UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM SB-2/A POST EFFECTIVE AMENDMENT NO. 3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 XFONE, INC. (Name of small business issuer in its charter) Nevada 7389 11-3618510 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification incorporation or Classification Number) organization) Code Number) c/o Swiftnet Ltd. Britannia House 960 High Road London, United Kingdom N12 9RY N/A (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 011.44.2084469494 The Corporation Trust Company of Nevada 6100 Nell Rd Suite 500 Reno NV 89511 (Name, address and telephone number of agent for service) 477,800 SHARES ARE BEING OFFERED BY SELLING SHAREHOLDERS All Communications to: Brenda Lee Hamilton, Esq. Hamilton, Lehrer & Dargan P.A. 2 East Camino Real, Suite 202 Boca Raton, Florida 33432 Telephone 561-416-8956 Facsimile 561-416-2855 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. [ ] The prospectus forming a part of this registration statement combines common stock offered pursuant to a previously filed and effective registration statement on Form SB-2, Registration No. 333-67232 pursuant to Rule 429 (a). - -------------------------------------------------------------------------------- CALCULATION OF REGISTRATION FEE (1)(2) Title of each class Amount Offering Aggregate Amount of of securities to be price offering registration to be registered registered per share price fee - -------------------------------------------------------------------------------- Common Stock, 477,800 $3.50 $1,672,300 $399.68 $.001 par value - -------------------------------------------------------------------------------- (1) Estimated solely to calculate the registration fee pursuant to Rule 457. (2) Consists of the 477,800 shares of common stock which were registered on our original Form SB-2 registration statement that was filed originally filed on August 10, 2001 and declared effective by the Securities and Exchange Commission on December 12, 2001. (3) The fee for the 477,800 shares of common stock subject to this registration statement have previously been registered and the registration fee has been previously paid. (4) 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 transaction effected without the receipt of consideration which results in an increase in the number of outstanding shares of common stock. Selling shareholders hold all of the shares being registered. Our shares are quoted on the OTC Bulletin Board under the symbol "XFNE". We will not receive proceeds from the sale of shares from the selling shareholders. EXPLANATORY NOTE On August 10, 2001, we filed Registration No. 333-672-32 on Form SB-2, which was declared effective on December 12, 2001. On February 4, 2002, we filed Post Effective Amendment Number 1 to the Form SB-2, to provide updated information pertaining to our business. In addition, we filed Post Effective Amendment Number 2 to update information pertaining to our business. We are filing this Post Effective Amendment Number 3 to provide our financial statements for the year ended December 31, 2002 and to update other information pertaining to our business. 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 COVER PAGE 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. The information in this prospectus is not complete and may be changed. Our selling shareholders may not sell these securities offered pursuant to this prospectus 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 prospectus is April 8, 2003. PROSPECTUS XFONE, INC. 477,800 SHARES OF OUR COMMON STOCK ARE BEING OFFERED BY SELLING SHAREHOLDERS Our current shareholders are offering 477,800 shares of our common stock. Our common stock is quoted on the OTC Bulletin Board under the symbol ("XFNE"). There is no trading market for our common stock. THESE SECURITIES 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 sell these securities in any state where the offer or sale is not permitted. The date of this Post Effective Amendment Number 3 is April 8, 2003. Offering Information - ------------------------------------------------------------------------------- Price to Underwriting Estimated Proceeds to Public(1) Discounts and Offering Company(4) Commissions(2) Expenses(3) - ------------------------------------------------------------------------------- Per Share $3.50 N/A N/A N/A - ------------------------------------------------------------------------------- Total $0.0 $0.0 $0.0 $0.0 (1) Does not include offering costs, including filing, legal, accounting and miscellaneous fees incurred or expected to be incurred of approximately $137,899.68. We have agreed to pay all the costs of this offering. Selling shareholders will pay no offering expenses. (2) We will not receive proceeds from the sale of shares from the selling shareholders. The date of this Post Effective Amendment Number 3 is April 8, 2003.INSIDE FRONT COVER OF PROSPECTUS Until 90 days after the date of this prospectus, or until _______________, 2003, 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 sold allotments or subscriptions. 2 TABLE OF CONTENTS Page PART I - INFORMATION REQUIRED IN PROSPECTUS ITEM 1. Front of Registration Statement and Outside Front Cover of Prospectus.1 ITEM 2. Inside Front and Outside Back Cover Pages of Prospectus...............2 ITEM 3. Summary Information...................................................4 Risk factors..........................................................7 If Worldcom International Ltd.'s agreement to provide us with telephone routing and switching services is terminated, or if Worldcom ceases doing business, our revenues, and potential profitability may be adversely affected.............................. 7 We are subject to extensive foreign regulation, foreign jurisdiction, foreign political events or upheavals that may lead to increased costs and decreased revenues....................... 7 If our information and billing systems do not keep pace with our operational growth, our revenues and customer base will be adversely affected................................................... 7 Terrorist attacks, war, or armed conflict may negatively affect our business, financial condition, and results of operations......... 8 If we need financing, but are unable to obtain it to support our expansion plans, we will have to curtail othese plans and the value of your investment may be negatively affected.......... 8 The demand for our services fluctuates during certain periods which will negatively affect our revenues and stock price and make it difficult for you to determine whether our business will be successful.......................................... 8 Our management decisions are made by our founder and Chairman of our Board of Directors, Abraham Keinan, and our President/ Principal Executive Officer/Principal Financial Officer/ Principal Accounting Officer and a Director, Guy Nissenson; if we lose their services, our operations will be negatively impacted............................................................. 8 Our management has significant control over stockholder matters, which may affect the ability of minority stockholders to influence our activities....................................................... 9 Our operations are subject to possible conflicts of interest; there are no assurances that we will resolve these conflicts in a manner favorable to our minority shareholders................... 9 Our operations are subject to possible conflicts of interest regarding Swiftnet's agreements with Campbeltown Business, Ltd. and Abraham Keinan; there are no assurances that we will resolve these conflicts in a manner favorable to our minority shareholders... 9 Because our common stock is considered a penny stock, any investment in our common stock is considered a high-risk investment and is subject to restrictions on marketability; you may be unable to sell your shares................................ 10 We may not meet the proposed National Association of Security Dealer exchange listing Requirements, which may lead to increased investment risk and inability to sell your shares.......... 10 U.S. investors may have trouble in attempting to enforce liabilities based upon U.S. federal securities laws against us and our subsidiary, Swiftnet, and its non-U.S. resident directors............................................................ 10 Certain Nevada corporation law provisions could prevent a potential takeover of us which could adversely affect the market price of our common stock or deprive you of a premium over the market price................................................ 10 ITEM 4. Use of Proceeds .................................................... 11 ITEM 5. Determination of Offering Price .................................... 11 ITEM 6. Dilution ........................................................... 11 ITEM 7. Selling Shareholders ............................................... 11 ITEM 8. Plan of Distribution ............................................... 19 ITEM 9. Legal Proceedings .................................................. 21 ITEM 10. Directors, Executive Officers, Promoters and Control Persons ...... 22 ITEM 11. Security Ownership of Certain Beneficial Owners and Management..... 24 ITEM 12. Description of Securities ......................................... 25 ITEM 13. Interest of Named Experts and Counsel ............................. 27 ITEM 14. Disclosure of Commission Position on Indemnification .............. 27 ITEM 15. Organization within Last Five Years ............................... 27 ITEM 16. Description of Business ........................................... 32 ITEM 17. Management's Discussion and Analysis or Plan of Operation ......... 40 ITEM 18. Description of Property ........................................... 44 ITEM 19. Certain Relationships and Related Transactions .................... 44 ITEM 20. Market for Common Equity and Related Stockholder Matters .......... 48 ITEM 21. Executive Compensation ............................................ 51 ITEM 22. Financial Statements .............................................. 52 ITEM 23. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................... 53 PART II - INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. Indemnification of Directors and Officers............................53 ITEM 25. Other Expenses of Issuance and Distribution..........................53 ITEM 26. Recent Sales of Unregistered Securities..............................53 ITEM 27. Exhibits.............................................................55 ITEM 28. Undertakings.........................................................56 3 ITEM 3. SUMMARY INFORMATION AND RISK FACTORS PROSPECTUS SUMMARY This prospectus contains statements about our future business operations that involve risks and uncertainties. Our actual results could differ significantly from our anticipated future operations, because of many factors, including those identified under the "Risk Factors" Section of this prospectus beginning on page 7. The prospectus summary contains a summary of all material terms of the prospectus. You should carefully read all information in the prospectus, including the financial statements and their explanatory notes, under the Financial Statement Section beginning on page 51, before making an investment decision. In addition, you should consult you tax, legal, or business advisor before making an investment. HOW OUR COMPANY IS ORGANIZED We were incorporated in the State of Nevada on September 1, 2000 in order to acquire 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 by a share exchange in which we acquired all of Swiftnet's issued and outstanding stock in exchange for 2.4 million newly issued shares of our common stock. At the time of the share exchange our 2.4 million shares represented 55% of our issued shares. As a result of the share exchange, 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 of which 5,071,539 shares are issued and outstanding. We are authorized to issue 50,000,000 shares of preferred stock of which no shares are issued and outstanding. 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 011.44.2084469494. 4 ABOUT OUR BUSINESS We provide long distance voice and data communications services solely through our subsidiary, Swiftnet, Ltd, which has conducted communications service operations in the United Kingdom since 1990. We provide, facsimile, and e-mail methods of communications. Our customers are located in over 75 countries in Europe, Australia, North America, South America, Asia, and Africa. Approximately 75% of our revenues are derived from our customers located in the United Kingdom. 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. Our future services primarily include creating an Internet-based customer service and billing interface to include on-line registration, account control, payment and billing functions and information retrieval. We also plan to establish our services in other countries worldwide. In addition, we plan to resell cellular telephone services of other carriers. THE OFFERING: As of the date of this prospectus, we had 5,071,539 shares of common stock issued and outstanding and no shares of preferred stock outstanding. This offering is comprised entirely of shares of our common stock held by our selling shareholders. Although we have agreed to pay all offering expenses, we will not receive any proceeds from the sale of the selling shareholders' securities. Our Offering expenses were approximately $200,000. The selling shareholders are offering 477,800 shares of our common stock. Our common stock is quoted on the OTC Bulletin Board under the symbol ("XFNE"). There is no public market for our common stock. 5 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 2002 2001 2000 Audited Audited Audited IN POUNDS: ------------------------------------- REVENUES £3,741,436 £2,658,905 £1,354,746 OPERATING PROFIT £315,602 £235,336 £97,687 NET INCOME £240,981 £145,606 £69,559 BASIC EPS £0.05 £0.03 £0.02 TOTAL ASSETS £2,169,816 £1,569,336 £968,544 LONG TERM DEBT £66,193 £50,488 £40,676 December 31 CONVENIENCE TRANSLATION 2002 2001 2000 IN DOLLARS @1.6:1: ------------------------------------- Revenues $5,986,298 $4,254,248 $2,167,594 Operating profit $504,964 $376,538 $156,299 Net Income $385,570 $232,970 $111,294 Basic EPS $0.08 $0.05 $0.03 Total Assets $3,471,706 $2,510,938 $1,549,670 Long Term Debt $105,909 $80,781 $65,082 6 RISK FACTORS AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED IN THIS PROSPECTUS INVOLVES A HIGH DEGREE OF RISK. WE CANNOT ASSURE PROSPECTIVE INVESTORS THAT WE WILL CONTINUE OPERATIONS, GENERATE REVENUES, 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 of our common stock. If Worldcom International Ltd.'s agreement to provide us with telephone routing and switching services is terminated, or if Worldcom ceases doing business, our revenues, and potential profitability may be adversely affected. Should our agreement with WorldCom International, Ltd., our primary provider of telephone routing and switching services and a Great Britain based subsidiary of Worldcom, Inc., be terminated, or Worldcom, Inc., which filed for Chapter 11 bankruptcy on July 21, 2002, 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 the WorldCom switch to another provider. 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 revenues and potential profitability. For more detailed information regarding our agreement with WorldCom International, Ltd. please see our "Description of Business" Section beginning at page 32. We are subject to extensive foreign regulation, foreign jurisdiction, foreign political events or upheavals that may lead to increased costs and decreased revenues. 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. In addition, some foreign countries where we provide telecommunications services may be subject to economic upheavals or political crisis, instability or political changes in control. Our compliance with foreign rules and regulations or responses to political/economic events 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 32. If our information and billing systems do not keep pace with our operational growth, our revenues and customer base will be adversely affected. Over the past two years, our business has at least doubled. We now handle at least 1,000,000 transactions on a daily basis with over 2000 customers located in 75 countries. Accordingly, our information and billing systems are under increasing stress. If we fail to maintain and improve efficient information and billing systems or if these systems do not keep pace with our growth, our revenues and customer base will materially decrease. 7 Terrorist attacks, war, or armed conflict may negatively affect our business, financial condition, and results of operations. Terrorist attacks upon Great Britain or Great Britain's involvement in the war with Iraq or other armed conflict, may negatively impact consumer confidence and spending in Great Britain, as well as the economies of any of the countries where we conduct our business. Any such occurrences could negatively affect our business, financial condition, and results of operations. If we need financing, but are unable to obtain it to support our expansion plans, we will have to curtail othese plans and the value of your investment may be negatively affected. Our future business will involve substantial costs, primarily those costs associated with establishment of an Internet-based customer service and billing interface to include on-line registration, full account control, payment and billing information retrieval. If our revenues are insufficient to establish or market our Internet-based services, 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 and our future growth plans, which could negatively affect our revenues and potential profitability and the value of your investment. The demand for our services fluctuates during certain periods which will negatively affect our revenues and stock price 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 months of April, August and December. Because our revenues will correspond to our demand, our revenues will be negatively affected during those months and may reflect lower earnings. This could negatively affect our stock price and lower the value of your investment in our common stock and make it difficult for you to assess whether our business will be successful. Our management decisions are made by our founder and Chairman of our Board of Directors, Abraham Keinan, and our President/Principal Executive Officer/ Principal Financial Officer/Principal Accounting Officer, 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 President/Principal Executive Officer/ Principal Financial Officer/Principal Accounting Officer, Guy Nissenson. Because Messrs. Keinan and Nissenson are essential to our operations, you must rely 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/Principal Financial Officer/Principal Accounting 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. 