UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C.
20549
PROXY STATEMENT PURSUANT TO SECTION
14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant
x
Filed by a Party other than the
Registrant
o
Check the appropriate
box:
x
Preliminary Proxy
Statement
o
Confidential, for
Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
o
Definitive Proxy
Statement
o
Definitive Additional
Materials
o
Soliciting Material
Pursuant to Section 240.14a-12
XFONE,
INC.
(Name of Registrant as Specified In Its
Charter)
(Name of Person(s) Filing Proxy
Statement, if other than the Registrant)
Payment of Filing Fee (Check the
appropriate box):
x
No fee
required.
o
Fee computed on table
below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1)
|
Title of each class of securities
to which transaction
applies:
|
(2)
|
Aggregate number of securities to
which transaction applies:
|
(3)
|
Per unit price or other underlying
value of transaction computed pursuant to Exchange Act Rule 0-11 (set
forth the amount on which the filing fee is calculated and state how it
was determined):
|
(4)
|
Proposed maximum aggregate value
of transaction:
|
o
Fee paid previously
with preliminary materials.
o
Check box if any part
of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify
the filing for which the offsetting fee was paid previously. Identify
the previous filing by registration statement number, or the Form or Schedule
and the date of its filing.
(2)
|
Form, Schedule or Registration
Statement No.:
|
XFONE, INC.
5307
W. Loop 289
Lubbock,
Texas 79414
NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS
To be held on
December 16, 2008
To our Stockholders:
NOTICE IS HEREBY GIVEN that an Annual
Meeting (the “Meeting”) of the Stockholders of XFONE, INC., a Nevada corporation
(the “Company”) will be held at 10:30 a.m.
ET
on December 16, 2008, at the
offices of Gersten Savage LLP located at 600 Lexington Avenue, 9
th
Floor, New York, NY 10022,
United States, for the following purposes:
(i) To re-elect three (3) Class A
directors, each such director to serve
until the 2011 Annual Meeting of
the Company’s Stockholders and
until his successor is duly elected and
qualified or until his earlier resignation, removal or death. The
Board of Directors recommends that the Stockholders vote “FOR” this Proposal at
the Meeting;
see Appendix
A.
(ii) To approve the appointment of
Stark, Winter, Schenkein & Co., LLP as the Company’s Independent Certified
Public Accountants, for the fiscal year ending December 31, 2008, and the first
three quarters of the fiscal year ending December 31, 2009. The Board of
Directors recommends that the Stockholders vote
“
FOR
”
this Proposal at the Meeting;
S
ee Appendix
A.
(iii) To consider, approve
and authorize the issuance of an
aggregate of
321,452
warrants to purchase shares of the
Company’s common stock to Wade Spooner, former President and Chief Executive
Officer of Xfone USA, Inc., pursuant to the terms of a certain Separation
Agreement and Release
dated
August 15, 2008
between Mr.
Spooner
,
Xfone USA, Inc.
and the Company
, as well as the issuance of the
aggregate
321,452
shares of the Compa
n
y’s common stock
upon exercise of
the such common stock purchase warrants. The Board of Directors recommends that
the Stockholders vote “FOR” this Proposal at the Meeting; see
Appendix
A
.
(i
v
) To consider, approve and authorize the
issuance of an aggregate of
160,727
warrants to purchase shares of the
Company’s common stock to Ted Parsons, former
Executive Vice President
and Chief Marketing Officer
of
Xfone USA, Inc., pursuant to the terms of a certain Separation Agreement and
Release
dated August 15,
2008
between Mr.
Parsons,
Xfone USA, Inc.
and the Company
, as well as the issuance of the
aggregate
160,727
shares of the Company’s common stock
upon exercise of the such common stock purchase warrants. The Board of
Directors recommends that the Stockholders vote “FOR” this Proposal at the
Meeting; see
Appendix
A
.
|
By order of the Board of
Directors,
|
|
|
|
Date: October 31,
2008
|
By:
|
/s/ Guy
Nissenson
|
|
Guy
Nissenson
|
|
President, Chief Executive officer
and Director
|
STOCKHOLDERS ARE URGED TO FILL IN, DATE,
SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ACCOMPANYING PREPAID
ENVELOPE.
It is desirable that as many
Stockholders as possible be represented, in person or by proxy, at the Meeting.
Consequently, whether or not you now expect to be present, please execute and
return the enclosed proxy card. You have the power to revoke your proxy card at
any time before it is voted, and the giving of a proxy card will not affect your
right to vote in person if you attend the Meeting.
XFONE, INC.
5307
W. Loop 289
Lubbock,
Texas 79414
PROXY STATEMENT
ANNUAL MEETING OF
STOCKHOLDERS
To be held on December 16,
2008
This Proxy Statement is furnished in
connection with the solicitation of proxies on behalf of the Board of Directors
of Xfone, Inc. (the “Company”) for use at the Company's Annual Meeting of
Stockholders to be held on
December 16, 2008, and
at any postponements or adjournment
thereof (the “Meeting”). Further, solicitation of proxies may be made
personally, or by telephone, telegraph or E-mail, by regularly employed officers
and other employees of the Company, who will receive no additional compensation
for such. The cost of soliciting proxies will be borne by the Company which may
enlist the assistance, and reimburse the reasonable expenses, of banks and
brokerage houses in the additional solicitation of proxies and proxy
authorizations, particularly from their customers whose stock is not registered
in the owner's name, but in the name of such banks or brokerage
houses.
Only Shareholders of record at the close
of business on November 10, 2008 (the “Record Date”) are entitled to vote at the
Meeting. As of October 29, 2008, there were issued and
outstanding 18,376,075 shares of the Company's common stock, $0.001 par
value per share (the “Common Stock”). Each outstanding share of Common Stock is
entitled to one vote on all matters properly coming before the Meeting. All
properly executed, unrevoked proxies on the enclosed form of proxy card that are
received in time will be voted in accordance with the Stockholder's directions
and, unless contrary directions are given, will be voted for the proposals
described below (the “Proposals”). Anyone giving a proxy card may revoke it at
any time before it is exercised by giving the Board of Directors of the Company
written notice of the revocation, by submitting a proxy card bearing a later
date or by attending the Meeting and voting in person.
The presence in person or by properly
executed proxies of holders representing fifty point one percent (50.1%) of the
issued and outstanding shares of the Common Stock entitled to vote is necessary
to constitute a quorum for the transaction of business at the Meeting. Votes
cast by proxy or in person at the Meeting will be tabulated by the inspector of
elections appointed for the Meeting, who will determine whether or not a quorum
is present. Shares of Common Stock represented by proxies that are marked
“abstain” will be included in the determination of the number of shares present
and voting for purposes of determining the presence or absence of a quorum for
the transaction of business. Abstentions are not counted as voted either for or
against a Proposal. Brokers holding shares of Common Stock for beneficial owners
in “street name” must vote those shares according to specific instructions they
receive from the owners. However, brokers have discretionary authority to vote
on “routine” matters. Absent specific instructions from the beneficial owners in
the case of “non-routine” matters, the brokers may not vote the shares.
“Broker non-votes” result when brokers are precluded from exercising their
discretion on certain types of proposals. Shares that are voted by brokers on
some but not all of the matters will be treated as shares present for purposes
of determining the presence of a quorum on all matters, but will not be treated
as shares entitled to vote at the Meeting on those matters as to which
instructions to vote are not provided by the owner.
The Board of Directors of the Company
has adopted and approved each of the Proposals set forth herein and recommends
that the Company's Stockholders vote “FOR” each of the
Proposals.
Copies of the Company’s Annual Reports
on Form 10-KSB for the fiscal year ended December 31, 2007, which was filed with
the United States Securities and Exchange Commission (the “Commission”) on March
31, 2008, and amended on Form 10-KSB/A filed on April 15, 2008 and July 25,
2008, including financial statements, which are incorporated by reference into
this Proxy Statement and made a part hereof, are being mailed concurrently
herewith to all Stockholders of record on the Record Date.
Additional information about the Company
is contained in its current and periodic reports filed with the Commission.
These reports, their accompanying exhibits and other documents filed with the
Commission may be inspected without charge at the
Public Reference Room
maintained by the Securities and Exchange Commission at 100 F. Street, N.E.,
Washington, D.C. 20549
.
You
can obtain information about operation of the Public Reference Room by calling
the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission also maintains an Internet site that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the Securities and Exchange Commission at www.sec.gov.
Copies of such material can be obtained from the public reference section of the
Securities and Exchange Commission at prescribed rates.
The principal executive office of the
Company is located at:
5307
W. Loop 289
Lubbock,
Texas 79414
U.S.A.
Telephone Number:
806-771-5212
This Proxy Statement, the accompanying
Notice of Meeting and the proxy card will be first sent to the Shareholders on
or about November 20, 2008.
The date of this Proxy Statement October
31, 2008
TABLE
OF CONTENTS
|
6
|
|
|
|
7
|
|
|
|
9
|
|
9
|
|
9
|
|
10
|
|
10
|
|
|
|
11
|
|
11
|
|
12
|
|
13
|
|
14
|
|
14
|
|
14
|
|
14
|
|
15
|
|
15
|
|
15
|
|
|
|
16
|
|
16
|
|
18
|
|
18
|
|
23
|
|
|
|
24
|
|
|
|
36
|
|
|
|
36
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
38
|
|
38
|
|
38
|
|
39
|
|
41
|
|
41
|
|
42
|
|
42
|
|
42
|
|
|
|
43
|
|
43
|
|
43
|
|
44
|
|
46
|
|
46
|
|
47
|
|
48
|
|
48
|
|
|
|
49
|
|
49
|
|
49
|
|
49
|
|
49
|
|
59
|
|
62
|
|
65
|
|
66
|
|
68
|
|
71
|
|
72
|
|
72
|
|
77
|
|
82
|
|
83
|
|
83
|
|
83
|
|
83
|
|
84
|
|
85
|
|
85
|
|
86
|
|
87
|
|
90
|
|
90
|
|
90
|
|
90
|
|
91
|
|
|
|
92
|
|
|
|
92
|
|
|
|
92
|
|
|
Appendix A
- Minutes of
Board of Directors Meetings
|
A1
|
|
|
(1)
Consolidated Financial Statements
of Xfone, Inc. and Subsidiaries as of December 31, 2007, and Consolidated
Financial Statements (Unaudited) of Xfone, Inc. and Subsidiaries as of
June 30, 2008
(2)
Consolidated Financial Statements
of NTS Communications, Inc. and Subsidiaries for the years ended July 31,
2007 and 2006
(3)
Unaudited Pro Forma Financial
Information for Xfone, Inc. and Subsidiaries
|
B1
|
|
|
Appendix C
– Separation Agreement and
Release entered into on August 15, 2008 between Xfone USA, Inc., Xfone,
Inc. and Wade Spooner
|
C1
|
|
|
Appendix D
– Separation Agreement and
Release entered into on August 15, 2008 between Xfone USA, Inc., Xfone,
Inc. and Ted Parsons
|
D1
|
SPECIAL NOTE
REGARDING FORWARD-LOOKING
STATEMENTS
This Proxy Statement
contains “forward-looking statements” and information relating to our business
that are based on our beliefs as well as assumptions made by us or based upon
information currently available to us. When used in this Proxy Statement, the
words anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,”
“project,” “should” and similar expressions are intended to identify
forward-looking statements. These forward-looking statements include, but are
not limited to, statements relating to our performance in “Business” and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” These statements reflect our current views and assumptions with
respect to future events and are subject to risks and uncertainties. Actual and
future results and trends could differ materially from those set forth in such
statements due to various factors. Such factors include, among others: general
economic and business conditions; industry capacity; industry trends;
competition; changes in business strategy or development plans; project
performance; availability, terms, and deployment of capital; and availability of
qualified personnel. These forward-looking statements speak only as of the date
of this Proxy Statement. Subject at all times to relevant securities law
disclosure requirements, we expressly disclaim any obligation or undertaking to
disseminate any update or revisions to any forward-looking statement contained
herein to reflect any change in our expectations with regard thereto or any
changes in events, conditions or circumstances on which any such statement is
based. In addition, we cannot assess the impact of each factor on our business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
SECURITY OWNERSHIP OF CERTAIN BE
NEF
ICIAL
OWNERS AND
MANAGEMENT
Only Stockholders of record at the close
of business on November 10, 2008 are entitled to vote at the Meeting. The total
number of shares of Common Stock of the Company, issued and outstanding as of
October 29, 2008, was 18,376,075 shares. Each such share of Common Stock is
entitled to one vote upon all matters to be acted upon at the Meeting. There are
no cumulative voting rights. The holders of fifty point one percent (50.1%) of
the outstanding votes shall constitute a quorum. A quorum is necessary to hold a
valid meeting. In accordance with the Company's Articles of Incorporation and
By-laws, and applicable law, the election of directors shall be by a plurality
of the votes cast and the remaining Proposals shall be by a majority of the
votes cast.
Abstentions and broker non-votes are not
counted as votes cast in the election of directors and will have no effect on
the election of directors except to the extent that they affect the total votes
received by a candidate. On matters other than the election of directors,
abstentions will be counted as votes cast, which will have the same effect as a
negative vote on the matter. A broker non-vote occurs when a broker votes on
some matter on the proxy card but not on others because the broker does not have
the authority to do so.
The following tables sets forth, as of
October 29, 2008, certain information with respect to the beneficial ownership
of our Common Stock by each stockholder known by us to be the beneficial owner
of more than 5% of our Common Stock and by each of our current directors and
executive officers. Each person has sole voting and investment power with
respect to the shares of Common Stock, except as otherwise indicated.
Information relating to beneficial ownership of Common Stock by our principal
stockholders and management is based upon information furnished by each person
using “beneficial ownership” concepts under the rules of the Commission. Under
these rules, a person is deemed to be a beneficial owner of a security if that
person has or shares voting power, which includes the power to vote or direct
the voting of the security, or investment power, which includes the power
to vote or direct the voting of the security. The person is also deemed to be a
beneficial owner of any security of which that person has a right to acquire
beneficial ownership within 60 days. Under the Commission rules, more than one
person may be deemed to be a beneficial owner of the same securities, and a
person may be deemed to be a beneficial owner of securities as to which he or
she may not have any pecuniary beneficial interest. We are unaware of any
contract or arrangement which could result in a change in control of our
company.
The following table assumes, based on
our stock records, that there are 18,376,075 shares issued and outstanding as of
October 29, 2008.
Title
of Class
|
Name, Title & Address of
Beneficial Owner
|
|
Amount of
Beneficial
Ownership
|
|
Nature of
Ownership
|
|
Percent
of Class
|
|
Common
|
Abraham
Keinan
(1)(3)
Chairman of the
Board
4 Wycombe
Gardens
London NW11
8AL
United
Kingdom
|
|
|
4,708,000
|
|
Direct
|
|
|
23.69
|
%
|
Common
|
Guy
Nissenson
(2)(3)
President, Chief Executive
Officer, and Director,
3A Finchley
Park
London N12 9JS
United
Kingdom
|
|
|
5,580,500
|
|
Direct/Indirect
|
|
|
28.08
|
%
|
Common
|
Eyal J.
Harish
(4)
Director
18 Bloch St.
Tel Aviv,
Israel
|
|
|
90,000
|
|
Direct
|
|
|
0.49
|
%
|
Common
|
Shemer S.
Schwartz
(5)
Director
5 Israel Galili
St.
Kefar Saba,
Israel
|
|
|
75,000
|
|
Direct
|
|
|
0.41
|
%
|
Common
|
Aviu
Ben-Horrin
(6)
Director
40 Jabotinski
St.
Kefar Sava,
Israel
|
|
|
25,000
|
|
Direct
|
|
|
0.14
|
%
|
Common
|
Itzhak
Almog
(7)
Director
7/A Moledet
St.
Hod Hasharon,
Israel
|
|
|
25,000
|
|
Direct
|
|
|
0.14
|
%
|
Common
|
Morris
Mansour
(8)
Director
31 Tenterden
Gardens
London NW4 1TG, United
Kingdom
|
|
|
20,000
|
|
Direct
|
|
|
0.11
|
%
|
Common
|
Israel
Singer
(9)
Director
63 Ben Eliezer
St.
Ramat Gan,
Israel
|
|
|
20,000
|
|
Direct
|
|
|
0.11
|
%
|
Common
|
Directors and Executive Officers
as a group (8 persons)(10)
|
|
|
7,666,500
|
|
Direct
|
|
|
35.47
|
%
|
Common
|
Scott Richard
L(11)
700 11th street South, Suite
101
Naples, FL
34102
|
|
|
3,362,605
|
|
Indirect
|
|
|
17.54
|
%
|
Common
|
Gagnon Securities
LLC(12)
1370 Ave. of the Americas, Suite
2400
New York, NY
10019
|
|
|
3,206,450
|
|
Direct
|
|
|
16.99
|
%
|
(1)
|
Until June 23, 2004, Abraham
Keinan indirectly held 1,302,331 shares of our Common Stock through Vision
Consultants Limited, a Nassau, Bahamas incorporated company that is 100%
owned by Mr. Keinan. On June 23, 2004, the shares held by Vision
Consultants Limited were transferred to Mr. Keinan as an individual. In
addition, certain stockholders provided Mr. Keinan and Mr. Nissenson with
irrevocable proxies representing a total of 2.25% of our Common Stock. On
November 24, 2004, our board of directors issued 1,500,000 options to Mr.
Keinan on the following terms: Option exercise price - $3.5, vesting date
- 12 month from the date of grant, expiration date - 5 years from the
vesting date. Mr. Keinan’s 4,708,000 shares of Common Stock include
1,500,000 shares issuable upon the exercise of options, exercisable within
60 days from the date of this Proxy Statement.
|
(2)
|
Guy Nissenson, our President,
Chief Executive Officer, and Director, holds 9,000 shares of our Common
Stock and has indirect beneficial ownership of 1,203,500 shares of our
Common Stock and direct beneficial ownership of 1,500,000 shares issuable
upon the exercise of options, exercisable within 60 days from the date of
this Proxy Statement. In addition, certain stockholders provided Mr.
Nissenson and Mr. Keinan with irrevocable proxies representing a total of
2.25% of our Common 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 so that
the relative percentage ownership of Abraham Keinan and Campbeltown
Business Ltd. remains the same. On November 24, 2004, our board of
directors issued 1,500,000 options to Mr. Nissenson on the following
terms: Option exercise price - $3.5, vesting date - 12 month from the date
of grant, expiration date - 5 years from the vesting
date.
On July 1, 2008, Mr. Nissenson and
Mr. Keinan entered into a certain Irrevocable Option Agreement (the
“Option Agreement”). Pursuant to the Option Agreement, Mr. Keinan granted
Mr. Nissenson (individually and/or together with the Nissenson Investors,
as such term is defined in the Option Agreement) an irrevocable and
exclusive option to purchase a minimum of 2,868,000 of the shares of Xfone
common stock, $0.001 par value per share, that he beneficially owns (the
“Option Shares”), at any time from the date of the Option Agreement
through 5:00 p.m. (British Time) on January 1, 2009, at a price per share
of $3.4289277 (the "Option"). In the event that Mr. Nissenson decides
to exercise the Option, Mr. Keinan has the right to sell to the
purchaser(s) of the Option Shares up to an additional 340,000 shares of
Xfone common stock that he owns, at the same price as the Option
Shares.
|
(3)
|
Our Chairman of the Board, Abraham
Keinan, and our President, Chief Executive Officer, and Director, Guy
Nissenson, exercise significant control over stockholder matters through a
September 28, 2004 Voting Agreement between Mr. Keinan, Mr. Nissenson and
Campbeltown Business Ltd., an entity owned and controlled by Mr. Nissenson
and his family. This agreement is for a term of 10 years and provides
that: (a) Messrs Keinan and Nissenson and Campbeltown Business, Ltd.
agree to vote any shares of our Common Stock controlled by them only in
such manner as previously agreed by all these parties; and (b) in the
event of any disagreement regarding the manner of voting, a party to the
agreement will not vote any shares, unless all the parties have settled
the disagreement.
|
(4)
|
Dr. Eyal J. Harish is the
brother-in-law of Abraham Keinan, our Chairman of the Board. Dr. Harish
holds 15,000 shares of our Common Stock and 75,000 shares issuable upon
the exercise of options, exercisable within 60 days from the date of this
Proxy Statement.
|
(5)
|
Mr. Shemer S. Schwartz holds
75,000 shares issuable upon the exercise of options, exercisable within 60
days from the date of this Proxy Statement.
|
(6)
|
Mr. Aviu Ben-Horrin holds 25,000
shares issuable upon the exercise of options, exercisable within 60 days
from the date of this Proxy Statement.
|
(7)
|
Mr. Itzhak Almog holds 25,000
shares issuable upon the exercise of options, exercisable within 60 days
from the date of this Proxy Statement.
|
(8)
|
Mr. Morris Mansour
holds 20,000 shares issuable upon the exercise of options,
exercisable within 60 days from the date of this Proxy
Statement.
|
(9)
|
Mr. Israel Singer
holds 20,000 shares issuable upon the exercise of options,
exercisable within 60 days from the date of this Proxy
Statement.
|
(10)
|
The 2,868,000 shares that are
deemed beneficially owned by both Mr. Keinan and Mr. Nissenson
are counted only once in the total shares reported. See Note 2
above.
|
(11)
|
According to a Schedule 13D/A
filed with the SEC on September 8, 2008, Richard L Scott, the controlling
member of XFN RLSI Investments, LLC, located at 700 11th Street South,
Suite 101, Naples, FL 34102, may be deemed to beneficially own
2,481,300
shares and a warrant to purchase
an additional 800,000 shares of Common Stock, for aggregate beneficial
ownership of
3,281,300
shares. On October 7, 2008, a
Form 4 was filed reflecting beneficial ownership of a total of
2,562,605
shares of
Common Stock. The table reflects beneficial ownership of all such shares
and the warrant to purchase 800,000 additional shares.
|
(12)
|
According to a Schedule 13G filed
with the SEC on March 27, 2008, Gagnon Securities LLC, a registered
investment adviser located at 1370 Ave. of the Americas, Suite 2400, New
York, NY, in its capacity as investment advisor, may be deemed to
beneficially own 3,206,450 shares held of record by customer accounts,
foundations, partnerships, trusts, and private investment funds to which
it furnishes investment
advice.
|
As of the date of this Proxy Statement,
our Chairman of the Board, Abraham Keinan, beneficially owns 17.46% of our
Common Stock (excluding options). Our President, Chief Executive Officer, and
Director, Guy Nissenson
beneficially owns 0.05% of our Common
Stock and has significant influence over an additional 6.55% of our Common Stock
(excluding options), which is owned by Campbeltown Business Ltd., an entity
owned and controlled by Mr. Nissenson and his family. In addition, certain
stockholders provided Mr. Nissenson and Mr. Keinan with irrevocable proxies
representing a total of 2.25% of our Common Stock. Eyal Harish, a director,
beneficially owns 0.08% of our Common Stock (excluding options). Our wholly
owned subsidiary, Swiftnet Limited, beneficially owns 0.71% of our Common Stock.
Therefore, our management potentially may vote 27.10% of our Common Stock,
without giving effect to the issuance of any shares upon the exercise of
outstanding warrants or options. As such, our management may have
control over the outcome of matters submitted to a vote of the holders of our
Common Stock, including the election of our directors (who serve on a classified
Board of Directors, with staggered terms of office), amendments to our articles
of incorporation and bylaws and approval of significant corporate transactions.
Additionally, our management may be able to delay, deter or prevent a change in
our control that might be beneficial to our other
stockholders.
PRO
POSAL I
APPROVAL OF NOMINEES TO THE BOARD OF
DIRECTORS
General
On October 25, 2007, the Company’s Board
of Directors adopted amendments to the Company’s Bylaws in order to, among other
things, provide that the Board shall be comprised of not less than two (2) and
no more than eight (8) directors, and to create a classified board by dividing
the Board’s current membership into three classes, Class A, Class B and Class
C.
C
urrently, Classes A and B are each
comprised of three (3) directors, and Class C has two (2) directors
. The names of the directors
serving in each class, along with the applicable terms of office are set forth
below:
Director
|
Class
|
Term
|
Abraham
Keinan
|
Class A
|
Standing
for re-election at th
is
2008 Annual Meeting
; upon such re-election, will next
stand for re-election at the 2011 Annual Meeting
|
Guy
Nissenson
|
Class A
|
Standing
for re-election at th
is
2008 Annual Meeting
; upon such re-election, will next
stand for re-election at the 2011 Annual Meeting
|
Shemer Shimon
Schwarz
|
Class A
|
Standing
for re-election at th
is
2008 Annual Meeting
; upon such re-election, will next
stand for re-election at the 2011 Annual Meeting
|
Eyal Josef
Harish
|
Class B
|
E
ligible for re-election at the
2009 Annual Meeting
|
Aviu
Ben-Horrin
|
Class B
|
E
ligible for re-election at the
2009 Annual Meeting
|
Itzhak
Almog
|
Class B
|
E
ligible for re-election at the
2009 Annual Meeting
|
Morris
Mansour
|
Class C
|
El
igible for re-election at the 2010
Annual Meeting
|
Israel
Singer
|
Class C
|
E
ligible for re-election at the
2010 Annual Meeting
|
As reflected in the table, each of the
three (3) members of Class A of the Board of Directors, Abraham Keinan, Guy
Nissenson and Shemer Shimon Schwarz, were nominated and are standing for
re-elect
ion
at this Meeting
, to serve for a term of
three
(3)
years until re-elected
at the 2011 Annual Meeting
or the election and qualification of
their successors, or until their earlier resignation, removal or
death.
Information Regarding the Nominees for
the Board of Directors
The following table lists the nominees
to the Board of Directors and their other current positions with
Company. Biographical information for each nominee follows the
table.
Name
|
Age
|
Director /
Officer
|
Abraham
Keinan
|
58
|
Chairman of the Board of
Directors, since our inception.
|
Guy
Nissenson
|
33
|
Director, President and Chief
Executive Officer since our inception.
|
Shemer S.
Schwartz
|
33
|
Director, since December 19, 2002,
and is an independent director and a member of our Audit Committee and our
Compensation Committee.
|
Mr. Abraham Keinan has been our Chairman
of the Board of Directors since our inception. Abraham Keinan founded Swiftnet
in February 1990. Mr. Keinan has been the Chairman of the Board of Directors of
Swiftnet since its inception. From 1991 to October 2003, Mr. Keinan was
Swiftnet’s Managing Director. In or about January 2002, Mr. Keinan became a
Director of Auracall. Mr. Keinan has been a Director of Xfone 018 since its
inception in April 2004. In March 2005, Mr. Keinan became the Chairman of the
Board of Directors of Xfone 018. Mr. Keinan has been a Director of Xfone USA
since its inception in May 2004. Mr. Keinan has been a Director of Story Telecom
since May 2006. Mr. Keinan has been a Director of Equitalk.co.uk. since July
2006. In February 2008, Mr. Keinan became a Director of NTS Communications. In
1975, Mr. Keinan received a Bachelor of Science Degree in Mechanical Engineering
from Ben-Gurion University, Beer-Sheeva - Israel.
Mr. Guy Nissenson has been our
President, Chief Executive Officer and Director since our inception. Mr.
Nissenson joined Swiftnet in October 1999 and became a Director of Swiftnet in
May 2000. He had been the Managing Director of Swiftnet from October 2003 until
July 2006. In October 2002, Mr. Nissenson became a Director of Story Telecom. In
or about January 2002, Mr. Nissenson became a Director of Auracall. Mr.
Nissenson has been a Director of Xfone 018 since its inception in April 2004.
Mr. Nissenson has been a Director of Xfone USA since its inception in May 2004.
In March 2005, Mr. Nissenson became the Chairman of the Board of Directors of
Xfone USA. Mr. Nissenson has been a Director of Equitalk.co.uk. since July 2006.
In February 2008, Mr. Nissenson became a Director of NTS Communications and its
Chairman of the Board. Mr. Nissenson was a marketing manager of RADA Electronic
Industries Ltd. in Israel from May 1997 to October 1998. Mr. Nissenson was an
audit and control officer with the rank of Lieutenant of the Israel Defense
Forces - Central Drafting Base and other posts from March 1993 to May 1997. In
July 2000, Mr. Nissenson received a Bachelor of Science Degree in Business
Management from Kings College - University of London. In September 2001, Mr.
Nissenson received a Master of Business Administration in International Business
from Royal Holloway at the University of London in London, United
Kingdom.
Mr. Shemer S. Schwartz has been a member
of our Board of Directors since December 19, 2002, and is an independent
director and a member of the Audit Committee and the Compensation Committee. Mr.
Schwartz has been a Director of Xfone 018 since its inception in April 2004. Mr.
Schwartz had been a Director of Xfone USA from March 2005 until February 2008.
From March 2003 to January 2008, Mr. Schwartz was the co-founder and
research and development expert of XIV Ltd., a data storage start up company
located in Tel-Aviv, Israel. XIV Ltd. was acquired by IBM in January 2008 and
since that time, Mr. Schwartz has led research and developement of the XIV Ltd.
storage project at IBM. From November 2001 to March 2003, Mr. Schwartz has been
an Application Team Leader of RF Waves, an Israel based high technology company
in the field of wireless communication. From 1996 to 2001, Mr. Schwartz was a
Captain in the Research and Development Center of the Israel Defense Forces
Intelligence. In July 1995, Mr. Schwartz received a BS degree in Physics and
Mathematics from the Hebrew University in Jerusalem. In September 2003, Mr.
Schwartz received an MS degree in Computer science from the Tel-Aviv University
in Tel-Aviv, Israel.
Requir
ed
Vote
Unless individual stockholders specify
otherwise, each returned proxy card will be voted for the
re-
election of the
three (3) Class A
nominees who are listed
herein.
Directors are elected at the annual
meeting of stockholders by a plurality of votes and a separate vote for the
election of directors will be held at each annual meeting for each class of
directors having nominees for election at such annual meeting. Director may
resign at any time by delivering his/her resignation to the Chairman of the
Board of Directors, such resignation to specify whether it will be effective at
a particular time, upon receipt or at the pleasure of the Board of Directors (if
no such specification is made, it shall be deemed effective at the pleasure of
the Board of Directors), and when one or more directors resigns from the Board
of Directors, effective at a future date, a majority of the directors then in
office, including those who have so resigned, shall have power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office for the unexpired portion of the term of the director whose place shall
be vacated and until his/her successor shall have been duly elected and
qualified. Any director may be removed by the affirmative vote of not less than
eighty percent (80%) of the outstanding shares of the Company then entitled to
vote, with or without cause, at any time, at a special or an annual meeting of
stockholders, or by a written consent.
The individuals named in the enclosed
form of proxy card will vote, if so authorized, FOR the persons named above as
directors of the Company. Management of the Company is not aware of any reason
why any of the nominees will not be able to serve. If a nominee should
subsequently become unavailable for election, the persons voting the
accompanying proxy card may, in their sole discretion, vote FOR such substitute
nominee the present Board of Directors may recommend.
At the Meeting a vote will be taken on a
proposal to approve the re-election of the three (3) Class A director
nominees.
_______________________________
Shareholder Vote
Required
Approval of the proposal to re-elect the
three (3) Class A director nominees will, pursuant to the Nevada Revised
Statues, require a plurality of the votes cast by the stockholders at the
Meeting.
The Board of Directors recommends a vote
FOR the re-election of the three (3) Class A director
nominees.
CORPORATE
GO
VERNANCE
Information About
the
Other Members
of the Board
and Officers
The following table lists the other
members of the Board of Directors and their current positions with Company, who
are not standing for re-election at the Annual Meeting. It also
includes information about our executive officers who are not also directors.
Our Board of Directors elects our executive officers. Biographical information
for each director and officer is provided below.
Name
|
Age
|
Director /
Officer
|
Eyal J.
Harish
|
56
|
Director, since December 19,
2002.
|
Itzhak
Almog
|
69
|
Director, since May 18, 2006, and
is an independent director and Chairman of our Audit Committee and our
Nominating Committee.
|
Aviu
Ben-Horrin
|
60
|
Director, since November 23, 2004,
and is an independent director.
|
Israel
Singer
|
59
|
Director, since December 28, 2006,
and is an independent director and a member of our Audit
Committee.
|
Morris
Mansour
|
61
|
Director, since December 28, 2006,
and is an independent director and Chairman of our Compensation
Committee and a member of our Nominating
Committee.
|
Niv Krikov
|
38
|
Principal Accounting Officer since
May 9, 2007 and Treasurer and Chief Financial Officer since August 13,
2007.
|
Dr. Eyal J. Harish has been a member of
our Board of Directors since December 19, 2002. Dr. Harish has been a Director
of Xfone 018 since its inception in April 2004. Dr. Harish had been a Director
of Xfone USA from March 2005 until February 2008. 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 communications company. Dr. Harish is
the brother-in-law of Mr. Keinan, our Chairman of the Board.
Mr. Itzhak Almog has been a member of
our Board of Directors since May 18, 2006, and is an independent director and
Chairman of the Audit Committee and the Nominating Committee. From 2002 to
present, Mr. Almog is an independent business consultant, specializing in
international marketing and management. From 1993 to 2002, Mr. Almog was the
President and CEO of Comverge Control Systems Ltd., an Israel based start up
company, which developed innovative solutions for Electric Utilities. From 1990
to 1993, Mr. Almog was the President of Tasco Electronic Services, Inc., a US
based Hi-Tech company, specializing in Automatic Test machines for commercial
and military Aviation. Mr. Almog was an officer with the rank of Rear Admiral in
the Israel Defense Forces and served in various commanding posts in the Israeli
Navy. In 1980 Mr. Almog received a BA in Modern Middle East History and
Economics from the Tel Aviv University in Tel Aviv. In 1984 Mr. Almog received a
Master of Business Administration from the Tel Aviv University in Tel
Aviv.
Mr. Aviu Ben-Horrin has been a member of
our Board of Directors since November 23, 2004, and is an independent director.
Mr. Ben-Hurrin had been a member of our Audit Committee from November 24, 2004
until January 17, 2007. From 2001 to present, Mr. Ben-Horrin directs, controls
and manages various real estate projects together with Bonei RMAG Ltd. and MPK
Ltd. From 1996 to 2001, Mr. Ben-Horrin managed real estate projects for Lear Or
Ltd. and was an engineering consultant for Orik Ltd., a construction company.
From 1994 to 1996, Mr. Ben-Horrin worked for the Ministry of Construction and
Housing of the state of Israel as a manager of various projects. From 1975 to
1992, Mr. Ben-Horrin was an officer with the rank of Colonel in the Israel
Defense Forces and served in various engineering and commanding posts. In 1975,
Mr. Ben-Horrin received a BS in Mechanical Engineering from the Technion
University in Haifa. In 1987, Mr. Ben-Horrin received a BA in Economics from the
Bar-Ilan University in Ramat Gan.
Mr. Israel Singer has been a member of
our Board of Directors since December 28, 2006, and is an independent director
and a member of the Audit Committee since January 17, 2007. Mr. Singer is an
elected member of the Ramat Gan City council. During 2006 Mr. Singer had been
the managing director of the academic center “Raanana College” in Israel. During
the years 2004-2005 Mr. Singer was a consultant to the Education Committee of
the “Israeli Knesset” (the Israeli Parliament). From 1985 to 2003, Mr. Singer
was the principal of the “Blich High School” in Ramat Gan. From 1992 to 1998 Mr.
Singer was a member of the board of directors of Rada Electronic Industries Ltd.
In 1973, Mr. Singer received a B.Sc. in Physics from the Tel Aviv University in
Tel Aviv, Israel. In 1978, Mr. Singer received an M.Sc. in High - Energy Physics
from the Tel Aviv University in Tel Aviv, Israel.
Mr. Morris Mansour has been a member of
our Board of Directors since December 28, 2006, and is an independent director
and the Chairman of the Compensation Committee and a member of the Nominating
Committee. Mr. Mansour has been a Director of Superderivatives, Inc.,
a leading company in developing and marketing options and derivatives pricing
systems in forex, interest rates, commodities etc, since 2001. Since 2000 he has
been a Director of Soffair Financial Services, a company engaged in investment,
property and finance. From 1995 to 1999 Mr. Mansour was a financial advisor for
several private companies which invested in hi-tech start-up companies, and
property. From 1986 to 1988 and from 1993 to 1994, Mr. Mansour was Director and
General Manager of “Le Shark Ltd.,” a major clothing brand in the United
Kingdom. From 1980 to 1985, Mr. Mansour was the Credit Manager of Bank Hapoalim
B.M. in the United Kingdom and a senior member of its Management Committee. In
1972, Mr. Mansour received a B.A. in Economics and International Relations from
the Hebrew University in Jerusalem, Israel.
Mr. Niv Krikov has been our Vice
President Finance since March 13, 2007, and our Principal Accounting Officer
since May 9, 2007. On August 13, 2007, in accordance with a resolution of the
Board of Directors of the Company, the Company elected Mr. Krikov, as its
Treasurer and Chief Financial Officer. Following his election, Mr. Krikov no
longer serves as Vice President Finance of the Company, but continues to serve
as its Principal Accounting Officer. Prior to joining the Company, Mr. Krikov
held the following financial and accounting positions: Corporate Controller of
Nur Macroprinter Ltd., a publicly traded company (OTCBB: NURMF.PK) acting as a
manufacturer of wide format digital printers, where Mr. Krikov was responsible,
among other duties, for the preparation of all financial reports (2005 to March
2007); Controller and later Credit and Revenues Manager of Alvarion Ltd.
(NASDAQ: ALVR) (2002 to 2005); Certified public accountant at the Israeli public
accounting firm of Kost Forer Gabbay & Kasierer, an affiliate of the
international public accounting firm Ernst & Young (1997 to 2001). Mr.
Krikov holds a B.A. degree in Economics and Accounting from the Tel Aviv
University and is licensed as a CPA in Israel. Mr. Krikov also holds a LL.M
degree from the Faculty of Law at the Bar Ilan University.
Except as set forth herein, no officer
or director of the Company has, during the last five years: (i) been
convicted in or is currently subject to a pending criminal proceeding (excluding
traffic violations and other minor offenses); (ii) been a party to a civil
proceeding of a judicial or administrative body of competent jurisdiction and as
a result of such proceeding was or is subject to a judgment, decree or final
order enjoining future violations of, or prohibiting or mandating activities
subject to any federal or state securities or banking laws including, without
limitation, in any way limiting involvement in any business activity, or finding
any violation with respect to such law, nor (iii) has any bankruptcy
petition been filed by or against the business of which such person was an
executive officer or a general partner, whether at the time of the bankruptcy of
for the two years prior thereto.
Signifi
cant
Employees
Mrs. Barbara Baldwin, 46 years of age,
is President and Chief Executive Officer of Xfone USA, a position she was
appointed to on February 28, 2008 replacing Wade Spooner, and is President and
Chief Executive Officer of NTS Communications. Ms. Baldwin was
appointed to the Board of Directors of Xfone USA on February 28, 2008, and to
the Board of Directors of NTS Communications on 1991. She also serves
in the following capacities of the following subsidiaries of NTS: Director and
Managing Member of NTS Management Company, LLC; President of Communications
Brokers, Inc.; Director and President of NTS Construction Company; President of
Midcom of Arizona, Inc.; and Director and President of Garey M. Wallace,
Inc. Ms. Baldwin also serves as Director and President of NTS
Properties, LC, a former subsidiary of NTS Communications, and a Director of NTS
Holdings Incorporated. She has been employed by NTS Communications
since 1982, and has held a variety of positions with NTS Communications,
including being directly responsible for sales and marketing, management
information systems, customer service and account administration. She
has served as President of NTS Communications since 1994 and as President and
CEO of NTS Communications since 2000. Ms. Baldwin holds a B.B.A. and an M.B.A.
from Texas Tech University in Lubbock, Texas.
Mr. Brad Worthington, 43 years of age,
is Executive Vice President and Chief Operating Officer of NTS
Communications. Mr. Worthington was appointed to the Board of
Directors of NTS Communications on 1994. Mr. Worthington received his B.S. Ed.
From Southwest Texas State University in 1987 and his J.D. from Texas Tech
University School of Law in 1990. He is licensed to practice law in
the State of Texas. Mr. Worthington is a member of the State Bar of
Texas, and the Lubbock County Bar Association and is admitted to practice in the
Federal District Court for the Northern District of Texas. Mr.
Worthington served as General Counsel for NTS Communications from 1990 until
2000. As General Counsel Mr. Worthington was responsible for advising
senior staff on various legal and regulatory issues, preparation and review of
contracts, contract and business negotiations. Mr. Worthington was
named Executive Vice President in 1994 and Chief Operating Officer in
2000. Mr. Worthington also serves in the following capacities of the
following subsidiaries of NTS: Director and Managing Member of NTS Management
Company, LLC; Secretary of Communications Brokers, Inc.; Secretary of NTS
Construction Company; Secretary of Midcom of Arizona, Inc.; and Director and
Secretary of Garey M. Wallace Company, Inc. Mr. Worthington also
serves as Director and Vice President of NTS Properties, LC, and Director of NTS
Holdings Incorporated.
Mr. Jerry E. Hoover, 60 years of age, is
Executive Vice President, Treasurer and Chief Financial Officer and NTS
Communications. Mr. Hoover graduated from Texas Tech University in 1971 and
shortly afterward began a career in public accounting. Mr. Hoover has
been a Certified Public Accountant for over 30 years and for the last 20 years
has worked with accounting issues unique to the telecommunications
industry. In addition, he has also taught accounting, taxation, and
auditing at the university level. Mr. Hoover was a principal in a
major Lubbock accounting firm where he began doing work for NTS Communications
in 1984. He joined NTS Communications on an in-house basis in 1994 as
Executive Vice President and Treasurer, and was named Chief Financial Officer in
2000. Mr. Hoover also serves in the following capacities of the
following subsidiaries of NTS: Director and Manager of NTS Management
Company, LLC; Treasurer of Communications Brokers, Inc.; Treasurer of NTS
Telephone Company, LLC; Treasurer of Midcom of Arizona, Inc.; and Treasurer of
Garey M. Wallace Company, Inc. Mr. Hoover also serves as the Sole
Manager of NTS Telephone Company, LLC; Director and Secretary Treasurer of NTS
Properties, LC, and as Director of NTS Holdings
Incorporated.
Mr. John Mark Burton, 44 years of age,
was appointed as the Managing Director of Swiftnet at the completion of the
acquisition of Equitalk.co.uk on July 3, 2006. He founded Equitalk.co.uk, the
UK’s first fully automated e-telco, in 2000 and has been serving as its Managing
Director since then. On August 3, 2006, Mr. Burton was appointed to the Board of
Directors of Swiftnet. On August 7, 2006, Mr. Burton was elected as a Chairman
to the Board of Directors of Story Telecom, Inc. and Story Telecom Limited
(collectively, "Story Telecom"), and on March 31, 2008 he was appointed as Story
Telecom's Managing Director. On August 14, 2007, Mr. Burton was appointed as
Managing Director and appointed to the Board of Directors of Auracall. Prior to
founding Equitalk, Mr. Burton founded Nexus Telecom Limited in 1995. Under his
leadership as Managing Director, Nexus designed an award-winning server-based
soft switch that gained UK Regulatory and IBM Approval. Prior to Nexus, Mr.
Burton worked as Business Development Manager for Griffin International (a
telecom messaging company). He has also served as R&D Manager at Nortel
Networks with responsibility for engineers in the UK, US and Far East designing
a next generation, open architecture PBX. Mr. Burton is a graduate of the
University of Liverpool where he earned a BEng degree in Electronic Engineering.
He holds an MBA from Cranfield School of Management and a CEng MIEE designation
from the Institute of Electrical Engineers. He is a Member of the
British Institute of Directors.
Mr. Roni Haliva, 43 years of age, was
appointed as the Managing Director of our Israel based subsidiary, Xfone 018, on
August 26, 2007. Mr. Haliva has over 20 years of experience in the
telecommunication market. During the last two years, he was Senior Vice
President of Bezeq International Ltd., a leading telecommunication services
provider in Israel. Prior to this position, he established the marketing and
sales division of Malam Group, one of the major IT service providers in Israel,
and served as Senior Vice President with overall responsibility for the business
development, marketing & sales of the company. Prior to Malam, Mr. Haliva
worked as VP Marketing and Sales for Siemens Israel, which is the Regional
Company representing the global Siemens conglomerate in Israel. He has also
served in various managerial duties in Bezeq, the local exchange carrier in
Israel. Mr. Haliva received a Bsc. degree in computers engineering from the
Technion (The Israel Institute of Technology). He also holds an MBA from the Ben
Gurion University in Israel.
Mrs. Bosmat Houston, 48 years of age,
has been our Research and Development Manager since our inception. She joined
Swiftnet 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.
Family
Relationships
Dr. Eyal J. Harish, one of our
directors, is the brother-in-law of Mr. Abraham Keinan, our Chairman of the
Board.
Mr. Iddo Keinan, son of Mr. Abraham
Keinan, our Chairman of the Board, has been employed by our wholly owned UK
based subsidiary, Swiftnet Limited since 1998.
Mr. Guy Nissenson, our President, Chief
Executive Officer, and Director, and other members of the Nissenson family own
and control Campbeltown Business Ltd., our major shareholder and a former
consultant.
Mr. Haim Nissenson, father of Mr. Guy
Nissenson, our President, Chief Executive Officer, and Director, is the Managing
Director of Dionysos Investments (1999) Ltd., our consultant. Dionysos
Investments is owned and controlled by certain members of the Nissenson family,
other than Guy Nissenson.
Involvement in
Certain Legal
Proceedings
No director, person nominated to become
a director, executive officer, promoter or control person of the Company has,
during the last five years: (i) been convicted in or is currently subject
to a pending a criminal proceeding (excluding traffic violations and other minor
offenses); (ii) been a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such proceeding
was or is subject to a judgment, decree or final order enjoining future
violations of, or prohibiting or mandating activities subject to any Federal or
state securities or banking or commodities laws including, without limitation,
in any way limiting involvement in any business activity, or finding any
violation with respect to such law, nor (iii) any bankruptcy petition been
filed by or against the business of which such person was an executive officer
or a general partner, whether at the time of the bankruptcy or for the two years
prior thereto.
Board Independence
The Company applies the
standards of the NYSE Alternext
(formerly the American Stock Exchange), the
stock exchange upon which the Company’s
Common Stock is listed in the U.S., for determining the independence of the
members of its Board of Directors and Board committees. The Board has determined
that the following directors are independent within these rules: Shemer S.
Schwartz, Itzhak Almog, Aviu Ben-Horrin, Israel Singer and Morris
Mansour.
Board Meetings and
Attendance
During fiscal
2007
, the Company’s Board of Directors held
15
physical and telephonic meetings.
The Board also approved certain actions by unanimous written consent.
With the exception of Aviu Ben-Horrin,
Morris Mansour and Israel
Singer
all incumbent
directors attended, either in person or via telephone, at least 75% of all
meetings of the Board that were held in fiscal
2007
during the period in which they served
as a director.
Messrs.
Mansour and Singer
attended at least
65
% of all meetings of the Board during
fiscal
2007.
Mr. Ben-Horrin
attended at least
50
% of all meetings of the Board during
fiscal
2007
.
Committees of the Board of
Directors
We have an Audit Committee that was
formed in a November 24, 2004 Board of Directors meeting. The Audit Committee is
composed of three directors: Messrs. Almog, Schwartz and Singer (all three are
considered independent directors). Mr. Almog who satisfies the “financial
sophistication” requirement was appointed as the Chairman of the Audit
Committee. The Audit Committee makes decisions regarding our audit, the
appointment of auditors, and the inclusion of financial statements in our
periodic reports. Issues regarding our 2004 Stock Option Plan and 2007 Stock
Incentive Plan are decided by the entire Board of Directors, including the
members of the Audit Committee.
The Audit Committee is governed by a
charter which was originally adopted on November 24, 2004. On January 28, 2008,
in accordance with its responsibility to annually review the adequacy of its
charter, the Audit Committee and the Board approved amendments to the charter to
update it to comply with rules and regulations applicable to the Company that
have changed since the charter was last reviewed and to make certain technical,
clarifying and non-substantive
changes. A copy of the Committee’s
charter as amended is available on the Company’s website, at
www.xfone.com.
During fiscal 2007, the Company’s Audit
Committee held 6 physical and telephonic meetings. The Audit Committee also
approved certain actions by unanimous written consent. All incumbent directors
serving on the Audit Committee attended, either in person or via telephone, at
least 75% of all meetings of the Audit Committee that were held in fiscal 2007
during the period in which they served on the committee, with the exception of
Mr. Singer, who attended 50% of such meetings.
In addition, we have a Nominating
Committee of our Board of Directors, which was established by our Board on
December 30, 2007. The primary functions of the Nominating Committee are to
assist the Board by identifying individuals qualified to become Board members,
to recommend to the Board the director nominees for the Company’s annual
meetings of shareholders, and to recommend to the Board director nominees for
each Board committee. The Nominating Committee is comprised of at least two
members satisfying the independence requirements of the U.S. Securities and
Exchange Commission and
the
NYSE Alternext (formerly the
American Stock Exchange
)
.
Messrs. Itzhak Almog (Chairman) and
Morris Mansour were appointed by the Board as members of the Nominating
Committee, to serve in such capacities until their resignation, retirement,
removal by the Board, or until their successors are
appointed.
The Nominating Committee is governed by
a charter which was adopted by the Board on December 30, 2007. A copy of the
charter of the Nominating Committee is available on the Company’s website, at
www.xfone.com.
On December 30, 2007, our Board of
Directors also established a Compensation Committee. The Compensation Committee
was created to assist the Board in the discharge of its responsibilities with
respect to the compensation of the Company’s directors and officers. The
Compensation Committee is comprised of at least two members satisfying the
independence requirements of the U.S. Securities and Exchange Commission and
the NYSE Alternext
(formerly the American Stock Exchange
)
.
In addition, each member of the
Compensation Committee is required to be a “nonemployee director,” within the
meaning of Rule 16b-3 issued by the SEC, and an “outside director,” within the
meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended.
Messrs Morris Mansour (Chairman) and Shemer S. Schwartz were appointed by the
Board as members of the Nominating Committees, to serve in such capacities until
their resignation, retirement, removal by the Board, or until their successors
are appointed
The Compensation Committee is governed
by a charter which was adopted by the Board on December 30, 2007. A copy of the
charter of the Compensation Committee is available on the Company’s website, at
www.xfone.com.
Stockholder Commu
nicati
ons with the Board
The Company has not implemented a policy
or procedure by which its stockholders can communicate directly with our
Directors. Nevertheless, every effort has been made to ensure that the
views of stockholders are heard by the Board of Directors or individual
Directors, as applicable, and that appropriate responses are provided to
stockholders in a timely manner. The Company believes it is responsive to
stockholder communications, and therefore the Company has not considered it
necessary to adopt a formal process for stockholder communications with the
Board of Directors. During the upcoming year the Board of Directors will
continue to monitor whether it would be appropriate to adopt such a
process.
Audit Committee Financial
Expert
Mr. Itzhak Almog who satisfies the
“financial sophistication” requirement is the Audit Committee financial expert
as defined by Item 407(d)(5) of Regulation S-B of the Securities Exchange Act of
1934, as amended, and the Chairman of the Audit Committee.
Code of Conduct and
Ethics
The Audit Committee of the Board of
Directors of the Company has adopted and approved a Code of Conduct and Ethics
(the “Code”) to apply to all the directors, officers and employees of the
Company. The Code which was ratified by the Board of Directors of the Company is
intended to promote ethical conduct and compliance with laws and regulations, to
provide guidance with respect to the handling of ethical issues, to implement
mechanisms to report unethical conduct, to foster a culture of honesty and
accountability, to deter wrongdoing and to ensure fair and accurate financial
reporting. The Code became effective on August 15, 2006.
The Code was previously filed on the
Company’s Current Report on Form 8-K filed with the SEC on August 15, 2006, and
is also available on our website at www.xfone.com.
EXECUTIVE
COMPENSATION
Summary
Compensation
The following table summarizes all
compensation received for services rendered to the Company during the fiscal
years ended December 31, 2006 and 2007 by our Chief Executive Officer and two
other executive officers other than our Chief Executive Officer who were serving
as our executive officers at December 31, 2006 and 2007 (collectively, our
“Named Executive Officers”).
Summary Compensation
Table
Name and Principal
Position
|
Year
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock Awards
($)
|
|
|
Option Awards
($)
|
|
Non-Equity Incentive Plan
Compensation
($)
|
|
|
Non-qualified Deferred
Compensation Earnings
($)
|
|
All Other Compensation
(10)
($)
|
|
Total
($)
|
Abraham
Keinan
,
Chairman of the
Board
|
2007
|
96,043
|
(1)
|
|
|
|
|
|
|
|
|
|
254,350
|
(2)
|
|
|
|
18,796
|
(3)
|
369,189
|
|
2006
|
94,032
|
(1)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
100,710
|
(4)
|
|
|
–
|
|
35,920
|
(3)
|
230,662
|
Guy
Nissenson
,
President, CEO, and
Director
|
2007
|
96,043
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
242,490
|
(6)
|
|
|
|
|
31,294
|
(7)
|
338,533
|
|
2006
|
94,032
|
(5)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
163,381
|
(8)
|
|
|
–
|
|
26,341
|
(7)
|
283,754
|
Niv
Krikov
,
Treasurer, CFO and Principal
Accounting Officer
(9)
|
2007
|
76,030
|
|
|
|
3,650
|
|
|
|
–
|
|
|
|
–
|
|
–
|
|
|
|
–
|
|
–
|
|
79,680
|
|
2006
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
N/A
|
|
|
|
N/A
|
|
N/A
|
|
N/A
|
(1)
|
Salary paid to Mr. Keinan by our
U.K. based wholly owned subsidiary, Swiftnet Limited, in connection with
his employment as Chairman of the Board. Mr. Keinan has been the Chairman
of the Board of Directors of Swiftnet since its inception in 1990. The
amount shown in the table above for 2006 was paid in British Pound
Sterling (£48,000) and has been translated into U.S. dollars for
convenience purposes using the rate of exchange of the U.S. dollar at
December 31, 2006. The representative rate of exchange of the £ at
December 31, 2006 was £1 = $1.959. The amount shown in the table above for
2007 was paid in British Pound Sterling (£48,000) and has been translated
into U.S. dollars using the average rate of exchange of the U.S. dollar
during 2007. The average rate of exchange of the £ during 2007 was £1 =
$2.001.
|
(2)
|
Pursuant to a Company’s Board of
Directors’ resolution dated December 25, 2006, on March 28, 2007, the
Company and Mr. Keinan entered into a consulting agreement, effective as
of January 1, 2007 (the “Keinan Consulting Agreement”). The Keinan
Consulting Agreement provides that Mr. Keinan shall render the Company
advisory, consulting and other services in relation to the business and
operations of the Company (excluding its business and operations in the
United Kingdom). In consideration of the performance of the Services
pursuant to the Keinan Consulting Agreement, the Company agreed to pay Mr.
Keinan a monthly fee of £10,000 ($17,818) (the “Fee”). Mr. Keinan invoices
the Company at the end of each calendar month, and the Company makes the
monthly payments immediately upon receipt of such invoices. The
amount shown reflects payments to Mr. Keinan pursuant to the Keinan
Consulting Agreement.
|
(3)
|
The amount shown for 2006 reflects
airfare expenses incurred by the Company for the travels of Mr. Keinan’s
wife and payments for a leased car for Mr. Keinan’s use during 2006. The
amount shown for 2007 reflects payments for a leased car for Mr. Keinan’s
use in 2007.
|
(4)
|
On April 2, 2002, our Board of
Directors approved a bonus and success fee whereby if the Company receives
monthly revenues in excess of $485,000 then Mr. Keinan and our former
consultant, Campbeltown Business Ltd. shall receive 1% of such monthly
revenues, up to a maximum of one million dollars (the “Bonus and Success
Fee”). On April 10, 2003, Mr. Keinan and Campbeltown Business waived their
right to receive 1% of the revenues generated by Story Telecom. On
February 8, 2007, an Agreement was entered by and between the Company,
Swiftnet, Campbeltown Business, and Mr. Keinan (the “February 8, 2007
Agreement”). The February 8, 2007 Agreement provides that effective as of
January 1, 2007, the Bonus and Success Fee is cancelled, and that Mr.
Keinan and Campbeltown Business shall have no further right to any
percentage of our revenues. Mr. Keinan agreed to receive a total amount of
only $100,710 (£51,409) as Bonus and Success Fee for 2006, which is
reflected in the table above, and waived the
remainder.
|
(5)
|
Salary paid to Mr. Nissenson by
our U.K. based wholly owned subsidiary, Swiftnet, in connection with his
employment as Director of Business Development. Mr. Nissenson joined
Swiftnet in October 1999 and became a member of its Board of Directors in
May 2000. Mr. Nissenson had been the Managing Director of Swiftnet from
October 2003 until July 2006. The amount shown in the table above for 2006
was paid in British Pound Sterling (£48,000) and has been translated into
U.S. dollars for convenience purposes using the rate of exchange of the
U.S. dollar at December 31, 2006. The representative rate of exchange of
the £ at December 31, 2006 was £1 = $1.959. The amount shown in the table
above for 2007 was paid in British Pound Sterling (£48,000) and has been
translated into U.S. dollars using the average rate of exchange of the
U.S. dollar during 2007. The average rate of exchange of the £ during 2007
was £1 = $2.001.
|
(6)
|
Pursuant to a Company’s Board of
Directors’ resolution dated December 25, 2006, on March 28, 2007, the
Company and Mr. Nissenson entered into a consulting agreement, effective
as of January 1, 2007 (the “Nissenson Consulting Agreement”). The
Nissenson Consulting Agreement provides that Mr. Nissenson shall render
the Company advisory, consulting and other services in relation to the
business and operations of the Company (excluding its business and
operations in the United Kingdom). In consideration of the performance of
the Services pursuant to the Nissenson Consulting Agreement, the Company
agreed to pay Mr. Nissenson a monthly fee of £10,000 ($17,818) (the
“Fee”). Mr. Nissenson invoices the Company at the end of each calendar
month, and the Company makes the monthly payments immediately upon receipt
of such invoices. The amount shown reflects payments to Mr.
Nissenson pursuant to the Nissenson Consulting
Agreement.
|
(7)
|
The amount shown in the table
above reflects airfare expenses incurred by the Company for the travels of
Mr. Nissenson’s wife during 2006 and
2007.
|
(8)
|
On May 11, 2000, Swiftnet and Mr.
Keinan entered into a consulting agreement with Campbeltown Business that
provided that Swiftnet will hire Campbeltown Business as its financial and
business development consultant and will pay Campbeltown Business £2,000
per month together with an additional monthly performance bonus based upon
Swiftnet attaining certain revenue levels (the “Consulting Agreement”). On
April 2, 2002, our Board of Directors approved a bonus and success fee
whereby if the Company receives monthly revenues in excess of $485,000
then Mr. Keinan and Campbeltown Business shall receive 1% of such monthly
revenues, up to a maximum of one million dollars (the “Bonus and Success
Fee”). On April 10, 2003, Mr. Keinan and Campbeltown Business waived their
right to receive 1% of the revenues generated by Story Telecom. On
February 8, 2007, an Agreement was entered by and between the Company,
Swiftnet, Campbeltown Business, and Mr. Keinan (the “February 8, 2007
Agreement”). The February 8, 2007 Agreement provides that effective as of
January 1, 2007, the Bonus and Success Fee is cancelled, and that Mr.
Keinan and Campbeltown Business shall have no further right to any
percentage of our revenues. The February 8, 2007 Agreement further
provides that effective as of January 1, 2007, the Consulting Agreement is
terminated. Campbeltown Business agreed to receive a total amount of only
$163,381 (£83,400) as compensation under the Consulting Agreement and the
Bonus and Success Fee for 2006, and waived the remainder. Campbeltown
Business Ltd., a private company incorporated in the British Virgin
Islands, is owned and controlled by Guy Nissenson and other members of the
Nissenson family. Guy Nissenson owns 20% of Campbeltown Business. The
compensation is shown in the table above as paid to Guy Nissenson due to
his 20% ownership of Campbeltown
Business.
|
(9)
|
Mr. Niv Krikov has been our Vice
President Finance since March 13, 2007, and our Principal Accounting
Officer since May 9, 2007. On August 13, 2007, in accordance with a
resolution of the Board of Directors of the Company, the Company elected
Mr. Krikov as its Treasurer and Chief Financial Officer. Following his
election, Mr. Krikov no longer serves as Vice President Finance of the
Company, but continues to serve as its Principal Accounting
Officer.
|
(10)
|
The Company acknowledges that on
several occasions, consultants may be required to travel frequently for a
long duration around the world. Therefore, in order to enable the
consultants’ spouses to accompany them on certain lengthy trips for a
normal family life, the Company bears travel expenses for the consultants’
spouses.
|
Outstanding Equity Awards at 2007
Fisca
l Year-End
The following table sets forth certain
information concerning option awards and stock awards held by our Named
Executive Officers as of December 31, 2007. Our Named Executive Officers did not
hold any stock awards as of December 31, 2007.
|
|
Option
Awards
|
|
|
Stock
Awards
|
|
Name
|
|
Number of Securities Underlying
Unexercised Options
(#)
Exercisable
|
|
|
Number of Securities Underlying
Unexercised Options
(#)
Unexercisable
|
|
|
Equity Incentive Plan Awards:
Number of Securities Underlying Unexercised Unearned
Options
(#)
|
|
|
Option Exercise
Price
($)
|
|
|
Option Expiration
Date
|
|
|
Number of Shares or Units of Stock
that Have Not Vested
(#)
|
|
|
Market Value of Shares or Units of
Stock that Have Not Vested
($)
|
|
|
Equity Incentive Plan Awards:
Number of Unearned Shares, Units or Other Rights that Have Not
Vested
(#)
|
|
|
Equity Incentive Plan Awards:
Market or Payout Value of Unearned Shares, Units or Other Rights that Have
Not Vested
($)
|
|
|
Abraham
Keinan
|
|
|
1,500,000
|
(1)
|
|
|
–
|
|
|
|
–
|
|
|
|
3.50
|
|
|
Nov. 24,
2010
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Guy
Nissenson
|
|
|
1,500,000
|
(1)
|
|
|
–
|
|
|
|
–
|
|
|
|
3.50
|
|
|
Nov. 24,
2010
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Niv Krikov
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
(1)
|
These options were granted on
November 24, 2004, vested in full on November 24, 2005, and will expire on
November 24, 2010.
|
Employment Agreements; Termination of
E
mployme
nt and Change-in-Control
Arrangements
Executive Officers
The employment arrangements of
Mr.
Abraham Keinan
, our
Chairman of the Board, and Mr.
Guy
Nissenson
, our President,
Chief Executive Officer, and Director, are described in detail under the section
captioned “Certain Relationships and Related Transactions and Director
Independence” of this Proxy Statement.
Niv Krikov
Effective August 13, 2007, in accordance
with Board resolutions of the same date, the Company elected Mr. Niv Krikov, its
Vice President Finance and Principal Accounting Officer, as the Company’s
Treasurer and Chief Financial Officer. Following his election, Mr. Krikov no
longer serves as Vice President Finance of the Company. For holding the
positions of Treasurer, Chief Financial Officer and Principal Accounting
Officer, Mr. Krikov is entitled to the following employment terms: A monthly
gross salary of 33,000 NIS (approximately $8,888) (the “Salary”); Executive
insurance - the Company allocates 13.3% of the Salary (8.3% for severance
payments and 5% for remuneration), and Mr. Krikov allocates 5% of the Salary.
The insurance includes a loss of working capacity coverage (up to 2.5%) that is
paid by the Company; Continuing education fund - the Company allocates 7.5% of
the Salary and Mr. Krikov allocates 2.5% of the Salary; Company car, including
fuel expenses; Company mobile phone; 19 days of paid vacation per each
employment year. The timing of the vacation will be coordinated with the
Company’s Chief Executive Officer. Recuperation payments as provided by the
applicable collective agreement in Israel. Mr. Krikov will be granted options to
purchase a certain amount of the Company’s shares of Common Stock, as to be
recommended by the Chief Executive Officer of the Company and approved of the
Board of Directors. Such options are intended to be granted under and subject to
the Company’s 2007 Stock Incentive Plan. The Company and Mr. Krikov may
terminate the employment of Mr. Krikov with the Company upon 30 days prior
notice. Mr. Krikov is based at the Company’s subsidiary’s executive offices in
Israel.
Significant
Employees
Barbara Baldwin, Jerry Hoover and Brad
Worthington
NTS Communications, Inc. ("NTS") entered
into Employment Agreements with each of Barbara Baldwin, who, prior to our
acquisition of NTS, served as NTS’ President and CEO, Jerry Hoover, who, prior
to our acquisition of NTS, served as NTS’ Executive Vice President - Chief
Financial Officer, and Brad Worthington, who, prior to our acquisition of NTS,
served as NTS’ Executive Vice President - Chief Operating Officer (each an “NTS
Officer,” and collectively the “NTS Officers”). The Employment Agreements
provide for continued employment of the NTS Officers with NTS in their
respective capacities, and are for five-year terms each, effective as of
February 26, 2008.
The Employment Agreements provide for
initial annual salaries for Ms. Baldwin of $273,000, and $243,840 for each of
Messrs. Hoover and Worthington, and annual salaries (not less than the NTS
Officer’s respective initial annual salary) to be determined by NTS’ Board of
Directors for each year of employment thereafter. In addition, the NTS Officers
are entitled to one-time signing bonuses in the amount of $500,000 for Ms.
Baldwin and $243,840 for each of Messrs. Hoover and Worthington on the effective
date of the Employment Agreements.
Pursuant to the terms of the Employment
Agreements, the NTS Officers were granted the following stock option awards
under the Company’s 2007 Stock Incentive Plan on February 26, 2008: Ms. Baldwin
was granted options to purchase 250,000 shares of the Company’s Common Stock,
and each of Messrs. Hoover and Worthington was granted options to purchase
400,000 shares of the Company’s Common Stock. Each option is immediately
exercisable, expires five years from the grant date, and has an exercise price
of $2.794, which is 10% over the average closing price of the Company’s Common
Stock for the ten trading days immediately preceding August 22, 2007, the
execution date of the Purchase Agreement. Additionally, the Employment
Agreements provide that at the end of each NTS Officer’s second year of his or
her employment, he or she will be granted options to purchase 267,000 shares of
the Company’s Common Stock, which will be immediately exercisable at $5.00 per
share, and will expire five years from such grant date.
The Employment Agreements may be
terminated upon the death of the NTS Officers, for cause (immediately upon
notice from NTS to the NTS Officer), for good reason (following thirty days’
prior notice from NTS to the NTS Officer), for any reason other than for good
reason, or upon the disability of the NTS Officer, each as defined in the
Employment Agreements. The NTS Officers are entitled to the following payments
upon such termination:
1.
|
If the NTS Officer terminates the
Employment Agreement for good reason, NTS will pay the NTS Officer his or
her salary for the remainder of the employment term, except that if the
NTS Officer obtains other employment during that time, such salary
payments will be reduced by the amount received with respect to such other
employment.
|
2.
|
If the NTS Officer terminates his
employment for any reason other than for good reason, the NTS Officer will
be entitled to receive his or her salary only through the date such
termination is effective, and any unexercised vested options to purchase
the Company’s Common Stock and rights to receive any additional options to
purchase the Company’s Common Stock shall be
cancelled.
|
3.
|
If NTS terminates the Employment
Agreement for cause, the NTS Officer will be entitled to receive his or
her salary through the date such termination is effective, and any options
for the Company’s Common Stock issued in any year subsequent to Employment
Year 1 shall be cancelled.
|
4.
|
If the Employment Agreement is
terminated because of the NTS Officer’s death, the NTS Officer will be
entitled to receive his or her salary through the end of the calendar
month in which his or her death occurs, and any right to receive any
additional options to purchase the Company’s Common Stock shall be
cancelled.
|
5.
|
If the Employment Agreement
expires after the performance of the full term and NTS and the NTS Officer
cannot agree on the terms for an extension of the Employment Agreement or
a new employment agreement to replace the Employment Agreement, and the
NTS Officer terminates employment, then the NTS Officer will be entitled
to receive as severance pay his or her salary for a period of three (3)
months following the date of such
termination.
|
6.
|
If the Employment Agreement is
terminated by either party as a result of the NTS Officer’s disability,
NTS will pay the NTS Officer his or her s alary through the remainder of
the calendar month during which such termination is effective and any
right to receive any additional options for the Company’s Common Stock
shall be cancelled.
|
In the event of any termination of
employment by the NTS Officers for any reason other than death, disability or
for good reason, the NTS Officers have agreed to pay to NTS the following
amounts as liquidated damages:
Employment Year during which such
termination occurs:
|
|
Ms. Baldwin
|
|
|
Mr. Hoover
|
|
|
Mr.
Worthington
|
|
Year 1
|
|
$
|
773,000
|
|
|
$
|
487,680
|
|
|
$
|
487,680
|
|
Year 2
|
|
$
|
618,400
|
|
|
$
|
390,144
|
|
|
$
|
390,144
|
|
Year 3
|
|
$
|
463,800
|
|
|
$
|
292,608
|
|
|
$
|
292,608
|
|
Year 4
|
|
$
|
309,200
|
|
|
$
|
195,072
|
|
|
$
|
195,072
|
|
Year 5
|
|
$
|
154,600
|
|
|
$
|
97,536
|
|
|
$
|
97,536
|
|
The NTS Officers are permitted to
participate in such life insurance, hospitalization, major medical, and other
executive benefit plans of NTS that may be in effect from time to time. However,
the NTS Officers’ accrual of, or participation in plans providing for, such
benefits will cease on the effective date of the termination of the Employment
Agreement, and the NTS Officer will be entitled to accrued benefits pursuant to
such plans only as provided in such plans.
The NTS Officers have also agreed to
confidentiality and non-disclosure of confidential information during and
following the employment period, as well as customary non-competition and
non-interference for the greater of (i) five (5) years from the date of the
Employment Agreement or (ii) the employment period and for a period of two
(2) years following the date that the employment ends.
The Employment Agreements also provide
piggyback registration rights for the NTS Officers from the effective date of
the Employment Agreement through the expiration or termination of the Employment
Agreements, to register for resale the shares of the Company’s Common Stock they
own as a result of exercising any of the options granted pursuant to the
Employment Agreements. The Company will pay the registration expenses with
respect to such piggyback registrations.
John Mark Burton
A July 3, 2006 Service Agreement between
the Company, Swiftnet Limited and John Mark Burton (otherwise known as
“Executive” in the service agreement), the Managing Director of our UK based
subsidiaries, Swiftnet, Equitalk.co.uk, Auracall, and Story Telecom, provides
for an employment term for Mr. Burton for an indefinite period, terminable by
either party giving to the other three months notice, if given during the first
six months of the agreement, and thereafter, Swiftnet must provide Mr. Burton
with no less than six months notice, and Mr. Burton must provide Swiftnet with
no less than three months written notice, to terminate the
agreement.
The agreement provides that Mr. Burton
is entitled to a salary at a rate of £70,000 (approximately $115,378) per year,
inclusive of any directors’ fees payable to him, payable by equal monthly
installments in arrears on the last day of each month. In addition, Mr. Burton
is entitled to bonus compensation as follows:
1.
|
Within fourteen (14) days from the
date of this agreement, the Company will grant the Executive, under its
2004 Stock Option Plan, 300,000 options for restricted shares of its
Common Stock, at a strike price of $3.50 per share. Such options shall
vest as follows: 75,000 options on the first anniversary of this agreement
and 18,750 each quarter thereafter during which he is employed by
Swiftnet. Such options may be exercised at any time before the tenth
anniversary of the date of the
agreement.
|
2.
|
On or before 31 August 2006, the
Executive will be paid a bonus of £4,000 ($6,593) if he has produced a
business plan that the Board approves for execution in
writing.
|
3.
|
On or before 31 October 2006, the
Executive will be paid a bonus equal to twelve per cent (12%) of the
revenues referable for the month of September 2006 from former customers
of Equitalk, which have transferred to Swiftnet and whose CLIs and other
details have been entered into Swiftnet’s system and set up so as to
ensure that their calls are routed by means of Swiftnet’s switch by 30
September 2006. If such former customers have not paid in relation to such
revenues by 31 December 2006, then the Executive shall repay to Swiftnet
within thirty (30) days, the portion of the bonus that relates to the
non-collected revenues.
|
4.
|
If the share capital of Swiftnet,
the Company or any Associated Company of either is admitted to a
recognized investment exchange in the United Kingdom (a “Listing”) at any
time during the course of the Executive’s employment, the Executive will
be paid a bonus of one point thirty three per cent (1.33%) of the amount
raised on such a Listing. Such bonus will be subject to any applicable law
and appropriate approvals from the American Stock Exchange, SEC and/or UK
Recognized Stock Exchange and shall be paid as soon as reasonably
practicable following the date of the Listing by way of the grant of
options or warrants (exercisable at any time within 5 years of the date of
grant subject to any lock-in periods agreed as part of the Listing
process) exercisable into restricted shares of Common Stock of the
Company. Such options or warrants will be priced at the issue price of the
Listing, according to the Black Scholes option - pricing model, with a
volatility of ninety per cent (90%).
|
5.
|
If Swiftnet, the Company or any
Associated Company acquires the shares, assets of undertaking of any
company or business in the United Kingdom (an “Acquisition”) at any time
during the course of the Executive’s employment, the Executive will be
paid a bonus of one point thirty three per cent (1.33%) of the value of
the Acquisition. Such bonus will be subject to any applicable law and
appropriate approvals from the American Stock Exchange and/or SEC and
shall be paid as soon as reasonably practicable following the date of the
Acquisition and may be satisfied by Swiftnet by procuring that the Company
allots restricted shares of Common Stock to the Executive to the value of
such bonus.
|
6.
|
On or before 31 August 2006, the
Executive and Swiftnet will agree a bonus scheme linked to his individual
performance. An on-target bonus of £4,000 per month will be payable for
each month, such targets to be set so as to reward the Executive for
improving the profitability and revenue of Swiftnet, whilst giving him a
realistic chance of reaching them. The bonus will be paid monthly in
arrears and there shall be no entitlement to receive any bonus once the
Executive’s employment has terminated. The Executive and the Company will
agree a formula to pay the Executive a reduced bonus if targets are not
met and an increased bonus if targets are
exceeded.
|
7.
|
The Executive is entitled to the
same piggyback registration rights with respect to the securities of the
Company allotted to the Executive under the service agreement, as those
enumerated in Clause 3.5 and Schedule 13 of the May 25, 2006 Agreement to
purchase Equitalk.co.uk.
|
The service agreement further provides
for payment of a sum equal to 7.5% of the Executive’s salary for way of a
contribution to his personal pension scheme, and provides for medical insurance,
a company car, reimbursement for reasonable business expenses, customary
ancillary benefits. Mr. Burton has agreed to preserve all confidential and
proprietary information relating to Swiftnet’s business during and after the
term of his employment, and he has also agreed to a non-competition provision
that is in effect during the term of his employment and for a period of 6 months
after termination, and a non-solicitation provisions that is in effect during
the term of the service agreement and for a period of 1 year after
termination.
