UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2008
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ____________ to ____________
Commission
file number:
001-32521
XFONE,
INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
|
11-3618510
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
5307 W. Loop 289
Lubbock
,
Texas
79414
(Address
of principal executive offices)
806-771-5212
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer,, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
o
Large
accelerated filer
|
o
|
Accelerated
filer
|
o
|
Non-accelerated
filer
|
o
|
Smaller
reporting company
|
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
x
As of
November 13, 2008, 18,376,075 shares of the Company’s common stock, $0.001 par
value, were issued and outstanding
XFONE,
INC. AND SUBSIDIARIES
Index
PART I
:
FINANCIAL
INFORMATION
Item
1:
|
Financial
Statements and Condensed Notes (Unaudited) - Period Ended September 30,
2008
|
Xfone, Inc. and
Subsidiaries
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
September
30,
2008
|
Xfone, Inc. and
Subsidiaries
|
|
CONSOLIDATED
BA
LAN
CE
SHEETS
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Unaudited
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
4,872,507
|
|
|
$
|
5,835,608
|
|
Restricted
cash
|
|
|
-
|
|
|
|
25,562,032
|
|
Accounts receivable,
net
|
|
|
9,424,256
|
|
|
|
5,886,499
|
|
Prepaid expenses and other
receivables
|
|
|
9,308,649
|
|
|
|
3,985,307
|
|
|
|
|
|
|
|
|
|
|
Total
current
assets
|
|
|
23,605,412
|
|
|
|
41,269,446
|
|
|
|
|
|
|
|
|
|
|
INVENTORY
|
|
|
385,279
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
-
|
|
|
|
7,190
|
|
|
|
|
|
|
|
|
|
|
LONG TERM
ASSETS
|
|
|
2,141,094
|
|
|
|
2,076,061
|
|
|
|
|
|
|
|
|
|
|
FIXED ASSETS,
NET
|
|
|
49,267,972
|
|
|
|
5,747,758
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS,
NET
|
|
|
3,031,845
|
|
|
|
1,076,784
|
|
|
|
|
|
|
|
|
|
|
GOODWILL
|
|
|
27,151,710
|
|
|
|
16,872,088
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
105,583,312
|
|
|
$
|
67,049,327
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
Xfone, Inc. and
Subsidiaries
|
CONSOLIDATED BALANCE
SHEETS
|
|
September
30,
|
|
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
Short-term bank credit and current
maturities of notes payable
|
|
$
|
5,340,566
|
|
|
$
|
1,094,339
|
|
Trade
payables
|
|
|
9,199,155
|
|
|
|
8,287,420
|
|
Other liabilities and accrued
expenses
|
|
|
8,484,447
|
|
|
|
5,322,045
|
|
Current maturities of obligations
under capital leases
|
|
|
91,132
|
|
|
|
89,654
|
|
Current maturities of
b
onds
|
|
|
3,925,758
|
|
|
|
3,268,476
|
|
|
|
|
|
|
|
|
|
|
Total
current
liabilities
|
|
|
27,041,058
|
|
|
|
18,061,934
|
|
|
|
|
|
|
|
|
|
|
DEFERRED
TAXES
|
|
|
5,472,892
|
|
|
|
1,103
|
|
|
|
|
|
|
|
|
|
|
NOTES
PAYABLE
|
|
|
4,176,580
|
|
|
|
1,013,808
|
|
|
|
|
|
|
|
|
|
|
BONDS
|
|
|
27,054,300
|
|
|
|
22,083,892
|
|
|
|
|
|
|
|
|
|
|
OBLIGATIONS UNDER CAPITAL
LEASES
|
|
|
9,725
|
|
|
|
31,893
|
|
|
|
|
|
|
|
|
|
|
SEVERANCE
PAY
|
|
|
104,444
|
|
|
|
148,600
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
187,770
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
64,046,769
|
|
|
|
41,341,230
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Common stock of $0.001 par
value:
|
|
|
|
|
|
|
|
|
75,000,000 shares authorized
September
30, 2008;
|
|
|
|
|
|
|
|
|
13,467,928 and 18,376,075 issued
and outstanding at December 31, 2007 and
September
30, 2008,
respectively
|
|
|
18,376
|
|
|
|
13,468
|
|
Additional paid-in
capital
|
|
|
43,295,304
|
|
|
|
26,494,985
|
|
Foreign currency translation
adjustment
|
|
|
(1,910,383
|
)
|
|
|
(1,564,814
|
)
|
Stock compensation
fund
|
|
|
(681,778
|
)
|
|
|
(295,155
|
)
|
Retained
earnings
|
|
|
815,024
|
|
|
|
1,059,613
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders'
equity
|
|
|
41,536,543
|
|
|
|
25,708,097
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
shareholders' equity
|
|
$
|
105,583,312
|
|
|
$
|
67,049,327
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of these consolidated financial
statements.