8 Our management has significant control over stockholder matters, which may affect the ability of minority stockholders to influence our activities. Collectively, our officers/directors beneficially own approximately 86.6% of our outstanding common stock. As such, our officers/directors and the their family members control the outcome of all matters submitted to a vote by 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. Our operations are subject to possible conflicts of interest; there are no assurances that we will resolve these conflicts in a manner favorable to our minority shareholders. Our officers/directors are involved in other business activities and may, in the future, become involved in such other business opportunities. If other business opportunities become available, our officers/directors may face a conflict in selecting between our business objectives and their own. We have not formulated a policy for the resolution of such conflicts. Future transactions or arrangements between or among our officers, directors and shareholders, and companies they control, may result in conflicts of interest, which may have an adverse affect on the rights of minority shareholders, our operations and our financial condition. Our operations are subject to possible conflicts of interest regarding Swiftnet's agreements with Campbeltown Business, Ltd. and Abraham Keinan; there are no assurances that we will resolve these conflicts in a manner favorable to our minority shareholders. During May 1999 Swiftnet, Ltd. entered into a renewable consulting agreement with Campbeltown Business, Ltd., a privately held company that is owned by our President/Principal Executive Officer/Principal Financial Officer/Principal Accounting Officer, Guy Nissenson, and his family. This agreement provides for cash payments to Campbeltown Business, Ltd. 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 Swiftnet 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, please see our "Organization within the Last Five Years" Section at page 27. 9 Because our common stock is considered a penny stock, any investment in our common stock is considered a high-risk investment and is subject to restrictions on marketability; you may be unable to sell your shares. If our common stock becomes tradable in the secondary market, we may be subject to the penny stock rules adopted by the Securities and Exchange Commission that require brokers to provide extensive disclosure to its customers prior to executing trades in penny stocks. These disclosure requirements may cause a reduction in the trading activity of our common stock, which in all likelihood would make it difficult for our shareholders to sell their securities. For additional details concerning the disclosure requirements under the penny stock rules, see the section entitled Penny Stock Considerations at page 49 below. We may not meet the proposed National Association of Security Dealer exchange listing Requirements, which may lead to increased investment risk and inability to sell your shares. Our common stock is quoted on the OTC Bulletin Board under the symbol "XFNE". The National Association of Security Dealers has proposed to the Securities and Exchange Commission that the OTC Bulletin Board be phased out and eliminated, to be replaced with the Bulletin Board Exchange. If this occurs, we may not meet the new exchange listing requirements. Should we fail to meet the new exchange requirements, you will lose your entire investment. U.S. investors may have trouble in attempting to enforce liabilities based upon U.S. federal securities laws against us and our subsidiary, Swiftnet, and its non-U.S. resident directors. Our operations are conducted through our subsidiary, Swiftnet, Ltd., which is incorporated and located in the United Kingdom. Accordingly, all of our assets are located outside the United States. In addition, all of our directors are foreign citizens. As a result, it may be difficult or impossible for United States investors to serve process within the United States upon us or to enforce judgment upon us for civil liabilities in United States courts. Certain Nevada corporation law provisions could prevent a potential takeover of us which could adversely affect the market price of our common stock or deprive you of a premium over the market price. We are incorporated in the State of Nevada. Certain provisions of Nevada corporation law could adversely affect the market price of our common stock. Because Nevada corporation law requires board approval of a transaction involving a change in our control, it would be more difficult for someone to acquire control of us. Nevada corporate law also discourages proxy contests making it more difficult for you and other shareholders to elect directors other than the candidates nominated by our board of directors. 10 SPECIAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS This prospectus contains "forward looking statements" which you should read and interpret with caution. Some of the statements in this prospectus are "forward looking statements". These forward looking statements involve certain known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward looking statements. These factors include, among others, the factors set forth under "Risk Factors." The words "believe," "expect," "anticipate," "intend," and "plan" and similar expressions identify forward looking statements. We caution you not to place undue reliance or make your investment decision based on any forward-looking statements. We undertake no obligation to update or revise any of the forward-looking statements in this document to reflect any future events or developments. ITEM 4. USE OF PROCEEDS Not Applicable. We will not receive any proceeds from the sale of the securities by the selling shareholders. ITEM 5. DETERMINATION OF OFFERING PRICE Our management has determined the offering price for the selling shareholders' shares. The offering price has been arbitrarily determined and does not bear any relationship to our assets, results of operations, or book value, or to any other generally accepted criteria of valuation. Prior to this offering, there has been no market for our common shares. ITEM 6. DILUTION Not Applicable. We are not offering any shares in this Registration Statement. All shares are being registered on behalf of our selling shareholders. ITEM 7. SELLING SHAREHOLDERS The selling shareholders named below are selling the securities. The table assumes that all of the securities will be sold in this offering. However, any or all of the securities listed below may be retained by any of the selling shareholders, and therefore, no accurate forecast can be made as to the number of securities that will be held by the selling shareholders upon termination of this offering. We believe that the selling shareholders listed in the table have sole voting and investment powers with respect to the securities indicated. We will not receive any proceeds from the sale of the securities by the selling shareholders. None of the selling shareholders are broker-dealers or affiliates of broker-dealers. 11 - ------------------------------------------------------------------------------------------------------------- Amount Beneficially Beneficially Amount Percentage Owner Business Nature of Relationship Owned Prior To Be Before/After Name Companies and Businesses With Issuer To Offering Offered Offering - ------------------------------------------------------------------------------------------------------------- A. J. Benson Limited Textile / Clothing 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Adminland Ltd. Real Estate 400 400 0.008%/0 - ------------------------------------------------------------------------------------------------------------- Agrafiotis, Employee 800 800 0.016%/0 Konstantinos - ------------------------------------------------------------------------------------------------------------- Alter A., J. 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Analysis Software consultancy & 100 100 0.002%/0 International Ltd. supply - ------------------------------------------------------------------------------------------------------------- Asia Centre Plc Real Estate 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Aviv Plastics Limited Plastics 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- B & B Import Export Import & Export Commerce 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Beeton, Sandra Former Employee 500 500 0.010%/0 - ------------------------------------------------------------------------------------------------------------- Binoray Ltd. Shipping & Forwarding 200 200 0.004%/0 Agents - ------------------------------------------------------------------------------------------------------------- BLD Agencies Ltd. Textile / Clothing 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Brittany Plant Ltd. Plant & Machinery 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- C K Business Systems Telecommunication 300 300 0.006%/0 - ------------------------------------------------------------------------------------------------------------- C.E.R. Ltd Business & management 100 100 0.002%/0 consultancy - ------------------------------------------------------------------------------------------------------------- Charitan, Mordechay 70000 70000 1.400%/0 - ------------------------------------------------------------------------------------------------------------- China Associates Ltd. Trading & Investment 100 100 0.002%/0 Services - ------------------------------------------------------------------------------------------------------------- 12 Cont'd - ------------------------------------------------------------------------------------------------------------- Cohen L., A. 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- D M Q A Technical Technical Services 200 200 0.004%/0 Services(UK) - ------------------------------------------------------------------------------------------------------------- Danielli, Rami 50000 50000 1.000%/0 - ------------------------------------------------------------------------------------------------------------- Dargan, Howard Attorney Attorney 20000 20000 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Dasons Computers Ltd. Computer Consultants 20000 20000 0.400%/0 - ------------------------------------------------------------------------------------------------------------- Direct Bargain Import/Export 200 200 0.004%/0 Supplies Ltd. - ------------------------------------------------------------------------------------------------------------- Dury, Charlie Agent 300 300 0.006%/0 - ------------------------------------------------------------------------------------------------------------- Ebert, Herman Agent 2500 2500 0.050%/0 - ------------------------------------------------------------------------------------------------------------- Elani, Zion 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Eliav, Jacob 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Euro Net Data Ltd. Computer related 100 100 0.002%/0 activities - ------------------------------------------------------------------------------------------------------------- Faith Products Ltd. Manufacture perfumes & toilet preparations 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Fastgrand Ltd. Property Management 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Feiner, Norman Agent 1200 1200 0.024%/0 - ------------------------------------------------------------------------------------------------------------- Feld, J. 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- First United Kingdom Import/Export 200 200 0.004%/0 Ltd. - ------------------------------------------------------------------------------------------------------------- Fiserves Securities Investments 200 200 0.004%/0 Inc. FBO - ------------------------------------------------------------------------------------------------------------- Foto Fair Photography 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Franks, Bryan Agent 300 300 0.006%/0 - ------------------------------------------------------------------------------------------------------------- 13 Cont'd. - ------------------------------------------------------------------------------------------------------------- Friedman, S. 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Ganz, H. 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Gavish, M. 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Gerald Wise & Co. Ltd. Wholesale of waste & 200 200 0.004%/0 scrap - ------------------------------------------------------------------------------------------------------------- Gibraltor Bravo Investments 300 300 0.006%/0 Investment - ------------------------------------------------------------------------------------------------------------- Glick, Cheryl Employee 2500 2500 0.050%/0 - ------------------------------------------------------------------------------------------------------------- Gurvitz, Meir 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Guyomarch Management Investments 5000 5000 0.100%/0 Ltd. - ------------------------------------------------------------------------------------------------------------- Halpern M., D. 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Hamilton, Lehrer & Attorney Attorney 55,000 55,000 0.01%/0 Dargan P.A. - ------------------------------------------------------------------------------------------------------------- Hanina Fine Arts Ltd. 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Hari Exporters & Imports & Export 200 200 0.004%/0 Importers - ------------------------------------------------------------------------------------------------------------- Harish, Eyal 40000 40000 0.800%/0 - ------------------------------------------------------------------------------------------------------------- Harkus, Ray Agent 300 300 0.006%/0 - ------------------------------------------------------------------------------------------------------------- Hatziantoniou, Employee 800 800 0.016%/0 Athanasios - ------------------------------------------------------------------------------------------------------------- Heller, A. 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Hendon Bagel Bakery Bakery 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Hochhauser, E. 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Hope Paul, Ashley Reseller 150 150 0.003%/0 - ------------------------------------------------------------------------------------------------------------- 14 Cont'd. - ------------------------------------------------------------------------------------------------------------- Independent Telephone Telecommunication Agent 300 300 0.006%/0 Analysis, Ltd. - ------------------------------------------------------------------------------------------------------------- InTouchUK.com Ltd. Telecommunication Reseller 300 300 0.006%/0 - ------------------------------------------------------------------------------------------------------------- J H Handling Ltd. 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Jacobson, Isaac 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- K W, Phillip Employee 900 900 0.018%/0 - ------------------------------------------------------------------------------------------------------------- Kaifeng Ltd. Restaurants 300 300 0.006%/0 - ------------------------------------------------------------------------------------------------------------- Karoz, Zeev 10000 10000 0.200%/0 - ------------------------------------------------------------------------------------------------------------- KBMD Accounting, auditing; 100 100 0.002%/0 tax consult - ------------------------------------------------------------------------------------------------------------- Kol, Dov 300 300 0.006%/0 - ------------------------------------------------------------------------------------------------------------- Kruskal Insurance Insurance Broker 100 100 0.002%/0 Brokers - ------------------------------------------------------------------------------------------------------------- Leading Edge Services Business & management 200 200 0.004%/0 Ltd. consultancy - ------------------------------------------------------------------------------------------------------------- Lehrer, Frederick M. Attorney Attorney 30000 30000 0.006%/0 - ------------------------------------------------------------------------------------------------------------- Lew, R 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Loudwater Trade & Wholesale coffee, tea, 200 200 0.004%/0 Finance Ltd. cocoa etc - ------------------------------------------------------------------------------------------------------------- Lusky, Moshe 5000 5000 0.100%/0 - ------------------------------------------------------------------------------------------------------------- Markus King & Co. Chartered Surveyors 300 300 0.006%/0 - ------------------------------------------------------------------------------------------------------------- Martin Heller Accountants 200 200 0.004%/0 Chartered Accountant - ------------------------------------------------------------------------------------------------------------- Meir, Yechiel 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Merchant Whitewater Business & management 200 200 0.004%/0 Ltd. consultancy - ------------------------------------------------------------------------------------------------------------- 15 Cont'd. - ------------------------------------------------------------------------------------------------------------- Michael Pasha & Co. Secretarial & translation 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Mosdor & Co. Ltd. Property (Landlords) 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Moskovitz, Dan 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Multinet Global Ltd. Telecommunication 300 300 0.006%/0 - ------------------------------------------------------------------------------------------------------------- Museum Plc Wholesale of clothing & 100 100 0.002%/0 footwear - ------------------------------------------------------------------------------------------------------------- Netta Holdings LLC Investments 10000 10000 0.200%/0 - ------------------------------------------------------------------------------------------------------------- New Design Ltd. Architectural, technical 100 100 0.002%/0 consult - ------------------------------------------------------------------------------------------------------------- Noyek, Terence 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Oban Management Ltd. Entertainment activities 300 300 0.006%/0 - ------------------------------------------------------------------------------------------------------------- P. Rothem - IDC Ltd. Retail of fruit, meat & 100 100 0.002%/0 vegetables - ------------------------------------------------------------------------------------------------------------- Patagonia Travel Travel Agency 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Patel, R 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Pickles D., Phillip 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Polepart Ltd. Food retail 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Prestige Network Ltd. Translation 300 300 0.006%/0 - ------------------------------------------------------------------------------------------------------------- Rainbow Properties Ltd Real Estate 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Recommend Ltd Installation of 400 400 0.008%/0 electrical wiring - ------------------------------------------------------------------------------------------------------------- Reed & Co Estate Real Estate 200 200 0.004%/0 Agents - ------------------------------------------------------------------------------------------------------------- Reit Asset Management Asset Management 300 300 0.006%/0 - ------------------------------------------------------------------------------------------------------------- Rokach, B. 