Swiftnet may at any time and in its
absolute discretion (whether or not any notice of termination has been given by
Swiftnet) terminate the service agreement with immediate effect and make a
payment in lieu of notice, for termination under certain circumstances. This
payment shall comprise the Executive’s basic salary (at the rate payable when
this option is exercised) and any bonus, pension contributions or any other
benefits and shall be subject to deductions for income tax and national
insurance contributions as appropriate (the “Payment in Lieu”). The Executive
will not, under any circumstances, have any right to payment in lieu unless the
Company has exercised its option to pay in lieu of notice. The Payment in Lieu
may, at Swiftnet’s sole discretion, be made at the date that the termination of
the Executive’s employment is effected by Swiftnet. During any such period the
Executive is required to keep Swiftnet informed on a monthly basis as to his
earnings and the Executive agrees that Swiftnet may deduct any monies he earns
as a consultant or employee during that period from the Payment in
Lieu.
Swiftnet may also suspend the Executive
for up to ninety (90) days on full pay to allow it to investigate any complaint
made against the Executive in relation to his employment with
Swiftnet.
On July 11, 2006, and in conjunction
with his service agreement, the Company’s Board of Directors approved the grant
of 300,000 options, under and subject to its 2004 Stock Option Plan, to Mr.
Burton. The options are convertible on a one to one basis into restricted shares
of our Common Stock, at an exercise price of $3.50, and have a term of ten
years. The vesting of the options will be over a period of 4 years as follows:
75,000 options were vested on July 3, 2007. Thereafter, 18,750 options are
vested every 3 months for the following 3 years.
Roni Haliva
An employment contract dated August 26,
2007 (the “Contract”) between Xfone 018 Ltd., our majority-owned Israel based
subsidiary, and Roni Haliva, its General Manager, provides that Mr. Haliva will
be paid a base salary of NIS 36,000 (approximately $9,696) per month, and will
also be entitled to annual bonus payments which will be determined based upon
Xfone 018’s achievement of certain performance targets related to its annual
budget (the “Targets”) as proposed by Mr. Haliva and fixed by Xfone 018’s Board
of Directors annually.
Mr. Haliva also was paid a budget
preparation bonus of NIS 6,000 (approximately $1,616) for the months of
September, October and November of 2007. The Contract also provides for
allocations to a pension plan and continuing education fund for Mr. Haliva’s
benefit, as well as the receipt of convalescent pay, payments in connection with
a sale of Xfone 018’s shares or business under certain circumstances, use of a
company car, and other customary ancillary benefits. Mr. Haliva has agreed to
preserve all confidential and proprietary information relating to Xfone 018’s
business during and after the term of his employment, and he has agreed to
non-competition and non-solicitation provisions that are in effect during the
term of the Contract and for one year thereafter.
Mr. Haliva will also be entitled to
receive the following number of options to purchase shares of the Company’s
Common Stock under the Company’s 2007 Stock Incentive Plan. The options are
described in Appendix A to the Contract, which was approved by the Company’s
Board of Directors and entered into by the Company on August 26,
2007:
1)
|
Within 30 days of adoption of the
2007 Stock Incentive Plan, Mr. Haliva will be granted options to purchase
300,000 shares of Common Stock, at an exercise price of $3.50 per share,
of which (i) options to purchase 75,000 shares will be exercisable
after 12 months have elapsed from the commencement of his employment, but
not before the qualifying date (the “First Exercise Date”); and
(ii) options to purchase 18,750 shares will be exercisable at the end
of every 3 month period, beginning after 3 months have elapsed from the
First Exercise Date.
|
2)
|
At the end of each calendar year
between 2008 and 2011, and upon the achievement by Xfone 018 100% of its
Targets for each such year, Mr. Haliva will be granted options to purchase
25,000 shares of the Registrant’s Common Stock under the 2007 Stock
Incentive Plan, for an exercise price of $3.50 per share, which will be
exercisable 30 days after the Registrant publishes its annual financial
statements for such year.
|
All options will expire 120 days after
termination of Mr. Haliva’s employment with Xfone 018.
The Contract may be terminated by either
party at any time, upon 120 days prior written notice during the first year of
Mr. Haliva’s employment, and upon 180 days prior written notice during the
second year of employment and thereafter.
Bosmat Houston
The employment agreement dated January
1, 2000, as amended from time to time through salary review letters, between
Swiftnet Limited and Bosmat Houston, Research and Development Manager, provides
for employment for an unspecified term on an “at will” basis. Either Swiftnet of
Ms. Houston may terminate the agreement upon three-months written notice;
however, if Ms. Houston is in violation of the agreement, Swiftnet may terminate
her employment without notice. The agreement provides that Ms. Houston be paid
an annual salary of £54,000 (approximately $89,006) payable monthly on the first
day of each month. Ms. Houston has agreed to preserve all confidential and
proprietary information relating to the Company’s business during and for a
period of 3 years after the term of her employment. She has also agreed to
non-competition provision for a period of one year after termination of the
agreement.
On February 6, 2005, Ms. Houston was
granted options to purchase 150,000 shares of the Company’s Common Stock under
the 2004 Stock Option Plan at an exercise price of $3.50 per share, vesting over
a period of 4 years as follows: 25% of the options are vested after a year from
the date of grant. Thereafter, 1/16 of the options are vested every 3 months for
the following 3 years. The options expire 5.5 years from the date of
grant.
Director C
ompens
ation for 2007
Compensation for Board Services and
Reimbursement of Expenses
The Company does not compensate
Directors who also serve as executive officers of the Company for their services
on the Board. During fiscal 2007, the Company compensated all its non-employed
Directors for participation at meetings of the Board and Committees of the Board
as follows: (a) $250 - for physical participation at each meeting of the
Board or Committee of the Board; plus (b) $100 - for participation via the
telephone at each meeting of the Board or Committee of the Board. In addition,
the Company reimbursed its non-employed Directors for expenses incurred in
connection with Board services. These expenses are reviewed and pre-approved by
the President of the Company.
The following table reflects all
compensation awarded to, earned by or paid to the Company’s Directors for the
fiscal year ended December 31, 2007.
Name
|
|
Fees Earned or Paid in Cash
(1)
($)
|
|
|
Stock Awards
($)
|
|
|
Options Awards
($)(9)
|
|
|
Non-Equity Incentive Plan
Compensation
($)
|
|
|
Nonqualified Deferred Compensation
Earnings
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Abraham
Keinan(2)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Guy
Nissenson(2)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Eyal J.
Harish(3)
|
|
|
1,250
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
450
|
|
Shemer S. Schwartz
(4)
|
|
|
3,600
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,100
|
|
Itzhak
Almog(5)
|
|
|
5,200
|
|
|
|
–
|
|
|
|
18,633
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
23,833
|
|
Aviu
Ben-Horrin(6)
|
|
|
2,450
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,150
|
|
Israel
Singer(7)
|
|
|
1,250
|
|
|
|
–
|
|
|
|
15,081
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
16,331
|
|
Morris
Mansour(8)
|
|
|
1,250
|
|
|
|
–
|
|
|
|
15,081
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
16,331
|
|
(1)
|
These amounts were paid on
February 11, 2008.
|
(2)
|
The Company does not compensate
Directors who also serve as executive officers for their services on the
Board. Accordingly, Mr. Keinan and Mr. Nissenson did not receive any
compensation for their service on the Company’s Board during fiscal
2007.
|
|
|
(3)
|
As of December 31, 2007, Mr.
Harish held 75,000 options, fully exercisable at an exercise price of
$3.50 and with expiration date of November 24,
2010.
|
(4)
|
As of December 31, 2007, Mr.
Schwartz held 75,000 options, fully exercisable at an exercise price of
$3.50 and with expiration date of November 24,
2010.
|
(5)
|
As of December 31, 2007, Mr. Almog
held 25,000 options, fully exercisable at an exercise price of $3.50 and
with expiration date of October 30,
2012.
|
(6)
|
As of December 31, 2006, Mr.
Ben-Horrin held 25,000 options, fully exercisable at an exercise price of
$3.50 and with expiration date of November 24,
2010.
|
(7)
|
As of December 31, 2007, Mr.
Singer held 20,000 options, which will vest in full on June 5, 2008, one
year from grant date, are exercisable at an exercise price of $3.50, and
will expire on June 5, 2013.
|
(8)
|
As of December 31, 2007, Mr.
Mansour held 20,000 options, which will vest in full on June 5, 2008, one
year from grant date, are exercisable at an exercise price of $3.50, and
will expire on June 5, 2013.
|
(9)
|
The amount shown in the table
reflects the dollar amount recognized for fiscal 2007 financial statement
reporting purposes of the outstanding stock options granted to the
directors in accordance with FAS
123R.
|
CERTAIN RELATIONSHIPS
AND RELATED
TRANSACTIONS
Swiftnet Limited
General Contract for
Services
A General Contract for Services by and
between the Company and its wholly owned subsidiary, Swiftnet Limited, provides
that as of January 1, 2005, the Company will provide Swiftnet the following
services: Marketing, Finance and Operational Consultancy work related to
customers and transactions that are based in and outside the United Kingdom. In
return for these services, Swiftnet will pay the Company the following
consideration: 5% of the total turnover of Swiftnet; 5% on money raised from
sources outside the United Kingdom; and expenses. The General Contract for
Services may be terminated by either party upon 30 days prior written notice to
the other party.
On March 14, 2007, the Company and
Swiftnet entered into a First Amendment to the General Contract for Services
(the “First Amendment”) to be effective as of January 1, 2006. The First
Amendment provides that the Company will render Swiftnet the following services;
Day-to-day support to the Directors of Swiftnet in the general management of the
business (to include Marketing, Finance and Operational advisory work), special
projects (outside of the day-to-day management of the business) required to
achieve specific business development goals (to include the new supplier
relationships and the introduction of new products and processes) and activities
to secure financing for Swiftnet (from outside the U.K.). In exchange for the
services Swiftnet will pay the Company according to the following schedule; 2.5%
of the total turnover of Swiftnet, in return for special projects: £750 per each
Xfone executive per day, 5% of money raised from sources outside the U.K., and
expenses.
Story Telecom
Limited
Loan
On July 17, 2007, Story Telecom Limited,
at that time our majority-owned UK subsidiary and as of March 25, 2008 a
wholly-owned subsidiary, agreed to loan us up to £400,000 ($787,175) that it had
as cash surplus in its bank account. The loan bears fixed interest rate at 4%
over the interest payable by the bank for deposits under the same terms. The
loan is for a one-year term but can be accelerated by Story Telecom if it
requires additional financing to continue to operate as a going concern. The
loan is guaranteed by our wholly owned UK subsidiary, Swiftnet Limited and by
amounts owed to us by Story Telecom. In addition, Story Telecom has the right to
set-off repayments under the loan against sums due to us by Story Telecom. The
loan is re-payable at any time upon 30 days’ notice. On July 18, 2007 and on
September 25, 2007, we borrowed £350,000 ($688,778) and £50,000 ($98,397),
respectively, of the loan. On October 8, 2007, Story Telecom agreed to increase
the loan ceiling by £300,000 to a maximum of £700,000. Further borrowings of
£100,000 ($196,794) were made on October 9, 2007. As of June 30, 2008, the
aggregate outstanding borrowings were £500,000 ($995,331).
Xfone 018 Ltd.
Investment Agreement with a Minority
Partner
According to an August 26, 2004
Investment Agreement between us, Xfone 018 Ltd. and our 26% minority interest
partner in Xfone 018 (respectively, the “Investment Agreement”, the “Minority
Partner”), the Minority Partner provided in 2004 a bank guarantee of 10,000,000
NIS ($2,822,467) to the Ministry of Communications of the State of Israel which
replaced an existing bank guarantee given by us in connection with Xfone 018’s
license to provide international telecom services in Israel. As part of the
Investment Agreement, we agreed to indemnify the Minority Partner for any damage
caused to him due to the forfeiture of the bank guarantee with the Ministry of
Communications on account of any act and/or omission of Xfone 018, provided that
the said act or omission is performed against the opinion of the Minority
Partner or without his knowledge. Further, we agreed that if at the end of the
first two years of Xfone 018’s business activity, its revenues shall be less
than $2,000,000 or if it shall cease business activity (at any time), we shall
secure the return of the bank guarantee to the Minority
Partner.
Pursuant to the Investment Agreement,
the Minority Partner provided in the fourth quarter of year 2004, a shareholder
loan of approximately $400,000 to Xfone 018 (the “Minority Partner Loan”). The
Minority Partner Loan is for four years with annual interest of 4% and linkage
to the Israeli consumer price index. As of June 30, 2008, the balance of
the Minority Partner Loan was NIS 1,943,535 ($579,813).
Pursuant to the Investment Agreement, as
of June 30, 2008, Xfone, Inc. provided to Xfone 018 a shareholder loan in
an aggregate amount of
$516,226
.
The Investment Agreement provides that
we shall be entitled to receive from Xfone 018 management fees equivalent to 5%
of the operating profit of Xfone 018, in return for the management services
provided by us to Xfone 018. As of June 30, 2008, management fees in the amount
of $139,595 were due and paid.
Giora Spigel
Agreement
Pursuant to a verbal agreement between
Mr. Giora Spigel and us, the Board of Directors of Xfone 018 approved on
November 24, 2004, subject to the approval of the Ministry of Communications of
the State of Israel, that shares held by us, representing 5% ownership of Xfone
018, will be transferred to Margo Pharma Ltd. (formerly Margo Sport Ltd.). a
company owned by Mr. Spigel and his wife. Upon approval of the Ministry of
Communications of the State of Israel, such verbal agreement was evidenced by a
share transfer deed as required by the Israel Company Law -
1999.
Xfone 018 is currently owned 69% by us,
26% by Newcall Ltd. (a company owned by the Minority Partner), and 5% by Margo
Pharma Ltd.
Crestview Capital Master,
LLC
Consultancy Agreement with Crestview
Capital Partners
On November 20, 2006, the Company and
Crestview Capital Partners, LLP (the “Consultant”) entered into a one-year
Consultancy Agreement (the “Consultancy Agreement”). During the term of the
Consultancy Agreement, the Company will engage the Consultant as its strategic
consultant on United States capital markets for micro-cap public companies. In
return for its services pursuant to the Consultancy Agreement, the Consultant
was granted 117,676 warrants to purchase restricted shares of the Company’s
Common Stock, registered in the name of Crestview Capital Master, LLC (the
“Warrants”). The Warrants are exercisable pursuant to the following terms:
Vesting - 29,419 warrants immediately, 29,419 warrants on February 10, 2007,
29,419 warrants on May 10, 2007, and 29,419 warrants on August 10, 2007;
Exercise Price - $3.50; Term - five years.
Abraham Keinan
Keinan Share
Issuance
On September 1, 2000, we issued
1,730,000 shares of our Common Stock to our founder and Chairman of the Board,
Abraham Keinan, for services rendered to us in our corporate formation. Mr.
Keinan’s services consisted of the establishment of our business concept and
providing us with technical expertise. We valued Mr. Keinan’s services at
$247,390.
Keinan Stock Ownership through Vision
Consultants
Until June 23, 2004, our Chairman of the
Board, Mr. Abraham Keinan indirectly held 1,302,331 shares of our Common Stock
through Vision Consultants Limited, a Nassau, Bahamas incorporated company that
is 100% owned by Mr. Keinan. On June 23, 2004, the shares held by Vision
Consultants Limited were transferred to Mr. Keinan as an
individual.
Redemption of Keinan
Shares
On December 29, 2005, the Board of
Directors of the Company entered into an oral stock purchase agreement with Mr.
Keinan pursuant to which it repurchased 100,000 restricted shares of its Common
Stock at a price of $2.50 per share (market price at that day was $2.75 per
share). The 100,000 shares were returned to us for cancellation. The Agreement
was approved by a majority of the non-interested members of the Board of
Directors.
On December 25, 2006, the Board of
Directors of the Company entered into an oral stock purchase agreement with Mr.
Keinan, pursuant to which the Company repurchased from Mr. Keinan 100,000
restricted shares of its Common Stock at a price of $2.70 per share (market
price at that day was $2.80 per share). The 100,000 shares were returned to us
for cancellation on December 26, 2006. The Agreement was approved by all
non-interested members of the Board of Directors, following a review and
discussion by the Company’s Audit Committee.
Keinan Employment with
Swiftnet
Our Chairman of the Board, Mr. Abraham
Keinan, has been employed by our wholly owned UK based subsidiary, Swiftnet
Limited since its inception in 1990. In 2005, Mr. Keinan’s annual salary was
£54,594 ($89,985). In 2006, Mr. Keinan’s annual salary was £48,000 ($79,117).
Mr. Keinan received in addition to his monthly salary pension benefits and a
company car. With respect to employment years 1990-2006, Mr. Keinan had no
written employment agreement with Swiftnet.
Keinan Employment Agreement with
Swiftnet
Pursuant to a Company’s Board of
Directors’ resolution dated December 25, 2006, on March 28, 2007, Swiftnet and
Mr. Keinan entered into an employment agreement, to be effective as of January
1, 2007 (the “Keinan Employment Agreement”).
The Keinan Employment Agreement provides
that Mr. Keinan shall be employed as the Chairman of the Board of Directors of
Swiftnet. Keinan Employment Agreement shall be in effect for an initial fixed
term of five years, beginning on January 1, 2007, (the “Initial Effective
Term”), and thereafter shall automatically be renewed for additional terms of
three years (each, an “Additional Effective Term”). Notwithstanding the
foregoing, each of Swiftnet and Mr. Keinan shall have the right to terminate the
automatic renewal of Keinan Employment Agreement, for any reason whatsoever, by
a termination notice in writing, to be provided to the other party not less than
six months prior to: (i) the expiration of the Initial Effective Term, or
(ii) the expiration of any Additional Effective Term (the “Notice Period”).
Notwithstanding the foregoing, Mr. Keinan shall have the right to terminate the
Keinan Employment Agreement, for any reason whatsoever, and at any time,
including during the Initial Effective Term (“Early Termination”). In the event
of Early Termination, the Notice Period shall be of not less than eight
months.
Under the Keinan Employment Agreement,
Swiftnet shall pay to Mr. Keinan during the term of his engagement a salary at
the rate of £48,000 ($79,117) per annum, such salary to be paid in equal monthly
installments in arrears on the last Friday of each month. Swiftnet shall provide
Mr. Keinan with an appropriate executive car or car allowance with an effective
annual cost to Swiftnet of up to £15,000 ($24,724).
Swiftnet shall pay Mr. Keinan
contributions to the following schemes: (i) Health care for him and his
immediate family; (ii) Permanent health; (iii) Life insurance
arrangements (up to a maximum of four times salary); (iv) Pension rights -
Swiftnet shall contribute a monthly sum equal to 7.5% of his salary;
(v) Travel insurance.
Swiftnet shall reimburse to Mr. Keinan
all traveling, hotel, restaurant and other expenses incurred by him in the
proper performance of his duties under his engagement.
If during the period of the employment
under the Keinan Employment Agreement Mr. Keinan shall cease to be a director of
Swiftnet, his employment shall continue and the terms of the Keinan Employment
Agreement (other than those relating to the holding of office of director /
chairman) shall continue in full force.
The Keinan Employment Agreement also
contains special arrangements for sickness benefits, holiday entitlement and
provisions regarding non-competition; intellectual property; confidentiality;
conflict of interests and other standard terms and
conditions.
The Keinan Employment Agreement was
approved by all non-interested members of the Board of Directors, following a
review and discussion by the Company’s Audit Committee.
Keinan Consulting
Agreement
Pursuant to a Company’s Board of
Directors’ resolution dated December 25, 2006, on March 28, 2007, the Company
and Mr. Keinan entered into a consulting agreement, to be effective as of
January 1, 2007 (the “Keinan Consulting Agreement”).
The Keinan Consulting Agreement provides
that Mr. Keinan shall render the Company advisory, consulting and other services
in relation to the business and operations of the Company (excluding its
business and operations in the United Kingdom).
In consideration of the performance of
the Services pursuant to the Keinan Consulting Agreement, the Company initially
paid Mr. Keinan a monthly fee of £10,000 ($16,483), which was increased by the
Board of Directors following the recommendation of the Audit Committee and the
Compensation Committee in accordance with the terms described below, to £16,000
($26,372) effective as of June 1, 2008 (the “Fee”). Mr. Keinan shall invoice the
Company at the end of each calendar month and the Company shall make the monthly
payment immediately upon receiving such invoice. Once a calendar year, and no
later than December 15, the Company’s Board shall consider approving an increase
to the Fee. Such Board approval shall be subject to the prior review, oversight
and recommendation to the Board of both the Audit Committee and the Compensation
Committee of the Company (the “Compensation Committee”). However, in the event
the Company has not established a Compensation Committee, the review, oversight
and recommendation to the Board of the Audit Committee shall suffice. In
connection with the performance of this provision, the Audit Committee, the
Compensation Committee and the Board shall take into account, among other
factors, growth in the Company’s revenues and/or
profits.
The Company’s Board shall, from time to
time, and not less than once a calendar year, consider approving a grant of
success bonus to Mr. Keinan (the “Bonus”). Such Board approval shall be subject
to the prior review, oversight and recommendation to the Board of both the Audit
Committee and the Compensation Committee. However, in the event the Company has
not established a Compensation Committee, the review, oversight and
recommendation to the Board of the Audit Committee shall suffice. In connection
with the performance of this provision, the Audit Committee, the Compensation
Committee and the Board shall take into account, among other factors, growth in
the Company’s revenues and/or profits and/or successful completion of
transactions or activities by the Company (such as, but not limited to,
reorganization, mergers, acquisitions, capital raisings and cost cuts). Any
Board member, except Mr. Keinan, may, at any time and from time to time,
initiate a Bonus grant to Mr. Keinan, and in such an event the approving process
shall be set in motion.
Mr. Keinan waived his bonus for 2007 to
which he is entitled pursuant to this provision.
Immediately upon the establishment by
the Company of any new stock option or purchase plan or other equity
compensation arrangement pursuant to which options or stock may be acquired by
officers, directors, employees, or consultants of the Company (collectively, the
“Plan”), the Company’s Board shall consider approving a grant of an appropriate
amount of options (or any other applicable rights) under the Plan to Mr. Keinan.
Such Board approval shall be subject to the prior review, oversight and
recommendation to the Board of both the Audit Committee and the Compensation
Committee. However, in the event the Company has not established a Compensation
Committee, the review, oversight and recommendation to the Board of the Audit
Committee shall suffice.
In addition to the Fee and the Bonus,
the Company shall pay directly and/or reimburse Mr. Keinan for his Expenses. For
the purposes of the Keinan Consulting Agreement, the term “Expenses” shall mean
any and all amounts actually paid by the Company and/or by Mr. Keinan, and/or to
be paid by Mr. Keinan at his direction, including, without limitation
(i) costs associated with telecommunication services and products, and
(ii) costs associated with transportation and/or travel (including, but not
limited to, by plane, train, rented car and taxi) and/or accommodation
(including, but not limited to, at rented flats and hotels) and/or any other
board and lodging expenses (including, but not limited to, food, restaurants and
entertainment) which were and/or will be incurred in connection with the
performance of the Services pursuant to the Keinan Consulting
Agreement.
The Company acknowledges that in order
to render the Services pursuant to the Keinan Consulting Agreement, Mr. Keinan
may be required to travel frequently around the world. Therefore, in order to
enable Mr. Keinan a normal family life the Company shall bear Expenses which are
related to Mr. Keinan’s spouse.
Mr. Keinan shall hold and use, in his
sole discretion, credit cards in the name of the Company (the “Credit Cards”).
Due to Mr. Keinan’s position with the Company (i.e. Chairman of the Board) he
may from time to time use the Credit Cards to make certain Company payments and
pay certain Company expenses.
This Keinan Consulting Agreement shall
be in effect for an initial fixed term of five years, beginning on January 1,
2007 (the “Initial Effective Term”), and thereafter, unless terminated as
provided below, shall automatically be renewed for additional terms of three
years (each, an “Additional Effective Term”). Notwithstanding the foregoing,
each of the Company and Mr. Keinan shall have the right to terminate the
automatic renewal of the Keinan Consulting Agreement, for any reason whatsoever,
by a termination notice in writing, to be provided to the other party not less
than six months prior to: (i) the expiration of the Initial Effective Term,
or (ii) the expiration of any Additional Effective Term (the “Notice
Period”). Notwithstanding the foregoing, as long as Mr. Keinan shall command
and/or control, directly and/or indirectly, including together with others (as
well as pursuant to that certain Voting Agreement dated September 28, 2004, by
and among Mr. Keinan, Guy Nissenson and Campbeltown Business Ltd.) and/or by
proxies, fifteen percent (15%) or more of the voting rights of the Company, if
the Company shall choose to exercise its right to terminate the automatic
renewal of the Keinan Consulting Agreement, the Notice Period shall be of not
less than twelve months. Notwithstanding the foregoing, Mr. Keinan shall have
the right to terminate the Keinan Consulting Agreement, for any reason
whatsoever, and at any time, including during the Initial Effective Term (“Early
Termination by Mr. Keinan“). In the event of Early Termination by Mr. Keinan,
the Notice Period shall be of not less than eight
months.
The Keinan Consulting Agreement further
provided that no later than June 30, 2007, the Company and Mr. Keinan shall
enter into a severance agreement providing for an appropriate severance package
for Mr. Keinan (the “Severance Agreement”). The Severance Agreement shall, inter
alia, cover events of termination of the automatic renewal of the Keinan
Consulting Agreement by the Company or Mr. Keinan, termination of the Keinan
Consulting Agreement by Mr. Keinan, and scheduled retirement by Mr. Keinan. The
Company has not yet entered into any such agreement.
The Keinan Consulting Agreement also
contains provisions regarding non-competition; intellectual property;
confidentiality; conflict of interests; and other standard terms and
conditions.
The Keinan Consulting Agreement was
approved by all non-interested members of the Board of Directors, following a
review and discussion by the Company’s Audit Committee.
Keinan Bonus and Success
Fee
On April 2, 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 Campbeltown Business shall receive 1% of
such monthly revenues, up to a maximum of one million dollars (the “Bonus and
Success Fee”). On April 10, 2003, Mr. Keinan and Campbeltown Business waived
their right to receive 1% of the revenues generated by Story Telecom. On
February 8, 2007, an Agreement was entered by and between the Company, Swiftnet,
Campbeltown Business, and Mr. Keinan (the “February 8, 2007 Agreement”). The
February 8, 2007 Agreement provides that effective as of January 1, 2007, the
Bonus and Success Fee is cancelled, and that Mr. Keinan and Campbeltown Business
shall have no further right to any percentage of our
revenues.
On June 28, 2004, our Board of Directors
approved a bonus of £5,000 ($8,241) to Mr. Keinan for his efforts in connection
with obtaining the license to become an international telecom service provider
in Israel by Xfone 018.
Keinan Loan
Since our inception in September 2000,
through December 31, 2000, we along with our subsidiary, Swiftnet provided
Abraham Keinan, our Chairman of the Board, with a loan. This loan originally was
reflected in a September 29, 2000 promissory note payable in ten equal
installments ending on January 1, 2011. This note is non-interest bearing. We
provided the loan to Mr. Keinan to promote his loyalty and continued service as
our Chairman of the Board of Directors. On December 29, 2005, Mr. Keinan repaid
£123,966 ($261,512) which was due for the fiscal year ended December 31, 2005.
On December 26, 2006 Mr. Abraham Keinan, repaid the final payment of £123,965
($261,510) under the terms of his loan.
Indemnification
Xfone 018 Ltd., Our Israeli subsidiary,
has obtained certain credit facilities from Bank Hapoalim B.M. The credit
facilities are secured with a personal guarantee by Abraham Keinan and Guy
Nissenson, which includes a pledge on 1,000,000 shares of Common Stock of the
Company owned by Mr. Keinan, and an undertaking to provide Bank Hapoalim with an
additional financial guarantee of up to $500,000 under certain circumstances. We
agreed to indemnify Abraham Keinan and/or Guy Nissenson on account of any damage
and/or loss and/or expense (including legal expenses) that they may incur in
connection with the stock pledge and/or any other obligation made by them to
Bank Hapoalim in connection with the collateral.
Guy Nissenson
Campbeltown Business
Ltd.
Consulting Agreement
On May 11, 2000, Swiftnet Limited, which
is now our wholly owned subsidiary, and our Chairman of the Board of Directors,
Abraham Keinan, entered into an 18-month renewable consulting agreement with
Campbeltown Business Ltd., a private company incorporated in the British Virgin
Island which is owned by Guy Nissenson, our President, Chief Executive Officer,
and Director and other family members of Mr. Nissenson. This agreement provided
that Swiftnet will hire Campbeltown Business as its financial and business
development consultant and will pay Campbeltown Business £2,000 per month, along
with an additional monthly performance bonus based upon Swiftnet attaining the
following revenue levels, for consulting services in the area of business
development and management activities:
TARGET AMOUNT OF REVENUES PER
MONTH
|
ADDITIONAL MONTHLY
BONUS
|
Less than £125,000 (approximately
$206,033)
|
£0
|
Between £125,000 -
£150,000
(approximately $206,033 -
$247,239)
|
£1,250 (approximately
$2,060)
|
Between £150,000 -
£175,000
(approximately $247,239 -
$288,446)
|
£2,500 (approximately
$4,121)
|
Over £175,000
(approximately
$288,446)
|
£2,750 (approximately
$4,533)
|
The agreement with Campbeltown Business
involving the aforementioned monthly payment of £2000, along with an additional
monthly performance bonus, was separate from a bonus and success fee arrangement
that was approved by our Board of Directors on April 2,
2002.
The May 11, 2000 agreement was for 18
months, but provided that it will be renewed by mutual agreement of Swiftnet and
Campbeltown Business. On November 5, 2001, May 11, 2003, November 10, 2004, and
May 11, 2006 we renewed this agreement for additional 18-month periods. On
February 8, 2007, an Agreement was entered by and between the Company, Swiftnet,
Campbeltown Business, and Mr. Keinan (the “February 8, 2007 Agreement”). The
February 8, 2007 Agreement provides that effective as of January 1, 2007, the
aforementioned consulting agreement is terminated.
Stock Purchase
Agreement
On June 19, 2000, Swiftnet Limited
entered into a Stock Purchase Agreement with Abraham Keinan and Campbeltown
Business Ltd. a company owned and controlled by Guy Nissenson and his family.
This agreement provides that:
·
|
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.
|
·
|
Campbeltown Business 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.
|
·
|
Campbeltown Business would invest
$100,000 in Swiftnet, in exchange for 20% of the total issued shares of
Swiftnet;
|
·
|
Campbeltown Business would also
receive 5% of our issued and outstanding shares following our acquisition
with Swiftnet. In June 2000, Campbeltown Business invested the $100,000 in
Swiftnet. We acquired Swiftnet and Campbeltown received 720,336 shares of
our Common Stock for its 20% interest in
Swiftnet.
|
·
|
Swiftnet and Abraham Keinan would
guarantee that Campbeltown Business’ 20% interest in the outstanding
shares of Swiftnet would be exchanged for at least 10% of our outstanding
shares and that Campbeltown Business would have in total at least 15% of
our total issued shares after our acquisition
occurred.
|
·
|
Campbeltown Business would have
the right to nominate 33% of the members of our board of directors and
Swiftnet’s board of directors. When Campbeltown Business ownership in our
Common Stock was less than 7%, Campbeltown Business would have the right
to nominate only 20% of our board members but always at least one member.
In the case that Campbeltown Business ownership in our Common Stock was
less than 2%, this right would
expire.
|
·
|
Campbeltown Business would have
the right to nominate a vice president in Swiftnet. Mr. Guy Nissenson was
nominated as of the time of the June 19, 2000 agreement. If for any reason
Guy Nissenson will leave his position, Campbeltown Business and Abraham
Keinan will agree on another nominee. The Vice President will be employed
with suitable conditions.
|
·
|
Campbeltown Business 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.
|
·
|
Keinan and Campbeltown Business
have signed a right of first refusal agreement for the sale of their
shares.
|
·
|
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. This right expires when Campbeltown no longer owns
any equity interest or shares in our company or our subsidiary,
Swiftnet.
|
Bonus and Success
Fee
On April 2, 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 Campbeltown Business shall receive 1% of
such monthly revenues, up to a maximum of one million dollars (the “Bonus and
Success Fee”). On April 10, 2003, Mr. Keinan and Campbeltown Business waived
their right to receive 1% of the revenues generated by Story Telecom. This bonus
and success fee was separate from our consulting agreement with Campbeltown
Business, involving a monthly payment of £2000, along with an additional monthly
performance bonus.
On February 8, 2007, an Agreement was
entered by and between the Company, Swiftnet, Campbeltown Business, and Mr.
Keinan (the “February 8, 2007 Agreement”). The February 8, 2007 Agreement
provides that effective as of January 1, 2007, the Bonus and Success Fee is
cancelled, and that Mr. Keinan and Campbeltown Business shall have no further
right to any percentage of our revenues.
Nissenson Employment Agreements with
Swiftnet
May 11, 2000 Employment
Agreement
On May 11, 2000, Swiftnet Limited and
our Chairman of the Board of Directors, Abraham Keinan, entered into an
employment agreement with Guy Nissenson, our President, Chief Executive Officer,
and Director (the “May 11, 2000 Employment Agreement”). Under the terms of the
agreement, Swiftnet employed Mr. Nissenson to provide business development and
sales and marketing services, at a base rate of £1000 per month (approximately
$1,648). The May 11, 2000 Employment Agreement provided that when Swiftnet
reaches average sales of £175,000 per month for a consecutive three-month
period, Mr. Nissenson’s salary will increase to £2,000 (approximately $3,297)
per month. The May 11, 2000 Employment Agreement further provided that Mr.
Nissenson will receive an unspecified number of options to acquire our stock
that is limited to 50% of the options that Mr. Keinan receives. As such, the
agreement protected Mr. Nissenson’s rights to have at least 50% of the options
rights that Mr. Keinan will have. Mr. Nissenson can transfer the right of these
options to another company or person at his discretion. Swiftnet may only cancel
these options if: (1) Mr. Nissenson no longer works with Swiftnet; or
(2) if within twelve months of Mr. Nissenson’s employment with the company
Swiftnet and any other companies that may buy or merge into Swiftnet in the
future, do not reach average revenues (over a three consecutive month period) of
at least £120,000. Because the average sales per month exceeded £120,000 within
a twelve-month period of Mr. Nissenson’s employment, Swiftnet cannot cancel
these options.
March 28, 2007 Employment
Agreement
Pursuant to a Company’s Board of
Directors’ resolution dated December 25, 2006, on March 28, 2007, Swiftnet and
Mr. Nissenson entered into an employment agreement, to be effective as of
January 1, 2007 (the “Nissenson Employment Agreement”).
The Nissenson Employment Agreement
provides that Mr. Nissenson shall be employed as Director of Business
Development of Swiftnet. Nissenson Employment Agreement shall be in effect for
an initial fixed term of five years, beginning on January 1, 2007, (the “Initial
Effective Term”), and thereafter shall automatically be renewed for additional
terms of three years (each, an “Additional Effective Term”). Notwithstanding the
foregoing, each of Swiftnet and Mr. Nissenson shall have the right to terminate
the automatic renewal of Nissenson Employment Agreement, for any reason
whatsoever, by a termination notice in writing, to be provided to the other
party not less than six months prior to: (i) the expiration of the Initial
Effective Term, or (ii) the expiration of any Additional Effective Term
(the “Notice Period”). Notwithstanding the foregoing, Mr. Nissenson shall have
the right to terminate the Nissenson Employment Agreement, for any reason
whatsoever, and at any time, including during the Initial Effective Term (“Early
Termination”). In the event of Early Termination, the Notice Period shall be of
not less than eight months.
Under the Nissenson Employment
Agreement, Swiftnet shall pay to Mr. Nissenson during the term of his engagement
a salary at the rate of £48,000 ($79,117) per annum, such salary to be paid in
equal monthly installments in arrears on the last Friday of each month. Swiftnet
shall provide Mr. Nissenson with an appropriate executive car or car allowance
with an effective annual cost to Swiftnet of up to £15,000
($24,724).
Swiftnet shall pay Mr. Nissenson
contributions to the following schemes: (i) Health care for him and his
immediate family; (ii) Permanent health; (iii) Life insurance
arrangements (up to a maximum of four times salary); (iv) Pension rights -
Swiftnet shall contribute a monthly sum equal to 7.5% of his salary;
(v) Travel insurance.
Swiftnet shall reimburse to Mr.
Nissenson all traveling, hotel, restaurant and other expenses incurred by him in
the proper performance of his duties under his engagement.
If during the period of the employment
under the Nissenson Employment Agreement Mr. Nissenson shall cease to be a
director of Swiftnet, his employment shall continue and the terms of the
Nissenson Employment Agreement (other than those relating to the holding of
office of director) shall continue in full force.
The Nissenson Employment Agreement also
contains special arrangements for sickness benefits, holiday entitlement and
provisions regarding non-competition; intellectual property; confidentiality;
conflict of interests and other standard terms and
conditions.
The Nissenson Employment Agreement
supersedes the May 11, 2000 Employment Agreement.
The Nissenson Employment Agreement was
approved by all non-interested members of the Board of Directors, following a
review and discussion by the Company’s Audit Committee.
Nissenson Consulting
Agreement
Pursuant to a Company’s Board of
Directors’ resolution dated December 25, 2006, on March 28, 2007, the Company
and Mr. Nissenson entered into a consulting agreement, to be effective as of
January 1, 2007 (the “Nissenson Consulting Agreement”).
The Nissenson Consulting Agreement
provides that Mr. Nissenson shall render the Company advisory, consulting and
other services in relation to the business and operations of the Company
(excluding its business and operations in the United
Kingdom).
In consideration of the performance of
the Services pursuant to the Nissenson Consulting Agreement, the Company shall
pay Mr. Nissenson a monthly fee of £10,000 ($16,483), which was increased by the
Board of Directors following the recommendation of the Audit Committee and the
Compensation Committee in accordance with the terms described below, to £16,000
($26,372) effective as of June 1, 2008 (the “Fee”). Mr. Nissenson shall invoice
the Company at the end of each calendar month and the Company shall make the
monthly payment immediately upon receiving such invoice. Once a calendar year,
and no later than December 15, the Company’s Board shall consider approving an
increase to the Fee. Such Board approval shall be subject to the prior review,
oversight and recommendation to the Board of both the Audit Committee and the
Compensation Committee of the Company (the “Compensation Committee”). However,
in the event the Company has not established a Compensation Committee, the
review, oversight and recommendation to the Board of the Audit Committee shall
suffice. In connection with the performance of this provision, the Audit
Committee, the Compensation Committee and the Board shall take into account,
among other factors, growth in the Company’s revenues and/or
profits.
The Company’s Board shall, from time to
time, and not less than once a calendar year, consider approving a grant of
success bonus to Mr. Nissenson (the “Bonus”). Such Board approval shall be
subject to the prior review, oversight and recommendation to the Board of both
the Audit Committee and the Compensation Committee. However, in the event the
Company has not established a Compensation Committee, the review, oversight and
recommendation to the Board of the Audit Committee shall suffice. In connection
with the performance of this provision, the Audit Committee, the Compensation
Committee and the Board shall take into account, among other factors, growth in
the Company’s revenues and/or profits and/or successful completion of
transactions or activities by the Company (such as, but not limited to,
reorganization, mergers, acquisitions, capital raisings and cost cuts). Any
Board member, except Mr. Nissenson, may, at any time and from time to time,
initiate a Bonus grant to Mr. Nissenson, and in such an event the approving
process shall be set in motion.
Mr. Nissenson waived his bonus for 2007
to which he is entitled pursuant to this provision.
Immediately upon the establishment by
the Company of any new stock option or purchase plan or other equity
compensation arrangement pursuant to which options or stock may be acquired by
officers, directors, employees, or consultants of the Company (collectively,
“Plan”), the Company’s Board shall consider approving a grant of an appropriate
amount of options (or any other applicable rights) under the Plan to Mr.
Nissenson. Such Board approval shall be subject to the prior review, oversight
and recommendation to the Board of both the Audit Committee and the Compensation
Committee. However, in the event the Company has not established a Compensation
Committee, the review, oversight and recommendation to the Board of the Audit
Committee shall suffice.
In addition to the Fee and the Bonus,
the Company shall pay directly and/or reimburse Mr. Nissenson for his Expenses.
For the purposes of the Nissenson Consulting Agreement, the term “Expenses”
shall mean any and all amounts actually paid by the Company and/or by Mr.
Nissenson, and/or to be paid by Mr. Nissenson at his direction, including,
without limitation (i) costs associated with telecommunication services and
products, and (ii) costs associated with transportation and/or travel
(including, but not limited to, by plane, train, rented car and taxi) and/or
accommodation (including, but not limited to, at rented flats and hotels) and/or
any other board and lodging expenses (including, but not limited to, food,
restaurants and entertainment) which were and/or will be incurred in connection
with the performance of the Services pursuant to the Nissenson Consulting
Agreement.
The Company acknowledges that in order
to render the Services pursuant to the Nissenson Consulting Agreement, Mr.
Nissenson may be required to travel frequently around the world. Therefore, in
order to enable Mr. Nissenson a normal family life the Company shall bear
Expenses which are related to Mr. Nissenson’s spouse.
Mr. Nissenson shall hold and use, in his
sole discretion, credit cards in the name of the Company (the “Credit Cards”).
Due to Mr. Nissenson’s position with the Company (i.e. President and CEO) he may
from time to time use the Credit Cards to make certain Company payments and pay
certain Company expenses.
This Nissenson Consulting Agreement
shall be in effect for an initial fixed term of five years, beginning on January
1, 2007 (the “Initial Effective Term”), and thereafter, unless terminated as
provided below, shall automatically be renewed for additional terms of three
years (each, an “Additional Effective Term”). Notwithstanding the foregoing,
each of the Company and Mr. Nissenson shall have the right to terminate the
automatic renewal of the Nissenson Consulting Agreement, for any reason
whatsoever, by a termination notice in writing, to be provided to the other
party not less than six months prior to: (i) the expiration of the Initial
Effective Term, or (ii) the expiration of any Additional Effective Term
(the “Notice Period”). Notwithstanding the foregoing, as long as Mr. Nissenson
shall command and/or control, directly and/or indirectly, including together
with others (as well as pursuant to that certain Voting Agreement dated
September 28, 2004, by and among Mr. Nissenson, Abraham Keinan and Campbeltown
Business Ltd.) and/or by proxies, fifteen percent (15%) or more of the voting
rights of the Company, if the Company shall choose to exercise its right to
terminate the automatic renewal of the Nissenson Consulting Agreement, the
Notice Period shall be of not less than twelve months. Notwithstanding the
foregoing, Mr. Nissenson shall have the right to terminate the Nissenson
Consulting Agreement, for any reason whatsoever, and at any time, including
during the Initial Effective Term (“Early Termination by Mr. Nissenson “). In
the event of Early Termination by Mr. Nissenson, the Notice Period shall be of
not less than eight months.
The Nissenson Consulting Agreement
further provided that no later than June 30, 2007, the Company and Mr. Nissenson
shall enter into a severance agreement providing for an appropriate severance
package for Mr. Nissenson (the “Severance Agreement”). The Severance Agreement
shall, inter alia, cover events of termination of the automatic renewal of the
Nissenson Consulting Agreement by the Company or Mr. Nissenson, termination of
the Nissenson Consulting Agreement by Mr. Nissenson, and scheduled retirement by
Mr. Nissenson. The Company has not yet entered into any such
agreement.
The Nissenson Consulting Agreement also
contains provisions regarding non-competition; intellectual property;
confidentiality; conflict of interests and other standard terms and
conditions.
The Nissenson Consulting Agreement was
approved by all non-interested members of the Board of Directors, following a
review and discussion by the Company’s Audit Committee.
Nissenson Bonus and Success
Fee
On December 29, 2005, the Company’s
Board of Directors granted a bonus to Mr. Nissenson for an aggregate amount of
$220,000 (the “Bonus”). The Company’s Board of Directors with the exception of
Mr. Nissenson and Mr. Keinan who abstained from voting, resolved and granted the
Bonus to Mr. Nissenson for his exceptional efforts and professional abilities to
achieve the Company’s goals and determined that it was in the best interest of
the Company, moreover, the Company believes that the Bonus was fair and
proportionate to its President and Chief Executive Officer’s commitment and
achievements.
Mr. Nissenson waived $22,610 of the
Bonus.
Dionysos Investments (1999) Ltd.
Financial Services and Business Development Consulting
Agreement
A Financial Services Consulting
Agreement was entered into on November 18, 2004, between Dionysos Investments
(1999) Ltd., an Israeli company (“Dionysos Investments”) and the Company with
respect to certain services (the “Dionysos Investments Consulting Agreement”).
Mr. Haim Nissenson, father of Mr. Guy Nissenson, our President, Chief Executive
Officer, and Director, is the Managing Director of Dionysos Investments.
Dionysos Investments is owned and controlled by certain members of the Nissenson
family, other than Mr. Guy Nissenson.
Under the Dionysos Investments
Consulting Agreement, Dionysos Investments agrees to assist the Company in
connection with services related to financial activities, financial reports,
mergers & acquisitions and other business development work (the “Services”).
In the event the Company requests additional services, the scope of such
additional services shall be as agreed by the parties and shall be governed by
the Dionysos Investments Consulting Agreement.
The Dionysos Investments Consulting
Agreement provided that Dionysos Investments will be compensated by the Company
for the Services provided to the Company in the amount of £3,000 ($4,945) per
month beginning on the Effective Date of the Dionysos Investments Consulting
Agreement (the “Fees”). In addition, the Company will reimburse Dionysos
Investments, based on prior approval, for expenses incurred, which expenses
include travel, hotel, meals, courier, report reproduction and other
administrative costs when and where needed (the “Expenses”). Compensation for
any additional services provided by Dionysos Investment for the Company shall be
as agreed by the parties.
The Effective Date of the Dionysos
Investments Consulting Agreement is January 1, 2005 (the “Effective Date”). The
term of the Dionysos Investments Consulting Agreement is two years (the “Term”).
According to the Dionysos Investments Consulting Agreement, the Term will be
automatically renewed for successive two-year periods, unless either party
provides written notice at least ninety days prior to the end of the Term that
such party does not wish to renew the Dionysos Investments Consulting
Agreement.
On February 8, 2007, pursuant to the
recommendations of the Audit Committee of the Company and the resolutions of its
Board of Directors dated December 25, 2006, and February 4, 2007, the Company
and Dionysos Investments entered into a First Amendment to the of the Dionysos
Investments Consulting Agreement (the “First Amendment”).
The First Amendment provides that
Section 2 of the Dionysos Investments Consulting Agreement shall be amended in
its entirety to provide as follows:
(i)
|
The parties agree that Dionysos
Investments will be compensated by the Company for the Services provided
to the Company in the amount of £8,000 ($13,186) per month, beginning on
January 1, 2007;
|
(ii)
|
In addition, the Company will pay
Dionysos Investments a one time success fee in the amount of £10,000
($16,483), for initiating, establishing and developing the relationship
between the Company and certain Israeli financial institutions during
fiscal years 2005-2006, relationships which resulted in significant
investments made by certain Israeli financial
institutions;
|
(iii)
|
In addition, the Company will pay
Dionysos Investments a success fee for any future investments in the
Company made by Israeli investors during fiscal year 2007, provided such
investments were a direct or indirect result of the Services provided to
the Company. The success fee will be equal to 0.5% (half percent) of the
gross proceeds of such investments;
and
|
(iv)
|
In addition, the Company will
reimburse Dionysos Investments, based on prior approval by the Audit
Committee of the Company, for expenses incurred, which expenses will
include travel, hotel, meals, courier, report reproduction and other
administrative costs when and where needed. Compensation for any
additional services provided by Dionysos Investments for the Company shall
be as agreed by the parties.
|
The parties agreed that the
abovementioned compensation will only apply to fiscal year 2007, and then be
reviewed and reconsidered by the Audit Committee and Board of Directors of the
Company in December 2007. In the event the Board of Directors of the Company,
exercising sole discretion, decides not to approve the abovementioned
compensation for fiscal year 2008, Dionysos Investments will have the option, in
its sole discretion, to terminate the Dionysos Investments Consulting Agreement,
or continue and provide the Services in return for the same compensation which
was paid to it in fiscal years 2005-2006 (i.e. fee of £3,000 per month plus
reimbursement of expenses).”
The First Amendment further declares
that the Audit Committee and Board of Directors of the Company approved the
automatic renewal of the Term for an additional two-year period, ending on
December 31, 2008.
On January 28, 2008, in accordance with
the recommendation of the Audit Committee and in recognition of and following
the successful efforts of Dionysos in raising capital for the Company in Israel
during the Company’s 2007 fiscal year, the Board of Directors of the Company
approved and confirmed by resolution the engagement of Dionysos to serve as the
Company’s consultant for the fiscal year ended December 31, 2008 at the same
level of compensation which was agreed to and paid for the fiscal year ended
December 31, 2007.
Voting Agreement
Our Chairman of the Board, Abraham
Keinan, and our President, Chief Executive Officer, and Director, Guy Nissenson,
exercise significant control over stockholder matters through a September 28,
2004 Voting Agreement between Mr. Keinan, Mr. Nissenson and Campbeltown Business
Ltd, an entity owned and controlled by Mr. Nissenson and his family. This
agreement, which is for a term of 10 years, provides that: (a) Messrs.
Keinan and Nissenson and Campbeltown Business, Ltd. agree to vote any shares of
our Common Stock controlled by them only in such manner as previously agreed by
all these parties; and (b) in the event of any disagreement regarding the
manner of voting, a party to the agreement will not vote any shares, unless all
the parties have settled the disagreement.
Option Agreement
On July 1, 2008, Abraham Keinan, our
Chairman of the Board and Guy Nissenson, our President, CEO and a director,
entered into a certain Irrevocable Option Agreement (the “Option Agreement”).
Pursuant to the Option Agreement, Mr. Keinan granted Mr. Nissenson (individually
and/or together with the Nissenson Investors, as such term is defined in the
Option Agreement) an irrevocable and exclusive option to purchase a minimum of
2,868,000 of the shares of Xfone common stock, $0.001 par value per share, that
he beneficially owns (the “Option Shares”), at any time from the date of the
Option Agreement through 5:00 p.m. (British Time) on January 1, 2009, at a price
per share of $3.4289277 (the "Option").
In the event that Mr. Nissenson decides
to exercise the Option, Mr. Keinan has the right to sell to the purchaser(s) of
the Option Shares up to an additional 340,000 shares of Xfone common stock that
he owns, at the same price as the Option Shares (the "Additional
Shares”).
Upon the purchase of the Option Shares
and any Additional Shares, (i) Mr. Keinan shall immediately resign from all of
his positions with Xfone and/or its subsidiaries, (ii) shall relinquish any
rights under his agreements with the Registrant and its subsidiaries, including
fees, salary, bonuses, options (including but not limited to outstanding and
fully vested options), severance pay, etc., and (iii) the Voting Agreement by
and between Mr. Keinan, Mr. Nissenson and Campbeltown Business Ltd. dated
September 28, 2004 shall terminate.
Iddo Keinan
Mr. Iddo Keinan, son of Mr. Abraham
Keinan, our Chairman of the Board, has been employed by our wholly owned UK
based subsidiary, Swiftnet limited since 1998.
In 2006 Mr. Iddo Keinan served as the
Commercial Director of Swiftnet, and his annual salary was £54,459 ($89,763). On
December 25, 2006, our Board of Directors approved the continuing employment of
Mr. Iddo Keinan by Swiftnet Limited, at an annual salary of £36,000.
Accordingly, in 2007 his annual salary was £36,000 ($59,337). On September 1,
2008, Mr. Keinan’s role changed to Wholesale Manager for
Swiftnet.
Free Cash Flow Participation Agreement
with NTS Holdings, Inc.
The Company entered into a Free Cash
Flow Participation Agreement (the “Participation Agreement”) with NTS Holdings,
an entity owned by Barbara Baldwin, NTS' President and CEO, Jerry Hoover, NTS'
Executive Vice President - Chief Financial Officer, and Brad Worthington, NTS'
Executive Vice Presidents - Chief Operating officer, pursuant to which NTS
Holdings will be entitled to a payment from the Company of an amount equal to 5%
of the aggregate excess free cash flow generated by the Company’s U.S.
Operations, which is defined in the Participation Agreement as the operations of
the Company and its U.S. subsidiaries, which include Xfone USA, Inc. and NTS,
and their respective subsidiaries, as well as any U.S. entity that the Company
acquires directly, or indirectly through its subsidiaries in the future (a
“Future Acquisition”). NTS Holdings will be entitled to the participation amount
beginning at such time as the Company has received a full return of its initial
invested capital, plus an additional 8% return per year, in connection with the
NTS acquisition (as well as in connection with any Future
Acquisition).
The Participation Agreement will remain
in effect in perpetuity, unless earlier terminated in accordance with its terms.
Termination of the Participation Agreement may occur upon a sale or buyout of
the Company’s U.S. Operations, at the option of the purchaser in any such
transaction, and in the limited circumstances set forth in the Participation
Agreement.
Shareholder Value,
Ltd.
Shareholder Value, Ltd. is a Texas
limited partnership which owns 100% of the building in Lubbock, Texas, from
which NTS Communications leases its corporate offices, Network Control Center,
Customer Care and Internet help desk locations. See “Item 2 – Description of
Property” above. NTS Properties, LC is a Texas limited liability
company that serves as the general partner of Shareholder Value, Ltd., and,
in that capacity, owns 1% of Shareholder Value, Ltd. The remaining 99% of
Shareholder Value, Ltd. is owned by a small group of investors, which includes
several former shareholders of NTS Communications who sold their respective
interests in NTS Communications to Xfone in connection with Xfone’s acquisition
of NTS Communications in February 2008. Such shareholders include
Telephone Electronics Corporation (“TEC”), NTS Communications’ former majority
shareholder, which owns approximately 49.5% of Shareholder Value Ltd., Barbara
Baldwin, President and CEO of NTS Communications and Xfone USA, who owns
approximately 7.425% of Shareholder Value, Ltd., Jerry Hoover, Executive Vice
President, Treasurer and Chief Financial Officer of NTS Communications, who owns
approximately 4.95% of Shareholder Value, Ltd., and Brad Worthington, Executive
Vice President and Chief Operating Officer of NTS Communications, who owns
approximately 4.95% of Shareholder Value, Ltd.
NTS Properties, LC, was a wholly owned
subsidiary of NTS Communications prior to the consummation of Xfone’s
acquisition of NTS Communications in February 2008. As a closing
condition of the acquisition transaction, NTS Communication’s ownership interest
in NTS Properties, LC was distributed pro-rata to former shareholders of NTS
Communications, including TEC, which currently owns approximately 63.47% of NTS
Properties, LC, and Ms. Baldwin, Mr. Hoover and Mr. Worthington who currently
own approximately 5.52%, 0.08% and 0.37% of NTS Properties, LC,
respectively.
SECTION 16(a) BENE
FICIAL
OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United
States, our directors, executive (and certain other) officers, and any persons
holding ten percent or more of our Common Stock must report on their ownership
of the Common Stock and any changes in that ownership to the SEC. Specific due
dates for these reports have been established. During the fiscal year ended
December 31, 2007, we believe that all reports required to be filed by Section
16(a) were filed on a timely basis.
LEGAL P
ROCE
EDINGS
The Company is not engaged in, nor is it
aware of any pending or threatened, litigation in which any of its directors,
executive officers or 5% shareholders is a party adverse to the Company or has a
material interest adverse to the Company.
PROP
OSA
L
II
APPROVAL OF THE APPOINTMENT OF THE
COMPANY’S
INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS
Background
On January 18, 2006, the Audit Committee
of the Company, in accordance with its rotation of independent auditors policy,
replaced Chaifetz & Schreiber, P.C. as our independent auditors and
appointed Stark Winter Schenkein & Co., LLP (“SWS”), an independent member
of BKR International, as independent auditors of the Company. There were no
reportable events, disagreements or dissatisfaction with Chaifetz &
Schreiber to report as defined in Regulation S-B Item 304(a)(2). Chaifetz &
Schreiber were replaced as part of the Company policy of rotating its lead and
reviewing audit partners after five consecutive years. On January 31, 2006, we
filed with the U.S. Securities and Exchange Commission an amended current report
on Form 8-K disclosing the appointment of SWS as our new auditors. On
December 28, 2006, our shareholders approved the appointment of SWS as our
Independent Certified Public Accountants for the fiscal year ending December 31,
2006, and the first three quarters of the fiscal year ending December 31,
2007.
SWS served as the Company’s Independent
Certified Public Accountants for the fiscal years ending December 31, 2006 and
2007, and for the first three quarters of the fiscal year ending December 31,
2008. On October 30, 2008, the Audit Committee of the Company approved the
appointment of SWS as the Company’s Independent Certified Public Accountants for
the fiscal year ending December 31, 2008, and the first three quarters of the
fiscal year ending December 31, 2009.
The Company does not currently expect a
representative of SWS to physically attend the Meeting, however, it is
anticipated that an SWS representative will be available to participate in the
Meeting via telephone or video conference in the event they wish to make a
statement, and in order to respond to appropriate questions.
Audit and Non-Audit
Fees
Aggregate fees for professional services
rendered to the Company by SWS as of or for the two fiscal years ended
December 31, 2007 and 2006 are set forth below:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2007
|
|
|
2006
|
|
|
Audit Fees
|
|
$
|
133,668
|
|
|
$
|
141,375
|
|
Audit-Related
Fees
|
|
|
7,000
|
|
|
|
19,034
|
|
Tax Fees
|
|
|
12,500
|
|
|
|
25,000
|
|
All Other
|
|
|
2,725
|
|
|
|
2,415
|
|
Total
|
|
$
|
155,893
|
|
|
$
|
187,824
|
|
|
Audit
Fees
Aggregate fees for
professional services rendered by SWS in connection with its audit of the
Company’s consolidated financial statements for the fiscal years 2007 and 2006
and the quarterly reviews of our financial statements included in Forms
10-QSB.
Audit-related
Fees
Aggregate fees for
professional services rendered by SWS in connection with its review of Company’s
filings (i.e. Forms 8-K and S-1) with the SEC.
Tax
Fees
Aggregate fees for
professional consulting services rendered by SWS in connection with the
Company's state and federal taxes.
All
Other
Reimbursement for
expenses in connection with professional services rendered by SWS to the
Company.
The Charter of the Audit Committee
provides that although the Audit Committee has the sole authority to appoint the
Independent Auditors, the Audit Committee shall recommend that the Board ask the
Company’s stockholders at their Annual Meeting to approve the Audit Committee’s
selection of Independent Auditors. Therefore, a vote will be taken at the
Meeting on a Proposal to approve the appointment of SWS as the Company’s
Independent Certified Public Accountants for the ensuing
year.
At the Meeting a vote will be taken on a
proposal to approve the appointment of the Company’s Independent Certified
Public Accountants.
_______________________________
Shareholder Vote
Required
Approval of the proposal to approve the
appointment of SWS as the Company’s Independent Certified Public Accountants for
the ensuing year requires the affirmative vote of the holders of a majority of
the shares of common stock present in person or represented by proxy at the
Meeting.
The Board of Directors recommends a vote
FOR the approval of the appointment of SWS.
PROP
OS
AL
III
APPROVAL OF ISSUANCE OF COMMON STOCK
PURCHASE WARRANTS AND SHARES OF COMMON STOCK UNDERLYING SUCH WARRANTS TO WADE
SPOONER
Background
On May 28, 2004, the Company entered
into an agreement and Plan of Merger to acquire WS Telecom, Inc., a Mississippi
corporation, and its two wholly owned subsidiaries, eXpeTel Communications, Inc.
and Gulf Coast Utilities, Inc., through the merger of WS Telecom into our wholly
owned U.S. subsidiary Xfone USA, Inc. (“Xfone USA”). On July 1, 2004, Xfone USA
entered into a management agreement with WS Telecom which provided that Xfone
USA provide management services to WS Telecom pending the consummation of the
merger. The management agreement provided that all revenues generated from WS
Telecom business operations would be assigned and transferred to Xfone USA. The
term of the management agreement commenced on July 1, 2004, and continued until
the consummation of the merger on March 10, 2005. Xfone USA, Inc. is an
integrated telecommunications service provider that owns and operates its own
facilities-based, telecommunications switching system and network. Xfone USA
provides residential and business customers with high quality local, long
distance and high-speed broadband Internet services, as well as cable television
services in certain planned residential communities in Mississippi. Xfone USA is
licensed to provide telecommunications services in Alabama, Florida, Georgia,
Louisiana and Mississippi. Xfone USA utilizes integrated multi-media offerings -
combining digital voice, data and video services over broadband technologies to
deliver services to customers throughout its service areas.
In
conjunction with the consummation of the merger, on March 10, 2005, an
Employment Agreement was entered between Xfone USA and Wade Spooner, its
President and Chief Executive Officer (the “Employment Agreement”). Mr. Spooner
served as Xfone USA’s President and Chief Executive Officer from March 10, 2005
through the date of expiration of the Employment Agreement, March 10,
2008. On March 11, 2008, Xfone USA notified Mr. Spooner in writing
that Xfone USA was not renewing his Employment Agreement, and Mr. Spooner’s
employment with Xfone USA ended at the close of business on March 11,
2008.
Separation Agreement
and Spooner Warrants to be Issued
Thereunder
On August 15, 2008,
Xfone USA,
the Company and Mr. Spooner entered into a Separation Agreement and Release (the
“Separation Agreement”). A copy of the Separation Agreement is attached hereto
as
Appendix
C
. Pursuant to the Separation Agreement, Mr. Spooner forever
released and discharged the Company, Xfone USA, NTS Communications, Inc., the
Oberon Group, LLC and their respective affiliates (including subsidiaries),
shareholders, directors, officers, employees, agents and attorneys (in their
individual and representative capacities), including, without limitation Guy
Nissenson, Barbara Baldwin and Adam Breslawsky (collectively the “Released
Entities and Persons”), and Xfone USA has forever released and discharged Mr.
Spooner and his agents and attorneys (in their individual and representative
capacities) from any and all claims, demands, losses, damages, actions, causes
of action, suits, debts, promises, liabilities, obligations, liens, costs,
expenses, attorney’s fees, indemnities, subrogations (contractual or
equitable) or duties, of any nature, character or description whatsoever,
arising from or relating to, directly or indirectly, Mr. Spooner’s employment
and discontinuation of employment with Xfone USA.
In
connection with the Separation Agreement, Mr. Spooner will be issued an
aggregate 321,452 Common Stock purchase warrants, as follows (collectively, the
“Spooner Warrants’):
a.
300,000
non-tradable warrants (“Spooner New Warrants”) to purchase shares of the
Company’s restricted Common Stock for a term of five (5) years from the date of
issuance, convertible on a one-to-one basis at a strike price of
$3.63 per share; and
b.
21,452
non-tradable warrants convertible on a one to one basis into the Company's
restricted Common Stock, of which 2,483 warrants will expire on December 30,
2010 and have a strike price of $3.04 per share, and the remaining 18,969 of the
warrants will expire on March 31, 2011 and have a strike price of $3.26 per
share (collectively, the “Spooner Additional Acquisition Bonus Warrants”),
issuable in full settlement and satisfaction of any Acquisition Bonus Warrants
due to Mr. Spooner under Section 3.4 of his Employment Agreement.
The
issuance of the Spooner New Warrants and the Spooner Additional Acquisition
Bonus Warrants is subject to the approval of the NYSE Alternext (formerly the
American Stock Exchange), the Tel-Aviv Stock Exchange (the “TASE”) and/or any
other applicable exchange or market where the Company's Common Stock is
traded. The Company received approval from the TASE on August
26, 2008. On October 3, 2008, the NYSE Alternext notified the Company that the
issuance of the Spooner New Warrants and the Spooner Additional Acquisition
Bonus Warrants required the approval of the Company’s shareholders pursuant to
NYSE Alternext rules.
Mr.
Spooner was also granted piggyback registration rights with respect to the
shares underlying the Spooner New Warrants and the Spooner Additional
Acquisition Bonus Warrants for a period of five years from the date of the
Separation Agreement.
In
addition, Xfone USA agreed to pay Mr. Spooner $210,000.00 in cash, payable in
twenty four (24) bi-monthly payments of $8,750.00 on the 15
th
and the
last day of each month or on the next business day if a payment date falls on
either a weekend or holiday, beginning on August 23, 2008. To date,
Xfone USA has paid Mr. Spooner $35,000 pursuant to the terms of the Separation
Agreement.
Pursuant
to the Separation Agreement the terms and conditions of the confidentiality,
non-compete and non-interference provisions provided for in Mr. Spooner’s
Employment Agreement were ratified and remain in full force and
effect. Under the Employment Agreement, Mr. Spooner agreed to
preserve all confidential and proprietary information relating to Xfone USA’s
business, including executive inventions after the term of his employment, and
he agreed to non-competition and non-non-interference provisions that are in
effect for two years after the date of his termination of
employment.
Mr.
Spooner has agreed to return to Xfone USA all documents (and all copies thereof)
and any and all other Xfone USA property in Spooner’s possession, custody or
control, and to cooperate, for a period of one year from the date of the
Separation Agreement, in connection with any action or proceeding which relates
to the Company and/or its affiliates. Xfone USA agreed to pay Mr.
Spooner a consulting fee of $200 per hour for each hour exceeding 5 hours per
month and reimburse Mr. Spooner for reasonable out-of-pocket expenses
pre-approved by the Company (such as hotel and travel expenses) incurred by Mr.
Spooner in connection with such cooperation following its receipt of Mr.
Spooner's appropriately itemized request. Consulting payments and
expense reimbursement shall be paid on the 15th of the month following the month
in which such fee or expense was incurred, or on the next business day if a
payment date falls in either a weekend or holiday.
Any
breach of his obligations under certain sections of the Employment Agreement or
the Separation Agreement that are not cured as provided in the Separation
Agreement, will result in a forfeiture of the cash payment, forfeiture of the
Spooner New Warrants, and will give Xfone USA the right to purchase any of the
Company's Common Stock acquired by exercise of any of the Spooner New Warrants
granted pursuant to the Separation Agreement at the strike price
therefore.
Current C
api
talization
Common
Stock
:
Authorized - 75,000,000 (par value
$0.001)
Issued and outstanding as of October 29,
2008 - 18,376,075
Preferred
Stock
:
Authorized / Issued and outstanding as
of October 29, 2008 - None
Pursuant to a resolution of the Board of
Directors of the Company dated July 11, 2006, in connection with the
listing of the shares of the Company on the TASE, the
Company agreed that as long as its shares are listed for trading on the
TASE, the Company shall not create, issue or allot shares of a
class other than the class listed for trading on the TASE, other
than allotments or issuances that comply with the requirements
of Section 46B(A)(1) of the Israel Securities Law,
1968.
Treasury
Stock
:
Issued and outstanding as of October 29,
2008 - None
Warrants
:
Issued and outstanding as
of October 29, 2008 - 7,015,709
Each issued and outstanding warrant is
exercisable into one share of Common Stock at an exercise price range of $2.86 -
$6.80 per share.
The Company has a contractual obligation
to issue additional warrants to purchase an aggregate of 482,179 shares of its
Common Stock of which 321,452 consist of the Spooner Warrants to be issued to
Mr. Spooner, as described above. The remaining 160,727 warrants are
issuable to Ted Parsons, and are described below under “Proposal
IV.” As described above, the issuance of such warrants is subject to
the approval of both the NYSE Alternext and the TASE. The TASE granted approval
on August 26, 2008.
Options
under the Company's 2004 Stock Option Plan
:
Authorized -
5,500,000
Granted and outstanding as of October
29, 2008 - 4,215,000
Each granted and outstanding option is
exercisable into one share of Common Stock at an exercise price range of $3.146
- $3.50 per share.
Plan Administrator (Pool + Terminated)
as of October 6, 2008 - 1,274,595
Exercised as of October 29, 2008 -
10,405
Options
under the Company's 2007 Stock Incentive Plan
:
Authorized -
8,000,000
Granted and outstanding as of October
29, 2008 - 1,050,000
Each granted and outstanding option is
exercisable into one share of Common Stock at an exercise price of $2.794 per
share.
Plan Administrator (Pool + Terminated)
as of October 29, 2008 - 6,950,000
Exercised as of October 29, 2008 -
None
Series A
Bonds
Principal Amount Allotted, Issued and
Outstanding as of October 29, 2008 -
NIS 100,382,100 par value
(approximately
$25,562,032, based on the exchange rate as of December 13,
2007).
The Series A bonds bear
an
initial annual interest at a rate of 9%
payable in semiannual installments on
June 1st and December 1st of each year
from
2008 to 2015 (inclusive)
.
Commencing on the
date of listing of the Bonds on the TASE, the interest rate payable for the
unpaid balance of the Bonds will be reduced by 1%, to an annual interest rate of
8%.
The
principal and
interest
of the Bonds is
linked
to the
Israeli
consumer price index for the month of
October 2007
. P
rincipal
is
payable in eight (8) equal
annual installments on December 1st of
each year
from
2008 to 2015 (inclusive).
.
Di
vid
ends
No cash dividend was declared in
2005, 2006, 2007, or through the date of this Proxy
Statement.
Description of Rights and Liabilities of
Common Stockholders
Dividend
Rights
- The holders of
outstanding shares of Common Stock are entitled to receive dividends out of
assets legally available therefore at such times and in such amounts as the
board of directors of the Company may from time to time
determine.
Voting
Rights
- Each holder of the
Company's Common Stock is entitled to one vote for each share held on record on
all matters submitted to the vote of stockholders, including the election of
directors. All voting is non-cumulative, which means that the holder of more
than fifty percent (50%) of the shares voting for the election of the directors
can elect all the directors. The board of directors may issue shares for
consideration of previously authorized but un-issued Common Stock without future
stockholder action.
Classification
of Board of Directors
- The Company’s Board of Directors is classified into three classes,
Class A, Class B and Class C. Currently, Classes A and B are each comprised of
three (3) directors, and Class C has two (2) directors, as shown in the table
below:
Director
|
Class
|
Abraham
Keinan
|
Class A
|
Guy
Nissenson
|
Class A
|
Shemer Shimon
Schwarz
|
Class A
|
Eyal Josef
Harish
|
Class B
|
Aviu
Ben-Horrin
|
Class B
|
Itzhak
Almog
|
Class B
|
Morris
Mansour
|
Class C
|
Israel
Singer
|
Class
C
|
At the Meeting, the Class A Directors
are standing for re-election for a term of three (3) years until 2011 and
re-elected or the election and qualification of their successors, or until their
earlier resignation, removal or death. The directors serving in Class B of the
Board will serve until 2009, at which time they will up for re-election for a
three year term, and the directors serving in Class C of the Board will serve
until 2010, at which time they will be up for re-election for another three year
term. Directors serve until the election and qualification of their successors,
or until their earlier resignation, removal or death. Directors are
elected at the annual meeting of stockholders by a plurality of votes and a
separate vote for the election of directors will be held at each annual meeting
for each class of directors having nominees for election at such annual
meeting.
Liquidation
Rights
- Upon liquidation,
the holders of the Common Stock are entitled to receive pro rata all of the
assets of the Company available for distribution to such
holders.
Preemptive
Rights
- Holders of Common
Stock are not entitled to preemptive rights.
Redemption
rights
- No redemption
rights exist for shares of Common Stock.
Sinking Fund
Provisions
- No sinking
fund provisions exist.
Further
Liability for Calls
- No
shares of Common Stock are subject to further call or assessment by the
Company.
Potential
Liabilities of Common Stockholders to State and Local Authorities
- No material potential liabilities are
anticipated to be imposed on stockholders under state statues. Certain Nevada
regulations, however, require regulation of beneficial owners of more than 5% of
the voting securities. Stockholders that fall into this category, therefore, may
be subject to fines in circumstances where non-compliance with these regulations
is established.