|
|
Xfone, Inc. and
Subsidiaries
|
CONSOLIDATED STAT
EMEN
TS OF
OPERATIONS
|
(Unaudited)
|
|
|
Nine
months
ended
|
|
|
Three months
ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
67,608,521
|
|
|
$
|
35,298,441
|
|
|
$
|
25,962,701
|
|
|
$
|
12,144,919
|
|
Cost of
revenues
|
|
|
34,536,276
|
|
|
|
15,232,960
|
|
|
|
13,519,015
|
|
|
|
4,909,717
|
|
Gross
profit
|
|
|
33,072,245
|
|
|
|
20,065,481
|
|
|
|
12,443,686
|
|
|
|
7,235,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development
|
|
|
47,519
|
|
|
|
38,245
|
|
|
|
14,939
|
|
|
|
6,449
|
|
Marketing and
selling
|
|
|
9,517,132
|
|
|
|
8,598,893
|
|
|
|
3,378,328
|
|
|
|
3,124,387
|
|
General and
administrative
|
|
|
18,506,824
|
|
|
|
9,102,552
|
|
|
|
7,091,436
|
|
|
|
3,255,822
|
|
Non- recurring
loss
|
|
|
189,610
|
|
|
|
-
|
|
|
|
189,610
|
|
|
|
-
|
|
Total operating
expenses
|
|
|
28,261,085
|
|
|
|
17,739,690
|
|
|
|
10,674,313
|
|
|
|
6,386,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit
|
|
|
4,811,160
|
|
|
|
2,325,791
|
|
|
|
1,769,373
|
|
|
|
848,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing expenses,
net
|
|
|
(5,031,403
|
)
|
|
|
(380,347
|
)
|
|
|
(1,035,823
|
)
|
|
|
(73,652
|
)
|
Equity profit in income of
affiliated company
|
|
|
-
|
|
|
|
132,868
|
|
|
|
-
|
|
|
|
20,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority
interest and taxes
|
|
|
(220,243
|
)
|
|
|
2,078,312
|
|
|
|
733,550
|
|
|
|
795,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(194,960
|
)
|
|
|
(218,138
|
)
|
|
|
(15,901
|
)
|
|
|
(45,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
taxes
|
|
|
(415,203
|
)
|
|
|
1,860,174
|
|
|
|
717,649
|
|
|
|
750,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
(
expense
)
benefit
|
|
|
170,614
|
|
|
|
(438,873
|
)
|
|
|
(80,010
|
)
|
|
|
(184,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
(244,589
|
)
|
|
$
|
1,421,301
|
|
|
$
|
637,639
|
|
|
$
|
565,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per
Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.014
|
)
|
|
$
|
0.124
|
|
|
$
|
0.035
|
|
|
$
|
0.049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.014
|
)
|
|
$
|
0.124
|
|
|
$
|
0.035
|
|
|
$
|
0.049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,371,811
|
|
|
|
11,495,871
|
|
|
|
18,376,075
|
|
|
|
11,528,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
17,371,811
|
|
|
|
11,495,871
|
|
|
|
18,390,518
|
|
|
|
11,528,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
Xfone, Inc. and
Subsidiaries
|
CONSOLIDATED
STATEM
ENTS
OF CASH
FLOWS
|
(Unaudited)
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash flow from operating
activities
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
(244,589
|
)
|
|
$
|
1,421,301
|
|
Adjustments required to reconcile
net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
3,004,635
|
|
|
|
823,384
|
|
Compensation in connection with
the issuance of warrants and options
|
|
|
495,693
|
|
|
|
225,835
|
|
Accrued interest and exchange rate
on bonds
|
|
|
3,446,803
|
|
|
|
-
|
|
Minority
interest
|
|
|
194,960
|
|
|
|
218,138
|
|
Equity in earnings of affiliated
company
|
|
|
-
|
|
|
|
(132,868
|
)
|
I
ncrease in account
receivables
|
|
|
(75,330
|
)
|
|
|
(1,135,322
|
)
|
Increase
in
inventories
|
|
|
(23,889
|
)
|
|
|
-
|
|
Increase in prepaid expenses and
other receivables
|
|
|
(3,259,426
|
)
|
|
|
(688,233
|
)
|
Decrease in long term
receivables
|
|
|
111,316
|
|
|
|
-
|
|
Increase in trade
payables
|
|
|
1,164,560
|
|
|
|
933,978
|
|
Increase (decrease) in severance
pay
|
|
|
(57,139
|
)
|
|
|
71,950
|
|
Decrease in accrual for
non-recurring loss
|
|
|
(3,832,228
|
)
|
|
|
-
|
|
Increase in other
payables
|
|
|
326,826
|
|
|
|
1,401,202
|