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- 16 Cont'd. - ------------------------------------------------------------------------------------------------------------- Rosenberg, R 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Rotbard, Alicia 10000 10000 0.200%/0 - ------------------------------------------------------------------------------------------------------------- Rotenberg, Danny 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Rudder Clothing Ltd Textile / Clothing 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Sidi, Rafi Agent 300 300 0.006%/0 - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- Sixtrees Ltd. Wholesale of household 100 100 0.002%/0 goods - ------------------------------------------------------------------------------------------------------------- Snaith Insurance Insurance Broker 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Steinberg, J. 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Suncrest Trading Ltd. General Wholesale 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Sunflower Investment Investments 20000 20000 0.400%/0 Group Ltd. - ------------------------------------------------------------------------------------------------------------- Tager, Mordechai 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Tager-Charitan, Sharon 300 300 0.006%/0 - ------------------------------------------------------------------------------------------------------------- Tapewish Ltd. Artistic & literary 200 200 0.004%/0 creation - ------------------------------------------------------------------------------------------------------------- Travelon Int'l Ltd. Travel Agency 300 300 0.006%/0 - ------------------------------------------------------------------------------------------------------------- Trinity Managment Ltd. Management Services 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Tropicourt Ltd. Uniform Accessories 100 100 0.002%/0 (Belt, Badges, Etc) - ------------------------------------------------------------------------------------------------------------- Val D'isere Fashions Textile / Clothing 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Wainman, B. 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Webb W., Daniel Reseller 150 150 0.003%/0 - ------------------------------------------------------------------------------------------------------------- 17 Cont'd. - ------------------------------------------------------------------------------------------------------------- Weisz, A. 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- Wellington Gallery Art Gallery 200 200 0.004%/0 - ------------------------------------------------------------------------------------------------------------- Wiseglass, Ofer 5000 5000 0.100%/0 - ------------------------------------------------------------------------------------------------------------- Worldnet Global.com Telecommunication Reseller 500 500 0.010%/0 Ltd. - ------------------------------------------------------------------------------------------------------------- Wright J., Steven 100 100 0.002%/0 - ------------------------------------------------------------------------------------------------------------- WST Charters Travel Agency 300 300 0.006%/0 - ------------------------------------------------------------------------------------------------------------- Zeneca Commercial, Commodities wholesale Lender 100000 100000 2.000%/0 S.A. - ------------------------------------------------------------------------------------------------------------- Zodiac Maritime Maritime Agency 500 500 0.010%/0 Agencies Ltd. - ------------------------------------------------------------------------------------------------------------- Total 477,800 477,800 ============================================================================================================= * An agent denotes a non-employee commission-based sales person. ** A reseller is a wholesale customer that purchases telecommunications services and then resells those services to third parties for a potential profit. 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 only if the shares are qualified for sale or are exempt from qualification in the states in which the selling shareholders or proposed purchasers reside. There is no assurance that the states in which we seek qualification will approve resales of the shares. 18 ITEM 8. PLAN OF DISTRIBUTION Our selling shareholders are offering 477,800 shares of our common stock. We will not receive proceeds from the sale of shares by the selling shareholders. The securities offered by this prospectus will be sold by the selling shareholders or by those to whom such shares are transferred. We will file post-effective amendments to this Registration Statement to identify transferees to whom the selling shareholders transfer their securities. We are not aware of any underwriting arrangements that have been entered into by the selling shareholders. The distribution of the securities by the selling shareholders may be affected in one or more transactions that may take place in the over the counter market, including broker's transactions, privately negotiated transactions or through sales to one or more dealers acting as principals in the resale of these securities. The selling shareholders and any of their pledges, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are then traded or in private transactions. Our Common Shares are quoted on the OTC Bulletin Board under the symbol ("XFNE"). Selling shareholders may use any one or more of the following methods to sell their shares: o Ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; o Block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block of shares as principal to facilitate the transaction; o Purchases by a broker-dealer as principal and resale by the broker-dealer for its account; o An exchange distribution in accordance with the rules of the applicable exchange; o Privately negotiated transactions; o A combination of any such methods of sale; and o Any other method permitted pursuant to applicable law. Any of the selling shareholders, acting alone or in concert with one another, may be considered statutory underwriters under the Securities Act of 1933 if they are directly or indirectly conducting an illegal distribution of the securities on behalf of our corporation. For instance, an illegal distribution may occur if any of the selling shareholders were to provide us with cash proceeds from their sales of the securities. If any of the selling shareholders are determined to be underwriters, they may be liable for securities violations in connection with any material misrepresentations or omissions made in this prospectus. 19 We have sought qualification for sale of the securities in those states where the securities will be offered by obtaining publishing in Standard & Poors manual. That qualification is necessary to resell the securities in the public market. The securities may only be resold if the securities are qualified for sale or are exempt from qualification in the states in which the selling shareholders or proposed purchasers reside. There is no assurance that the states in which we have obtained qualification will continue to approve of the security resales. In addition, the selling shareholders and any brokers and dealers through whom sales of the securities are made may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, and the commissions or discounts and other compensation paid to such persons may be regarded as underwriters' compensation. The selling shareholders may pledge all or a portion of their securities as collateral for margin accounts or in loan transactions, and the securities may be resold pursuant to the terms of such pledges, accounts or loan transactions. Upon default by such selling shareholders, the pledgee in such loan transaction would have the same rights of sale as the selling shareholders under this prospectus. The selling shareholders may also enter into exchange traded listed option transactions, which require the delivery of the securities listed under this prospectus. The selling shareholders may also transfer securities owned in other ways not involving market makers or established trading markets, including directly by gift, distribution, or other transfer without consideration, and upon any such transfer the transferee would have the same rights of sale as such selling shareholders under this prospectus. In addition to the above, each of the selling shareholders and any other person participating in a distribution will be affected by the applicable provisions of the Securities Exchange Act of 1934, including, without limitation, Regulation M, which may limit the timing of purchases and sales of any of the securities by the selling shareholders or any such other person. There can be no assurances that the selling shareholders will sell any or all of the securities. In order to comply with state securities laws, if applicable, the securities will be sold in jurisdictions only through registered or licensed brokers or dealers. In various states, the securities may not be sold unless these securities have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with. Under applicable rules and regulations of the Securities Exchange Act of 1934, as amended, any person engaged in a distribution of the securities may not simultaneously engage in market-making activities in these securities for a period of one (1) or five (5) business days prior to the commencement of such distribution. 20 All of the foregoing may affect the marketability of the securities. Pursuant to the various agreements we have with the selling shareholders, we will pay all the fees and expenses incident to the registration of the securities, other than the selling shareholders' pro rata share of underwriting discounts and commissions, if any, which is to be paid by the selling shareholders. Should any substantial change occur regarding the status or other matters concerning the selling shareholders, we will file a Rule 424(b) prospectus disclosing such matters. ITEM 9.LEGAL PROCEEDINGS In July 2001 we filed a lawsuit in the court of Petach - Tikva, Israel against Ryfcom, Ltd. and its Chief Executive Officer, Mr. Paltiel Porat. In this lawsuit, we allege an unpaid debt due to us in the amount of $107,528 from Ryfcom for services rendered by us. The debt arose from an agreement between us and Ryfcom, a provider of calling card services operating in Israel, in which traffic originating from Ryfcom calling cards was delivered through our system in London. Mr. Porat signed a personal guarantee agreement to secure the all of Ryfcom's obligations under our agreement with Ryfcom. Before the judgment, Mr. Paltiel repaid the amount of approximately $15,000. On January 6, 2003, the court of Petach Tikva, rendered a judgment in favor of Swiftnet. According to the judgment Mr. Paltiel has to repay the remainder of the money, approximately $92,000, plus the court fee that was paid by Swiftnet of approximately $1,500, plus expenses in the amount of $9,300. All amounts are linked until fully paid by the Israeli Consumer Price Index. We are involved in a potential dispute with a former director of Swiftnet Ltd, Yehuda Shenhav, regarding Mr. Shenhav's claim that Swiftnet unjustly removed him from Swiftnet's board of directors. From April 2000 to May 2000, Swiftnet desired to enhance its finance and management team by removing Mr. Shenhav from its board of directors and replacing him with our President/Principal Executive Officer/Principal Financial Officer/Principal Accounting Officer, Mr. Guy Nissenson. Mr. Shenhav has never participated in any board meetings and was never actively involved in the management of Swiftnet. The proposed enhancement of our finance and management team was in preparation for Swiftnet's plan to become a Securities and Exchange Commission reporting company and later an OTC Bulletin Board traded company. Despite our invitations and correspondence to Mr. Shenhav to exercise his rights through proxy regarding his proposed removal from Swiftnet's Board of Directors, he never properly exercised his rights. On June 16, 2000, over 75% of Swiftnet's shareholders passed resolutions removing Mr. Shenhav from Swiftnet's Board of Directors and replaced him with Mr. Guy Nissenson. We have never received any communications from Mr. Shenhav threatening litigation in this matter; however, Mr. Shenhav claims that the process by which he was removed from Swiftnet's Board of Directors was not lawful. No actual litigation has been initiated in this matter and we have not received any other communications from Mr. Shenhav regarding any such claims since approximately July 2000. 21 Although we believe that Mr. Shenhav's claims have no merit and we will vigorously defend any such claims should they be litigated, there are no assurances that we will prevail in such litigation. Any judgment that may be brought against us in connection with such a matter may have an adverse effect upon our financial condition. In addition, should additional shares be issued to the former director/shareholder, the value of your investment will be diluted. No litigation has been filed regarding this matter as of the date of this prospectus. 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. 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. Mr. Shur signed a personal guarantee agreement to secure the MG Telecom obligations under our agreement with MG Telecom. Mr. Shur has 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 dispositions of this matter. Other than the above, we are not a party to any pending legal proceeding, nor is our property the subject of such a legal proceeding. ITEM 10. 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. 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 - -------------------- ---------- --------------------------------------------- Abraham Keinan 53 Chairman of the Board of Directors - -------------------- ---------- --------------------------------------------- Guy Nissenson 28 President, Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer and Director - -------------------- ---------- --------------------------------------------- Eyal Harish 50 Director - -------------------- ---------- --------------------------------------------- Shemer Schwartz 28 Director - -------------------- ---------- --------------------------------------------- Mr. Abraham Keinan has been our Chairman of the Board of Directors and our Principal Financial and Accounting Officer since our inception. Abraham Keinan founded Swiftnet, Ltd., in January 1991. From 1991 to present, he has been Swiftnet's Managing Director. Abraham Keinan received a Bachelor of Science Degree in Mechanical Engineering from Ben-Gurion University, Beer-Sheeva - Israel. 22 Mr. Guy Nissenson has been our President, Principal Executive Officer, and a Director since our inception. Guy Nissenson joined Swiftnet, Ltd. in October 1999 and became a director of Swiftnet, Ltd. in May 2000. He was a marketing manager of RADA Electronics Industries from May 1997 to October 1998. Guy 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, Guy Nissenson received a Bachelor of Science Degree in Business Management from Kings College - University of London. Dr. Eyal Harish has been one of our directors since December 19, 2002. From 1980 to present, Dr. Harish has been in his own 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. Mr. Shemer Schwartz has been one of our directors since December 19, 2002. From November 1991 to present, 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 R&D Center of the Israeli Defense Forces Intelligence. In 1995, Mr. Schwartz received a BSc degree in Physics and Mathematics from the Hebrew University in Jerusalem. 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. Other than as identified above, we have no significant employees. FAMILY RELATIONSHIPS Dr. Harish, one of our directors, is the brother-in-law of Mr. Keinan, our Chairman of the Board. Other than this family relationship, there are no other family relationships among our officers, directors, 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. 23 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets 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. - ---------- ----------------------- --------------------- --------------- ----------- Title of Name & Address of Amount of Beneficial Nature of Percent of Class Beneficial Owner Ownership Ownership Class - ---------- ----------------------- --------------------- --------------- ----------- Common Abraham Keinan 2,342,333 Direct 46.2 4 Wycombe Gardens London Nw11 8al United Kingdom - ---------- ----------------------- --------------------- --------------- ----------- Common Vision Consultants (1) 1,302,331 Indirect* 25.7 Kings Court POB N-3944 Bay Street Nassau, Bahamas - ---------- ----------------------- --------------------- --------------- ----------- Common Eyal Harrish 15,000 Direct 0.3 3 Moshe Dayan Street Raanana, Israel - ---------- ----------------------- --------------------- --------------- ----------- Common Shemer Schwartz 0 Not Applicable 0.0 960 High Road London N12 9RY United Kingdom - ---------- ----------------------- --------------------- --------------- ----------- Common Campbeltown 720,336 Indirect* 14.4 Business, Ltd. (2) P.O. Box 3152 Road Town, Tortola, British Virgin Islands - ---------- ----------------------- --------------------- --------------- ----------- Common All directors and executive officers 4,380,000 86.6 as a group - ---------- ----------------------- --------------------- --------------- ----------- 24 This table is based upon information derived from our stock records. Unless otherwise indicated in the footnotes to this table, we believe that each of the shareholders named in this table has 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. The Chairman of our Board of Directors, Abraham Keinan, and our President/Principal Executive Officer/Principal Financial Officer/Principal Accounting Officer, Guy Nissenson, have entered into a shareholders agreement with each other, on behalf of their respective companies, Vision Consultants and Campbeltown Business, Ltd., pursuant to which each party has a right of first refusal on any proposed sale of our stock by the other party. (1) Our Chairman of the Board, Abraham Keinan, owns 100% of the stock of Vision Consultants, which was incorporated in Nassau, Bahamas. The sole business purpose of this corporation is to hold and manage Mr. Keinan's investments. (2) Guy Nissenson and his family are shareholders of Campbeltown Business, Ltd. Pursuant to a Stock Purchase Agreement, clarified on July 30, 2001, Campbeltown Business, Ltd. has an option to acquire 10% 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 , 2003, 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. ITEM 12. DESCRIPTION OF SECURITIES General The following description is only a summary of the material terms of our securities, and is qualified in its entirety by reference to our Articles of Incorporation and Bylaws. Our Articles of Incorporation and Bylaws have been filed as exhibits to the registration statement of which this prospectus is a part. Common stock We are authorized to issue 25,000,000 shares of common stock with a par value of $.001 per share. As of the date of this registration statement, there were 5,071,539 common shares issued and outstanding held by 125 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. 