Use
of Proceeds
The
Company will receive proceeds of up to $1,158,387 from the exercise
by Mr. Spooner of the Spooner Warrants described herein, if and to the extent
that any such warrants are exercised, and assuming all warrants are exercised at
their current respective exercise prices prior to their
expiration. Since we cannot predict when the warrants will be
exercised, if ever, we have not earmarked these proceeds for any particular
purpose, and we anticipate that any proceeds that we do receive will be added to
our general working capital for application to our ongoing
operations.
Shareholder
Approval
and Authorization
In accordance with the rules of the NYSE
Alternext,
approval of the
Company’s shareholders is required in order to issue the Spooner Warrants
described above, and in order to issue and list on the NYSE Alternext the shares
of the Company’s Common Stock underlying such Spooner Warrants upon exercise of
such Spooner Warrants.
At the meeting a vote will be taken on a
proposal to
(A)
approve and authorize the
issuance of the Spooner Warrants to Mr. Wade Spooner, which include the Spooner
New Warrants
and
the Spooner
Additional Acquisition Bonus Warrants
, pursuant to the terms of the
Separation Agreement, and
(B)
to approve and authorize the issuance of
(i) the 300,000 shares of the Company’s
Common Stock
upon exercise of the
Spooner New
Warrants; and (ii) the 21,452 shares of the Company’s Common Stock upon exercise
of the Spooner Additional Acquisition Bonus Warrants (the aggregate 321,452
shares of Common Stock are collectively referred to as the “Spooner Warrant
Shares”).
_______________________________
Shareholder Vote
Required
Approval
of the proposal
to approve
and authorize the issuances of the Spooner Warrants to Mr. Wade Spooner,
pursuant to the terms of the Separation Agreement, and to approve and authorize
the issuance of
the Spooner Warrant Shares upon exercise of the Spooner
Warrants,
requires the affirmative
vote of the holders of a majority of the Common Stock present in person or
represented by proxy at the Meeting
.
The Board of Directors recommends a
vote
FOR
the approval and authorization of the
issuances of the Spooner Warrants to Mr. Wade Spooner, pursuant to the terms of
the Separation Agreement, and the approval and authorization of the issuance of
the Spooner Warrant Shares upon exercise of the Spooner
Warrants.
PROPO
SAL
IV
APPROVAL OF ISSUANCE OF COMMON STOCK
PURCHASE WARRANTS AND SHARES OF COMMON STOCK UNDERLYING SUCH WARRANTS TO TED
PARSONS
Background
On May 28, 2004, the Company entered
into an agreement and Plan of Merger to acquire WS Telecom, Inc., a Mississippi
corporation, and its two wholly owned subsidiaries, eXpeTel Communications, Inc.
and Gulf Coast Utilities, Inc., through the merger of WS Telecom into our wholly
owned U.S. subsidiary Xfone USA, Inc. (“Xfone USA”). On July 1, 2004, Xfone USA
entered into a management agreement with WS Telecom which provided that Xfone
USA provide management services to WS Telecom pending the consummation of the
merger. The management agreement provided that all revenues generated from WS
Telecom business operations would be assigned and transferred to Xfone USA. The
term of the management agreement commenced on July 1, 2004, and continued until
the consummation of the merger on March 10, 2005. Xfone USA, Inc. is an
integrated telecommunications service provider that owns and operates its own
facilities-based, telecommunications switching system and network. Xfone USA
provides residential and business customers with high quality local, long
distance and high-speed broadband Internet services, as well as cable television
services in certain planned residential communities in Mississippi. Xfone USA is
licensed to provide telecommunications services in Alabama, Florida, Georgia,
Louisiana and Mississippi. Xfone USA utilizes integrated multi-media offerings -
combining digital voice, data and video services over broadband technologies to
deliver services to customers throughout its service areas.
In
conjunction with the consummation of the merger, on March 10, 2005, an
Employment Agreement was entered between Xfone USA and Ted Parsons, its
Executive President and Chief Marketing Officer (the “Employment Agreement”).
Mr. Parsons served as Xfone USA’s Executive President and Chief Marketing
Officer from March 10, 2005 through the date of expiration of the Employment
Agreement, March 10, 2008. On March 11, 2008, Xfone USA notified Mr.
Parsons in writing that Xfone USA was not renewing his Employment Agreement, and
Mr. Parsons’ employment with Xfone USA ended at the close of business on March
11, 2008.
Separation Agreement
and Parsons Warrants to be Issued
Thereunder
On August 15, 2008,
Xfone USA,
the Company and Mr. Parsons entered into a Separation Agreement and Release (the
“Separation Agreement”). A copy of the Separation Agreement is attached hereto
as
Appendix
D
. Pursuant to the Separation Agreement, Mr. Parsons forever
released and discharged the Company, Xfone USA, NTS Communications, Inc., the
Oberon Group, LLC and their respective affiliates (including subsidiaries),
shareholders, directors, officers, employees, agents and attorneys (in their
individual and representative capacities), including, without limitation Guy
Nissenson, Barbara Baldwin and Adam Breslawsky (collectively the “Released
Entities and Persons”), and Xfone USA has forever released and discharged Mr.
Parsons and his agents and attorneys (in their individual and representative
capacities) from any and all claims, demands, losses, damages, actions, causes
of action, suits, debts, promises, liabilities, obligations, liens, costs,
expenses, attorney’s fees, indemnities, subrogations (contractual or
equitable) or duties, of any nature, character or description whatsoever,
arising from or relating to, directly or indirectly, Mr. Parsons’ employment and
discontinuation of employment with Xfone USA.
In
connection with the Separation Agreement, Mr. Parsons will be issued an
aggregate 160,727 Common Stock purchase warrants, as follows (collectively, the
“Parsons Warrants’):
a.
150,000
non-tradable warrants (“Parsons New Warrants”) to purchase shares of the
Company’s restricted Common Stock for a term of five (5) years from the date of
issuance, convertible on a one-to-one basis at a strike price of $3.63 per
share; and
b.
10,727
non-tradable warrants convertible on a one to one basis into the Company’s
restricted Common Stock, of which 1,242 warrants will expire on December 30,
2010 and have a strike price of $3.04 per share, and the remaining 9,485 of the
warrants will expire on March 31, 2011 and have a strike price of $3.26 per
share (collectively, the “Parsons Additional Acquisition Bonus Warrants”),
issuable in full settlement and satisfaction of any Acquisition Bonus Warrants
due to Mr. Parsons under Section 3.4 of his Employment Agreement.
The
issuance of the Parsons New Warrants and the Parsons Additional Acquisition
Bonus Warrants is subject to the approval of the NYSE Alternext (formerly the
American Stock Exchange), the Tel-Aviv Stock Exchange (the “TASE”) and/or any
other applicable exchange or market where the Company’s Common Stock is
traded. The Company received approval from the TASE on August
26, 2008. On October 3, 2008, the NYSE Alternext notified the Company that the
issuance of the Parsons New Warrants and the Parsons Additional Acquisition
Bonus Warrants required the approval of the Company’s shareholders pursuant to
NYSE Alternext rules.
Mr.
Parsons was also granted piggyback registration rights with respect to the
shares underlying the Parsons New Warrants and the Parsons Additional
Acquisition Bonus Warrants for a period of five years from the date of the
Separation Agreement.
In
addition, Xfone USA agreed to pay Mr. Parsons $115,340.00 in cash, payable in
twenty four (24) bi-monthly payments of $4,805.84 on the 15
th
and the
last day of each month or on the next business day if a payment date falls on
either a weekend or holiday, beginning on August 23, 2008. To date,
Xfone USA has paid Mr. Parsons
$
19,223.36
pursuant
to the terms of the Separation Agreement.
Pursuant
to the Separation Agreement the terms and conditions of the confidentiality,
non-compete and non-interference provisions provided for in Mr. Parsons’
Employment Agreement were ratified and remain in full force and
effect. Under the Employment Agreement, Mr. Parsons agreed to
preserve all confidential and proprietary information relating to Xfone USA’s
business, including executive inventions after the term of his employment, and
he agreed to non-competition and non-non-interference provisions that are in
effect for two years after the date of his termination of
employment.
Mr.
Parsons has agreed to return to Xfone USA all documents (and all copies thereof)
and any and all other Xfone USA property in Parsons’ possession, custody or
control, and to cooperate, for a period of one year from the date of the
Separation Agreement, in connection with any action or proceeding which relates
to the Company and/or its affiliates. Xfone USA agreed to pay Mr.
Parsons a consulting fee of $100 per hour for each hour exceeding 5 hours per
month and reimburse Mr. Parsons for reasonable out-of-pocket expenses
pre-approved by the Company (such as hotel and travel expenses) incurred by Mr.
Parsons in connection with such cooperation following its receipt of Mr.
Parsons' appropriately itemized request. Consulting payments and
expense reimbursement shall be paid on the 15th of the month following the month
in which such fee or expense was incurred, or on the next business day if a
payment date falls in either a weekend or holiday.
Any
breach of his obligations under certain sections of the employment agreement or
the Separation Agreement that are not cured as provided in the Separation
Agreement, will result in a forfeiture of the cash payment, forfeiture of the
Parsons New Warrants, and will give Xfone USA the right to purchase any of the
Company Common Stock acquired by exercise of any of the Parsons New Warrants
granted pursuant to the Separation Agreement at the strike price
therefore.
Current
Capit
alization
Common
Stock
:
Authorized - 75,000,000 (par value
$0.001)
Issued and outstanding as of October 29,
2008 - 18,376,075
Preferred
Stock
:
Authorized / Issued and outstanding as
of October 29, 2008 - None
Pursuant to a resolution of the Board of
Directors of the Company dated July 11, 2006, in connection with the
listing of the shares of the Company on the TASE, the
Company agreed that as long as its shares are listed for trading on the
TASE, the Company shall not create, issue or allot shares of a
class other than the class listed for trading on the TASE, other
than allotments or issuances that comply with the requirements
of Section 46B(A)(1) of the Israel Securities Law,
1968.
Treasury
Stock
:
Issued and outstanding as of October 29,
2008 - None
Warrants
:
Issued and outstanding as
of October 29, 2008 - 7,015,709
Each issued and outstanding warrant is
exercisable into one share of Common Stock at an exercise price range of $2.86 -
$6.80 per share.
The Company has a contractual obligation
to issue additional warrants to purchase an aggregate of 482,179 shares of its
Common Stock of which 160,727 consist of the Parsons Warrants to be issued to
Mr. Parsons, as described above. The remaining 321,452 warrants are
issuable to Wade Spooner, and are described above under “Proposal
III.” As described above, the issuance of such warrants is subject to
the approval of both the NYSE Alternext and the TASE. The TASE granted approval
on August 26, 2008.
Options
under the Company's 2004 Stock Option Plan
:
Authorized -
5,500,000
Granted and outstanding as of October
29, 2008 - 4,215,000
Each granted and outstanding option is
exercisable into one share of Common Stock at an exercise price range of $3.146
- $3.50 per share.
Plan Administrator (Pool + Terminated)
as of October 6, 2008 - 1,274,595
Exercised as of October 29, 2008 -
10,405
Options
under the Company's 2007 Stock Incentive Plan
:
Authorized -
8,000,000
Granted and outstanding as of October
29, 2008 - 1,050,000
Each granted and outstanding option is
exercisable into one share of Common Stock at an exercise price of $2.794 per
share.
Plan Administrator (Pool + Terminated)
as of October 29, 2008 - 6,950,000
Exercised as of October 29, 2008 -
None
Series A
Bonds
Principal Amount Allotted, Issued and
Outstanding as of October 29, 2008 -
NIS 100,382,100 par value
(approximately
$25,562,032, based on the exchange rate as of December 13,
2007).
The Series A bonds bear
an
initial annual interest at a rate of 9%
payable in semiannual installments on
June 1st and December 1st of each year
from
2008 to 2015 (inclusive)
.
Commencing on the
date of listing of the Bonds on the TASE, the interest rate payable for the
unpaid balance of the Bonds will be reduced by 1%, to an annual interest rate of
8%.
The
principal and
interest
of the Bonds is
linked
to the
Israeli
consumer price index for the month of
October 2007
. P
rincipal
is
payable in eight (8) equal
annual installments on December 1st of
each year
from
2008 to 2015
(inclusive).
Divi
de
nds
No cash dividend was declared in
2005, 2006, 2007, or through the date of this Proxy
Statement.
Description of Rights and Liabilities of
Common Stockholders
Dividend
Rights
- The holders of
outstanding shares of Common Stock are entitled to receive dividends out of
assets legally available therefore at such times and in such amounts as the
board of directors of the Company may from time to time
determine.
Voting
Rights
- Each holder of the
Company's Common Stock is entitled to one vote for each share held on record on
all matters submitted to the vote of stockholders, including the election of
directors. All voting is non-cumulative, which means that the holder of more
than fifty percent (50%) of the shares voting for the election of the directors
can elect all the directors. The board of directors may issue shares for
consideration of previously authorized but un-issued Common Stock without future
stockholder action.
Classification
of Board of Directors
- The Company’s Board of Directors is classified into three classes,
Class A, Class B and Class C. Currently, Classes A and B are each comprised of
three (3) directors, and Class C has two (2) directors, as shown in the table
below:
Director
|
Class
|
Abraham
Keinan
|
Class A
|
Guy
Nissenson
|
Class A
|
Shemer Shimon
Schwarz
|
Class A
|
Eyal Josef
Harish
|
Class B
|
Aviu
Ben-Horrin
|
Class B
|
Itzhak
Almog
|
Class B
|
Morris
Mansour
|
Class C
|
Israel
Singer
|
Class
C
|
At the Meeting, the Class A Directors
are standing for re-election for a term of three (3) years until 2011 and
re-elected or the election and qualification of their successors, or until their
earlier resignation, removal or death. The directors serving in Class B of the
Board will serve until 2009, at which time they will up for re-election for a
three year term, and the directors serving in Class C of the Board will serve
until 2010, at which time they will be up for re-election for another three year
term. Directors serve until the election and qualification of their successors,
or until their earlier resignation, removal or death. Directors are
elected at the annual meeting of stockholders by a plurality of votes and a
separate vote for the election of directors will be held at each annual meeting
for each class of directors having nominees for election at such annual
meeting.
Liquidation
Rights
- Upon liquidation,
the holders of the Common Stock are entitled to receive pro rata all of the
assets of the Company available for distribution to such
holders.
Preemptive
Rights
- Holders of Common
Stock are not entitled to preemptive rights.
Redemption
rights
- No redemption
rights exist for shares of Common Stock.
Sinking Fund
Provisions
- No sinking
fund provisions exist.
Further
Liability for Calls
- No
shares of Common Stock are subject to further call or assessment by the
Company.
Potential
Liabilities of Common Stockholders to State and Local Authorities
- No material potential liabilities are
anticipated to be imposed on stockholders under state statues. Certain Nevada
regulations, however, require regulation of beneficial owners of more than 5% of
the voting securities. Stockholders that fall into this category, therefore, may
be subject to fines in circumstances where non-compliance with these regulations
is established.
Use
of Pro
ceed
s
The
Company will receive proceeds of up to
$
579,197
from
the exercise by Mr. Parsons of the Parsons Warrants described herein, if and to
the extent that any such warrants are exercised, and assuming all warrants are
exercised at their current respective exercise prices prior to their
expiration. Since we cannot predict when the warrants will be
exercised, if ever, we have not earmarked these proceeds for any particular
purpose, and we anticipate that any proceeds that we do receive will be added to
our general working capital for application to our ongoing
operations.
Shareholder
Approval
and
Authorization
In accordance with the rules of the NYSE
Alternext,
approval of the
Company’s shareholders is required in order to issue the
Parsons
Warrants described above, and in order
to issue and list on the NYSE Alternext the shares of the Company’s Common Stock
underlying such
Parsons
Warrants upon exercise of such
Parsons
Warrants.
At the meeting a vote
will be taken on a proposal to
(A)
approve and authorize
the issuance of th
e
Parsons
Warrants to Mr.
Ted
Parsons
,
which include the
Parsons
New
Warrants
and
the
Parsons
Additional Acquisition Bonus
Warrants
, pursuant to the
terms of the Separation Agreement, and
(B)
to approve and
authorize the issuance of (i) the
150
,000 shares of the
Company’s
Common
Stock
upon exercise of the
Parsons New Warrants; and (ii) the
10,727 shares of the Company’s Common Stock upon exercise of the Parsons
Additional Acquisition Bonus Warrants (the aggregate 160,727 shares of Common
Stock are collectively referred to as the “Parsons Warrant
Shares”).
_______________________________
Shareholder Vote
Required
Approval
of the proposal
to approve
and authorize the issuances of the
Parsons
Warrants to Mr.
Ted Parsons
, pursuant to the terms of the
Separation Agreement, and to approve and authorize the issuance of
the
Parsons Warrant Shares upon exercise of the Parsons Warrants,
requires the affirmative vote of the
holders of a majority of the Common Stock present in person or represented
by proxy at the Meeting
.
The Board of Directors recommends a
vote
FOR
the approval and authorization of the
issuances of the
Parsons
Warrants to Mr.
Ted
Parsons
, pursuant to the terms of the
Separation Agreement, and the approval and authorization of the issuance of
the Parsons Warrant Shares upon exercise of the Parsons
Warrants.
STATEMENT OF ADDITIONAL
INFORMATION
A.
FINA
NCIAL
INFORMATION
See
Appendix
B
.
B. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
The information set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”) contains certain “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of
the Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995, including, among others, (i) expected changes in
the Company's revenues and profitability, (ii) prospective business
opportunities and (iii) the Company's strategy for financing its business.
Forward-looking statements are statements other than historical information or
statements of current condition. Some forward-looking statements may be
identified by use of terms such as “believes”, “anticipates”, “intends” or
“expects”. These forward-looking statements relate to the plans, objectives and
expectations of the Company for future operations. Although the Company believes
that its expectations with respect to the forward-looking statements are based
upon reasonable assumptions within the bounds of its knowledge of its business
and operations, in light of the risks and uncertainties inherent in all future
projections, the inclusion of forward-looking statements in this Proxy Statement
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be
achieved.
You should read the following discussion
and analysis in conjunction with the Financial Statements and Notes attached
hereto, and the other financial data appearing elsewhere in this Proxy
Statement.
The Company's revenues and results of
operations could differ materially from those projected in the forward-looking
statements as a result of numerous factors, including, but not limited to, the
following: the risk of significant natural disaster, the inability of the
Company to insure against certain risks, inflationary and deflationary
conditions and cycles, currency exchange rates, changing government regulations
domestically and internationally affecting our products and
businesses.
OVERVIEW
Xfone, Inc. was incorporated in Nevada,
U.S.A. in September 2000. We are a holding and managing company providing
international voice, video and data communications services with operations in
the United States, the United Kingdom and Israel offering a wide range of
services, including: local, long distance and international telephony services;
video; prepaid and postpaid calling cards; cellular services; Internet services;
messaging services (Email/Fax Broadcast, Email2Fax and Cyber-Number); and
reselling opportunities. We serve customers worldwide.
In February 2007, we moved our principal
executive offices from the UK to Flowood, Mississippi, and shared executive
office space with our wholly owned U.S. subsidiary, Xfone USA, Inc. The
headquarters of Xfone USA and our principal executive offices recently moved
from the Flowood, Mississippi location to Lubbock, Texas, to the existing
headquarters of NTS Communications, Inc., which we acquired in February
2008.
On October 4, 2000, we acquired Swiftnet
Limited which had a business plan to provide comprehensive range of
telecommunication services and products, integrated through one website.
Swiftnet was incorporated in 1990 under the laws of the United Kingdom and is
headquartered in London, England. Until 1999, the main revenues for Swiftnet
were derived from messaging and fax broadcast services. During 2000, Swiftnet
shifted its business focus to voice services and now offers a comprehensive
range of calling services to resellers and end customers. Utilizing automation
and proprietary software packages, Swiftnet’s strategy is to grow without the
need for heavy investments and with lower expenses for operations and
registration of new customers.
On April 15, 2004, we established an
Israel based subsidiary, Xfone Communication Ltd. (which changed its name to
Xfone 018 Ltd. in March 2005). On July 4, 2004, the Ministry of Communications
of the State of Israel granted Xfone 018 a license to provide international
telecom services in Israel. We started providing services in Israel through
Xfone 018 as of mid-December 2004. Headquartered in Petach Tikva, Israel, Xfone
018 Ltd. is a telecommunications service provider that owns and operates its own
facilities-based telecommunications switching system. Xfone 018 provides
residential and business customers with high quality international and local
carrier services.
On May 28, 2004, we entered into an
agreement and Plan of Merger to acquire WS Telecom, Inc., a Mississippi
corporation, and its two wholly owned subsidiaries, eXpeTel Communications, Inc.
and Gulf Coast Utilities, Inc., through the merger of WS Telecom into our wholly
owned U.S. subsidiary Xfone USA, Inc. On July 1, 2004, Xfone USA entered into a
management agreement with WS Telecom which provided that Xfone USA provide
management services to WS Telecom pending the consummation of the merger. The
management agreement provided that all revenues generated from WS Telecom
business operations would be assigned and transferred to Xfone USA. The term of
the management agreement commenced on July 1, 2004, and continued until the
consummation of the merger on March 10, 2005. Xfone USA, Inc. is an integrated
telecommunications service provider that owns and operates its own
facilities-based, telecommunications switching system and network. Xfone USA
provides residential and business customers with high quality local, long
distance and high-speed broadband Internet services, as well as cable television
services in certain planned residential communities in Mississippi. Xfone USA is
licensed to provide telecommunications services in Alabama, Florida, Georgia,
Louisiana and Mississippi. Xfone USA utilizes integrated multi-media offerings -
combining digital voice, data and video services over broadband technologies to
deliver services to customers throughout its service areas.
On August 18, 2005, we entered into an
Agreement and Plan of Merger to acquire I-55 Internet Services, Inc., a
Louisiana corporation (the “I-55 Internet Merger Agreement”). On September 13,
2005, we filed a Form 8-K discussing the impact of Hurricane Katrina on the
transaction contemplated by the I-55 Internet Merger Agreement. On October 10,
2005, we entered into a First Amendment to the Merger Agreement, by and among
I-55 Internet Services, Xfone, Inc, Xfone USA, Inc., our wholly-owned United
States subsidiary and Hunter McAllister and Brian Acosta, key employees of I-55
Internet Services, in order to induce Xfone, Inc and Xfone USA not to terminate
the I-55 Internet Merger Agreement due to the material adverse effect that
Hurricane Katrina has had on the assets and business of I-55 Internet Services.
As part of the amendment and since, at that time, the merger of I-55 Internet
Services with and into Xfone USA had not been consummated yet, in the interim,
the parties agreed and entered into on October 11, 2005 a Management Agreement
(the “I-55 Internet Management Agreement”) that provided that I-55 Internet
Services hired and appointed Xfone USA as manager to be responsible for the
operation and management of all of I-55 Internet Services business operations,
including among other things personnel, accounting, contracts, policies and
budget. In consideration of the management services provided under the I-55
Internet Management Agreement, I-55 Internet Services assigned and transferred
to Xfone USA all revenues generated and expenses incurred in the ordinary course
of business during the term of the I-55 Internet Management Agreement. The term
of the I-55 Internet Management Agreement commenced on October 11, 2005 and
continued until the consummation of the merger on March 31,
2006.
In conjunction with the consummation of
the merger and in exchange for all of the capital stock of I-55 Internet
Services, we issued a total of 789,863 shares of our Common Stock valued at
$2,380,178 and 603,939 warrants exercisable for a period of five years into
shares of our Common Stock, with an exercise price of $3.31, valued based on the
Black Scholes option-pricing model (the “Xfone Stock and Warrant
Consideration”). A portion of the Xfone Stock and Warrant Consideration issued
at closing was placed in an escrow account, to be held pending certain
adjustments. The Company subsequently made the following two claims against
such escrow account: Claim #1: The Company made a claim on March 27, 2007
to adjust the total consideration based upon the changes in customer billings as
determined pursuant to a formula set forth in the First Amendment to the Merger
Agreement (the “Customer Billing Adjustment Amount”), which the Company had
determined was $247,965.57. Claim #2: The Company determined an undisclosed
liability, in accordance with Article 6.03 of the I-55 Internet Services, Inc.
Merger Agreement (as amended), in the amount of $147,550 and on November 28,
2006, sent a claim for this amount. The Shareholder Representatives of I-55
Internet Services disputed the amounts in both claims submitted and so the
parties entered into negotiations on May 2, 2007, where they agreed to reduce
the amount claimed in Claim #1 by $104,948.46, which represents adjustments made
to the 90-Day column, Trade Accounts, and certain accounts that had previously
been listed as having 90-Day balances but were subsequently confirmed as not
having 90-Day balances, and by the final amount billed to EBI Comm, Inc. (“EBI”)
in 2005 prior to the assets of EBI being purchased by Xfone USA, and agreed to
reduce the original Loss amount claimed in Claim #2 by $6,800.00, representing
additional services purchased with Zipa, Inc. under the direction of Xfone USA
during the Management Agreement period from October 2005 through March 2006.
Upon settlement of the claims, two Joint Deposition Notices for the escrow
agent, Trustmark National Bank, were delivered to the Shareholder
Representatives of I-55 Internet Services for execution, however, a Shareholder
Representative refused to execute the notices pending approval of the claims by
the shareholders of I-55 Internet Services. On June 7, 2007, the
shareholders met and rejected the figure agreed upon with respect to Claim #1
and accepted the figure agreed upon with respect to Claim #2. On or about
May 12, 2008, after further negotiations, Xfone USA and I-55 agreed to value
Claim #1 at $143,017.11 and Claim #2 at $140,750.00 for a total agreed loss of
$283,767.11. This resulted in the Company’s receipt of 62,850 shares of
Xfone Common Stock and 44,470 Xfone Stock Warrants from the
Escrow Account in satisfaction of these claims (the “Returned Xfone Stock
and Warrant Consideration”) and the balance of the Xfone Common Stock and Xfone
Stock Warrants remaining in the Escrow Account was distributed to the selling
I-55 Internet shareholders and the escrow account was closed out on June 16,
2008. The components of the Returned Xfone Stock and Warrant Consideration were
cancelled by the Company on June 3, 2008.
In conjunction with that certain Letter
Agreement dated October 10, 2005 with MCG Capital Corporation, a major creditor
of I-55 Internet Services, and upon the consummation of the merger on March 31,
2006, we issued to MCG Capital 667,998 shares of our Common Stock, valued at
fair value of $2,010,006, in return for retiring its loan with I-55
Internet Services
.
I-55 Internet Services provided Internet
access and related services, such as installation of various networking
equipment, website design, hosting and other Internet access installation
services, throughout the Southeastern United States to individuals and
businesses located predominantly in rural markets in Louisiana and Mississippi.
As a result of the merger with and into Xfone USA, these services are now
available in expanded markets throughout Louisiana and Mississippi. The Internet
service offerings include dial-up, DSL, high speed dedicated Internet access,
web services, email, the World Wide Web, Internet relay chat, file transfer
protocol and Usenet news access to both residential and business customers. The
I-55 Internet Services offerings provided various prices and packages that
allowed I-55 Internet Services subscribers to customize their subscription with
services that met customers’ particular requirements. Xfone USA now provides
bundled services of voice and data (broadband Internet) to customers throughout
its service areas.
On August 26, 2005, we entered into an
Agreement and Plan of Merger to acquire I-55 Telecommunications, LLC, a
Louisiana corporation (the “I-55 Telecom Merger Agreement”). On September 13,
2005, we filed a Form 8-K discussing the impact of Hurricane Katrina on the
transaction contemplated by the I-55 Telecom Merger Agreement. In order to
demonstrate our intention to continue on with the transaction contemplated
by the I-55 Telecom Merger Agreement, the parties entered into on October 12,
2005 a Management Agreement (the “I-55 Telecom Management Agreement”) that
provided that I-55 Telecommunications hired and appointed Xfone USA as manager
to be responsible for the operation and management of all of I-55
Telecommunications’ business operations. In consideration of the management
services provided under the I-55 Telecom Management Agreement, I-55
Telecommunications assigned and transferred to Xfone USA all revenues generated
and expenses incurred in the ordinary course of business during the term of the
I-55 Telecom Management Agreement. The term of the I-55 Telecom Management
Agreement commenced on October 12, 2005 and continued until the consummation of
the merger on March 31, 2006.
In conjunction with the consummation of
the merger and in exchange for all of the capital stock of I-55
Telecommunications, LLC, we issued a total of 223,702 shares of our Common Stock
valued at $671,687 and 79,029 warrants exercisable for a period of five years
into shares of our Common Stock, with an exercise price of $3.38, valued based
on the Black Scholes option-pricing model (the “Xfone Stock and Warrant
Consideration”). A portion of the Xfone Stock and Warrant Consideration issued
at closing was placed in an escrow account. The Company determined a breach of
the representations and warranties in the Merger Agreement resulting from the
failure of I-55 Telecommunications to disclose the liability due and payable to
the Louisiana Universal Service Fund (“LA USF”) through the period of October
2005, at which time Xfone USA undertook the management role of I-55
Telecommunications. Pursuant to Section 1(g) of the Escrow Agreement
dated as of March 31, 2006 by and among Xfone USA, the Escrow Agent, and the
President and Sole Member of I-55 Telecommunications, and in accordance with
Article 6.02 of the Merger Agreement, Xfone USA notified the other parties that
it believed that it had suffered a Loss of $30,625.52, pursuant to the
provisions of Article 6.02 of the Merger Agreement dated as of August 26,
2005. Having not received any response from the President and Sole Member of
I-55 Telecommunications, nor from his counsel, on October 15, 2007, and after
the allotted response time allowed, Xfone USA instructed the Escrow Agent
(Trustmark National Bank) to deliver from the Escrow Fund of the President and
Sole Member of I-55 Telecommunications, to the Company, 7,043 shares of Common
Stock and 4,838 Xfone Stock Warrants. The 7,043 shares of Common
Stock and 4,838 Xfone Stock Warrants were returned to the Company for
cancellation on October 31, 2007.
In conjunction with certain Agreements
to Purchase Promissory Notes dated October 31, 2005 / February 3, 2006 with
Randall Wade James Tricou; Rene Tricou - Tricou Construction; Rene Tricou - Bon
Aire Estates; Rene Tricou - Bon Aire Utility; and Danny Acosta, creditors of
I-55 Telecommunications (the “Creditors”), and upon the consummation of the
merger on March 31, 2006, we issued to the Creditors an aggregate of 163,933
restricted shares of Common Stock and an aggregate of 81,968 warrants,
exercisable at $3.38 per share, at a total value of $492,220, in return for
retiring their individual loans with I-55
Telecommunications.
I-55 Telecommunications provided voice,
data and related services throughout Louisiana and Mississippi to both
individuals and businesses. Prior to the merger with and into Xfone USA, I-55
Telecommunications was a licensed facility based CLEC operating in Louisiana and
Mississippi with a next generation class 5 carrier switching platform. I-55
Telecommunications provided a complete package of local and long distance
services to residential and business customers across both states. As a result
of the merger, Xfone USA has now expanded its On-Net (facilities) service area,
through I-55 Telecommunications, into New Orleans, Louisiana and surrounding
areas, including Hammond, Louisiana. Xfone USA is expanding its sales offices to
include New Orleans, in an effort to continue revenue growth and increase market
share in the revitalized city, as well as into Hammond, Louisiana. The
competition in secondary markets, such as Jackson, Mississippi, as opposed to
Tier 1 markets such as Atlanta, Georgia, is also rapidly declining due to
the removal of UNE-P and the decline in the competitive local exchange providers
that had been dependent on UNE-P as their only source for providing competitive
local telephone services in those markets. This provides for a unique
opportunity for Xfone USA to gain market share, by utilizing its existing
network and to expand its facilities into these opportunity areas becoming a
primary alternative to the monopoly Incumbent Local
Exchange Company.
On September 27, 2005, a Securities
Purchase Agreement was entered for a $2,000,000 financial transaction by and
among us, Xfone USA, Inc., eXpeTel Communications, Inc., Gulf Coast Utilities,
Inc. and Laurus Master Fund, Ltd. The investment took the form of a convertible
term note secured by our United States assets. The Term Note has a 3 year term,
bears interest at a rate equal to prime plus 1.5% per annum, and is convertible,
under certain conditions, into shares of our common stock at an initial
conversion price equal to $3.48 per share. In conjunction with the financial
transaction, we issued to Laurus Master Fund 157,500 warrants which are
exercisable at $3.80 per share for a period of five years. The closing of the
financial transaction was on September 28, 2005. As of August 1, 2007, Laurus
Master Fund, Ltd. assigned to Valens U.S. SPV I, LLC a principal amount equal to
$169,925.11 of the Term Note, and to Valens Offshore Fund SPV I, Ltd. a
principal amount equal to $549,289.76 of the Term Note. The Term Note was
fully paid off in cash on September 26, 2008.
On September 28, 2005, a Securities
Purchase Agreement was entered for a $2,212,500 financial transaction by and
among us, Crestview Capital Master, LLC, Burlingame Equity Investors, LP,
Burlingame Equity Investors II, LP, Burlingame Equity Investors (Offshore),
Ltd., and Mercantile Discount - Provident Funds. Upon the closing of the
financial transaction on October 31, 2005, we issued to the investors an
aggregate of 885,000 shares of common stock at a purchase price of $2.50 per
share together with, 221,250 warrants exercisable at $3.00 per share and 221,250
warrants exercisable at $3.25 per share. The financial transaction resulted in
dilution in the percentage of common stock owned by the Company’s existing
shareholders, although the price paid was in excess of the net tangible book
value per share and accordingly was not economically
dilutive.
On November 23, 2005, a Securities
Purchase Agreement was entered for a $810,000 financial transaction by and among
us, Mercantile Discount-Provident Funds, Hadar Insurance Company Ltd., the
Israeli Phoenix Assurance Company Ltd., and Gaon Gemel Ltd. In conjunction with
the financial transaction, we issued an aggregate of 324,000 shares of common
stock at a purchase price of $2.50 per share together with 81,000 warrants
exercisable at $3.00 per share for a period of five years and 81,000 warrants
exercisable at $3.25 per share for a period of five years. The financial
transaction was closed on April 6, 2006. The financial transaction resulted in
dilution in the percentage of common stock owned by the Company’s existing
shareholders, although the price paid was in excess of the net tangible book
value per share and accordingly was not economically
dilutive.
On January 1, 2006, Xfone USA, Inc., our
wholly owned subsidiary, entered into an Agreement with EBI Comm, Inc. (“EBI”),
a privately held Internet Service Provider, to purchase the assets of EBI. EBI
provided a full range of Internet access options for both commercial and
residential customers in north Mississippi. Based in Columbus, Mississippi,
EBI’s services included Dial-up, DSL, T1 Dedicated Access and Web Hosting. The
customer base, numbering approximately 1,500 Internet users, is largely
concentrated in the Golden Triangle area, which includes Columbus, West Point
and Starkville, Mississippi. The acquisition was structured as an asset
purchase, providing for Xfone USA to pay EBI total consideration equal to 50% of
the monthly collected revenue from the customer base during the first 12 months,
beginning January 2006. Acquired assets include the customer base and customer
lists, trademarks and all related intellectual property, fixed assets and all
account receivables. As a result of further negotiations between us and EBI, we
have agreed to pay the total consideration of this acquisition in cash in the
amount of $85,699 in monthly payments of $10,000 until paid in full, and we made
the first of such payments on June 1, 2007 and final payment on January 25,
2008. The acquisition was not significant from an accounting
perspective.
On January 10, 2006 (effective as of
January 1, 2006), Xfone USA, Inc., our wholly owned subsidiary, entered into an
Asset Purchase Agreement with Canufly.net, Inc. (“Canufly.net”), an Internet
Service Provider based in Vicksburg, Mississippi, and its principal shareholder,
Mr. Michael Nassour. Canufly.net provided residential and business customers
with high-speed Internet services and utilized the facilities-based network of
Xfone USA, as an alternative to BellSouth, to provide Internet connectivity to
its customers. Canufly.net also provided Internet services through a small
wireless application in certain areas in Vicksburg, Mississippi. The transaction
was closed on January 24, 2006. We agreed to pay a total purchase price of up to
$710,633, payable as follows: (i) $185,000 in cash payable in twelve equal
monthly payments, the first installment was paid at closing, and as of December
31, 2006, the entire amount was paid in full and in accordance with the Asset
Purchase Agreement; (ii) $255,633 in cash, paid at closing, to pay off the loan
with the B&K Bank; (iii) 33,768 restricted shares of Common Stock and 24,053
warrants exercisable at $2.98 per share for a period of five years were issued
to the shareholders of Canufly.net during May 2006. Following the closing in
2006 and due to the satisfaction of certain earn out provisions in the
Asset Purchase Agreement the Company issued in March 2007 an additional 20,026
restricted shares of Common Stock and 14,364 warrants exercisable at $2.98 per
share for a period of five years to the shareholders of Canufly.net. The
acquisition was not significant from an accounting
perspective.
On May 10, 2006, we, Story Telecom,
Inc., Story Telecom Limited, Story Telecom (Ireland) Limited, Nir Davison, and
Trecastle Holdings Limited, a company owned and controlled by Mr. Davison,
entered into a Stock Purchase Agreement. Pursuant to the Stock Purchase
Agreement, we increased our ownership interest in Story Telecom from 39.2% to
69.6% in a cash transaction valued at $1,200,000. $900,000 of the total
consideration was applied to payables owed by Story Telecom to us and our
subsidiary Swiftnet Limited for back-end telecommunications services. The
balance of $300,000 was paid to Story Telecom to be used as working capital.
Story Telecom, Inc., a telecommunication service provider, operated in the
United Kingdom through its two wholly owned subsidiaries, Story Telecom Limited
and Story Telecom (Ireland) Limited (which was dissolved on February 23, 2007).
Following the acquisition, Story Telecom operates as a division of our
operations in the United Kingdom. The stock purchase pursuant to the Stock
Purchase Agreement was completed on May 16, 2006. The transaction contemplated
by the Stock Purchase Agreement was not significant from an accounting
perspective.
On March 25, 2008, in connection with a
settlement of a legal proceeding initiated by Mr. Nir Davison and due to come
before the UK Employment Tribunal Service, we purchased from Mr. Davison and
Trecastle Holdings Limited, the shares of common stock of Story Telecom, Inc.
that each party owned, respectively, for an aggregate purchase price of £270,000
($538,083), pursuant to the terms of a Compromise Agreement and a Securities
Purchase Agreement entered into between the parties on that date. Upon
acquisition of the shares of common stock of Story Telecom, Inc. from Mr.
Davison and Trecastle Holdings, Story Telecom, Inc. became our wholly owned
subsidiary.
On May 25, 2006, we and the shareholders
of Equitalk.co.uk Limited, a privately held telephone company based in the
United Kingdom (“Equitalk”) entered into an Agreement relating to the sale and
purchase of Equitalk (the “Equitalk Agreement”). The Equitalk Agreement provided
for us to acquire Equitalk in a restricted Common Stock and warrant transaction
valued at $1,650,000. The acquisition was completed on July 3, 2006, and on that
date Equitalk became our wholly owned subsidiary. In conjunction with the
completion of the acquisition and in exchange for all of the capital stock of
Equitalk, we issued a total of 402,192 restricted shares of our Common Stock and
a total of 281,872 warrants exercisable at $3.025 per share for a period of five
years. Founded in December 1999, Equitalk, a VC-financed company, was the first
fully automated e-telco in the United Kingdom. Equitalk provides both
residential and business customers with low-cost IDA and CPS voice services,
broadband and teleconferencing.
On June 19, 2006, we entered into a
Securities Purchase Agreement to sell to Central Fund for the Payment of
Severance Pay of the First International Bank of Israel Ltd.; Meiron Provident
Fund for Self Employed Persons of the First International Bank of Israel Ltd.;
Atidoth Provident and Compensation Fund of the First International Bank of
Israel Ltd.; Tohelet Provident and Compensation Fund of the first International
Bank of Israel Ltd.; Mishtalem Funds for Continuing Education of the First
International Bank of Israel Ltd.; Keren Hashefa Provident and Compensation
Fund of the First International Bank of Israel Ltd.; Hamelacha Provident and
Compensation Fund of the First International Bank of Israel Ltd.; Teuza
Provident and Compensation Fund of the First International Bank of Israel Ltd.;
Kidma Provident Funds Management Company Ltd. for Menifa Provident Fund for Bank
of Israel Employees; and Security Pension Fund for Artisans Industrialists and
Self Employed Persons Ltd. an aggregate of 344,825 restricted shares of common
stock, at a purchase price of $2.90 per share, together with an aggregate of
172,415 warrants to purchase shares of common stock, at an exercise price of
$3.40 per share and with a term of five years. The financial transaction was
closed on September 28, 2006. The financial transaction resulted in dilution in
the percentage of common stock owned by the Company’s existing shareholders,
although the price paid was in excess of the net tangible book value per share
and accordingly was not economically dilutive.
On December 24, 2006, the Company
entered into an Agreement to sell to Halman-Aldubi Provident Funds Ltd. and
Halman-Aldubi Pension Funds Ltd. an aggregate of 344,828 restricted shares of
its common stock, at a purchase price of $2.90 per share, together with an
aggregate of 172,414 warrants to purchase shares of its common stock, at an
exercise price of $3.40 per share and with a term of five years. The financial
transaction was closed on February 8, 2007. The financial transaction resulted
in dilution in the percentage of common stock owned by the Company’s existing
shareholders, although the price paid was in excess of the net tangible book
value per share and accordingly was not economically
dilutive.
On August 15, 2007, the Company,
Swiftnet Limited, our wholly owned U.K.-based subsidiary (“Swiftnet”), and Dan
Kirschner entered into a definitive Share Purchase Agreement to be completed on
the same date, pursuant to which Swiftnet purchased from Mr. Kirschner the 67.5%
equity interest in Auracall Limited (“Auracall”) that he beneficially owned,
thereby increasing Swiftnet’s ownership interest in Auracall from 32.5% to 100%.
Swiftnet had acquired the 32.5% interest in Auracall through several
transactions that occurred since October 16, 2001. The purchase price for the
shares was £810,918 (approximately $1,616,158), payable as follows: £500,000
(approximately $996,500) was paid in cash upon signing of the Share Purchase
Agreement, and the remaining £304,000, plus interest of £6,918 (approximately
$619,658), was payable in monthly installments beginning in September 2007 and
continued through March 2008. In connection with the acquisition, Auracall and
Swiftnet entered into an Inter-Company Loan Agreement, pursuant to which
Auracall agreed to lend Swiftnet £850,000 (approximately $1,694,050) for the
sole purpose of and in connection with Swiftnet’s acquisition of the Auracall
shares. The loan is unsecured, bears interest at a rate of 5% per annum, and is
to be repaid in five years (i.e., August 15, 2012), but may be repaid earlier
without charge or penalty. As a result of the terms of the transaction, Mr.
Kirschner no longer serves as Auracall’s Managing Director or as a member of its
board of directors.
On October 23, 2007, the Company entered
into Subscription Agreements with 15 investors affiliated with Gagnon
Securities, Inc. who agreed to purchase an aggregate of 1,000,000 shares of the
Company’s common stock, par value $0.001 per share at a price of $3.00 per
share, for a total subscription amount of $3,000,000. This offering was made by
the Company, acting without a placement agent, pursuant to the Company’s
Registration Statement on Form SB-2 (File No. 333-143618) which was declared
effective by the U.S. Securities and Exchange Commission on August 6, 2007.
The 1,000,000 shares were issued on November 6, 2007. Following the
effectiveness of the Registration Statement on Form SB-2 (File No. 333-143618)
described above, pursuant to which the offerings on October 23, 2007 and
November 4, 2007 described above were made, the Company did not file a
prospectus supplement within the required time period containing the final fixed
offering price of $3.00 per share due to an unintentional error. This
constituted a technical violation of Section 5(b)(2) of the Securities Act. The
Company filed Current Reports on Form 8-K on October 23, 2007 and November 5,
2007 following its entry into the related subscription agreements with the
purchasers of the shares, and filed a Post-Effective Amendment on November 7,
2007, each of which disclosed such final fixed price. The
Post-Effective Amendment filed on November 7, 2007 was never declared effective
by the SEC. The Company is relying upon the cure provision provided
by Rule 424(b)(8) under the Securities Act in order to cure such
violation. The Company believes that such violation was cured under
Rule 424(b)(8) upon filing of the Post-Effective Amendment, as it made a good
faith effort to file such Post-Effective Amendment as soon as practicable upon
discovery of the unintentional failure to file the prospectus supplement, and
because the filing with the SEC of the Post-Effective Amendment and other
filings related to the sale of the shares satisfied the prospectus delivery
requirements of Section 5(b)(2) under the “access equals delivery” model adopted
by the SEC.
On November 4, 2007, the Company entered
into Subscription Agreements with: (i) XFN - RLSI Investments, LLC, an entity
affiliated with Richard L. Scott Investments, LLC, a U.S. institutional
investor, which agreed to purchase 250,000 shares of the Company’s common stock,
par value $0.001 per share at a price of $3.00 per share, for a total
subscription amount of $750,000 (the “U.S. Offering”); and (ii) certain Israeli
institutional investors, which agreed to purchase an aggregate of 700,000 shares
of the Company’s Common Stock, at a price of $3.00 per share, for a total
subscription amount of $2,100,000 (the “Israeli Offering”). The U.S. Offering
and Israeli Offering were made by the Company pursuant to the Company’s
Registration Statement on Form SB-2 (File No. 333-143618) which was declared
effective by the U.S. Securities and Exchange Commission on August 6, 2007.
Following the effectiveness of the Registration Statement on Form SB-2
(File No. 333-143618) described above, pursuant to which the offerings on
October 23, 2007 and November 4, 2007 described above were made, the Company did
not file a prospectus supplement within the required time period containing the
final fixed offering price of $3.00 per share due to an unintentional
error. This constituted a technical violation of Section 5(b)(2) of
the Securities Act. The Company filed Current Reports on Form 8-K on October 23,
2007 and November 5, 2007 following its entry into the related subscription
agreements with the purchasers of the shares, and filed a Post-Effective
Amendment on November 7, 2007, each of which disclosed such final fixed
price. The Post-Effective Amendment filed on November 7, 2007 was
never declared effective by the SEC. The Company is relying upon the
cure provision provided by Rule 424(b)(8) under the Securities Act in order to
cure such violation. The Company believes that such violation was
cured under Rule 424(b)(8) upon filing of the Post-Effective Amendment, as it
made a good faith effort to file such Post-Effective Amendment as soon as
practicable upon discovery of the unintentional failure to file the prospectus
supplement, and because the filing with the SEC of the Post-Effective Amendment
and other filings related to the sale of the shares satisfied the prospectus
delivery requirements of Section 5(b)(2) under the “access equals delivery”
model adopted by the SEC. The U.S. Offering was made by the Company acting
without a placement agent. The Israeli Offering was made by the Company with the
services of First International & Co. - Underwriting & Investments Ltd.,
one of the Israeli investors, acting as placement agent, for which it is
entitled to a placement fee equal to 5% (plus VAT, if applicable) of the gross
proceeds of the Israeli Offering. In addition, the Company will pay
its consultant, Dionysos Investments (1999) Ltd. (“Dionysos”) a success fee
equal to 0.5% of the gross precedes of the Israeli Offering, pursuant to that
certain First Amendment to Financial Services and Business Development
Consulting Agreement by and among the Company and Dionysos dated February 8,
2007. During 2008 a total amount of NIS 501,910 ($130,502) was paid to
Dionysos.
On December 13, 2007, the Company
entered into Subscription Agreements with: (i) XFN-RLSI Investments, LLC,
an entity affiliated with Richard L. Scott Investments, LLC, a U.S.
institutional investor, which agreed to purchase 800,000 Units, each of which
consists of two shares of the Company’s common stock and one warrant to purchase
one share of common stock at a price of $6.20 per Unit (“Unit”), for a total
subscription amount of $4,960,000; and (ii) certain investors affiliated
with or who are customers of Gagnon Securities LLC who agreed to purchase an
aggregate of 500,000 Units, for a total subscription amount of $3,100,000. The
warrants are exercisable for a period of five years from issuance at an exercise
price of $3.10 per share. The financing was completed on February 26,
2008. XFN-RLSI Investments, LLC is not an affiliate of the Company. This
offering was made pursuant to the 4(2) exemption under the Securities Act of
1933, as amended, and was made by the Company acting without a placement
agent.
On December 13, 2007
(the “Date of Issuance”)
, the Company accepted offers, for the
issuance of securities to Israeli institutional investors, for total gross
proceeds of NIS 100,382,100 (approximately $25,562,032) par value
non-convertible bonds (Series A) (the “Bonds”). The Bonds were issued for an
amount equal to their par value.
The Bonds accrue annual interest at
a rate of 9% that will
be
paid semi-annually on the 1st of June
and on the 1st of December of every year from
2008 until 2015
(inclusive).
The
principal of the Bonds will be repaid
in
eight equal annual payments
on
the 1
st of December of every year
from 2008 until 2015 (inclusive). The principal and interest
of the Bonds
is linked to the Israeli Consumer Price
Index (“CPI”).
Within the framework of the conditions
of the Bonds' offering
, the
Company
has committed,
among other things, as follows:
1.
|
To make an effort and to take all
actions that are reasonably required, subject to the law and the rules of
the Tel Aviv Stock Exchange Ltd. (the “TASE”), to list the Bonds for
trading on the TASE, such that restrictions on resale will not apply in
accordance with Section 15c of the Israeli Securities Law 5728-1968 (the
“Israeli Securities Law”) on the holders of the Bonds, no later than 12
months from the Date of Issuance.
|
2.
|
Immediately after the issuance the
Company will apply to the TASE to list the Bonds as a “non-tradable
security” with the TASE Clearing House, at the discretion of the Company,
subject to the law and the rules of the TASE.
|
3.
|
Starting from the date of the
Bonds’ listing for trade on the TASE, to the extent such listing occurs,
the interest rate payable for the unpaid balance of the Bonds will be
reduced by 1% (to an annual interest rate of
8%).
|
4.
|
Until the Bonds are listed for
trade on the TASE, in the event that the rating of the Bonds is reduced
from the rating given them at their issuance - A3 by Midroog - to Baa1 (or
an equivalent rating by another rating company), the annual rate of
interest on the Bonds will increase by 0.25%.
|
5.
|
If the Bonds are not listed for
trading within 12 months from the Date of Issuance, any holder of the
Bonds will be allowed (but not required), to redeem his Bonds, in whole or
in part, in an early redemption.
|
6.
|
In the event that by March 31,
2008 the conditions for the release of the proceeds of the offering by the
Trustee, as set forth in the Indenture of the Bonds, are not met, the
issuance will be canceled and the Trustee will return the proceeds of the
offering to the holders of the Bonds, along with interest at an annual
rate of 9%, linked to the CPI, for the period from the Date of Issuance
until the date of the return of the proceeds as stated. The
interest from the proceeds of the offering that have accumulated in the
trust account will be transferred to the Company. The applicable
conditions are: (i) that the Company raises an aggregate of at least $20.0
million in equity financings (this condition has been satisfied subject to
the receipt of certain regulatory approvals); and (ii) that the conditions
(which are not related to the financing of the acquisition) for the
consummation of the NTS Acquisition have been
met.
|
7.
|
The occurrence of certain events
in connection with the Company may lead to the requirement to immediately
redeem the Bonds. Among those events are: (1) customary events such as
non-payment, the appointment of a liquidator or temporary or permanent
conservator, whose appointment is not canceled within a certain period of
time, the placement of a lien on substantive assets of the Company, the
realization of pledges on substantive assets of the Company, the
termination of the Company and when a bank requires immediate repayment of
a substantive amount of credit; (2) specific events that relate to the
period before the Bonds are listed for trade on the TASE such as the
reduction of the rating of the Bonds to Baa2 of Midroog (or an equivalent
rating of another rating company) or to a lower rating, if the Company
issues additional bonds in a manner that causes the current rating of the
Bonds to be reduced, if the Bonds cease to be rated for a period greater
than 30 days, if the proportion of the debt to EBITDA increases above 4:1,
if the Company ceases to control (directly and/or indirectly) NTS
Communications (for this purpose “control” has the meaning as defined in
the Israeli Securities Law) and in the event that Mr. Guy Nissenson ceases
to serve as President and CEO of the Company; (3) additional specific
events such as the payment of a dividend that will cause the proportion of
the shareholders equity to the Company’s balance sheet to be lower than
25%.
|
On March 25, in conjunction with the
issuance of the Bonds, the Company issued the holders of the Bonds, for no
additional consideration, 956,020 (non-tradable) warrants, each exercisable at
an exercise price of $3.50 with a term of 4 years. The 956,020 shares underlying
the warrants have been registered in accordance with the Securities Act pursuant
to the Company's Registration Statement on Form S-1 (File No. 333-150305,
declared effective by the SEC on September 2, 2008).
Each of the institutional investors
represented that it is an institutional investor classified as a type of
investor listed in the first supplement to the Israeli Securities Law, for the
purposes of Section 15a(b)(1) of the Israeli Securities Law; that its offer was
for itself and/or for customers that are investors listed in Section 5a(b)(1) of
the Israeli Securities Law, respectively.
Each of the institutional investors has
also declared that it knows and understands, that the private placement is being
done in Israel only (and not in the U.S.) and is intended only for Israeli
residents, that are in Israel (and not in the U.S.) and not for U.S. persons
(“U.S. Person”) as they are defined in Regulation S regulated under the
Securities Act. Each of the institutional investors has declared and
confirmed, that it is incorporated and active in Israel, and that it is not a
U.S. Person, and that it is not located outside of Israel at the time of the
filing of the offer. Each of the institutional investors has declared
that it knows that it will not be allowed to take action to sell the Bonds and
Warrants in the U.S. and/or to a U.S. Person. Each of the institutional
investors has declared and confirmed that the Bonds, Warrants and shares that
may result from the exercise of the Warrants, are not acquired for the purpose
of “distribution” (as this term is defined in the US securities laws) in the
U.S.
According to an agreement entered into
as of December 12, 2007, between the Company and Excellence Nessuah Underwriting
(1993) Ltd. (“Excellence Underwriters”) and First International & Co. -
Underwriting and Investments Ltd. (“First International Underwriters”) (the
"December 12, 2007 Agreement"), Excellence Underwriters and First International
Underwriters undertook to serve as the pricing underwriters for the prospectus
to be filed with the Israeli Securities Authority and the TASE for the listing
for trade of the Bonds on the TASE (“Commitment to Serve as a Pricing
Underwriter”). In connection with Excellence Underwriters and First
International Underwriters Commitment to Serve as a Pricing Underwriter and the
services rendered by them to the Company in connection with the Bonds offering,
the Company agreed to pay Excellence Underwriters and First International
Underwriters a fee equal to 3% of the proceeds of the offering, 1% to be paid
upon the receipt of the proceeds of the offering by the Trustee, and the
additional 2% to be paid upon the release to the Company of the proceeds of the
offering by the Trustee. In the event that the conditions set forth in 1.6 above
are not met, the Company will not be paid back the 1% payment. During 2008 a
total amount of NIS 3,000,000 ($829,823) was paid to Excellence
Underwriters.
In addition, the Company paid its
consultant, Dionysos Investments (1999) Ltd. (“Dionysos”) a success fee equal to
0.5% of the proceeds of the Bonds offering, pursuant to that certain First
Amendment to Financial Services and Business Development Consulting Agreement by
and among the Company and Dionysos dated February 8, 2007. During 2008 a total
amount of NIS 501,910 ($130,502) was paid to Dionysos.
To the Company’s best knowledge and
based on information that was provided to it by Excellence Underwriters and
First International Underwriters, the requirements of the Israeli law have been
fulfilled regarding the prohibition on conflicts of interest between an
underwriter and its associates and between an underwriter and an issuer,
including in connection with a sale through a non-uniform
offer.
On August 22, 2007, we entered into a
Stock Purchase Agreement (the “NTS Purchase Agreement”) with NTS Communications,
Inc. (“NTS”), a provider of integrated voice, data and video solutions
headquartered in Lubbock, Texas, and the owners of approximately 85% of the
equity interests in NTS, to acquire NTS. Subsequently, all of the remaining
shareholders of NTS executed the Agreement, bringing the total percentage of
equity interests in NTS owned by NTS shareholders that entered into the
Agreement (the “NTS Sellers”) to 100%. On February 14, 2008, we
entered into a First Amendment to the NTS Purchase Agreement to amend the
agreement to further extend the expiration date for the closing of our
acquisition of NTS. On February 26, 2008, we entered into a Second
Amendment to the NTS Purchase Agreement which amended, among other things, the
definition and elements of working capital, as such term is defined in the NTS
Purchase Agreement, and increased the escrow amount. On April 25, 2008, we
entered into a Third Amendment, pursuant to which we agreed to an extension of
time for the calculation and payment of the post closing working
capital adjustment under the NTS Purchase
Agreement.
The acquisition closed on February 26,
2008. Upon closing of the acquisition, NTS and its six wholly owned
subsidiaries, NTS Construction Company, Garey M. Wallace Company, Inc., Midcom
of Arizona, Inc., Communications Brokers, Inc., NTS Telephone Company, LLC, and
NTS Management Company, LLC, became our wholly owned
subsidiaries.
The purchase price for the acquisition
set forth in the NTS Purchase Agreement was approximately $42,000,000 (excluding
acquisition related costs), plus (or less) (i) the difference between NTS’
estimated working capital and the working capital target for NTS as set forth in
the NTS Purchase Agreement, and (ii) the difference between amounts allocated by
NTS for its fiber optic network build-out project anticipated in Texas and any
indebtedness incurred by NTS in connection with this project, each of which was
subject to our advance written approval. After applying this formula,
the final aggregate purchase price was calculated as $41,900,000, and was paid
as follows:
·
|
$35,414,715 was paid in cash;
and
|
·
|
2,366,892 shares of our Common
Stock were issued to certain NTS Sellers who elected to reinvest all or a
portion of their allocable sale price in our Common Stock, pursuant to the
terms of the NTS Purchase Agreement. Our Board of Directors determined, in
accordance with the NTS Purchase Agreement, the number of shares of our
Common Stock to be delivered to each participating NTS Seller by dividing
the portion of such NTS Seller’s allocable sale price that the NTS Seller
elected to receive in shares of our Common Stock by 93% of the average
closing price of our Common Stock on the American Stock Exchange for the
ten consecutive trading days preceding the trading day immediately prior
to the Closing Date (i.e., $2.74). The aggregate sales price reinvested by
all such NTS Sellers was
$6,485,284.
|
On February 26, 2008, and in connection
with the closing of the acquisition, the parties entered into the following
material definitive agreements:
A.
Free Cash Flow Participation Agreement.
The Company entered into a Free Cash
Flow Participation Agreement (the “Participation Agreement”) with NTS Holdings,
an entity owned by Barbara Baldwin, NTS’ President and CEO, Jerry Hoover, NTS’
Executive Vice President – Chief Financial Officer, and Brad Worthington, NTS’
Executive Vice President – Chief Operating Officer, pursuant to which NTS
Holdings will be entitled to a payment from the Company of an amount equal to 5%
of the aggregate excess free cash flow generated by the Company’s U.S.
Operations, which is defined in the Participation Agreement as the operations of
the Company and its U.S. subsidiaries, which include Xfone USA, Inc. and NTS,
and their respective subsidiaries, as well as any U.S. entity that the Company
acquires directly, or indirectly through its subsidiaries in the future (a
“Future Acquisition”). NTS Holdings will be entitled to the participation amount
beginning at such time as the Company has received a full return of its initial
invested capital, plus an additional 8% return per year, in connection with the
NTS acquisition (as well as in connection with any Future
Acquisition).
The Participation Agreement will remain
in effect in perpetuity, unless earlier terminated in accordance with its terms.
Termination of the Participation Agreement may occur upon a sale or buyout of
the Company’s U.S. Operations, at the option of the purchaser in any such
transaction, and in the limited circumstances set forth in the Participation
Agreement.
B.
Escrow Agreement.
In accordance with the terms of the
Purchase Agreement, the Company and certain representatives of the NTS
Shareholders (the “NTS Shareholder Representatives”) entered into an Escrow
Agreement with Trustmark National Bank, as escrow agent, pursuant to which the
Company deposited an amount of cash and shares of Common Stock equal to
$6,679,999 (15.9%) of the aggregate purchase price for the acquisition, to be
held and administered by the escrow agent in order to secure certain obligations
of the sellers under the Purchase Agreement. Each share of Common Stock
deposited with the escrow agent has an agreed value of $2.74, which was
determined by using the average per share closing price of the Common Stock for
the ten (10) consecutive trading days preceding the trading day immediately
prior to the Closing Date.
C.
Release.
Concurrently with the execution of the
agreements described above, each of Barbara Baldwin, Jerry Hoover and Brad
Worthington executed a Release, releasing NTS, the Company and their respective
officers, directors, shareholders, employees and their successors and assigns,
from any and all claims, causes or rights of action, demands and damages related
to the business, affairs, actions or omissions of NTS and those of its officers,
directors, employees or independent contractors through the Closing Date, as
well as from any amounts due from NTS to the Officer for serving NTS in any
capacity through the Closing Date.
D. In
addition, the Company entered into a Noncompetition, Nondisclosure and
Nonsolicitation Agreement with Telephone Electronics Corporation, the largest
NTS shareholder prior to the closing; and NTS entered into employment agreements
with Barbara Baldwin, Jerry Hoover and Brad Worthington.
In connection with the closing of the
acquisition on February 26, 2008, the Company issued 2,366,892 shares of
the Company’s Common Stock to certain NTS Shareholders who elected to reinvest
all or a portion of their allocable sale price in the Company’s Common Stock,
pursuant to the terms of the Purchase Agreement. The Company’s Board
of Directors determined, in accordance with the Purchase Agreement, the number
of shares of the Company’s Common Stock to be delivered to each participating
NTS Shareholder by dividing the portion of such NTS Shareholder’s allocable sale
price that the NTS Shareholder elected to receive in shares of the Company’s
Common Stock by 93% of the average closing price of the Company’s Common Stock
on the American Stock Exchange for the ten consecutive trading days preceding
the trading day immediately prior to the Closing Date (i.e.,
$2.74). The aggregate sales price reinvested by all such NTS
Shareholders was $6,485,284.
On March 5, 2008, the Company entered
into a letter agreement (the “March 5, 2008 Agreement”) with Oberon
Securities, LLC, a New York City-based registered broker-dealer (“Oberon
Securities”), pursuant to which the Company will pay Oberon Securities
$1,200,000 in cash for its services to the Company as financial advisor in
connection with the Company's acquisition of NTS, payable as follows: (i)
$400,000 no later than March 7, 2008 (ii) $400,000 no later than May 1, 2008 and
(iii) $400,000 no later than July 1, 2008. The March 5, 2008 Agreement sets
forth the total and final fees due to Oberon Securities for its services in
connection with the NTS acquisition, pursuant to the Company’s prior agreements
with Oberon Securities and its affiliates.
RESULTS OF OPER
ATIONS
FOR THE YEAR ENDED DECEMBER 31, 2007
U.K. Operations -
2007
Our U.K. subsidiary, Swiftnet
Limited operates switching and computer systems offering a range of
innovative, in-house developed telecommunications services. Swiftnet's strategy
is to grow without the need for heavy investments and with lower operational
expenses through the use of
automation. A comprehensive range of telecommunication services
and products are sold directly to end-users, through a web
site integrating all of Swiftnet's services. The services
are mainly telephone related services to customers dialing local and
international destinations. Swiftnet provides value added services such as fax
broadcast, email to fax and various other messaging services. Swiftnet
also provides services for a range of resellers and partners to sell to
their customers. These resellers and partners include Auracall Limited, Story
Telecom Limited and Equitalk.co.uk Limited. Swiftnet's telecommunications
services are used by subscribers in the U.K. and
worldwide.
Our U.K. subsidiary, Equitalk.co.uk
Limited is an automated e-telco providing post-paid, telecommunications
services to customers across the whole of the U.K. These customers are
typically making calls within the UK. Equitalk’s strategy is to grow through
acquiring customers directly through sales and marketing
activities.
Our U.K. subsidiary, Story Telecom
Limited provides international calling services through calling cards
and special access numbers available for use from mobile
phones and landlines. Story Telecom's strategy is to grow through adding
products and services targeted at customers making international
calls.
Our U.K. subsidiary, Auracall Limited
provides international calling services through special access numbers
available for use from mobile phones and landlines. Auracall’s
strategy is to grow through promoting existing and new products via a network of
agents.
In 2007, we had only approximately 0.2%
of the market share of the United Kingdom telecommunication market (not
including mobiles revenues), based on our revenues of $24 million during 2007,
compared with the approximately $10 billion telecommunication market (not
including mobiles revenues) in the United Kingdom.
We had four major types of customers in
the U.K.: Residential, Commercial, Governmental agencies
and Resellers. In 2007 our largest non-affiliated reseller was
WorldNet Global Communications Ltd. which generated under 1% of our total
revenues. We provide WorldNet Global Communications with the billing system. We
anticipate that WorldNet will continue to contribute approximately the same
amount of UKP to our revenues in year 2008.
However, should our agreements involving
WorldNet be cancelled, our revenues will be negatively
affected.
In 2007, approximately 54.3% of our
revenues were derived from our operations in the United
Kingdom.
U.S. Operations -
2007
Our sole U.S. subsidiary during 2007,
Xfone USA, Inc. provides voice, data and related services throughout Louisiana
and Mississippi to both individuals and businesses. Xfone USA is a licensed
facility based CLEC operating in Louisiana and Mississippi with a next
generation class 5-carrier switching platform. Xfone USA offers a complete
package of local and long distance services to residential and business
customers across both states.
In 2007 we had approximately 11,000
End-User Switched Access telephone lines in the Alabama, Louisiana and
Mississippi market through the combination of Xfone USA and I-55
Telecommunications, LLC or approximately 0.2% of market share. This total market
size in 2007 represented 5,732,998 telephone lines, with BellSouth
Telecommunications maintaining its monopoly market share with 4,949,629
telephone lines or approximately 86% of the market. All CLECs combined made up
the remaining 783,369 telephone lines or approximately 14% of the tri-state
market, according to the 2007 FCC Report - Trends in Local Telephone
Competition.
In 2007, approximately 27.5% of our
revenues were derived from our operations in the United
States.
With continued cross selling to Xfone
USA Customers as well as projected expansion into specific targeted wire
centers, we expect to continue revenue growth and increase market share.
Regulations affecting the telecommunications industry began in March 2006;
conversions of all circuits affected were completed in April 2006. The
competition in rural markets is also rapidly declining due to the removal of
UNE-P and the decline in the competitive local exchange providers that had been
dependent on UNE-P as their only source for providing competitive local
telephone services in those communities. We believe that this provides for a
unique opportunity for Xfone USA to continue to gain market share, by utilizing
its existing network and to expand it facilities into these areas becoming a
primary alternative to the monopoly Incumbent Local Exchange
Company.
The overall trend for 2007 continued to
show improving wire line margins in the Business markets and maintaining margins
in the Residential (Consumer) markets for facilities based
providers. Mergers and acquisitions continued throughout 2007, as a
component for offsetting the line loss felt throughout the CLEC industry due to
the regulatory changes. The industry will see continued merger and acquisition
activity in 2008 and beyond for companies that have cash and public equity
resources. These transactions will continue to change the landscape in the
telecommunications industry. Analysts still believe there will be more
consolidation opportunity over the next two to three years in both wire line and
wireless markets.
As a result of regulatory changes, the
competitive landscape continues to change, creating additional opportunity for
facilities based competitive carriers to gain a larger market share in a shorter
period of time in certain geographic markets, through internal growth (sales)
and external growth (mergers and acquisitions) due to the continued departure of
non-faculties based providers through either termination of their business or
through acquisitions.
Demands in the market show continued
interest in providing Telco TV, VOIP products and rapid growth in the Broadband
market, heating up competition with the Regional Bell Carriers and cable
providers. DSL services should continue to grow due to aggressive pricing with
higher speeds becoming the norm delivering download speeds of 6 Meg in certain
areas.
Xfone USA’s business plan for 2007
continues to include expansion of market share in both Business and Residential
markets with focus in its specific geographic service areas primarily in
Mississippi and Louisiana, and in those markets where the company has deployed
its own network and Central Offices (CO’s), which are the highest margin areas.
The Business markets will continue to be expanded through Direct Sales and
Independent sales efforts, while the Residential markets will be expanded
through radio, direct mail, email marketing and other low cost advertising and
message delivery opportunities.
In May 2007, Xfone USA hired a Vice
President of Business Sales and incorporated an aggressive business sales
expansion plan focusing this effort in its specific geographic and high margin
service areas in Jackson, Mississippi, Baton Rouge and New Orleans, Louisiana.
The expansion effort is on plan from the projections submitted in May
2007.
The Company’s business plan in 2007 also
included growth through acquisitions, which made sense for several reasons: (i)
faster results in achieving large top line revenue performance; (ii) significant
synergies impact from consolidating corporate functions; and (iii) relatively
easy integration of acquired companies because of facilities and network
architecture.
Xfone USA is also planning for the
future and emergence of the “Third Network” and has scale and availability to
implement VoIP, Telco TV, WiFi and WiMax network architecture, as they become
more viable into the future. However, these deployments are currently under much
scrutiny and are being implemented in larger metropolitan areas such as New York
City, Philadelphia, and San Francisco.
Xfone USA, a facilities based fully
integrated communications carrier, is positioned in 2008 to continue to take
full advantage of the regulatory opportunities afforded to facilities-based
providers as a result of the FCC TRRO ruling in 2005, as well as to take
advantage of the consolidation momentum started in 2006.
Israeli Operations -
2007
Since the opening of the international
telephony market in Israel to competition in 1996, and until 2004, only three
companies have provided international telephony services in Israel. The market,
estimated at that time to be 2 billion minutes per year, was more or less
equally divided between the three companies. On July 4, 2004, the Ministry of
Communications of the State of Israel granted our subsidiary, Xfone 018 a
license to provide international telecom services in Israel. We started
providing services in Israel through Xfone 018 as of mid-December 2004. In 2004,
two other new providers of international telephony services launched their
services. The international telephony market is highly competitive and therefore
all six providers had to offer low prices in order to attract or retain
subscribers and call minutes.
During 2006, two significant mergers
occurred in the Israeli international telephony market, leaving only four
companies in the competition. The aforementioned mergers enabled Xfone 018 to
execute, as of December 2006, a new business strategy, according to which it
re-priced its services by distinguishing the rates for its subscribed customers
from the rates for its non-subscribed customers. The new strategy has proved to
be successful, and in 2007 Xfone 018 revenues were significantly
increased.
In 2007, the Israeli international
telephony market was estimated to be 2.9 billion minutes. We estimate our market
share as of December 31, 2007, as approximately 5.5% of the Israeli
market.
We have two major types of customers in
Israel: Residential and Commercial.
In 2007, approximately 18.2% of our
revenues were derived from our operations in Israel.
Xfone 018 is operating with
significantly lower overhead than its three competitors in the Israeli market by
utilizing and building on our previous business models. We therefore believe
that Xfone 018 will increase its market share in the international communication
market, will generate a greater part of our revenues and will have a major
contribution to our expected growth.
Our primary geographic markets are the
United Kingdom, the United States and Israel. However, we serve
customers worldwide.
COMPARISON FINANCIAL
INFORMATION YEARS ENDED
DECEMBER 31, 2007 AND 2006 -
PERCENTAGE OF REVENUES:
|
|
Year Ended
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of
Revenues
|
|
|
-44
|
%
|
|
|
-58
|
%
|
Gross
Profit
|
|
|
56
|
%
|
|
|
42
|
%
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
Research and
Development
|
|
|
0
|
%
|
|
|
0
|
%
|
Marketing and
Selling
|
|
|
-24
|
%
|
|
|
-13
|
%
|
General and
Administrative
|
|
|
-28
|
%
|
|
|
-26
|
%
|
Non- recurring
loss
|
|
|
-6
|
%
|
|
|
0
|
%
|
Total Operating
Expenses
|
|
|
-58
|
%
|
|
|
-39
|
%
|
Income (loss) before
Taxes
|
|
|
-4
|
%
|
|
|
2
|
%
|
Net Income
|
|
|
-3
|
%
|
|
|
2
|
%
|
COMPARISON OF THE YEARS ENDED DECEMBER
31, 2007 AND 2006
Revenues.
Revenues for the year ended December
31, 2007 increased 18% to $44,723,934 from $37,914,037 for the same period in
2006. The increase in our revenues is primarily attributable to the operation of
Xfone UK and Xfone 018. During 2007, the revenues of Xfone UK increased 43% to
$24,263,610 from $16,951,119 for the same period in 2006. The increase in
revenues in the U.K. is mainly a result of increased marketing activity and
on-going product improvements. Despite the sharp increase in the revenues in the
UK, Xfone UK suffered a slow down during the fourth quarter due to a change in
the tariff structure by one of the local mobile operators. During the fourth
quarter, Xfone UK suffered a decrease in sales attributable to a change in the
tariff structure by a local mobile operator. A high proportion of Xfone UK's
customers have mobile phones from this operator and use Xfone's services by
dialing an Xfone access number from their mobile phone. During the fourth
quarter, the mobile operator changed the pricing on the access numbers, so that
they were no longer cost effective for customers to dial. This change affected
not only Xfone, but all alternative suppliers of international calls in the UK.
Xfone UK undertook a marketing campaign to promote its other services to these
customers, to allow them to connect via alternative, low cost access numbers.