|
Increase (decrease) in deferred
taxes
|
|
|
(900,556
|
)
|
|
|
125,165
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
351,635
|
|
|
|
3,264,530
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing
activities
|
|
|
|
|
|
|
|
|
Purchase of
equipment
|
|
|
(6,521,045
|
)
|
|
|
(881,096
|
)
|
Proceeds from short term
deposit
|
|
|
27,467,049
|
|
|
|
-
|
|
Change in other assets and
long-term receivables
|
|
|
-
|
|
|
|
4,954
|
|
Non recurring acquisition
expenses
|
|
|
(189,610
|
)
|
|
|
-
|
|
Acquisition of
minority interest in
Auracall
Limited
|
|
|
-
|
|
|
|
(527,339
|
)
|
Acquisition of minority interest
in Story Telecom, Inc.
|
|
|
(690,207
|
)
|
|
|
-
|
|
Acquisition of NTS Communications,
Inc.
|
|
|
(39,180,509
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(19,114,322
|
)
|
|
|
(1,403,481
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from financing
activities
|
|
|
|
|
|
|
|
|
Repayment of long term loans from
banks and others
|
|
|
(827,709
|
)
|
|
|
(688,788
|
)
|
Proceeds from issuance of shares
and detachable warrants, net of issuance expenses
|
|
|
14,496,037
|
|
|
|
853,648
|
|
Proceeds from long term loans from
banks
|
|
|
5,807,828
|
|
|
|
20,419
|
|
Proceeds from exercise of
options
|
|
|
14,368
|
|
|
|
22,050
|
|
Changes in capital lease
obligation
|
|
|
(72,203
|
)
|
|
|
(83,300
|
)
|
Repayment of convertible
notes
|
|
|
(914,942
|
)
|
|
|
(
533,239
|
)
|
Increase (decrease) in short term
loan and bank credit
|
|
|
335
|
|
|
|
(1,338,704
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
18,503,714
|
|
|
|
(1,747,914
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
(704,129
|
)
|
|
|
(202,936
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in
cash
|
|
|
(963,101
|
)
|
|
|
(89,801
|
)
|
|
|
|
|
|
|
|
|
|
Cash at the beginning of the
period
|
|
|
5,835,608
|
|
|
|
1,218,392
|
|
|
|
|
|
|
|
|
|
|
Cash at the end of the
period
|
|
$
|
4,872,507
|
|
|
$
|
1,128,591
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
Xfone, Inc. and
Subsidiaries
|
NOTES TO
CONSOLIDAT
ED FINANCIAL
STATEMENTS
SEPTEMBER
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, United Kingdom and
Israel.
|
Xfone's holdings in subsidiaries as of
September 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
SEPTEMBER
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
SEPTEMBER
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
(recently
renamed to the NYSE Altermext US, LLC)
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, the
Company entered into a Third Amendment to the purchase agreement,
pursuant to which the Company 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
SEPTEMBER
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(*
*
)
|
|
$
|
34,860,6
6
8
|
|
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
|
|
|
|
|
|
|
|
* The Company is still in the
process of allocating the Intangible Assets from this
acquisition.
|
|
** Includes accrued expenses
of $368,687 and cash of $6,485,284 that was received for the issuance
of 2,366,892 shares of the Company's
common stock.
|
Xfone, Inc. and
Subsidiaries
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER
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
SEPTEMBER
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 $1,983,087 and $1,090,572 at September 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 including
$2,070,015 and $1,753,503 of net
b
onds issuance cost,
at
September 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.
Xfone, Inc. and
Subsidiaries
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER
30, 2008
(Unaudited)
|
|
Note 2 - Significant Accounting Policies
(Cont.)
|
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.