25 Each share of 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 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 common stock are entitled to receive ratably such dividends, if any, as may be declared by the board of directors out of funds legally available. On December 23, 2002, we declared a cash dividend in the amount of $.02 per share on our common stock for all shareholders of record of our common stock at the close of business on December 31, 2002. We paid this dividend on January 15, 2003. We have not paid any other dividends on our common stock since our inception. We anticipate that all future earnings, if any, will be retained for development of our business. Any future disposition of dividends will be at the discretion of our Board of Directors and will depend upon, among other things, our future earnings, operating and financial condition, capital requirements, and other factors. 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. There are not any provisions in our Articles of Incorporation or our Bylaws that would prevent or delay change in our control. Preferred Stock We are authorized to issue 50,000,000 shares of $.001 value par preferred stock. As of the date of this registration statement, there are no preferred shares outstanding. We presently have no plans to issue any shares of preferred stock. However, preferred stock may be issued with preferences and designations as the Board of Directors may from time to 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 may assist management in impeding and unfriendly takeover or attempted changes in control. There are no restrictions on our ability to repurchase or reclaim our preferred shares, while there is any arrearage in the payment of dividends on our preferred stock. 26 ITEM 13. INTEREST OF NAMED EXPERTS AND COUNSEL Our financial statements as of December 31, 2001 and December 31, 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for the years 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 105,000 shares of our common stock in exchange for legal services rendered to us in the preparation of our initial registration statement on Form SB-2. ITEM 14. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES LIABILITIES The Bylaws of this corporation, subject to the provisions of Nevada Corporation Law, contain provisions which allow the corporation 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 the best interest of the corporation. 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. ITEM 15. ORGANIZATION WITHIN LAST FIVE YEARS On September 1, 2000, in accordance with our first board of directors meeting, we issued 1,730,000 shares of our common stock to our founder and director, Abraham Keinan for services rendered to us in our corporate formation. Specifically, Mr. Keinan's services consisted of the establishment of our business concept and providing his technical expertise to our business. Our Board of Directors valued Mr. Keinan's services at $247,390. On or about April 6, 2000, Swiftnet, Ltd., our subsidiary, entered into an agreement with Adar International Inc. and Sydney J. Golub whereby they would assist Swiftnet Ltd. to become a publicly traded company. This agreement provided for: o A proposed merger between Swiftnet Ltd. and Adar Alternative Two, Inc. whereby Adar Alternative Two was to acquire all of Swiftnet's outstanding stock; o The filing of an S-4 Registration Statement prepared by Attorney Michael T. Williams registering shares issued in the merger between Swiftnet and Adar Alternative Two, Inc; o Closing of the merger after the effectiveness of the S-4 Registration Statement; and o Adar Alternative Two Inc. being the surviving corporation and changing its name to Xfone, Inc. 27 After the closing of the merger, Swiftnet, Ltd. would have controlled 96% of the common stock of Adar Alternative Two Inc., Sidney Golub would have controlled 2%, and Michael T. Williams would have controlled 2%. Swiftnet Ltd. agreed to the proposed terms of the agreement based on the advice of its Attorney at that time, Michael T. Williams that the proposed transactions were the most beneficial and expeditious method for Swiftnet Ltd. to have its common shares quoted on the OTC Bulletin Board. On approximately July 6, 2001, our new counsel, Hamilton, Lehrer and Dargan, P.A., advised us that neither the S-4 registration statement nor the proposed merger would accomplish our objective of having Swiftnet, Ltd.'s common shares quoted on the OTC Bulletin Board. We then instructed Hamilton, Lehrer and Dargan, P.A. to request Adar Alternative Two's counsel, Mr. Burt Wiand, to affect the withdrawal of the S-4 registration statement. The Adar Alternative Two S-4 registration statement was withdrawn on or about October 12, 2001 and we proceeded with our Form SB-2 registration statement. On or about October 4, 2000, we acquired 11,000 of the A equity outstanding common shares of Swiftnet and 11,000 of the B voting common shares of Swiftnet, representing all of Swiftnet's issued and outstanding stock in exchange for 2.4 million shares of our newly issued common stock. As a result of this transaction, Swiftnet became our subsidiary. In the exchange, our shares were valued at $0.143 per share for a total of approximately $344,187 and Swiftnet's A and B shares were valued at $15.64 per share for a total of $344,187. There was no monetary exchange in the Swiftnet acquisition. Since inception through December 31, 2000, we have, along with our subsidiary, Swiftnet, Ltd., loaned Abraham Keinan a total of 216,133 Pound Sterling or approximately $322,586 based upon the exchange rate at December 31, 2000. We provided the loan to Mr. Keinan to promote his loyalty and continued service as our Chairman of the Board of Directors. This loan is reflected in a promissory note payable in ten equal installments of approximately $19,150 beginning January 1, 2002 and ending on January 1, 2011. This note is non-interest bearing. There has been no material remodification or reclassification of this loan since the passage of the Sarbanes Oxley Act. 28 On May 5, 2000, Swiftnet, Ltd. entered into an 18-month renewable consulting agreement with Campbeltown Business, Ltd., a private company owned by Guy Nissenson, our President/Principal Executive Officer/Principal Financial Officer/Principal Accounting Officer and Director, and his family. We renewed this agreement for an additional 18 month period beginning on November 5, 2001 and ending on July 5, 2003. We plan to renew this agreement for an additional 18 month term after the expiration of the current term on July 5, 2003. Swiftnet agreed to provide the following services to us: (a) analysis of proposed acquisitions; (b) seek markets for our telecommunications services in additional countries; (c) formulate strategies for our future growth plans; and (d) introduce potential customers to our business. Under the agreement, we are obligated to pay Campbeltown Business, Ltd. 2,000 UK Pound Sterling (approximately $2,946) 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) (approximately $ 184,125 - $ 220,950 US) (approximately $ 1,841 US) - ----------------------------------------------- -------------------------------- Between 150,000 - 175,000 (UK) 2,500 Pounds (UK) (approximately $ 220,950 - $ 257,775 US) (approximately $ 3,583 US) - ----------------------------------------------- -------------------------------- Over 175,000 Pounds (UK) 2,750 Pounds (UK) (approximately $ 257,775 US) (approximately $ 4,050 US) - ----------------------------------------------- -------------------------------- 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 President/Principal Executive Officer/Principal Financial Officer/Principal Accounting Officer and a Director. This agreement does not expire. Under the terms of the agreement, Swiftnet has employed Mr. Nissenson for the purpose of business development and sales and marketing, at a base rate of 1000 pounds (UK) per month (approximately $1,433 US). When Swiftnet reaches average sales of 175,000 pounds (UK) per month for a three month period, Guy Nissenson's salary will be increased to 2,000 pounds (approximately $2,866 US) per month. In addition, the agreement provides that Guy 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. Because Mr. Keinan has not received any options to date, the option amount terms are not specified. At such time as the options are received by Mr. Keinan, our Board of Directors will establish the terms of the options. 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) Guy Nissenson no longer works with Swiftnet; or (2) if within twelve months of Guy 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. 29 On June 19th, 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 was made in contemplation of the April 6, 2000 Swiftnet, Ltd./Adar International, Inc. merger being completed, whereby Adar International, Inc. was to acquire all of Swiftnet, Ltd.'s outstanding common stock. The June 19, 2000 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. o Campbeltown Business, Ltd. 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 Business, Ltd. o Campbeltown Business, Ltd. would invest $100,000 in Swiftnet Ltd., in exchange for 20% of the total issued shares of Swiftnet, Ltd.; Campbeltown Business, Ltd. would also receive 5% of the issued and outstanding shares of our company following our acquisition with Swiftnet, Ltd. o Swiftnet, Ltd. and Keinan would guarantee that Campbeltown Business, Ltd.'s 20% interest in the outstanding shares of Swiftnet would be exchanged for at least 10% of our outstanding shares and that Campbeltown Business, Ltd. would have in total at least 15% of our total issued shares after our acquisition occurred. o Campbeltown Business, Ltd. would have the right to nominate 33% of the members of our board of directors and Swiftnet's board of directors. When Campbeltown Business, Ltd. ownership in our common stock was less than 7%, Campbeltown Business, Ltd. would have the right to nominate only 20% of our board members but always at least one member. In the case that Campbeltown Business, Ltd. ownership in our common stock was less than 2%, this right would expire. In the case that Adar Group transaction is not concluded and Campbeltown Business, Ltd. sells all of its shares in Swiftnet, the right for 33% board members in Swiftnet, Ltd. will expire. o Campbeltown Business, Ltd. would have the right to nominate a vice president in Swiftnet and/or our common stock. It is agreed that Mr. Guy Nissenson is nominated now. If for any reason Guy Nissenson will leave his position, Campbeltown Business, Ltd. and Abraham Keinan will agree on another nominee. The Vice President will be employed with suitable conditions. This right will expire when both conditions happen: Campbeltown Business, Ltd. is no longer a shareholder in Swiftnet, Ltd. and it owns less than 2% of our common stock. 30 o Campbeltown Business, Ltd. has the option to purchase additional shares of Swiftnet that will represent 10% of all issued shares after 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 December 31, 2005. Campbeltown Business, Ltd. can exercise this option in parts. If this option is exercised before the conclusion of Adar Group transaction Mr. Keinan and Swiftnet will make sure and guarantee that the shares owned by Campbeltown Business, Ltd. because of exercising this option will be exchanged by the same percentage of ownership in our common stock. It is agreed that if Campbeltown Business, Ltd. exercised only part of the option buying Swiftnet shares it will have the right to exercise the remainder of the option for our shares at the same terms. As long as Swiftnet is not a public company or is merged/bought/taken over by a third party only half of the option above could be taken. o Alternatively to the right described in the point above after the conclusion of Adar group transaction Campbeltown Business, Ltd. will have the option to purchase shares of Xfone that will represent 10% of all issued and outstanding shares at the first day of flotation (after the transaction) for the amount of $200,000 US. It is Campbeltown Business, Ltd. decision what alternative to choose. This transaction can be executed either by Xfone issuing new shares, or by Abraham Keinan selling his private shares in Xfone (as long as he has an adequate amount of shares), as Abraham Keinan will decide. The option can be executed in parts and will expire on December 31, 2005. o Campbeltown Business, Ltd. 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 seek for money in a private placement for equity or any other rights, Campbeltown Business, Ltd. will have the right of first refusal on any transaction or part of it until December 31, 2005 or as long as it owns over 7% of Swiftnet equity or 4% of our common stock. o Keinan and Campbeltown Business, Ltd. 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 Business, Ltd. This right expires when Campbeltown Business, Ltd. no longer owns any equity interest or shares in our company or our subsidiary, Swiftnet. 31 After our formation, on July 30, 2001, and as a result of the rescission of the Swiftnet, Ltd./Adar International, Inc. merger transaction, the June 19, 2000 stock purchase agreement between Campbeltown Business, Ltd. and Swiftnet was supplemented by a letter of understanding between Campbeltown Business, Ltd. and us. This letter of understanding provides that we must complete our Form SB-2 registration statement and obtain quotation of our common stock on the OTC Bulletin Board. Our stock is quoted on the OTC Bulletin Board under the symbol "XFNE". 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 August 5, 2000, Swiftnet, Ltd. and Abraham Keinan entered into an agreement with an unrelated individual, Nissim Levy, who was to secure a credit facility of $200,000 (US) on behalf of Swiftnet, Ltd. The purpose of the credit facility was to finance Swiftnet's proposed growth plan, including the purchase of a switch, the IP system, development software, other equipment and for working capital purposes. Mr. Levy was also to provide Swiftnet with a bank guarantee for purposes of securing the $200,000 credit facility. At the time, Mr. Levy had no relationship or association with us or our management or Swiftnet, Ltd., other than being a personal friend of Mr. Keinan. As of the date of this prospectus, the credit facility is not used because Swiftnet was able to pay for the equipment and working capital from its growth and increased ability to generate cash and its securing of a long term equipment loan to purchase the necessary equipment. In accordance with the terms of the agreement, Swiftnet issued to Zeneca Commercial S.A., a company owned and controlled by Mr. Levy, a total of 100,000 shares representing 2% of its then outstanding shares, which were subsequently exchanged for 100,000 shares of our stock. Under the terms of the agreement, if we do not conduct an initial public offering by August 5, 2001, Mr. Levy has the option to surrender his shares to Swiftnet's nominee, at which time we will be obligated to pay Mr. Levy 5% of the outstanding balance on the bank loan from its inception and until repayment. Even though we did not conduct a public offering by August 5, 2001, Mr. Levy has not exercised this option to date; accordingly, there is no change in the status of the agreement at this time. Mr. Levy's option to surrender his shares expires on May 8, 2003. Other than the above transactions, we have not entered into any material transactions with any promoter, director, executive officer, and nominee for director, beneficial owner of five percent or more of our common stock, or family members of such persons. ITEM 16. 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 through a share exchange 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 share exchange, the 2.4 million shares represented 55% of our issued shares. As a result of the share exchange, 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 March 26, 2003, there are 5,071,539 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 011.44.2084469494. 32 BUSINESS We provide long distance voice and data communications services solely through our subsidiary, Swiftnet, Ltd., which has conducted communications service operations in the United Kingdom since 1990. Swiftnet's business consists0 of selling various telecommunication related services, including telephone, facsimile, e-mail, calling cards, and Internet driven applications. Because our operations are conducted solely through Swiftnet, we have provided the same services since our inception. Our customers are located in 78 countries in Europe, Australia, North America, South America, Asia, and Africa. Approximately 75% of our revenues are derived from our United Kingdom customers. Our future business plans include negotiating with more carriers, continuing our media advertising campaign, conducting our added value services, and recruiting new agents, resellers and managers to sell our telecommunications services on a performance incentive basis. Our Principal Services and their Markets: We use network switching and transport facilities of Tier I and Tier II long distance providers such as Worldcom International, Ltd. Tier 1. Tier 1 calls are typically transferred via large telephone operators in which the service level is usually very high. Tier 2 calls usually have lower cost prices and are routed through smaller companies or other routings. On or about June 2, 2001, we began to provide our services 24 hours a day, 7 days a week. We provide the following telecommunication services: o Indirect telephone service: Using 1XXX access [similar to XX-XX-XXXX in the US] we resell telephone services provided by other carriers or through the use of our own platform. 1XXX access is a code number 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. 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. 33 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. 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 utilizing store and forward delivery. o Auracall: This is a service that was introduced in approximately March 2002. The Auracall services 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 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, 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. During 2003, we plan to continue enhancing this service at an estimated cost of $100,000. 