This has been successful in terms of migrating customers, and the number of
minutes switches by the company is growing well. However, these alternative
products generate a lower level of sales and margin per minute than the original
products.
During 2007, revenues of Xfone 018
increased by 49% to $8,169,433 from $5,488,712 for the same period in 2006. The
increase in revenues of Xfone 018 is mainly a result of a new business strategy,
according to which it re-priced its services by distinguishing the rates for its
subscribed customers from the rates for its non-subscribed customers, expanding
its customer base, and introducing a new product to the market. During 2007, the
revenues of Xfone USA decreased 21% to $12,290,891 from $15,474,206 for the same
period in 2006. The decrease in revenues is primarily due to the attrition of
dialup internet customers and longer than expected commissioning process until
revenues is earned.
Cost of
Revenues.
Cost of revenues
consists primarily of traffic time purchased from telephony companies and other
related charges. Cost of revenues for the year ended December 31, 2007,
decreased 10.7% to $19,626,322 from $21,968,998 for the same period in 2006. The
decrease in our cost of revenues is primarily attributed to the operations in
the UK and Israel. The results of operations of Equitalk and Story Telecom in
the UK were consolidated for the full period of 2007 for the first time, and as
a result, contributed to the high gross margin in the UK. Commencing August 15,
2007, Auracall's results of operations were consolidated for the first time and
contributed high margin to our UK operations. High gross margin contributed by
Xfone 018 resulted from the change in the business strategy from the end of
2006. Cost of revenues as a percentage of revenues decreased to approximately
44% in 2007, from approximately 58% in 2006.
As a result of ongoing product
improvements, an increase in the sales of higher margin services and strategic
change in our pricing policy to segregate between registered and unregistered
users in Israel, we achieved a decreased in cost of revenues as percentage of
revenues in all our geographic markets, and primarily in the U.K. and Israel
where cost of revenues as percentage of revenues decrease to 41.4% and 37%,
respectively, in the year ended December 31, 2007, compared to 69.8% and 44.6%,
respectively, in the same period in 2006.
Research and
Development
. Research and
development expenses were $47,609 for the year ended December 31, 2007, which is
consistent with our research and development costs of $45,709 during the year
ended December 31, 2006. Research and development expenses consist of labor
costs of our research and development manager and other related costs. We
estimate that research and development expenses will remain in the same level in
2008.
Marketing and Selling
Expenses.
Marketing and
selling expenses consist primarily of commissions to agents and resellers. Other
marketing and selling expenses are related to compensation attributed to
employees engaged in marketing and selling activities, promotion, advertising
and related expenses. Marketing and selling expenses for the year ended December
31, 2007, increased 121% to $10,886,883 from $4,937,007 for the same period in
2006. The increase in the marketing and selling expenses is primarily attributed
to our operations in the U.K and Israel. Approximately $5,250,000 of the
increase is attributed to agents' commission payable by Swiftnet, $5,075,000 of
which was payable to Auracall Limited, in the period before Auracall became a
wholly owned subsidiary. Approximately $725,000 of the increase is attributed to
the selling and marketing activities of Story Telecom which was consolidated for
the first time during the second quarter of 2006, and Equitalk which was
consolidated in our financial statements during July 2006. Approximately
$500,000 of the marketing and selling expenses is attributed to the launch of
marketing campaign in Israel. Marketing and selling expenses as a percentage of
revenues increased to 24% for the year ended December 31, 2007 from 13% for the
same period in 2006.
General and
Administrative Expenses
.
General and administrative expenses for the year ended December 31, 2007,
increased 24% to $12,335,759 from $9,927,301 for the same period in 2006. This
increase is mainly due to increase in payroll expenses in the U.K., U.S. and
Israel. General and administrative expenses consist primarily of compensation
costs for administration, finance and general management personnel and
consulting fees.
Non- recurring
Loss.
On March 19, 2008, the
UK court handed down judgment in the dispute between Swiftnet and MCI and
awarded £1,278,942 ($2,564,036) plus legal costs and interest in favour of
MCI. The Company's financial statements have carried the full amount
Swiftnet calculated that it owed to MCI based on the data held in Swiftnet’s
billing systems. The net effect of this judgement including estimation of the
Company's legal fees, MCI’s legal costs and interest payable is approximately
£1,427,737 ($2,856,803) which is presented as a non-recurring loss in the
Statement Of Operations.
Financing
Expenses.
Financing
expenses, net, for the year ended December 31, 2007, decreased 5% to $515,562
from $540,668 for the same period in 2006. This decrease is mainly due to
the repayment of interest bearing loans and balances in the US and
Israel.
Net Income
(Loss).
Net Loss for the
year ended December 31, 2007 was $1,283,892 compared with a net income $660,696
for the same period in 2006. This is primarily due to the non
recurring loss and decrease in the U.K.
Earning (Loss) Per
Share.
Diluted net loss per
share of common stock for the year ended December 31, 2007 was $0.109 compared
to diluted net profit of 0.065 for the same period in 2006.
BALANCE SHEET
Comparison of the balance sheet as of
December 31, 2007 and December 31, 2006
Current
Assets
. Current assets
amounted to $41,269,446 as of December 31, 2007, as compared with $10,291,475 as
of December 31, 2006. The increase in the current assets is mainly attributable
to the increase in cash in the amount of $4,617,216 provided mainly by operating
expenses, an increase in restricted cash in the amount of $25,562,032 provided
by issuance of debentures, and accrued expenses incurred in connection with the
debentures issuance and with the judgment handed down against Swiftnet in its
dispute with MCI.
Fixed
Assets.
Fixed assets net,
amounted to $5,747,758 as of December 31, 2007, as compared with $4,466,048 as
of December 31, 2006.
Current
Liabilities.
As of December
31, 2007, current liabilities amounted to $18,061,934 as of December 31, 2007,
as compared with $11,220,856 as of December 31, 2006.
Long-term
liabilities.
As of
December 31, 2007, long-term liabilities amounted to $23,279,296 as of December
31, 2007, as compared with $2,333,830 as of December 31,
2006.
The increase in both current and long
term liabilities is mainly attributed to the issuance of debentures in December
2007.
COMPARISON FINANCIAL INFORMATION THREE
AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007 - PERCENTAGE OF
REVENUES
|
Six months
ended
June 30,
|
|
Three months
ended
June 30,
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Revenues
|
|
100%
|
|
|
100%
|
|
|
100%
|
|
|
100%
|
Cost of
Revenues
|
|
-50.5%
|
|
|
-44.6%
|
|
|
-51.7%
|
|
|
-44.1%
|
Gross
Profit
|
|
49.5%
|
|
|
55.4%
|
|
|
48.3%
|
|
|
55.9%
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Research and
Development
|
|
-0.1%
|
|
|
-0.1%
|
|
|
-0.1%
|
|
|
-0.1%
|
Marketing and
Selling
|
|
-14.7%
|
|
|
-23.6%
|
|
|
-13.4%
|
|
|
-23.6%
|
General and
Administrative
|
|
-27.4%
|
|
|
-25.3%
|
|
|
-27.5%
|
|
|
-25.5%
|
Total Operating
Expenses
|
|
-42.2%
|
|
|
-49.0%
|
|
|
-41%
|
|
|
-49.2%
|
Income (loss) before
Taxes
|
|
-2.7%
|
|
|
4.8%
|
|
|
-5%
|
|
|
4.9%
|
Net Income
(loss)
|
|
-2.1%
|
|
|
3.7%
|
|
|
-7.2%
|
|
|
3.5%
|
RESULTS OF
OPERATIONS
COMPARISON OF THE SIX MONTHS PERIODS
ENDED JUNE 30, 2008 AND JUNE 30, 2007
Revenues
. Revenues for the six months
ended June 30, 2008 increased 79.9% to $41,645,820 from $23,153,522 for the same
period in 2007. The increase of $18,492,298 in the consolidated revenues is
attributed to $20,859,660 increase in our revenues in the United States and
$686,303 increase in Israel which is offset by a $3,053,665 decrease in revenues
in the United Kingdom. In the first six months of 2008, revenues in the United
States as a percentage of total revenues increased to 66% from 28.6% for the
same period in 2007, whereas revenues in the United Kingdom and Israel as a
percentage of total revenues decreased to 22.9% and 11.2% from 54.3% and 17.1%,
respectively.
Revenues in the United States for the
six months ended June 30, 2008 increased 315.5% to $27,470,618 from $6,610,958
for the same period in 2007. Approximately $22,200,000 of the increase was
contributed by NTS Communications, Inc. ("NTS"), our wholly-owned subsidiary as
of February 26, 2008 and which was consolidated for the first time in the
first quarter of 2008. The increase in revenues was offset by a decrease of
approximately $1,300,000 in revenues from other carriers and due to attrition of
residential customers.
Revenues in the United Kingdom for the
six months ended June 30, 2008 decreased 24.3% to $9,520,525 from $12,574,190
for the same period in 2007. The decrease in sales in the UK was wholly
attributable to a change in the tariff structure by the mobile operator
O2.
Revenues in Israel for the six months
ended June 30, 2008 increased 17.3% to $4,654,677 from $3,968,374 for the same
period in 2007. This increase is mainly attributed to ongoing marketing efforts
and the revaluation of the NIS to the U.S dollar.
Our primary geographic markets are the
United States, the United Kingdom and
Israel. However, we serve customers
worldwide.
Cost of
Revenues
. Cost of revenues
consists primarily of traffic time purchased from telephone companies and other
related charges. Cost of revenues for the six months ended June 30, 2008
increased 103.6% to $21,017,261 from $10,323,243 for the same period in 2007.
Cost of revenues as a percentage of revenues in the six months ended June 30,
2008 increased to 50.5% from 44.6% in the same period in
2007.
Cost of revenues as a percentage of
revenues in the United States in the six months ended June 30, 2008 increased to
56.8% from 47.6% in the same period in 2007. The increase is mainly attributed
to NTS which was consolidated for the first time in the first quarter of
2008. Within our group, NTS presents higher cost of revenues than the other
subsidiaries in the group. Strategically, NTS decided to migrate its customers
from the current copper-based services to its new Fiber-based infrastructure. As
a result of this strategy we expect to reduce the cost of revenues
gradually.
Cost of revenues in the UK for the
second quarter of 2008, include the cost of Auracall which was acquired on
August 15, 2007 and was not consolidated in the same period of 2007. The
consolidation of high margin products which were sold by Auracall, together with
the ongoing product improvements we achieved a decrease in cost of revenues
as percentage of revenues in the United Kingdom where cost of revenues as
percentage of revenues decrease to 37% compared to 45.7% in the same period in
2007. Following the change at the end of 2007 in the tariff structure by the
mobile operator O2, the cost of revenues of our UK subsidiaries is expected
to be slightly higher on alternative products.
Cost of revenues as a percentage of
revenues in Israel in the six months ended June 30, 2008 increased to 40.8% from
35.9% in the same period in 2007. The increase is attributed to introduction of
commission- based services, which have generated lower gross
margins.
Research and
Development
. Research and
development expenses for the six months ended June 30, 2008 and for the same
period in 2007 were 0.1% of total revenues. The research and development
activities are located in the U.K only and include the payroll of those who are
engaged in the development activities. We estimate that the research and
development expenses will remain in the same level until the end of
2008.
Marketing and Selling
Expenses
. Marketing and
selling expenses consist primarily of commissions to agents and resellers. Other
marketing and selling expenses are related to compensation attributed to
employees engaged in marketing and selling activities, promotion, advertising
and related expenses. Marketing and selling expenses for the six months ended
June 30, 2008 increased 12.1% (or $664,298) to $6,138,804 from $5,474,506 for
the same period in 2007. Marketing and selling expenses as a percentage of
revenues decreased to 14.7% for the six months ended June 30, 2008 from 23.6%
for the same period in 2007. Approximately $1,250,000 in marketing expenses for
the six months ended June 30, 2008 is contributed by NTS which was
consolidated for the first time in the first quarter of 2008. An increase
of approximately $250,000 in Israel is attributed to ongoing marketing campaigns
during the first half of 2008. A decrease of approximately $800,000 in the U.K
is attributed to the decrease in sales.
General and
Administrative Expenses
.
General and administrative expenses consist primarily of compensation costs for
administration, finance and general management personnel and consulting fees.
General and administrative expenses for the six months ended June 30, 2008
increased 95.2% to $11,415,388 from $5,846,730 for the same period in 2007.
Approximately $5,700,000 in general and administrative expenses for the six
months ended June 30, 2008 is contributed by NTS which was consolidated for
the first time in the first quarter of 2008.
Financing
Expenses
. Financing
expenses, net, for the six months ended June 30, 2008 increased to $3,995,580
from $306,695 for the same period in 2007. $2,756,406 of the increase in the
financial expenses is attributed to the effect of fluctuation in the exchange
rate of the NIS on our Bonds stated in NIS and linkage to the Israeli CPI
expenses and $765,083 is attributed to the interest payable on the Bonds. The
remaining increase in the financial expenses, net consists of interest expenses
on our interest bearing obligations and the effect of currency exchange rate on
intercompany balances with our subsidiaries who reports in NIS and GBP as
their functional currencies.
Net Income
(Loss).
Net loss for the
six months ended June 30, 2008 was $882,228 compared to net income of $855,834
for the same period in 2007.
Earning (Loss) Per
Share.
Diluted net loss per
share of common stock for the six months ended June 30, 2008 was ($0.052),
compared to diluted net income per share of common stock $0.075 for the same
period in 2007.
COMPARISON OF THE THREE MONTH PERIODS
END
ED JUNE 30, 2008 AND JUNE 30, 2007
Revenues
. Revenues for the quarter ended
June 30, 2008 increased 122.3% to $ 25,852,722 from $11,629,806 for the same
period in 2007. This increase in the consolidated revenues is attributed to an
increase of $15,571,249 and $416,818 in the United States and Israel,
respectively, which is offset by a decrease of $1,765,151 in the revenues in the
U.K. In the second quarter of 2008, revenues in the United States as a
percentage of total revenues increased to 72.6% from 27.4% for the same period
in 2007, whereas revenues in the United Kingdom and Israel as a percentage of
total revenues decreased to 18.2% and 9.2% from 55.7% and 16.9%,
respectively.
Revenues in the United States for the
quarter ended June 30, 2008 increased 487.8% to $18,763,114 from $3,191,865 for
the same period in 2007. Approximately $16,200,000 of the increase was
contributed by NTS, our wholly-owned subsidiary as of February 26,
2008 and which was consolidated for the first time in the first quarter of 2008.
Notwithstanding the increase in revenues was offset by a decrease in revenues
from other carriers and due to attrition of residential
customers.
Revenues in the United Kingdom for the
quarter ended June 30, 2008 decreased 27.2% to $4,713,101 from $6,478,252 for
the same period in 2007. The decrease in sales in the UK was wholly attributable
to a change in the tariff structure by the mobile operator
O2.
Revenues in Israel for the quarter ended
June 30, 2008 increased 21.3% to $2,376,507 from $1,959,689 for the same period
in 2007. This increase is mainly attributed to ongoing marketing efforts and the
revaluation of the NIS to the U.S dollar.
Cost of
Revenues
. Cost of revenues
consists primarily of traffic time purchased from telephone companies and other
related charges. Cost of revenues for the quarter ended June 30, 2008 increased
160.4% to $13,360,988 from $5,130,021 for the same period in 2007. The increase
in the cost of revenues is primarily attributed to the operations in the United
States and Israel. Cost of revenues as a percentage of revenues in the quarter
ended June 30, 2008, increased to 51.7% from 44.1% in the same period in
2007.
Cost of revenues as a percentage of
revenues in the United States in the three months ended June 30, 2008 increased
to 56.5% from 48.6% in the same period in 2007. The increase is mainly
attributed to NTS which was consolidated for the first time in the first
quarter of 2008. Within our group, NTS presents higher cost of revenues than the
other subsidiaries in the group. Strategically, NTS decided to migrate its
customers from the current copper-based services to its new Fiber-based
infrastructure. As a result of this strategy we expect to reduce the cost
of revenues gradually.
Cost of revenues in the UK for the
second quarter of 2008, include the cost of Auracall which was acquired on
August 15, 2007 and was not consolidated in the same period of 2007. The
consolidation of high margin products which were sold by Auracall, together with
the ongoing product improvements we achieved a decrease in cost of revenues as
percentage of revenues in the United Kingdom where cost of revenues as
percentage of revenues in the three months ended June 30, 2008 decrease to 38.8%
compared to 44.3% in the same period in 2007. Following the change at the end of
2007 in the tariff structure by the mobile operator O2, the cost of revenues of
our UK subsidiaries is expected to be slightly higher on alternative
products.
Cost of revenues as a percentage of
revenues in Israel in the three months ended June 30, 2008 increased to 39.3%
from 36.1% in the same period in 2007. The increase is attributed to
introduction of commission- based services, which have generated lower gross
margins.
Research and
Development
. Research and
development expenses for the quarter ended June 30, 2008 and for the same period
in 2007 were 0.1% of total revenues. We estimate that the research and
development expenses will remain in the same level during the second half of
2008.
Marketing and Selling
Expenses
. Marketing and
selling expenses consist primarily of commissions to agents and resellers. Other
marketing and selling expenses are related to compensation attributed to
employees engaged in marketing and selling activities, promotion, advertising
and related expenses. Marketing and selling expenses for the quarter ended June
30, 2008 increased 26.6% (or $730,645) to $ 3,473,175 from $2,742,530 for the
same period in 2007. Marketing and selling expenses as a percentage of revenues
decreased to 13.4% for the quarter ended June 30, 2008 from 23.6% for the same
period in 2007. Approximately $900,000 in marketing expenses for the quarter
ended June 30, 2008 is contributed by NTS which was consolidated for the
first time in the first quarter of 2008. An increase of approximately
$150,000 in Israel is attributed to ongoing marketing campaigns during the
second quarter of 2008. A decrease of approximately $800,000 in the U.K is
attributed to the decrease in sales.
General and
Administrative Expenses
.
General and administrative expenses consist primarily of compensation costs for
administration, finance and general management personnel and consulting fees.
General and administrative expenses for the quarter ended June 30, 2008
increased 140% to $7,103,668 from $2,959,944 for the same period in 2007.
Approximately $4,000,000 in General and Administrative expenses for the quarter
ended June 30, 2008 is contributed by NTS which was consolidated for the
first time in the first quarter of 2008.
Financing
Expenses
. Financing
expenses, net, for the quarter ended June 30, 2008 increased to $3,092,411 from
$166,826 for the same period in 2007. $2,442,861 of the increase in the
financial expenses is attributed to the effect of fluctuation in the exchange
rate of the NIS on our Bonds stated in NIS and linkage to the Israeli CPI
expenses and $553,263 is attributed to the interest payable on the Bonds. The
remaining increase in the financial expenses, net consists of interest expenses
on our interest bearing obligations and the effect of currency exchange rate on
intercompany balances with our subsidiaries who reports in NIS and GBP
as their functional currencies.
Net Income
(Loss).
Net loss for the
quarter ended June 30, 2008 was ($963,358) compared to net income of $411,439
for the same period in 2007.
Earning (Loss) Per
Share.
Diluted net loss per
share of common stock for the quarter ended June 30, 2008 was ($0.052), compared
to diluted net profit of $0.036 for the same period in 2007.
LIQUIDITY
AND CAPITAL
RESOURCES
Cash and cash equivalents as of December
31, 2007, amounted to $5,835,608 compared to $1,218,392 as of December 31, 2006,
an increase of $4,617,216. Net cash provided by operating activities in the year
ended December 31, 2007, was $4,839,731. Cash used for investing activities in
the year ended December 31, 2007, was $27,413,190. Net cash provided by
financing activities for the year ended December 31, 2007, was $27,530,225,
mainly attributable to issuance of shares and warrants for cash of $7,465,555,
the repayment of financial obligations of $1,051,079, the decrease in short-term
bank credit of $1,821,597 and the issuance of debentures of $22,821,827, net of
issuance expenses.
Cash and cash equivalents as of June 30,
2008, amounted to $5,447,700 compared to $5,835,608 as of December 31, 2007,
a decrease of $387,908. Net cash provided by operating activities in the
six months ended June 30, 2008, was $461,002. Cash used for investing activities
in the six months ended June 30, 2008, was $16,313,645 mainly
attributable to the purchase of fixed assets and to the acquisition of NTS less
proceeds from the issuance of bonds during December 2007 which were held in
escrow in short term bank deposits. Net cash provided in financing activities
for the six months ended June 30, 2008, was $15,815,410 mainly
attributable to issuance of shares and warrants for cash of $14,496,036,
proceeds from long-term line of credit from a bank, the payment of semi-annual
interest coupon of the company's Bonds and the repayment of financial
obligations of $858,874.
Our capital investments are primarily
for the purchase of equipment and software for services that we provide or
intend to provide.
Capital lease obligations: We are the
lessee of switching and other telecom equipment under capital leases expiring on
various dates from 2008 through 2009.
As of June 30, 2008, the minimum
future lease payments are:
Date
|
|
|
|
2008
|
|
$
|
86,201
|
|
2009
|
|
|
46,573
|
|
|
|
$
|
132,774
|
|
We shall continue to finance our
operations and fund the current commitments for capital expenditures mainly from
the cash provided from operating activities and from private and/or public
placements.
Xfone, Inc.
On December 13, 2007, and in conjunction
with a private offering of the same date, the Company issued an aggregate of NIS
100,382,100 (approximately $25,562,032, based on the exchange rate as of
December 13, 2007) non-convertible bonds (Series A) (the “Bonds”) to Israeli
institutional investors.
The Bonds are rated A3 by Midroog (an
affiliate of Moody's) and will pay an initial annual interest at a rate of 9%
that will be paid semi-annually on the 1st of June and on the 1st of December of
every year from 2008 until 2015 (
inclusive). Commencing on the
date of listing of the Bonds on the TASE, the interest rate payable for the
unpaid balance of the Bonds will be reduced by 1%, to an annual interest rate of
8%. The principal of the Bonds will be repaid in eight equal annual
payments on the 1st of December of every year from 2008 until 2015 (inclusive).
The principal and interest of the Bonds is linked to the Israeli Consumer Price
Index. The Bonds were issued for an amount equal to their par
value.
On February 26, 2008, the Company
completed the issuance of 800,000 Units (as defined below) to XFN-RLSI
Investments, LLC, an entity affiliated with Richard
L. Scott Investments, LLC, a U.S.
institutional investor, and 500,000 Units to certain investors affiliated with
or who are customers of Gagnon Securities LLC, pursuant to Subscription
Agreements entered into with each of the investors on December 13,
2007. Each “Unit” consists of two shares of the Company’s Common
Stock and one warrant to purchase one share of Common Stock, exercisable for a
period of five years from the date of issuance at an exercise price of $3.10 per
share. The Units were sold at a price of $6.20 per Unit, for an
aggregate purchase price of $8,060,000.
In connection with the closing of the
acquisition on February 26, 2008, the Company issued 2,366,892 shares of
the Company’s Common Stock to certain former NTS Shareholders who elected to
reinvest all or a portion of their allocable sale price in the Company’s Common
Stock, pursuant to the terms of the Purchase Agreement. The Company’s
Board of Directors determined, in accordance with the Purchase Agreement, the
number of shares of the Company’s Common Stock to be delivered to each
participating NTS Shareholder by dividing the portion of such NTS Shareholder’s
allocable sale price that the NTS Shareholder elected to receive in shares of
the Company’s Common Stock by 93% of the average closing price of the Company’s
Common Stock on the American Stock Exchange for the ten consecutive trading days
preceding the trading day immediately prior to the Closing Date (i.e.,
$2.74). The aggregate sales price reinvested by all such NTS
Shareholders was $6,485,284.
On March 25, 2008, in conjunction with
the issuance of the Bonds, the Company issued the holders of the Bonds, for no
additional consideration, 956,020 (non-tradable) warrants, each exercisable at
an exercise price of $3.50 with a term of 4 years. The 956,020 shares underlying
the warrants have been registered in accordance with the Securities Act pursuant
to the Company's Registration Statement on Form S-1 (File No. 333-150305,
declared effective by the SEC on September 2, 2008).
On July 17, 2007, Story Telecom Limited,
our UK subsidiary, agreed to loan us up to £400,000 ($786,976) that it had as
cash surplus in its bank account. The loan bears fixed interest rate at 4% over
the interest payable by the bank for deposits under the same terms. The loan is
for a one-year term but can be accelerated by Story Telecom if it requires
additional financing to continue to operate as a going concern. The loan is
guaranteed by our wholly-owned UK subsidiary, Swiftnet Limited and by amounts
owed to us by Story Telecom. In addition, Story Telecom has the right to set-off
repayments under the loan against sums due to us by Story Telecom. The loan is
pre-payable at any time upon 30 days’ notice. On July 18, 2007 and on September
25, 2007, we borrowed £350,000 ($688,604) and £50,000 ($98,372), respectively,
of the loan. On October 8, 2007, Story Telecom agreed to increase the loan
ceiling by £300,000 to a maximum of £700,000. Further borrowings of £100,000
($196,744) were made on October 9, 2007. As of June 30, 2008, the aggregate
outstanding borrowings were £500,000 ($995,331).
On June 3, 2008, the Company canceled
62,850 shares of its Common Stock, and 44,470 warrants which were returned to it
by Trustmark National Bank, acting as escrow agent in conjunction with an
escrow set up in connection with the consummation of the Company’s
acquisition of I-55 Internet Services, Inc. on March 31, 2006.
The Company made the following two claims against the escrow
account: Claim #1: The Company made a claim on March 27, 2007 to
adjust the total consideration based upon the changes in customer billings as
determined pursuant to a formula set forth in the First Amendment to the Merger
Agreement, which the Company had determined was $247,965.57. Claim #2: The
Company determined an undisclosed liability, in accordance with Article 6.03 of
the I-55 Internet Services, Inc. Merger Agreement (as amended), in the amount of
$147,550 and on November 28, 2006, sent a claim for this amount.
On or about May 12, 2008, Xfone USA and the shareholder
representatives of I-55 Internet Services reached an
agreement to value Claim #1 at $143,017.11 and Claim #2 at $140,750.00 for
a total agreed loss of $283,767.11. This resulted in the Company’s
receipt of 62,850 total shares of Xfone Common Stock and 44,470 of Xfone Stock
Warrants from the Escrow Account in satisfaction of these
claims.
US subsidiaries
Our U.S. subsidiary, Xfone USA, Inc.,
has certain loan facilities with certain liens on our fixed assets in the form
of installment loan agreements. The total aggregate amount of these loans as of
June 30, 2008 is $162,075.
Our U.S subsidiary, NTS Communications,
Inc., has short-term bank facilities of $4,000,000 and approximately $644,000
notes payable for the purchase of certain fixed assets. These notes payable are
secured by fixed assets in the form of installment loan agreements. In addition,
a wholly owned subsidiary of NTS received a non-recourse long term note to
finance the build-out of the fiber network in Levelland, Texas, collateralized
by the project. The total aggregate amount of these loans as of June 30, 2008 is
$6,742,473.
Upon the assignment of the
Interconnection Agreement between WS Telecom, Inc. and BellSouth
Telecommunications, Inc. to Xfone USA, Inc., and consummation of the merger on
March 10, 2005, we, the ultimate parent company and our subsidiaries Swiftnet
Limited and Xfone 018 Ltd., individually and/or jointly, agreed to guarantee all
undisputed debts owing to BellSouth Telecommunications by Xfone USA in
accordance with the assigned Interconnection Agreement. The guarantee was given
on December 16, 2004, and became effective upon the consummation of the merger
on March 10, 2005.
On September 27, 2005, we entered into a
Securities Purchase Agreement for a $2,000,000 financial transaction with
Xfone USA, Inc., eXpeTel Communications, Inc., Gulf Coast Utilities, Inc. and
Laurus Master Fund, Ltd. The investment, which took the form of a convertible
term note secured by our United States assets, has a 3 year term and bears
interest at a rate equal to prime plus 1.5% per annum. The Term Note is
convertible, under certain conditions, into shares of our common stock at an
initial conversion price equal to $3.48 per share. In conjunction with the
financial transaction, we issued to Laurus Master Fund 157,500 warrants which
are exercisable at $3.80 per share for a period of five years. The closing of
the financing was on September 28, 2005. As of August 1, 2007, Laurus Master
Fund, Ltd. assigned to Valens U.S. SPV I, LLC a principal amount equal to
$169,925.11 of the Term Note, and to Valens Offshore Fund SPV I, Ltd. a
principal amount equal to $549,289.76 of the Term Note. Net proceeds from the
financing were mainly used for procurement of capital equipment and general
working capital purposes for us and Xfone USA, eXpeTel Communications and Gulf
Coast Utilities, Inc. The balance as of June 30, 2008 due to Laurus Master Fund
was $223,642. The Term Note was fully paid off in cash on September 26,
2008.
UK subsidiaries
On April 18, 2002 Bank Leumi (UK) plc
issued company credit cards to two directors of Swiftnet Limited, and by
way of securing the balances on these cards, took a First Party Charge over
Swiftnet to the sum of £50,000 ($98,397).
As of April 10, 2003, Equitalk.co.uk
Limited, our U.K. based subsidiary since July 2006, has received loan facilities
from Barclays Bank plc in the form of a Government Small Firms Loan Guarantee
Scheme Loan Agreement whereby Barclays would lend Equitalk £150,000
($285,191). The loan plus interest is repaid monthly and payments are up to
date. As part of the agreement a Debenture charge was raised on all
the assets of Equitalk. The balance as of June 30, 2008 due is £8,334
($16,590).
Israeli subsidiary
Our Israel based subsidiary, Xfone 018
Ltd. has received credit facilities from Bank Hapoalim B.M. in Israel in order
to finance its activities. As of June 30, 2008, the credit facilities include a
revolving credit line of 500,000 NIS ($141,123), a short-term credit line of
2,250,000 NIS ($635,055), and long-term credit line of 1,290,000 NIS ($364,098).
In addition, the bank made available to Xfone 018 a long-term facility of
3,150,000 NIS ($889,077) to procure equipment. The credit facilities are secured
with: (a) a floating charge on Xfone 018 assets, securities, banknotes, unissued
capital stock,
reputation
, and any property and right including
profits
thereof
Xfone 018
has or may have at any time and in any
manner
; (b) a fixed charge on its
telecommunication equipment (including switches) and
insurance
rights thereof; (c) subordination of a
Term Note of $800,000. This Term Note was executed in July 2004 by Xfone 018 in
favor of the Company; (d) assignment of rights by way of pledge on the Partner
Communications Company Ltd. contract, the Cellcom Israel Ltd. contract, the
Pelephone Communications Ltd. contract, and the credit companies contracts with
Xfone 018; (e) personal collateral by Abraham Keinan and Guy Nissenson, which
includes a pledge on 1,000,000 shares of common stock of the Company owned by
Mr. Keinan, and an undertaking to provide Bank Hapoalim with an additional
financial guarantee of up to $500,000 under certain circumstances. The Company
agreed to indemnify Abraham Keinan and/or Guy Nissenson on account of any damage
and/or loss and/or expense (including legal expenses) that they may incur in
connection with the stock pledge and/or any other obligation made by them to
Bank Hapoalim in connection with the collateral; (f) The Company and Swiftnet
Limited issued a Letter of Guarantee, unlimited in amount, in favor of the bank,
guaranteeing all debt and indebtedness of Xfone 018 towards the bank; (g)
subordination of the Minority Partner Loan (as defined below). As of June 30,
2008, Xfone 018 has a balance due of 2,106,033 NIS ($628,291) under
the credit facility.
According to an agreement between us,
Xfone 018 Ltd. and our 26% minority interest partner in Xfone 018 (the “Minority
Partner”), the Minority Partner provided in 2004 a bank guarantee of 10,000,000
NIS ($2,822,467) to the Ministry of Communications of the State of Israel which
replaced an existing bank guarantee given by the Company in connection with
Xfone 018’s license to provide international telecom services in Israel. As part
of the agreement, the Company agreed to indemnify the Minority Partner for any
damage caused to him due to the forfeiture of the bank guarantee with the
Ministry of Communications on account of any act and/or omission of Xfone 018,
provided that the said act or omission is performed against the opinion of the
Minority Partner or without his knowledge.
According to the above-mentioned
agreement with the Minority Partner, the Minority Partner provided in the fourth
quarter of 2004, a shareholder loan of approximately $400,000 to Xfone 018
(the “Minority Partner Loan”). The Minority Partner Loan is payable after four
years with annual interest of 4% and linkage to the Israeli consumer price
index. As of June 30, 2008, the balance of the Minority Partner Loan is
1,943,535 NIS ($579,813).
According to the above-mentioned Term
Note and agreement with the Minority Partner, as of June 30, 2008, the Company
provided to Xfone 018 a shareholder loan in an aggregate amount of
$1,316,226
.
As of June 30, 2008, our Israeli
subsidiary activities were financed by the shareholders loans and by using
2,106,033 NIS ($628,291) of the credit facility from Bank
Hapoalim.
On November 5, 2007, Bank Hapoalim B.M.
in Israel provided a
bank
guarantee of 322,500 NIS ($91,025) to
the Ministry of Communications of the State of Israel in connection with a
November 7, 2007 license to commence an experimental deployment of Local
Telephone Services utilizing Voice over Broadband (VoB) technology, which was
granted to Xfone 018. In connection with the bank guarantee, Xfone 018 executed
an indemnification agreement in favor of Bank Hapoalim. The bank guarantee will
expire on April 30, 2009.
During February 2008, Xfone 018 Ltd. has
received a capital lease facilities to purchase certain communication equipment
amounting to $ 75,095 to be paid in 23 equal installments. The balance as of
June 30, 2008 is $66,163.
IMPACT OF INFLATION AND
CURRENCY FLUCTUATIONS
22.9% and 11.2% of our revenues in the
first half of 2008 were derived from our U.K. and Israeli operations,
respectively, compared to 54.3% and 17.1% in the same period in 2007. In the
first half of 2008, approximately 30% of the direct traffic costs in Israel
were in GBP and the rest were in New Israeli Shekels (“NIS”), compared to 68% in
the same period in 2007. We believe that the U.S. and Israeli portions of our
revenues will increase in the next two quarters of 2008.
For continuing transactions made in
currencies other then US dollar we use a current conversion rate. For
noncontingent past transactions made in currencies other then US dollar we use
the conversion rate of the time of transaction.
Our costs of revenues are mainly in
U.S.
Most of our assets, liabilities (except
the Bonds), revenues and expenditures are in U.S. dollars and GBP. The remainder
of the assets, liabilities, revenues and expenditures are in NIS. We anticipate
that in the second half of 2008 the portion of U.S. dollars will continue to
grow although the portion of GBP will stay significant.
Notwithstanding having our Bonds stated
in NIS and linked to the Israeli CPI, during the six months period ended June
30, 2008, the revaluation of the NIS in relation with the U.S. dollar and the
inflation increased our outstanding debt by approximately $3,873,100 and
$860,000 respectively. The Company may use foreign currency exchange contracts
and other derivatives instruments to be the appropriate tool for managing such
exposure.
Inflation in any of the countries where
we operate would affect our operational results if we shall not be able to
match our revenues with growing expenses caused by
inflation.
If the rate of inflation causes a rise
in salaries or other expenses and the market conditions don't allow us to raise
prices proportionally, it will have a negative effect on the value of our assets
and on our potential profitability.
C.
BU
SINE
SS
Background
Xfone, Inc. was incorporated in Nevada,
U.S.A. in September 2000. We are a holding and managing company providing
international voice, video and data communications services with operations in
the United States, the United Kingdom and Israel offering a wide range of
services, including: local, long distance and international telephony services;
video; prepaid and postpaid calling cards; cellular services; Internet services;
messaging services (Email/Fax Broadcast, Email2Fax and Cyber-Number); and
reselling opportunities. We serve customers worldwide.
In February 2007, we moved our principal
executive offices from the UK to Flowood, Mississippi, and shared executive
office space with our wholly owned U.S. subsidiary, Xfone USA, Inc. The
headquarters of Xfone USA and our principal executive offices recently moved
from the Flowood, Mississippi location to Lubbock, Texas, to the existing
headquarters of NTS Communications, Inc., which we acquired in February 2008.
See “NTS Communications, Inc.” below.
Swiftnet Limited
On October 4, 2000, we acquired Swiftnet
Limited which had a business plan to provide comprehensive range of
telecommunication services and products, integrated through one website.
Swiftnet was incorporated in 1990 under the laws of the United Kingdom and is
headquartered in London, England. Until 1999, the main revenues for Swiftnet
were derived from messaging and fax broadcast services. During 2000, Swiftnet
shifted its business focus to voice services and now offers a comprehensive
range of calling services to resellers and end customers. Utilizing automation
and proprietary software packages, Swiftnet’s strategy is to grow without the
need for heavy investments and with lower expenses for operations and
registration of new customers.
Xfone 018 Ltd.
On April 15, 2004, we established an
Israel based subsidiary, Xfone Communication Ltd. (which changed its name to
Xfone 018 Ltd. in March 2005). On July 4, 2004, the Ministry of Communications
of the State of Israel granted Xfone 018 a license to provide international
telecom services in Israel. We started providing services in Israel through
Xfone 018 as of mid-December 2004. Headquartered in Petach Tikva, Israel, Xfone
018 Ltd. is a telecommunications service provider that owns and operates its own
facilities-based telecommunications switching system. Xfone 018 provides
residential and business customers with high quality international and local
carrier services.
WS Telecom, Inc.
On May 28, 2004, we entered into an
agreement and Plan of Merger to acquire WS Telecom, Inc., a Mississippi
corporation, and its two wholly owned subsidiaries, eXpeTel Communications, Inc.
and Gulf Coast Utilities, Inc., through the merger of WS Telecom into our wholly
owned U.S. subsidiary Xfone USA, Inc. On July 1, 2004, Xfone USA entered into a
management agreement with WS Telecom which provided that Xfone USA provide
management services to WS Telecom pending the consummation of the merger. The
management agreement provided that all revenues generated from WS Telecom
business operations would be assigned and transferred to Xfone USA. The term of
the management agreement commenced on July 1, 2004, and continued until the
consummation of the merger on March 10, 2005. Xfone USA, Inc. is an integrated
telecommunications service provider that owns and operates its own
facilities-based, telecommunications switching system and network. Xfone USA
provides residential and business customers with high quality local, long
distance and high-speed broadband Internet services, as well as cable television
services in certain planned residential communities in Mississippi. Xfone USA is
licensed to provide telecommunications services in Alabama, Florida, Georgia,
Louisiana and Mississippi. Xfone USA utilizes integrated multi-media offerings -
combining digital voice, data and video services over broadband technologies to
deliver services to customers throughout its service areas.
I-55 Internet Services,
Inc.
On August 18, 2005, we entered into an
Agreement and Plan of Merger to acquire I-55 Internet Services, Inc., a
Louisiana corporation (the “I-55 Internet Merger Agreement”). On September 13,
2005, we filed a Form 8-K discussing the impact of Hurricane Katrina on the
transaction contemplated by the I-55 Internet Merger Agreement. On October 10,
2005, we entered into a First Amendment to the Merger Agreement, by and among
I-55 Internet Services, Xfone, Inc, Xfone USA, Inc., our wholly-owned United
States subsidiary and Hunter McAllister and Brian Acosta, key employees of I-55
Internet Services, in order to induce Xfone, Inc and Xfone USA not to terminate
the I-55 Internet Merger Agreement due to the material adverse effect that
Hurricane Katrina has had on the assets and business of I-55 Internet Services.
As part of the amendment and since, at that time, the merger of I-55 Internet
Services with and into Xfone USA had not been consummated yet, in the interim,
the parties agreed and entered into on October 11, 2005 a Management Agreement
(the “I-55 Internet Management Agreement”) that provided that I-55 Internet
Services hired and appointed Xfone USA as manager to be responsible for the
operation and management of all of I-55 Internet Services business operations,
including among other things personnel, accounting, contracts, policies and
budget. In consideration of the management services provided under the I-55
Internet Management Agreement, I-55 Internet Services assigned and transferred
to Xfone USA all revenues generated and expenses incurred in the ordinary course
of business during the term of the I-55 Internet Management Agreement. The term
of the I-55 Internet Management Agreement commenced on October 11, 2005 and
continued until the consummation of the merger on March 31,
2006.
In conjunction with the consummation of
the merger and in exchange for all of the capital stock of I-55 Internet
Services, we issued a total of 789,863 shares of our Common Stock valued at
$2,380,178 and 603,939 warrants exercisable for a period of five years into
shares of our Common Stock, with an exercise price of $3.31, valued based on the
Black Scholes option-pricing model (the “Xfone Stock and Warrant
Consideration”). A portion of the Xfone Stock and Warrant Consideration issued
at closing was placed in an escrow account, to be held pending certain
adjustments. The Company subsequently made the following two claims against
such escrow account: Claim #1: The Company made a claim on March 27, 2007
to adjust the total consideration based upon the changes in customer billings as
determined pursuant to a formula set forth in the First Amendment to the Merger
Agreement (the “Customer Billing Adjustment Amount”), which the Company had
determined was $247,965.57. Claim #2: The Company determined an undisclosed
liability, in accordance with Article 6.03 of the I-55 Internet Services, Inc.
Merger Agreement (as amended), in the amount of $147,550 and on November 28,
2006, sent a claim for this amount. The Shareholder Representatives of I-55
Internet Services disputed the amounts in both claims submitted and so the
parties entered into negotiations on May 2, 2007, where they agreed to reduce
the amount claimed in Claim #1 by $104,948.46, which represents adjustments made
to the 90-Day column, Trade Accounts, and certain accounts that had previously
been listed as having 90-Day balances but were subsequently confirmed as not
having 90-Day balances, and by the final amount billed to EBI Comm, Inc. (“EBI”)
in 2005 prior to the assets of EBI being purchased by Xfone USA, and agreed to
reduce the original Loss amount claimed in Claim #2 by $6,800.00, representing
additional services purchased with Zipa, Inc. under the direction of Xfone USA
during the Management Agreement period from October 2005 through March 2006.
Upon settlement of the claims, two Joint Deposition Notices for the escrow
agent, Trustmark National Bank, were delivered to the Shareholder
Representatives of I-55 Internet Services for execution, however, a Shareholder
Representative refused to execute the notices pending approval of the claims by
the shareholders of I-55 Internet Services. On June 7, 2007, the
shareholders met and rejected the figure agreed upon with respect to Claim #1
and accepted the figure agreed upon with respect to Claim #2. On or about
May 12, 2008, after further negotiations, Xfone USA and I-55 agreed to value
Claim #1 at $143,017.11 and Claim #2 at $140,750.00 for a total agreed loss of
$283,767.11. This resulted in the Company’s receipt of 62,850 shares of
Xfone Common Stock and 44,470 Xfone Stock Warrants from the
Escrow Account in satisfaction of these claims (the “Returned Xfone Stock
and Warrant Consideration”) and the balance of the Xfone Common Stock and Xfone
Stock Warrants remaining in the Escrow Account was distributed to the selling
I-55 Internet shareholders and the escrow account was closed out on June 16,
2008. The components of the Returned Xfone Stock and Warrant Consideration were
cancelled by the Company on June 3, 2008.
In conjunction with that certain Letter
Agreement dated October 10, 2005 with MCG Capital Corporation, a major creditor
of I-55 Internet Services, and upon the consummation of the merger on March 31,
2006, we issued to MCG Capital 667,998 shares of our Common Stock, valued at
fair value of $2,010,006, in return for retiring its loan with I-55 Internet
Services.
I-55 Internet Services provided Internet
access and related services, such as installation of various networking
equipment, website design, hosting and other Internet access installation
services, throughout the Southeastern United States to individuals and
businesses located predominantly in rural markets in Louisiana and Mississippi.
As a result of the merger with and into Xfone USA, these services are now
available in expanded markets throughout Louisiana and Mississippi. The Internet
service offerings include dial-up, DSL, high speed dedicated Internet access,
web services, email, the World Wide Web, Internet relay chat, file transfer
protocol and Usenet news access to both residential and business customers. The
I-55 Internet Services offerings provided various prices and packages that
allowed I-55 Internet Services subscribers to customize their subscription with
services that met customers’ particular requirements. Xfone USA now provides
bundled services of voice and data (broadband Internet) to customers throughout
its service areas.
I-55 Telecommunications,
LLC
On August 26, 2005, we entered into an
Agreement and Plan of Merger to acquire I-55 Telecommunications, LLC, a
Louisiana corporation (the “I-55 Telecom Merger Agreement”). On September 13,
2005, we filed a Form 8-K discussing the impact of Hurricane Katrina on the
transaction contemplated by the I-55 Telecom Merger Agreement. In order to
demonstrate our intention to continue on with the transaction contemplated by
the I-55 Telecom Merger Agreement, the parties entered into on October 12, 2005
a Management Agreement (the “I-55 Telecom Management Agreement”) that provided
that I-55 Telecommunications hired and appointed Xfone USA as manager to be
responsible for the operation and management of all of I-55 Telecommunications’
business operations. In consideration of the management services provided under
the I-55 Telecom Management Agreement, I-55 Telecommunications assigned and
transferred to Xfone USA all revenues generated and expenses incurred in the
ordinary course of business during the term of the I-55 Telecom Management
Agreement. The term of the I-55 Telecom Management Agreement commenced on
October 12, 2005 and continued until the consummation of the merger on March 31,
2006.
In conjunction with the consummation of
the merger and in exchange for all of the capital stock of I-55
Telecommunications, LLC, we issued a total of 223,702 shares of our Common Stock
valued at $671,687 and 79,029 warrants exercisable for a period of five years
into shares of our Common Stock, with an exercise price of $3.38, valued based
on the Black Scholes option-pricing model (the “Xfone Stock and Warrant
Consideration”). A portion of the Xfone Stock and Warrant Consideration issued
at closing was placed in an escrow account. The Company determined a breach of
the representations and warranties in the Merger Agreement resulting from the
failure of I-55 Telecommunications to disclose the liability due and payable to
the Louisiana Universal Service Fund (“LA USF”) through the period of October
2005, at which time Xfone USA undertook the management role of I-55
Telecommunications. Pursuant to Section 1(g) of the Escrow Agreement dated as of
March 31, 2006 by and among Xfone USA, the Escrow Agent, and the President and
Sole Member of I-55 Telecommunications, and in accordance with Article 6.02 of
the Merger Agreement, Xfone USA notified the other parties that it believed that
it had suffered a Loss of $30,625.52, pursuant to the provisions of Article 6.02
of the Merger Agreement dated as of August 26, 2005. Having not received any
response from the President and Sole Member of I-55 Telecommunications, nor from
his counsel, on October 15, 2007, and after the allotted response time allowed,
Xfone USA instructed the Escrow Agent (Trustmark National Bank) to deliver from
the Escrow Fund of the President and Sole Member of I-55 Telecommunications, to
the Company, 7,043 shares of Common Stock and 4,838 Xfone Stock Warrants. The
7,043 shares of Common Stock and 4,838 Xfone Stock Warrants were returned to the
Company for cancellation on October 31, 2007.
In conjunction with certain Agreements
to Purchase Promissory Notes dated October 31, 2005 / February 3, 2006 with
Randall Wade James Tricou; Rene Tricou - Tricou Construction; Rene Tricou - Bon
Aire Estates; Rene Tricou - Bon Aire Utility; and Danny Acosta, creditors of
I-55 Telecommunications (the “Creditors”), and upon the consummation of the
merger on March 31, 2006, we issued to the Creditors an aggregate of 163,933
restricted shares of Common Stock and an aggregate of 81,968 warrants,
exercisable at $3.38 per share, at a total value of $492,220, in return for
retiring their individual loans with I-55
Telecommunications.
I-55 Telecommunications provided voice,
data and related services throughout Louisiana and Mississippi to both
individuals and businesses. Prior to the merger with and into Xfone USA, I-55
Telecommunications was a licensed facility based CLEC operating in Louisiana and
Mississippi with a next generation class 5 carrier-switching platform. I-55
Telecommunications provided a complete package of local and long distance
services to residential and business customers across both states. As a result
of the merger, Xfone USA has now expanded its On-Net (facilities) service area,
through I-55 Telecommunications, into New Orleans, Louisiana and surrounding
areas, including Hammond, Louisiana. Xfone USA is expanding its sales offices to
include New Orleans, in an effort to continue revenue growth and increase market
share in the revitalized city, as well as into Hammond, Louisiana. The
competition in secondary markets, such as Jackson, Mississippi, as opposed to
Tier 1 markets such as Atlanta, Georgia, is also rapidly declining due to the
removal of UNE-P and the decline in the competitive local exchange providers
that had been dependent on UNE-P as their only source for providing competitive
local telephone services in those markets. This provides for a unique
opportunity for Xfone USA to gain market share, by utilizing its existing
network and to expand its facilities into these opportunity areas becoming a
primary alternative to the monopoly Incumbent Local Exchange
Company.
EBI Comm, Inc.
On January 1, 2006, Xfone USA, Inc., our
wholly owned subsidiary, entered into an Agreement with EBI Comm, Inc. (“EBI”),
a privately held Internet Service Provider, to purchase the assets of EBI. EBI
provided a full range of Internet access options for both commercial and
residential customers in north Mississippi. Based in Columbus, Mississippi,
EBI’s services included Dial-up, DSL, T1 Dedicated Access and Web Hosting. The
customer base, numbering approximately 1,500 Internet users, is largely
concentrated in the Golden Triangle area, which includes Columbus, West Point
and Starkville, Mississippi. The acquisition was structured as an asset
purchase, providing for Xfone USA to pay EBI total consideration equal to 50% of
the monthly collected revenue from the customer base during the first 12 months,
beginning January 2006. Acquired assets include the customer base and customer
lists, trademarks and all related intellectual property, fixed assets and all
account receivables. As a result of further negotiations between us and EBI, we
have agreed to pay the total consideration of this acquisition in cash in the
amount of $85,699 in monthly payments of $10,000 until paid in full, and we made
the first of such payments on June 1, 2007 and final payment on January 25,
2008. The acquisition was not significant from an accounting
perspective.
Canufly.net, Inc.
On January 10, 2006 (effective as of
January 1, 2006), Xfone USA, Inc., our wholly owned subsidiary, entered into an
Asset Purchase Agreement with Canufly.net, Inc. (“Canufly.net”), an Internet
Service Provider based in Vicksburg, Mississippi, and its principal shareholder,
Mr. Michael Nassour. Canufly.net provided residential and business customers
with high-speed Internet services and utilized the facilities-based network of
Xfone USA, as an alternative to BellSouth, to provide Internet connectivity to
its customers. Canufly.net also provided Internet services through a small
wireless application in certain areas in Vicksburg, Mississippi. The transaction
was closed on January 24, 2006. We agreed to pay a total purchase price of up to
$710,633, payable as follows: (i) $185,000 in cash payable in twelve equal
monthly payments, the first installment was paid at closing, and as of December
31, 2006, the entire amount was paid in full and in accordance with the Asset
Purchase Agreement; (ii) $255,633 in cash, paid at closing, to pay off the
loan with the B&K Bank; (iii) 33,768 restricted shares of Common Stock
and 24,053 warrants exercisable at $2.98 per share for a period of five years
were issued to the shareholders of Canufly.net during May 2006. Following the
closing in 2006 and due to the satisfaction of certain earn out provisions in
the Asset Purchase Agreement the Company issued in March 2007 an additional
20,026 restricted shares of Common Stock and 14,364 warrants exercisable at
$2.98 per share for a period of five years to the shareholders of Canufly.net.
The acquisition was not significant from an accounting
perspective.
Story Telecom
On May 10, 2006, we, Story Telecom,
Inc., Story Telecom Limited, Story Telecom (Ireland) Limited, Nir Davison, and
Trecastle Holdings Limited, a company owned and controlled by Mr. Davison,
entered into a Stock Purchase Agreement. Pursuant to the Stock Purchase
Agreement, we increased our ownership interest in Story Telecom from 39.2% to
69.6% in a cash transaction valued at $1,200,000. $900,000 of the total
consideration was applied to payables owed by Story Telecom to us and our
subsidiary Swiftnet Limited for back-end telecommunications services. The
balance of $300,000 was paid to Story Telecom to be used as working
capital.
Story Telecom, Inc., a telecommunication
service provider, operated in the United Kingdom through its two wholly owned
subsidiaries, Story Telecom Limited and Story Telecom (Ireland) Limited (which
was dissolved on February 23, 2007). Following the acquisition, Story Telecom
operates as a division of our operations in the United Kingdom. The stock
purchase pursuant to the Stock Purchase Agreement was completed on May 16, 2006.
The transaction contemplated by the Stock Purchase Agreement was not significant
from an accounting perspective.
On March 25, 2008, we purchased from Mr.
Davison and Trecastle Holdings Limited, the shares of common stock of Story
Telecom, Inc. that each party owned, respectively, for an aggregate purchase
price of £270,000 ($538,083), pursuant to the terms of a Securities Purchase
Agreement entered into between the parties on that date. Upon acquisition of the
shares of common stock of Story Telecom, Inc. from Mr. Davison and Trecastle
Holdings, Story Telecom, Inc. became our wholly owned
subsidiary.
Equitalk.co.uk
Limited
On May 25, 2006, we and the shareholders
of Equitalk.co.uk Limited, a privately held telephone company based in the
United Kingdom (“Equitalk”) entered into an Agreement relating to the sale and
purchase of Equitalk (the “Equitalk Agreement”). The Equitalk Agreement provided
for us to acquire Equitalk in a restricted Common Stock and warrant transaction
valued at $1,650,000. The acquisition was completed on July 3, 2006, and on that
date Equitalk became our wholly owned subsidiary. In conjunction with the
completion of the acquisition and in exchange for all of the capital stock of
Equitalk, we issued a total of 402,192 restricted shares of our Common Stock and
a total of 281,872 warrants exercisable at $3.025 per share for a period of five
years. Founded in December 1999, Equitalk, a VC-financed company, was the first
fully automated e-telco in the United Kingdom. Equitalk provides both
residential and business customers with low-cost IDA and CPS voice services,
broadband and teleconferencing.
Auracall Limited
On August 15, 2007, the Company,
Swiftnet Limited, our wholly owned U.K.-based subsidiary (“Swiftnet”), and Dan
Kirschner entered into a definitive Share Purchase Agreement to be completed on
the same date, pursuant to which Swiftnet purchased from Mr. Kirschner the 67.5%
equity interest in Auracall Limited (“Auracall”) that he beneficially owned,
thereby increasing Swiftnet’s ownership interest in Auracall from 32.5% to 100%.
Swiftnet had acquired the 32.5% interest in Auracall through several
transactions that occurred since October 16, 2001. The purchase price for the
shares was £810,917.64 (approximately $1,616,158), payable as follows: £500,000
(approximately $996,500) was paid in cash upon signing of the Share Purchase
Agreement, and the remaining £304,000, plus interest of £6,917.64 (approximately
$619,658), was payable in monthly installments beginning in September 2007 and
continued through March 2008. In connection with the acquisition, Auracall and
Swiftnet entered into an Inter-Company Loan Agreement, pursuant to which
Auracall agreed to lend Swiftnet £850,000 (approximately $1,694,050) for the
sole purpose of and in connection with Swiftnet’s acquisition of the Auracall
shares. The loan is unsecured, bears interest at a rate of 5% per annum, and is
to be repaid in five years (i.e., August 15, 2012), but may be repaid earlier
without charge or penalty. As a result of the terms of the transaction, Mr.
Kirschner no longer serves as Auracall’s Managing Director or as a member of its
board of directors.
NTS Communications,
Inc.
On August 22, 2007, we entered into a
Stock Purchase Agreement (the “NTS Purchase Agreement”) with NTS Communications,
Inc. (“NTS”), a provider of integrated voice, data and video solutions
headquartered in Lubbock, Texas, and the owners of approximately 85% of the
equity interests in NTS, to acquire NTS. Subsequently, all of the remaining
shareholders of NTS executed the Agreement, bringing the total percentage of
equity interests in NTS owned by NTS shareholders that entered into the
Agreement (the “NTS Sellers”) to 100%. On February 14, 2008, we
entered into a First Amendment to the NTS Purchase Agreement to amend the
agreement to further extend the expiration date for the closing of our
acquisition of NTS. On February 26, 2008, we entered into a Second
Amendment to the NTS Purchase Agreement which amended, among other things, the
definition and elements of working capital, as such term is defined in the NTS
Purchase Agreement, and increased the escrow amount. On April 25, 2008, we
entered into a Third Amendment, pursuant to which we agreed to an extension of
time for the calculation and payment of the post closing working
capital adjustment under the NTS Purchase
Agreement.
The acquisition closed on February 26,
2008. Upon closing of the acquisition, NTS and its six wholly owned
subsidiaries, NTS Construction Company, Garey M. Wallace Company, Inc., Midcom
of Arizona, Inc., Communications Brokers, Inc., NTS Telephone Company, LLC, and
NTS Management Company, LLC, became our wholly owned
subsidiaries.
The purchase price for the acquisition
set forth in the NTS Purchase Agreement was approximately $42,000,000 (excluding
acquisition related costs), plus (or less) (i) the difference between NTS’
estimated working capital and the working capital target for NTS as set forth in
the NTS Purchase Agreement, and (ii) the difference between amounts allocated by
NTS for its fiber optic network build-out project anticipated in Texas and any
indebtedness incurred by NTS in connection with this project, each of which was
subject to our advance written approval. After applying this formula,
the final aggregate purchase price was calculated as $41,900,000, and was paid
as follows:
·
|
$35,414,715 was paid in cash;
and
|
·
|
2,366,892 shares of our Common
Stock were issued to certain NTS Sellers who elected to reinvest all or a
portion of their allocable sale price in our Common Stock, pursuant to the
terms of the NTS Purchase Agreement. Our Board of Directors determined, in
accordance with the NTS Purchase Agreement, the number of shares of our
Common Stock to be delivered to each participating NTS Seller by dividing
the portion of such NTS Seller’s allocable sale price that the NTS Seller
elected to receive in shares of our Common Stock by 93% of the average
closing price of our Common Stock on the American Stock Exchange for the
ten consecutive trading days preceding the trading day immediately prior
to the Closing Date (i.e., $2.74). The aggregate sales price reinvested by
all such NTS Sellers was
$6,485,284.
|
Our
Principal
Services and
Their Markets
United Kingdom
We provide through our United Kingdom
operations (Swiftnet, Equitalk, Story Telecom and Auracall) the following
telecommunication products / services:
Services provided by
Swiftnet
Telephony
Services
·
|
Carrier Pre
Select (CPS):
CPS is
a telephony service which enables customers to benefit from our low call
usage charges, without having to make any changes to their existing
telephone lines or numbers. The service allows customers to route all
their outgoing calls over our network. This gives them access to
competitive call rates and a wide range of services. Customers using CPS
only pay line rental to their service operator, while we bill them for all
call charges. CPS is available nationally provided the customer is
connected to a BT local
exchange.
|
·
|
Indirect
Access:
This is a
telephony service which enables customers to benefit from our low call
usage charges, without having to make any changes to their existing
telephone lines or numbers. The service allows customers to route a
specific outgoing call over our network by using the prefix code
“1689.”
|
·
|
Calling
Cards:
This service
is available to all our subscribers. The Calling Card works by using an
access number and a PIN code, and offers a convenient and easy way to make
calls virtually anywhere in the UK, as well as from 27 other destinations
worldwide.
|
Messaging
Services
·
|
Email2Fax:
Allows users to send fax messages
directly from their email or web
software.
|
·
|
Cyber-Number:
Allows users to receive fax
messages directly to their email software via a personal
number.
|
·
|
Email/Fax
Broadcast:
This
service allows the user to send multiple personalized faxes and emails to
thousands of users in
minutes.
|
Internet Based Customer
Service
·
|
Our Internet based customer
service and on-line registration (found at www.swiftnet.co.uk) includes
full details on all our products and
services.
|
Our UK based subsidiary, Swiftnet
Limited owns and operates its own facilities-based telecommunications switching
system.
Services Provided by
Equitalk.co.uk
Telephony Services
·
|
Carrier Pre
Select (CPS):
CPS is
a telephony service which enables customers to benefit from our low call
usage charges, without having to make any changes to their existing
telephone lines or numbers. The service allows customers to route all
their outgoing calls over our network. This gives them access to
competitive call rates and a wide range of services. Customers using CPS
only pay line rental to their service operator, while we bill them for all
call charges. CPS is available nationally provided the customer is
connected to a BT local
exchange.
|
·
|
Indirect
Access:
This is a
telephony service which enables customers to benefit from our low call
usage charges, without having to make any changes to their existing
telephone lines or numbers. The service allows customers to route a
specific outgoing call over our network by using the prefix code
“1664.”
|
·
|
Internet/Data
Service:
We provide
high-speed Internet access to residential customers utilizing the digital
data network of Griffin Internet. Our ADSL service provides up to 8 Mbps
of streaming speed combined with Static IP addresses, as well as multiple
mailboxes. Our Internet/Data services are bundled with our voice services
for residential and business
customers.
|
·
|
Conference
Service:
We provide
web-managed low cost teleconferencing services through our partnership
with Auracall Limited. Up to 10 people can call in to a conference circuit
and be joined together by dialing the same PIN. There is no need to
reserve a conference call in advance and each caller pays for their own
call.
|
Internet Based Customer Service and
Billing Interface
·
|
Our Internet based customer
service and billing interface (found at www.equitalk.co.uk) includes
on-line registration, full account control, and payment and billing
functions and information
retrieval.
|
Services provided by Story
Telecom
·
|
Prepaid Calling Cards: Story
Telecom initiates, markets and distributes Prepaid Calling Cards that are
served by our switch and systems. Story Telecom supplies the Prepaid
Calling Cards to retail stores through its network of dealers. The Calling
Card enables the holder to call anywhere in the world by dialing either a
toll free number or a local access number from any telephone that routes
the holder’s call to our Interactive Voice Response System that
automatically asks for the holder’s private PIN code, validates the code
dialed by the customer, and tells the credit balance of the card. The
holder is then instructed to dial to his or her desired destination, at
which time our Interactive Voice Response System tells the holder how long
he or she can speak according to the balance on the card and what the cost
per minute is. The holder of the card can use the card repeatedly until
the balance is zero.
|
·
|
Story Direct and Story Mobile:
These services allow any individual with either a BT line or a mobile
phone to make international calls at a lower cost and without prepayment
for setting up an account with another carrier. These services can be
accessed by any business or residential user through Story Telecom
website, found at www.storytelecom.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 BT
published rates or their network operator’s rates by gaining access to our
switch and providing savings on a per minute
basis.
|
·
|
Text & Talk: This service
allows any individual with a mobile phone to make international calls at a
lower cost by purchasing calling credit via a Premium Rate Text. When
customers need to make an international or national call they can dial an
access number followed by their destination
number.
|
Internet Based Customer Service and
Billing Interface
·
|
Our Internet based customer
service (found at www.storytelecom.co.uk) includes full details on all our
products and services.
|
Services provided by
Auracall
·
|
Free Time: This service
allows any individual with a BT line to make international calls at a
lower cost and without prepayment for setting up an account with another
carrier. The Auracall service can be accessed by any business or
residential user through our website at www.auracall.com. When customers
need to make an international or national call they can dial the
appropriate designed number for that country and save on calling rates
over the current BT published rates by gaining access to our switch and
providing savings on a per minute
basis.
|
·
|
T-Talk: This service
allows any individual with a mobile phone to make international calls at a
lower cost by purchasing calling credit via a Premium Rate Text. When
customers need to make an international or national call they can dial an
access number followed by their destination
number.
|
Internet Based Customer Service and
Billing Interface
·
|
Our Internet based customer
service (found at www.auracall.co.uk) includes full details on all our
products and services.
|
United States
We provide through our United States
operations (Xfone USA and NTS Communications) the following telecommunication
products / services:
Services provided by Xfone
USA
·
|
Local Telephone
Service:
Using our
own network in concentrated local areas throughout Mississippi and
Louisiana and utilizing the underlying network of BellSouth
Telecommunications, Inc. (the new ATT), outside of our local areas, we
provide local dial tone and calling features, such as hunting, call
forwarding and call waiting to both business and residential customers
throughout Louisiana and Mississippi, including T-1 and PRI local
telephone services to business
customers.
|
·
|
Long Distance
Service:
We use our
own network where available and QWEST, a nationwide long distance carrier,
as our underlying long distance network provider. In conjunction with
Local Telephone Services, we provide Long Distance Services to our
residential and business customers. We provide two different categories of
long distance services - Switched Services to both residential and small
business customers, which include 1+ Outbound Service, Toll Free Inbound
Service and Calling Card Service. For larger business customers we also
provide Dedicated Services such as T-1 and PRI Services. Our long distance
services are only available to customers who use our local telephone
services.
|
·
|
Internet/Data
Service:
We provide
high-speed broadband Internet access to residential and business customers
utilizing our own integrated digital data network and utilizing the
broadband gateway network of the new ATT. Our DSL service provides up to 3
Mbps of streaming speed combined with Dynamic IP addresses, as well as
multiple mailboxes and Web space. Our DSL services also include spam
filter, instant messaging, pop-up blocking, web mail access, and parental
controls. We also provide dial-up Internet access service for quick and
dependable connection to the web. Our Internet/Data services are
stand-alone products or are bundled with our voice services for
residential and business
customers.
|
·
|
Customer
Service:
Customer
Service is paramount at Xfone USA and is one of our major differentiating
characteristics, thus tantamount to being one of our product offerings.
Customers have been conditioned to accept poor customer service from the
larger monopoly companies because they have never had any real choice in
service providers, especially in the residential market. Our attentive
customer service department is an additional “product offering” which
sells - as well as retains - customers. The full scope of communications
service entails network service, customer service, and repair
service.
|
·
|
Customer
Premise Equipment (“CPE”)
: Xfone USA also resells a variety
of CPE and CPE related services to its customers. Primarily,
these sales involve acting with NTS Comunications, Inc. as an authorized
dealer for Toshiba phone systems. These systems are sold to customers
either on a stand-alone basis, or in conjunction with the purchase of
local, long distance, and/or data services from the
company.
|
Our US based subsidiary, Xfone USA, Inc.
owns and operates its own facilities-based telecommunications carrier
class-switching platform.
Services provided by NTS
Communications
Retail Services
·
|
Local Services: NTS delivers local
telephony service to its customers through an “on-net” UNE-L connection,
including voice mail, caller ID, forwarding, 3-way calling, blocking, and
PBX services. In addition, NTS sells ”off-net” total service
resale lines which contribute less than 7% of total local service
revenue. NTS provides UNE-L services in Lubbock, Abilene,
Amarillo, Midland, Odessa, Pampa, Plainview, and Wichita Falls,
Texas. NTS provides local services via FTTP in Lubbock and
Wolfforth. NTS provides resold local services throughout Texas
via its resale agreement with
AT&T.
|
·
|
Retail Long Distance Services: NTS
offers a full range of long distance services to its customers, including
competitively priced switched long distance (including intrastate,
interstate, and international), toll-free service, dedicated T-1 long
distance and calling cards. The vast majority of its customers
are concentrated in West Texas. Approximately 10% of long
distance customers are in Arizona, New Mexico, Oklahoma, Kansas, and
Colorado.
|
·
|
Internet Data Services: NTS began
offering broadband service in 1999. Download speeds range from
500 Kilobits to 100 Megabits per second, depending on the end user’s
distance from an NTS collocation or the type of facilities used to deliver
the service. NTS launched dial-up service in
1985. NTS provides broadband and dial-up Internet service in
all of its Texas markets.
|
·
|
Fiber-Based Services (“Fiber to
the Premise or FTTP”): As an integrated telecom provider, NTS is capable
of providing quality triple play (voice, digital video & data) on one
bill at competitive prices to its FTTP customers. NTS offers a
full selection of video services, including basic cable, video on demand,
HDTV and DVR. NTS is a member of the National Cable Television
Cooperative and as a member obtains favorable programming rates from most
major networks. NTS provides FTTP service in Lubbock and
Wolfforth, Texas.
|
·
|
Customer Premise Equipment
(“CPE”): NTS resells a variety of CPE and CPE related services to its
customers. Primarily, these sales involve NTS acting as an
authorized dealer for Toshiba phone systems. These systems are sold to
customers either on a stand-alone basis, or in conjunction with the
purchase of local, long distance, and/or data services from the
company.
|
Wholesale Services
·
|
Private Line Services: NTS offers
aggregation and resale of leased fiber transport network from AT&T and
other fiber network operators. This service is mostly provided
for carrier customers that need direct network connectivity, as well as
enterprises that require dedicated branch office
connections. Services are generally offered under 1-year
contracts for a fixed amount per month. NTS provides private
line service nationwide.
|
·
|
Wholesale Switched Termination
Services: NTS sells its wholesale-switched minutes to local telecom
companies who do not have the volume to warrant attractive pricing from
AT&T and other large carriers. NTS provides multi-regional
switched termination, switched toll free origination and wholesale
Internet access services to various carrier customers. Services
are generally offered for a fixed amount per minute. NTS
provides wholesale switched termination services to customers via network
connections in NTS POPs and switch
sites.
|
Internet Based Customer
Service
·
|
Our Internet based customer
service (found at www.ntscom.com) includes full details on all our retail
products and services.
|
Our US based subsidiary, NTS
Communications, Inc., owns and operates its own facilities-based
telecommunications switching system.
Future Plans
Levelland/Smyer FTTP
Opportunity
NTS, through its wholly owned
subsidiary, NTS Telephone Company, LLC, plans to extend its FTTP network to the
nearby communities of Levelland (located 30 miles west of Lubbock) and Smyer
(approximately 15 miles west of Lubbock). Upon project completion,
these communities will add approximately 6,200 passings to the NTS FTTP
footprint and bring total FTTP passings to approximately 21,000. NTS
Telephone Company, LLC, has received approval from the Rural Utilities Service
(“RUS”) for an $11.8 million, 17-year debt financing to complete this
overbuild. The RUS loan is non-recourse to NTS and all other NTS
subsidiaries and interest is charged at the average rate of U.S. government
obligations (equivalent to approximately 3.8% a year at today’s
rates). Data from marketing surveys indicated a very strong demand
for triple play (voice, data/Internet, and video) service offerings and
projected a market penetration for NTS of 69% in approximately three years from
project completion. NTS’ capital investment in the project is a $2.5
million equity contribution that serves as credit support for the
loan. NTS will provision voice, data, and video services for NTS
Telephone Company. NTS will receive a management fee from NTS
Telephone Service equal to 15% of its revenues. NTS expects to begin
providing initial triple-play service to some areas of Levelland in the fourth
quarter of 2008 with more areas becoming available as overbuild construction is
completed. Project completion could be delayed by any number of
factors including but not limited to weather and the availability of contractors
and materials.
Israel
We provide through our Israeli
operations (Xfone 018) the following telecommunication products /
services:
·
|
International
Telephony Services:
We provide international telephony services with the prefix code of “018”.
We provide these services both to our subscribers and to occasional
customers. The service is offered to both residential and business
customers.
|
·
|
Local Telephony
Services:
We provide
to Israeli subscribers local telephony services with the prefix code of
“078”. The service is offered to both residential and business
customers in the framework of an experimental deployment of Local
Telephone Services utilizing Voice over Broadband (VoB)
technology.
|
·
|
XFONECARD:
We provide an international toll
free calling card service, available in over 40 countries around the
globe.
|
·
|
SIMPLE:
The SIMPLE is a pre programmed,
rechargeable, mobile SIM card which can be used with any unlocked GSM
(Global System for Mobiles) mobile phone virtually anywhere in the world.
SIMPLE allows us to deliver call savings, by diverting the customer
dialing command away from the local mobile operator that the phone is
connected to, and instead, it sends the call to one of the mobile
operators with whom we hold a special agreement. We offer for sale or rent
three types of SIM Cards which may be used from over 90 countries around
the globe - "SIMPLE+", "SIMPLE World" and "SIMPLE
Europe". We also offer a
special
SIM Card for the U.S.A- "SIMPLE
USA".
|
·
|
International
Telephony Access:
We
provide international telephony access to the Israeli telephone network by
selling incoming call minutes to various international operators across
the globe.
|
Internet Based Customer
Service
·
|
Our Internet based customer
service and on-line registration (found at www.018.co.il) includes full
details on all our products and
services.
|
Our Israel based subsidiary Xfone 018
owns and operates its own facilities-based telecommunications carrier
class-switching platform.
Our
Distribution
and Marketing
Methods
We use the following distribution
methods to market our services:
·
|
We use employed, direct sales
executives to sell to medium to large size business customers; these sales
executives have quota attainment requirements and receive a monthly
salary, allowance and are paid
commissions;
|
·
|
We actively recruit independent
contractor agents and resellers who purchase telephone traffic directly
from us at a discount, and who then resell this telephone traffic to their
customers at a mark-up according to their own price
lists;
|
·
|
We utilize agents that sell our
services directly to customers at our established prices; these agents
receive a commission of approximately 5%-12% of the total sale amount less
any bad debts;
|
·
|
We use third party direct sales
organizations (telesales and door-to-door) to register new
customers;
|
·
|
We cooperate with major companies
and worker’s councils;
|
·
|
We have retail and wholesale sales
offices; employees at these sales offices receive annual salaries and
commissions;
|
·
|
We use direct marketing, including
by newspaper, radio and television
advertisements;
|
·
|
We attend telecommunications trade
shows to promote our services;
and
|
·
|
We utilize the Internet as an
additional distribution channel for our
services.
|
Our
Billing
Practices
We charge our customers based on a
monthly fixed amount or on actual usage by full or partial minutes. Our rates
vary with distance, duration, time, type of call, and product or service
provided, but are not dependent upon the facilities selected for the call
transmission. The standard terms for our customers require either pre-payments
or payments due as early as 16 or as late as 30 days from the date of the
invoice, or within 90 days from when the invoice is issued by the local
operator. Our supplier’s standard terms are payment within 30 to 90 days from
invoice date; however, some new suppliers ask for shorter payment
terms.