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 September 30, 2008 (unaudited) and
December 31, 2007 (audited), the unaudited condensed consolidated
statements of operations for the three and nine months ended September 30,
2008 and 2007, and the unaudited condensed consolidated statements of cash flows
for the nine months ended September 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
SEPTEMBER
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 of NTS Communications, Inc. 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, commencing on September 2, 2008.
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, the Company issued a total of 789,863 shares of Common Stock valued at
$2,380,178 and 603,939 warrants exercisable for a period of five years into
shares of 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
SEPTEMBER
30, 2008
(Unaudited)
|
Note 3 - Capital Structure, stock
options, warrants (Cont.)
|
|
Nine
months ended
September
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
|
|
|
4,755,625
|
|
|
$
|
2.7
3
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of
options granted
|
|
|
|
|
|
$
|
1.24
|
|
(a) Include options under contractual
obligation as specified in note 3A, below.
The following table summarizes
information about options outstanding and exercisable at September 30,
2008:
|
|
Range price
($)
|
Number of
options
|
Weighted average remaining
contractual life (years)
|
Weighted average exercise
price
|
|
|
|
|
2.79-5.00
|
4,
755
,
625
|
3.
28
|
$2.7
3
|
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, 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
SEPTEMBER
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.
|
|
|
Nine
months ended
September
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
0
|
|
Forfeited
|
|
|
(44,470
|
)
|
|
$
|
3.31
|
|
Warrants outstanding at the end of
the period
|
|
|
7,015,709
|
|
|
$
|
|
|
The Company has a contractual obligation
to issue warrants to purchase an aggregate of 482,179 shares of its Common Stock
to two former employees of Xfone USA, Inc. 450,000 of such warrants are to be
exercisable at $3.63 per share, 3,725 of such warrants are to be exercisable at
$3.04 per share, and the remaining 28,454 shares are to be exercisable at $3.26
per share. The issuance of such warrants is subject to the approval of both the
NYSE Alternext (formerly
the American Stock
Exchange) and the
Tel Aviv Stock
Exchange
(“
TASE
”)
. The TASE granted approval on August
26, 2008. On October 3, 2008, the Company was advised by the NYSE Alternext that
the approval of the shareholders of the Company is required in order to allow
the issuance of the warrants and the listing of the underlying shares. The
Company will seek such approval at its 2008 annual meeting of shareholders,
scheduled to be held on December 16, 2008
Xfone, Inc. and
Subsidiaries
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER
30, 2008
(Unaudited)
|
Note 4 - Segment
Information
Geographical
segments
|
|
Nine
months
ended
|
|
|
Three months
ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
$
|
14,747,449
|
|
|
$
|
19,802,430
|
|
|
$
|
5,226,924
|
|
|
$
|
7,228,240
|
|
United
States
|
|
|
45,636,605
|
|
|
|
9,416,464
|
|
|
|
18,165,987
|
|
|
|
2,805,506
|
|
Israel
|
|
|
7,224,467
|
|
|
|
6,079,547
|
|
|
|
2,569,790
|
|
|
|
2,111,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
67,608,521
|
|
|
|
35,298,441
|
|
|
|
25,962,701
|
|
|
|
12,144,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
5,947,831
|
|
|
|
8,599,767
|
|
|
|
2,422,293
|
|
|
|
2,848,568
|
|
United
States
|
|
|
25,661,123
|
|
|
|
4,454,359
|
|
|
|
10,069,794
|
|
|
|
1,308,870
|
|
Israel
|
|
|
2,927,322
|
|
|
|
2,178,834
|
|
|
|
1,026,928
|
|
|
|
752,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of
revenues
|
|
|
34,536,276
|
|
|
|
15,232,960
|
|
|
|
13,519,015
|
|
|
|
4,909,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
8,799,618
|
|
|
|
11,202,663
|
|
|
|
2,804,631
|
|
|
|
4,379,672
|
|
United
States
|
|
|
19,975,482
|
|
|
|
4,962,105
|
|
|
|
8,096,193
|
|
|
|
1,496,636
|
|
Israel
|
|
|
4,297,145
|
|
|
|
3,900,713
|
|
|
|
1,542,862
|
|
|
|
1,358,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,072,245
|
|
|
|
20,065,481
|
|
|
|
12,443,686
|
|
|
|
7,235,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
6,636,852
|
|
|
|
9,871,602
|
|
|
|
2,155,735
|
|
|
|
4,037,476
|
|
United
States
|
|
|
16,677,009
|
|
|
|
4,383,633
|
|
|
|
6,517,139
|
|
|
|
1,254,060
|
|
Israel
|
|
|
3,332,649
|
|
|
|
2,109,371
|
|
|
|
1,370,271
|
|
|
|
794,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,646,510
|
|
|
|
16,364,606
|
|
|
|
10,043,145
|
|
|
|
6,085,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
2,162,766
|
|
|
|
1,331,061
|
|
|
|
648,896
|
|
|
|
342,196
|
|
United
States
|
|
|
3,298,473
|
|
|
|
578,472
|
|
|
|
1,579,054
|
|
|
|
242,576
|
|
Israel
|
|
|
964,496
|
|
|
|
1,791,342
|
|
|
|
172,591
|
|
|
|
564,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,425,735
|
|
|
|
3,700,875
|
|
|
|
2,400,541
|
|
|
|
1,149,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses related to the