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 Telsis 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 70% from our telephone services; o Approximately 15% from our messaging services, including facsimile, nodal and e-mail related services; and o Approximately 15% from our calling cards, including 0800 and pin access. 34 Our Customers: We have four major types of customers: o Residential - These customers either must dial 1XXX or acquire a box that dials automatically. o Commercial - Smaller businesses are treated the same as residential customers. Larger businesses' PBX units are reprogrammed. o Government Agencies - Includes the United Nations World Economic Forum, the Argentine Embassy, and the Israeli Embassy. o Resellers, such as WorldNet, VSAT, and Voicenet - 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 20 percent of our revenues. Our supplier's standard terms are payment within 30 days from invoice date; however, payments are being made up to 90 days from date of invoice without interest or penalty. 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. 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. 35 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; 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 o During November 2002, we started utilizing 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 the launch of "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. Material Agreements: Reseller Agreements We have agreements with approximately 15 resellers, including Voicenet, VSAT, Worldnet and InTouchUK.com. Our reseller agreement with Voicenet may be terminated with 60 days notice, and our reseller agreement with Worldnet may be terminated with 7 days notice. The Voicenet agreement requires that Voicenet make minimum monthly payments to us of 10,000 pounds UK (approximately $14,730 US). Our reseller agreement with VSAT provides that we receive payment directly from a customer secured by VSAT and we then remit to VSAT their portion of the sale. Our reseller agreement with InTouchUK.com provides that company with an exclusive right to sell our fax broadcast services in the United Kingdom, including Northern Ireland, provided that InTouchUK.com makes certain minimum monthly revenue payments to us of 35,000 pounds UK (approximately $51,555) to us, in order to maintain their exclusivity rights under their reseller agreement. 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 Davidson 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; (c) Technical help service (24 Hours/7 Days a week); and (d) Use of relevant software and hardware including switch, billing, and IVR. 36 Under the agreement, Nir Davidson will supply Story Telecom Ltd. with the following: (a) Marketing and sales; (b) Distribution channels; and (c) Management in which Nir Davidson will function as the Managing Director of Story Telecom Ltd. In addition, the agreement provides that Nir Davidson will have the option to purchase our shares of common stock within a 12 month period after the September 30, 2002 agreement, according to the formula specified in paragraph 28 of the agreement. Supplier Agreements 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 be corrected within 15 days. To our knowledge, we are in compliance with all material terms of the agreement. We do not have an exclusive agreement with WorldCom International, Ltd.; Worldcom International, Ltd. provides these same services to our competitors. We also have agreements with British Telecom and Teleglobe as suppliers of telephone routing and switching services. Our Future Business Plans Our other future plans include the following: Media Advertising We initiated a media advertising campaign in the last quarter of 2002 that consists of advertising our services in newspapers. Contingent upon satisfactory advertising results, market conditions and sufficient cash flow, we will continue our media campaign for approximately 12 months at an estimated cost of $200,000. Our anticipated source for the cost of our media advertising campaign is from positive cash-flow from our operations. Promoting our Added Value Services Such as Cyber Number and Email2 Facsimile We are considering whether to promote our added value services such as cyber number and email facsimile services by Internet advertising and advertisements in professional and business magazines and with direct marketing via mail and facsimile. Our anticipated source for the cost of this possible promotion is positive cash flow from operations. Evaluating Our Pricing Structure to Determine Whether we can Offer More Competitive Prices We will evaluate our pricing structure by comparing our pricing structure with our competitors and attempt to increase our efficiencies in customer purchases, customer service, operations, and marketing in order to keep our costs at a minimum. Our evaluation is a continuous internal process which does not require us to spend additional funds. Recruiting New Agents, Resellers, and Managers based on Performance Based Incentives We have continued our recruitment process which we began in January 2001; to date, we have recruited approximately 17 new agents, 11 new resellers, and 3 managers. During the period from April 2003 until December 2003, we plan to recruit approximately 15 new agents, 10 resellers and 3 managers based on performance-based incentives. These personnel will receive performance based incentives consisting of a percentage of profits and/or revenues. We will recruit these personnel through professional meetings, meetings and professional conferences, and personal connections. The estimated cost of our recruiting process is $10,000. Our anticipated source for the recruitment is our positive cash flow from operations. 37 Negotiating with More Carriers We will negotiate with more carriers for the purpose of reducing our cost base and risk. We will conduct these negotiations on a continuous basis. We do not anticipate material costs to conduct these negotiations. Developing Incoming and Outgoing Interconnection with Various Telephone Carriers and Incorporating Our Switch and Messaging Platform that Interfaces to our Prepay and Billing Systems Since our inception, we have attempted to develop incoming and outgoing interconnection with various telephone carriers that will involve negotiations with various telephone carriers, acquisition and installment of telephone lines, and enhancement of our switch capacity. In addition we will incorporate our switch and messaging platform that interfaces to our prepay and billing systems that will involve software development and integration. The purpose of developing this aspect of our business is to enhance capacity and enable on line integrated billing to our customers and resellers. The estimated cost of further enhancing this aspect of our business is $50,000. Our anticipated source for completing this aspect of our business is positive cash flow from operations. Competitive Business Conditions The communications and information services industry is highly competitive and varied. Many of our existing and potential competitors have 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 Smaller regional carriers such as Quip.com; o Wireless telecommunications providers such as Vodafone; and o International carriers. Currently, there are approximately 160 licensed telecom carriers in the United Kingdom market. Most of these competitors have greater financial, personnel, and marketing resources greater than we do. In addition, most of these 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, these competitors have greater growth and profit potential than we do. 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: WorldCom International, Ltd. is our principal supplier of telephone routing and switching services, representing approximately 65% of such services to us. Our other suppliers are British Telecom and Teleglobe, both of which supply telephone routing and switching services. These companies furnish us with less than 35% of these type of services to us. Dependence on Major Customers: During 2002, we had no customer accounts that accounted for more than 10% of our revenues. Collectively, the United Kingdom accounts for approximately 75% of our revenues. We do not anticipate than any customer or country, besides the United Kingdom, will account for more than 10% of our revenues during 2003. Patents, trademarks and licenses: We do not have any patents or trademarks, nor have we filed any applications for patents or trademarks. Our subsidiary, Swiftnet, Ltd., is licensed in the United Kingdom as an international telecommunication carrier. 38 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 upon thirty days notice in the event of certain conditions. 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 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. We believe that we are in substantial compliance with applicable laws and regulations. To the extent that these laws and regulations are changed or new laws or regulations are adopted, we may be required to obtain additional licenses or renew, modify or replace our existing licenses. If we fail to comply with these laws, we could lose our license or be subjected to other sanctions that could result in substantial costs to us. 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. In the future, if our services expand, it is possible that we will become subject to the telecommunications laws and regulations of the United States. If this occurs, compliance with such laws will involve higher costs than we now have in Europe. 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. We have incurred less than 50,000 Pounds Sterling or approximately $71,000 US in aggregate research and development expenses since January 1, 1998. During fiscal year 2002, we spent $51,200 on research and development. Employees We have 9 full-time employees consisting of: o 1 Chief Executive Officer; o 1 President; o 1 research and development manager; and o 6 employees in our administration department; We also have 3 part-time employees that operate in shifts, helping our administrative 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., New York, New York, and Chicago, Illinois. 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. 39 ITEM 17. MANAGEMENTS DISCUSSION AND ANALYSIS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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", "will", or " 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. Years ended December 31, 2002 and 2001 Overview. We are a holding company that operates entirely through our subsidiary, Swiftnet, Ltd., a U.K. based telecommunication service provider and international licensed telecommunication carrier. As of February 28, 2003, Swiftnet, Ltd. is and has been our only 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, Xfone 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. Financial Information - Percentage of Revenues Year ended December 31 2002 2001 2000 ------------------------------- Revenues 100.00% 100.00% 100.00% Cost of Revenues -58.66% -61.29% -64.90% Gross Profit 41.34% 38.71% 35.10% Operating Expenses: Research and Development -0.86% -1.16% -2.15% Marketing and Selling -8.56% -8.24% -8.29% General and Administrative -23.48% -20.46% -17.45% Total Operating Expenses -32.90% -29.86% -27.89% Income before Taxes 8.39% 7.72% 6.34% Net Income 6.44% 5.48% 5.13% 40 The US Dollars amounts for both 2002 and 2001 are presented herein at the current rate of £1 to $1.6 for convenience purposes. Consolidated Statement of Operations Revenues. Revenues for the year ended December 31, 2002 increased by 41% to £3,741,436 ($5,968,298), from £2,658,905 ($4,254,248) for the same period in 2001. The increase in revenues is attributed mainly to growth in revenues generated from our voice telephony services. Cost of Revenues. Cost of revenues consists primarily of traffic time purchased from telephone companies and other related charges. Cost of revenues increased by 35% to £2,194,792 ($3,511,667) for the year ended December 31, 2002, from £1,629,604 ($2,607,366) for the year ended December 31, 2001, representing 58.7% and 61.3% of the total revenues for the year ended December 31, 2002 and December 31, 2001, respectively. The decrease in cost of revenues is attributable to lower rates that we negotiated and concluded with our suppliers. Gross Profit. Gross profit is total revenues less cost of revenues. Gross profit excludes general corporate expenses, finance expenses and income tax. For the year ended December 31, 2002 and 2001, respectively, gross profit was £1,546,644 ($2,474,631) and £1,029,301 ($1,646,882) which represents a 50% increase. The gross profit as a percentage of revenues increased to 41.3% for the year ended December 31 2002, from 38.7% for the year ended December 31, 2001. The increase of the gross profit as a percentage of revenues is attributed to the lower rates that the company paid in the year ended December 31, 2002. Research and Development. Research and development expenses were £32,000 ($51,200) and £30,791 ($49,265) for the year ended December 31, 2002 and 2001, respectively, which represents 1% and 1.2% of revenues for the years ended December 31, 2002 and 2001, for the same periods, respectively. These expenses consist of labor costs of our research and development manager and other related costs. Main developments relate to the development of the Xfone web site and its interconnections, and 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 £320,418 ($512,668) from £219,238 ($350,781) for the year ended December 31, 2002 and 2001, respectively. Marketing and selling expenses as a percentage of revenues were 8.6% and 8.2% for the year ended December 31, 2002 and 2001, respectively. 41 General and Administrative Expenses. General and administrative expenses increased to £878,624 ($1,405,799) for the year ended December 31, 2002 from £543,936 ($870,298) for the year ended December 31,2001. As a percentage of revenues, general and administrative expenses increased to 23.5% for the year ended December 31, 2002, from 20.5% for the year ended December 31, 2001. This increase is mainly attributable to expenses related to the growth in our operations and our status as a public company. Financing Expenses. Financing expenses, net, decreased to £12,837 ($20,539) for the year ended December 31, 2002 from £30,982 ($49,571) for the year ended December 31, 2001. Income Before Taxes. Income before taxes for the year ended December 31, 2002 increased by 53% to £313,794 ($502,071) from £205,363 ($328,581) for the year ended December 31, 2001. The increase of the income before taxes is attributable primarily to the increase of 41% in our revenues and the lesser increase of 35% in our cost of revenues. Income before taxes as a percentage of revenues was 8.4 for the year ended December 31, 2002 and 7.7% for the year ended December 31, 2001. 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, 2002, amounted to £72,813 (116,501) which represents 23% of the income before taxes, as compared with £59,757 ($95,611) for the year ended December 31, 2001 representing 29% of the income before taxes. The decrease in the percentage of taxes on such income before taxes is attributable primarily to the carry forward loss of the parent company. Net Income. Net income for the year ended December 31, 2002 amounted to £240,981 ($385,570)representing 6.4% of our revenues, as compared with £145,606 ($232,970), representing 5.4% of the revenues for the year ended December 31, 2001. The increase in the net income is mainly attributable to the 53% growth in our Income before taxes and our lesser increase of 22% in the taxes on income. Earning per share The earning per share of common stock for the year ended December 31, 2002 was £0.05 ($0.08) for the basic 5,030,444 weighted average shares of common stock and £0.04 ($0.07) for diluted number of shares of common stock including the option to buy 500,000 shares of common stock. Balance Sheet Current Assets. Current Assets amounted to £1,658,835 ($2,654,136) as of December 31, 2002 as compared to £1,194,762 ($1,911,619) as of December 31, 2001. This increase of £464,073 ($742,517) is mainly attributable to a 32% increase in account receivable and a 64% increase in cash both of which are a result of our growth in business activities and profitability. Loan to shareholder. Loan to shareholder amounted to £303,130 ($485,008) as of December 31, 2002, as compared to £282,347 ($451,755) as of December 31,2001. As of December 31, 2002, £45,558 ($72,893) of the loan is classified as a current asset. This loan to shareholder was made to our Chairman of the Board, Abraham Keinan, and was made prior to the passage of the Sarbanes Oxley Act. There has been no material modification of the loan since the passage of the Sarbanes Oxley Act. Fixed assets. Fixed assets after accumulated depreciation increased to £252,894 ($404,631) as of December 31, 2002 as compared with £158,437 ($253,499) as of December 31,2001. Purchase of equipment during the year ended December 31, 2001 amounted to £152,757 ($244,411); depreciation for the same period amounted to £58,300 $93,280. 42 Current Liabilities. As of December 31, 2002, current liabilities increased by £367,697 ($588,315) to £1,462,027 ($2,339,244) as compared with £1,094,330 ($1,750,928) as of December 31, 2001. This increase is mainly attributable to an increase of £214,607 ($343,371) in trade payables that increased as a result of the 35% growth in cost of revenues. Liquidity and Capital resources September 30, 2002. Net cash provided by operating activities for the year ended December 31, 2002 was £345,379 ($552,606). The cash provided by operating activities was primarily attributable to our net Income of £240,981 ($385,570) complemented by depreciation for the amount of £58,300 ($93,280). Investment activities used £153,272 ($245,235) primarily for purchase of equipment. Net financing activities provided £613 ($981). Cash at December 31, 2002 amounted to £471,963 ($755,141), an increase of £192,720 ($308,352) since December 31,2001. Our current assets for December 31, 2002 are higher than our current liabilities by £196,808 ($314,893). Our commitments for capital expenditures as of December 31, 2002 were £41,193 ($65,909), the purpose of these commitments was buying new equipment. We shall continue to finance our operations and fund the commitments for capital expenditures mainly from the cash provided from operating activities. We also have an unused $200,000 credit facility that a United Kingdom bank made available to our subsidiary, Swiftnet. We believe that our future cash flow from operations together with our current cash and the unused bank facility will be sufficient to finance our activities through the years 2003 and 2004. For business expansion purposes requiring additional capital, we intend to raise funds through a public or private placement sale of our securities and/or by obtaining financing from a financial institution; however, there are no assurances that we will be successful in obtaining funding through any means. Impact of Inflation and Currency Fluctuations. As of December 31, 2002, we deal with only two currencies United Kingdom Pounds and United States dollars. Even when we do business in other countries rather than the United Kingdom or the United States we sell and buy in either United Kingdom pounds or United States dollars. Most of our revenues and current assets are in United Kingdom pounds, the long-term loan to a shareholder is all in United Kingdom Pounds. Our cost of revenues is all in United Kingdom pounds. Most of our liabilities, operating and financing expenses are in United Kingdom pounds. The reminder of the assets, liabilities, revenues and expenditures are in United States 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 United Kingdom pounds. Conversely, any increase in the value of the United Kingdom pound in relation to the United States 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. If we are unable to match our revenues with our expenses, inflation would affect our operational results. If the 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 our profitability. 