Carriers and Negotiating Lower
Rates
Our increased sales in 2006 and 2007
have enabled us to negotiate significantly lower rates with the carriers we use
to carry our international call traffic, which gives us the opportunity to
increase our margins or offer significant reductions to secure deals with major
clients. If our sales increase, we anticipate that we will continue to negotiate
for lower rates. There can be no assurance that we will be successful in
negotiating lower rates.
Divisions
We operate the following
divisions:
·
|
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.
|
·
|
Customer
Service Division -
In
the United Kingdom and the United States we operate a live customer
service center that operates 24 hours a day, 7 days a week. In Israel our
customer service center operates 6 days a
week.
|
·
|
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.
|
·
|
Administration
Division -
Our
Administration Division provides the billing, collection, credit control,
and customer support aspects of our
business.
|
·
|
Research and
Development Division -
The function of our Research and
Development Division is to develop and improve our billing system, switch
and telephony platforms, websites and special
projects.
|
·
|
Marketing
Division -
Our
Marketing Division is responsible for our marketing and selling campaigns
that target potential and existing retail
customers.
|
Geographic Markets
Our primary geographic markets are the
United States, the United Kingdom and Israel. However, we serve customers
worldwide.
Competitive Bu
siness
Conditions
The U.K. Market
The communications and information
services industry in the U.K. is highly competitive and varied. In 2007, we had
only approximately 0.2% of the market share of the United Kingdom
telecommunication market (not including mobiles revenues), based on our revenues
of $24 million during 2007, compared with the approximately $10 billion
telecommunication market (not including mobiles revenues) in the United Kingdom,
according to the United Kingdom regulatory oversight of these companies, the
Office of Communications - United Kingdom, otherwise known as Ofcom, the website
of which may be accessed at www.ofcom.org.uk.
The U.S. Market
NTS operates in a highly competitive
environment which is generally characterized by the dominance of the Incumbent
Local Exchange Carrier (ILEC). With respect to its primary Texas
markets, the dominant ILEC is AT&T (formerly Southwestern Bell Telephone
Company). NTS also competes with the Incumbent Cable TV Provider
(ICTVP) in markets where that carrier provides voice, data and/or video
services. In its core Texas markets, the ICTVP is SuddenLink
Communications or Time Warner Communications. Within these same core
markets, NTS also competes with a variety of widely dispersed smaller
Competitive Local Exchange Carriers (CLEC). In the February 2007 FCC
report, Trends in Telephone Service - Industry Analysis and Technology Division,
Wireline Competition Bureau, it is reported that total Texas switched access
lines in service (as of June 30, 2006) were 11,863,981, with the ILEC community
possessing a market share of approximately 84% and the balance is being served
by various CLEC’s and ICTVP’s. With respect to its data and long
distance products, the company competes with various national and regional
players including AT&T, Verizon, Qwest, Level 3 and
others.
In 2007, Xfone USA had approximately
11,000 End-User Switched Access telephone lines in the Alabama, Louisiana and
Mississippi market or approximately 0.2% of market share. This total market size
in 2007 represented 5,732,998 telephone lines, with BellSouth Telecommunications
maintaining its monopoly market share with 4,949,629 telephone lines or
approximately 86% of the market. All CLECs combined made up the remaining
783,369 telephone lines or approximately 14% of the tri-state market, according
to the 2007 FCC Report - Trends in Local Telephone
Competition.
The Israeli Market
Since the opening of the international
telephony market in Israel to competition in 1996, and until 2004, only three
companies have provided international telephony services in Israel. The market,
estimated at that time to be 2 billion minutes per year, was more or less
equally divided between the three companies. On July 4, 2004, the Ministry of
Communications of the State of Israel granted our subsidiary, Xfone 018 a
license to provide international telecom services in Israel. We started
providing services in Israel through Xfone 018 as of mid-December 2004. In 2004,
two other new providers of international telephony services launched their
services. The international telephony market is highly competitive and therefore
all six providers had to offer low prices in order to attract or retain
subscribers and call minutes.
During 2006, two significant mergers
occurred in the Israeli international telephony market, leaving only four
companies in the competition. The aforementioned mergers enabled Xfone 018 to
execute, as of December 2006, a new business strategy, according to which it
re-priced its services by distinguishing the rates for its subscribed customers
from the rates for its non-subscribed customers. The new strategy has proved to
be successful, and in 2007 Xfone 018 revenues were significantly
increased.
In 2007, the Israeli international
telephony market was estimated to be 2.9 billion minutes. We estimate our market
share as of December 31, 2007, as approximately 5.5% of the Israeli
market.
Principal
Suppl
iers
In 2007, our principal suppliers of
telephone routing and switching services according to the percentage of the
costs of revenues were:
·
|
British Telecommunications -
20%
|
·
|
Bezeq The Israel Telecommunication
Corp - 7%
|
We are dependent on several of our
suppliers, including those that provide significant hardware and software
products and support. However, these suppliers are required to provide us with
services according to the relevant regulations and their licenses to operate as
a telecommunications provider in the relevant jurisdictions.
Major Customers
We have six major types of
customers:
·
|
Residential
-
in the U.S. -
pre-subscribed customers, including for local, long distance, internet and
cable television services; outside of the U.S. - pre-subscribed customers
and customers who must dial a special code to access our switch or acquire
a box that dials
automatically.
|
·
|
Commercial
-
we serve small to
complex business customers around the
world.
|
·
|
Governmental
agencies -
Including
the United Nations World Economic Forum, certain embassies and the Bank of
Israel. We also provide cities, counties, schools and universities in
Texas with a host of services, including local, long distance, internet
and private line services.
|
·
|
Resellers
-
We provide
resellers with our telephone and messaging services for a wholesale
price. We also provide long haul switched termination to a
variety of companies throughout the United States who resell our
services.
|
·
|
Telecommunications
companies -
We
provide our services through telecommunication companies (such as British
Telecom and Bezeq The Israel Telecommunication Corp) which collect the
fees relating to such services and forward them to
us.
|
·
|
Mobile Users
-
including customers
who can access our switch utilizing our access number and thereafter are
able to make low-cost international calls; customers who purchase, via a
reversed billed SMS, pre-paid credit for international calls and those
using our international roaming SIM
cards.
|
Certain Telecommunication operators act
as collection channels for the Company. In 2007, we had two major collection
channels, one in the U.K. and one in Israel. Collections through these channels
accounted to approximately 22% and 6% of our total revenues in 2007,
respectively, and 18% and 5% of our total revenues in 2006, respectively. With
respect to collection of monies for us, these Telecommunication operators are
not deemed to be customers of the Company.
In 2007 our largest non-affiliated
reseller was WorldNet Global Communications Ltd. which generated under 1% of our
total revenues. We provide WorldNet Global Communications with the billing
system. We anticipate that WorldNet will continue to contribute approximately
the same amount of UKP to our revenues in year 2008.
Collectively, in 2007 the United Kingdom
accounts for approximately 54.3% of our revenues, the United States accounts for
approximately 27.5% of our revenues and Israel accounts for approximately 18.2%
of our revenues.
Our integrated revenue approach led to
revenue from each source as described above and is partially driven by the
activities of other revenue sources. Our revenues are dependent upon the
following factors: price competition in telephone rates; access provided to our
services by other telecoms companies and the prices for that access; demand for
our services; individual economic conditions in our markets; and our ability to
market our services.
Patents and T
radem
arks
In the U.K
On September 14, 2000, Equitalk received
notification from the Trademarks Registry Office of Great Britain that its
trademark, “
Equitalk
” was registered by that government
agency.
On January 9, 2004, we received
notification from the Trademarks Registry Office of Great Britain that as of
August 8, 2003, our trademark, “
Xfone
” was registered by that government
agency.
In the U.S
The Mark “
XFONE
” was registered with the United States
Patent and Trademark Office on July 15, 2008.
The Mark, “
NTS
Communications
” related to
the provision of telephone telecommunications services in the United States, was
registered by the United States Patent and Trademark Office on September 4,
1984, and renewed through the year 2014.
The Mark, “
NTS Communications
(with design)
” related to
the provision of telephone communications services in the United States, was
registered by the United States Patent and Trademark Office on October 12, 1993,
and has been renewed through the year 2013.
The Mark, “
NTS-ONLINE (with
design)
” related to the
provision of web hosting, on-line message boards and information, was registered
by the United States Patent and Trademark Office on August 15,
2000.
On February 6, 2007, NTS filed an
application with the United States Patent and Trademark Office to register the
Mark, “
NTS-ONLINE
” related to the provision of expanded
telecom services, web hosting services, and domain name services. The
application also seeks to eliminate the design associated with the mark.
On May 27, 2008, the United States Patent and Trademark Office issued a Notice
of Allowance. Registration will be complete once NTS files a
Statement of Use, due by November 27, 2008.
On April 22, 2005, Xfone USA received
notification from the United States Patent and Trademark Office that as of April
12, 2005, its Mark, “
eXpeTel
” was registered by that government
agency.
In Israel
On August 6, 2007, Xfone 018 received
notification from the Israeli Patent Office that as of March 30, 2007, its Mark,
“
Xfone
018
” was registered by that
government agency.
We do not have any other patents or
registered trademarks.
Regulatory
Matters
We provide our services in many
countries, all of which have different regulations, standards and controls
related to licensing, telecommunications, import/export, currency and trade. We
believe that we are in substantial compliance with these laws and
regulations.
In the U.K
In 1996, our subsidiary, Swiftnet
Limited was granted a license to operate a telecommunications system from the
Secretary of State for Trade and Industry of the United Kingdom. On July 25,
2003, the regulatory situation within the United Kingdom changed dramatically
with the ending of the licensing regime and the withdrawal and revocation of the
Telecommunication Act.
The licensing regime has been replaced
by a general authorization regime with the introduction of the General
Conditions of Entitlement.
Swiftnet Limited, Equitalk.co.uk
Limited, Auracall Limited and Story Telecom Limited are now affected by
regulations introduced by the Office of Communications (“Ofcom”). Ofcom is the
regulator for the UK communications industries, with responsibilities across
television, radio, telecommunications and wireless communications services. Our
UK businesses are also affected by the rules set by regulator for Premium Rate
Services (Phonepay Plus - www.phonepayplus.org.uk). We do not believe that any
regulations introduced by Ofcom or Phonepay Plus will significantly interfere
with or substantially impair our business.
In the U.S
Xfone USA is licensed as a CLEC and an
Inter-exchange Carrier to provide local telephone and long distance services in
the states of Alabama, Florida, Georgia, Louisiana and Mississippi. Internet and
data services provided by Xfone USA are not regulated
services.
As of March 10, 2005, and upon
consummation of the merger of WS Telecom, with and into Xfone USA, we became
subject to applicable US state and federal telecommunications laws and
regulations. Compliance with such laws involved higher costs than we had in
Europe.
On March 9, 2005, the Mississippi Public
Service Commission (“MSPSC”) issued an Order opening a Generic Change of Law
Proceeding (“MSPSC Proceeding”) to consider amendments to existing
Interconnection Agreements between BellSouth Telecommunications, Inc. and all
(CLECs) in Mississippi. As an interested party and as a CLEC, Xfone USA
petitioned and was granted permission to intervene in the MSPSC Proceeding for
regulatory purposes. On October 26, 2005, the MSPSC held its hearing on the
MSPSC Proceeding and took the results of the proceeding under advisement. On
October 20, 2006 the MSPSC issued its Order in this matter, requiring various
changes to Interconnection Agreements between BellSouth Telecommunications, Inc.
and all CLECs in Mississippi, including the Interconnection Agreement under
which Xfone USA operates. The issues addressed by the MSPSC in this proceeding
were regulatory in nature and did not involve monetary
damages.
From time to time Xfone USA may be
required to seek regulatory approval before applicable state public utility
commissions of certain transactions, including business combinations with other
telecommunications providers. During 2005, upon request of Xfone USA, the MSPSC
and the Louisiana Public Service Commission granted regulatory approval of the
sale and transfer of the assets and the customer base of I-55 Telecommunications
to Xfone USA. This transaction was closed on March 31, 2006.
Certain required annual regulatory
reports to be filed by Xfone USA with the MSPSC were not made in a timely
manner. The most recent filings have been made and we are
working diligently to remediate all other omissions. Xfone USA
still faces some risk that these late filings could result in a monetary
penalty.
On February 14, 2008, Xfone and NTS
received domestic and international Section 214 authorization from the United
States Federal Communications Commission to transfer control of NTS to the
Company.
NTS has certain domestic and
international Section 214 authority, which authorizes NTS to provide long
distance service in the United States.
NTS is registered re-seller of
long-distance services in the states of Arizona, Colorado, Kansas, New Mexico,
Oklahoma and Texas. NTS is also registered to provide local services
in New Mexico and Texas. Further, in Texas, NTS has the authority to
provide local telecommunications services throughout the state of Texas, to
provide cable television services in Lubbock and Wolfforth, and has permits to
provide video services in designated areas within Lubbock, Wolfforth, Smyer and
Levelland. In addition, NTS has entered into 9-1-1 Emergency Service Agreements
with the applicable 9-1-1 entities in the markets it serves.
On May 19, 2008 a petition was filed
with the Federal Communications Commission (In the Matter of NTS Communications,
Inc., Petition for Extension of Waiver of Section 76.1204(a)(1) of the
Commission’s Rules, CS Docket No. 97-80 filed May 19, 2008). This Petition
seeks a two-year extension of the relief previously granted from Commission
Rules banning the use of integrated set-top boxes by cable service
providers. The original waiver, granted on July 23, 2007, expired on July
1, 2008.
On June 27, 2008, a petition was filed
with the Federal Communications Commission (In the Matter of Xfone USA, Inc.,
Petition for Waiver of Sections 54.307(c) and 54.802(a) of the Commissions
Rules, CS Docket No. 96-45, filed June 27, 2008). This Petition seeks
relief from the failure to timely file reports necessary to receive FUSF
reimbursement for the provision of telecommunications service in high cost areas
of Mississippi. If granted, Xfone USA anticipates it will receive
approximately $100,000.00 in unpaid reimbursements.
Effect of Probable
Governmental Regulations
As an ETC (Eligible Telecommunications
Carrier), there are numerous actions proposed at both the state and federal
level which could limit NTS and Xfone USA’s future access to reimbursement from
various Universal Service Funds (“USF”). NTS currently only receives
minimal reimbursement from USF for its provision of Lifeline and LinkUp services
While Xfone USA received significant support for services provided in high cost
areas of Mississippi. These measures could limit NTS and Xfone USA’s
ability to obtain reimbursement for services provided in high cost
areas. In areas where it has not deployed its own last mile
facilities, NTS and Xfone USA continue to rely on AT&T for access to high
cap interoffice and last mile copper loop facilities. AT&T’s
obligation to provide these facilities is created by the Federal
Telecommunications Act of 1996 and corresponding regulations of the FCC and
memorialized in interconnection agreements between NTS and Xfone USA and
Incumbent Local Exchange Carriers. Should laws or regulations be
changed to limit and or eliminate competitive access to these essential
facilities, NTS business could be adversely affected. The FCC has
been considering access charge reform to address issues created by VoIP traffic,
namely the compensation due, if any, to terminating carriers for VoIP originated
calls. Resolution of this issue will clarify legal and regulatory
uncertainty about the treatment of these calls and could have the effect of
opening the door to new markets for NTS’ wholesale switched
services. At the state level, the Texas State PUC has implemented
rules which may result in the reduction of NTS’ intrastate access revenues in
the fourth quarter of 2008.
In Israel
On April 15, 2004, we established Xfone
Communication Ltd. and renamed it to Xfone 018 Ltd in March 2005. On July 4,
2004 the Ministry of Communications of the State of Israel (the "MOCSIL")
granted Xfone 018 a license to provide international telecom services in Israel
(the "International Telecommunications Services License"). The International
Telecommunications Services License may be revoked by this agency in the
occurrence of certain events such as breach of telecommunication laws and
regulations or breach of certain provisions of the license.
On May 31, 2006, Xfone 018 was granted
permission by the MOCSIL to commence an experimental deployment of International
Telephone Services utilizing Voice over Broadband (VoB) technology. On May 31,
2007 the permission expired. On May 4, 2008, the MOCSIL approved an amendment to
the International Telecommunications Services License which included
International Telephone Services utilizing Voice over Broadband (VoB) technology
within our International Telecommunications Services
License.
On August 21, 2006, the MOCSIL granted
Xfone 018 a license to operate in Israel as an ISP, thus enabling Xfone 018 to
provide Internet access, Email and EDI (electronic data interchange)
services.
On August 2, 2007, Xfone 018 was granted
permission by the MOCSIL to provide international SMS
services.
On November 7, 2007, the MOCSIL granted
Xfone 018 a license to commence an experimental deployment of Local Telephone
Services utilizing Voice over Broadband (VoB) technology. Unless extended by the
MOCSIL, the license will expire on April 30, 2009.
On May 24, 2007, the MOCSIL informed
Xfone 018 that it is considering imposing on it a financial sanction as a
result of Xfone 018’s failure to provide the new "Mobilization of Telephone
Numbers" service (the "Service"), as of September 1, 2006, as required by law.
On June 14, 2007, Xfone 018 responded to the MOCSIL and explained the reasons
for the delay in the implementation of the Service, In December 2007, the
Service was implemented in Israel by all telecom service providers, including
Xfone 018. Xfone 018 has not received any additional communications from the
MOCSIL in this regard since its implementation of the Service, and accordingly,
believes the matter to be resolved.
Effect of Probable Governmental
Regulations
There are numerous actions recently
proposed by the Grunow Committee, an advisory committee appointed by the
Ministry of Communications of the State of Israel, which could affect our
business in the future. Below are the significant recommendations of the
committee that could apply to us if adopted:
·
|
Naked ADSL: A proposal has
been made to separate between the telephony and internet access in the
"Last Mile". If adopted, this could be beneficial to Xfone 018, as it
would provide Xfone 018 with the opportunity to penetrate the market with
its VOB local calls
services.
|
·
|
Unbundling: A proposal has been
made to force the existing infrastructure providers to enable other
providers to use their infrastructure in fair prices to encourage
competition. If adopted, this could affect Xfone 018’s business by
allowing it to offer a wider range of services at attractive
prices.
|
·
|
MVNO: A proposal has been
made to open the Israeli market to new virtual players in the mobile
arena. If adopted, this could affect Xfone 018’s business by
allowing it to penetrate a new market, which constitutes more than 50% of
the Israeli communication
market.
|
·
|
International Calls: A
proposal has been made to enable mobile operators to supply international
calls based on agreed access charge from the international carriers. If
adopted, this could negatively affect Xfone 018’s business by enlarging
the number of its
competitors.
|
·
|
WIMAX: A proposal has been
made to issue WIMAX frequencies in order to establish new access networks
in Israel. If adopted, this could be beneficial to Xfone 018’s
business by allowing it to penetrate and gain a new market share by direct
access.
|
Research and Dev
elopme
nt Activities
During fiscal year 2006, we spent
£23,333 ($49,101) on research and development activities. During fiscal year
2007, we spent £23,794 ($47,609) on research and development activities. During
the first half of 2008 we spent £16,413 ($32,580) on research and development
activities. Other than developing and expanding our telecommunications
applications and our websites, we do not intend to undertake any significant
research and development activities in 2008.
Cost of Compliance with Environmental
Laws
During 2007, NTS incurred approximately
$31,000 expenses related to the encapsulation of asbestos insulation located on
certain of the basement piping and basement boiler jacket of the Metro Tower, a
property owned in Lubbock, Texas, and in connection with the replacement of the
roof of the building to remediate a potential interior mold problem with
originated from a roof leak. NTS will from time to time incur
additional similar expenses in the future to monitor and encapsulate, where
necessary, isolated areas of asbestos. On March 21, 2008, NTS received notice
that the remediation project at Metro Tower had been completed, and accordingly
does not anticipate significant future expenses related to mold remediation at
this property over and above those normally associated with customary and usual
building maintenance.
We currently have no other costs
associated with compliance with environmental regulations. We do not anticipate
any other future costs associated with environmental compliance; however, there
can be no assurance that we will not incur such costs in the
future.
Employees
We currently have 28 employees in the
United Kingdom, 337 in the United States, and 45 employees in
Israel.
Reports
to
Security
Holders
We are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended. Accordingly, we
file annual, quarterly and other reports, proxy statements and information with
the Securities and Exchange Commission. You may read and copy these reports at
the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1–800–SEC–0330. Our filings are also available to the public
from commercial document retrieval services and the Internet worldwide website
maintained by the U.S. Securities and Exchange Commission at www.sec.gov. We
also provide a link to these filings on our website at
www.xfone.com.
D. LEGAL M
ATTE
RS
I. FCC Enforcement
Bureau
On March 6, 2006, the FCC’s Enforcement
Bureau initiated an investigation into Telephone Electronic Company’s (“TEC”)
compliance with FCC Rules for compensation of payphone service
providers. The Enforcement Bureau issued requests for production to
TEC, its affiliates and subsidiaries. TEC was a majority shareholder
of NTS Communications, Inc. ("NTS") at the time of this investigation, prior to
our acquisition of NTS on February 26, 2008. On April 26, 2006, NTS
filed its response to the request for production. The FCC has the
authority to issue fines for violations of its regulations. NTS
believes it is in compliance and will not incur any fine. The
investigation is pending.
II. David Espinoza vs. NTS
Communications, Inc. and Schindler Elevator Corp.
On June 29, 2007, David Espinoza filed a
personal injury suit against NTS Communications, Inc. ("NTS"), a wholly-owned
U.S. based subsidiary of the Company as of February 26, 2008, and Schindler
Elevator Corp., in the 237th District Court of Lubbock County,
Texas. Espinoza was an employee of one of the tenants in Metro Tower,
a building owned by NTS Communications. The complaint alleges that
the claim arises from an incident that occurred on July 20, 2005 when Espinoza
fell in an elevator at Metro Tower and sustained injuries to his knee and
shoulder. Espinoza sought unspecified damages for personal injuries.
On or about June 3, 2008, all Parties signed a Settlement Agreement. The
terms of the Agreement are confidential. Any amounts payable by
NTS will be paid by its insurance carrier. On July 24, 2008 the
case was dismissed.
GENERAL
AND OTHER
MATTERS
Management knows of no matters other
than the matters described above that will be presented to the Meeting. However,
if any other matters properly come before the Meeting, or any of its
postponements or adjournments, the person or persons voting the proxies will
vote them in accordance with his or their best judgment on such
matters.
SOLICITATION
OF
PROXIES
The Company is making the mailing and
will bear the costs associated therewith. There will be no solicitations made.
The Company will reimburse banks, brokerage firms, other custodians, nominees
and fiduciaries for reasonable expenses incurred in sending proxy material to
beneficial owners of the Company’s common stock.
STOCKHOLDER
PROPOSALS
The Board of Directors has not yet
determined the date on which the next Annual Meeting of Stockholders of the
Company will be held. Any proposal by a Stockholder intended to be presented at
the Company’s next Annual Meeting of Stockholders must be received at the
offices of the Company a reasonable amount of time prior to the date on
which the information or proxy statement for that meeting are mailed to
Stockholders in order to be included in the Company’s information or proxy
statement relating to that meeting.
While you have the matter in mind,
please complete, sign and return the enclosed proxy card.
|
|
|
|
By order of the Board of
Directors,
|
|
|
|
Date: October 31,
2008
|
By:
|
/s/ Guy
Nissenson
|
|
Guy
Nissenson
|
|
President and Chief Executive
officer
|
Ap
pendix
A
XFONE,
INC.
MINUTES
OF THE BOARD OF DIRECTORS MEETING
October
30, 2008
The
Directors of Xfone, Inc. (the “Company”) held, via telephone conference, a
meeting on October 30, 2008.
The
following Directors participated and had the ability to hear and be heard by all
participants, and constituted a quorum pursuant to the Bylaws of the Company:
Abraham Keinan, Guy Nissenson, Itzhak Almog, Shemer S. Schwartz (by proxy to
Itzhak Almog), Eyal J. Harish (by proxy to Abraham Keinan), and Aviu
Ben-Horrin.
The
following participated by invitation: Alon Reisser, the Company’s General
Counsel and Secretary, and Niv Krikov, the Company's Chief Financial
Officer.
Abraham
Keinan presided as Chairman of the meeting and Alon Reisser acted as
Secretary.
The
meeting was called to order at 14:40 CDT.
RESOLUTIONS
After
discussion and upon motion duly made, seconded and carried, it was resolved as
follows:
|
(i)
|
The
Board of Directors calls for the 2008 Annual Meeting of shareholders of
the Company to be held at 10:30 am ET on December 16, 2008, at the offices
of Gersten Savage LLP located at 600 Lexington Avenue, 9
th
Floor, New York, NY 10022, United States (the “Annual
Meeting”).
|
|
(ii)
|
Only
shareholders of record at the close of business on November 10, 2008,
shall be entitled to vote at the Annual
Meeting.
|
|
(iii)
|
Reference
is made to the approval on October 30, 2008 of the Audit Committee of the
Board of Directors of the Company of the appointment of Stark Winter
Schenkein & Co., LLP (“SWS”) as the Company’s Independent Certified
Public Accountants for the fiscal year ended December 31, 2008 and the
first three quarters of the fiscal year ended December 31, 2009, pursuant
to that certain Engagement Letter by and among the Company and SWS, dated
October 30, 2008, attached hereto as
Appendix A
and
incorporated herein by reference.
|
|
|
RESOLVED
,
that the Board of Directors hereby recommends
that the Stockholders of the Company vote "FOR" the approval of the
appointment of SWS as the Company’s Independent Certified Public
Accountants for the ensuing year at the Annual Meeting; and be it
further
|
|
(iv)
|
RESOLVED
, that the terms
and conditions of the Separation Agreement and Release with each of
Messrs. Wade Spooner and Ted Parsons, each dated August 15, 2008 (each, a
“Separation Agreement,” and together, the “Separation Agreements”), which
were previously approved by the Board of Directors by resolution on August
13, 2008, are hereby re-approved and/or ratified and/or confirmed in all
respects; and be it further
|
|
(v)
|
RESOLVED
, that the
issuances of the New Warrants and the Additional Acquisition Bonus
Warrants to each of Messrs. Spooner and Parsons (as these terms are
defined in each respective Separation Agreement) (collectively, the
“Warrants”), pursuant to the terms of each person’s respective Separation
Agreement, are hereby authorized and/or approved and/or ratified and/or
confirmed in all respects; and be it
further
|
|
(vi)
|
RESOLVED
, that the
issuances of the Company's shares of common stock underlying the Warrants
upon exercise (the “Underlying Shares”) are hereby authorized and/or
approved and/or ratified and/or confirmed in all respects; and be it
further
|
|
(vii)
|
RESOLVED
, that the Board
of Directors hereby recommends that the Stockholders of the Company vote
"FOR" the approval of the issuances of the Warrants and the Underlying
Shares, pursuant to the terms of the Separation Agreements, at the Annual
Meeting; and be it further
|
|
(viii)
|
RESOLVED,
that the
officers of the Company (including the Secretary) be, and they are or any
one of them is, hereby authorized, empowered and directed, from time to
time, in the name and on behalf of the Company to execute, make oath to,
acknowledge and deliver, any and all agreements, orders, directives,
certificates, notices, assignments and other documents, instruments and
papers (including, without limitation, applications to the NYSE Alternext
and the Tel Aviv Stock Exchange for the listing of the Underlying Shares,
and in connection with the preparation and filing of a Registration
Statement with the Securities and Exchange Commission to register the
Underlying Shares, with any amendments, supplements and modifications
thereto) and to take or cause to be taken such steps as they, with and
upon the advice of legal counsel of the Company, may determine to be
necessary, appropriate or advisable to carry out the intent and purposes
of the foregoing resolutions, such determination to be evidenced
conclusively by the execution and delivery of such documents and the
taking of such steps.
|
ADJOURNMENT
There
being no further business, and upon motion duly made and seconded, the meeting
was adjourned.
Respectfully
Submitted,
___________________
Abraham
Keinan
Chairman
of the Board
___________________
Alon
Reisser
Secretary
Appendix
B
FINANCIAL
STATEMENTS
Xfone,
Inc. and Subsidiaries
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
As
of December 31, 2007
|
CONTENTS
|
|
B-2
|
|
|
|
B
-3
|
|
|
|
B-4
|
|
|
|
B-6
|
|
|
|
B-7
|
|
|
|
B-8
|
|
|
|
B-11
|
REPORT OF INDEPENDENT
REGISTERED
PUBLIC
ACCOUNTING FIRM
To the
Board of Directors
Xfone,
Inc.
We have
audited the accompanying consolidated balance sheet of Xfone, Inc. as of
December 31, 2007, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the years ended December 31,
2007 and 2006. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. We did not audit the
financial statements of Xfone 018, Ltd., a 69% owned subsidiary, which
statements reflect 5.5% of total consolidated assets as of December 31, 2007 and
18.3% of consolidated revenues for the year ended December 31, 2007. Those
financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Xfone 018, Ltd. as of December 31, 2007 and for the year ended December 31,
2007 and 2006 is based solely on the report of the other
auditor.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated 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 and 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, and based on that of the other auditor, the consolidated financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of Xfone, Inc. as of December 31, 2007, and the
consolidated results of its operations and cash flows for the years ended
December 31, 2007 and 2006, in conformity with accounting principles generally
accepted in the United States of America.
/s/
Stark Winter Schenkein & Co., LLP
Stark
Winter Schenkein & Co., LLP
Denver,
Colorado
March 31,
2008
Report of Independent
Registered Public
Accounting Firm
To the Shareholders and
Board of Directors of
Xfone 018
Ltd.
We have
audited the accompanying balance sheets of Xfone 018 Ltd. ("the Company") as of
December 31, 2007 and 2006 and the related statements of operations,
shareholders' equity (deficiency) and cash flows for the 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated 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 and 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, the financial statements referred to above, present fairly, in all
material respects, the financial position of the Company as of December 31,
2007 and 2006 and the result of the operations, shareholders' equity
(deficiency) and cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
|
Yarel
+ Partners
C.P.A
(Isr.)
|
Tel-Aviv,
Israel
March
24, 2008
|
An
Independent Member of BKR
International
|
Xfone, Inc.
and
Subsidiaries
|
|
|
|
|
|
BALANCE
SHEET
|
|
|
|
|
|
December
31,
|
|
|
2007
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
Cash
|
|
$
|
5,835,608
|
|
|
Restricted
cash
|
|
|
25,562,032
|
|
|
Accounts
receivable, net
|
|
|
5,886,499
|
|
|
Prepaid
expenses and other receivables (Note 3)
|
|
|
3,985,307
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
41,269,446
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
7,190
|
|
|
|
|
|
|
|
|
LONG
TERM ASSETS (including $1,753,503 of bonds issuance cost,
net)
|
|
|
2,076,061
|
|
|
|
|
|
|
|
|
FIXED
ASSETS, NET (NOTE 4)
|
|
|
5,747,758
|
|
|
|
|
|
|
|
|
OTHER
ASSETS, NET (NOTE 5)
|
|
|
17,948,872
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
67,049,327
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
BALANCE
SHEET
|
|
|
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
Notes
payable - current portion (Note 7)
|
|
$
|
1,094,339
|
|
Trade
payables
|
|
|
8,287,420
|
|
Other
liabilities and accrued expenses (Note 6)
|
|
|
5,322,045
|
|
Obligations
under capital leases - current portion (note 9)
|
|
|
89,654
|
|
Current
maturities of Bonds (note 8)
|
|
|
3,268,476
|
|
Total
current liabilities
|
|
|
18,061,934
|
|
|
|
|
|
|
DEFERRED
TAXES (NOTE 10)
|
|
|
1,103
|
|
|
|
|
|
|
NOTES
PAYABLE (NOTE 7)
|
|
|
1,013,808
|
|
|
|
|
|
|
BONDS
(NOTE 8)
|
|
|
22,083,892
|
|
|
|
|
|
|
OBLIGATIONS
UNDER CAPITAL LEASES (NOTE 9)
|
|
|
31,893
|
|
|
|
|
|
|
SEVERANCE
PAY
|
|
|
148,600
|
|
|
|
|
|
|
Total
liabilities
|
|
|
41,341,230
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENT LIABILITIES (NOTE 11)
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
Common
stock:
|
|
|
|
|
75,000,000
shares authorized
|
|
|
|
|
13,467,928
issued and outstanding
|
|
|
13,468
|
|
Contributions
in excess of par value
|
|
|
26,494,985
|
|
Foreign
currency translation adjustment
|
|
|
(1,564,814
|
)
|
Deferred
stock compensation
|
|
|
(295,155
|
)
|
Retained
earnings
|
|
|
1,059,613
|
|
|
|
|
|
|
T
otal
shareholders' equity
|
|
|
25,708,097
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
67,049,327
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
Xfone, Inc.
and
Subsidiaries
|
|
|
|
|
|
|
|
|
STATEMENTS
OF OPERATIONS
|
|
|
Years
Ended
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
44,723,934
|
|
|
$
|
37,914,037
|
|
Cost
of revenues
|
|
|
19,626,322
|
|
|
|
21,968,998
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
25,097,612
|
|
|
|
15,945,039
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
47,609
|
|
|
|
45,709
|
|
Marketing
and selling
|
|
|
10,886,883
|
|
|
|
4,937,007
|
|
General
and administrative
|
|
|
12,335,759
|
|
|
|
9,927,301
|
|
Non-
recurring loss
(note
11)
|
|
|
2,856,803
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
26,127,054
|
|
|
|
14,910,017
|
|
|
|
|
|
|
|
|
|
|
Operating
profit (loss)
|
|
|
(1,029,442
|
)
|
|
|
1,035,022
|
|
Financing
expenses, net
|
|
|
(515,562
|
)
|
|
|
(540,688
|
)
|
Equity
in income of affiliated company
|
|
|
132,867
|
|
|
|
60,574
|
|
Loss
from a change of holding of affiliated company
|
|
|
-
|
|
|
|
(58,472
|
)
|
Other
income
|
|
|
-
|
|
|
|
84,723
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before minority interest and taxes
|
|
|
(1,412,137
|
)
|
|
|
581,159
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(297,860
|
)
|
|
|
81,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before taxes
|
|
|
(1,709,997
|
)
|
|
|
662,961
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (expense)
|
|
|
426,105
|
|
|
|
(2,265
|
)
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,283,892
|
)
|
|
$
|
660,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net profit (loss) per share
|
|
$
|
(0.109
|
)
|
|
$
|
0.065
|
|
|
|
|
|
|
|
|
|
|
Diluted
net profit (loss) per share
|
|
$
|
(0.109
|
)
|
|
$
|
0.065
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares used for computing:
|
|
|
|
|
|
Basic
profit (loss) per share
|
|
|
11,777,645
|
|
|
|
10,135,874
|
|
|
|
|
|
|
|
|
|
|
Diluted
profit (loss) per share
|
|
|
11,777,645
|
|
|
|
10,135,874
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
|
Xfone, Inc
. and
Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
|
|
|
|
FOR
THE YEARS ENDED 31, 2006 AND 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Ordinary
Shares
|
|
|
Share
Capital
|
|
|
Contributions
in
excess of
par
value
|
|
|
Foreign
currency
translation
adjustments
|
|
|
Deferred
Stock
Compensation
|
|
|
Retained
Earnings
|
|
|
Total
Shareholders'
Equity
|
|
Balance
at January 1, 2006
|
|
|
8,172,671
|
|
|
$
|
8,684
|
|
|
$
|
8,354,964
|
|
|
$
|
(228,043
|
)
|
|
$
|
-
|
|
|
$
|
1,682,809
|
|
|
$
|
9,818,414
|
|
Deferred
stock compensation, net
|
|
|
-
|
|
|
|
-
|
|
|
|
739,131
|
|
|
|
-
|
|
|
|
(739,131
|
)
|
|
|
-
|
|
|
|
-
|
|
Amortization
of deferred compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
227,738
|
|
|
|
-
|
|
|
|
227,738
|
|
Redemption
of stock
|
|
|
(100,000
|
)
|
|
|
(100
|
)
|
|
|
(269,762
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(269,862
|
)
|
Stock
issued during the period, net of issuance expenses :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
services
|
|
|
40,629
|
|
|
|
47
|
|
|
|
27,381
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,428
|
|
For
cash
|
|
|
663,825
|
|
|
|
709
|
|
|
|
1,020,717
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,021,426
|
|
For
acquisitions
|
|
|
1,544,761
|
|
|
|
1,610
|
|
|
|
5,920,870
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,922,480
|
|
For
loan repayment
|
|
|
831,931
|
|
|
|
204
|
|
|
|
2,790,652
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,790,856
|
|
Warrants
granted to consultants for services and others
|
|
|
-
|
|
|
|
-
|
|
|
|
425,740
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
425,740
|
|
Currency
translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,152,658
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,152,658
|
)
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
660,696
|
|
|
|
660,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
11,153,817
|
|
|
$
|
11,154
|
|
|
$
|
19,009,693
|
|
|
$
|
(1,380,701
|
)
|
|
$
|
(511,393
|
)
|
|
$
|
2,343,505
|
|
|
$
|
19,472,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2007
|
|
|
11,153,817
|
|
|
$
|
11,154
|
|
|
$
|
19,009,693
|
|
|
$
|
(1,380,701
|
)
|
|
$
|
(511,393
|
)
|
|
$
|
2,343,505
|
|
|
$
|
19,472,258
|
|
Deferred
stock compensation, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization
of deferred compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
216,238
|
|
|
|
|
|
|
|
216,238
|
|
Stock
issued during the period, net oof
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
of
issuance expenses :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
cash
|
|
|
2,294,828
|
|
|
|
2,295
|
|
|
|
6,489,955
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,492,250
|
|
For
acquisitions
|
|
|
20,026
|
|
|
|
20
|
|
|
|
(20
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercise
of options options
|
|
|
6,300
|
|
|
|
6
|
|
|
|
22,044
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,050
|
|
Shares
cancelled
|
|
|
(7,043)
|
|
|
|
(7)
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Fair
value of warrants granted to bonds holders
|
|
|
-
|
|
|
|
-
|
|
|
|
973,306
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
973,306
|
|
Currency
translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(184,113
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(184,113
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,283,892
|
)
|
|
|
(1,283,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
13,467,928
|
|
|
$
|
13,468
|
|
|
$
|
26,494,985
|
|
|
$
|
(1,564,814
|
)
|
|
$
|
(295,155
|
)
|
|
$
|
1,059,613
|
|
|
$
|
25,708,097
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
Xfone, Inc.
and S
ubsidiaries
|
|
|
|
|
|
|
|
|
STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Years
Ended
|
|
|
|
December
31 ,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,283,892
|
)
|
|
$
|
660,696
|
|
Adjustments
required to reconcile net income
|
|
|
|
|
|
|
|
|
to
net cash provided by (used in)
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,211,798
|
|
|
|
1,092,085
|
|
Compensation in
connection with the issuance of warrants and options issued for
professional services
|
|
|
216,238
|
|
|
|
255,166
|
|
Minority
interest
|
|
|
297,860
|
|
|
|
(81,802
|
)
|
Currency
differences on convertible notes and loans
|
|
|
-
|
|
|
|
368
|
|
Loss
from a change of holding of affiliated company
|
|
|
-
|
|
|
|
58,472
|
|
Changes
in earnings of equity investments
|
|
|
(132,868
|
)
|
|
|
(60,574
|
)
|
Decrease
(increase) in account receivables
|
|
|
2,796,353
|
|
|
|
(1,335,519
|
)
|
Decrease
(increase) in long term assets
|
|
|
373,258
|
|
|
|
-
|
|
Decrease
(increase) in other receivables
|
|
|
(1,703,548
|
)
|
|
|
771,517
|
|
Decrease
in shareholder loans receivable
|
|
|
-
|
|
|
|
242,847
|
|
Increase
(decrease) in trade payables
|
|
|
663,601
|
|
|
|
(1,305,973
|
)
|
Increase
(decrease) in other liabilities and accrued expenses
|
|
|
2,523,797
|
|
|
|
(390,947
|
)
|
Increase
(decrease) in severance pay
|
|
|
57,160
|
|
|
|
63,305
|
|
Decrease
in deferred taxes
|
|
|
(180,026
|
)
|
|
|
(51,657
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
4,839,731
|
|
|
|
(82,016
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flow from investing activities:
|
|
|
|
|
|
|
|
|
Investment
in short- term deposit
|
|
|
(24,998,173
|
)
|
|
|
-
|
|
Purchase
of other assets
|
|
|
-
|
|
|
|
(1,258
|
)
|
Purchase
of equipment
|
|
|
(1,322,908
|
)
|
|
|
(871,998
|
)
|
Change
in prepaid acquisition costs
|
|
|
(479,502
|
)
|
|
|
-
|
|
Change
in long- term receivables
|
|
|
-
|
|
|
|
(106,254
|
)
|
Acquisition
of EBI
|
|
|
-
|
|
|
|
(99,372
|
)
|
Acquisition
of Canufly
|
|
|
-
|
|
|
|
(506,684
|
)
|
Acquisition
of I-55 Internet Services
|
|
|
-
|
|
|
|
(104,560
|
)
|
Acquisition
of I-55 Telecommunications
|
|
|
-
|
|
|
|
(30,196
|
)
|
Net
cash acquired from the acquisition of Equitalk
|
|
|
-
|
|
|
|
146,878
|
|
Net
cash acquired from the acquisition of Story Telecom
|
|
|
-
|
|
|
|
65,579
|
|
Net
cash acquired from the acquisition of Auracall
|
|
|
(612,607
|
)
|
|
|
-
|
|
Net
cash (used in) investing activities
|
|
|
(27,413,190
|
)
|
|
|
(1,507,865
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
STATEMENTS
OF CASH FLOWS (Continued)
|
|
|
|
|
|
|
|
Years
Ended
|
|
|
December 31
,
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
Cash flow from financing
activities:
|
|
|
|
|
|
|
Repayment
of long term loans from banks and others
|
|
|
(1,051,079
|
)
|
|
|
(2,544,945
|
)
|
Increase
in capital lease obligation
|
|
|
(105,968
|
)
|
|
|
52,511
|
|
Increase
(decrease) in short-term bank credit, net
|
|
|
(1,821,597
|
)
|
|
|
240,647
|
|
Proceeds
from long term loans from banks
|
|
|
199,437
|
|
|
|
307,412
|
|
Repayment
of convertible notes
|
|
|
-
|
|
|
|
(623,812
|
)
|
Issuance
of bonds, net of issuance expenses
|
|
|
22,821,827
|
|
|
|
-
|
|
Proceeds
from exercise of options
|
|
|
22,050
|
|
|
|
-
|
|
Proceeds
from issuance of shares and detachable warrants, net of issuance
expenses
|
|
|
7,465,555
|
|
|
|
751,564
|
|
Net
cash provided by (used in) financing activities
|
|
|
27,530,225
|
|
|
|
(1,816,623
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(339,550
|
)
|
|
|
(262,660
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
4,617,216
|
|
|
|
(3,669,164
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at the beginning of year
|
|
|
1,218,392
|
|
|
|
4,887,556
|
|
Cash
and cash equivalents at the end of year
|
|
$
|
5,835,608
|
|
|
$
|
1,218,392
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
Supplemental disclosure of non cash investing and
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
129,308
|
|
|
$
|
290,404
|
|
|
|
|
|
|
|
|
|
|
Tax
paid
|
|
$
|
986
|
|
|
$
|
111,859
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of EBI
|
|
$
|
-
|
|
|
$
|
176,326
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Canufly
|
|
$
|
-
|
|
|
$
|
354,412
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of I-55 Internet Services
|
|
$
|
-
|
|
|
$
|
3,195,299
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of I-55 Telecommunication
|
|
$
|
-
|
|
|
$
|
818,513
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Equitalk
|
|
$
|
-
|
|
|
$
|
279,475
|
|
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
$
|
830,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets via capital lease
|
|
$
|
26,510
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Capitalization
of finance expenses related with acquisition costs of NTS
Communications
|
|
$
|
213,179
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
Xfone,
Inc
. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
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
voice, video and data telecommunications services, including: local, long
distance and international telephony services; prepaid and postpaid
calling cards; cellular services; Internet services; messaging services
(Email/Fax Broadcast, Email2Fax and Cyber-Number); and reselling
opportunities, with operations in the United States, the United
Kingdom and Israel.
|
Xfone's
holdings in subsidiaries as of December 31, 2007 were as follows:
|
|
Swiftnet
Limited ("
Swiftnet
") - wholly
owned U.K. subsidiary.
|
|
|
Equitalk.co.uk
Limited ("
Equitalk
") - wholly
owned U.K. subsidiary.
|
|
|
Auracall
Limited ("Auracall") - wholly owned U.K. subsidiary of
Swiftnet.
|
|
|
Xfone
USA, Inc. and its two wholly owned subsidiaries, eXpeTel Communications,
Inc. and Gulf Coast Utilities, Inc. (collectively, "
Xfone USA
") - wholly
owned U.S. subsidiary.
|
|
|
Story
Telecom, Inc. and its wholly owned U.K. subsidiary, Story Telecom Limited
(collectively, "
Story
Telecom
") - majority owned U.S. subsidiary, in which Xfone holds a
69.6% ownership share.
|
|
|
Xfone
018 Ltd. ("
Xfone
018
") - majority owned Israeli subsidiary in which Xfone holds a
69% ownership share.
|
See also
Note 18 (Subsequent Events).
|
B.
|
On
January 1, 2006, Xfone USA, Inc., entered into an Agreement with EBI Comm,
Inc. (“EBI”), a privately held Internet Service Provider, to purchase the
assets of EBI. EBI provided a full range of Internet access options for
both commercial and residential customers in north Mississippi. Based in
Columbus, Mississippi, EBI's services included Dial-up, DSL, T1 Dedicated
Access and Web Hosting. The customer base, numbering approximately 1,500
Internet users, is largely concentrated in the Golden Triangle area, which
includes Columbus, West Point and Starkville, Mississippi. The acquisition
was structured as an asset purchase, providing for Xfone USA to pay EBI
total consideration equal to 50% of the monthly collected revenue from the
customer base during the first 12 months, beginning January 2006. Acquired
assets include the customer base and customer lists, trademarks and all
related intellectual property, fixed assets and all account receivables.
Xfone USA paid a total consideration for this acquisition in the amount of
$85,699 in monthly payments of $10,000 until paid in full, and made the
first of such payments on June 1, 2007 and final payment on January 25,
2008. Payment for this acquisition was recorded as other
assets.
|
The
following table summarizes the fair values of the assets acquired and
liabilities assumed, as of January 1, 2006:
EBI
Comm, Inc.
|
|
|
|
Current
assets, excluding cash acquired
|
|
$
|
-
|
|
Total
assets acquired
|
|
|
-
|
|
|
|
|
|
|
Total
liabilities
|
|
|
176,326
|
|
Net
liabilities assumed
|
|
$
|
176,326
|
|
|
|
|
|
|
Purchase
price:
|
|
|
|
|
Cash
paid
|
|
$
|
85,698
|
|
Acquisition
costs
|
|
|
13,674
|
|
|
|
$
|
99,372
|
|
|
|
|
|
|
Goodwill
|
|
$
|
275,698
|
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note
1 -
Organization
and Nature of Business (Cont.)
|
|
|
C.
|
On
January 10, 2006 (effective as of January 1, 2006), Xfone USA, Inc.,
entered into an Asset Purchase Agreement with Canufly.net, Inc.
(“Canufly.net”), an Internet Service Provider based in Vicksburg,
Mississippi, and its principal shareholder, Mr. Michael Nassour.
Canufly.net provided residential and business customers with high-speed
Internet services and utilized the facilities-based network of Xfone USA,
as an alternative to BellSouth, to provide Internet connectivity to its
customers. Canufly.net also provided Internet services through a small
wireless application in certain areas in Vicksburg, Mississippi. The
transaction was closed on January 24, 2006. Xfone agreed to pay a total
purchase price of up to $710,633, payable as follows: (i) $185,000 in cash
payable in twelve equal monthly payments, the first installment was paid
at closing, and as of December 31, 2006, the entire amount was paid in
full and in accordance with the Asset Purchase Agreement; (ii) $255,633 in
cash, paid at closing, to pay off the loan with the B&K Bank;
(iii) 33,768 restricted shares of common stock and 24,053 warrants
exercisable at $2.98 per share for a period of five years were issued to
the shareholders of Canufly.net during May 2006. Following the closing in
2006 and due to the satisfaction of certain earnout provisions in the
Asset Purchase Agreement Xfone issued in March 2007 additional 20,026
restricted shares of common stock and 14,364 warrants exercisable at $2.98
per share for a period of five years to the shareholders of
Canufly.net.
|
Canufly.net,
Inc.
|
|
|
|
Current
assets, excluding cash acquired
|
|
$
|
-
|
|
Fixed
assets
|
|
|
36,753
|
|
Total
assets acquired
|
|
|
36,753
|
|
|
|
|
|
|
Current
liabilities
|
|
|
-
|
|
Long-term
liabilities
|
|
|
-
|
|
Total
liabilities
|
|
|
-
|
|
Net
assets assumed
|
|
$
|
36,753
|
|
|
|
|
|
|
Purchase
price:
|
|
|
|
|
Cash
acquired or commitment in cash, net
|
|
$
|
495,524
|
|
Acquisition
costs
|
|
|
11,160
|
|
Fair
market value of stock and warrant issued
|
|
|
193,951
|
|
Total
|
|
|
700,635
|
|
|
|
|
|
|
Goodwill
|
|
$
|
663,882
|
|
|
|
|
|
|
|
D.
|
On
May 10, 2006, Xfone, Story Telecom, Inc., Story Telecom Limited, Story
Telecom (Ireland) Limited, Nir Davison, and Trecastle Holdings Limited, a
company controlled by Mr. Davison, entered into the Stock Purchase
Agreement. Pursuant to the Stock Purchase Agreement, Xfone increased its
ownership interest in Story Telecom from 39.2% to 69.6% in a cash
transaction valued at $1,200,000. $900,000 of the total consideration was
applied to payables owed by Story Telecom to Xfone and its subsidiary
Swiftnet Limited for back-end telecommunications services. The
balance of $300,000 was paid to Story Telecom, to be used as working
capital. Story Telecom, Inc., a telecommunication service provider,
operated in the United Kingdom through its two wholly owned subsidiaries,
Story Telecom Limited and Story Telecom (Ireland) Limited (which was
dissolved on February 23, 2007). Story Telecom operates as a division of
Xfone's operations in the United Kingdom. The stock purchase pursuant to
the Stock Purchase Agreement was completed on May 16,
2006. (See Note 18).
Pursuant
to the above-mentioned Stock Purchase Agreement, at certain dates and
provided Story Telecom meets certain business and financial covenants, Nir
Davison and Trecastle Holdings Limited shall have the option to sell to
the Company all of their shares in Story Telecom for U.S. $450,000 in
cash, or equivalent in the Company's common stock (to be decided by the
Company). In addition, at certain dates and provided Story Telecom meets
certain business and financial covenants, the Company shall have the
option to buy from Nir Davison and Trecastle Holdings Limited all of their
shares in Story Telecom for U.S. $900,000 in cash, or equivalent in the
Company's common stock (to be decided by the Company). The Stock Purchase
Agreement further provides that upon request from Story Telecom, and
provided certain conditions are met, the Company shall provide all
consents necessary to make Story Telecom a publicly traded company through
a distribution of its shares as a dividend to the shareholders of the
Company, or a similar transaction. If the Company will fail to provide all
necessary consents it shall have to buy from Nir Davison and Trecastle
Holdings Limited all their shares of Story Telecom for $1,000,000, paid
70% in the Company's shares, valued at market price on an average of 30
trading days, and 30% in cash.
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note
1 -
Organization
and Nature of Busin
ess
(Cont.)
The
following table summarizes the fair values of the assets acquired and
liabilities assumed, as of May 10, 2006:
Story
Telecom, Inc.
|
|
|
|
|
|
|
|
Current
assets, excluding cash acquired
|
|
$
|
710,194
|
|
Fixed
assets
|
|
|
2,200
|
|
Other
assets
|
|
|
-
|
|
Total
assets acquired
|
|
|
712,394
|
|
|
|
|
|
|
Current
liabilities
|
|
|
3,541,719
|
|
Long-term
liabilities
|
|
|
-
|
|
Total
liabilities
|
|
|
3,541,719
|
|
Net
liabilities assumed
|
|
$
|
2,829,325
|
|
|
|
|
|
|
Purchase
price:
|
|
|
|
|
Cash
acquired, net
|
|
$
|
(65,579
|
|
Acquisition
costs
|
|
|
-
|
|
Total
|
|
$
|
(65,579
|
|
|
|
|
|
|
Goodwill
|
|
$
|
2,690,786
|
|
Trade
name
|
|
$
|
72,960
|
|
The value
assigned to the trade name is amortized on a straight-line basis over 7
years.
|
E.
|
As
of May 10, 2006 the Company had a £1,010,030 receivable from Global VOIP
Services Limited ("Global VOIP"), an Irish company which provided telecom
services. Story Telecom, Inc. and/or its subsidiaries owed £1,010,030 to
Global VOIP. In separate agreements, subsequent to the May 10,
2006 Stock Purchase Agreement, Story Telecom, Inc and/or its subsidiaries
were assigned the £1,010,030 receivable and payable on Global
VOIP's books. The assignment of Global VOIP's receivable and payable
resulted in a non-cash transaction that removed Globe VOIP's receivable
from the books of the Company and results in inter-company receivables and
payables that eliminate in consolidation. There is no income
statement effect to these
transactions.
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note
1 -
Organization
and Nature of Business (Cont.)
|
F.
|
On
May 25, 2006, Xfone and the shareholders of Equitalk.co.uk Limited, a
privately held telephone company based in the United Kingdom ("Equitalk")
entered into an Agreement relating to the sale and purchase of Equitalk
(the "Equitalk Agreement"). The Equitalk Agreement provided for Xfone to
acquire Equitalk in a restricted common stock and warrant transaction
valued at $1,650,000. The acquisition was completed on July 3, 2006,
and on that date Equitalk became Xfone's wholly owned subsidiary. In
conjunction with the completion of the acquisition and in exchange for all
of the capital stock of Equitalk, Xfone issued a total of 402,192
restricted shares of its common stock and a total of 281,872 warrants
exercisable at $3.025 per share for a period of five years. Founded in
December 1999, Equitalk, a VC-financed company, was the first fully
automated e-telco in the United Kingdom. Equitalk provides both
residential and business customers with low-cost IDA and CPS voice
services, broadband and
teleconferencing.
|
The
following table summarizes the fair values of the assets acquired and
liabilities assumed, as of July 3, 2006:
Equitalk.co.uk
Limited
|
|
|
|
|
|
|
|
Current
assets, excluding cash acquired
|
|
$
|
276,442
|
|
Fixed
assets
|
|
|
4,251
|
|
Other
assets
|
|
|
-
|
|
Total
assets acquired
|
|
|
280,693
|
|
|
|
|
|
|
Current
liabilities
|
|
|
446,478
|
|
Long-term
liabilities
|
|
|
141,200
|
|
Total
liabilities
|
|
|
587,678
|
|
Net
liabilities assumed
|
|
$
|
(306,985
|
|
|
|
|
|
|
Purchase
price:
|
|
|
|
|
Cash
acquired, net
|
|
$
|
(155,030
|
|
Acquisition
costs
|
|
|
13,875
|
|
Fair
market value of stock and warrant issued
|
|
|
1,420,567
|
|
Total
|
|
$
|
1,279,412
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,395,513
|
|
Customer
relations
|
|
$
|
$190,884
|
|
The value
assigned to the customer relations is amortized on a straight-line basis over 7
years.
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note 1 -
Organization an
d Nature of Business
(Cont.)
|
G.
|
On
August 15, 2007, the Company, Swiftnet, and the majority shareholder of
Auracall Limited ("Majority Shareholder") entered into a definitive Share
Purchase Agreement, pursuant to which Swiftnet purchased from the Majority
Shareholder the 67.5% equity interest in Auracall, thereby increasing
Swiftnet’s ownership interest in Auracall from 32.5% to 100%. The purchase
price for the shares was £810,918 (approximately $1,616,158), payable
as follows: £500,000 (approximately $996,500) was paid in cash upon
signing of the Share Purchase Agreement, and the remaining £304,000, plus
interest of £6,918 (approximately $619,658), was payable in monthly
installments which commenced in September 2007 and
continued through March 2008. In connection with the acquisition,
Auracall and Swiftnet entered into an Inter-Company Loan Agreement,
pursuant to which Auracall agreed to lend Swiftnet £850,000 (approximately
$1,694,050) for the sole purpose of and in connection with Swiftnet’s
acquisition of the Auracall shares. The loan is unsecured,
bears interest at a rate of 5% per annum, and is to be repaid in five
years, but may be repaid earlier without charge or penalty.
|
The
following table summarizes the fair values of the assets acquired and
liabilities assumed, as of August 15, 2007:
Auracall
Limited
|
|
|
|
Current
assets, excluding cash acquired
|
|
$
|
875,510
|
|
Fixed
assets
|
|
|
30,051
|
|
Total
assets acquired
|
|
|
905,561
|
|
|
|
|
|
|
Current
liabilities
|
|
|
1,018,229
|
|
|
|
|
|
|
Net
liabilities assumed
|
|
|
(112,668
|
)
|
|
|
|
|
|
Acquired
net assets (67.5%)
|
|
|
(76,051
|
)
|
|
|
|
|
|
Purchase
price:
|
|
|
|
|
Cash
acquired, net
|
|
|
233,541
|
|
Deferred
liabilities
|
|
|
604,158
|
|
Acquisition
costs
|
|
|
140,900
|
|
|
|
|
978,599
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,054,650
|
|
|
|
|
|
|
The
financial statements consolidate the operations of Xfone, Swiftnet, Equitalk,
Xfone USA, Story Telecom, Auracall and Xfone 018 - (collectively the "
Company
").
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note 2 -
Significant Accounting
Policies
The
financial statements are prepared in accordance with generally accepted
accounting principles in the United States. The significant accounting policies
followed in the preparation of the financial statements, applied on a consistent
basis, are as follows:
|
A.
|
Principles of
Consolidation and Basis of Financial Statement
Presentation
|
The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America (GAAP)
and include the accounts of the Company and its wholly-owned subsidiaries. All
significant inter-company balances and transactions have been eliminated in
consolidation. A minority interest in the loss of a subsidiary will be recorded
according to the respective equity interest of the minority and up to its
exposure and/or legal obligation to cover the subsidiary losses in case of
equity reduced to zero or below.
|
B.
|
Foreign
Cur
rency
Translation
|
Effective
January 1, 2007, the Company changed its functional and reporting currency from
the Great Britain Pounds ("GBP") to the U.S. dollar for the reason that a
majority of the Company's transactions and balances are denominated in U.S.
dollars. Consistent with SFAS No. 52, Foreign Currency Translation (“SFAS No.
52”), the change in functional currency will be accounted for prospectively;
therefore, there is no effect on the historical consolidated financial
statements. The translated amounts for non-monetary assets at December 31, 2006,
became the accounting basis for those assets as of January 1, 2007.
The
determination of the functional currency for the Company's foreign subsidiaries
is made based on the appropriate economic factors. In addition a substantial
portion of the Company's costs are incurred in U.S. dollars. The Company's
management believes that the U.S. dollar is the primary currency of the economic
environment in which it operate. Thus, the Company's functional and reporting
currency and the functional and reporting currency of certain of its
subsidiaries is the U.S. dollar.
Accordingly,
monetary accounts maintained in currencies other than the U.S. dollar are
re-measured into U.S. dollars in accordance with SFAS No. 52. All gains and
losses of the re-measurement of monetary balance sheet items are reflected in
the consolidated statements of operations as financial income or expenses as
appropriate. The Company's functional currency is US$, the Company's financial
records are maintained in US$, and the Company's financial statements are
prepared in US$. The functional currency of Swiftnet, Equitalk, Story Telecom
and Auracall is GBP, the financial records of these subsidiaries are maintained
in GBP and the financial statements of these subsidiaries are prepared in GBP.
The functional currency of Xfone 018 is New Israeli Shekels ("NIS"), the
financial records of Xfone 018 are maintained in NIS, and the financial
statements of Xfone 018 are prepared in NIS.
Foreign
currency transactions during the period are translated into each company's
denominated currency at the exchange rates ruling at the transaction dates.
Gains and losses resulting from foreign currency transactions are included in
the consolidated statement of operations. Assets and liabilities denominated in
foreign currencies at the balance sheet date are translated into each company's
denominated currency at period-end exchange rates. All exchange differences are
dealt with in the consolidated statements of operations. The financial
statements of the Company's operations based outside of the United States have
been translated into US$ in accordance with SFAS No. 52. When translating
functional currency financial statements into US$, period-end exchange rates are
applied to the consolidated balance sheets, while average period rates are
applied to consolidated statements of operations. Translation gains and losses
are recorded in translation reserve as a component of shareholders'
equity.
Restricted
cash include proceeds from the issuance of securities to Israeli institutional
investors, for total gross proceeds of NIS 100,382,100 (approximately
$25,562,032) par value bonds (Series A). The proceeds were invested in weekly
interest-bearing deposits and were transferred to the Company's control upon the
fulfillment of the following conditions: (i) that the Company raises an
aggregate of at least $20.0 million in equity financings; and (ii) that the
conditions for the consummation of the acquisition of NTS Communications, Inc
have been met. These conditions were satisfied during February
2008 (See also Note 18).
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Not
e
2 -
Significant Accounting Policies (Cont.)
Accounts
receivable are recorded at net realizable value consisting of the carrying
amount less the allowance for uncollectible accounts.
The
Company uses the allowance method to account for uncollectible accounts
receivable balances. Under the allowance method, estimate of uncollectible
customer balances is made using factors such as the credit quality of the
customer and the economic conditions in the market. An allowance for doubtful
accounts is determined with respect to those amounts that the Company has
determined to be doubtful of collection. When an account balance is past due and
attempts have been made to collect the receivable through legal or other means
the amount is considered uncollectible and is written off against the allowance
balance.
As of
December 31, 2007 the accounts receivable are presented net of an allowance for
doubtful accounts of $1,090,572. Bad debt expenses for the years ended 2007 and
2006 are $641,477 and $290,998 respectively.
Fixed
Assets are stated at cost. Depreciation is calculated based on a straight-line
method over the estimated useful lives of the assets. Annual rates of
depreciation are as follows:
|
|
Useful
Life
|
|
Communication
equipment
|
|
|
10
years
|
|
Equipment
held under lease
|
|
|
4 years
|
|
Office
furniture and equipment
|
|
|
4-14
years
|
|
Development
costs
|
|
|
3
years
|
|
Computer
equipment
|
|
|
3-4
years
|
|
Motor
vehicles
|
|
|
4
years
|
|
Building
and plant
|
|
|
4-14
years
|
|
Depreciation
expenses amounted to $1,044,722 and $833,541 for the years ended
December 31, 2007 and 2006, respectively.
|
F.
|
Other
I
ntangible
A
ssets
|
Other
intangible assets with determinable lives consist of license for communication
services and are amortized over the 20 year term of the license.
Customer
base and trade name related to merger and acquisitions are amortized over a
period between 6-7 years from the date of the purchase.
Amortization
expenses amounted to $167,076 and $258,544 for the years ended December 31,
2007 and 2006, respectively.
The
Company periodically evaluates the recoverability of the carrying amount of
long-lived assets (including property, plant and equipment, and intangible
assets with determinable lives) whenever event or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. The
Company evaluates events or changes in circumstances based on a number of
factors including operating results, business plans and forecasts, general and
industry trends and, economic projections and anticipated cash flows.
Impairment, if any, is assessed when the undiscounted expected future cash flows
derived from an asset are less than its carrying amount. Impairment losses are
measured as the amount by which the carrying value of an asset exceeds its fair
value and are recognized in earnings. The Company also continually evaluates the
estimated useful lives of all long-lived assets and periodically revises such
estimates based on current events.
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note
2 -
Significant Accounting Policies (Cont.)
The
Company's source of revenues results from charges to customers for the call
minutes they use while on the Company's telecommunications system. Such revenues
are recognized at the time this service is rendered. Amounts prepaid by
customers are deferred and recorded as a liability and then recorded as revenue
when the customer utilizes the service. Messaging services customers are being
charged on a per minute basis, per fax page or email. Commissions to agents are
accounted as marketing costs for the Company.
Revenue
for services is recognized when the related services are provided. Payments
received in advance are deferred until the service is provided.
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.
Basic
earning per share (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.
Deferred
tax liabilities or assets reflect temporarily differences between amounts of
assets and liabilities for financial and tax reporting and are adjusted, as
appropriate, to reflect changes in tax rates expected to be in effect when the
temporary differences reverse.
|
L.
|
Stock-Based
Compensation
|
Effective
the beginning of the first quarter of fiscal year 2006, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 123(R),
“Share-Based Payment” (“SFAS 123(R)”) using the modified prospective transition
method. The Company previously applied APB 25, “Accounting for Stock Issued to
Employees” and related interpretations and provided the required pro forma
disclosures required under SFAS 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”). The Company elected to adopt the modified
prospective application method as provided by SFAS 123(R), and, accordingly, the
Company recorded compensation costs as the requisite service rendered for the
unvested portion of previously issued awards that remain outstanding at the
initial date of adoption and any awards issued, modified, repurchased or
cancelled after the effective date of SFAS 123(R). The Company use the
Black-Scholes option pricing model which requires extensive use of accounting
judgment and financial estimates, including estimates of the expected term
participants will retain their vested stock options before exercising them, the
estimated volatility of its common stock price over the expected term, and the
number of options that will be forfeited prior to the completion of their
vesting requirements. Application of alternative assumptions could produce
significantly different estimates of the fair value of stock-based compensation
and consequently, the related amounts recognized in the Consolidated Statements
of Operations.
|
M.
|
Goodwill and
Indefinite-Lived Purchased Intangible
Assets
|
In
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" (“SFAS No.
142”), goodwill acquired in business combination is assigned to reporting units
that are expected to benefit from the synergies of the combination as of the
acquisition date. The company assesses goodwill and indefinite-lived intangible
assets for impairment annually at the end of each year and more frequently if
events and circumstances indicate impairment may have occurred in accordance
with SFAS No. 142. SFAS 142 also requires that the fair value of
indefinite-lived purchased intangible assets be estimated and compared to the
carrying value. The Company recognizes an impairment loss when the estimated
fair value of the indefinite-lived purchased intangible assets is less than the
carrying value. No impairment was recorded at December 31, 2007 and
2006.
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note 2 -
Significant Accounting Policies
(Cont.)
Certain
prior period balances in the consolidated statement of cash flows were
reclassified to appropriately present net cash used in operating activities and
effect of exchange rate changes on cash and cash equivalents. The
reclassification had no effect on previously reported net income and
shareholders' equity.
|
O.
|
Re
cent
Accounting
Pronouncements
|
1) SFAS
157
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
(“SFAS No. 157”) which provides enhanced guidance for using fair value to
measure assets and liabilities. SFAS No. 157 provides a common definition of
fair value and establishes a framework to make the measurement of fair value in
generally accepted accounting principles more consistent and comparable. SFAS
No. 157 also requires expanded disclosures to provide information about the
extent to which fair value is used to measure assets and liabilities, the
methods and assumptions used to measure fair value, and the effect of fair value
measures on earnings. SFAS No. 157 is effective for financial statements issued
in fiscal years beginning after November 15, 2007 and to interim periods within
those fiscal years. The Company is currently in the process of evaluating the
effect, if any, the adoption of SFAS No. 157 will have on its consolidated
results of operations, financial position, or cash flows.
2) SFAS
159
In
February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS No. 159).
SFAS No. 159 permits companies to choose to measure certain financial
instruments and other items at fair value. The standard requires that unrealized
gains and losses are reported in earnings for items measured using the fair
value option. SFAS No. 159 is effective for the Company beginning in
the first quarter of fiscal year 2008. The adoption of SFAS No. 159
will not have a significant impact on the Company’s consolidated financial
statements.
3) SFAS
141
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (SFAS No. 141(R)). Under SFAS No. 141(R), an
entity is required to recognize the assets acquired, liabilities assumed,
contractual contingencies, and contingent consideration at their fair value on
the acquisition date. It further requires that acquisition-related costs be
recognized separately from the acquisition and expensed as incurred,
restructuring costs generally be expensed in periods subsequent to the
acquisition date, and changes in accounting for deferred tax asset valuation
allowances and acquired income tax uncertainties after the measurement period
impact income tax expense. The adoption of SFAS No. 141(R) will change
the Company’s accounting treatment for business combinations on a prospective
basis for those acquisitions being consummated beginning in the first quarter of
fiscal year 2009.
4)
SAB 110
In
December 2007, the U.S. Securities and Exchange Commission (the “SEC”)
issued Staff Accounting Bulletin 110 ("SAB 110") to amend the
SEC’s views discussed in Staff Accounting Bulletin 107
(SAB 107) regarding the use of the simplified method in developing an
estimate of expected life of share options in accordance with
SFAS No. 123(R). SAB 110 is effective for the Company beginning
in the first quarter of fiscal year 2008. The adoption of SAB 110 will not
have an impact on the Company’s consolidated financial statements.
Note
3 - Prepaid Expenses, Other Receivables and
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
taxes
|
|
$
|
430,876
|
|
Prepaid
acquisition costs
|
|
|
692,681
|
|
Accrued
income
|
|
|
280,364
|
|
Prepaid
expenses
|
|
|
1,453,910
|
|
Tax
authorities
|
|
|
331,105
|
|
Other
receivables
|
|
|
796,371
|
|
|
|
|
|
|
|
|
$
|
3,985,307
|
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note
4 - Fixed Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
Communication
equipment
|
|
$
|
5,214,315
|
|
Equipment
held under capital lease
|
|
|
103,392
|
|
Office
furniture and equipment
|
|
|
2,121,971
|
|
Development
costs
|
|
|
781,614
|
|
Computer
equipment
|
|
|
686,955
|
|
Motor
vehicles
|
|
|
179,041
|
|
Building
and plant
|
|
|
685,730
|
|
|
|
|
9,773,018
|
|
|
|
|
|
|
Accumulated
Depreciation
|
|
|
|
|
Communication
equipment
|
|
|
1,372,233
|
|
Equipment
held under capital lease
|
|
|
24,267
|
|
Office
furniture and equipment
|
|
|
1,690,335
|
|
Development
costs
|
|
|
344,800
|
|
Computer
equipment
|
|
|
414,712
|
|
Motor
vehicles
|
|
|
30,324
|
|
Building
and Plant
|
|
|
148,589
|
|
|
|
|
4,025,260
|
|
|
|
|
|
|
|
|
$
|
5,747,758
|
|
Note
5 - Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
Goodwill
|
|
$
|
16,872,088
|
|
Customer
relations
|
|
|
982,448
|
|
Trade
name
|
|
|
73,478
|
|
License
|
|
|
330,365
|
|
|
|
|
18,258,379
|
|
|
|
|
|
|
Accumulated
amortization:
|
|
|
|
|
Customer
relations
|
|
|
232,475
|
|
Trade
name
|
|
|
17,145
|
|
License
|
|
|
59,887
|
|
|
|
|
309,507
|
|
|
|
|
|
|
Other
assets, net
|
|
$
|
17,948,872
|
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note
6 - Other Liabilities and Accrued
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
taxes
|
|
$
|
62,648
|
|
Government
authorities
|
|
|
372,156
|
|
Payroll
and other taxes
|
|
|
94,232
|
|
Accrued
expense (1)
|
|
|
4,495,861
|
|
Others
|
|
|
297,148
|
|
|
|
|
|
|
|
|
$
|
5,322,045
|
|
(1)
includes accrued expenses related to the issuance of bonds and the private
placement during October - December 2007 of $811,676 and accrued legal and
interest expenses payable to MCI WorldCom Limited of $1,494,640 (see also note
11).
Note
7
- Notes Payable
|
Annual
Interest
|
|
|
|
|
rate
|
|
|
|
|
|
|
|
|
Convertible
note (1)
|
Prime
+ 1.5%
|
|
$
|
623,643
|
|
Note
payable to others, due on demand, monthly interest payments
only
|
5%
- 7%
|
|
|
327,587
|
|
Bank
loans
|
0%
|
|
|
50,120
|
|
Loans
payable over 5 years
|
Prime
+ 1.0%
|
|
|
615,041
|
|
Loan
(2)
|
Israeli
Consumer Price Index + 4.0%
|
|
|
491,756
|
|
|
|
|
|
2,108,147
|
|
|
|
|
|
|
|
less
current portion
|
|
|
|
1,094,339
|
|
|
|
|
|
|
|
Long
term portion
|
|
|
$
|
1,013,808
|
|
|
|
|
|
|
|
1.
|
On
September 27, 2005, a Securities Purchase Agreement (the "Securities
Purchase Agreement") was entered for a $2,000,000 financial transaction by
and among the Company, Xfone USA, Inc., eXpeTel Communications, Inc., Gulf
Coast Utilities, Inc. and Laurus Master Fund, Ltd. The investment, which
took the form of a Convertible Term Note secured by the Company's United
States assets, has a 3 year term and bears interest at a rate equal to
prime plus 1.5% per annum. The Term Note is convertible, under certain
conditions, into shares of the Company's common stock at an initial
conversion price equal to $3.48 per share. In conjunction with this
financial transaction, we issued to Laurus Master Fund 157,500 warrants
which are exercisable at $3.80 per share for a period of five years. The
closing of the financial transaction was on September 28, 2005. The
Securities Purchase Agreement provides that for so long as twenty five
percent (25%) of the principal amount of the Term Note is outstanding, the
Company, without the prior written consent of Laurus Master Fund, shall
not, and shall not permit any of the Subsidiaries (as defined in the
Securities Purchase Agreement) to directly or indirectly declare or pay
any dividends, other than dividends paid to the Company or any of its
wholly-owned Subsidiaries.
|
2.
|
According
to the agreement between the Company, Xfone 018 Ltd. and our 26% minority
interest partner in Xfone 018 (the “Minority Partner”), the Minority
Partner provided in the fourth quarter of 2004, a shareholder loan of
approximately $400,000 to Xfone 018 (the “Minority Partner Loan”). The
Minority Partner Loan is payable after four years with annual interest of
4% and linkage to the Israeli consumer price index. As of December
31, 2007, the balance of the Minority Partner Loan is 1,891,293 NIS
($491,756).
