-------------------------------------------------------------------------------------------
Chairman of the Board Abraham Keinan November 1, 2004 /s/ Abraham Keinan
-------------------------------------------------------------------------------------------
President Guy Nissenson November 1, 2004 /s/ Guy Nissenson
-------------------------------------------------------------------------------------------
Principal Executive Officer Guy Nissenson November 1, 2004 /s/ Guy Nissenson
-------------------------------------------------------------------------------------------
Principal Accounting Officer Tommy R. Ferguson November 1, 2004 /s/ Guy Nissenson
-------------------------------------------------------------------------------------------
Principal Financial Officer Tommy R. Ferguson November 1, 2004 /s/ Guy Nissenson
-------------------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Name Signature Title Date
--------------------------------------------------------------------------------------------
Abraham Keinan /s/ Abraham Keinan Chairman of the Board November 1, 2004
--------------------------------------------------------------------------------------------
Guy Nissenson /s/ Guy Nissenson President,
Principal Executive Officer,
and Director November 1, 2004
--------------------------------------------------------------------------------------------
II-16