43 ITEM 18. DESCRIPTION OF PROPERTY Our corporate headquarters are located at 960 High Road, London N12 9RY - United Kingdom. This 1600 square foot facility has four offices, one computer room, one operation room that controls the computer room, entrance hall, main hall, accounting, secretarial and administration and a kitchen. 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. ITEM 19. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On September 1, 2000, in accordance with our first board of directors meeting, we issued 1,730,000 shares of our common stock to our founder and director, Abraham Keinan for services rendered to us in our corporate formation. Specifically, Mr. Keinan's services consisted of the establishment of our business concept and providing his technical expertise to our business. Our Board of Directors valued Mr. Keinan's services at $247,390. On or about April 6, 2000 Swiftnet, Ltd., our subsidiary, entered into an agreement with Adar International Inc. and Sydney J. Golub whereby they would assist Swiftnet Ltd. to become a publicly traded company. This agreement provided for: o A proposed merger between Swiftnet Ltd. and Adar Alternative Two, Inc. whereby Adar Alternative Two was to acquire all of Swiftnet's outstanding stock; o The filing of an S-4 Registration Statement prepared by Attorney Michael T. Williams registering shares issued in the merger between Swiftnet and Adar Alternative Two, Inc; o Closing of the merger after the effectiveness of the S-4 Registration Statement; and o Adar Alternative Two Inc. being the surviving corporation and changing its name to Xfone, Inc. After the closing of the merger, Swiftnet, Ltd.'s would have controlled 96% of the common stock of Adar Alternative Two Inc., Sidney Golub would have controlled 2%, and Michael T. Williams would have controlled 2%. Swiftnet Ltd. agreed to the proposed terms of the agreement based on the advice of its Attorney, Michael T. Williams that the proposed transactions were the most beneficial and expeditious method for Swiftnet Ltd. to have its common shares quoted on the OTC Bulletin Board. On approximately July 6, 2001, our new counsel, Hamilton, Lehrer and Dargan, P.A., advised us that neither the S-4 registration statement nor the proposed merger would accomplish our objective of having Swiftnet, Ltd.'s common shares quoted on the OTC Bulletin Board. We then instructed Hamilton, Lehrer and Dargan, P.A. to request Adar Alternative Two's counsel, Mr. Burt Wiand, to affect the withdrawal of the S-4 registration statement. The Adar Alternative Two S-4 registration statement was withdrawn on or about October 12, 2001 and we proceeded with our Form SB-2 registration statement. 44 On or about October 4, 2000, we acquired 11,000 of the A equity outstanding common shares of Swiftnet and 11,000 of the B voting common shares of Swiftnet, representing all of Swiftnet's issued and outstanding stock in exchange for 2.4 million shares of our newly issued common stock. As a result of this transaction, Swiftnet became our subsidiary. In the exchange, our shares were valued at $0.143 per share for a total of approximately $344,187 and Swiftnet's A and B shares were valued at $15.64 per share for a total of $344,187. There was no monetary exchange in the Swiftnet acquisition. Since inception through December 31, 2000, we have, along with our subsidiary, Swiftnet, Ltd., loaned Abraham Keinan a total of 216,133 Pound Sterling or approximately $322,586 based upon the exchange rate at December 31, 2000. We provided the loan to Mr. Keinan to promote his loyalty and continued service as our Chairman of the Board of Directors. This loan is reflected in a promissory note payable in ten equal installments of approximately $19,150 beginning January 1, 2002 and ending on January 1, 2011. This note is non-interest bearing. On May 5, 2000, Swiftnet, Ltd. entered into an 18-month renewable consulting agreement with Campbeltown Business, Ltd., a private company owned by Guy Nissenson, our President/Principal Executive Officer/Principal Financial Officer/Principal Accounting Officer and a Director, and his family. We renewed this agreement for an additional 18 month period beginning on November 5, 2001 and ending on July 5, 2003. We plan to renew this agreement for an additional 18 month term in after the expiration of the current term on July 5, 2003. Swiftnet agreed to provide the following services to us: (a) analysis of proposed acquisitions; (b) seek markets for our telecommunications services in additional countries; (c) formulate strategies for our future growth plans; and (d) introduce potential customers to our business. Under the agreement, we are obligated to pay Campbeltown Business, Ltd. 2,000 UK Pound Sterling (approximately $2,946) 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) (approximately $ 184,125 - $ 220,950 US) (approximately $ 1,841 US) - ----------------------------------------------- -------------------------------- Between 150,000 - 175,000 (UK) 2,500 Pounds (UK) (approximately $ 220,950 - $ 257,775 US) (approximately $ 3,583 US) - ----------------------------------------------- -------------------------------- Over 175,000 Pounds (UK) 2,750 Pounds (UK) (approximately $ 257,775 US) (approximately $ 4,050 US) - ----------------------------------------------- -------------------------------- 45 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 President/Principal Executive Officer/Principal Financial Officer/Principal Accounting Officer and a Director. This agreement does not expire. Under the terms of the agreement, Swiftnet has employed Mr. Nissenson for the purpose of business development and sales and marketing, at a base rate of 1000 pounds (UK) per month (approximately $1,433 US). When Swiftnet reaches average sales of 175,000 pounds (UK) per month for a three month period, Guy Nissenson's salary will be increased to 2,000 pounds (approximately $2,866 US) per month. In addition, the agreement provides that Guy 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. Because Mr. Keinan has not received any options to date, the option amount terms are not specified. At such time as the options are received by Mr. Keinan, our Board of Directors will establish the terms of the options. 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) Guy Nissenson no longer works with Swiftnet; or (2) if within twelve months of Guy 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. On June 19th, 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 was made in contemplation of the April 6, 2000 Swiftnet, Ltd/Adar International, Inc. merger being completed, whereby Adar International, Inc. was to acquire all of Swiftnet, Ltd.'s outstanding common stock. The June 19, 2000 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. o Campbeltown Business, Ltd. 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 Business, Ltd. o Campbeltown Business, Ltd. would invest $100,000 in Swiftnet Ltd., in exchange for 20% of the total issued shares of Swiftnet, Ltd.; Campbeltown Business, Ltd. would also receive 5% of the issued and outstanding shares of our company following our acquisition with Swiftnet. o Swiftnet, Ltd., and Keinan would guarantee that Campbeltown Business, Ltd.'s 20% interest in the outstanding shares of Swiftnet would be exchanged for at least 10% of our outstanding shares and that Campbeltown Business, Ltd. would have in total at least 15% of our total issued shares after our acquisition occurred. o Campbeltown Business, Ltd. would have the right to nominate 33% of the members of our board of directors and Swiftnet's board of directors. When Campbeltown Business, Ltd. ownership in our common stock was less than 7%, Campbeltown Business, Ltd. would have the right to nominate only 20% of our board members but always at least one member. In the case that Campbeltown Business, Ltd. ownership in our common stock was less than 2%, this right would expire. In the case that Adar group transaction is not concluded and Campbeltown Business, Ltd. sells all of its shares in Swiftnet, the right for 33% board members in Swiftnet will expire. 46 o Campbeltown Business, Ltd. would have the right to nominate a vice president in Swiftnet and/or our common stock. It is agreed that Mr. Guy Nissenson is nominated now. If for any reason Guy Nissenson will leave his position, Campbeltown Business, Ltd. and Abraham Keinan will agree on another nominee. The Vice President will be employed with suitable conditions. This right will expire when both conditions happen: Campbeltown Business, Ltd. is no longer a shareholder in Swiftnet and it owns less than 2% of our common stock. o Campbeltown Business, Ltd. has the option to purchase additional shares of Swiftnet that will represent 10% of all issued shares after 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 Business, Ltd. can exercise this option in parts. If this option is exercised before the conclusion of Adar Group transaction Keinan and Swiftnet will make sure and guarantee that the shares owned by Campbeltown Business, Ltd. because of exercising this option will be exchanged by the same percentage of ownership in our common stock. It is agreed that if Campbeltown Business, Ltd. exercised only part of the option buying Swiftnet shares it will have the right to exercise the remainder of the option for our shares at the same terms. As long as Swiftnet is not a public company or is merged/bought/taken over by a third party only half of the option above could be taken. o Alternatively to the right described in the point above after the conclusion of Adar group transaction Campbeltown Business, Ltd. will have the option to purchase shares of Xfone that will represent 10% of all issued and outstanding shares at the first day of flotation (after the transaction) for the amount of $200,000 US. It is Campbeltown Business, Ltd. decision what alternative to choose. This transaction can be executed either by Xfone issuing new shares, or by Abraham Keinan selling his private shares in Xfone (as long as he has an adequate amount of shares), as Abraham Keinan will decide. The option can be executed in parts and will expire on Dec 31, 2005. o Campbeltown Business, Ltd. 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 Business, Ltd. 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 Business, Ltd. 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 Business, Ltd. This right expires when Campbeltown Business, Ltd. no longer owns any equity interest or shares in our company or our subsidiary, Swiftnet. After our formation, on July 30, 2001, and as a result of the rescission of the Swiftnet, Ltd./Adar International, Inc. merger transaction, the June 19, 2000 stock purchase agreement between Campbeltown Business, Ltd. and Swiftnet was supplemented by a letter of understanding between Campbeltown Business, Ltd. and us. This letter of understanding provides that we must complete our Form SB-2 registration statement and obtain quotation of our common stock on the OTC Bulletin Board. Our stock is quoted on the OTC Bulletin Board under the symbol "XFNE". 47 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 August 5, 2000, Swiftnet, Ltd. and Abraham Keinan entered into an agreement with an unrelated individual, Nissim Levy, who was to secure a credit facility of $200,000 (US) on behalf of Swiftnet, Ltd. The purpose of the credit facility was to finance Swiftnet's proposed growth plan, including the purchase of a switch, the IP system, development software, other equipment and for working capital purposes. Mr. Levy was also to provide Swiftnet with a bank guarantee for purposes of securing the $200,000 credit facility. At the time, Mr. Levy had no relationship or association with us or our management or Swiftnet, Ltd., other than being a personal friend of Mr. Keinan. As of the date of this prospectus, the credit facility is not used because Swiftnet was able to pay for the equipment and working capital from its growth and increased ability to generate cash and its securing of a long term equipment loan to purchase the necessary equipment. In accordance with the terms of the agreement, Swiftnet issued to Zeneca Commercial S.A., a company owned and controlled by Mr. Levy, a total of 100,000 shares representing 2% of its then outstanding shares, which were subsequently exchanged for 100,000 shares of our stock. Under the terms of the agreement, if we do not conduct an initial public offering by August 5, 2001, Mr. Levy has the option to surrender his shares to Swiftnet's nominee, at which time we will be obligated to pay Mr. Levy 5% of the outstanding balance on the bank loan from its inception and until repayment. Even though we did not conduct a public offering by August 5, 2001, Mr. Levy has not exercised this option to date; accordingly, there is no change in the status of the agreement at this time. Mr. Levy's option to surrender his shares expires on May 8, 2003. Other than the above transactions, we have not entered into any material transactions with any promoter, director, executive officer, and nominee for director, beneficial owner of five percent or more of our common stock, or family members of such persons. ITEM 20. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Price of And Dividends on The Registrant's Common Equity and Other Shareholder 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 on the OTC Bulletin Board under the symbol XFNE. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. 2002 Low High Fourth Quarter $ .66 $1.45 Third Quarter $ .70 $1.33 Second Quarter $ .70 $3.65 First Quarter $ .75 $ .75 2001 Low High Fourth Quarter $ .00 $ .00 Third Quarter $ .00 $ .00 Second Quarter $ .00 $ .00 First Quarter $ .00 $ .00 No regular trading market exists for our common stock and there is no assurance that a regular trading market 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. 48 Outstanding Options, Warrants and Convertible Securities. Under a Stock Purchase Agreement, clarified on July 30, 2001, Guy Nissenson, through Campbeltown Business Ltd., has an option to purchase 10% of the outstanding shares of our subsidiary, Swiftnet at a price of $200,000 until December 31, 2005 at which time the option will expire. Additionally, Guy Nissenson, through Campbeltown Business, Ltd. has the option to acquire 10% of our outstanding stock for the same total consideration of $200,000. If Campbeltown Business, Ltd. exercises its right to acquire any of our shares under this option, our Chairman of the Board of Directors, Abraham Keinan has a right, for a period of 30 days, to require us to use the proceeds from that exercise to repurchase an equal amount of our shares from him at the same price per share as paid by Campbeltown Business, Ltd. In addition, under the Stock Purchase Agreement, Campbeltown Business, Ltd. has the right to purchase or acquire the same number of shares of our stock as may be issued to Abraham Keinan in the future so that the relative percentage ownership of Abraham Keinan and Campbeltown Business, Ltd. remains the same. The amended Stock Purchase Agreement, as clarified on July 30, 2001, also prohibits us from issuing any additional shares or equity rights without a written agreement from Campbeltown Business, Ltd. In addition, under the agreement, Campbeltown Business, Ltd. has a right of first refusal on any securities offering we conduct until December 31, 2005, as long as they own more that 4% of our stock. In addition, the Stock Purchase Agreement, as currently amended, specifically provides that Campbeltown Business, Ltd. may assign their interest in that contract to any entity. Sales under Rule 144 As of the date of this registration statement, there are 691,539 shares of our common stock held by non-affiliates and 4,380,000 shares of our common stock held by affiliates that Rule 144 of the Securities Act of 1933 defines as restricted securities. No shares have been sold pursuant to Rule 144 of the Securities Act of 1933 and no shares are eligible to be resold pursuant to Rule 144. We have agreed to register all of the shares held by our existing non-affiliate selling shareholders. We plan to issue common stock subject to an employee benefit plan. The 477,800 shares being offered by our selling shareholders who are non-affiliates are be freely tradable without restrictions under the Securities Act of 1933; any such shares held by our "affiliates" would continue to be restricted by the resale limitations of Rule 144 under the Securities Act of 1933. In general, under Rule 144 as currently in effect, any of our affiliates and any person or persons whose sales are aggregated who has beneficially owned his or her restricted shares for at least one year, may be entitled to sell in the open market within any three-month period a number of shares of common stock that does not exceed the greater of (i) 1% of the then outstanding shares of our common stock, or (ii) the average weekly trading volume in the common stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also affected by limitations on manner of sale, notice requirements, and availability of current public information about us. Non-affiliates who have held their restricted shares for one year may be entitled to sell their shares under Rule 144 without regard to any of the above limitations, provided they have not been affiliates for the three months preceding such sale. Further, Rule 144A as currently in effect, in general, permits unlimited resales of restricted securities of any issuer provided that the purchaser is an institution that owns and invests on a discretionary basis at least $100 million in securities or is a registered broker-dealer that owns and invests $10 million in securities. Rule 144A allows our existing stockholders to sell their shares of common stock to such institutions and registered broker-dealers without regard to any volume or other restrictions. Unlike under Rule 144, restricted securities sold under Rule 144A to non-affiliates do not lose their status as restricted securities. 