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note
7 - Notes Payable (Cont.)
The notes
payable matures as follows:
|
|
|
|
Year
|
|
|
|
|
2008
|
|
$
|
1,094,339
|
|
2009
|
|
|
325,607
|
|
2010
|
|
|
134,307
|
|
2011
|
|
|
553,894
|
|
|
|
|
|
|
|
|
$
|
2,108,147
|
|
Note
8- Bonds
On
December 13, 2007, the Company issued a total of NIS 100,382,100
($25,562,032) Series A Bonds (the “Bonds”) to Israeli institutional
investors. The Bonds will pay annual interest at a rate of 9% that will be paid
semi-annually on the 1
st
of June
and on the 1
st
of
December of every year from 2008 until 2015 (inclusive). The
principal of the Bonds will be repaid in 8 equal annual payments on the 1
st
of
December of every year from 2008 until 2015 (inclusive). The principal and
interest of the Bonds is linked to the Israeli Consumer Price Index
(“CPI”). In the event that the Company shall list the Series A Bonds on
TASE, commencing from the date of the listing of the Series A Bonds on TASE, and
insofar as the Series A Bonds shall indeed be listed on TASE, the interest rate
that the unpaid balance of the Series A Bonds shall bear shall decrease by the
rate of 1% (calculated according to 365 days in a year) for the period that
shall commence on the date of the listing of the Series A Bonds on TASE and
concluding on the date of payment of the Series A Bonds. Additionally, the
Company issued the holders of the Bonds, for no additional consideration,
956,020 (non-tradable) Warrants, each exercisable at an exercise price of $3.50
with a term of 4 years.
The
Company attributed the composition of the proceeds from the offering as
follows:
|
|
|
|
Bonds
Series A
(1)
|
|
$
|
24,588,726
|
|
Stock
Purchase Warrants
(2)
|
|
|
973,306
|
|
Total
|
|
$
|
25,562,032
|
|
|
|
|
|
|
(1)
|
As
of December 31, 2007, the outstanding balance increased by $763,642 due to
interest accrued, linkage to the CPI and effect of the exchange rate of
the new Israeli Shekel.
|
(2)
|
Presented
as part of shareholders' equity.
|
Note
9 - Capital Lease Obligations
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.
Future
minimum lease payments under capital leases as of December 31, 2007
are:
2008
|
|
$
|
89,654
|
|
2009
|
|
|
31,893
|
|
|
|
|
|
|
Total
|
|
$
|
121,547
|
|
|
|
|
|
|
|
|
|
|
|
Total
minimum lease payments
|
|
$
|
136,274
|
|
Less:
amount representing interest
|
|
|
(14,727
|
)
|
|
|
|
|
|
Present
value of net minimum lease payment
|
|
$
|
121,547
|
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note 10 - Income Taxes
The
Company accounts for income taxes under the provisions of SFAS 109. SFAS No. 109
requires the recognition of deferred tax assets and liabilities for both the
expected impact of differences between the financial statement and tax basis of
assets and liabilities and for the expected future tax benefit to be derived
from tax loss and tax credit carry forward. The Company does not file
consolidated tax returns.
The
following table reflects the Company's deferred tax assets and
(liabilities):
|
|
|
|
|
|
|
|
Deferred
Tax Liabilities:
|
|
|
|
Accelerated
tax write off of fixed assets
|
|
$
|
1,103
|
|
|
|
|
|
|
Deferred
Tax Assets:
|
|
|
|
|
Carry
forward losses
|
|
|
363,768
|
|
Accrued
vacation and severance pay
|
|
|
67,108
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred taxes liabilities
|
|
$
|
429,773
|
|
The
provision for income taxes differs from the amount computed by applying the
statutory income tax rates to income before taxes as follows:
|
|
|
|
Income
tax computed at statutory rate
|
|
$
|
(628,809
|
)
|
|
|
|
|
|
Effect
of tax authority adjustments
|
|
|
35,642
|
|
Current
income (losses) for which no deferred tax expense (benefit) has been
recorded
|
|
|
39,860
|
|
Difference
between income reported for tax purposes and income for financial
reporting purposes - net
|
|
|
30,073
|
|
Deferred
taxes on losses (utilization of losses)
|
|
|
(506,877
|
)
|
Taxes
on losses for which a valuation allowance was not provided
|
|
|
603,686
|
|
Taxes
in respect of prior years
|
|
|
320
|
|
Provision
for income taxes
|
|
$
|
(426,105
|
)
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note 11 - Commitments and Contingent
Liabilities
Swiftnet
Limited, the Company’s wholly-owned U.K. based subsidiary, was served with a
claim on October 11, 2005 that was filed by MCI WorldCom Limited (currently
operating as Verizon UK Limited) (“MCI”) in an English court for the sum of
£1,640,440 ($3,398,992) plus interest accruing at a daily rate of £401 ($831)
which at the date of claim had amounted to £92,317 ($191,281). MCI’s claim was
for telecommunication services provided to Swiftnet. Swiftnet had been in
dispute with MCI regarding amounts due to MCI for telecommunications services
provided by MCI to Swiftnet. Swiftnet alleged that the disputed charges
were improperly billed by MCI to its account and therefore MCI should credit
Swiftnet for a certain amount of the claim. A substantial element of
Swiftnet’s counterclaim for credits was based upon special rates agreed verbally
by Swiftnet and MCI, which were not applied by MCI in its invoices.
Swiftnet pleaded a counterclaim and that £275,574 ($550,803) owed in relation to
traffic terminated through the Xfone network in Israel should be
deducted.
On 19
March 2008, the court handed down judgment in this dispute and awarded
£1,278,942 ($2,564,036) plus legal costs and interest in favour of MCI. The
Company's financial statements have carried the full amount Swiftnet calculated
that it owed to MCI based on the data held in Swiftnet’s billing systems. The
net effect of this judgment including estimation of the Company's legal
fees, MCI’s legal costs and interest payable is approximately £1,427,737
($2,856,803) which is presented as a non-recurring loss in the Statement of
Operations. Swiftnet is in the process of taking legal advice as to whether it
will seek an appeal to the English Court of Appeal.
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note 12 - Capital Structure, Stock
Options
Shares
and Warrants
A.
|
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.
|
B.
|
On
March 28, 2006, Xfone issued to Gersten Savage, LLP 755 restricted shares
of its common stock as consideration for legal services with a value of
£1,480 ($2,900).
|
C.
|
On
March 28, 2006, Xfone issued to Oberon Securities, LLC 30,144 shares of
its common stock pursuant to that certain Letter Agreement dated November
15, 2005, between Xfone and Oberon Securities with a value of £54,302
($106,378).
|
D.
|
On
March 31, 2006, and in conjunction with a Letter Agreement dated October
10, 2005 with MCG Capital Corporation, a major creditor of I-55 Internet
Services, Xfone issued to MCG Capital 667,998 shares of its common stock,
valued at fair value of $2,010,006, in return for retiring its loan
with I-55 Internet Services.
|
E.
|
On
April 6, 2006, Xfone sold 80,000 restricted shares of its common stock,
20,000 warrants exercisable at $3.00 per share, and 20,000 warrants
exercisable at $3.25 per share to Mercantile Discount-Provident Funds. The
warrants are exercisable for a period of 5 years. The total value of the
shares and warrants is £110,072 ($215,630).
|
F.
|
On
April 6, 2006, Xfone sold 90,000 restricted shares of its common stock,
22,500 warrants exercisable at $3.00 per share, and 22,500 warrants
exercisable at $3.25 per share to Hadar Insurance Company Ltd. The
warrants are exercisable for a period of 5 years. The total value of the
shares and warrants is £123,831 ($242,584).
|
G.
|
On
April 6, 2006, Xfone sold 110,000 restricted shares of its common stock,
27,500 warrants exercisable at $3.00 per share, and 27,500 warrants
exercisable at $3.25 per share to the Israeli Phoenix Assurance Company
Ltd. The warrants are exercisable for a period of 5 years. The total value
of the shares and warrants is £151,348 ($296,492).
|
H.
|
On
April 6, 2006, Xfone sold 44,000 restricted shares of its common stock,
11,000 warrants exercisable at $3.00 per share, and 11,000 warrants
exercisable at $3.25 per share to Gaon Gemel Ltd. The warrants are
exercisable for a period of 5 years. The total value of the shares and
warrants is £60,539 ($118,597).
|
I.
|
During
May 2006, and in conjunction with a January 10, 2006 Asset Purchase
Agreement by and among Xfone USA, Inc. and Canufly.net, Inc., Xfone issued
to the shareholders of Canufly.net 33,768 restricted shares of its common
stock and 24,053 warrants, exercisable at $2.98 per share for a period of
five years. The total value of the shares and warrants is £60,752
($112,330).
|
J.
|
On
May 10, 2006, Xfone issued in exchange for services 25,000 warrants
exercisable at $4.00 per share, 25,000 warrants exercisable at $4.50 per
share, 25,000 warrants exercisable at $5.00 per share, and 25,000 warrants
exercisable at $5.50 per share to Elite Financial Communications Group,
LLC. The term of the warrants shall expire at the later of: (i) 36 months
from the day of grant; (ii) 6 months after the underlying shares are
effective.
|
K.
|
During
May 2006, and in conjunction with the merger that consummated on March 31,
2006, Xfone issued to the shareholders of I-55 Internet Services, Inc.
789,863 restricted shares of its common stock valued at $2,380,178 and
603,939 warrants valued at $1,284,722, based on the Black Scholes
option-pricing model. The warrants are convertible on a one to one basis
into restricted shares of Xfone's common stock at an exercise price of
$3.31 per share, and have a term of five years.
|
L.
|
During
May 2006, and in conjunction with the merger that consummated on March 31,
2006, Xfone issued to the sole shareholder of I-55 Telecommunications,
LLC. 223,702 restricted shares of its common stock valued at $671,687 and
79,029 warrants valued at $166,667, based on the Black Scholes
option-pricing model. The warrants are convertible on a one to one basis
into restricted shares of Xfone's common stock at an exercise price of
$3.38 per share, and have a term of five years.
|
M.
|
During
May 2006, and in conjunction with Agreements to Purchase Promissory Notes
dated October 31, 2005 / February 3, 2006 with certain creditors of I-55
Telecommunications, LLC, Xfone issued to the creditors of I-55
Telecommunications 163,933 restricted shares of its common stock and
81,968 warrants at a total value of $492,220, in return for retiring their
individual loans with I-55 Telecommunications. The warrants are
convertible on a one to one basis into restricted shares of Xfone's common
stock at an exercise price of $3.38 per share, and have a term of five
years.
|
N.
|
On
May 30, 2006, Xfone issued 2,736 restricted shares of its common stock to
Elite Financial Communications Group, LLC in exchange for services. The
value of the shares is £4,955
($9,707).
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note
12 - Capital Structure, Stock Options (Cont.)
Shares
and Warrants (Cont.)
|
O.
|
On
June 28, 2006, Xfone cancelled 5,000 restricted shares of its common stock
which were issued in 2000 to Ofer Weisglass. The shares were issued to Mr.
Weisglass in return for services; however Mr. Weisglass failed to provide
the services to Xfone.
|
|
P.
|
On
July 3 2006, Xfone issued to Preiskel & Co LLP 5,236 restricted shares
of its common stock as consideration for legal services. The value of the
shares is £7,500 ($1,469).
|
|
Q.
|
On
July 5, 2006, and in conjunction with the acquisition that was completed
on July 3, 2006, Xfone issued to the shareholders of Equitalk.co.uk
Limited a total of 402,192 restricted shares of its common stock and a
total of 281,872 warrants exercisable at $3.025 per share for a period of
five years. The total value of the shares and warrants is £717,167
($1,404,930).
|
|
R.
|
On
July 11, 2006, and in conjunction with a March 10, 2005 Employment
Agreement between Xfone USA, Inc. and Wade Spooner, its President and
Chief Executive Officer at that time, Xfone issued to Mr. Spooner an
“Acquisition Bonus” of 32,390 warrants. Xfone was advised by AMEX that the
approval of the shareholders of Xfone is required in order to allow the
issuance and listing of the shares underlying said warrants. The required
approval was obtained on December 28, 2006. The warrants are convertible
on a one to one basis into restricted shares of Xfone's common stock at an
exercise price of $3.285, and have a term of five years. The value of the
warrants is £11,010 ($21,569).
|
|
S.
|
On
July 11, 2006, and in conjunction with a March 10, 2005 Employment
Agreement between Xfone USA, Inc. and Ted Parsons, its Vice President and
Chief Marketing Officer, Xfone issued to Mr. Parsons an “Acquisition
Bonus” of 16,195 warrants. Xfone was advised by AMEX that the approval of
the shareholders of Xfone is required in order to allow the issuance and
listing of the shares underlying said warrants. The required approval was
obtained on December 28, 2006. The warrants are convertible on a one to
one basis into restricted shares of Xfone's common stock at an exercise
price of $3.285, and have a term of five years. The value of the warrants
is £5,506 ($10,785).
|
|
T.
|
On
July 11, 2006, and in conjunction with a Letter Agreement dated June 15,
2006 between Xfone and Oberon Securities, LLC, Xfone issued to Oberon
Securities 243,100 warrants at an exercise price of $2.86 and 37,200
warrants at an exercise price of $3.34. The warrants are convertible on a
one to one basis into restricted shares of Xfone's common stock, and have
a term of five years. The value of the warrants is £180,140
($352,895).
|
|
U.
|
On
July 11, 2006, and in conjunction with a June 19, 2006 Securities Purchase
Agreement Xfone issued to several investors an aggregate of 172,415
warrants. The warrants are convertible on a one to one basis into
restricted shares of Xfone's common stock, at an exercise price of $3.40,
and have a term of five years. The value of the warrants is £91,186
($178,633).
|
|
V.
|
On
September 5, 2006, and in conjunction with a June 19, 2006 Securities
Purchase Agreement Xfone issued to several investors an aggregate of
344,825 restricted shares of common stock. The value of the shares is
£531,163 ($1,040,549).
|
|
W.
|
On
September 19, 2006, and in conjunction with a Letter Agreement dated June
15, 2006 between Xfone and Oberon Securities, LLC, Xfone issued to Oberon
Securities 90,000 restricted shares of common stock. The value of the
shares is £119,512 ($234,124).
|
|
X.
|
On
September 19, 2006, and pursuant to the Service Agreement dated December
6, 2005, that was terminated on August 28, 2006, Xfone cancelled 64,360 of
the 100,000 warrants which were issued to Elite Financial Communications
Group, LLC on May 10, 2006.
|
|
Y.
|
On
November 1, 2006, Xfone issued 6,994 restricted shares of its common stock
to Elite Financial Communications Group, LLC in exchange for services. The
value of the shares is £9,044 ($17,717).
|
|
Z.
|
On
November 20, 2006, Xfone issued in exchange for services 36,000 warrants
exercisable at $3.50 per share, 36,000 warrants exercisable at $4.00 per
share, and 36,000 warrants exercisable at $4.50 per share to Institutional
Marketing Services, Inc. The warrants have a term of five years. In the
event Xfone elects early termination of its agreement with Institutional
Marketing Services, then any warrants that have not yet reached their
vesting date will be cancelled. The value of the warrants is
£27,341($53,561).
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note
12 - Capital Structure, Stock Options (Cont.)
Shares
and Warrants (Cont.)
AA.
|
On
November 27, 2006, Xfone issued in exchange for services 117,676 warrants
exercisable at $3.50 per share to Crestview Capital Master, LLC. The
warrants have a term of five years and shall vest as follows: 29,419
warrants immediately, 29,419 warrants on February 10, 2007, 29,419
warrants on May 10, 2007, and 29,419 warrants on August 10, 2007. The
value of the warrants is £89,662 ($175,648).
|
|
|
BB.
|
On
December 26, 2006, and in conjunction with a December 25, 2006 oral stock
purchase agreement, Xfone repurchased from Abraham Keinan, its Chairman of
the Board, 100,000 restricted shares of its common stock at a price of
$2.70 per share (market price at that day was $2.80 per share). The
100,000 shares were returned to Xfone for cancellation. The Agreement was
approved by all non-interested members of the Board of Directors,
following a review and discussion by Xfone's Audit
Committee.
|
|
|
CC.
|
On
January 16, 2007, and in conjunction with a December 24, 2006 Securities
Purchase Agreement the Company issued an aggregate of 172,414 warrants to
Halman-Aldubi Provident Funds Ltd. and Halman-Aldubi Pension Funds Ltd.
The warrants are exercisable on a one to one basis into restricted shares
of our common stock, at an exercise price of $3.40, and have a term of
five years.
On
February 1, 2007, and in conjunction with a December 24, 2006 Securities
Purchase Agreement the Company issued an aggregate of 344,828 restricted
shares of our common stock, at a purchase price of $2.90 per share, to
Halman-Aldubi Provident Funds Ltd. and Halman-Aldubi Pension Funds
Ltd.
|
|
|
DD.
|
On
March 20, 2007, following the closing of the acquisition of the assets of
Canufly.net in 2006, and due to the satisfaction of certain earn out
provisions in the Asset Purchase Agreement, the Company issued to the
shareholders of Canufly.net additional 20,026 restricted shares of common
stock and 14,364 warrants exercisable at $2.98 per share for a period of
five years.
|
|
|
EE.
|
On
October 23, 2007, the Company entered into Subscription Agreements with 15
investors affiliated with Gagnon Securities, Inc. which agreed to
purchase an aggregate of 1,000,000 shares of the Company's common stock at
a price of $3.00 per share, for a total subscription amount of
$3,000,000. The 1,000,000 shares were issued on November 6,
2007.
|
|
|
FF.
|
On
November 4, 2007, the Company entered into Subscription Agreements with:
(i) XFN - RLSI Investments, LLC, an entity affiliated with Richard L.
Scott Investments, LLC, a U.S. institutional investor, which agreed to
purchase 250,000 shares of the Company's common stock at a price of
$3.00 per share, for a total subscription amount of $750,000; and (ii)
certain Israeli institutional investors, which agreed to purchase an
aggregate of 700,000 shares of the Company's common stock, at a price
of $3.00 per share, for a total subscription amount of $2,100,000 . The
950,000 shares were issued on November 13, 2007.
|
|
|
GG.
|
In
conjunction with the consummation of the merger and in exchange for all of
the capital stock of I-55 Telecommunications, LLC, the Company issued
a total of 223,702 shares of common stock valued at $671,687 and 79,029
warrants exercisable for a period of five years into shares of common
stock, with an exercise price of $3.38 (the “Xfone Stock and Warrant
Consideration”). A portion of the Xfone Stock and Warrant Consideration
issued at closing was placed in an escrow. The Company determined a breach
of the representations and warranties in the Merger Agreement resulting
from the failure of I-55 Telecommunications to disclose the liability due
and payable to the Louisiana Universal Service Fund (“LA USF”)
through the period of October 2005, at which time Xfone USA undertook the
management role of I-55 Telecommunications. Pursuant to Section 1(g) of
the Escrow Agreement dated as of March 31, 2006 by and among Xfone
USA, the Escrow Agent, and the President and Sole Member of I-55
Telecommunications, and in accordance with Article 6.02 of the Merger
Agreement, Xfone USA notified the other parties that it believed that it
had suffered a loss of $30,626 pursuant to the provisions of Article 6.02
of the Merger Agreement dated as of August 26, 2005. Having not received
any response from the President and Sole Member of I-55
Telecommunications, nor from his counsel, on October 15, 2007, and after
the allotted response time allowed, Xfone USA instructed the Escrow Agent
(Trustmark National Bank) to deliver from the Escrow Fund of the President
and Sole Member of I-55 Telecommunications, to the Company, 7,043 shares
of Common Stock and 4,838 Xfone Stock Warrants. The 7,043 shares of Common
Stock and 4,838 Xfone Stock Warrants were returned to the Company for
cancellation on October 31, 2007.
|
HH.
|
On
February 26, 2008, the Company completed the issuance of 800,000 Units (as
defined below) to XFN-RLSI Investments, LLC, an entity affiliated with
Richard L. Scott Investments, LLC, a U.S. institutional investor, and
500,000 Units to certain investors affiliated with or who are customers of
Gagnon Securities LLC, pursuant to Subscription Agreements entered into
with each of the investors on December 13, 2007. Each “Unit”
consists of two shares of the Company’s Common Stock and one warrant to
purchase one share of Common Stock, exercisable for a period of five years
from the date of issuance at an exercise price of $3.10 per
share. The Units were sold at a price of $6.20 per Unit, for an
aggregate purchase price of $8,060,000, which was held in escrow for the
benefit of the Company pending the receipt by the Company of approvals
from the American Stock Exchange and the Tel Aviv Stock Exchange for the
listing of the shares (including those underlying the warrants), as well
as the closing of the acquisition of NTS (see also note 18).
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note
12 - Capital Structure, Stock Options (Cont.)
Shares
and Warrants (Cont.)
|
|
Number
of warrants
|
|
|
Weighted
average exercise price
|
|
Warrants outstanding
at the beginning of the year
|
|
|
4,622,219
|
|
|
$
|
3.91
|
|
Granted
|
|
|
1,486,778
|
|
|
$
|
3.13
|
|
Forfeited
|
|
|
(4,838
|
)
|
|
$
|
3.38
|
|
Warrants outstanding
and exercisable at the end of the year
|
|
|
6,104,159
|
|
|
$
|
3.72
|
|
Stock Option
Plan
|
A.
|
In
November 2004, Xfone's board of directors approved the adoption of the
principal items forming Xfone's 2004 stock option plan (The “2004 Plan”)
for the benefit of employees, officers, directors, consultants and
subcontractors of the Company including its subsidiaries. The 2004
Plan was approved by a special meeting of shareholders on March 13, 2006.
The purpose of the 2004 Plan is to enable the Company to attract and
retain the best available personnel for positions of substantial
responsibility, to provide an incentive to such persons presently engaged
with the Company and to promote the success of the Company business. The
2004 Plan will provides for the grant of options an aggregate of 5,500,000
shares of Xfone's common stock. The 2004 Plan is administered by the
board that determines the persons to whom options are granted, the number
of options that are granted, the number of shares to be covered by each
option, the options may be exercised and whether the options is an
incentive or non-statutory option.
|
|
|
|
|
B.
|
At
November 24, 2004 3,200,000 options were granted under the 2004 Plan
according to the following terms: Option exercise price - $3.50, vesting
date - 12 month from the date of grant, expiration date - 5 years from the
vesting date.
|
|
|
|
|
C.
|
On
February 6, 2005, Xfone's board of directors approved a grant to employees
of 730,000 options under and subject to the 2004 Plan according to the
following terms: Option exercise price of $3.50; Vesting Date
-
the
vesting of the options will be over a period of 4 years as follows: 25% of
the options are vested after a year from the Date of Grant. Thereafter,
1/16 of the options are vested every 3 months for the following 3 years;
Expiration Date
-
5.5 years from the Grant Date.
|
|
|
|
|
D.
|
On
November 13, 2005, Xfone's Board of Directors ratified the grant
of 600,000 options to Wade Spooner and 300,000 options to Ted
Parsons on March 10, 2005, under the 2004 Plan, pursuant to the terms
described in their March 10, 2005 employment agreements. The stock options
provided for a five (5) year term from the vesting date, a strike price
that is 10% above the closing price of the Company's common stock on the
date of issue of the Options.
|
|
|
|
|
E.
|
On
June 8, 2005, Xfone's board of directors approved a grant to Xfone's Chief
Financial Officer, of 300,000 options under and subject to the 2004 Plan
of Xfone according to the following terms: Option exercise price of $3.50;
Vesting Date
-
the
vesting of the options will be over a period of 4 years as follows: 25% of
the options are vested after a year from the Date of Grant. Thereafter,
1/16 of the options are vested every 3 months for the following 3 years;
Expiration Date
-
5.5 years
from the grant date.
|
|
|
|
|
F.
|
On
July 11, 2006, and in conjunction with a July 3, 2006 Service Agreement
between Xfone, Swiftnet Limited and John Mark Burton, the Managing
Director of Xfone's UK based subsidiaries, Xfone's Board of Directors
approved the grant of 300,000 options, under and subject to its 2004 Plan,
to Mr. Burton. The options are convertible on a one to one basis into
restricted shares of Xfone's common stock, at an exercise price of $3.50,
and have a term of ten years. The vesting of the options will be over a
period of 4 years as follows: 75,000 options are vested on July 3, 2007.
Thereafter, 18,750 options are vested every 3 months for the following 3
years.
|
|
|
|
|
G.
|
On
October 30, 2006, Xfone's Board of Directors approved a grant of 25,000
options to Itzhak Almog under and subject to Xfone's 2004 Plan. The
options were granted according to the following terms: Date of Grant -
October 30, 2006; Option exercise price - $3.50; Vesting Date - 12 months
from the Date of Grant; Expiration Date - 5 years from the Vesting
Date.
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note
12 - Capital Structure, Stock Options (Cont.)
Stock
Option Plan
(Cont.)
|
H.
|
On
June 5, 2007, the Company’s Board of Directors approved a grant of 20,000
options to Israel Singer, and a grant of 20,000 options to Morris Mansour.
The options were granted under and subject to the Company’s 2004 Stock
Option Plan with the following terms: Date of Grant - June 5, 2007;
Exercise Price - $3.50 per share; Vesting Date - 12 months from the Date
of Grant; Expiration Date - 5 years from the Vesting
Date.
|
|
|
|
|
I.
|
On
June 5, 2007, the Company’s Board of Directors approved a grant of 200,000
options to Brian Acosta under the Company’s 2004 Plan. The options are
granted under the following terms: Date of Grant - June 5, 2007; Exercise
Price - $3.146 per share; Vesting Date - (a) 25,000 options on March 31,
2009; (b) 50,000 options on March 31, 2010; and (c) 125,000 options on
March 31, 2011; Expiration Date - 5 years from the Vesting Date;
Termination - in the event of termination of employment prior to the
completion of Mr. Acosta’s second year of employment with Xfone USA, then
175,000 of the aforementioned options shall automatically terminate; in
the event of termination of employment during Mr. Acosta’s third year of
employment with Xfone USA, then 125,000 of the aforementioned options
shall automatically terminate. Mr. Acosta is the Chief Technical Officer
of our subsidiary, Xfone USA.
|
|
|
|
|
J.
|
On
June 5, 2007, the Company’s Board of Directors approved a grant of 200,000
options to Hunter McAllister under the Company’s 2004 Plan. The options
are granted under the following terms: Date of Grant
-
June 5, 2007; Exercise
Price
-
$3.146 per
share; Vesting Date
-
(a) 25,000 options on
March 31, 2009; (b) 50,000 options on March 31, 2010; and (c) 125,000
options on March 31, 2011; Expiration Date
-
5 years from the
Vesting Date; Termination
-
in the event of
termination of employment prior to the completion of Mr. McAllister’s
second year of employment with Xfone USA, then 175,000 of the
aforementioned options shall automatically terminate; in the event of
termination of employment during Mr. McAllister’s third year of employment
with Xfone USA, then 125,000 of the aforementioned options shall
automatically terminate. Mr. McAllister is the Vice President Business
Development of our subsidiary, Xfone USA.
|
|
|
|
|
K.
|
On
October 28, 2007, our Board of Directors adopted and approved the
Company’s 2007 Stock Incentive Plan (the "2007 Plan") which is designated
for the benefit of employees, directors, and consultants of the Company
and its affiliates. The 2007 Plan was approved on December 17, 2007, at an
Annual Meeting of shareholders of the Company. The 2007 Plan authorizes
the issuance of awards for up to a total of 8,000,000 shares of our common
stock underlying such awards.
|
|
|
|
|
L.
|
On
August 26, 2007, the Company entered into a contractual obligation to
grant the General Manager of Xfone 018 the following number of options to
purchase shares of the Company’s common stock under the 2007 plan, (the
“Plan”):
(1)
Within
30 days of adoption of the Plan, the Company will grant options to
purchase 300,000 shares of Common Stock, at an exercise price of $3.50 per
share, of which (i) options to purchase 75,000 shares will vest on August
26, 2008,; and (ii) options to purchase 18,750 shares will be vest at the
end of every 3 month period thereafter.
(2)
At
the end of each calendar year between 2008 and 2011, and upon the
achievement by Xfone 018 100% of its Targets for each such year, the
General Manager of Xfone 018 will be granted options to purchase 25,000
shares of the Company’s Common Stock under the Plan, for an exercise price
of $3.50 per share, which will be exercisable 30 days after the Company
publishes its annual financial statements for such
year.
The
options will expire 120 days after termination of employment with Xfone
018.
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note 12 -
Capital Structure, Stock Options (Cont.)
Stock
Option Plan
(Cont.)
|
|
Number
of options
|
|
|
Weighted
average exercise price
|
|
Options
outstanding at the beginning of the year
|
|
|
5,350,000
|
|
|
$
|
3.69
|
|
Granted
(a)
|
|
|
740,000
|
|
|
$
|
3.31
|
|
Exercised
|
|
|
(6,300
|
)
|
|
$
|
3.50
|
|
Forfeited
|
|
|
(368,700
|
)
|
|
$
|
3.50
|
|
Options
outstanding at the end of the year
|
|
|
5,715,000
|
|
|
$
|
3.65
|
|
|
|
|
|
|
|
|
|
|
Options
vested and exercisable
|
|
|
3,689,063
|
|
|
$
|
3.50
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options granted
|
|
|
|
|
|
$
|
1.13
|
|
(a)
Include options under contractual obligation as specified in note
12L.
The
following table summarizes information about options vested and exercisable at
December 31, 2007:
|
Options
vested and exercisable
|
Range
price ($)
|
Number
of options
|
Weighted
average remaining contractual life (years)
|
Weighted
average exercise price
|
|
|
|
|
3.50
|
3,689,063
|
4.8
|
$3.02
|
Note
13 - Earnings Per Share
|
|
Year
Ended December 31 , 2007
|
|
|
|
Weighted
Average
|
|
|
|
Income
|
|
Shares
|
|
Per
Share
|
|
|
|
|
|
|
|
Amounts
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
(1,283,892)
|
|
|
|
|
|
|
Basic
EPS:
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
$
|
(1,283,892)
|
|
11,777,645
|
|
$
|
(0.109)
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Options
and
warrants
(*)
|
|
|
-
|
|
-
|
|
|
|
|
Diluted
EPS:
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
$
|
(1,283,892)
|
|
11,777,645
|
|
$
|
(0.109)
|
|
|
|
|
Year
Ended December 31 , 2006
|
|
|
|
|
Weighted
Average
|
|
|
|
|
Income
|
|
Shares
|
|
Per
Share
|
|
|
|
|
|
|
|
|
Amounts
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
$
|
660,696
|
|
|
|
|
|
|
Basic
EPS:
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
|
$
|
660,696
|
|
10,135,874
|
|
$
|
0.065
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Options
and
warrants
(*)
|
|
-
|
|
-
|
|
|
-
|
|
Diluted
EPS:
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
|
$
|
660,696
|
|
10,135,874
|
|
$
|
0.065
|
|
(*)
Anti-diluted
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note
14 - Related Party Transactions
|
|
Years
ended
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Campbeltown
Business Ltd.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
|
|
$
|
4,302
|
|
|
$
|
163,381
|
|
Accrued
Expenses
|
|
|
-
|
|
|
|
13,615
|
|
|
|
|
|
|
|
|
|
|
Vision
Consultants Limited:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
|
|
|
-
|
|
|
|
163,381
|
|
Accrued
expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Abraham
Keinan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
|
|
|
254,350
|
|
|
|
100,710
|
|
Accrued
expenses
|
|
|
20,050
|
|
|
|
11,568
|
|
|
|
|
|
|
|
|
|
|
Guy
Nissensson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
|
|
|
242,490
|
|
|
|
-
|
|
Accrued
expenses
|
|
|
20,050
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Story
Telecom Limited:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
(*)
|
|
|
-
|
|
|
|
2,883,942
|
|
Commissions
(*)
|
|
|
-
|
|
|
|
312,300
|
|
|
|
|
|
|
|
|
|
|
Auracall
Limited:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related
revenues (*)
|
|
|
3,324,726
|
|
|
|
1,501,092
|
|
Commissions
(*)
|
|
|
417,907
|
|
|
|
1,061,259
|
|
Due
(to) from Auracall (net)**
|
|
|
|
|
|
|
(142,633
|
)
|
Short-term
loan from Auracall Limited**
|
|
|
|
|
|
|
47,016
|
|
|
|
|
|
|
|
|
|
|
Dionysos
Investments (1999) Limited:
|
|
|
|
|
|
|
|
|
Fees
|
|
|
183,363
|
|
|
|
70,524
|
|
Accrued
Expenses
|
|
|
146,542
|
|
|
|
5,877
|
|
|
|
|
|
|
|
|
|
|
Balance:
|
|
|
|
|
|
|
|
|
Guy
Nissenson
|
|
|
-
|
|
|
|
(22,611
|
)
|
Abraham
Keinan
|
|
|
(7,205
|
)
|
|
|
(62,670
|
)
|
(*)
Amount represents the period for which Story Telecom Limited or Auracall Limited
was not consolidated into the Company's financial reports.
(**) Due
to the consolidation of Auracell Limited these amounts are eliminated
in the consolidated report.
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note 15 - Financial
Commitments
A.
|
The
Company leases its facilities in the UK, USA and Israel under operating
lease agreement, which will expire in 2009 through 2012. The minimum lease
payments under non-cancelable operating leases are as
follows:
|
Year
ended December 31,
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
365,649
|
|
2009
|
|
|
280,805
|
|
2010
|
|
|
193,257
|
|
2011
|
|
|
178,935
|
|
2012
|
|
|
118,612
|
|
|
|
|
1,137,258
|
|
B.
|
Pursuant
to a Company’s Board of Directors’ resolution dated December 25, 2006, on
March 28, 2007, the Company and Mr. Keinan entered into a consulting
agreement, to be effective as of January 1, 2007 (the “Keinan Consulting
Agreement”).
The
Keinan Consulting Agreement provides that Mr. Keinan shall render the
Company advisory, consulting and other services in relation to the
business and operations of the Company (excluding its business and
operations in the United Kingdom).
In
consideration of the performance of the Services pursuant to the Keinan
Consulting Agreement, the Company shall pay Mr. Keinan a monthly fee of
£10,000 ($21,044) (the “Fee”). Mr. Keinan shall invoice the Company at the
end of each calendar month and the Company shall make the monthly payment
immediately upon receiving such
invoice".
|
C.
|
Pursuant
to a Company’s Board of Directors’ resolution dated December 25, 2006, on
March 28, 2007, the Company and Mr. Nissenson entered into a consulting
agreement, to be effective as of January 1, 2007 (the “Nissenson
Consulting Agreement”).
The
Nissenson Consulting Agreement provides that Mr. Nissenson shall render
the Company advisory, consulting and other services in relation to the
business and operations of the Company (excluding its business and
operations in the United Kingdom).
In
consideration of the performance of the Services pursuant to the Nissenson
Consulting Agreement, the Company shall pay Mr. Nissenson a monthly fee of
£10,000 ($21,044) (the “Fee”). Mr. Nissenson shall invoice the Company at
the end of each calendar month and the Company shall make the monthly
payment immediately upon receiving such
invoice.
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Stock
Purchase Agreement
On June
19, 2000, Swiftnet Limited entered into a Stock Purchase Agreement with Abraham
Keinan and Campbeltown Business Ltd. a company owned and controlled by Guy
Nissenson and his family. This agreement provides that:
|
·
|
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.
|
|
·
|
Campbeltown
Business 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.
|
|
·
|
Campbeltown
Business would invest $100,000 in Swiftnet, in exchange for 20% of the
total issued shares of Swiftnet;
|
|
·
|
Campbeltown
Business would also receive 5% of the Company's issued and outstanding
shares following the Company's acquisition with Swiftnet. In June 2000,
Campbeltown Business invested the $100,000 in Swiftnet. Xfone acquired
Swiftnet and Campbeltown received 720,336 shares of the Company's common
stock for its 20% interest in Swiftnet.
|
|
·
|
Swiftnet
and Abraham Keinan would guarantee that Campbeltown Business' 20% interest
in the outstanding shares of Swiftnet would be exchanged for at least 10%
of the Company's outstanding shares and that Campbeltown Business would
have in total at least 15% of the Company's total issued shares after the
Company's acquisition occurred.
|
|
·
|
Campbeltown
Business would have the right to nominate 33% of the members of the
Company's board of directors and Swiftnet's board of directors. When
Campbeltown Business ownership in the Company's common stock was less than
7%, Campbeltown Business would have the right to nominate only 20% of the
Company's board members but always at least one member. In the case that
Campbeltown Business ownership in the Company's common stock was less than
2%, this right would expire.
|
|
·
|
Campbeltown
Business would have the right to nominate a vice president in Swiftnet.
Mr. Guy Nissenson was nominated as of the time of the June 19, 2000
agreement. If for any reason Guy Nissenson will leave his position,
Campbeltown Business and Abraham Keinan will agree on another nominee. The
Vice President will be employed with suitable
conditions.
|
|
·
|
Campbeltown
Business 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.
|
|
·
|
Keinan
and Campbeltown Business have signed a right of first refusal agreement
for the sale of their shares.
|
|
Until
Xfone conducts a public offering or is traded on a stock market, we are not
permitted to issue any additional shares or equity rights without a written
agreement from Campbeltown Business. This right expires when Campbeltown no
longer owns any equity interest or shares in Xfone or Swiftnet.
D.
|
Mr.
Haim Nissenson, father of Mr. Guy Nissenson, our President, Chief
Executive Officer, and Director, is the Managing Director of Dionysos
Investments. Dionysos Investments is owned and controlled by certain
members of the Nissenson family, other than Mr. Guy Nissenson. On February
8, 2007, pursuant to the recommendations of the Audit Committee of the
Company and the resolutions of its Board of Directors dated December 25,
2006, and February 4, 2007, the Company and Dionysos Investments entered
into a First Amendment to the of the Dionysos Investments Consulting
Agreement from earlier date. As a result, Dionysos Investments will be
compensated by the Company for the Services provided to the Company in the
amount of GBP 8,000 ($16,876) per month, beginning on January 1, 2007 and
will entitled for a success fee for any future investments in the Company
made by Israeli investors during fiscal year 2007, provided such
investments were a direct or indirect result of the Services provided to
the Company. The success fee will be equal to 0.5% (half percent) of the
gross proceeds of such investments. On January 28, 2008, in accordance
with the recommendation of the Audit Committee and in recognition of and
following the successful efforts of Dionysos in raising capital for the
Company in Israel during the Company’s 2007 fiscal year, the Board of
Directors of the Company approved and confirmed by resolution the
engagement of Dionysos to serve as the Company’s consultant for the fiscal
year ended December 31, 2008 at the same level of compensation which was
agreed to and paid for the fiscal year ended December 31,
2007.
|
E.
|
The
Company has commission agreements with various agents that are entitled to
commission of approximately 5%-12% of the total sale amount less any bad
debts.
|
Note
16 - Economic Dependency and Credit Risk
|
A.
|
Certain
Telecommunication operators act as collection channels for the Company. In
2007 the Company had two major collection channels, one in the U.K. and
one in Israel. Collections through these channels accounted to
approximately 22% and 6% of the Company's total revenues in 2007,
respectively, and 18% and 5% of the Company's total revenues in
2006, respectively. With respect to collection of monies for the
Company, these Telecommunication operators are not deemed to be customers
of the Company.
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
|
B.
|
Approximately,
25%, 20% and 7% of the Company's purchases are from three suppliers for
the year ended December 31, 2007, and 31%, 28%, 5% are from three
suppliers for the year ended December 31,
2006.
|
Note
17 - Segment Information
The
percentage of the Company's revenues is derived from the following Geographical
segments:
|
|
Years
Ended
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
United
Kingdom
|
|
$
|
24,263,610
|
|
|
$
|
16,951,119
|
|
United
States
|
|
|
12,290,891
|
|
|
|
15,474,206
|
|
Israel
|
|
|
8,169,433
|
|
|
|
5,488,712
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
44,723,934
|
|
|
|
37,914,037
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
10,696,915
|
|
|
|
11,834,466
|
|
United
States
|
|
|
5,904,797
|
|
|
|
7,684,708
|
|
Israel
|
|
|
3,024,610
|
|
|
|
2,449,824
|
|
|
|
|
|
|
|
|
|
|
Total
cost of revenues
|
|
|
19,626,322
|
|
|
|
21,968,998
|
|
|
|
|
|
|
|
|
|
|
Direct
Gross Profit:
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
13,566,695
|
|
|
|
5,116,653
|
|
United
States
|
|
|
6,386,094
|
|
|
|
7,789,497
|
|
Israel
|
|
|
5,144,823
|
|
|
|
3,038,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,097,612
|
|
|
|
15,945,039
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
12,556,993
|
|
|
|
3,582,173
|
|
United
States
|
|
|
*
6,466,501
|
|
|
|
*
6,658,270
|
|
Israel
|
|
|
2,963,461
|
|
|
|
3,209,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
21,986,955
|
|
|
|
*
13,449,879
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit:
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
1,009,702
|
|
|
|
1,534,480
|
|
United
States
|
|
|
*
(80,407
|
)
|
|
|
*
1,131,227
|
|
Israel
|
|
|
2,181,362
|
|
|
|
(170,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
*
3,110,657
|
|
|
|
*
2,495,160
|
|
|
|
|
|
|
|
|
|
|
Non-
recurring loss
|
|
|
2,856,803
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Expenses
related to Headquarter in the US
|
|
|
*
1,283,296
|
|
|
|
*
1,460,138
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
$
|
(1,029,442
|
)
|
|
$
|
1,035,022
|
|
|
(*)
Amounts were reclassified in order to present segment information without
the effect of expenses related to operating a Headquarters in the
US.
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note
18 - Subsequent Events
Acquisition
of NTS Communications, Inc. (“
NTS”
)
On
February 26, 2008 (the “Closing Date”), the Company completed its acquisition of
NTS pursuant to that certain Stock Purchase Agreement (the “Purchase Agreement”)
entered into on August 22, 2007 with NTS, and the equity owners of NTS as
sellers (the “NTS Shareholders”), as amended on February 14, 2008 and February
26, 2008 .
The
acquisition closed on February 26, 2008. Upon closing of the
acquisition, NTS and its six wholly owned subsidiaries, NTS Construction
Company, Garey M. Wallace Company, Inc., Midcom of Arizona, Inc., Communications
Brokers, Inc., NTS Telephone Company, LLC, and NTS Management Company, LLC,
became our wholly owned subsidiaries.
The
purchase price for the acquisition was approximately $42,000,000 (excluding
acquisition related costs), plus (or less) (i) the difference between NTS’
estimated working capital and the working capital target for NTS as set forth in
the Purchase Agreement, and (ii) the difference between amounts allocated by NTS
for its fiber optic network build-out project anticipated in Texas and any
indebtedness incurred by NTS in connection with this project, each of which was
subject to the Company’s advance written approval. After applying
this formula, the final aggregate purchase price was calculated as $41,900,000,
and was paid by the Company as follows: $35,414,715 was paid in cash;
and 2,366,892 shares of the Company’s common stock, were issued to certain
NTS Shareholders who elected to reinvest all or a portion of their allocable
sale price in the Company’s Common Stock, pursuant to the terms of the Purchase
Agreement. The Company’s Board of Directors determined, in accordance with the
Purchase Agreement, the number of shares of the Company’s Common Stock to be
delivered to each participating NTS Shareholder by dividing the portion of such
NTS Shareholder’s allocable sale price that the NTS Shareholder elected to
receive in shares of the Company’s Common Stock by 93% of the average closing
price of the Company’s Common Stock on the American Stock Exchange for the ten
consecutive trading days preceding the trading day immediately prior to the
Closing Date (i.e., $2.74). The aggregate sales price reinvested by all such NTS
Shareholders was $6,485,284.
On
February 26, 2008, and in connection with the closing of the acquisition, the
parties entered into the following material definitive agreements, among
others:
A.
Employment Agreements with
Barb
ara
Baldwin, Jerry Hoover and Brad Worthington
.
NTS
entered into Employment Agreements with each of Barbara Baldwin, who, prior to
the closing, served as NTS’ President and CEO, Jerry Hoover, who, prior to the
closing, served as NTS’ Executive Vice President - Chief Financial Officer, and
Brad Worthington, who, prior to the closing, served as NTS’ Executive Vice
President - Chief Operating Officer (each an “Officer,” and collectively the
“Officers”). The Employment Agreements provide for continued
employment of the Officers with NTS in their respective capacities, and are for
five-year terms each, effective as of the Closing Date.
The
Employment Agreements provide for initial annual salaries for Ms. Baldwin of
$273,000, and $243,840 for each of Messrs. Hoover and Worthington, and annual
salaries (not less than the Officer’s respective initial annual salary) to be
determined by NTS’ Board of Directors for each year of employment thereafter. In
addition, the Officers are entitled to one-time signing bonuses in the
amount of $500,000 for Ms. Baldwin and $243,840 for each of Messrs. Hoover and
Worthington on the effective date of the Employment Agreements.
Pursuant
to the terms of the Employment Agreements, the Officers were granted the
following stock option awards under the Company’s 2007 Stock Incentive Plan on
the Closing Date: Ms. Baldwin was granted options to purchase 250,000 shares of
the Company’s Common Stock, and each of Messrs. Hoover and Worthington was
granted options to purchase 400,000 shares of the Company’s Common
Stock. Each option is immediately exercisable, expires five years
from the grant date, and has an exercise price of $2.794, which is 10% over the
average closing price of the Company’s Common Stock for the ten trading days
immediately preceding August, 22, 2007, the execution date of the Purchase
Agreement. Additionally, the Employment Agreements provide that at
the end of each Officer’s second year of his or her employment, he or she will
be granted options to purchase 267,000 shares of the Company’s Common Stock,
which will be immediately exercisable at $5.00 per share, and will expire five
years from such grant date.
The
Employment Agreements also provide piggyback registration rights for the
Officers from the effective date of the Employment Agreement through the
expiration or termination of the Employment Agreements, to register for resale
the shares of the Company’s Common Stock they own as a result of exercising any
of the options granted pursuant to the Employment Agreements. The
Company will pay the registration expenses with respect to such piggyback
registrations.
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note
18 - Subsequent Events (Cont.)
B.
Free
Cash Flow Participation Agreement.
The
Company entered into a Free Cash Flow Participation Agreement (the
“Participation Agreement”) with NTS Holdings, pursuant to which NTS Holdings
will be entitled to a payment from the Company of an amount equal to 5% of
the aggregate excess free cash flow generated by the Company’s U.S.
Operations, which is defined in the Participation Agreement as the operations of
the Company and its U.S. subsidiaries, which include Xfone USA, Inc. and NTS,
and their respective subsidiaries, as well as any U.S. entity that the Company
acquires directly, or indirectly through its subsidiaries in the future (a
“Future Acquisition”). NTS Holdings will be entitled to the
participation amount beginning at such time as the Company has received a
full return of its initial invested capital, plus an additional 8% return per
year, in connection with the NTS acquisition (as well as in connection with any
Future Acquisition).
The
Participation Agreement will remain in effect in perpetuity, unless earlier
terminated in accordance with its terms. Termination of the
Participation Agreement may occur upon a sale or buyout of the Company’s U.S.
Operations, at the option of the purchaser in any such transaction, and in the
limited circumstances set forth in the Participation Agreement.
C.
Escrow
Agreement.
In
accordance with the terms of the Purchase Agreement, the Company and certain
representatives of the NTS Shareholders (the “NTS Shareholder Representatives”)
entered into an Escrow Agreement with Trustmark National Bank, as escrow agent,
pursuant to which the Company deposited an amount of cash and shares of Common
Stock equal to $6,679,999 (15.9%) of the aggregate purchase price for the
acquisition, to be held and administered by the escrow agent in order to secure
certain obligations of the sellers under the Purchase Agreement. Each share of
Common Stock deposited with the escrow agent has an agreed value of $2.74, which
was determined by using the average per share closing price of the Common
Stock for the ten (10) consecutive trading days preceding the trading day
immediately prior to the Closing Date.
D.
Issuance
of Common Stock to certain NTS Shareholders
In
connection with the closing of the acquisition on February 26, 2008, the Company
issued 2,366,892 shares of the Company’s Common Stock to certain NTS
Shareholders who elected to reinvest all or a portion of their allocable sale
price in the Company’s Common Stock, pursuant to the terms of the Purchase
Agreement. The Company’s Board of Directors determined, in accordance
with the Purchase Agreement, the number of shares of the Company’s Common Stock
to be delivered to each participating NTS Shareholder by dividing the portion of
such NTS Shareholder’s allocable sale price that the NTS Shareholder elected to
receive in shares of the Company’s Common Stock by 93% of the average closing
price of the Company’s Common Stock on the American Stock Exchange for the ten
consecutive trading days preceding the trading day immediately prior to the
Closing Date (i.e., $2.74). The aggregate sales price reinvested by
all such NTS Shareholders was $6,485,284.
E.
Issuance
of Common Stock to certain Accredited Investors pursuant to the December 13,
2007 Private Placement
On
February 26, 2008, the Company completed the issuance of 800,000 Units (as
defined below) to XFN-RLSI Investments, LLC, an entity affiliated with Richard
L. Scott Investments, LLC, a U.S. institutional investor, and 500,000 Units to
certain investors affiliated with or who are customers of Gagnon Securities LLC,
pursuant to Subscription Agreements entered into with each of the investors on
December 13, 2007. Each “Unit” consists of two shares of the
Company’s Common Stock and one warrant to purchase one share of Common Stock,
exercisable for a period of five years from the date of issuance at an exercise
price of $3.10 per share. The Units were sold at a price of $6.20 per
Unit, for an aggregate purchase price of $8,060,000, which was held in escrow
for the benefit of the Company pending the receipt by the Company of approvals
from the American Stock Exchange and the Tel Aviv Stock Exchange for the listing
of the shares (including those underlying the warrants), as well as the closing
of the acquisition of NTS.
The
private placement was made by the Company acting without a placement
agent.
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note
18 - Subsequent Events (Cont.)
Letter
agreement
with
Oberon Securities, LLC
On March
5, 2008, the Company entered into a letter agreement (the “March 5, 2008
Agreement”) with Oberon Securities, LLC, a New York City-based
registered broker-dealer (“Oberon Securities”), pursuant to which the Company
will pay Oberon Securities $1,200,000 in cash for its services to the Company as
financial advisor in connection with the Company's acquisition of NTS, payable
as follows: (i) $400,000 no later than March 7, 2008 (ii) $400,000 no later than
May 1, 2008 and (iii) $400,000 no later than July 1, 2008. The March 5, 2008
Agreement sets forth the total and final fees due to Oberon Securities for
its services in connection with the NTS acquisition, pursuant to the Company’s
prior agreements with Oberon Securities and its affiliates.
Agreement
of Principles with Tiv Taam Holdings 1 Ltd.
On March
17, 2008, Xfone 018 entered into an Agreement of Principles with Tiv Taam
Holdings 1 Ltd., an Israeli public company (“Tiv Taam”), pursuant to which Xfone
018 agreed to purchase from Tiv Taam, and Tiv Taam agreed to sell to Xfone 018,
approximately 89% of the outstanding share capital (approximately 69% of its
fully diluted share capital) of Robomatix Technologies Ltd. (“Robomatix”) which
Tiv Taam currently owns. Robomatix owns approximately 90% of the
issued share capital of Tadiran Telecom-Communication Services In Israel Ltd.
(“Tadiran Telecom”), which is the general partner of Tadiran
Telecom-Communication Services In Israel – Limited Partnership (“Tadiran Telecom
LP”), an Israeli entity dealing with the distribution, maintenance, assistance
services and sale of switchboards for the business community in
Israel. Accordingly, upon consummation of the acquisition, Xfone 018
will also acquire control over Tadiran Telecom and Tadiron Telecom
LP. The purchase price for the acquisition is NIS 44,000,000
(approximately $12,503,552), subject to adjustment as set forth in the
agreement, payable in three installments, as follows:
o
|
On
the closing date, NIS 15,500,000 (approximately $4,404,660) (the “First
Installment”);
|
o
|
By
November 20, 2008, NIS 15,500,000 (approximately $4,404,660), subject to
adjustment resulting from linkage to the Consumer Price
Index (the “Second Installment”);
and
|
o
|
By
November 1, 2009, NIS 13,000,000 (approximately $3,694,231), subject to
adjustment resulting from linkage to the Consumer Price Index (the
“Third Installment”).
|
Xfone 018
will have all rights as a shareholder of Robomatix upon closing of the
acquisition and payment of the First Installment.
Xfone
Inc., as the parent company of Xfone 018, has agreed to sign a letter of
guarantee with respect to the Second Installment and the Third
Installment. The agreement provides for a 60-day period during which
Xfone 018 shall perform a legal and accounting due diligence examination of
Robomatix, Tadiran Telecom and Tadiran Telecom LP. Xfone 018 has
undertaken to maintain confidentiality of all information delivered to Xfone
018, and has entered into a Confidentiality Undertaking.
The
closing of the transaction will occur on the later of (i) 75 days after the
execution of the Agreement (i.e, May 31, 2008), or (ii) 15 days after receipt of
necessary approvals of the General Director of the Antitrust Authority and other
Israeli governmental authorities. In the event that the necessary
approvals are not received within 120 days of the date of execution of the
Agreement, or a reserved approval was received or an approval under conditions
which make it burdensome on Xfone 018 or significantly prejudice the
profitability of the transaction for Xfone 018, the Agreement will be null and
void as if it was never executed.
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
|
Note
18 - Subsequent Events (Cont.)
Acquisition
of
additional
30.4%
ownership
interest
in
Story
Telecom, Inc.
On July
12, 2007, Story Telecom UK notified Mr. Davison, its Managing Director, that it
was terminating his employment, effective as of September 10, 2007. On July 25,
2007, the Company received notification of a claim filed on July 23, 2007 by Mr.
Davison with the United Kingdom Employment Tribunals against Story Telecom UK,
alleging wrongful termination of his employment as Managing Director. The claim
did not seek any specific damages. On August 21, 2007, the Company responded to
the United Kingdom Employment Tribunal by rejecting Mr. Davison's
claim.
On March
25, 2008, Story Telecom Limited (“Story Telecom UK”), the majority-owned U.K.
based subsidiary of the Company, settled the previously disclosed legal
proceeding in the U.K. initiated by Nir Davison, Story Telecom UK’s former
Managing Director.
In
connection with the settlement, the Company purchased the shares of common stock
of Story Telecom, Inc., the parent company of Story Telecom UK ("Story Telecom
US"), owned by Mr. Davison and owned by Trecastle Holdings Limited, a company
owned and controlled by Mr. Davison (“Trecastle”), which increased the Company's
ownership interest in Story Telecom US from 69.6% to 100%. As a
result, Story Telecom US became a wholly owned subsidiary of the
Company.
As part
of the settlement, Story Telecom UK agreed to pay Mr. Davison ₤30,000 ($59,787)
as compensation for loss of employment, which payment was made without admission
of liability. In addition, Mr. Davison agreed to file a Withdrawal of
Claim with the United Kingdom Employment Tribunal no later than March 26,
2008. The Withdrawal of Claim was filed on March 31, 2008.
In
connection with the Compromise Agreement, Nir Davison, Trecastle and the Company
entered into a Securities Purchase Agreement (the “SPA”) on the same date,
pursuant to which Mr. Davison and Trecastle agreed to sell to the Company, and
the Company agreed to purchase from each of Mr. Davison and Trecastle, the
shares of common stock of Story Telecom US that each party owned, respectively,
for an aggregate purchase price of ₤270,000 ($538,083).
FINANCIAL
STATEMENTS AND CONDENSED NOTES (UNAUDITED) - PERIOD ENDED JUNE 30,
2008
Xfone,
Inc. and Subsidiaries
|
|
|
CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
|
|
June
30, 2008
|
CONTENTS
|
PAGE
|
|
|
|
B-42
|
|
|
|
B-44
|
|
|
|
B-45
|
|
|
|
B-46
|
Xfone,
Inc. and Subsidiaries
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Unaudited
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,447,700
|
|
|
$
|
5,835,608
|
|
Restricted
cash
|
|
|
-
|
|
|
|
25,562,032
|
|
Accounts
receivable, net
|
|
|
8,672,620
|
|
|
|
5,886,499
|
|
Prepaid
expenses and other receivables
|
|
|
7,548,721
|
|
|
|
3,985,307
|
|
|
|
|
|
|
|
|
|
|
Total
current
assets
|
|
|
21,669,041
|
|
|
|
41,269,446
|
|
|
|
|
|
|
|
|
|
|
INVENTORY
|
|
|
335,640
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
-
|
|
|
|
7,190
|
|
|
|
|
|
|
|
|
|
|
LONG
TERM ASSETS
|
|
|
1,922,373
|
|
|
|
2,076,061
|
|
|
|
|
|
|
|
|
|
|
FIXED
ASSETS, NET
|
|
|
47,748,078
|
|
|
|
5,747,758
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS, NET
|
|
|
3,298,259
|
|
|
|
1,076,784
|
|
|
|
|
|
|
|
|
|
|
GOODWILL
|
|
|
27,151,710
|
|
|
|
16,872,088
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
102,125,101
|
|
|
$
|
67,049,327
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Xfone,
Inc. and Subsidiaries
|
CONSOLIDATED
BALANCE SHEETS
|
|
June
30,
|
|
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
Short-term
bank credit and current maturities of notes payable
|
|
$
|
4,791,497
|
|
|
$
|
1,094,339
|
|
Trade
payables
|
|
|
8,332,911
|
|
|
|
8,287,420
|
|
Other
liabilities and accrued expenses
|
|
|
8,475,737
|
|
|
|
5,322,045
|
|
Current
maturities of obligations under capital leases
|
|
|
105,791
|
|
|
|
89,654
|
|
Current
maturities of Bonds
|
|
|
3,925,758
|
|
|
|
3,268,476
|
|
|
|
|
|
|
|
|
|
|
Total
current
liabilities
|
|
|
25,631,694
|
|
|
|
18,061,934
|
|
|
|
|
|
|
|
|
|
|
DEFERRED
TAXES
|
|
|
5,519,503
|
|
|
|
1,103
|
|
|
|
|
|
|
|
|
|
|
NOTES
PAYABLE
|
|
|
3,538,725
|
|
|
|
1,013,808
|
|
|
|
|
|
|
|
|
|
|
BONDS
|
|
|
26,069,791
|
|
|
|
22,083,892
|
|
|
|
|
|
|
|
|
|
|
OBLIGATIONS
UNDER CAPITAL LEASES
|
|
|
26,983
|
|
|
|
31,893
|
|
|
|
|
|
|
|
|
|
|
SEVERANCE
PAY
|
|
|
106,768
|
|
|
|
148,600
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
171,869
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
61,065,333
|
|
|
|
41,341,230
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Common
stock of $0.001 par value:
|
|
|
|
|
|
|
|
|
75,000,000
shares authorized June 30, 2008;
|
|
|
|
|
|
|
|
|
13,467,928
and 18,376,075 issued and outstanding at December 31, 2007 and June
30, 2008, respectively
|
|
|
18,376
|
|
|
|
13,468
|
|
Additional
paid-in capital
|
|
|
43,295,304
|
|
|
|
26,494,985
|
|
Foreign
currency translation adjustment
|
|
|
(1,596,032
|
)
|
|
|
(1,564,814
|
)
|
Stock
compensation fund
|
|
|
(835,265
|
)
|
|
|
(295,155
|
)
|
Retained
earnings
|
|
|
177,385
|
|
|
|
1,059,613
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders'
equity
|
|
|
41,059,768
|
|
|
|
25,708,097
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
shareholders' equity
|
|
$
|
102,125,101
|
|
|
$
|
67,049,327
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
Xfone,
Inc. and Subsidiaries
|
CONSOLIDATED
STAT
EMENTS OF OPERATIONS
|
(Unaudited)
|
|
|
Six months
ended
|
|
|
Three months
ended
|
|
|
|
June
30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
41,645,820
|
|
|
$
|
23,153,522
|
|
|
$
|
25,852,722
|
|
|
$
|
11,629,806
|
|
Cost
of revenues
|
|
|
21,017,261
|
|
|
|
10,323,243
|
|
|
|
13,360,988
|
|
|
|
5,130,021
|
|
Gross
profit
|
|
|
20,628,559
|
|
|
|
12,830,279
|
|
|
|
12,491,734
|
|
|
|
6,499,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
32,580
|
|
|
|
31,796
|
|
|
|
17,570
|
|
|
|
16,018
|
|
Marketing
and selling
|
|
|
6,138,804
|
|
|
|
5,474,506
|
|
|
|
3,473,175
|
|
|
|
2,742,530
|
|
General
and administrative
|
|
|
11,415,388
|
|
|
|
5,846,730
|
|
|
|
7,103,668
|
|
|
|
2,959,944
|
|
Total
operating expenses
|
|
|
17,586,772
|
|
|
|
11,353,032
|
|
|
|
10,594,413
|
|
|
|
5,718,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit
|
|
|
3,041,787
|
|
|
|
1,477,247
|
|
|
|
1,897,321
|
|
|
|
781,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
expenses, net
|
|
|
(3,995,580
|
)
|
|
|
(306,695
|
)
|
|
|
(3,092,411
|
)
|
|
|
(166,826
|
)
|
Equity
profit in income of affiliated company
|
|
|
-
|
|
|
|
112,585
|
|
|
|
-
|
|
|
|
33,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before minority interest and taxes
|
|
|
(953,793
|
)
|
|
|
1,283,137
|
|
|
|
(1,195,090
|
)
|
|
|
647,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(179,059
|
)
|
|
|
(173,131
|
)
|
|
|
(96,585
|
)
|
|
|
(80,996
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before taxes
|
|
|
(1,132,852
|
)
|
|
|
1,110,006
|
|
|
|
(1,291,675
|
)
|
|
|
566,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
250,624
|
|
|
|
(254,172
|
)
|
|
|
328,317
|
|
|
|
(155,481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(882,228
|
)
|
|
$
|
855,834
|
|
|
$
|
(963,358
|
)
|
|
$
|
411,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.052
|
)
|
|
$
|
0.075
|
|
|
$
|
(0.052
|
)
|
|
$
|
0.036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.052
|
)
|
|
$
|
0.075
|
|
|
$
|
(0.052
|
)
|
|
$
|
0.036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,864,161
|
|
|
|
11,481,080
|
|
|
|
18,404,632
|
|
|
|
11,521,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
16,864,161
|
|
|
|
11,481,080
|
|
|
|
18,404,632
|
|
|
|
11,531,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Xfone,
Inc. and Subsidiaries
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flow from operating activities
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(882,228
|
)
|
|
$
|
855,834
|
|
Adjustments
required to reconcile net income (loss) to net cash provided by (used in)
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,747,552
|
|
|
|
526,688
|
|
Compensation
in connection with the issuance of warrants and options
|
|
|
342,206
|
|
|
|
121,610
|
|
Interest
and currency differences on bonds
|
|
|
4,016,886
|
|
|
|
-
|
|
Minority
interest
|
|
|
179,059
|
|
|
|
173,131
|
|
Equity
in earnings of affiliated company
|
|
|
-
|
|
|
|
(112,585
|
)
|
Decrease
(increase) in account receivables
|
|
|
872,769
|
|
|
|
(1,548,524
|
)
|
Decrease
in inventories
|
|
|
25,750
|
|
|
|
-
|
|
Increase
(decrease) in severance pay
|
|
|
(56,388
|
)
|
|
|
66,313
|
|
Increase
in prepaid expenses and other receivables
|
|
|
(1,322,344
|
)
|
|
|
(173,028
|
)
|
Decrease
in long term receivables
|
|
|
111,316
|
|
|
|
-
|
|
Increase
in trade payables
|
|
|
76,319
|
|
|
|
906,804
|
|
Decrease in
accrual for non-recurring loss (note 6)
|
|
|
(3,890,191
|
)
|
|
|
-
|
|
Increase
in other payables
|
|
|
93,213
|
|
|
|
259,037
|
|
Increase
(decrease) in deferred taxes
|
|
|
(852,917
|
)
|
|
|
1,083
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
461,002
|
|
|
|
1,076,363
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from investing activities
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(3,793,465
|
)
|
|
|
(598,246
|
)
|
Proceeds
from short term deposit
|
|
|
27,467,049
|
|
|
|
-
|
|
Change
in other assets and long-term receivables
|
|
|
-
|
|
|
|
128,203
|
|
Change
in prepaid expenses and other receivables
|
|
|
(116,513
|
)
|
|
|
|
|
Acquisition
of minority interest in Story Telecom, Inc.
|
|
|
(690,207
|
)
|
|
|
-
|
|
Acquisition
of NTS Communications, Inc.
|
|
|
(39,180,509
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) investing activities
|
|
|
(16,313,645
|
)
|
|
|
(470,043
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flow from financing activities
|
|
|
|
|
|
|
|
|
Repayment
of long term loans from banks and others
|
|
|
(458,874
|
)
|
|
|
(484,170
|
)
|
Proceeds
from issuance of shares and detachable warrants, net of issuance
expenses
|
|
|
14,496,036
|
|
|
|
853,649
|
|
Proceeds
from long term loans from banks
|
|
|
3,488,679
|
|
|
|
20,466
|
|
Proceeds
from exercise of options
|
|
|
14,368
|
|
|
|
22,050
|
|
Changes
in capital lease obligation
|
|
|
10,125
|
|
|
|
22,545
|
|
Payment
of first installment interest on Bonds
|
|
|
(1,334,924
|
)
|
|
|
-
|
|
Repayment
of convertible notes
|
|
|
(400,000
|
)
|
|
|
(397,025
|
)
|
Increase
(decrease) in short term loan and bank credit
|
|
|
-
|
|
|
|
(584,786
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
15,815,410
|
|
|
|
(547,271
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(350,675
|
)
|
|
|
(75,355
|
)
|
|
|
|
|
|
|
|
|
|
Net
(decrease) in cash
|
|
|
(387,908
|
)
|
|
|
(16,306
|
)
|
|
|
|
|
|
|
|
|
|
Cash
at the beginning of the period
|
|
|
5,835,608
|
|
|
|
1,218,392
|
|
|
|
|
|
|
|
|
|
|
Cash
at the end of the period
|
|
$
|
5,447,700
|
|
|
$
|
1,202,086
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Xfone,
Inc. and Subsidiaries
|
NOTES
TO CONSOLIDAT
ED FINANCIAL STATEMENTS
JUNE
30, 2008
(Unaudited)
|
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 voice, video and data telecommunications services,
including: local, long distance and international telephony services;
video; prepaid and postpaid calling cards; cellular services; Internet
services; messaging services (Email/Fax Broadcast, Email2Fax and
Cyber-Number); and reselling opportunities, with operations in the United
States, the United Kingdom and
Israel.
|
Xfone's
holdings in subsidiaries as of June 30, 2008 were as follows:
|
●
|
Swiftnet
Limited ("Swiftnet") - wholly owned U.K.
subsidiary.
|
|
|
Equitalk.co.uk
Limited ("Equitalk") - wholly owned U.K.
subsidiary.
|
|
|
Auracall
Limited ("Auracall") - wholly owned U.K.
subsidiary.
|
|
|
Xfone
USA, Inc. and its two wholly owned subsidiaries, eXpeTel Communications,
Inc. and Gulf Coast Utilities, Inc. - wholly owned U.S.
subsidiary.
|
|
|
Story
Telecom, Inc. and its wholly owned U.K. subsidiary, Story Telecom Limited
(collectively, " Story Telecom ") - wholly owned U.S.
subsidiary.
|
|
|
NTS
Communications, Inc. and its six wholly owned subsidiaries, NTS
Construction Company, Garey M. Wallace Company, Inc., Midcom of Arizona,
Inc., Communications Brokers Inc., NTS telephone Company, LLC and NTS
management Company, LLC - wholly owned U.S.
subsidiary.
|
|
|
Xfone
018 Ltd. ("Xfone 018") - majority owned Israeli subsidiary in which Xfone
holds a 69% ownership share.
|
|
B.
|
On
July 12, 2007, Story Telecom Limited (“Story Telecom UK”), notified
Mr. Davison, its Managing Director, that it was terminating his
employment, effective as of September 10, 2007. On July 25, 2007, the
Company received notification of a claim filed on July 23, 2007 by Mr.
Davison with the United Kingdom Employment Tribunals against Story Telecom
UK, alleging wrongful termination of his employment as Managing Director.
The claim did not seek any specific damages. On August 21, 2007, the
Company responded to the United Kingdom Employment Tribunal by rejecting
Mr. Davison's claim.
On
March 25, 2008, Story Telecom UK settled the above mentioned
claim.
In
connection with the settlement, the Company purchased the shares of common
stock of Story Telecom, Inc., the parent company of Story Telecom UK
("Story Telecom US"), owned by Mr. Davison and owned by Trecastle Holdings
Limited, a company owned and controlled by Mr. Davison, which increased
the Company's ownership interest in Story Telecom US from 69.6% to
100%. The aggregate purchase price was £270,000 ($538,083). As a
result, Story Telecom US became a wholly owned subsidiary of the
Company.
|
Xfone,
Inc. and Subsidiaries
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
(Unaudited)
|
Note
1 - Organization and Nature of Business (Cont.)
As
part of the settlement, Story Telecom UK agreed to pay Mr. Davison £30,000
($59,787) as compensation for loss of employment, which payment was made
without admission of liability. In addition, Mr. Davison agreed
to file a Withdrawal of Claim with the United Kingdom Employment Tribunal
which was filed on March 31,
2008.
|
The
following table summarizes the fair values of the assets acquired and
liabilities assumed, as of March 25, 2008:
Story
Telecom, Inc.
|
|
|
|
Current
Assets, excluding cash acquired
|
$
|
1,820,479
|
|
Fixed
assets
|
|
9,970
|
|
Total
Assets acquired
|
|
1,830,449
|
|
|
|
|
|
Current
liabilities
|
|
(1,679,409
|
)
|
Long
term liabilities
|
|
(2,400,809
|
)
|
Total
liabilities acquired
|
|
4,080,218
|
|
|
|
|
|
Net
liabilities assumed
|
$
|
(2,249,769
|
)
|
|
|
|
|
Acquired
net assets (30.4%)*
|
$
|
-
|
|
|
|
|
|
Purchase
price:
|
|
|
|
Cash
acquired, net
|
$
|
410,598
|
|
Acquisition
costs
|
|
279,609
|
|
Total
|
|
690,207
|
|
|
|
|
|
Goodwill
|
$
|
690,207
|
|
|
|
|
|
* The
minority has not been attributed losses
Xfone,
Inc. and Subsidiaries
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
(Unaudited)
|
Note
1 - Organization and Nature of Business (Cont.)
|
C.
|
On
February 26, 2008 (the “Closing Date”), the Company completed its
acquisition of NTS Communications, Inc. ("NTS") pursuant to that
certain Stock Purchase Agreement (the “Purchase Agreement”) entered into
on August 22, 2007 with NTS, and the equity owners of NTS as sellers (the
“NTS Shareholders”), as amended on February 14, 2008 and February 26, 2008
.
Upon
closing of the acquisition, NTS and its six wholly owned subsidiaries, NTS
Construction Company, Garey M. Wallace Company, Inc., Midcom of Arizona,
Inc., Communications Brokers, Inc., NTS Telephone Company, LLC, and NTS
Management Company, LLC, became the Company's wholly owned
subsidiaries.
The
purchase price for the acquisition was approximately $42,000,000
(excluding acquisition related costs), plus (or less) (i) the difference
between NTS’ estimated working capital and the working capital target for
NTS as set forth in the Purchase Agreement, and (ii) the difference
between amounts allocated by NTS for its fiber optic network build-out
project anticipated in Texas and any indebtedness incurred by NTS in
connection with this project, each of which was subject to the Company’s
advance written approval. After applying this formula, the
final aggregate purchase price was calculated as $41,900,000, and was paid
by the Company as follows: $35,414,715 was paid in cash; and 2,366,892
shares of the Company’s common stock, were issued to certain NTS
Shareholders who elected to reinvest all or a portion of their allocable
sale price in the Company’s Common Stock, pursuant to the terms of the
Purchase Agreement. The Company’s Board of Directors determined, in
accordance with the Purchase Agreement, the number of shares of the
Company’s Common Stock to be delivered to each participating NTS
Shareholder by dividing the portion of such NTS Shareholder’s allocable
sale price that the NTS Shareholder elected to receive in shares of the
Company’s Common Stock by 93% of the average closing price of the
Company’s Common Stock on the American Stock Exchange for the ten
consecutive trading days preceding the trading day immediately prior to
the Closing Date (i.e., $2.74). The aggregate sales price reinvested by
all such NTS Shareholders was $6,485,284.
On
April 25, 2008, we entered into a Third Amendment to the purchase
agreement, pursuant to which we agreed to an extension of time
for the calculation and payment of the post closing working
capital adjustment under the NTS Purchase
Agreement.
|
Xfone,
Inc. and Subsidiaries
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
(Unaudited)
|
Note
1 - Organization and Nature of Business (Cont.)
The
following table summarizes the fair values of the assets acquired and
liabilities assumed, as of February 26, 2008**
NTS
Communications, Inc.
|
|
|
|
Current
Assets, excluding cash acquired
|
|
$
|
5,913,441
|
|
Fixed
assets
|
|
|
39,631,997
|
|
Total
Assets acquired
|
|
|
45,545,438
|
|
|
|
|
|
|
Current
liabilities
|
|
|
8,076,112
|
|
Long
Term liabilities
|
|
|
9,237,411
|
|
Total
liabilities acquired
|
|
|
17,313,523
|
|
|
|
|
|
|
Net
assets assumed
|
|
$
|
28,231,915
|
|
|
|
|
|
|
Acquired
net assets (100%)
|
|
$
|
28,231,915
|
|
|
|
|
|
|
Purchase
price:
|
|
|
|
|
Cash
paid, net(*)
|
|
$
|
34,860,688
|
|
Fair
market value of stock and options issued
|
|
|
1,412,507
|
|
Acquisition
costs
|
|
|
3,951,154
|
|
Total
|
|
|
40,224,329
|
|
|
|
|
|
|
Customer
Relationship
|
|
|
2,153,000
|
|
|
|
|
|
|
License
|
|
|
250,000
|
|
|
|
|
|
|
Goodwill
|
|
$
|
9,589,414
|
|
|
|
|
|
|
*
Includes accrued expenses at the amount of $368,687 and cash in the amount
of $6,485,284 that was received for the issuance of 2,366,892 Shares of the
Company's Common stock.
** The
Company is still in the process of allocating the Intangible Assets from this
acquisition.
Xfone,
Inc. and Subsidiaries
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
(Unaudited)
|
Note
2 - Significant Accounting Policies
The
financial statements are prepared in accordance with generally accepted
accounting principles in the United States. The significant accounting policies
followed in the preparation of the financial statements, applied on a consistent
basis, are as follows:
|
A.
|
Principles
of Consolidation and Basis of Financial Statement
Presentation
|
The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America
("GAAP") and include the accounts of the Company and its subsidiaries. All
significant inter-company balances and transactions have been eliminated in
consolidation. A minority interest in the loss of a subsidiary will be recorded
according to the respective equity interest of the minority and up to its
exposure and/or legal obligation to cover the subsidiary losses in case of
equity reduced to zero or below.
|
B.
|
Foreign
Currency Translation
|
Effective
January 1, 2007, the Company changed its functional and reporting currency from
the Great Britain Pounds ("GBP") to the U.S. dollar for the reason that a
majority of the Company's transactions and balances are denominated in U.S.
dollars. Consistent with SFAS No. 52, Foreign Currency Translation, the change
in functional currency will be accounted for prospectively; therefore, there is
no effect on the historical consolidated financial statements. The translated
amounts for non-monetary assets at December 31, 2006, became the accounting
basis for those assets as of January 1, 2007.
The
determination of the functional currency for the Company's foreign subsidiaries
is made based on the appropriate economic factors. In addition a substantial
portion of the Company's costs are incurred in U.S. dollars. The Company's
management believes that the U.S. dollar is the primary currency of the economic
environment in which it operates. Thus, the Company's functional and reporting
currency and the functional and reporting currency of certain of its
subsidiaries is the U.S. dollar.
Accordingly,
monetary accounts maintained in currencies other than the U.S. dollar are
re-measured into U.S. dollars in accordance with SFAS No. 52 "Foreign Currency
Translation" ("SFAS No. 52"). All gains and losses of the re-measurement of
monetary balance sheet items are reflected in the consolidated statements of
operations as financial income or expenses as appropriate. The Company's
functional currency is US$, the Company's financial records are maintained in
US$, and the Company's financial statements are prepared in US$. The functional
currency of Swiftnet, Equitalk and Story Telecom is GBP, the financial records
of these subsidiaries are maintained in GBP and the financial statements of
these subsidiaries are prepared in GBP. The functional currency of Xfone 018 is
New Israeli Shekels ("NIS"), the financial records of Xfone 018 are maintained
in NIS, and the financial statements of Xfone 018 are prepared in
NIS.
Foreign
currency transactions during the period are translated into each company's
denominated currency at the exchange rates ruling at the transaction dates.
Gains and losses resulting from foreign currency transactions are included in
the consolidated statement of operations. Assets and liabilities denominated in
foreign currencies at the balance sheet date are translated into each company's
denominated currency at period-end exchange rates. All exchange differences are
dealt with in the consolidated statements of operations. The financial
statements of the Company's operations based outside of the United States have
been translated into US$ in accordance with SFAS No. 52. When translating
functional currency financial statements into US$, period-end exchange rates are
applied to the consolidated balance sheets, while average period rates are
applied to consolidated statements of operations. Translation gains and losses
are recorded in translation reserve as a component of shareholders'
equity.
Xfone,
Inc. and Subsidiaries
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
(Unaudited)
|
Note
2 - Significant Accounting Policies (Cont.)
Accounts
receivable are recorded at net realizable value consisting of the carrying
amount less the allowance for uncollectible accounts.
The
Company uses the allowance method to account for uncollectible accounts
receivable balances. Under the allowance method, estimate of uncollectible
customer balances is made using factors such as the credit quality of the
customer and the economic conditions in the market. An allowance for doubtful
accounts is determined with respect to those amounts that the Company has
determined to be doubtful of collection. When an account balance is past due and
attempts have been made to collect the receivable through legal or other means
the amount is considered uncollectible and is written off against the allowance
balance.
Accounts
receivable are presented net of an allowance for doubtful accounts of $1,860,368
and $1,090,572 at June 30, 2008 and December 31, 2007,
respectively.
|
D.
|
Other
Intangible Assets
|
Other
intangible assets with determinable lives consist of license to provide
communication services in Israel and are amortized over the 20 year term of the
license.
Customer
relations and trade name related to mergers and acquisitions are amortized over
a period between 2-13 years from the date of the purchase.
Long term
assets are include $1,682,334 and $1,753,503 of net Bonds issuance cost, net in
June 30, 2008 and December 31, 2007, respectively.
Bonds
issuance cost is amortized over a period of 8 years from the date of
issuance.
Basic
earning per share (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.
|
G.
|
Stock-Based
Compensation
|
Effective
the beginning of the first quarter of fiscal year 2006, the Company adopted the
provisions of SFAS 123R using the modified prospective transition method. Under
this method, prior periods are not restated. The Company use the Black-Scholes
option pricing model which requires extensive use of accounting judgment and
financial estimates, including estimates of the expected term participants will
retain their vested stock options before exercising them, the estimated
volatility of its common stock price over the expected term, and the number of
options that will be forfeited prior to the completion of their vesting
requirements. Application of alternative assumptions could produce significantly
different estimates of the fair value of stock-based compensation and
consequently, the related amounts recognized in the Consolidated Statements of
Operations. The provisions of SFAS 123R apply to new stock options and stock
options outstanding, but not yet vested, on the date the Company adopted SFAS
123R. Stock-based compensation expense was included in applicable departmental
expense categories in the Consolidated Statements of Operations.
|
H.
|
Goodwill
and Indefinite- Lived Purchased Intangible
Assets
|
SFAS No.
142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), establishes a
method of testing goodwill and other indefinite-lived intangible assets for
impairment on an annual basis or on an interim basis if an event occurs or
circumstances change that would reduce the fair value of a reporting unit below
its carrying value. The Company’s assessments involve determining an estimate of
the fair value of the Company’s reporting units in order to evaluate whether an
impairment of the current carrying amount of goodwill and other indefinite-lived
assets exists. The first step of the goodwill impairment test, used to identify
potential impairment, compares the fair value of a reporting unit with its
carrying amount, including goodwill. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is not considered
impaired, and thus the second step of the impairment test is unnecessary. If the
carrying amount of a reporting unit exceeds its fair value, the second step of
the goodwill impairment test is performed to measure the amount of impairment
loss, if any. Fair values are derived based on an evaluation of past and
expected future performance of the Company’s reporting units. A reporting unit
is an operating segment or one level below an operating segment. A component of
an operating segment is a reporting unit if the component constitutes a business
for which discrete financial information is available and the Company’s
executive management team regularly reviews the operating results of that
component. In addition, the Company combines and aggregates two or more
components of an operating segment as a single reporting unit if the components
have similar economic characteristics. The Company’s reportable segments under
the guidance of SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information,” are its reporting units.
Xfone,
Inc. and Subsidiaries
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
(Unaudited)
|
|
Note
2 - Significant Accounting Policies (Cont.)
The
second step of the goodwill impairment test, used to measure the amount of
impairment loss, compares the implied fair value of the reporting unit goodwill
with the carrying amount of that goodwill. If the carrying amount of the
reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess. The loss
recognized cannot exceed the carrying amount of goodwill. The implied fair value
of goodwill is determined in the same manner as the amount of goodwill
recognized in a business combination is determined. The Company allocates the
fair value of a reporting unit to all of the assets and liabilities of that unit
(including any unrecognized intangible assets) as if the reporting unit had been
acquired in a business combination and the fair value of the reporting unit was
the price paid to acquire the reporting unit. The excess of the fair value of a
reporting unit over the amounts assigned to its assets and liabilities is the
implied fair value of goodwill.
The
Company utilizes the discounted cash flow approach when determining the fair
value of each reporting unit as part of its annual assessments. As stated above,
goodwill is tested for impairment on an annual basis and more often if
indications of impairment exist. The results of the Company’s analysis indicated
that no reduction in the carrying amount of goodwill was required.
Certain
prior period balances in the consolidated balance sheets and statement of cash
flows were reclassified to appropriately present amounts of purchased goodwill
and net cash used in operating activities and net cash used in financing
activities and effect of exchange rate changes on cash and cash equivalents. The
reclassification had no effect on previously reported net income and
shareholders' equity.
The
Company was incorporated in Nevada, U.S.A. in September 2000 and is a provider
of voice, video and data telecommunications services, including: local, long
distance and international telephony services; video; prepaid and postpaid
calling cards; cellular services; Internet services; messaging services
(Email/Fax Broadcast, Email2Fax and Cyber-Number); and reselling opportunities,
with operations in the United States, the United Kingdom and Israel. The interim
condensed consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information, including
note disclosures, normally included in financial statements which are prepared
in accordance with accounting principles generally accepted in the United States
of America ('US GAAP') has been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures
included are adequate to make the information presented not
misleading.
In
management’s opinion, the condensed consolidated balance sheet as of
June 30, 2008 (unaudited) and December 31, 2007 (audited), the
unaudited condensed consolidated statements of operations for the three and six
months ended June 30, 2008 and 2007, and the unaudited condensed
consolidated statements of cash flows for the six months ended June 30,
2008 and 2007, contained herein, reflect all adjustments, consisting solely of
normal recurring items, which are necessary for the fair presentation of our
financial position, results of operations and cash flows on a basis consistent
with that of our prior audited consolidated financial statements. However, the
results of operations for the interim periods may not be indicative of results
to be expected for the full fiscal year. Therefore these financial
statements should be read in conjunction with the audited financial statements
and notes thereto and summary of significant accounting policies included in the
Company’s Form 10-K, as amended, for the year ended December 31,
2007.
The
Company and its subsidiaries account for income taxes in accordance with
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes" ('SFAS 109'). This statement prescribes the use of the liability method,
whereby deferred tax asset and liability account balances are determined based
on differences between financial reporting and tax base of assets and
liabilities and are measured using the enacted tax rates that will be in effect
when the differences are expected to reverse. The Company and its subsidiaries
provide a valuation allowance, if necessary, to reduce deferred tax assets to
their estimated realizable value.
Xfone,
Inc. and Subsidiaries
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
(Unaudited)
|
Note
3 - Capital Structure, stock options, warrants
On
February 26, 2008, the Company completed the issuance of 800,000 Units (as
defined below) to XFN-RLSI Investments, LLC, an entity affiliated with Richard
L. Scott Investments, LLC, a U.S. institutional investor, and 500,000 Units to
certain investors affiliated with or who are customers of Gagnon Securities LLC,
pursuant to Subscription Agreements entered into with each of the investors on
December 13, 2007. Each “Unit” consists of two shares of the
Company’s Common Stock and one warrant to purchase one share of Common Stock,
exercisable for a period of five years from the date of issuance at an exercise
price of $3.10 per share. The Units were sold at a price of $6.20 per
Unit, for an aggregate purchase price of $8,060,000.
In
connection with the closing of the acquisition on February 26, 2008, the Company
issued 2,366,892 shares of the Company’s Common Stock to certain NTS
Shareholders who elected to reinvest all or a portion of their allocable sale
price in the Company’s Common Stock, pursuant to the terms of the NTS Purchase
Agreement. The Company’s Board of Directors determined, in accordance
with the Purchase Agreement, the number of shares of the Company’s Common Stock
to be delivered to each participating NTS Shareholder by dividing the portion of
such NTS Shareholder’s allocable sale price that the NTS Shareholder elected to
receive in shares of the Company’s Common Stock by 93% of the average closing
price of the Company’s Common Stock on the American Stock Exchange for the ten
consecutive trading days preceding the trading day immediately prior to the
Closing Date (i.e., $2.74). The aggregate sales price reinvested by
all such NTS Shareholders was $6,485,284.
On March
25, 2008, the Company issued the holders of the Bonds, for no additional
consideration, 956,020 (non-tradable) warrants, each exercisable at an exercise
price of $3.50 with a term of 4 years.
On April
7, 2008, Rafael Dick, the former Managing Director of the Company's Israeli
subsidiary Xfone 018 Ltd. exercised 4,105 of his outstanding options under the
Company's 2004 Stock Option Plan, at an exercise price of $3.50 per
share.
In 2006,
in conjunction with the consummation of the merger and in exchange for all of
the capital stock of I-55 Internet Services, we issued a total of 789,863 shares
of our Common Stock valued at $2,380,178 and 603,939 warrants exercisable for a
period of five years into shares of our Common Stock, with an exercise price of
$3.31, valued based on the Black Scholes option-pricing model (the “Xfone Stock
and Warrant Consideration”). A portion of the Xfone Stock and Warrant
Consideration issued at closing was placed in an escrow account, to be held
pending certain adjustments. The Company subsequently made the following
two claims against such escrow account: Claim #1: The Company made a claim
on March 27, 2007 to adjust the total consideration based upon the changes in
customer billings as determined pursuant to a formula set forth in the First
Amendment to the Merger Agreement (the “Customer Billing Adjustment Amount”),
which the Company had determined was $247,965.57. Claim #2: The Company
determined an undisclosed liability, in accordance with Article 6.03 of the I-55
Internet Services, Inc. Merger Agreement (as amended), in the amount of $147,550
and on November 28, 2006, sent a claim for this amount. The Shareholder
Representatives of I-55 Internet Services disputed the amounts in both claims
submitted and so the parties entered into negotiations on May 2, 2007, where
they agreed to reduce the amount claimed in Claim #1 by $104,948.46, which
represents adjustments made to the 90-Day column, Trade Accounts, and certain
accounts that had previously been listed as having 90-Day balances but were
subsequently confirmed as not having 90-Day balances, and by the final amount
billed to EBI Comm, Inc. (“EBI”) in 2005 prior to the assets of EBI being
purchased by Xfone USA, and agreed to reduce the original Loss amount claimed in
Claim #2 by $6,800.00, representing additional services purchased with Zipa,
Inc. under the direction of Xfone USA during the Management Agreement period
from October 2005 through March 2006. Upon settlement of the claims, two Joint
Deposition Notices for the escrow agent, Trustmark National Bank, were delivered
to the Shareholder Representatives of I-55 Internet Services for execution,
however, a Shareholder Representative refused to execute the notices pending
approval of the claims by the shareholders of I-55 Internet Services. On
June 7, 2007, the shareholders met and rejected the figure agreed upon with
respect to Claim #1 and accepted the figure agreed upon with respect to Claim
#2. On or about May 12, 2008, after further negotiations, Xfone USA and
I-55 agreed to value Claim #1 at $143,017.11 and Claim #2 at $140,750.00 for a
total agreed loss of $283,767.11. This resulted in the Company’s receipt
of 62,850 shares of Xfone Common Stock and 44,470 Xfone Stock Warrants from
the Escrow Account in satisfaction of these claims (the “Returned Xfone
Stock and Warrant Consideration”) and the balance of the Xfone Common Stock and
Xfone Stock Warrants remaining in the Escrow Account was distributed to the
selling I-55 Internet shareholders and the escrow account was closed out on June
16, 2008. The components of the Returned Xfone Stock and Warrant Consideration
were cancelled by the Company on June 3, 2008.
Xfone,
Inc. and Subsidiaries
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
(Unaudited)
|
Note 3
- Capital Structure, stock options, warrants (Cont.)
|
|
Six
months ended
June
30, 2008
|
|
|
|
Number
of options
|
|
|
Weighted
average exercise price
|
|
Options
outstanding at the beginning of the period (a)
|
|
|
5,715,000
|
|
|
$
|
3.65
|
|
Granted
(b)
|
|
|
1,851,000
|
|
|
$
|
3.75
|
|
Exercised
|
|
|
(4,105
|
)
|
|
$
|
3.50
|
|
Forfeited
|
|
|
(1,195,895
|
)
|
|
$
|
4.34
|
|
Options
outstanding at the end of the period
|
|
|
6,366,000
|
|
|
$
|
3.55
|
|
|
|
|
|
|
|
|
|
|
Options
vested and exercisable
|
|
|
4,644,688
|
|
|
$
|
2.71
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options granted
|
|
|
|
|
|
$
|
1.24
|
|
(a)
Include options under contractual obligation as specified in note 3A,
below.
(b)
Include options under contractual obligation as specified in note 3B,
below.
The
following table summarizes information about options outstanding and exercisable
at June 30, 2008:
|
|
Range
price ($)
|
Number
of options
|
Weighted
average remaining contractual life (years)
|
Weighted
average exercise price
|
|
|
|
|
2.794-5.00
|
4,644,688
|
3.50
|
$2.71
|
(a)
Include options under contractual obligation as specified in note 3A-B,
below.
A.
|
On
August 26, 2007, the Company entered into a contractual obligation to
grant the General Manager of Xfone 018 the following number of options to
purchase shares of the Company’s common stock, $0.001 par value per share
(“Common Stock”), under the Company’s 2007 Stock Incentive
Plan (the “Plan”):
|
|
|
i.
|
Within
30 days of adoption of the Plan, the Company will grant options to
purchase 300,000 shares of Common Stock, at an exercise price of $3.50 per
share, of which (i) options to purchase 75,000 shares will vest on August
26, 2008; and (ii) options to purchase 18,750 shares will be vest at the
end of every 3 month period thereafter.
|
|
|
ii.
|
At
the end of each calendar year between 2008 and 2011, and upon the
achievement by Xfone 018 100% of its Targets (as determined in the General
Manager's employment agreement) for each such year, the General Manager of
Xfone 018 will be granted options to purchase 25,000 shares of the
Company’s Common Stock under the Plan, for an exercise price of $3.50 per
share, which will be exercisable 30 days after the Company publishes its
annual financial statements for such
year.
|
The
options will expire 120 days after termination of employment with Xfone
018.
Xfone,
Inc. and Subsidiaries
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
(Unaudited)
|
Note 3
- Capital Structure, stock options, warrants (Cont.)
B.
|
On
February 26, 2008, NTS Communications, Inc. entered into Employment
Agreements with each of Barbara Baldwin, who, prior to the closing, served
as NTS’ President and CEO, Jerry Hoover, who, prior to the closing, served
as NTS’ Executive Vice President - Chief Financial Officer, and Brad
Worthington, who, prior to the closing, served as NTS’ Executive Vice
President - Chief Operating Officer (each an “Officer,” and collectively
the “Officers”). The Employment Agreements provide for
continued employment of the Officers with NTS in their respective
capacities, and are for five-year terms each, effective as of the Closing
Date.
Pursuant to the terms of the Employment
Agreements, the Officers were granted the following stock option awards
under the Company’s 2007 Stock Incentive Plan on the Closing Date: Ms.
Baldwin was granted options to purchase 250,000 shares of the Company’s
Common Stock, and each of Messrs. Hoover and Worthington was granted
options to purchase 400,000 shares of the Company’s Common
Stock. Each option is immediately exercisable, expires five
years from the grant date, and has an exercise price of
$2.794. The total value of the options, based on Black-Scholes
option pricing model is $1,412,507. Additionally, at the end of each
Officer’s second year employment, the officer will be granted options
to purchase 267,000 shares of the Company’s Common Stock, which will be
immediately exercisable at $5.00 per share, and will expire five years
from such grant date. The total value of the options, based on
Black-Scholes option-pricing-model is
$882,316.
|
|
|
Six
months ended
June
30, 2008
|
|
|
|
Number
of Warrants
|
|
|
Weighted
average exercise price
|
|
Warrants
outstanding at the beginning of the period
|
|
|
6,104,159
|
|
|
$
|
3.72
|
|
Granted
|
|
|
956,020
|
|
|
$
|
3.5
|
|
Forfeited
|
|
|
(44,470
|
)
|
|
$
|
3.31
|
|
Warrants
outstanding at the end of the period
|
|
|
7,015,709
|
|
|
$
|
|
|
Xfone,
Inc. and Subsidiaries
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
(Unaudited)
|
Note 4
- Segment Information
Geographical
segments
|
|
Six
months ended
|
|
|
Three
months ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
$
|
9,520,525
|
|
|
$
|
12,574,190
|
|
|
$
|
4,713,101
|
|
|
$
|
6,478,252
|
|
United
States
|
|
|
27,470,618
|
|
|
|
6,610,958
|
|
|
|
18,763,114
|
|
|
|
3,191,865
|
|
Israel
|
|
|
4,654,677
|
|
|
|
3,968,374
|
|
|
|
2,376,507
|
|
|
|
1,959,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
41,645,820
|
|
|
|
23,153,522
|
|
|
|
25,852,722
|
|
|
|
11,629,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
3,525,538
|
|
|
|
5,751,199
|
|
|
|
1,826,414
|
|
|
|
2,871,329
|
|
United
States
|
|
|
15,591,329
|
|
|
|
3,145,489
|
|
|
|
10,603,460
|
|
|
|
1,551,663
|
|
Israel
|
|
|
1,900,394
|
|
|
|
1,426,555
|
|
|
|
931,114
|
|
|
|
707,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cost of revenues
|
|
|
21,017,261
|
|
|
|
10,323,243
|
|
|
|
13,360,988
|
|
|
|
5,130,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
5,994,987
|
|
|
|
6,822,991
|
|
|
|
2,886,687
|
|
|
|
3,606,923
|
|
United
States
|
|
|
11,879,289
|
|
|
|
3,465,469
|
|
|
|
8,159,654
|
|
|
|
1,640,202
|
|
Israel
|
|
|
2,754,283
|
|
|
|
2,541,819
|
|
|
|
1,445,393
|
|
|
|
1,252,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,628,559
|
|
|
|
12,830,279
|
|
|
|
12,491,734
|
|
|
|
6,499,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
4,481,117
|
|
|
|
5,834,126
|
|
|
|
2,377,073
|
|
|
|
3,011,607
|
|
United
States
|
|
|
10,159,870
|
|
|
|
3,129,573
|
|
|
|
6,704,701
|
|
|
|
1,602,168
|
|
Israel
|
|
|
1,962,378
|
|
|
|
1,314,942
|
|
|
|
1,038,247
|
|
|
|
655,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,603,365
|
|
|
|
10,278,641
|
|
|
|
10,120,021
|
|
|
|
5,269,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
1,513,870
|
|
|
|
988,865
|
|
|
|
509,614
|
|
|
|
595,316
|
|
United
States
|
|
|
1,719,419
|
|
|
|
335,896
|
|
|
|
1,454,953
|
|
|
|
38,034
|
|
Israel
|
|
|
791,905
|
|
|
|
1,226,877
|
|
|
|
407,146
|
|
|
|
596,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,025,194
|
|
|
|
2,551,638
|
|
|
|
2,371,713
|
|
|
|
1,230,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses related to the Headquarters in the US
|
|
|
983,407
|
|
|
|
1,074,391
|
|
|
|
474,392
|
|
|
|
448,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit
|
|
$
|
3,041,787
|
|
|
$
|
1,477,247
|
|
|
$
|
1,897,321
|
|
|
$
|
781,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xfone,
Inc. and Subsidiaries
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
(Unaudited)
|
Note 5 – Potential
acquistions
An
agreement in principle to acquire a majority stake in Tadiran Telecom -
Communication Services In Israel LP.
On March 17, 2008, Xfone 018 entered into an Agreement of Principles
with Tiv Taam Holdings 1 Ltd., an Israeli public company (“Tiv Taam”), pursuant
to which Xfone 018 agreed to purchase from Tiv Taam, and Tiv Taam agreed to sell
to Xfone 018, approximately 89% of the outstanding share capital (approximately
69% of its fully diluted share capital) of Robomatix Technologies Ltd.
(“Robomatix”) which Tiv Taam currently owns (the “Agreement of
Principles”). Robomatix owns approximately 90% of the issued share
capital of Tadiran Telecom-Communication Services In Israel Ltd. (“Tadiran
Telecom”), which is the general partner of Tadiran Telecom-Communication
Services In Israel – Limited Partnership (“Tadiran Telecom LP”), an Israeli
entity dealing with the distribution, maintenance, assistance services and sale
of switchboards for the business community in Israel. Accordingly,
upon consummation of the acquisition, Xfone 018 will also acquire control over
Tadiran Telecom and Tadiron Telecom LP. Pursuant to the Agreement of
Principles, the purchase price for the acquisition is NIS 44,000,000
(approximately $12,418,854), subject to adjustment as set forth in the
agreement, payable in three installments, as follows:
·
|
On
the closing date, NIS 15,500,000 (approximately $4,374,824) (the “First
Installment”);
|
·
|
By
November 20, 2008, NIS 15,500,000 (approximately $4,374,824), subject to
adjustment resulting from linkage to the Consumer Price
Index (the “Second Installment”);
and
|
·
|
By
November 1, 2009, NIS 13,000,000 (approximately $3,669,207), subject to
adjustment resulting from linkage to the Consumer Price Index (the
“Third Installment”).
|
Xfone 018
will have all rights as a shareholder of Robomatix upon closing of the
acquisition and payment of the First Installment.
Pursuant
to the Agreement of Principles, we, as the parent company of Xfone 018, have
agreed to sign a letter of guarantee with respect to the Second Installment and
the Third Installment.
As of the
date of this filing, negotiations between Xfone 018, Tiv Taam and the management
and employees of Tadiran Telecom LP have not been exhausted. There is no
assurance that the transaction will be successfully concluded.
Note
6 - MCI WorldCom Limited (Currently Operating as “Verizon
Business”)
Swiftnet
Limited, the Company’s wholly-owned U.K. based subsidiary, was served with a
claim on October 11, 2005 that was filed by MCI WorldCom Limited (currently
operating as Verizon UK Limited) (“MCI”) in an English court for the sum of
£1,640,440 ($3,188,687) plus interest accruing at a daily rate of £401 ($779)
which at the date of claim had amounted to £92,317 ($179,445). MCI’s claim
was for telecommunication services provided to Swiftnet. Swiftnet had been in
dispute with MCI regarding amounts due to MCI for telecommunications services
provided by MCI to Swiftnet. Swiftnet alleged that the disputed charges
were improperly billed by MCI and therefore MCI should credit Swiftnet for a
certain amount of the claim. A substantial element of Swiftnet’s counterclaim
for credits was based upon special rates agreed verbally by Swiftnet and MCI,
which were not applied by MCI in its invoices. Swiftnet pleaded a
counterclaim and that £275,574 ($535,660) owed in relation to traffic terminated
through the Company’s network in Israel should be deducted.
On March
19, 2008, the Judge handed down judgment in this dispute and awarded £1,278,942
($2,486,007) plus legal costs and interest in favor of MCI. Our financial
statements carried the full amount Swiftnet calculated that it owed to MCI based
on the data held in Swiftnet’s billing systems. The net effect of this judgment
was that Swiftnet’s costs were increased by £705,645 ($1,371,632), plus MCI’s
legal costs and interest payable. This change in costs was reflected in Swiftnet
and the Company’s financial statements for 2007, and legal costs and interest
were accrued for accordingly.
On April
15, 2008, MCI and Swiftnet agreed that Swiftnet would pay MCI a total of
£1,679,515.71 ($3,264,642.63) inclusive of all taxes, costs and any interest and
payments due from MCI to Swiftnet for Israeli traffic, through January 31, 2008.
The net effect of this agreement was a reduction to the MCI
accrual.
As of the
date of this report, Swiftnet has fully paid its obligations in connection with
the MCI litigation.
NTS
COMMUNICATIONS, INC.
AND
SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
YEARS
ENDED JULY 31, 2007 AND 2006
|
Page
|
|
|
|
B-60
|
|
|
Financial
statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary
information
|
|
|
|
|
|
|
|
|
|
|
|
|
B-81
|
INDEPENDE
NT AUDITOR’S
REPORT
The Board
of
Directors
NTS
Communications, Inc. and Subsidiaries
Lubbock,
Texas
We have
audited the accompanying consolidated balance sheets of NTS Communications, Inc.
and subsidiaries as of July 31, 2007 and 2006 and the related consolidated
statements of income, stockholders’ equity and cash flows for the 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 audit.
We
conducted our audit 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 and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of NTS Communications, Inc., and
subsidiaries as of July 31, 2007 and 2006, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles in the United States of America.
Our audit
was conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supplementary information presented
in the accompanying schedules is presented for purposes of additional analysis
and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements as a
whole.
Phillips
& Associates, CPA’s
CERTIFIED
PUBLIC ACCOUNTANTS
SEPTEMBER
17, 2007
NTS
COMMUNICATIONS, INC. AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
JULY 31,
2007 AND 2006
ASSETS
|
|
2007
|
|
|
2006
|
|
Current
a
sse
ts
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
6,635,181
|
|
|
$
|
5,387,759
|
|
Accounts receivable -
trade
|
|
|
3,041,221
|
|
|
|
3,039,745
|
|
Allowance for bad
debts
|
|
|
(202,735
|
)
|
|
|
(216,181
|
)
|
Other receivables
|
|
|
224,550
|
|
|
|
221,864
|
|
Unbilled revenue
|
|
|
1,399,650
|
|
|
|
1,776,210
|
|
Prepaid expenses
|
|
|
664,082
|
|
|
|
723,248
|
|
Accrued interest
|
|
|
251
|
|
|
|
142,940
|
|
Inventory
|
|
|
508,042
|
|
|
|
605,811
|
|
Deferred tax
benefit
|
|
|
1,154,897
|
|
|
|
237,265
|
|
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
|
13,425,139
|
|
|
|
11,918,661
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
4,998
|
|
|
|
639,958
|
|
|
|
|
|
|
|
|
|
|
Property,
equipment and improvements
|
|
|
100,700,076
|
|
|
|
97,394,616
|
|
Less accumulated depreciation
& amortization
|
|
|
(72,327,212
|
)
|
|
|
(68,536,765
|
)
|
|
|
|
28,372,864
|
|
|
|
28,857,851
|
|
Property, equipment and
improvements in
|
|
|
|
|
|
|
|
|
development
|
|
|
838,345
|
|
|
|
1,206,023
|
|
|
|
|
|
|
|
|
|
|
Total property, equipment and
improvements
|
|
|
29,211,209
|
|
|
|
30,063,874
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
|
|
|
|
Note receivable – Shareholder
Value, Ltd.
|
|
|
-
|
|
|
|
1,983,192
|
|
Goodwill
|
|
|
5,686,997
|
|
|
|
5,686,997
|
|
Less amortization of
goodwill
|
|
|
(1,278,809
|
)
|
|
|
(1,278,809
|
)
|
Deferred tax
benefit
|
|
|
-
|
|
|
|
438,403
|
|
Other assets
|
|
|
23,717
|
|
|
|
29,406
|
|
|
|
|
|
|
|
|
|
|
Total other
assets
|
|
|
4,431,905
|
|
|
|
6,859,189
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
47,073,251
|
|
|
$
|
49,481,682
|
|
The
accompanying notes are an integral part of these statements.
NTS
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
JULY 31,
2007 AND 2006
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
2007
|
|
|
2006
|
|
Current
liab
iliti
es
|
|
|
|
|
|
|
Accounts payable – trade and
carrier charges
|
|
$
|
2,445,915
|
|
|
$
|
3,000,197
|
|
Note payable
|
|
|
-
|
|
|
|
1,155,365
|
|
Current maturities of long-term
debt
|
|
|
445,397
|
|
|
|
693,258
|
|
Accrued other
liabilities
|
|
|
2,131,113
|
|
|
|
2,187,241
|
|
Deferred revenues
|
|
|
898,469
|
|
|
|
844,591
|
|
Customer deposits
|
|
|
50,142
|
|
|
|
50,047
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
5,971,036
|
|
|
|
7,930,699
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
Long-term debt, less current
portion
|
|
|
421,432
|
|
|
|
764,999
|
|
Deferred income
taxes
|
|
|
1,501,474
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total long-term
liabilities
|
|
|
1,922,906
|
|
|
|
764,999
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
7,893,942
|
|
|
|
8,695,698
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Common stock, no par value,
authorized
|
|
|
|
|
|
|
|
|
11,000,000 shares, 1,962,029
shares issued
|
|
|
|
|
|
|
|
|
in 2007 and 2006
|
|
|
4,959,938
|
|
|
|
4,959,938
|
|
Additional paid-in
capital
|
|
|
1,814,620
|
|
|
|
1,814,620
|
|
Retained earnings –
unrestricted
|
|
|
55,149,546
|
|
|
|
56,756,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,924,104
|
|
|
|
63,530,779
|
|
|
|
|
|
|
|
|
|
|
Treasury stock at cost, 702,878
shares in 2007
|
|
|
|
|
|
|
|
|
and 2006
|
|
|
(22,744,795
|
)
|
|
|
(22,744,795
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’
equity
|
|
|
39,179,309
|
|
|
|
40,785,984
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
47,073,251
|
|
|
$
|
49,481,682
|
|
The
accompanying notes are an integral part of these statements.
NTS COMMUNICAT
IO
NS
, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
YEARS
ENDED JULY 31, 2007 AND 2006
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Revenues
earned
|
|
$
|
67,421,984
|
|
|
$
|
67,340,912
|
|
|
|
|
|
|
|
|
|
|
Cost
of communication services
|
|
|
42,348,164
|
|
|
|
43,579,013
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
25,073,820
|
|
|
|
23,761,899
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
23,676,789
|
|
|
|
24,410,455
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
operations
|
|
|
1,397,031
|
|
|
|
(648,556
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
382,364
|
|
|
|
401,805
|
|
Building lease
|
|
|
779,777
|
|
|
|
695,140
|
|
Other income
|
|
|
63,749
|
|
|
|
88,182
|
|
Gain on sale of
assets
|
|
|
23,696
|
|
|
|
11,031
|
|
Gain on sale of
investments
|
|
|
410,702
|
|
|
|
-
|
|
Interest expense
|
|
|
(141,750
|
)
|
|
|
(183,779
|
)
|
|
|
|
|
|
|
|
|
|
Total other income
(expenses)
|
|
|
1,518,538
|
|
|
|
1,012,379
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
before income
taxes
|
|
|
2,915,569
|
|
|
|
363,823
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
1,022,245
|
|
|
|
140,681
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,893,324
|
|
|
$
|
223,142
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements.
NTS
COMMUNICATIONS,
INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS
ENDED JULY 31, 2007 AND 2006
|
|
Common
Stock
|
|
|
Additional
Paid-In Capital
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Total
Stock-holders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
July 31, 2005
|
|
$
|
4,959,938
|
|
|
$
|
1,814,620
|
|
|
$
|
56,533,079
|
|
|
$
|
(22,744,795
|
)
|
|
$
|
40,562,842
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
223,142
|
|
|
|
-
|
|
|
|
223,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
July 31, 2006
|
|
|
4,959,938
|
|
|
|
1,814,620
|
|
|
|
56,756,221
|
|
|
|
(22,744,795
|
)
|
|
|
40,785,984
|
|
Dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,499,999
|
)
|
|
|
-
|
|
|
|
(3,499,999
|
)
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
1,893,324
|
|
|
|
-
|
|
|
|
1,893,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
July 31, 2007
|
|
$
|
4,959,938
|
|
|
$
|
1,814,620
|
|
|
$
|
55,149,546
|
|
|
$
|
(22,744,795
|
)
|
|
$
|
39,179,309
|
|
The
accompanying notes are an integral part of these statements
NTS
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEM
ENTS
OF CASH FLOWS
YEARS
ENDED JULY 31, 2007 AND 2006
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
1,893,324
|
|
|
$
|
223,142
|
|
Adjustments
to reconcile net income to net
|
|
|
|
|
|
|
|
|
cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization of
fixed assets
|
|
|
6,084,457
|
|
|
|
6,855,241
|
|
Capitalized
depreciation
|
|
|
90,210
|
|
|
|
82,412
|
|
Increase (decrease) in deferred
taxes
|
|
|
1,022,245
|
|
|
|
140,681
|
|
(Gain) loss on sale or disposal
of assets
|
|
|
(23,696
|
)
|
|
|
(11,031
|
)
|
(Gain) loss on sale of
investments
|
|
|
(410,702
|
)
|
|
|
-
|
|
(Increase)
decrease:
|
|
|
|
|
|
|
|
|
Accounts receivable –
trade
|
|
|
(14,922
|
)
|
|
|
(1,492,338
|
)
|
Other receivables
|
|
|
(2,686
|
)
|
|
|
(160,984
|
)
|
Unbilled revenue
|
|
|
376,560
|
|
|
|
2,149,444
|
|
Accrued interest
|
|
|
142,689
|
|
|
|
(42,049
|
)
|
Prepaid expenses
|
|
|
59,166
|
|
|
|
(296,548
|
)
|
Inventory
|
|
|
97,769
|
|
|
|
(244,568
|
)
|
Other assets
|
|
|
5,689
|
|
|
|
6,406
|
|
Increase
(decrease):
|
|
|
|
|
|
|
|
|
Accounts payable –
trade
|
|
|
(554,282
|
)
|
|
|
(361,670
|
)
|
Customer deposits
|
|
|
95
|
|
|
|
419
|
|
Deferred revenue
|
|
|
53,878
|
|
|
|
(352,408
|
)
|
Accrued other
liabilities
|
|
|
(56,128
|
)
|
|
|
(244,494
|
)
|
Accrued
settlement
|
|
|
-
|
|
|
|
(218,487
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided (used) by operating activities
|
|
|
8,763,666
|
|
|
|
6,033,168
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property, equipment
and improvements
|
|
|
(5,238,717
|
)
|
|
|
(10,062,401
|
)
|
Proceeds from sale of
assets
|
|
|
48,730
|
|
|
|
23,697
|
|
Change in partnership
investment
|
|
|
1,777
|
|
|
|
(2,527
|
)
|
Proceeds from sale of
investments
|
|
|
1,043,885
|
|
|
|
-
|
|
Collection of note
receivable
|
|
|
1,983,192
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided (used) by investing activities
|
|
|
(2,161,133
|
)
|
|
|
(10,041,231
|
)
|
The
accompanying notes are an integral part of these statements.
NTS
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS
ENDED JULY 31, 2007 AND 2006
(Continued)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Principal payments on long-term
debt
|
|
|
(699,747
|
)
|
|
|
(1,556,745
|
)
|
Dividends paid
|
|
|
(3,499,999
|
)
|
|
|
-
|
|
Change in line of credit note
payable
|
|
|
(1,155,365
|
)
|
|
|
1,155,365
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided (used) by financing activities
|
|
|
(5,355,111
|
)
|
|
|
(401,380
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
1,247,422
|
|
|
|
(4,409,443
|
)
|
Cash/Cash
equivalents, beginning of year
|
|
|
5,387,759
|
|
|
|
9,797,202
|
|
|
|
|
|
|
|
|
|
|
Cash/Cash
equivalents, end of year
|
|
$
|
6,635,181
|
|
|
$
|
5,387,759
|
|
|
|
|
|
|
|
|
|
|
Supplementary
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
141,750
|
|
|
$
|
183,779
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non
cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment acquired by issuance of
long-term debt
|
|
$
|
108,319
|
|
|
$
|
416,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these statements.
NTS
COMMUNICATIONS,
IN
C. AND SUBSIDIARIES
NOTES TO
CON
SOLI
DATED FINANCIAL STATEMENTS
YEARS
ENDED JULY 31, 2007 AND 2006
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of
Company
NTS
Communications, Inc. (NTS) and its wholly owned subsidiaries provide
telecommunication services which are primarily engaged in selling or reselling
long distance telephone service and providing local telephone, internet and
video services to the general public, both commercial and
residential. These services are mainly provided within the
continental United States with a concentration in the Southwestern United
States.
NTS
Communications, Inc. is a consolidated subsidiary of its majority-owned
stockholder Telephone Electronics Corporation.
Principles of
consolidation
The
financial statements include the consolidated accounts of NTS Communications,
Inc. and its four wholly-owned subsidiaries, Garey M. Wallace Company, Inc. dba
GMW Company (inactive), NTS Properties, L.C., NTS Management Company, L.L.C.,
and NTS Construction Company. All significant intercompany
transactions have been eliminated in the consolidated financial
statements.
Revenue
recognition
Revenues
for long distance services are derived primarily from tolls charged to customers
and to other long distance carriers. Deferred revenues result from
billing for local service in advance. Revenues are recognized as
telecommunication services are provided.
Allowance for bad
debts
An
allowance for bad debts for trade accounts receivable is computed on the reserve
method and is considered adequate to absorb potential losses. Trade
receivables are charged off when management believes, after considering economic
conditions, business conditions and collection efforts, that the collection of
the account is doubtful.
Unbilled
revenue
Unbilled
revenue represents units of service provided by the Company prior to the end of
the fiscal year, but not included in accounts receivable due to the timing of
routine billing cycles. Each month’s unbilled revenue is converted to
accounts receivable by the end of the following month.
NTS
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JULY 31, 2007 AND 2006
(Continued)
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES,
Continued
|
Inventory
Inventories
consist primarily of telephone equipment and are stated at cost using the
first-in, first-out method.
Cash
equivalents
For
purposes of the consolidated statements of cash flows, cash equivalents include
all temporary cash investments with maturities of three months or
less.
Notes Receivable and
Allowance for Note Losses
Notes
receivable are stated at unpaid principal balances, less an allowance, if deemed
necessary, for note losses. Interest on notes is recognized over the
term of the note and is calculated using the simple-interest method on principal
amounts outstanding.
Notes are
placed on nonaccrual when management believes, after considering economic
conditions, business condition, and collection efforts, that the notes are
impaired or collection of interest is doubtful. Uncollectible
interest previously accrued is charged off, or an allowance is established by a
charge to interest income. Interest income on nonaccrual notes is
recognized only to the extent cash payments are received.
Property, equipment and
improvements
Communication
systems and other property and equipment are recorded at
cost. Maintenance, repairs and minor renewals are expensed as
incurred. Betterments and improvements which substantially increase the useful
lives of existing assets are capitalized. When properties are retired
or otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts and any profit or loss is credited or
charged to income.
Depreciation
and amortization are calculated using the straight-line method over the
estimated service lives of assets.
Long-lived
Assets
The
Company evaluates long-lived assets for impairment using a discounted cash flows
method whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. There was no impairment
charged to expense during fiscal years ended July 31, 2007 and
2006.
NTS
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JULY 31, 2007 AND 2006
(Continued)
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICES, Continued
Goodwill
Goodwill
represents the excess cost of companies acquired over the fair value of their
identifiable net assets at the date of acquisition. Goodwill is not
amortized pursuant to Financial Accounting Standards No. 142. The
fair value of goodwill is estimated annually by using the expected present value
of future cash flows. There was no impairment charged to expense in
2007 and 2006.
Income
taxes
Deferred
income taxes are recorded to reflect the tax consequences on future years of
differences between the tax basis of depreciable assets and their financial
reporting amounts at each year-end. Income taxes of future periods
are calculated using current tax structure, rates, and credits which have been
applied prospectively. Deferred income tax liability results
primarily from the excess of tax over book depreciation and the amortization of
section 197 intangibles for book over tax. Deferred tax asset results
primarily from certain accrued expenses recorded per books not tax deductible
until paid.
Advertising
costs
The
Company expenses the costs of advertising as incurred. Total
advertising costs expensed in 2007 and 2006 were $313,409 and $868,313,
respectively.
Reclassifications
Certain
accounts in the prior-year financial statements have been reclassified for
comparative purposes to conform with the presentation in the current-year
financial statements.
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 reporting
period. Actual results could differ from those
estimates.
NTS
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JULY 31, 2007 AND 2006
(Continued)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Current
portion of employee advances
|
|
$
|
-
|
|
|
$
|
1,360
|
|
Health
insurance refund
|
|
|
-
|
|
|
|
99,601
|
|
Vender
credit receivable
|
|
|
9,079
|
|
|
|
97,554
|
|
Miscellaneous
receivables
|
|
|
1,670
|
|
|
|
3,474
|
|
Receivable
from Shareholder Value Ltd.
|
|
|
26,239
|
|
|
|
19,875
|
|
Sales
tax refund receivable
|
|
|
187,562
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
224,550
|
|
|
$
|
221,864
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Shareholder
Value Ltd.
|
|
$
|
4,998
|
|
|
$
|
6,775
|
|
Land
|
|
|
-
|
|
|
|
633,183
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,998
|
|
|
$
|
639,958
|
|
NTS
Properties, L.C., a wholly owned subsidiary, is the managing partner with a 1%
interest in Shareholder Value, Ltd., a Texas partnership formed to manage
nonresidential real estate.
NTS
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JULY 31, 2007 AND 2006
(Continued)
4.
|
PROPERTY,
EQUIPMENT AND IMPROVEMENTS
|
|
|
|
|
Estimated
|
|
|
|
|
Useful
|
|
|
2007
|
|
|
2006
|
|
Lives
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
440,608
|
|
|
$
|
440,608
|
|
|
Communications
system in service
|
|
|
53,059,478
|
|
|
|
52,043,496
|
|
3-15
years
|
Building
|
|
|
2,100,779
|
|
|
|
2,044,684
|
|
20
years
|
Leasehold
improvements
|
|
|
1,928,760
|
|
|
|
1,923,817
|
|
5-15
years
|
Office
equipment
|
|
|
1,684,976
|
|
|
|
1,892,489
|
|
5-10
years
|
Computer
hardware/software
|
|
|
9,459,519
|
|
|
|
11,283,564
|
|
5- 7
years
|
Construction
equipment
|
|
|
393,915
|
|
|
|
383,064
|
|
5
years
|
Vehicles
|
|
|
883,759
|
|
|
|
911,869
|
|
5
years
|
Data,
telephone and video equipment -
|
|
|
|
|
|
|
|
|
|
fiber
network
|
|
|
2,854,657
|
|
|
|
2,935,684
|
|
3-15
years
|
Capitalized
installation charges
|
|
|
3,422,369
|
|
|
|
3,376,539
|
|
5
years
|
Fiber
optic system
|
|
|
24,471,256
|
|
|
|
20,158,802
|
|
18-20
years
|
|
|
|
|
|
|
|
|
|
|
Total
property, equipment and improvements
|
|
$
|
100,700,076
|
|
|
$
|
97,394,616
|
|
|
|
Total
depreciation and amortization expense on property, equipment and
improvements for the years ended July 31, 2007 and 2006 was $6,084,457 and
$6,855,241, respectively. Total depreciation expense
capitalized for the years ended July 31, 2007 and 2006 was $90,210 and
$82,412, respectively.
|
The
Company has a $3,500,000 revolving line of credit from City Bank. The
note is secured by an assignment of all accounts receivable, with interest equal
to the Wall Street Journal prime, maturing January 2008. As of July
31, 2007, there were no funds advanced against this line of
credit. At July 31, 2006, the total amount advanced on this line of
credit was $1,155,365.
NTS
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JULY 31, 2007 AND 2006
(Continued)
|
|
2007
|
|
|
2006
|
|
GE
Capital Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note for the purchase of the CLEC
equipment with a face
|
|
|
|
|
|
|
value of $727,276, with monthly
payments of $14,590,
|
|
|
|
|
|
|
including interest at 7.42%
through August, 2006, secured
|
|
|
|
|
|
|
by the purchased
equipment.
|
|
$
|
-
|
|
|
$
|
14,942
|
|
|
|
|
|
|
|
|
|
|
Note for the purchase of equipment
with a face
|
|
|
|
|
|
|
|
|
amount of $108,319, with monthly
payments of $3,468,
|
|
|
|
|
|
|
|
|
including interest at 9.31%
through July, 2010, secured by
|
|
|
|
|
|
|
|
|
the purchased
equipment.
|
|
|
105,728
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Note for the purchase of a DRM
faststart telephone switch
|
|
|
|
|
|
|
|
|
with a face amount of $1,353,202,
payable in monthly
|
|
|
|
|
|
|
|
|
installments of $25,518 including
interest at 4.970% through
|
|
|
|
|
|
|
|
|
September, 2007, secured by the
purchased equipment.
|
|
|
50,727
|
|
|
|
346,475
|
|
|
|
|
|
|
|
|
|
|
Note for the purchase of equipment
with a face value of $62,835,
|
|
|
|
|
|
|
|
|
with monthly payments of $1,232,
including interest at 9.30%
|
|
|
|
|
|
|
|
|
through April, 2011, secured by
the purchased equipment.
|
|
|
50,390
|
|
|
|
59,822
|
|
|
|
|
|
|
|
|
|
|
GE
Commercial Finance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note for the purchase of equipment
with a face value of $256,219,
|
|
|
|
|
|
|
|
|
with monthly payments of $7,568,
including interest at 9.30%
|
|
|
|
|
|
|
|
|
through March, 2009, secured by
the purchased equipment.
|
|
|
161,615
|
|
|
|
233,655
|
|
|
|
|
|
|
|
|
|
|
City
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note for the purchase of a
tractor, backhoe, trailer, and boring
|
|
|
|
|
|
|
|
|
machine with a face amount of
$126,575, payable in monthly
|
|
|
|
|
|
|
|
|
installments of $2,637, including
interest at 4.25% through
|
|
|
|
|
|
|
|
|
May, 2007, secured by the
purchased equipment.
|
|
|
-
|
|
|
|
26,412
|
|
|
|
|
|
|
|
|
|
|
Note for the purchase of vehicles
with a face value of $73,471,
|
|
|
|
|
|
|
|
|
payable in monthly installments of
$1,677, including interest at
|
|
|
|
|
|
|
|
|
4.49% through May, 2009, secured
by the purchased equipment.
|
|
|
35,333
|
|
|
|
53,403
|
|
|
|
|
|
|
|
|
|
|
Note for the purchase of equipment
with a face amount of
|
|
|
|
|
|
|
|
|
$1,064,230, payable in monthly
installments of $17,750,
|
|
|
|
|
|
|
|
|
plus interest at prime through
April, 2009, secured by the
|
|
|
|
|
|
|
|
|
purchased
equipment.
|
|
|
376,050
|
|
|
|
584,980
|
|
NTS
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JULY 31, 2007 AND 2006
(Continued)
|
6. LONG-TERM
DEBT, Continued
|
|
|
2007
|
|
|
2006
|
|
Note for the purchase of a pickup
with a face amount of $16,628
|
|
|
|
|
|
|
payable in monthly installments of
$509, including interest at
|
|
|
|
|
|
|
6.29% through April, 2009, secured
by the purchased pickup.
|
|
|
10,082
|
|
|
|
15,360
|
|
|
|
|
|
|
|
|
|
|
Note for the purchase of a pickup
with a face amount of $13,000
|
|
|
|
|
|
|
|
|
payable in monthly installments of
$306, including interest at
|
|
|
|
|
|
|
|
|
6.39% through February, 2010,
secured by the purchased pickup.
|
|
|
|
|
|
|
|
|
This note was retired prior to
maturity.
|
|
|
-
|
|
|
|
11,797
|
|
|
|
|
|
|
|
|
|
|
Note for the purchase of a dump
truck with a face amount of
|
|
|
|
|
|
|
|
|
$18,000 payable in monthly
installments of $438, including
|
|
|
|
|
|
|
|
|
interest at 7.75% through
February, 2010, secured by the
|
|
|
|
|
|
|
|
|
purchased dump
truck.
|
|
|
12,258
|
|
|
|
16,376
|
|
|
|
|
|
|
|
|
|
|
Note for the purchase of a pickup
with a face amount of $17,244
|
|
|
|
|
|
|
|
|
payable in monthly installments of
$402, including interest at
|
|
|
|
|
|
|
|
|
5.49% through October, 2009,
secured by the purchased pickup.
|
|
|
10,167
|
|
|
|
14,295
|
|
|
|
|
|
|
|
|
|
|
Note for the purchase of two
pickups with a face amount of
|
|
|
|
|
|
|
|
|
$32,894 payable in monthly
installments of $763, including
|
|
|
|
|
|
|
|
|
interest at 5.49% through August,
2009, secured by the
|
|
|
|
|
|
|
|
|
purchased pickups.
|
|
|
17,960
|
|
|
|
25,230
|
|
|
|
|
|
|
|
|
|
|
CitiCapital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note for the purchase of a
trencher and trailer with a face amount
|
|
|
|
|
|
|
|
|
of $93,800, payable in monthly
installments of $1,849, including
|
|
|
|
|
|
|
|
|
interest at 6.75% through April,
2009, secured by the purchased
|
|
|
|
|
|
|
|
|
equipment and guaranty by NTS
Communications, Inc.
|
|
|
36,519
|
|
|
|
55,510
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
866,829
|
|
|
$
|
1,458,257
|
|
The
aggregate maturities of the long-term debt for the five years ending July 31,
are as follows:
2008
|
|
$
|
445,397
|
|
2009
|
|
|
349,291
|
|
2010
|
|
|
56,638
|
|
2011
|
|
|
15,503
|
|
2012
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
866,829
|
|
NTS
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JULY 31, 2007 AND 2006
(Continued)
Lessee
The
Company is obligated under various operating leases for office facilities and
equipment rooms that expire at various times through 2013. Certain
leases contain contingent rental provisions keyed to the consumer price
index.
Future
minimum lease payments under noncancellable operating leases as of July 31,
2007, for each of the next five years in the aggregate are:
July
31,
|
|
|
Amount
|
|
|
|
|
|
|
|
|
2008
|
|
|
$
|
1,386,871
|
|
2009
|
|
|
|
1,285,334
|
|
2010
|
|
|
|
933,293
|
|
2011
|
|
|
|
786,886
|
|
2012
|
|
|
|
771,714
|
|
Thereafter
|
|
|
|
771,714
|
|
|
|
|
|
|
|
Total
minimum lease payments
|
|
|
$
|
5,935,812
|
|
Rent
expense for operating leases in fiscal years ending 2007 and 2006, was
$1,649,039 and $1,643,743, respectively.
Lessor
NTS
Management Company, L.L.C. (a consolidated subsidiary) is the lessor of the
Metro Tower building located in Lubbock, Texas. The building was acquired in
February, 1997 and has a capitalized amount of $1,661,262 and $1,605,167 with
corresponding accumulated depreciation of $825,955 and $711,907 at July 31, 2007
and 2006, respectively.
Minimum
future rentals to be received on noncancellable leases as of July 31, 2007, for
each of the next five years in the aggregate are:
July
31,
|
|
Amount
|
|
|
|
|
|
2008
|
|
$
|
281,101
|
|
2009
|
|
|
135,200
|
|
2010
|
|
|
51,983
|
|
2011
|
|
|
17,854
|
|
2012
|
|
|
4,000
|
|
|
|
|
|
|
Total
minimum future rentals
|
|
$
|
490,138
|
|
NTS
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JULY 31, 2007 AND 2006
(Continued)
The
following is an analysis reconciling taxable income per books with taxable
income per the corporate return.
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
|
|
|
|
before taxes
|
|
$
|
2,915,569
|
|
|
$
|
363,823
|
|
50% meals and
entertainment
|
|
|
21,923
|
|
|
|
21,661
|
|
Penalties
|
|
|
-
|
|
|
|
7,142
|
|
|
|
|
|
|
|
|
|
|
Taxable
income (loss) – financial
|
|
|
2,937,492
|
|
|
|
392,626
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in provision for bad debts
|
|
|
(8,072
|
)
|
|
|
(615,392
|
)
|
Increase
(decrease) in provision for accrued vacation
|
|
|
(84,631
|
)
|
|
|
3,261
|
|
Book
depreciation greater (lesser) than tax
|
|
|
414,314
|
|
|
|
958,276
|
|
Excess
tax gain (loss) on asset disposals
|
|
|
-
|
|
|
|
4,196
|
|
Book
amortization of section 197 intangibles
|
|
|
|
|
|
|
|
|
greater(lesser) than tax
amortization
|
|
|
(512,468
|
)
|
|
|
(512,468
|
)
|
Excess
book income over partnership K-1
|
|
|
(230
|
)
|
|
|
|
|
Utilization
of contribution carryover
|
|
|
-
|
|
|
|
(4,101
|
)
|
Utilization
of net operating loss carryover
|
|
|
(2,746,405
|
)
|
|
|
(226,398
|
)
|
|
|
|
|
|
|
|
|
|
Taxable
income (loss)
|
|
$
|
0
|
|
|
$
|
0
|
|
NTS
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JULY 31, 2007 AND 2006
(Continued)
8. INCOME
TAXES, Continued
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Federal
income tax liability at 34%
|
|
$
|
0
|
|
|
$
|
0
|
|
Increase
(decrease) in deferred income taxes
|
|
|
1,022,245
|
|
|
|
140,681
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
$
|
1,022,245
|
|
|
$
|
140,681
|
|
All
subsidiaries are filed on the consolidated Form 1120 of NTS Communications,
Inc.
|
The
following is an analysis of the components of deferred
taxes:
|
|
|
2007
|
|
|
2006
|
|
|
|
Current
|
|
|
Long-term
|
|
|
Current
|
|
|
Long-term
|
|
Difference
in financial and
|
|
|
|
|
|
|
|
|
|
|
|
|
tax depreciation
|
|
$
|
-
|
|
|
$
|
7,277,209
|
|
|
$
|
-
|
|
|
$
|
7,622,182
|
|
Provision
for bad debts
|
|
|
(202,735
|
)
|
|
|
-
|
|
|
|
(210,807
|
)
|
|
|
-
|
|
Provision
for accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vacation
|
|
|
(402,400
|
)
|
|
|
-
|
|
|
|
(487,030
|
)
|
|
|
-
|
|
Difference
in financial and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax goodwill
amortization
|
|
|
-
|
|
|
|
(2,861,109
|
)
|
|
|
-
|
|
|
|
(3,373,576
|
)
|
Net
operating loss carryforward
|
|
|
(2,791,620
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,538,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,396,755
|
)
|
|
|
4,416,100
|
|
|
|
(697,837
|
)
|
|
|
(1,289,418
|
)
|
|
|
|
x34
|
%
|
|
|
x34
|
%
|
|
|
x34
|
%
|
|
|
x34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
payable
|
|
$
|
(1,154,897
|
)
|
|
$
|
1,501,474
|
|
|
$
|
(237,265
|
)
|
|
$
|
(438,403
|
)
|
The net
operating loss carryforward will begin to expire in 2024.
9. EMPLOYEE
BENEFIT PLAN
The
Company maintains an employees’ savings and retirement plan under Section 401(k)
of the Internal Revenue Code. All full-time employees who have
completed six months of service become eligible to participate upon the nearest
semi-annual plan entry date. The Company’s contribution to the plan,
as determined by the board of directors, is discretionary and is limited to a
portion of the employee’s contribution. The Company contributed
$425,380 and $404,042 during the years ended July 31, 2007 and 2006,
respectively. All contributions were fully funded as of the report
date.
NTS
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JULY 31, 2007 AND 2006
(Continued)
10. RELATED
PARTY TRANSACTIONS
Shareholder
Value, Ltd., leases office space to NTS Communications, Inc. The partners of
Shareholder Value, Ltd., consist of stockholders of NTS Communications, Inc.,
and NTS Properties, L.C., the managing partner. NTS Properties, L.C.,
is a wholly owned subsidiary of NTS Communications, Inc. Total lease
payments made to Shareholder Value, Ltd. for the years ended July 31, 2007 and
2006 was $771,714 for each year.
NTS
Communications, Inc. also extended Shareholder Value Ltd., a line of credit in
the amount of $2,000,000. This note matures on October 31, 2014, with
interest payments at 6.55% due annually on October 31. At July 31,
2006, the principle balance outstanding was $1,983,192 with accrued interest of
$97,098. During 2007, this note was collected in its entirety along
with all accrued interest. Total interest received for the years
ended July 31, 2007 and 2006 was $125,984 and $129,899,
respectively.
NTS
Communications, Inc. has provided long distance switching service to companies
owned by NTS stockholders and directors, including Telephone Electronics
Corporation, a stockholder, owning 63.47% of NTS common stock. The
service is provided at a price equal to that charged to unrelated
dealers.
11.
|
CONCENTRATION
OF RISK
|
The
Company customarily grants credit to its customers and generally does not
require collateral. A substantial portion of credit sales is to other
long distance service providers. Accordingly, conditions in the long
distance telephone service industry, including actions by regulatory
authorities, may significantly influence the ability to collect a substantial
portion of its trade accounts receivable.
The
Company maintained cash in excess of the federally insured limit of
$100,000. At July 31, 2007 and 2006, uninsured deposits were
$7,214,581 and $6,342,595, respectively.
NTS
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JULY 31, 2007 AND 2006
(Continued)
On August
2, 2007, the Company declared a cash dividend of $2.40 per share payable on
August 15, 2007, to stockholders of record on July 31, 2007.
In
August, 2007, the Company announced that it had entered into a definitive
agreement to sell at least 95% of the issued and outstanding shares of its
common stock to Xfone, Inc. The agreement’s expiration date is
January 15, 2008 with an option to extend the date to February 15,
2008. The effective closing date is tentatively set for January 15,
2008.
SUPPLEMENTARY INFORMATION
NTS
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
SCHEDU
LES
OF REVENUES EARNED
YEARS
ENDED JULY 31, 2007 AND 2006
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Long
distance, toll, and operator assistance
|
|
$
|
17,166,703
|
|
|
$
|
17,811,076
|
|
Private
lines
|
|
|
17,080,956
|
|
|
|
17,492,527
|
|
Local
service
|
|
|
20,370,117
|
|
|
|
20,028,633
|
|
Data
services
|
|
|
6,987,319
|
|
|
|
6,606,434
|
|
Universal
service fee
|
|
|
1,224,633
|
|
|
|
1,095,492
|
|
PICC
cost recovery
|
|
|
263,570
|
|
|
|
294,879
|
|
Regulatory
cost recovery
|
|
|
376,387
|
|
|
|
25,328
|
|
Carrier
access billing
|
|
|
1,292,968
|
|
|
|
1,849,088
|
|
Paging
|
|
|
691
|
|
|
|
2,403
|
|
Telephone
systems sales & services
|
|
|
1,836,388
|
|
|
|
1,729,985
|
|
Conference
calls
|
|
|
48,536
|
|
|
|
43,099
|
|
Video
|
|
|
982,758
|
|
|
|
480,669
|
|
Other
credits
|
|
|
(209,042
|
)
|
|
|
(118,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
67,421,984
|
|
|
$
|
67,340,912
|
|
NTS
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
SCHEDULES
OF COST
OF COMMUNICATION
SERVICES
YEARS
ENDED JULY 31, 2007 AND 2006
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Access
and termination
|
|
$
|
1,029,596
|
|
|
$
|
1,518,241
|
|
Usage
|
|
|
9,473,694
|
|
|
|
8,838,517
|
|
Transport
|
|
|
3,493,832
|
|
|
|
3,742,851
|
|
Private
line
|
|
|
8,317,820
|
|
|
|
8,366,757
|
|
Local
service access
|
|
|
2,335,553
|
|
|
|
2,591,832
|
|
CLEC
local service
|
|
|
9,494,346
|
|
|
|
10,309,165
|
|
Conference
calls
|
|
|
20,486
|
|
|
|
19,722
|
|
Universal
service fund
|
|
|
1,365,518
|
|
|
|
1,145,060
|
|
PICC
fund
|
|
|
89,731
|
|
|
|
44,234
|
|
Amortization
of capitalized Installation charges
|
|
|
95,988
|
|
|
|
188,616
|
|
Circuit
establishment and maintenance
|
|
|
14,131
|
|
|
|
22,451
|
|
Video
services
|
|
|
490,147
|
|
|
|
236,731
|
|
Depreciation
and amortization of
|
|
|
|
|
|
|
|
|
telecommunications
equipment
|
|
|
4,786,055
|
|
|
|
5,354,699
|
|
Data
services
|
|
|
332,208
|
|
|
|
253,233
|
|
Payphone
service charge
|
|
|
45,385
|
|
|
|
67,467
|
|
800
access & administration fees
|
|
|
37,528
|
|
|
|
53,109
|
|
Telephone
equipment and warranty
|
|
|
886,943
|
|
|
|
808,522
|
|
Operator
assistance
|
|
|
38,723
|
|
|
|
16,883
|
|
Paging
services
|
|
|
480
|
|
|
|
923
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
42,348,164
|
|
|
$
|
43,579,013
|
|
NTS
COMMUNICATIONS, INC
. AND SUBSIDIARIES
CONSOLIDATED
SCHEDULES OF SELLING,
GENER
AL AND ADMINISTRATIVE
EXPENSES
YEARS
ENDED JULY 31, 2007 AND 2006
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
313,409
|
|
|
$
|
868,313
|
|
Automobile
and truck expense
|
|
|
183,470
|
|
|
|
199,627
|
|
Bad
debt expense
|
|
|
249,433
|
|
|
|
257,156
|
|
Bank
charges
|
|
|
141,723
|
|
|
|
104,110
|
|
Business
meals
|
|
|
43,619
|
|
|
|
42,825
|
|
Collection
agency fees
|
|
|
16,128
|
|
|
|
15,803
|
|
Commissions
|
|
|
890,198
|
|
|
|
885,051
|
|
Computer
expense
|
|
|
540,307
|
|
|
|
393,124
|
|
Contract
labor
|
|
|
63,327
|
|
|
|
80,061
|
|
Depreciation
|
|
|
1,202,414
|
|
|
|
1,311,926
|
|
Directors
fees
|
|
|
39,000
|
|
|
|
54,000
|
|
Dues
and subscriptions
|
|
|
50,311
|
|
|
|
58,693
|
|
Employee
benefits
|
|
|
425,380
|
|
|
|
404,042
|
|
Engineering
fees
|
|
|
7,120
|
|
|
|
6,213
|
|
Entertainment
and promotional
|
|
|
111,327
|
|
|
|
143,480
|
|
Freight
|
|
|
30,029
|
|
|
|
32,798
|
|
Insurance
|
|
|
2,204,707
|
|
|
|
1,765,040
|
|
State
infrastructure assessment
|
|
|
293,531
|
|
|
|
189,272
|
|
Internet
expenses
|
|
|
11,700
|
|
|
|
11,700
|
|
Legal
and accounting
|
|
|
250,741
|
|
|
|
202,280
|
|
Licenses
and fees
|
|
|
37,008
|
|
|
|
35,372
|
|
Management
fees
|
|
|
26,019
|
|
|
|
23,921
|
|
Miscellaneous
|
|
|
30,488
|
|
|
|
17,102
|
|
Office
supplies and expense
|
|
|
192,216
|
|
|
|
265,199
|
|
Postage
|
|
|
271,670
|
|
|
|
323,393
|
|
Rent
|
|
|
1,649,039
|
|
|
|
1,643,743
|
|
Repairs
and maintenance
|
|
|
337,756
|
|
|
|
322,797
|
|
Salaries
|
|
|
11,436,642
|
|
|
|
12,011,601
|
|
Taxes
– other
|
|
|
472,988
|
|
|
|
468,461
|
|
Taxes
– payroll
|
|
|
922,607
|
|
|
|
973,558
|
|
Telephone
|
|
|
188,317
|
|
|
|
251,100
|
|
Travel
|
|
|
185,097
|
|
|
|
218,712
|
|
Training
|
|
|
12,725
|
|
|
|
26,730
|
|
Trust
and loan fees
|
|
|
-
|
|
|
|
185
|
|
Utilities
|
|
|
846,343
|
|
|
|
803,067
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,676,789
|
|
|
$
|
24,410,455
|
|
NTS
COMMUNICATIONS, INC.
AND
SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER
31, 2007 AND 2006
NTS
COMMUNICATIONS, INC.
AND
SUBSIDIARIES
Table of Contents
Financial
statements
|
Page
|
|
|
|
B
-84
|
|
|
|
B-86
|
|
|
|
B-87
|
|
|
|
B-89
|
NTS
COMMUNIC
ATI
ONS, INC.
AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
(UNAUDITED)
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Current
assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
7,976,454
|
|
|
$
|
5,400,569
|
|
Accounts receivable -
trade
|
|
|
2,745,499
|
|
|
|
3,340,273
|
|
Allowance for bad
debts
|
|
|
(206,438
|
)
|
|
|
(222,223
|
)
|
Other receivables
|
|
|
25,762
|
|
|
|
158,258
|
|
Unbilled revenue
|
|
|
1,271,708
|
|
|
|
1,629,157
|
|
Prepaid expenses
|
|
|
779,460
|
|
|
|
723,444
|
|
Accrued interest
|
|
|
-
|
|
|
|
21,382
|
|
Inventory
|
|
|
562,995
|
|
|
|
360,239
|
|
Other
Current Assets
|
|
|
-
|
|
|
|
288,586
|
|
Deferred tax benefit –
Current
|
|
|
756,973
|
|
|
|
230,099
|
|
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
|
13,912,413
|
|
|
|
11,929,784
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
5,791
|
|
|
|
638,815
|
|
|
|
|
|
|
|
|
|
|
Property,
equipment and improvements
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
& amortization
|
|
|
27,544,758
|
|
|
|
28,600,460
|
|
|
|
|
|
|
|
|
|
|
Property, equipment and
improvements in
|
|
|
|
|
|
|
|
|
development
|
|
|
1,720,766
|
|
|
|
1,037,666
|
|
|
|
|
|
|
|
|
|
|
Total property, equipment and
improvements
|
|
|
29,265,524
|
|
|
|
29,638,126
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
|
|
|
|
Note receivable – Shareholder
Value, Ltd.
|
|
|
-
|
|
|
|
2,005,802
|
|
Goodwill
|
|
|
5,686,996
|
|
|
|
5,686,996
|
|
Less amortization of
goodwill
|
|
|
(1,278,809
|
)
|
|
|
(1,278,809
|
)
|
Deferred tax benefit –
Long-term
|
|
|
-
|
|
|
|
341,455
|
|
Other assets
|
|
|
23,717
|
|
|
|
378,610
|
|
|
|
|
|
|
|
|
|
|
Total other
assets
|
|
|
4,431,905
|
|
|
|
7,134,054
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
47,615,633
|
|
|
$
|
49,340,779
|
|
The
accompanying notes are an integral part of these statements.
NTS
COMMUNICATIONS, INC.
AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Current
liabilities
|
|
|
|
|
|
|
Accounts payable – trade and
carrier charges
|
|
$
|
2,670,852
|
|
|
$
|
2,959,921
|
|
Current maturities of long-term
debt
|
|
|
502,309
|
|
|
|
1,502,264
|
|
Accrued other
liabilities
|
|
|
2,591,194
|
|
|
|
2,342,626
|
|
Deferred revenues
|
|
|
888,857
|
|
|
|
920,104
|
|
Other current
liabilities
|
|
|
50,142
|
|
|
|
68,810
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
6,703,354
|
|
|
|
7,793,725
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
Long-term debt, less current
portion
|
|
|
2,745,867
|
|
|
|
673,994
|
|
Deferred income
taxes
|
|
|
1,416,612
|
|
|
|
4,583
|
|
|
|
|
|
|
|
|
|
|
Total long-term
liabilities
|
|
|
4,162,479
|
|
|
|
678,577
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
10,865,833
|
|
|
|
8,472,302
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Common stock, no par value,
authorized
|
|
|
|
|
|
|
|
|
11,000,000 shares, 1,962,029
shares issued
|
|
|
|
|
|
|
|
|
in December 31, 2007 and
2006
|
|
|
4,959,938
|
|
|
|
4,959,938
|
|
Additional paid-in
capital
|
|
|
1,814,620
|
|
|
|
1,814,620
|
|
Retained earnings –
unrestricted
|
|
|
52,720,037
|
|
|
|
56,838,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,494,595
|
|
|
|
63,613,272
|
|
|
|
|
|
|
|
|
|
|
Treasury stock at cost, 702,878
shares in
|
|
|
|
|
|
|
|
|
December 31, 2007 and
2006
|
|
|
(22,744,795
|
)
|
|
|
(22,744,795
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’
equity
|
|
|
36,749,800
|
|
|
|
40,868,477
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
47,615,633
|
|
|
$
|
49,340,779
|
|
The
accompanying notes are an integral part of these statements.