49 As a result of the provisions of Rule 144, all of the restricted securities could be available for sale in a public market, if developed, beginning 90 days after the date of this prospectus. The availability for sale of substantial amounts of common stock under Rule 144 could adversely affect prevailing market prices for our securities. 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 may be 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; 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 our securities, if our 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 may someday be subject to such penny stock rules and our shareholders will, in all likelihood, find it difficult to sell their securities. Holders. At December 31, 2002, there were 125 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. 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. 50 ITEM 21. 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 respectively by our Chief Executive Officer, Abraham Keinan who is the managing director of Swiftnet and Guy Nissenson, who is our President/Principal Executive Officer/Principal Financial Officer/Principal Accounting Officer and a Director. 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, $100,000. - --------------------------------------------------------------------------------------------------- Summary Compensation Chart - --------------------------------------------------------------------------------------------------- Annual Compensation Long Term Compensation - --------------------- ---------------------------------- ----------------------------------- ------ Name & Year Salary ($) Bonus($) Other($) Restricted Options($) L/Tip($) All Position Stock Awards Other - --------------- ----- -------------- --------- --------- ------------- ----------- --------- ------ Abraham Keinan 2002 $45,000 9,588 67,500 0 0 0 0 Chairman/CEO (30000 Pound (6,372 (45,000 Sterling) Pound Pound Sterling) Sterling) 2001 $42,300 0 0 0 0 0 0 (30000 Pound Sterling) 2000 $22,095 0 0 0 0 0 0 (15000 Pound Sterling) - --------------------------------------------------------------------------------------------------- Our chairman of the Board of Directors, Mr. Abraham Keinan, does not have a written employment agreement with us. Since January 2001, we have agreed to pay him a salary of $3,525 (2,500 Pound Sterling) per month. Abraham Keinan receives pension benefits and a company car. On May 11, 2000, we entered into a written employment agreement with our President/Principal Executive Officer/Principal Financial Officer/Principal Accounting Officer and Director, Guy Nissenson. Under the agreement, Guy Nissenson will work on business development, sales and marketing. We have agreed to pay him a salary of $1,473 (1000 Pound Sterling) per month, subject to a future increase of $1,473 (1000 Pound Sterling) if Swiftnet reaches average sales of $257,775 (175,000 Pound Sterling) per month. In addition, we have agreed that if we grant options to Abraham Keinan, we will grant Guy Nissenson options to buy Swiftnet or us according to the following formula: 50% of the options with same price and conditions that Abraham Keinan will receive, subject to our reaching a benchmark of $176,760 (120,000 Pound Sterling) average sales per month during Guy Nissenson activities or in the 12 months thereafter. The agreement with Guy Nissenson can be terminated by either party with one month notice. 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. Our research and development manager, Mrs. Bosmat Houston, has an employment agreement us which provides that we pay her a salary of $3,337 (2266 Pound Sterling) 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. 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. 51 ITEM 22. FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Xfone, Inc. and Subsidiary - -------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002 52 - -------------------------------------------------------------------------------- Xfone, Inc. and Subsidiary - -------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002 CONTENTS -------- PAGE ---- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 Balance Sheet 2-3 Statements of Operations 4 Statement of Changes in Shareholders' Equity 5 Statements of Cash Flows 6-7 Notes to Consolidated Financial Statements 8-21 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, 2002, 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, 2002, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/Chaifetz & Schreiber, P.C. Chaifetz & Schreiber, P.C. 21 Harbor Park Drive N. Port Washington, NY 11050 March 25, 2003 F-1 - -------------------------------------------------------------------------------- Xfone, Inc. and Subsidiary - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET December 31, December 31, 2002 2002 ------------ ------------ Convenience translation into U.S. $ Current assets Cash £ 471,963 $ 755,141 Accounts receivable, net 960,729 1,537,166 Prepaid expenses and other receivables 180,585 288,936 Loan to shareholder 45,558 72,893 ------------ ------------ Total Current Assets 1,658,835 2,654,136 ------------ ------------ Loan to shareholder 257,572 412,115 ------------ ------------ Investments 515 824 ------------ ------------ Fixed assets Cost 559,471 895,154 Less - accumulated depreciation (306,577) (490,523) ------------ ------------ Total fixed assets 252,894 404,631 ------------ ------------ Total assets £2,169,816 $3,471,706 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. F-2 - -------------------------------------------------------------------------------- Xfone, Inc. and Subsidiary - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET December 31, December 31, 2002 2002 ------------ ----------------------- Convenience translation into U.S. $ ------------ ----------------------- Current liabilities Dividend payable £ 63,261 $ 101,218 Notes payable - current portion 4,000 6,400 Trade payables 1,176,183 1,881,893 Other liabilities and accrued expenses 197,053 315,285 Obligations under capital leases - current portion 21,530 34,448 ------------ ----------------------- Total current liabilities 1,462,027 2,339,244 Deferred taxes 25,000 40,000 Notes payable 7,167 11,467 Obligation under capital lease 34,026 54,442 ------------ ----------------------- Total liabilities 1,528,220 2,445,153 ------------ ----------------------- Shareholders' equity Preferred stock - 50,000,000 shares authorized, none issued Common stock: 25,000,000 shares authorized, £.0006896 par value; 5,060,889 issued and outstanding 3,490 5,584 Contributions in excess of shares 180,219 288,350 Receipt on account of shares - - Retained earnings 457,887 732,619 ------------ ----------------------- Total shareholders' equity 641,596 1,026,553 ------------ ----------------------- Total liabilities and shareholders' equity £2,169,816 $3,471,706 ============ ======================= The accompanying notes are an integral part of these consolidated financial statements. F-3 - -------------------------------------------------------------------------------- Xfone, Inc. and Subsidiary - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended Years Ended December 31, December 31, 2002 2001 2002 2001 ---------- ---------- ---------- ------------ Convenience translation into U.S. $ ---------- ---------- ------------------------- Revenues £3,741,436 £2,658,905 $5,986,298 $4,254,248 Cost of revenues (2,194,792) (1,629,604) (3,511,667) (2,607,366) ---------- ---------- ---------- ------------ Gross profit 1,546,644 1,029,301 2,474,631 1,646,882 ---------- ---------- ---------- ------------ Operating expenses: Research and development (32,000) (30,791) (51,200) (49,265) Marketing and selling (320,418) (219,238) (512,668) (350,781) General and administrative (878,624) (543,936) (1,405,799) (870,298) ---------- ---------- ---------- ------------ Total operating expenses (1,231,042) (793,965) (1,969,667) (1,270,344) Operating profit 315,602 235,336 504,964 376,538 Financing expenses - net (12,837) (30,982) (20,539) (49,571) Other income 11,029 1,009 17,646 1,614 ---------- ---------- ---------- ------------ Income before taxes 313,794 205,363 502,071 328,581 Taxes on income (72,813) (59,757) (116,501) (95,611) ---------- ---------- ---------- ------------ Net income £ 240,981 £ 145,606 $ 385,570 $ 232,970 ========== ========== ========== ============ Earnings Per Share: Basic £ 0.05 £ 0.03 $ 0.08 $ 0.05 ========== ========== ========== ============ Diluted £ 0.04 £ 0.03 $ 0.07 $ 0.04 ========== ========== ========== ============ The accompanying notes are an integral part of these consolidated financial statements. F-4 - ------------------------------------------------------------------------------------------- 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, 2001 4,800,000 £ 3,310 £ 134,143 £ 134,561 £ 272,014 Issuance of ordinary shares 200,000 138 6,760 - 6,898 Net income - - - 145,606 145,606 --------- -------- ---------- -------- ------------- Balance at December 31, 2001 5,000,000 £ 3,448 £ 140,903 £ 280,167 £ 424,518 --------- -------- ---------- -------- ------------- Balance at January 1, 2002 5,000,000 3,448 140,903 280,167 424,518 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 £ 3,490 £ 180,219 £ 457,887 £ 641,596 ========= ======== ========== ======== ============= Convenience translation into U.S. $: Balance at January 1, 2002 5,000,000 $5,517 $225,445 $448,267 $679,229 Issuance of shares 60,889 67 62,905 - 62,972 Net income - - - 385,570 385,570 Dividend - - - (101,218) (101,218) --------- -------- ---------- -------- ------------- Balance at December 31, 2002 5,060,889 $5,584 $288,350 $732,619 $1,026,553 ========= ======== ========== ======== ============= The accompanying notes are an integral part of these consolidated financial statements. F-5 - ----------------------------------------------------------------------------------------------------------------- Xfone, Inc. and Subsidiary - ----------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS Years Years Ended Ended December 31, December 31, 2002 2001 2002 2001 ------------------------- ----------------------------------- Convenience translation into U.S. $ Cash flow from operating activities Net income £240,981 £145,606 $385,570 $232,970 Adjustments to reconcile net income to net cash provided by operating activities 104,398 35,665 167,036 57,064 ------------------------- ----------------------------------- Net cash provided by operating activities 345,379 181,271 552,606 290,034 ------------------------- ----------------------------------- Cash flow from investing activities Investments made in year (515) - (824) - Purchase of equipment (152,757) (108,377) (244,411) (173,403) ------------------------- ----------------------------------- Net cash used in investing activities (153,272) (108,377) (245,235) (173,403) ------------------------- ----------------------------------- Cash flow from financing activities Repayment of long term debt (9,970) - (15,952) - Proceeds from issuance of long term debt - 9,904 - 15,846 Proceeds from issuance of common stock 10,583 - 16,933 - ------------------------- ----------------------------------- Net cash provided by financing activities 613 9,904 981 15,846 ------------------------- ----------------------------------- Net increase in cash Cash, beginning of year 279,243 196,445 446,789 314,312 Cash, at end of year £471,963 £279,243 $755,141 $446,789 ========================= =================================== Supplement disclosures of cash flow information: Net cash paid during the year for: Income taxes £41,723 £ - $66,757 $ - ========================= =================================== Interest £12,816 £6,496 $20,506 $ 10,394 ========================= =================================== The accompanying notes are an integral part of these consolidated financial statements. F-6 - -------------------------------------------------------------------------------------------------------------- Xfone, Inc. and Subsidiary - -------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.) (1) Adjustments to reconcile net income to net cash provided by operating activities: Years Years Ended Ended December 31, December 31, 2002 2001 2002 2001 ----------------------------- ----------------------------------- Convenience translation into U.S. $ ----------------------------- ----------------------------------- Depreciation £58,300 £37,012 $93,280 $59,219 ----------- ----------- ------------- --------------- Stock issued for professional services 28,775 6,898 46,040 11,037 ----------- ----------- ------------- --------------- Changes in assets and liabilities: Increase in trade receivables (233,770) (431,873) (374,032) (690,997) (Increase) decrease in other receivables (65,570) 58,793 (104,912) 94,068 Increase in shareholder loans (20,783) (66,212) (33,253) (105,939) Increase in trade payables 214,607 461,466 343,371 738,346 Increase (decrease) in other payables 117,839 (50,419) 188,542 (80,670) Increase in deferred taxes 5,000 20,000 8,000 32,000 ----------- ----------- ------------- --------------- Total adjustments 17,323 (8,245) 27,716 (13,192) ----------- ----------- ------------- --------------- £104,398 £35,665 $167,036 $57,064 =========== =========== ============= =============== The accompanying notes are an integral part of these consolidated financial statements. F-7 - -------------------------------------------------------------------------------- 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 ("£") since this is the currency of the prime economic environment, the U.K., in which the operations of the Company are conducted. Transactions and balances denominated in Sterling are presented at their original amounts. Transactions and balances in other currencies are translated into Sterling in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52 of the U.S. Financial Accounting Standards Board ("FASB"). Accordingly, items have been translated as follows: Monetary items - at the exchange rate effective at the balance sheet date. Revenues and expense items - at the exchange rates in effect at the date of recognition of those items. Exchange gains and losses from the aforementioned translation are included in financing expenses, net. C. The financial statements have been translated into U.S. dollars using the rate of exchange of the U.S. dollar at December 31, 2002. The translation was made solely for the convenience of the readers. It should be noted that the £figures do not necessarily represent the current cost amounts of the various elements presented and that the translated U.S. dollar figures should not be construed as a representation that the £ currency amounts actually represented, or could be converted into, U.S. dollars. The representative rate of exchange of the £ at December 31, 2002 was £1 = 1.60 U.S.$. F-8 - -------------------------------------------------------------------------------- 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. Allowance for Doubtful Accounts The allowance is determined based upon management's evaluation of receivables doubtful of collection on a specific basis. Such allowances for doubtful accounts are as follows: £ December 31, 2002 190,550 December 31, 2001 115,550 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 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. F-9 - -------------------------------------------------------------------------------- Xfone, Inc. and Subsidiary - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) Note 2 - Significant Accounting Policies (Cont.) F. Revenue Recognition (cont.) Management believes that the Company's revenue recognition policies are in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). 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. H. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143 "Accounting For Asset Retirement Obligations" which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and reporting for the impairment of long-lived assets. In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated With Exit or Disposal Activities" which addresses the accounting and reporting for costs associated with exit or disposal activities and primarily, provides for the recognition of a liability when related costs are incurred rather than when an entity commits to an exit or disposal plan. 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 adoption of these statements are not expected to have a material effect on the Company's financial condition, results of operations or cash flows. I. 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. F-10 - -------------------------------------------------------------------------------- Xfone, Inc. and Subsidiary - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) Note 2 - Significant Accounting Policies (Cont.) I. Income Taxes Income taxes are accounted for under Statement of Financial Accounting Standards No. 109, "Accounting 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. Note 3 - Prepaid Expenses and Other Receivables December 31, December 31, 2002 2002 ----------- ----------------------- Convenience translation into US$ ----------- ----------------------- Due from Swiftglobal, Ltd. (nonaffiliated entity) £ 59,274 $94,839 Other prepaid expenses 59,127 94,603 Due from related entities 30,921 49,473 Others receivables 31,263 50,021 ----------- ----------------------- £ 180,585 $288,936 =========== ======================= Note 4 - Loans to Shareholders The Company has a non-interest bearing demand loan of £45,558 due from a shareholder. In addition, the Company has a non-interest bearing loan of £257,572, due from such shareholder which has been classified as noncurrent. F-11 - -------------------------------------------------------------------------------------------------------- Xfone, Inc. and Subsidiary - -------------------------------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) December 31, December 31, 2002 2002 ------------ ---------------------------------- Note 5 - Fixed Assets Convenience translation into U.S.