NTS COMMUNICATIONS, INC.
AND
SUBSIDIARIES
CONSOLIDATED ST
ATE
MENTS OF
INCOME
(UNAUDITED)
|
|
Five
months ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Revenues
earned
|
|
$
|
26,352,595
|
|
|
$
|
27,921,772
|
|
|
|
|
|
|
|
|
|
|
Cost
of communication services
|
|
|
16,490,365
|
|
|
|
17,850,420
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,862,230
|
|
|
|
10,071,352
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
8,988,100
|
|
|
|
10,314,870
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
operations
|
|
|
874,130
|
|
|
|
(243,518
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
89,496
|
|
|
|
151,666
|
|
Building lease
|
|
|
325,132
|
|
|
|
194,100
|
|
Other income
|
|
|
34,068
|
|
|
|
147,676
|
|
Gain on sale of
assets
|
|
|
4,351
|
|
|
|
-
|
|
Interest expense
|
|
|
(87,461
|
)
|
|
|
(78,564
|
)
|
|
|
|
|
|
|
|
|
|
Total other income
(expenses)
|
|
|
365,586
|
|
|
|
414,878
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
before income
taxes
|
|
|
1,239,716
|
|
|
|
171,360
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
647,263
|
|
|
|
88,864
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
592,453
|
|
|
$
|
82,496
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these statements.
NTS COMMUNICATIONS, INC.
AND
SUBSIDIARIES
CONSOLIDATED STATEM
ENT
S OF CASH
FLOWS
(UNAUDITED)
|
|
Five
months ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
592,453
|
|
|
$
|
82,496
|
|
Adjustments
to reconcile net income to net
|
|
|
|
|
|
|
|
|
cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization of
fixed assets
|
|
|
2,426,861
|
|
|
|
2,547,403
|
|
Capitalized
depreciation
|
|
|
38,346
|
|
|
|
-
|
|
Increase (decrease) in deferred
taxes
|
|
|
313,062
|
|
|
|
353,656
|
|
(Gain) loss on sale or disposal
of assets
|
|
|
(4,351
|
)
|
|
|
(16,102
|
)
|
(Increase)
decrease:
|
|
|
|
|
|
|
|
|
Accounts receivable –
trade
|
|
|
299,425
|
|
|
|
(294,486
|
)
|
Other receivables
|
|
|
198,788
|
|
|
|
63,607
|
|
Unbilled revenue
|
|
|
127,942
|
|
|
|
147,053
|
|
Accrued interest
|
|
|
251
|
|
|
|
121,558
|
|
Prepaid expenses
|
|
|
(115,378
|
)
|
|
|
(196
|
)
|
Inventory
|
|
|
(54,953
|
)
|
|
|
245,572
|
|
Other Current
Assets
|
|
|
|
|
|
|
(308,202
|
)
|
Increase
(decrease):
|
|
|
|
|
|
|
|
|
Accounts payable –
trade
|
|
|
224,937
|
|
|
|
(40,276
|
)
|
Deferred revenue
|
|
|
(9,612
|
)
|
|
|
75,513
|
|
Customer deposits
|
|
|
|
|
|
|
8,194
|
|
Accrued other
liabilities
|
|
|
460,081
|
|
|
|
174,148
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided (used) by operating activities
|
|
|
4,497,852
|
|
|
|
3,159,938
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property, equipment
and improvements
|
|
|
(2,519,522
|
)
|
|
|
(2,988,037
|
)
|
Proceeds from sale of
assets
|
|
|
4,351
|
|
|
|
30,517
|
|
Change in partnership
investment
|
|
|
(793
|
)
|
|
|
(1,423
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided (used) by investing activities
|
|
|
(2,515,964
|
)
|
|
|
(2,958,943
|
)
|
The
accompanying notes are an integral part of these statements.
NTS COMMUNICATIONS, INC.
AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
|
|
Five
months ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Proceeds on long term
debt
|
|
$
|
2,595,935
|
|
|
$
|
567,591
|
|
Principal payments on long-term
debt
|
|
|
(214,588
|
)
|
|
|
(150,410
|
)
|
Changes in line of credit note
payable
|
|
|
|
|
|
|
(605,365
|
)
|
Dividend Paid
|
|
|
(3,021,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided (used) by financing activities
|
|
|
(640,615
|
)
|
|
|
(188,184
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
1,341,273
|
|
|
|
12,811
|
|
Cash/Cash
equivalents, beginning of year
|
|
|
6,635,181
|
|
|
|
5,387,758
|
|
|
|
|
|
|
|
|
|
|
Cash/Cash
equivalents, end of year
|
|
$
|
7,976,454
|
|
|
$
|
5,400,569
|
|
|
|
|
|
|
|
|
|
|
Supplementary
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
80,236
|
|
|
$
|
77,834
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non
cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment acquired by issuance of
long-term debt
|
|
$
|
-
|
|
|
$
|
125,000
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these statements.
NTS COMMUNICATIONS, INC.
AND
SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Reporting cutoff
date
NTS
Communications, Inc. (NTS) changed it reporting cutoff date from July 31 to
December 31.
Nature of
Company
NTS and
its wholly owned subsidiaries provide telecommunication services which are
primarily engaged in selling or reselling long distance telephone service and
providing local telephone, internet and video services to the general public,
both commercial and residential. These services are mainly provided
within the continental United States with a concentration in the Southwestern
United States.
NTS
Communications, Inc. is a consolidated subsidiary of its majority-owned
stockholder Telephone Electronics Corporation.
Principles of
consolidation
The
financial statements include the consolidated accounts of NTS Communications,
Inc. and its four wholly-owned subsidiaries, Garey M. Wallace Company, Inc. dba
GMW Company (inactive), NTS Properties, L.C., NTS Management Company, L.L.C.,
NTS Construction Company. All significant intercompany transactions
have been eliminated in the consolidated financial statements.
Revenue
recognition
Revenues
for long distance services are derived primarily from tolls charged to customers
and to other long distance carriers. Deferred revenues result from
billing for local service in advance. Revenues are recognized as
telecommunication services are provided.
Allowance for bad
debts
An
allowance for bad debts for trade accounts receivable is computed on the reserve
method and is considered adequate to absorb potential losses. Trade
receivables are charged off when management believes, after considering economic
conditions, business conditions and collection efforts, that the collection of
the account is doubtful.
Unbilled
revenue
Unbilled
revenue represents units of service provided by the Company prior to the end of
the fiscal year, but not included in accounts receivable due to the timing of
routine billing cycles. Each month’s unbilled revenue is converted to
accounts receivable by the end of the following month.
NTS COMMUNICATIONS, INC.
AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES,
Continued
|
Inventory
Inventories
consist primarily of telephone equipment and are stated at cost using the
first-in, first-out method.
Cash
equivalents
For
purposes of the consolidated statements of cash flows, cash equivalents include
all temporary cash investments with maturities of three months or
less.
Notes Receivable and
Allowance for Note Losses
Notes
receivable are stated at unpaid principal balances, less an allowance, if deemed
necessary, for note losses. Interest on notes is recognized over the
term of the note and is calculated using the simple-interest method on principal
amounts outstanding.
Notes are
placed on nonaccrual when management believes, after considering economic
conditions, business condition, and collection efforts, that the notes are
impaired or collection of interest is doubtful. Uncollectible
interest previously accrued is charged off, or an allowance is established by a
charge to interest income. Interest income on nonaccrual notes is
recognized only to the extent cash payments are received.
Property, equipment and
improvements
Communication
systems and other property and equipment are recorded at
cost. Maintenance, repairs and minor renewals are expensed as
incurred. Betterments and improvements which substantially increase the useful
lives of existing assets are capitalized. When properties are retired
or otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts and any profit or loss is credited or
charged to income.
Depreciation
and amortization are calculated using the straight-line method over the
estimated service lives of assets.
Long-lived
Assets
The
Company evaluates long-lived assets for impairment using a discounted cash flows
method whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. There was no impairment
charged to expense during the periods ended December 31, 2007 and
2006.
NTS COMMUNICATIONS, INC.
AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICES, Continued
Goodwill
Goodwill
represents the excess cost of companies acquired over the fair value of their
identifiable net assets at the date of acquisition. Goodwill is not
amortized pursuant to Financial Accounting Standards No. 142. The
fair value of goodwill is estimated annually by using the expected present value
of future cash flows. There was no impairment charged to expense in
2007 and 2006.
Income
taxes
Deferred
income taxes are recorded to reflect the tax consequences on future years of
differences between the tax basis of depreciable assets and their financial
reporting amounts at each year-end. Income taxes of future periods
are calculated using current tax structure, rates, and credits which have been
applied prospectively. Deferred income tax liability results
primarily from the excess of tax over book depreciation and the amortization of
section 197 intangibles for book over tax. Deferred tax asset results
primarily from certain accrued expenses recorded per books not tax deductible
until paid.
Advertising
costs
The
Company expenses the costs of advertising as incurred. Total
advertising costs expensed in the five months ended December 31, 2007 and 2006
were $109,704 and $136,803, respectively.
Reclassifications
Certain
accounts in the prior-year financial statements have been reclassified for
comparative purposes to conform with the presentation in the current-year
financial statements.
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 reporting
period. Actual results could differ from those
estimates.
NTS COMMUNICATIONS, INC.
AND
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Acquisition
of NTS Communications, Inc. (“NTS”)
On
February 26, 2008 (the “Closing Date”), Xfone, Inc. acquired NTS pursuant to
that certain Stock Purchase Agreement (the “Purchase Agreement”) entered into on
August 22, 2007 with NTS, and the equity owners of NTS as sellers (the “NTS
Shareholders”), as amended on February 14, 2008 and February 26,
2008.
The
acquisition closed on February 26, 2008. Upon closing of the acquisition, NTS
and its four wholly owned subsidiaries, NTS Construction Company, Garey M.
Wallace Company, Inc, NTS Telephone Company, LLC, and NTS Management Company,
LLC, became wholly owned subsidiaries of Xfone, Inc.
The
purchase price for the acquisition was approximately $42,000,000, plus (or less)
(i) the difference between NTS’ estimated working capital and the working
capital target for NTS as set forth in the Purchase Agreement, and (ii) the
difference between amounts allocated by NTS for its fiber optic network
build-out project anticipated in Texas and any indebtedness incurred by NTS in
connection with this project. After applying this formula, the final
aggregate purchase price was calculated as $41,900,000, and was paid by Xfone,
Inc. as follows: $35,414,716 was paid in cash; and 2,366,892 shares of Xfone,
Inc.'s common stock issued to certain NTS Shareholders who elected to reinvest
all or a portion of their allocable sale price in the Xfone, Inc.'s Common
Stock, pursuant to the terms of the Purchase Agreement.
Xfone,
Inc.
Pro
Forma Combined Condensed Balance Sheet and Statements of Operations
(Unaudited)
The
unaudited pro forma condensed combined financial information reflecting the
combination of Xfone, Inc, and NTS Communications Inc. is provided for
informational purposes only. The pro forma information is not necessarily
indicative of what the companies’ results of operations actually would have been
had the merger been completed at the dates indicated. In addition, the unaudited
pro forma condensed combined financial information does not purport to project
the future operating results of the combined company.
The
amounts allocated to acquired assets and liabilities in the unaudited pro forma
financial statements are based on management’s preliminary valuation estimates.
Definitive allocations will be performed and finalized on a later stage.
Accordingly, the purchase price allocation pro forma adjustments included in the
unaudited financial statements are preliminary and have been made for the
purpose of providing unaudited pro forma condensed combined financial
information and are subject to revision based on a final determination of fair
value. In the opinion of management of the Company, all adjustments have
been made that are necessary to present fairly the pro forma data.
The
unaudited pro forma financial statements also include certain purchase
accounting adjustments, including items expected to have a continuing impact on
the consolidated results, such as decreased depreciation expense on acquired
tangible assets and interest payment on debt. The unaudited pro forma statements
do not include the impacts of any revenue, cost or other operating synergies
that may result from the merger.
The pro
forma condensed combined Balance Sheet reflects the result of combining the
consolidated balance sheet of Xfone, Inc and its subsidiaries and the balance
sheet of NTS Communications, Inc. as of December 31, 2007.
The Xfone
Statements of Income for the year ended December 31, 2007 have been combined
with the NTS Statements of Income for the year ended December 31,
2007.
Xfone,
Inc. and
Subsidiaries
|
PRO FORMA BALANCE
SHEETS
|
DECEMBER 31,
2007
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Xfone,
Inc.
|
|
|
NTS
Communications
|
|
|
Pro
forma adjustments
|
|
Pro
form
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,835,608
|
|
|
$
|
7,976,454
|
|
|
|
(3,249,373
|
)
|
(a)
|
|
$
|
10,562,689
|
|
Restricted
cash
|
|
|
25,562,032
|
|
|
|
-
|
|
|
|
(25,562,032
|
)
|
(b)
|
|
|
-
|
|
Account
Receivables, net
|
|
|
5,886,499
|
|
|
|
3,836,531
|
|
|
|
|
|
|
|
|
9,723,030
|
|
Prepaid
expenses and other receivables
|
|
|
3,985,307
|
|
|
|
1,536,433
|
|
|
|
273,510
|
|
(c)
|
|
|
5,795,250
|
|
Inventory
|
|
|
-
|
|
|
|
562,995
|
|
|
|
|
|
|
|
|
562,995
|
|
Total
current
assets
|
|
|
41,269,446
|
|
|
|
13,912,413
|
|
|
|
|
|
|
|
|
26,643,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENTS
|
|
|
-
|
|
|
|
5,791
|
|
|
|
|
|
|
|
|
5,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
7,190
|
|
|
|
-
|
|
|
|
|
|
|
|
|
7,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG
TERM LIABILITIES
|
|
|
2,076,061
|
|
|
|
-
|
|
|
|
|
|
|
|
|
2,076,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIXED
ASSETS, NET
|
|
|
5,747,758
|
|
|
|
29,265,524
|
|
|
|
3,020,281
|
|
(d)
|
|
|
38,033,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS, NET
|
|
|
17,948,872
|
|
|
|
4,431,905
|
|
|
|
12,107,122
|
|
(e)
|
|
|
34,487,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
67,049,327
|
|
|
$
|
47,615,633
|
|
|
|
|
|
|
|
$
|
101,254,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payables – current portion
|
|
$
|
1,094,339
|
|
|
$
|
502,309
|
|
|
|
|
|
|
|
$
|
1,596,648
|
|
Trade
Payables
|
|
|
8,287,420
|
|
|
|
2,670,852
|
|
|
|
|
|
|
|
|
10,958,272
|
|
Other
liabilities and accrued expenses
|
|
|
5,322,045
|
|
|
|
3,530,193
|
|
|
|
1,200,000
|
|
(f)
|
|
|
10,052,238
|
|
Current
maturities of obligations under leases
|
|
|
89,654
|
|
|
|
-
|
|
|
|
|
|
|
|
|
89,654
|
|
Bonds
– current portion
|
|
|
3,268,476
|
|
|
|
-
|
|
|
|
1,953,910
|
|
(g)
|
|
|
5,222,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current
liabilities
|
|
|
18,061,934
|
|
|
|
6,703,354
|
|
|
|
|
|
|
|
|
27,919,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFFERED
TAXES
|
|
|
1,103
|
|
|
|
1,416,612
|
|
|
|
(1,417,715
|
)
|
(c)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTES
PAYABLE
|
|
|
1,013,808
|
|
|
|
2,745,867
|
|
|
|
|
|
|
|
|
3,759,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OBLIGATIONS
UNDER CAPITAL LEASES
|
|
|
31,893
|
|
|
|
-
|
|
|
|
|
|
|
|
|
31,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BONDS
|
|
|
22,083,892
|
|
|
|
-
|
|
|
|
|
|
|
|
|
22,083,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEVERANCE
PAY
|
|
|
148,600
|
|
|
|
-
|
|
|
|
|
|
|
|
|
148,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
41,341,230
|
|
|
|
10,865,833
|
|
|
|
|
|
|
|
|
53,943,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
25,708,097
|
|
|
|
36,749,800
|
|
|
|
(15,146,687
|
)
|
(h)
|
|
|
47,311,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
67,049,327
|
|
|
$
|
47,615,633
|
|
|
|
|
|
|
|
$
|
101,254,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTES TO
PROFORMA BALANCE SHEET
(a).Net
change in cash and cash equivalents includes:
1. Proceeds
from issuance of bonds of $25.6m that as of December 31, 2007 was held as
restricted cash in an escrow account.
2. Issuance
of shares and warrants to XFN-RLSI Investments, LLC and certain investors
affiliated with or who are customers of Gagnon Securities LLC. The issuance was
consummated during February 2008 for total proceeds of $8,060,000.
3. Amounts
paid in cash to certain shareholders of NTS Communications Inc. ("NTS") and
acquisition costs paid in cash.
4. Adjustment
of distribution of dividends to the former shareholders of NTS during 2007 in
the amount of approximately $3m.
(b).Classification
of proceeds from issuance of bonds to cash and cash equivalents as part of
closing the acquisition of NTS.
(c).
Deferred tax liability in connection with interest and depreciation
expenses.
(d).
Adjustment of depreciation expenses in NTS to the estimated useful life of the
assets.
(e).
Record of intangible assets according to the Purchase Price Allocation that was
prepared by Xfone. Third party valuation will be completed within short
time.
(f).
Record of accrued expenses in relation to acquisition costs.
(g).
Record of interest payable to bonds holders in 2007 as if the bonds were issued
on January 1, 2007.
(h).Adjustment
of shareholders' equity includes:
1. Elimination
of equity in NTS;
2. Issuance
of common stock in connection with the acquisition financing (as indicated in
section (a)2 above);
3. Issuance
of common stock and warrants to NTS senior management; and
4. Adjustment
due to distribution of dividends to the former shareholders of NTS
Communications Inc. during 2007.
Xfone,
Inc. and Subsidiaries
|
PRO
FORMA STATEMENTS OF OPERATIONS
|
(Unaudited)
|
YEAR
ENDED DECEMBER 31, 2007
|
|
|
Xfone
Inc
|
|
|
|
NTS
Communications
|
|
|
Pro
forma adjustments
|
|
Pro
forma
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
44,723,934
|
|
|
|
$
|
66,522,841
|
|
|
|
|
|
|
$
|
111,246,775
|
|
|
Cost
of Revenues
|
|
|
19,626,322
|
|
|
|
|
40,860,503
|
|
|
|
|
|
|
|
60,486,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
25,097,612
|
|
|
|
|
25,662,338
|
|
|
|
|
|
|
|
50,759,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
47,609
|
|
|
|
|
-
|
|
|
|
|
|
|
|
47,609
|
|
|
Marketing
and selling
|
|
|
10,886,883
|
|
|
|
|
4,473,363
|
|
|
|
|
|
|
|
15,360,246
|
|
|
General
and administrative
|
|
|
12,335,759
|
|
|
|
|
18,232,129
|
|
|
|
(3,020,281
|
)
|
(a)
|
|
|
27,547,607
|
|
|
Non
recurring loss
|
|
|
2,856,803
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
2,856,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating
expenses
|
|
|
26,127,054
|
|
|
|
|
22,705,492
|
|
|
|
|
|
|
|
|
45,812,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit (loss)
|
|
|
(1,029,442
|
)
|
|
|
|
2,956,846
|
|
|
|
|
|
|
|
|
4,947,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
income (expenses), net
|
|
|
(515,562
|
)
|
|
|
|
134,449
|
|
|
|
(1,953,909
|
)
|
(b)
|
|
|
(2,335,022
|
)
|
|
Equity
in income of affiliated company
|
|
|
132,867
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
132,867
|
|
|
Other
income
|
|
|
-
|
|
|
|
|
480,869
|
|
|
|
|
|
|
|
|
480,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before minority interest and taxes
|
|
|
(1,412,137
|
)
|
|
|
|
3,572,164
|
|
|
|
|
|
|
|
|
3,226,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(297,860
|
)
|
|
|
|
-
|
|
|
|
|
|
|
|
|
(297,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes
|
|
|
(1,709,997
|
)
|
|
|
|
3,572,164
|
|
|
|
|
|
|
|
|
2,928,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
on income
|
|
|
426,105
|
|
|
|
|
(1,486,897
|
)
|
|
|
1,691,225
|
|
(c)
|
|
|
630,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (loss)
|
|
$
|
(1,283,892
|
)
|
|
|
$
|
2,085,267
|
|
|
|
|
|
|
|
$
|
3,558,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
of non recurring loss
|
|
|
1,999,762
|
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
1,999,762
|
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from recurring operations
|
|
$
|
715,870
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,558,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
(0.109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
of non recurring loss
|
|
|
0.170
|
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
0.109
|
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
0.061
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTES TO PROFORMA STATEMENTS
OF OPERATIONS
(a) Adjustment
of depreciation expenses as result of Purchase Price Allocation that was
prepared by Xfone. Third party valuation will be completed within
short time.
(b) Interest
expense on bonds in 2007 as if the bonds were issued on January 1,
2007.
(c) Adjustment
of income taxes in connection with depreciation and interest
expenses.
(d) Excluding
the effect of non recurring loss, net of income tax.
A
ppendix
C
SEPARATION
AGREEMENT AND RELEASE
This Separation Agreement and Release
(this “Agreement”) is entered into as of the 15
th
day of
August 2008, between Wade Spooner (“Spooner”) and Xfone USA, Inc. (the
“Company”).
RECITALS
A. Spooner
was employed by the Company as President and Chief Executive Officer pursuant to
an Employment Agreement dated March 10, 2005 (the “Employment Agreement”) which
expired on March 10, 2008 and Spooner was notified in writing on March 11, 2008
that the Company was not renewing the Employment Agreement and Spooner’s
employment with the Company ended at the close of business on March 11, 2008
(the “Employment Expiration Date”).
B. Spooner
and the Company wish to compromise and settle all claims and issues arising from
or related to Spooner’s employment with the Company, on the terms and conditions
expressed in this Agreement.
NOW, THEREFORE, based upon the
foregoing recitals, in consideration of the mutual terms, covenants and
conditions hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which are acknowledged by each party, Spooner and the
Company agree as follows:
Section
1
Payments to
Spooner
1.1 In
full settlement of any and all claims by Spooner against the Company, the
Company shall cause to be paid to Spooner the following:
(i)
Cash
Payments
. $210,000.00 payable in twenty four (24) bi-monthly
payments of $8,750.00 on the 15
th
and the
last day of each month or on the next business day if a payment date falls on
either a weekend or holiday beginning following the date that this Agreement is
no longer revocable as provided in Section 19 hereof. The Company
agrees to direct deposit these payments to a bank account specified by Spooner
in writing to the Company.
(ii)
New
Warrants
. 300,000 non-tradable warrants (“New Warrants”) to
purchase restricted common stock of Xfone, Inc. (“Xfone Common Stock”) which
warrants shall be issued upon and subject to the approval of the American Stock
Exchange, the Tel-Aviv Stock Exchange and/or any other applicable exchange or
market where the Xfone Common Stock is traded (jointly or severally the
“Exchange”). Spooner acknowledges that the foregoing Exchange
approval may be conditional upon the approval of the issuance of the New
Warrants by the shareholders of Xfone, Inc., and that Xfone, Inc. shall seek
such shareholder approval, if so required by the Exchange, at its 2008 annual
meeting of shareholders. The New Warrants shall provide for a five
(5) year term from the date of issuance and be convertible on a one-to-one basis
into restricted Xfone Common Stock with a strike price of $3.63 per
share. For a period of five (5) years after the date
hereof, whenever Xfone, Inc. (“Xfone”) proposes to file a
registration statement under the Securities Act of 1933, as amended, pertaining
to the sale by Xfone of common stock or securities convertible into common stock
in an underwritten offering, and the registration form to be used may be used
for the registration of the shares underlying the New Warrants granted to
Spooner under this Section 1.1(ii) (in this Section 1.1(ii) a "Piggyback
Registration"), Xfone will give prompt written notice to Spooner of its
intention to effect such a registration and will include in such registration
the shares underlying Spooner’s New Warrants issued under this Section 1.1(ii)
unless Spooner objects to inclusion of such shares by a written notice to Xfone
within two (2) business days after the receipt of Xfone’s notice to
Spooner. If a Piggyback Registration is an underwritten primary
registration on behalf of Xfone, and the managing underwriters advise Xfone in
writing that in their opinion the number of securities requested to be included
in such registration exceeds the number which can be sold in such offering,
Xfone will include in such registration (i) first, the securities Xfone proposes
to sell, and (ii) second, the shares underlying New Warrants of Spooner
requested to be included in such registration and securities held by other
persons having piggyback registration rights, if any, pro rata among the holders
of such securities on the basis of the number of shares of registerable
securities held by such holders. Xfone will pay the Registration
Expenses with respect to all Piggyback Registrations. The term
"Registration Expenses" means expenses incident to registration and filing fees,
fees and expenses of compliance with securities or blue sky laws, printing
expenses, messenger and delivery expenses and fees and disbursements of counsel
for Xfone and all independent certified public accountants, and other persons
retained by Xfone. Spooner shall pay, with respect to the underlying
shares registered and proposed to be resold by him, all applicable underwriting
or brokerage fees, as well as the fees and disbursements of any counsel employed
by him in connection with such registration statement. Spooner shall
cooperate with Xfone with respect to the preparation and filing of the
registration statement, and shall complete and execute any required
questionnaire.
Spooner
acknowledges and agrees that his 500,000 unvested options for Xfone Common Stock
which were granted pursuant to Section 3.3 of the Employment Agreement were
terminated on March 11, 2008, and that the remaining 100,000 vested options
terminated on June 11, 2008 and he does not hold and is not due any other
options under the Employment Agreement or otherwise.
(iii)
WS Telecom Merger
Warrants
. Spooner and the Company agree that Spooner was
issued 304,725 warrants for restricted Xfone Common Stock with a strike price of
$3.63 and a term of 5 years from the date of issue on March 10, 2005 (the “WS
Telecom Merger Xfone Warrants”) in connection with the consummation of the
merger of WS Telecom, Inc. with and into Xfone USA, Inc. on March 10, 2005
pursuant to the Agreement and Plan of Merger dated May 28, 2004 (the “WS Telecom
Merger Agreement”).
Spooner
and the Company agree that pursuant to Xfone’s Registration Statement on Form
SB-2 (File No. 333-139024) which was declared effective by the U.S. Securities
and Exchange Commission (the “SEC”) on December 12, 2006, that 304,725 shares of
Xfone Common Stock which may be issued in the event of exercise of the WS
Telecom Merger Xfone Warrants were registered.
Within
fourteen (14) business days of receipt by Xfone’s transfer agent (the “Transfer
Agent”) of the original warrant certificate(s) evidencing the 304,725 WS Telecom
Merger Xfone Warrants the Company shall cause the Transfer Agent to issue a
replacement warrant certificate for 304,725 Xfone warrants exercisable on a one
for one basis into unrestricted Xfone Common Stock with an expiration date of
March 10, 2010 and a strike price of $3.63 per share.
(iv)
Acquisition Bonus
Warrants
. Pursuant to Section 3.4 of the Employment Agreement,
Spooner was to receive acquisition warrants (the “Acquisition Bonus Warrants”)
for restricted Xfone Common Stock with a value equal to 1.334% of the Aggregate
Transaction Consideration (as defined in the Employment Agreement) of each
acquisition closed during Spooner’s employment period, with the value of the
warrants received to be calculated by Xfone one day prior to the closing of each
acquisition assuming a 90% volatility of the underlying Parent Common Stock
pursuant to the Black Scholes option-pricing model, with vesting six months from
the date of issue. The warrants were to be convertible on a
one-to-one basis into restricted Xfone Common Stock with a term of five years
and a strike price equal to 10% above the closing price of the Parent Common
Stock one day prior to the closing date of each acquisition. Spooner
was issued 32,390 Acquisition Bonus Warrants on July 11, 2006 which
warrants are exercisable on a one to one basis into restricted Xfone Common
Stock with an exercise price of $3.285 per share and an expiration date of
July 11, 2011. Pursuant to Xfone’s Registration Statement on
Form SB-2 (File No. 333-139024) which was declared effective by the SEC on
December 12, 2006, 32,390 shares of Xfone Common Stock which may be issued in
the event of the exercise of the 32,390 Acquisition Bonus Warrants were
registered.
The
parties to this Agreement disagree as to the total number of Acquisition Bonus
Warrants that Spooner was entitled to receive under Section 3.4 of his
Employment Agreement for acquisitions completed by the Company during the term
of his employment. The parties agree that in full settlement and
satisfaction of any Acquisition Bonus Warrants due to Spooner under Section 3.4
of the Employment Agreement, Xfone shall issue to Spooner an additional 21,452
non-tradable warrants convertible on a one to one basis into restricted Xfone
Common Stock with 2,483 of the warrants to have an expiration date of December
30, 2010 with a strike price of $3.04 per share and 18,969 of the warrants to
have an expiration date of March 31, 2011 with a strike price of $3.26 per share
(the “Additional Acquisition Bonus Warrants”). The Additional
Acquisition Bonus Warrants shall be issued upon and subject to the approval of
the Exchange. Spooner acknowledges that the foregoing Exchange
approval may be conditional upon the approval of the issuance of the Additional
Acquisition Bonus Warrants by the shareholders of Xfone and that Xfone shall
seek such shareholder approval, if so required by the Exchange, at its 2008
annual meeting of shareholders. Through the expiration date of the
Additional Acquisition Bonus Warrants, whenever Xfone proposes to file a
registration statement under the Securities Act of 1933, as amended, pertaining
to the sale by Xfone of common stock or securities convertible into common stock
in an underwritten offering, and the registration form to be used may be used
for the registration of the shares underlying the unexpired Additional
Acquisition Bonus Warrants granted to Spooner under this Section 1.1(iv) (in
this Section 1.1(iv) a "Piggyback Registration"), Xfone will give prompt written
notice to Spooner of its intention to effect such a registration and will
include in such registration the shares underlying Spooner’s unexpired
Additional Acquisition Bonus Warrants issued under this Section 1.1(iv) unless
Spooner objects to inclusion of such shares by a written notice to Xfone within
two (2) business days after the receipt of Xfone’s notice to
Spooner. If a Piggyback Registration is an underwritten primary
registration on behalf of Xfone, and the managing underwriters advise Xfone in
writing that in their opinion the number of securities requested to be included
in such registration exceeds the number which can be sold in such offering,
Xfone will include in such registration (i) first, the securities Xfone proposes
to sell, and (ii) second, the shares underlying unexpired Additional Acquisition
Bonus Warrants of Spooner requested to be included in such registration and
securities held by other persons having piggyback registration rights, if any,
pro rata among the holders of such securities on the basis of the number of
shares of registerable securities held by such holders. Xfone will
pay the Registration Expenses with respect to all Piggyback
Registrations. The term "Registration Expenses" means expenses
incident to registration and filing fees, fees and expenses of compliance with
securities or blue sky laws, printing expenses, messenger and delivery expenses
and fees and disbursements of counsel for Xfone and all independent certified
public accountants, and other persons retained by Xfone. Spooner
shall pay, with respect to the underlying shares proposed to be resold by him,
all applicable underwriting or brokerage fees, as well as the fees and
disbursements of any counsel employed by him in connection with such
registration statement. Spooner shall cooperate with Xfone with
respect to the preparation and filing of the registration statement, and shall
complete and execute any required questionnaire.
(v) Xfone
shall use commercially reasonable efforts to obtain the Exchange approval and
shareholder approval, if required for the issuance of the New Warrants and
Additional Acquisition Bonus Warrants.
1.2 From
and after the Employment Expiration Date, Spooner is not eligible to participate
in any employee benefit plans of the Company other than to elect and to pay in
accordance with the requirements of COBRA to continue coverage at Spooner’s own
expense under the Company’s group health insurance plan. Spooner
further acknowledges and agrees that other than the warrants as provided in
Section 1.1 hereof, that he is due no other warrants under the Employment
Agreement or otherwise.
1.3 Spooner
represents and warrants that the consideration recited in this Agreement
constitutes a payment in compromise and settlement of claims for general damages
as alleged by Spooner and as consideration for his obligations as provided in
Sections 2, 3, 4 and 23 of this Agreement. Except as specifically set
forth herein, the Company or Spooner makes no representation or warranty
concerning the tax treatment of the consideration for this
Agreement. Spooner and not the Company shall be solely liable for any
taxes, penalties, interest, liens or subrogated claims (if any) payable, or
alleged by any authority to be payable, as a result of the payments due under
Section 1.1(i) or the issuance or exercise of any of the warrants issued
pursuant to Section 1.1. Spooner shall defend, indemnify and hold the
Company harmless with respect to any actual or alleged liability for any such
taxes, penalties, interest, liens or subrogated claims. Spooner
acknowledges and agrees that he accepts the warrants issued hereunder and the
risk of any loss related thereto, including without limitation, the loss in
value of the warrants or any loss resulting from the sale of any Xfone Common
Stock acquired by exercise of any of the warrants.
Section
2
Release
2.1 Subject
to the provisions of Section 19 of this Agreement, through the execution hereof,
Spooner forever releases and discharges the Company, Xfone, NTS Communications,
Inc., the Oberon Group, LLC and their respective affiliates (including
subsidiaries), shareholders, directors, officers, employees, agents and
attorneys (in their individual and representative capacities), including,
without limitation Guy Nissenson, Barbara Baldwin and Adam Breslawsky
(collectively the “Released Entities and Persons”) from any and all claims,
demands, losses, damages, actions, causes of action, suits, debts, promises,
liabilities, obligations, liens, costs, expenses, attorney’s fees, indemnities,
subrogations (contractual or equitable) or duties, of any nature,
character or description whatsoever, arising from or relating to, directly or
indirectly, Spooner’s employment and discontinuation of employment with the
Company.
2.2 The
release of claims in Subsection 2.1 includes, but is not limited to, claims at
law or equity or sounding in contract (express or implied) or torts arising
under federal, state or local laws or the common law prohibiting age, sex, race,
national origins, disability, veteran status or any other forms of
discrimination (including, but not limited to, the Family and Medical Leave Act,
the Age Discrimination in Employment Act of 1967, the American with Disabilities
Act of 1991, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of
1866, the Civil Rights Act of 1991, the Older Workers Benefit Protection Act,
42 U.S.C. § 1981, the National Labor Relation Act, and all amendments
to the aforementioned statutes).
2.3 Subject
to the provision of Section 19 of this Agreement, through the execution hereof,
the Company forever releases and discharges Spooner and his agents and attorneys
(in their individual and representative capacities), from any and all claims,
demands, losses, damages, actions, causes of action, suits, debts, promises,
liabilities, obligations, liens, costs, expenses, attorney’s fees, indemnities,
subrogations (contractual or equitable) or duties, of any nature,
character or description whatsoever, arising from or relating to, directly or
indirectly, Spooner’s employment with the Company. The Company shall
use commercially reasonable efforts to remove Spooner from any personal guaranty
of any accounts of the Company.
Section
3
Non-Disparagement/Confidentiality
3.1 Spooner
understands and agrees that Spooner shall not, publicly or privately, disparage
or make any statements (written or oral) that could impugn the integrity,
acumen, ethics, or business practices of the Released Entities and Persons
except to the extent (and only to the extent) necessary in any judicial or
arbitration action to enforce the provisions of this Agreement or in
connection with any judicial or administrative proceeding to the extent
required by applicable law. Company agrees not to make any statements
(written or oral) that could impugn the integrity, acumen, ethics, or business
practices of Spooner except to the extent (and only to the extent) necessary in
any judicial or arbitration action to enforce the provisions of this
Agreement or in connection with any judicial or administrative
proceeding to the extent required by applicable law.
3.2 The
parties agree that the terms and conditions of this Agreement and the disputes,
claims and discussions that gave rise to this Agreement shall be maintained in
confidence, except that any party may reveal the terms of this Agreement to
their respective accountants or attorneys or in connection with any action to
enforce the terms of this Agreement or to the extent otherwise required by
federal, state, or local laws or by the SEC or the Exchange.
Section
4
Cooperation
4.1 For
a period of one year following the date of this Agreement Spooner understands
and agrees that Spooner shall provide reasonable cooperation in connection with
any action or proceeding which relates to the Company and/or its affiliates,
including without limitation in connection with any litigation and/or disputes
arising out of actions or inactions of the Company and/or its affiliates of
which Spooner has knowledge or information. Spooner further agrees to
cooperate with the Company and its affiliates in a reasonable manner in
supplying data, information, and expertise within Spooner's special knowledge or
competence and otherwise assist the Company and its affiliates in the protection
of the interests of the Company and its affiliates. The Company shall
pay Spooner a consulting fee of $200 per hour for each hour exceeding 5 hours
per month and reimburse Spooner for reasonable out-of-pocket expenses
pre-approved by the Company (such as hotel and travel expenses) incurred by
Spooner in connection with such cooperation following its receipt of Spooner's
appropriately itemized request. Consulting payments and expense
reimbursement shall be paid on the 15th of the month following the month in
which such fee or expense was incurred, or on the next business day if a payment
date falls in either a weekend or holiday.
Section
5
Company
Property
5.1 Spooner
agrees to return to the Company all Company documents (and all copies thereof)
and any and all other Company property in Spooner’s possession, custody or
control, including, but not limited to, financial information, customer
information, customer lists, employee lists, Company files, notes, cellular
telephones, personal computers (provided that Spooner may purchase his laptop
for $600.00 upon return of a disc with any Company information and a
certification that all Company information on the laptop has been transferred
and returned to the Company and has been deleted from his laptop), contracts,
drawings, records, business plans and forecasts, financial information,
specifications, computer-recorded information, software, tangible property,
credit cards, entry cards, identification badges and keys, and any materials of
any kind which contain or embody any proprietary or confidential material of the
Company (and all reproductions thereof). Upon return of such Company
information by Spooner, the Company shall be responsible for retaining and/or
maintaining such documents and/or property commensurate with its records
retention policy.
Section
6
Authority to
Execute
6.1 Each
of the persons signing this Agreement represents and warrants that he or she has
all requisite authority to execute and perform this Agreement.
Section
7
Binding
Effect
7.1 This
Agreement shall inure to the benefit of and be binding upon the parties and
their respective heirs, successors and assigns. Except as
specifically provided in Section 2 of this Agreement and except to the extent
that the rights created hereunder inure to the benefit of Spooner’s heirs, this
Agreement is not intended to create, and shall not create, any rights in any
person who is not a party to this Agreement.
Section
8
Waiver
8.1 Neither
the failure nor any delay on the part of either party to exercise any right,
remedy, power or privilege under this Agreement shall operate as a waiver of
that right, remedy, power or privilege. No waiver of any right,
remedy, power or privilege with respect to any particular occurrence shall be
construed as a wavier of such right, remedy, power or privilege with respect to
any other occurrence.
Section
9
Time of the
Essence
9.1 Time
is of the essence in the performance of this Agreement and all of its terms,
provisions, conditions and covenants.
Section
10
Entire
Agreement
10.1 This
Agreement contains the entire agreement between the parties with respect to the
subject matter hereof and may not be changed or terminated orally, but only by a
written instrument executed by the parties after the date of this
Agreement. The Company and Spooner further acknowledge and agree that
neither party will make any claim, at any time or place, that this Agreement has
been orally altered or modified in any respect whatsoever. It is
expressly acknowledged and recognized by all parties that there are no oral or
written collateral agreements between Spooner and the Company other than such
agreements as may be contained or referenced herein.
Section
11
Construction/Breach
11.1 The
terms and conditions of this Agreement shall be construed as a whole according
to the fair meaning and not strictly for or against any party. The
parties acknowledge that each of them has reviewed this Agreement and has had
the opportunity to have it reviewed by its attorneys, and that any rule of
construction to the effect that ambiguities are to be resolved against the
drafting party shall not apply in the interpretation of this Agreement,
including any exhibits or amendments thereto.
11.2 Spooner
understands and agrees that a breach of any of his obligations or duties under
Sections 2, 3, 4, 5 of this Agreement, or Sections 7, 8 and 9 of the Employment
Agreement which are not cured within ten (10) days of notice thereof from the
Company will cause, without prejudice to any other remedy that the Released
Entities and Persons may have against Spooner under any applicable law, any
future payments due Spooner to not be paid, will cause a forfeiture of any prior
payments under Section 1.1(i) of this Agreement, cancellation of the New
Warrants granted hereunder in Section 1.1(ii) hereof, and will give the Company
the right to purchase any Xfone Common Stock acquired by exercise of any of the
New Warrants of Spooner granted under Section 1.1(ii) hereunder at the strike
price therefore.
Section
12
Partial
Invalidity
12.1 If
any term of this Agreement or the application of any term of this Agreement is
held by a court of competent jurisdiction to be invalid, void or unenforceable,
all provisions, covenants and conditions of this Agreement, and all of their
applications, not so held invalid, void or unenforceable, shall continue in full
force and effect and shall not be affected, impaired or invalidated in any
way.
Section
13
Attorneys’
Fees
13.1 In
any action or proceeding to enforce the terms of this Agreement or to redress
any violation of this Agreement, the prevailing party shall be entitled to
recover as damages its reasonable attorneys’ fees and costs incurred, whether or
not the action is reduced to judgment. For the purposes of this
provision, the “prevailing party” shall be that party who is successful with
regard to the main issue, even if that party did not prevail on all
issues.
Section
14
Governing
Law
14.1 The
laws of the State of Mississippi applicable to contracts made or to be wholly
performed in the State of Mississippi (without giving effect to choice of law or
conflict of law principles) shall govern the validity, construction, performance
and effect of this Agreement.
Section
15
Consent to Jurisdiction and
Venue; Service of Process
15.1 Each
of the parties to this Agreement submit to the personal jurisdiction of the
courts of the State of Mississippi, County of Rankin and the Federal courts of
the United States sitting in the Southern District of Mississippi, and any
appellate court from any such state or Federal court, and hereby irrevocably and
unconditionally agree that all claims, actions and proceedings arising out of or
relating to this Agreement may be heard and determined in such courts or, to the
extent permitted by law, in such Federal court. Each of the parties
to this Agreement agree that a final nonappealable judgment in any such claim,
action or proceeding shall be conclusive and may be enforced in any other
jurisdiction by suit on the judgment or in any other manner provided by
law.
15.2 Each
of the parties to this Agreement irrevocably and unconditionally waives, to the
fullest extent that each such party may legally and effectively do so, any
objection which it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this Agreement or any related
matter in the courts of the State of Mississippi, County of Rankin and the
Federal courts of the United States sitting in the Southern District of
Mississippi, and the defense of an inconvenient forum to the maintenance of such
claim in any such court.
15.3 Spooner
agrees that process may be served on him by registered mail, addressed to
Spooner’s last address known to the Company, or in any other manner authorized
by law.
Section
16
Necessary
Action
16.1 Each
of the parties shall do any act or thing and execute any or all documents or
instruments necessary or proper to effectuate the provisions and intent of this
Agreement.
Section
17
Notices
17.1 Any
and all notices and demands by or from any party required or desired to be given
under this Agreement shall be in writing and shall be validly given or made if
served either personally or if deposited in the United States mail, certified or
registered, postage prepaid, return receipt requested, or if sent by a
nationally recognized overnight delivery service. If such notice or
demand is served by registered or certified mail or by overnight delivery in the
manner provided, service shall be conclusively deemed given upon receipt or
attempted delivery, whichever is sooner.
17.2 Any
notice of demand to Spooner shall be addressed to him at 153 Belle Pointe,
Madison, Mississippi 39110.
17.3 Any
notice of demand to the Company or Xfone shall be addressed as
follows:
Xfone
USA, Inc.
5307 West Loop 289, Suite
200
Lubbock,
TX 79414
ATTN: President and
CEO
Phone: (806) 797-0687
E-mail:
Barbara.Baldwin@ntscom.com
with a copy to:
Xfone, Inc.
1 Haodem Street, 3rd Floor
Petach
Tikva
Israel
ATTN: General
Counsel
Phone:
(011) 972-3925-4452
E-mail:
alon@xfone.com
and to:
Watkins Ludlam Winter & Stennis,
P.A.
633 North State Street
Jackson,
MS 39202
ATTN: Gina M.
Jacobs
Phone: (601)
949-4705
E-mail:
gjacobs@watkinsludlam.com
17.4 Any
party may change its address for receiving notices or demands by a written
notice given in the manner provided in this Section, which notice of change of
address shall not become effective, however, until its actual receipt by the
other party.
Section
18
Miscellaneous
The captions appearing at the
commencement of the Sections of this Agreement are descriptive only and for
convenience in reference to this Agreement and shall not define, limit or
describe the scope or intent of this Agreement, nor in any way affect this
Agreement.
Section
19
Revocation
Period
19.1 This
Agreement is enforceable when both parties have signed the
Agreement. Spooner and the Company understand and acknowledge that
Spooner has seven (7) calendar days following his execution of this Agreement to
revoke his acceptance of this Agreement.
19.2 For
revocation under Section 19.1 to be effective, written notice of revocation must
be received by the Company no later than 5:00 p.m. on the seventh (7
th
)
calendar day after Spooner signs this Agreement. If Spooner revokes
this Agreement, it shall not be effective or enforceable, and neither party will
be deemed to have released the other or to have waived any rights with respect
to the matters addressed in this Agreement.
Section
20
Time to Review
Agreement
20.1 Spooner
acknowledges that he received a copy of this Agreement and was given at least
twenty-one (21) days to review and consider the provisions of this Agreement
prior to execution.
Section
21
Advice of
Counsel
21.1 EACH
PARTY ACKNOWLEDGES THAT IT CONSULTED WITH AN ATTORNEY BEFORE SIGNING THIS
AGREEMENT.
Section
22
Voluntary Nature of
Agreement
22.1 Both
parties acknowledge that they have carefully read this Agreement; that they have
been afforded an opportunity for counsel of their choosing to read and review
it; that they have had the provisions fully explained to them by their counsel;
that the only promises made are those stated in this Agreement; and that they
are signing this Agreement freely, voluntarily and with full knowledge of its
terms and consequences.
Section
23
Confidentiality and
Non-Compete Agreement
23.1 For
and in consideration of the payments provided in Section 1.1 hereof, the terms
and conditions of the Confidentiality provisions as provided in Section 7 of the
Employment Agreement and Non-Compete and Non-Interference as provided in
Sections 8 and 9 of the Employment Agreement are not modified by this Agreement
and are hereby ratified by Spooner and shall remain in full force and
effect.
Section
24
Counterparts
24.1 This
Agreement may be executed in one or more counterparts, each of which will be
deemed to be an original copy of this Agreement and all of which, when taken
together, will be deemed to constitute one and the same agreement.
[Remainder
of Page Intentionally Left Blank]
PLEASE
READ THIS AGREEMENT CAREFULLY.
IT
CONTAINS A RELEASE OF ALL CLAIMS.
SPOONER: COMPANY:
Xfone USA, Inc.
/s/ Wade
Spooner
Wade
Spooner
By:
/s/ Guy
Nissenson
Date:
August 15,
2008
Guy
Nissenson, Chairman
Date:
August 15,
2008
Xfone,
Inc., solely for purposes of agreeing to provisions of Section
1.1(ii)-(v)
By:
/s/ Guy
Nissenson
Guy
Nissenson, President and CEO
Date:
August 15,
2008
Appendix
D
SEPARATION
AGREEMENT AND RELEASE
This Separation Agreement and Release
(this “Agreement”) is entered into as of the 15
th
day of
August 2008, between Ted Parsons (“Parsons”) and Xfone USA, Inc. (the
“Company”).
RECITALS
A. Parsons
was employed by the Company as Executive Vice President and Chief Marketing
Officer pursuant to an Employment Agreement dated March 10, 2005 (the
“Employment Agreement”) which expired on March 10, 2008 and Parsons was notified
in writing on March 11, 2008 that the Company was not renewing the Employment
Agreement and Parsons’ employment with the Company ended at the close of
business on March 11, 2008 (the “Employment Expiration Date”).
B. Parsons
and the Company wish to compromise and settle all claims and issues arising from
or related to Parsons’ employment with the Company, on the terms and conditions
expressed in this Agreement.
NOW, THEREFORE, based upon the
foregoing recitals, in consideration of the mutual terms, covenants and
conditions hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which are acknowledged by each party, Parsons and the
Company agree as follows:
Section
1
Payments to
Parsons
1.1 In
full settlement of any and all claims by Parsons against the Company, the
Company shall cause to be paid to Parsons the following:
(i)
Cash
Payments
. $115,340.00 payable in twenty four (24) bi-monthly
payments of $4805.84 on the 15
th
and the
last day of each month or on the next business day if a payment date falls on
either a weekend or holiday beginning following the date that this Agreement is
no longer revocable as provided in Section 19 hereof. The Company
agrees to direct deposit these payments to a bank account specified by Parsons
in writing to the Company.
(ii)
New
Warrants
. 150,000 non-tradable warrants (“New Warrants”) to
purchase restricted common stock of Xfone, Inc. (“Xfone Common Stock”) which
warrants shall be issued upon and subject to the approval of the American Stock
Exchange, the Tel-Aviv Stock Exchange and/or any other applicable exchange or
market where the Xfone Common Stock is traded (jointly or severally the
“Exchange”). Parsons acknowledges that the foregoing Exchange
approval may be conditional upon the approval of the issuance of the New
Warrants by the shareholders of Xfone, Inc., and that Xfone, Inc. shall seek
such shareholder approval, if so required by the Exchange, at its 2008 annual
meeting of shareholders. The New Warrants shall provide for a five
(5) year term from the date of issuance and be convertible on a one-to-one basis
into restricted Xfone Common Stock with a strike price of $3.63 per
share. For a period of five (5) years after the date
hereof, whenever Xfone, Inc. (“Xfone”) proposes to file a
registration statement under the Securities Act of 1933, as amended, pertaining
to the sale by Xfone of common stock or securities convertible into common stock
in an underwritten offering, and the registration form to be used may be used
for the registration of the shares underlying the New Warrants granted to
Parsons under this Section 1.1(ii) (in this Section 1.1(ii) a "Piggyback
Registration"), Xfone will give prompt written notice to Parsons of its
intention to effect such a registration and will include in such registration
the shares underlying Parsons’ New Warrants issued under this Section 1.1(ii)
unless Parsons objects to inclusion of such shares by a written notice to Xfone
within two (2) business days after the receipt of Xfone’s notice to
Parsons. If a Piggyback Registration is an underwritten primary
registration on behalf of Xfone, and the managing underwriters advise Xfone in
writing that in their opinion the number of securities requested to be included
in such registration exceeds the number which can be sold in such offering,
Xfone will include in such registration (i) first, the securities Xfone proposes
to sell, and (ii) second, the shares underlying New Warrants of Parsons
requested to be included in such registration and securities held by other
persons having piggyback registration rights, if any, pro rata among the holders
of such securities on the basis of the number of shares of registerable
securities held by such holders. Xfone will pay the Registration
Expenses with respect to all Piggyback Registrations. The term
"Registration Expenses" means expenses incident to registration and filing fees,
fees and expenses of compliance with securities or blue sky laws, printing
expenses, messenger and delivery expenses and fees and disbursements of counsel
for Xfone and all independent certified public accountants, and other persons
retained by Xfone. Parsons shall pay, with respect to the underlying
shares registered and proposed to be resold by him, all applicable underwriting
or brokerage fees, as well as the fees and disbursements of any counsel employed
by him in connection with such registration statement. Parsons shall
cooperate with Xfone with respect to the preparation and filing of the
registration statement, and shall complete and execute any required
questionnaire.
Parsons
acknowledges and agrees that his 250,000 unvested options for Xfone Common Stock
which were granted pursuant to Section 3.3 of the Employment Agreement were
terminated on March 11, 2008, and that the remaining 50,000 vested options
terminated on June 11, 2008 and he does not hold and is not due any other
options under the Employment Agreement or otherwise.
(iii)
WS Telecom Merger
Warrants
. Parsons and the Company agree that Parsons was
issued 39,198 warrants for restricted Xfone Common Stock with a strike price of
$3.63 and a term of 5 years from the date of issue on March 10, 2005 (the “WS
Telecom Merger Xfone Warrants”) in connection with the consummation of the
merger of WS Telecom, Inc. with and into Xfone USA, Inc. on March 10, 2005
pursuant to the Agreement and Plan of Merger dated May 28, 2004 (the “WS Telecom
Merger Agreement”).
Parsons
and the Company agree that pursuant to Xfone’s Registration Statement on Form
SB-2 (File No. 333-139024) which was declared effective by the U.S. Securities
and Exchange Commission (the “SEC”) on December 12, 2006, that 39,198 shares of
Xfone Common Stock which may be issued in the event of exercise of the WS
Telecom Merger Xfone Warrants were registered.
Within
fourteen (14) business days of receipt by Xfone’s transfer agent (the “Transfer
Agent”) of the original warrant certificate(s) evidencing the 39,198 WS Telecom
Merger Xfone Warrants the Company shall cause the Transfer Agent to issue a
replacement warrant certificate for 39,198 Xfone warrants exercisable on a one
for one basis into unrestricted Xfone Common Stock with an expiration date of
March 10, 2010 and a strike price of $3.63 per share.
(iv)
Acquisition Bonus
Warrants
. Pursuant to Section 3.4 of the Employment Agreement,
Parsons was to receive acquisition warrants (the “Acquisition Bonus Warrants”)
for restricted Xfone Common Stock with a value equal to 1.334% of the Aggregate
Transaction Consideration (as defined in the Employment Agreement) of each
acquisition closed during Parsons’ employment period, with the value of the
warrants received to be calculated by Xfone one day prior to the closing of each
acquisition assuming a 90% volatility of the underlying Parent Common Stock
pursuant to the Black Scholes option-pricing model, with vesting six months from
the date of issue. The warrants were to be convertible on a
one-to-one basis into restricted Xfone Common Stock with a term of five years
and a strike price equal to 10% above the closing price of the Parent Common
Stock one day prior to the closing date of each acquisition. Parsons
was issued 16,195 Acquisition Bonus Warrants on July 11, 2006 which
warrants are exercisable on a one to one basis into restricted Xfone Common
Stock with an exercise price of $3.285 per share and an expiration date of
July 11, 2011. Pursuant to Xfone’s Registration Statement on
Form SB-2 (File No. 333-139024) which was declared effective by the SEC on
December 12, 2006, 16,195 shares of Xfone Common Stock which may be issued in
the event of the exercise of the 16,195 Acquisition Bonus Warrants were
registered.
The
parties to this Agreement disagree as to the total number of Acquisition Bonus
Warrants that Parsons was entitled to receive under Section 3.4 of his
Employment Agreement for acquisitions completed by the Company during the term
of his employment. The parties agree that in full settlement and
satisfaction of any Acquisition Bonus Warrants due to Parsons under Section 3.4
of the Employment Agreement, Xfone shall issue to Parsons an additional 10,727
non-tradable warrants convertible on a one to one basis into restricted Xfone
Common Stock with 1,242 of the warrants to have an expiration date of December
30, 2010 with a strike price of $3.04 per share and 9,485 of the warrants to
have an expiration date of March 31, 2011 with a strike price of $3.26 per share
(the “Additional Acquisition Bonus Warrants”). The Additional
Acquisition Bonus Warrants shall be issued upon and subject to the approval of
the Exchange. Parsons acknowledges that the foregoing Exchange
approval may be conditional upon the approval of the issuance of the Additional
Acquisition Bonus Warrants by the shareholders of Xfone and that Xfone shall
seek such shareholder approval, if so required by the Exchange, at its 2008
annual meeting of shareholders. Through the expiration date of the
Additional Acquisition Bonus Warrants, whenever Xfone proposes to file a
registration statement under the Securities Act of 1933, as amended, pertaining
to the sale by Xfone of common stock or securities convertible into common stock
in an underwritten offering, and the registration form to be used may be used
for the registration of the shares underlying the unexpired Additional
Acquisition Bonus Warrants granted to Parsons under this Section 1.1(iv) (in
this Section 1.1(iv) a "Piggyback Registration"), Xfone will give prompt written
notice to Parsons of its intention to effect such a registration and will
include in such registration the shares underlying Parsons’ unexpired Additional
Acquisition Bonus Warrants issued under this Section 1.1(iv) unless Parsons
objects to inclusion of such shares by a written notice to Xfone within two (2)
business days after the receipt of Xfone’s notice to Parsons. If a
Piggyback Registration is an underwritten primary registration on behalf of
Xfone, and the managing underwriters advise Xfone in writing that in their
opinion the number of securities requested to be included in such registration
exceeds the number which can be sold in such offering, Xfone will include in
such registration (i) first, the securities Xfone proposes to sell, and (ii)
second, the shares underlying unexpired Additional Acquisition Bonus Warrants of
Parsons requested to be included in such registration and securities held by
other persons having piggyback registration rights, if any, pro rata among the
holders of such securities on the basis of the number of shares of registerable
securities held by such holders. Xfone will pay the Registration
Expenses with respect to all Piggyback Registrations. The term
"Registration Expenses" means expenses incident to registration and filing fees,
fees and expenses of compliance with securities or blue sky laws, printing
expenses, messenger and delivery expenses and fees and disbursements of counsel
for Xfone and all independent certified public accountants, and other persons
retained by Xfone. Parsons shall pay, with respect to the underlying
shares proposed to be resold by him, all applicable underwriting or brokerage
fees, as well as the fees and disbursements of any counsel employed by him in
connection with such registration statement. Parsons shall cooperate
with Xfone with respect to the preparation and filing of the registration
statement, and shall complete and execute any required
questionnaire.
(v) Xfone
shall use commercially reasonable efforts to obtain the Exchange approval and
shareholder approval, if required for the issuance of the New Warrants and
Additional Acquisition Bonus Warrants.
1.2 From
and after the Employment Expiration Date, Parsons is not eligible to participate
in any employee benefit plans of the Company other than to elect and to pay in
accordance with the requirements of COBRA to continue coverage at Parsons’ own
expense under the Company’s group health insurance plan. Parsons
further acknowledges and agrees that other than the warrants as provided in
Section 1.1 hereof, that he is due no other warrants under the Employment
Agreement or otherwise.
1.3 Parsons
represents and warrants that the consideration recited in this Agreement
constitutes a payment in compromise and settlement of claims for general damages
as alleged by Parsons and as consideration for his obligations as provided in
Sections 2, 3, 4 and 23 of this Agreement. Except as specifically set
forth herein, the Company or Parsons makes no representation or warranty
concerning the tax treatment of the consideration for this
Agreement. Parsons and not the Company shall be solely liable for any
taxes, penalties, interest, liens or subrogated claims (if any) payable, or
alleged by any authority to be payable, as a result of the payments due under
Section 1.1(i) or the issuance or exercise of any of the warrants issued
pursuant to Section 1.1. Parsons shall defend, indemnify and hold the
Company harmless with respect to any actual or alleged liability for any such
taxes, penalties, interest, liens or subrogated claims. Parsons
acknowledges and agrees that he accepts the warrants issued hereunder and the
risk of any loss related thereto, including without limitation, the loss in
value of the warrants or any loss resulting from the sale of any Xfone Common
Stock acquired by exercise of any of the warrants.
Section
2
Release
2.1 Subject
to the provisions of Section 19 of this Agreement, through the execution hereof,
Parsons forever releases and discharges the Company, Xfone, NTS Communications,
Inc., the Oberon Group, LLC and their respective affiliates (including
subsidiaries), shareholders, directors, officers, employees, agents and
attorneys (in their individual and representative capacities), including,
without limitation Guy Nissenson, Barbara Baldwin and Adam Breslawsky
(collectively the “Released Entities and Persons”) from any and all claims,
demands, losses, damages, actions, causes of action, suits, debts, promises,
liabilities, obligations, liens, costs, expenses, attorney’s fees, indemnities,
subrogations (contractual or equitable) or duties, of any nature,
character or description whatsoever, arising from or relating to, directly or
indirectly, Parsons’ employment and discontinuation of employment with the
Company.
2.2 The
release of claims in Subsection 2.1 includes, but is not limited to, claims at
law or equity or sounding in contract (express or implied) or torts arising
under federal, state or local laws or the common law prohibiting age, sex, race,
national origins, disability, veteran status or any other forms of
discrimination (including, but not limited to, the Family and Medical Leave Act,
the Age Discrimination in Employment Act of 1967, the American with Disabilities
Act of 1991, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of
1866, the Civil Rights Act of 1991, the Older Workers Benefit Protection Act,
42 U.S.C. § 1981, the National Labor Relation Act, and all amendments
to the aforementioned statutes).
2.3 Subject
to the provision of Section 19 of this Agreement, through the execution hereof,
the Company forever releases and discharges Parsons and his agents and attorneys
(in their individual and representative capacities), from any and all claims,
demands, losses, damages, actions, causes of action, suits, debts, promises,
liabilities, obligations, liens, costs, expenses, attorney’s fees, indemnities,
subrogations (contractual or equitable) or duties, of any nature,
character or description whatsoever, arising from or relating to, directly or
indirectly, Parsons’ employment with the Company. The Company shall
use commercially reasonable efforts to remove Parsons from any personal guaranty
of any accounts of the Company.
Section
3
Non-Disparagement/Confidentiality
3.1 Parsons
understands and agrees that Parsons shall not, publicly or privately, disparage
or make any statements (written or oral) that could impugn the integrity,
acumen, ethics, or business practices of the Released Entities and Persons
except to the extent (and only to the extent) necessary in any judicial or
arbitration action to enforce the provisions of this Agreement or in
connection with any judicial or administrative proceeding to the extent
required by applicable law. Company agrees not to make any statements
(written or oral) that could impugn the integrity, acumen, ethics, or business
practices of Parsons except to the extent (and only to the extent) necessary in
any judicial or arbitration action to enforce the provisions of this
Agreement or in connection with any judicial or administrative
proceeding to the extent required by applicable law.
3.2 The
parties agree that the terms and conditions of this Agreement and the disputes,
claims and discussions that gave rise to this Agreement shall be maintained in
confidence, except that any party may reveal the terms of this Agreement to
their respective accountants or attorneys or in connection with any action to
enforce the terms of this Agreement or to the extent otherwise required by
federal, state, or local laws or by the SEC or the Exchange.
Section
4
Cooperation
4.1 For
a period of one year following the date of this Agreement Parsons understands
and agrees that Parsons shall provide reasonable cooperation in connection with
any action or proceeding which relates to the Company and/or its affiliates,
including without limitation in connection with any litigation and/or disputes
arising out of actions or inactions of the Company and/or its affiliates of
which Parsons has knowledge or information. Parsons further agrees to
cooperate with the Company and its affiliates in a reasonable manner in
supplying data, information, and expertise within Parsons’ special knowledge or
competence and otherwise assist the Company and its affiliates in the protection
of the interests of the Company and its affiliates. The Company shall
pay Parsons a consulting fee of $100.00 per hour for each hour exceeding 5 hours
per month and reimburse Parsons for reasonable out-of-pocket expenses
pre-approved by the Company (such as hotel and travel expenses) incurred by
Parsons in connection with such cooperation following its receipt of Parsons’
appropriately itemized request. Consulting payments and expense
reimbursement shall be paid on the 15th of the month following the month in
which such fee or expense was incurred, or on the next business day if a payment
date falls in either a weekend or holiday.
Section
5
Company
Property
5.1 Parsons
agrees to return to the Company all Company documents (and all copies thereof)
and any and all other Company property in Parsons’ possession, custody or
control, including, but not limited to, financial information, customer
information, customer lists, employee lists, Company files, notes, cellular
telephones, personal computers (provided that Parsons may purchase his laptop
for $300.00 upon return of a disc with any Company information and a
certification that all Company information on the laptop has been transferred
and returned to the Company and has been deleted from his laptop), contracts,
drawings, records, business plans and forecasts, financial information,
specifications, computer-recorded information, software, tangible property,
credit cards, entry cards, identification badges and keys, and any materials of
any kind which contain or embody any proprietary or confidential material of the
Company (and all reproductions thereof). Upon return of such Company
information by Parsons, the Company shall be responsible for retaining and/or
maintaining such documents and/or property commensurate with its records
retention policy.
Section
6
Authority to
Execute
6.1 Each
of the persons signing this Agreement represents and warrants that he or she has
all requisite authority to execute and perform this Agreement.
Section
7
Binding
Effect
7.1 This
Agreement shall inure to the benefit of and be binding upon the parties and
their respective heirs, successors and assigns. Except as
specifically provided in Section 2 of this Agreement and except to the extent
that the rights created hereunder inure to the benefit of Parsons’ heirs, this
Agreement is not intended to create, and shall not create, any rights in any
person who is not a party to this Agreement.
Section
8
Waiver
8.1 Neither
the failure nor any delay on the part of either party to exercise any right,
remedy, power or privilege under this Agreement shall operate as a waiver of
that right, remedy, power or privilege. No waiver of any right,
remedy, power or privilege with respect to any particular occurrence shall be
construed as a wavier of such right, remedy, power or privilege with respect to
any other occurrence.
Section
9
Time of the
Essence
9.1 Time
is of the essence in the performance of this Agreement and all of its terms,
provisions, conditions and covenants.
Section
10
Entire
Agreement
10.1 This
Agreement contains the entire agreement between the parties with respect to the
subject matter hereof and may not be changed or terminated orally, but only by a
written instrument executed by the parties after the date of this
Agreement. The Company and Parsons further acknowledge and agree that
neither party will make any claim, at any time or place, that this Agreement has
been orally altered or modified in any respect whatsoever. It is
expressly acknowledged and recognized by all parties that there are no oral or
written collateral agreements between Parsons and the Company other than such
agreements as may be contained or referenced herein.
Section
11
Construction/Breach
11.1 The
terms and conditions of this Agreement shall be construed as a whole according
to the fair meaning and not strictly for or against any party. The
parties acknowledge that each of them has reviewed this Agreement and has had
the opportunity to have it reviewed by its attorneys, and that any rule of
construction to the effect that ambiguities are to be resolved against the
drafting party shall not apply in the interpretation of this Agreement,
including any exhibits or amendments thereto.
11.2 Parsons
understands and agrees that a breach of any of his obligations or duties under
Sections 2, 3, 4, 5 of this Agreement, or Sections 7, 8 and 9 of the Employment
Agreement which are not cured within ten (10) days of notice thereof from the
Company will cause, without prejudice to any other remedy that the Released
Entities and Persons may have against Parsons under any applicable law, any
future payments due Parsons to not be paid, will cause a forfeiture of any prior
payments under Section 1.1(i) of this Agreement, cancellation of the New
Warrants granted hereunder in Section 1.1(ii) hereof, and will give the Company
the right to purchase any Xfone Common Stock acquired by exercise of any of the
New Warrants of Parsons granted under Section 1.1(ii) hereunder at the strike
price therefore.
Section
12
Partial
Invalidity
12.1 If
any term of this Agreement or the application of any term of this Agreement is
held by a court of competent jurisdiction to be invalid, void or unenforceable,
all provisions, covenants and conditions of this Agreement, and all of their
applications, not so held invalid, void or unenforceable, shall continue in full
force and effect and shall not be affected, impaired or invalidated in any
way.
Section
13
Attorneys’
Fees
13.1 In
any action or proceeding to enforce the terms of this Agreement or to redress
any violation of this Agreement, the prevailing party shall be entitled to
recover as damages its reasonable attorneys’ fees and costs incurred, whether or
not the action is reduced to judgment. For the purposes of this
provision, the “prevailing party” shall be that party who is successful with
regard to the main issue, even if that party did not prevail on all
issues.
Section
14
Governing
Law
14.1 The
laws of the State of Mississippi applicable to contracts made or to be wholly
performed in the State of Mississippi (without giving effect to choice of law or
conflict of law principles) shall govern the validity, construction, performance
and effect of this Agreement.
Section
15
Consent to Jurisdiction and
Venue; Service of Process
15.1 Each
of the parties to this Agreement submit to the personal jurisdiction of the
courts of the State of Mississippi, County of Rankin and the Federal courts of
the United States sitting in the Southern District of Mississippi, and any
appellate court from any such state or Federal court, and hereby irrevocably and
unconditionally agree that all claims, actions and proceedings arising out of or
relating to this Agreement may be heard and determined in such courts or, to the
extent permitted by law, in such Federal court. Each of the parties
to this Agreement agree that a final nonappealable judgment in any such claim,
action or proceeding shall be conclusive and may be enforced in any other
jurisdiction by suit on the judgment or in any other manner provided by
law.
15.2 Each
of the parties to this Agreement irrevocably and unconditionally waives, to the
fullest extent that each such party may legally and effectively do so, any
objection which it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this Agreement or any related
matter in the courts of the State of Mississippi, County of Rankin and the
Federal courts of the United States sitting in the Southern District of
Mississippi, and the defense of an inconvenient forum to the maintenance of such
claim in any such court.
15.3 Parsons
agrees that process may be served on him by registered mail, addressed to
Parsons’ last address known to the Company, or in any other manner authorized by
law.
Section
16
Necessary
Action
16.1 Each
of the parties shall do any act or thing and execute any or all documents or
instruments necessary or proper to effectuate the provisions and intent of this
Agreement.
Section
17
Notices
17.1 Any
and all notices and demands by or from any party required or desired to be given
under this Agreement shall be in writing and shall be validly given or made if
served either personally or if deposited in the United States mail, certified or
registered, postage prepaid, return receipt requested, or if sent by a
nationally recognized overnight delivery service. If such notice or
demand is served by registered or certified mail or by overnight delivery in the
manner provided, service shall be conclusively deemed given upon receipt or
attempted delivery, whichever is sooner.
17.2 Any
notice of demand to Parsons shall be addressed to him at 855 South Pear Orchard
Road, Suite 200, Ridgeland, Mississippi 39157.
17.3 Any
notice of demand to the Company or Xfone shall be addressed as
follows:
Xfone
USA, Inc.
5307 West Loop 289, Suite
200
Lubbock,
TX 79414
ATTN: President and
CEO
Phone: (806) 797-0687
E-mail:
Barbara.Baldwin@ntscom.com
with a copy to:
Xfone, Inc.
1 Haodem Street, 3rd Floor
Petach
Tikva
Israel
ATTN: General
Counsel
Phone:
(011) 972-3925-4452
E-mail:
alon@xfone.com
and to:
Watkins Ludlam Winter & Stennis,
P.A.
633 North State Street
Jackson,
MS 39202
ATTN: Gina M.
Jacobs
Phone: (601)
949-4705
E-mail:
gjacobs@watkinsludlam.com
17.4 Any
party may change its address for receiving notices or demands by a written
notice given in the manner provided in this Section, which notice of change of
address shall not become effective, however, until its actual receipt by the
other party.
Section
18
Miscellaneous
The captions appearing at the
commencement of the Sections of this Agreement are descriptive only and for
convenience in reference to this Agreement and shall not define, limit or
describe the scope or intent of this Agreement, nor in any way affect this
Agreement.
Section
19
Revocation
Period
19.1 This
Agreement is enforceable when both parties have signed the
Agreement. Parsons and the Company understand and acknowledge that
Parsons has seven (7) calendar days following his execution of this Agreement to
revoke his acceptance of this Agreement.
19.2 For
revocation under Section 19.1 to be effective, written notice of revocation must
be received by the Company no later than 5:00 p.m. on the seventh (7
th
)
calendar day after Parsons signs this Agreement. If Parsons revokes
this Agreement, it shall not be effective or enforceable, and neither party will
be deemed to have released the other or to have waived any rights with respect
to the matters addressed in this Agreement.
Section
20
Time to Review
Agreement
20.1 Parsons
acknowledges that he received a copy of this Agreement and was given at least
twenty-one (21) days to review and consider the provisions of this Agreement
prior to execution.
Section
21
Advice of
Counsel
21.1 EACH
PARTY ACKNOWLEDGES THAT IT CONSULTED WITH AN ATTORNEY BEFORE SIGNING THIS
AGREEMENT.
Section
22
Voluntary Nature of
Agreement
22.1 Both
parties acknowledge that they have carefully read this Agreement; that they have
been afforded an opportunity for counsel of their choosing to read and review
it; that they have had the provisions fully explained to them by their counsel;
that the only promises made are those stated in this Agreement; and that they
are signing this Agreement freely, voluntarily and with full knowledge of its
terms and consequences.
Section
23
Confidentiality and
Non-Compete Agreement
23.1 For
and in consideration of the payments provided in Section 1.1 hereof, the terms
and conditions of the Confidentiality provisions as provided in Section 7 of the
Employment Agreement and Non-Compete and Non-Interference as provided in
Sections 8 and 9 of the Employment Agreement are not modified by this Agreement
and are hereby ratified by Parsons and shall remain in full force and
effect.
Section
24
Counterparts
24.1 This
Agreement may be executed in one or more counterparts, each of which will be
deemed to be an original copy of this Agreement and all of which, when taken
together, will be deemed to constitute one and the same agreement.
[Remainder
of Page Intentionally Left Blank]
PLEASE
READ THIS AGREEMENT CAREFULLY.
IT
CONTAINS A RELEASE OF ALL CLAIMS.
PARSONS: COMPANY:
Xfone USA, Inc.
/s/ Ted
Parsons
Ted
Parsons
By:
/s/ Guy
Nissenson
Date:
August 15,
2008
Guy
Nissenson, Chairman
Date:
August 15,
2008
Xfone,
Inc., solely for purposes of agreeing to provisions of Section
1.1(ii)-(v)
By:
/s/ Guy
Nissenson
Guy
Nissenson, President and CEO
Date:
August 15,
2008
Xfone (AMEX:XFN)
Historical Stock Chart
Von Jun 2024 bis Jul 2024
Xfone (AMEX:XFN)
Historical Stock Chart
Von Jul 2023 bis Jul 2024