$ ------------ ---------------------------------- Cost Machinery and equipment £ 289,871 $463,794 Office furniture and equipment 59,409 95,054 Motor vehicle 35,000 56,000 Development costs 32,060 51,296 Property held under capital lease: Switching equipment 143,131 229,010 ------------ ---------------------------------- £ 559,471 $895,154 ============ ================================== Accumulated Depreciation Machinery and equipment £ 206,244 $329,990 Office furniture and equipment 46,200 73,920 Motor vehicle 23,925 38,280 Development costs 8,015 12,824 Property held under capital lease: Switching equipment 22,193 35,509 ------------ ---------------------------------- £ 306,577 $490,523 ============ ================================== Note 6 - Investments During 2002, the Company entered into two business ventures acquiring approximately 47% of Auracall Limited and 40% of Story Telecom Limited, both start up entities in the U.K. F-12 - ----------------------------------------------------------------------------------------------------------------- Xfone, Inc. and Subsidiary - ----------------------------------------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) December 31, December 31, 2002 2002 ------------ -------------------------------- Convenience translation into US$ ------------ -------------------------------- Note 7 -Other Liabilities and Accrued Expenses Corporate taxes £ 86,549 $138,478 Professional fees 30,201 48,322 Payroll and other taxes 37,338 59,741 Others 42,965 68,744 ------------ -------------------------------- £197,053 $315,285 Note 8 - Notes Payable December 31, December 31, 2002 2002 ------------ -------------------------------- Convenience translation into US$ ------------ -------------------------------- First National Finance - maturity 2005, annual Interest rate 7.16% £ 6,000 $9,600 Newcourt - maturity 2005, annual interest rate 7.16% 5,167 8,267 ------------ -------------------------------- 11,167 17,867 Less: current portion (4,000) (6,400) ------------ -------------------------------- Notes payable - non current £ 7,167 $11,467 ============ ================================ F-13 - -------------------------------------------------------------------------------------------- Xfone, Inc. and Subsidiary - -------------------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) Note 8 - Notes Payable (cont.) B. Maturities of notes payable are as follows: Convenience translation into U.S. $ ---------------------------- December 31 ----------- 2003 £ 4,000 $6,400 2004 4,000 6,400 2005 3,167 5,067 -------- ---------------------------- £ 11,167 $17867 ======== ============================ Note 9 - Capital Lease Obligations The Company is the lessee of switching equipment under capital leases expiring in various years through 2005. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are depreciated over their estimated productive lives. Depreciation of assets under capital leases is included in depreciation expense for 2002. Minimum future lease payments under capital leases as of December 31, 2002 for each of the next three years are: Convenience translation into U.S. $ ---------------------------- December 31 ----------- 2003 £ 25,710 $41,136 2004 25,710 41,136 2005 14,876 23,802 -------- ---------------------------- Total minimum lease payments 66,296 106,074 Less: amount representing interest (10,740) (17,184) -------- ---------------------------- Present value of net minimum lease payment £ 55,556 $88,890 ======== ============================ Interest rates on capitalized leases vary up to 9.6%. F-14 - -------------------------------------------------------------------------------- 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. SFAS 109, additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. The Company does not file consolidated tax returns. At December 31, 2002, Xfone had deferred tax assets of approximately £6,500, resulting from its net operating loss. The Company has not been able to determine that it is more likely than not that the deferred tax asset will be realized and has, therefore, provided a valuation allowance for the total amount of the benefit. The following table reflects the Company's deferred tax liabilities at December 31, 2002: Convenience translation into U.S. $ ----------------------- Net operating loss deduction £ 6,500 $10,400 Valuation allowance (6,500) (10,400) Accelerated tax writeoff of fixed assets 25,000 40,000 ------- ----------------------- Net deferred liability £25,000 $40,000 ======= ======================= The provision for income taxes differs from the amount computed by applying the statutory income tax rate to income before taxes, excluding the loss included therein of £65,252 for the year ended December 31, 2001, for which no benefit has been recognized, as follows: Years Ended Years Ended December 31, December 31, 2002 2001 2002 2001 --------- --------- --------- --------- Convenience translation into U.S. $ ----------------------------------- Income tax computed at statutory rate £73,066 £53,682 $116,906 $85,891 Effect of permanent differences 6,663 6,075 10,661 9,720 Utilization of net operating loss (6,916) - (11,066) - --------- --------- --------- --------- Provision for income taxes £72,813 £59,757 $116,501 $95,611 ========= ========= ========= ========= The net operating loss carryforward at December 31, 2002 was approximately £32,000 and expires in the year 2021. F-15 - -------------------------------------------------------------------------------- Xfone, Inc. and Subsidiary - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) Note 11 - Capital Structure, Stock Options and Dividend Campbeltown Business Ltd., a shareholder, has the option from the Company and one of its directors to purchase 500,000 additional shares of Xfone for the amount of $200,000. This transaction can be executed either by Xfone issuing new shares, or by the director selling his private shares as long as he has an adequate amount of shares, as the director will decide. This option will expire on December 31, 2005. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. The common stock has no pre-emptive or conversion rights or other subscription rights. There are no sinking fund provisions applicable to the common stock. During November 2001, the Company issued 105,000 shares of common stock to its attorneys as compensation for services rendered in connection with the successful initial registration and offering of the Companies' shares which was effective December 28, 2001. The value of the stock at the time of its issuance was charged to professional fees. During July 2001, the Company issued 95,000 shares of common stock to the Swiftnet Management Fund to be distributed by such fund at will. In 2002, the Company issued 45,014 shares of common stock at a value of £28,775 as compensation for professional services rendered to the Company. On December 19, 2002, the Company declared a dividend of $0.02 per share to stockholders of record on December 31, 2002, payable on January 15, 2003. F-16 - -------------------------------------------------------------------------------- Xfone, Inc. and Subsidiary - -------------------------------------------------------------------------------- Note 12 - Earnings Per Share ----------------------------------------------------------------- 2002 Weighted Average ----------------------------------------------------------------- Income Shares Per Share Per Share (Numerator) (Denominator) Amounts Amounts ----------------------------------------------------------------- Convenience translation into U.S. $ ----------------------------------------------------------------- Net Income £ 240,981 Basic EPS: £ 240,981 5,030,444 £0.05 $0.08 Income available to common stockholders Effect of dilutive securities: Options - 500,000 - - Diluted EPS: Income available to common stockholders £ 240,981 5,530,444 £0.04 $0.07 ----------------------------------------------------------------- 2001 Weighted Average ----------------------------------------------------------------- Income Shares Per Share Per Share (Numerator) (Denominator) Amounts Amounts ----------------------------------------------------------------- Convenience translation into U.S. $ ----------------------------------------------------------------- Net Income £ 145,606 Basic EPS: £ 145,606 4,848,333 £ 0.03 $0.05 Income available to common stockholders Effect of dilutive securities: Options - 500,000 - - Diluted EPS: Income available to common stockholders £ 145,606 5,348,333 £ 0.03 $0.04 F-17 - ---------------------------------------------------------------------------------------------- Xfone, Inc. and Subsidiary - ---------------------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) Note 13 - Selected Statement of Operations Data Years Years Ended Ended December 31, December 31, 2002 2001 2002 2001 -------- -------- -------- -------- Convenience translation into U.S. $ -------- -------- ----------------------------------- A. Marketing & Selling: Advertising £ 22,401 £ 4,904 $ 35,842 $ 7,847 Consultancy 59,372 39,187 94,995 62,699 Commissions 174,835 139,827 279,735 223,723 Others 63,810 35,320 102,096 56,512 -------- -------- -------- -------- £320,418 £219,238 $512,668 $350,781 ======== ======== ======== ======== £ B. General & Administrative: Salaries & benefits £268,884 £180,952 $430,215 $289,524 Rent & maintenance 90,916 47,623 145,466 76,197 Communications 11,539 28,619 18,462 45,791 Professional fees 142,863 156,959 228,581 251,134 Bad debts 226,984 84,427 363,174 135,083 Depreciation 58,300 37,012 93,280 59,219 Others 79,138 8,344 126,621 13,350 -------- -------- -------- -------- £878,624 £543,936 $1,405,799 $870,298 ======== ======== ======== ======== F-18 - ---------------------------------------------------------------------------------------------- Xfone, Inc. and Subsidiary - ---------------------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.) Note 13 - Selected Statement of Operations Data (cont.) Years Years Ended Ended December 31, December 31, 2002 2001 2002 2001 -------- -------- -------- -------- Convenience translation into U.S. $ -------- -------- ----------------------------------- C. Financing Expenses, Net: Bank interest & charges £ 1,607 £ 25,741 $ 2,571 $ 41,186 Interest on capital lease 8,476 3,808 13,562 6,093 Foreign currency exchange 21 - 34 - Other interest and charges 2,733 1,433 4,372 2,292 -------- -------- -------- -------- £ 12,837 £ 30,982 $ 20,539 $ 49,571 ======== ======== ======== ======== F-19 - ------------------------------------------------------------------------------------------------------- Xfone, Inc. and Subsidiary - ------------------------------------------------------------------------------------------------------- Note 14 - Related Party Transactions Years Years Ended Ended December 31, December 31, --------------------- ----------------------------------- 2002 2001 2002 2001 --------------------- ----------------------------------- Convenience translation into U.S. $ --------------------- ----------------------------------- Shareholders' salaries £63,448 £42,000 $101,517 $ 67,200 Shareholders' pensions £ - £ 3,300 $ - $ 5,280 Campbeltown Business Ltd.: Consulting and professional fees £59,372 £78,375 $ 94,995 $125,400 Vision Consultants Limited: Consulting expense £25,000 £ - $ 40,000 $ - Story Telecom Limited : Accounts receivable, net £ 3,606 £ - $ 5,770 $ - Due from related entities £14,725 £ - $ 23,560 $ - Revenues £ 3,716 £ - $ 5,946 $ - Auracall Limited : Due from related entities £16,196 £ - $ 25,914 $ - Trade payables £12,362 £ - $ 19,779 $ - Commission expense £73,661 £ - $117,858 $ - F-20 - -------------------------------------------------------------------------------- Xfone, Inc. and Subsidiary - -------------------------------------------------------------------------------- Note 15 - Financial Commitments The Company has annual rent commitments under a non-cancellable operating lease of £38,200, which terminates in December 2012. Note 16 - Economic Dependency and Credit Risk Approximately, 14% and 13% of total 2002 revenues were derived, respectively, from two customers and approximately 12% of total 2001 revenues was derived from one of these customers. Approximately, 19% and 18% of the total accounts receivable - net at 2002 were due from the aforementioned two customers, respectively. F-21 ITEM 23. CHANGES IN AND DISAGREEEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART II ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS Nevada Revised Statutes Section 78.7502, 78.751, and our bylaws provide us with the power to indemnify any of our directors, officers, employees or agents. The director, officer, employ or agent must have conducted himself in good faith and reasonably believe that his conduct was in, or not opposed to our best interests. Our by-laws provide that: Our directors shall be entitled to rely on information, opinions reports or statements, including financial statements and other financial data, prepared or presented by: (a) One or more of our officers, directors or employees whom a director reasonably believes to be reliable and competent in the matters presented, (b) Counsel, public accountants or other persons as to matters which a director reasonably believes to be within such person's professional or expert competence or (c) A committee of our board of directors upon which he does not serve, duly designated in accordance with a provision of the articles of incorporation or the by-laws, as to matters within its designated authority, which committee the director reasonably believes to merit confidence. ITEM 25. 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 $399.68 Legal Fees and Expenses $77,500 Accounting Fees and Expenses $40,000 Miscellaneous* $20,000 =============================================== Total* $137,899.68 * Estimated Figure ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES On September 1, 2000, we issued 1,730,000 shares of our common stock to our founder and director, Abraham Keinan, for services rendered in our corporate formation. On September 1, 2000, we issued 270,000 shares of our common stock to Campbeltown Business Ltd, for services rendered in our corporate formation. Campbeltown Business Ltd. is owned by our President/Principal Executive Officer/ Principal Financial Officer/Principal Accounting Officer and Director, Guy Nissenson and his family. 53 On October 20, 2000, we issued 100,000 shares of our common stock to Zeneca Commercial S.A., on behalf of Mr. Nissim Levy, for giving our subsidiary, Swiftnet, a bank guaranty for the amount of $200,000. On October 20, 2000, we issued 252,800 shares of our common stock to 116 non- U.S. Companies and non-U.S. persons for non cash consideration. Our legitimate business purpose for issuing these shares was to: (a) gain recognition of our business operations; (b) establish a stock holder base for our common stock; (c) assist us in our future plan to secure qualification for quotation on the Over the Counter Bulletin Board; and (d) to motivate our employees. On October 20, 2000, we issued 25,000 shares to agents of Swiftnet for the purpose of future incentive plan for our agents. On July 25, 2001, we issued 117,200 shares to the 'management fund' of our subsidiary Swiftnet for future incentive of the management team implementing the expanding plan of the company. On September 20, 2000, we issued an aggregate of 2,400,000 shares of our common stock to Abraham Keinan, Vision Consultants Ltd., and Campbeltown Business Ltd. to acquire our subsidiary, Swiftnet, Ltd. On August 1, 2002, we sold 2,631 shares of our common stock to Mr. Vic Chhabria at $0.95 per share or an aggregate of $2,500. On September 1, 2002, we sold 2,551 shares of our common stock to Mr. Vic Chhabria at $0.98 per share or an aggregate of $2,500. On October 1, 2002, we sold 3,333 shares of our common stock to Mr. Vic Chhabria at $0.75 per share or an aggregate of $2,500. On November 1, 2002, we sold 4330 shares of our common stock to Mr. Vic Chhabria at $0.58 per share or an aggregate of $2,500. On December 1, 2002, we sold 3030 shares of our common stock to Mr. Vic Chhabria at $0.83 per share or an aggregate of $2,500. We sold these shares of our common stock to Mr. Vic Chhabria based on a July 23, 2002 agreement we entered into with him that includes the following terms: o As a valuable reseller of our services, we will sell Mr. Chhabria $2,500 worth of our common stock on the first of every month beginning August 2002; o The shares that will be issued to Mr. Chhabria will be allotted from treasury and will be restricted; o The share price will be determined on the first trading day of every month, less a 25% discount; o The $2,500 will be made on the first of the month; and o The agreement is for 12 months and can be altered or continued by written consent from both sides. We relied upon Section 4(2) and Regulation S of the Securities Act of 1933, as amended for the above issuances. None of these issuance involved underwriters, underwriting discounts or commissions or any public offer in the United States. We placed restrictive legends on all certificates issued. We believed that Regulation S and Section 4(2) were available because: o We are an operational company with revenues and not a blank check company; o Sales were not made by general solicitation or advertising; o Sales were made only to accredited investors or investors who represented that they were sophisticated enough to evaluate the risks of the investment; o No offers or sales were made to persons in the United States; and o No direct selling efforts were made in the United States. On July 25, 2001, we issued 105,000 shares of our common stock to the Law Firm of Hamilton, Lehrer & Dargan, P.A. for legal services rendered to us. We relied upon the exemption from registration provided by Section 4(2) and Rule 506 of Regulation D of the Act, as amended. We believed this exemption is available because the issuance to Hamilton, Lehrer & Dargan, P.A. was an isolated transaction which did not involve a public offering. 54 ITEM 27. 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) 3.2 Bylaws of Xfone, Inc.(1) 3.3 Articles of Incorporation of Swiftnet, Ltd.(1) 3.4 Bylaws of Swiftnet, Ltd.(1) 3.5 Amended bylaws of Xfone, Inc.(3) 4. Specimen Stock Certificate* 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 5, 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 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 Davidson dated September 30, 2002 21. List of Subsidiaries* 23. Consent of Chaifetz & Schreiber, P.C.*** 23.1 Consent of Chaifetz & Schreiber, P.A. 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. 55 ITEM 28. UNDERTAKINGS The undersigned Registrant hereby undertakes: 1. To file, during any period a post-effective amendment to this registration statement 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. 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. 56 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 on April 8, 2003. XFONE, INC. Title Name Date Signature - ----------------------------- ---------------- ----------- -------------------- Chairman of the Board Abraham Keinan 04/08/03 /s/ Abraham Keinan - ----------------------------- ---------------- ----------- -------------------- President Guy Nissenson 04/08/03 /s/ Guy Nissenson - ----------------------------- ---------------- ----------- -------------------- Principal Executive Officer Guy Nissenson 04/08/03 /s/ Guy Nissenson - ----------------------------- ---------------- ----------- -------------------- Principal Accounting Officer Guy Nissenson 04/08/03 /s/ Guy Nissenson - ----------------------------- ---------------- ----------- -------------------- Principal Financial Officer Guy Nissenson 04/08/03 /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 04/08/03 - ---------------- -------------------- -------------------------------- ---------- Guy Nissenson /s/ Guy Nissenson President, Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer, and Director 04/08/03 - ---------------- -------------------- -------------------------------- ---------- 57
- NTS Dashboard
- Filings
-
POS AM Filing
Nts (NTS) Inactive POS AMProspectus update (post-effective amendment)
Filed: 8 Apr 03, 12:00am