Headquarters in the
US
|
|
|
1,614,575
|
|
|
|
1,375,084
|
|
|
|
631,168
|
|
|
|
300,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit
|
|
$
|
4,811,160
|
|
|
$
|
2,325,791
|
|
|
$
|
1,769,373
|
|
|
$
|
848,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xfone, Inc. and
Subsidiaries
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER
30, 2008
(Unaudited)
|
Note 5 – Potential
acquisitions
An agreement in principle to acquire a
majority stake in Tadiran Telecom - Communication Services In Israel
LP.
On March 17, 2008,
Xfone 018
had
entered into an Agreement of Principles
with Tiv Taam Holdings 1 Ltd., an Israeli public company (“Tiv Taam”), pursuant
to which
Xfone
018
had
agreed to purchase from Tiv Taam, and
Tiv Taam
had
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 owns (the “Agreement of
Principles”). Robomatix
was the
own
er of
approximately 90% of the issued share
capital of Tadiran Telecom-Communication Services In Israel Ltd. (“Tadiran
Telecom”), 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
would have
also acquire
d
control over Tadiran Telecom and
Tadir
a
n
Telecom LP. Pursuant to the
Agreement of Principles, the purchase price for the acquisition
was
NIS
44,000,000 ($
11
,351,909
), subject to adjustment as set forth in
the agreement, payable in three installments
.
Pursuant to the Agreement of Principles,
the Company
, as the parent company of
Xfone 018
,
had
agreed to sign a letter of guarantee
with respect to the Second Installment and the Third
Installment.
On
September 2, 2008, Robomatix entered into an agreement with a third party
to sell its holdings of common stock of Tadiran Telecom and its rights in
Tadiran Telecom LP. Accordingly, the negotiations between Xfone 018
and Tiv Taam ceased.
As a
result, the Company recoded one-time expenses of $189,610 consist primarily of
f
inancing, legal and accounting
fees.
Item
2.
|
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 Quarterly
Report 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 Quarterly
Report.
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. The Company is
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. The Company serves
customers worldwide.
In February 2007, the Company
moved its principal executive offices from the
UK
to
Flowood
,
Mississippi
, and shared executive office space with
its wholly owned
U.S.
subsidiary, Xfone USA, Inc. The
headquarters of Xfone
USA
and its principal executive
offices recently moved from the Flowood,
Mississippi
location to
Lubbock
,
Texas
, to the existing headquarters of NTS
Communications, Inc. ("NTS"), which the Company acquired in February
2008.
On October 4, 2000, the Company 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, the Company
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
. The Company 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, 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. 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, the Company 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, the Company 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, the Company 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, the Company 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, the Company 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, the Company 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, the Company 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, the Company 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, the Company 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, the Company 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, the Company 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, the Company 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, the Company 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 the Company 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. The Company 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, the Company, 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, the Company 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, the Company 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, the Company 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, the
Company 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, the Company 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,
based on the exchange rate
as of December 13, 2007
)
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
that is 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 is 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 are linked to
the Israeli Consumer Price Index.
On
November 4, 2008, the Company filed a public prospectus (the “Prospectus”) with
the Israel Securities Authority (the “ISA”) and the
Tel Aviv Stock Exchange ("TASE")
for listing of the Bonds for trading on the TASE.
On November 11, 2008 (the “Date of
Listing”), the Bonds
commenced trading on the
TASE. From the Date of Issuance until
the Date of Listing, the Bonds accrued annual interest at a rate of 9%. As
of the Date of Listing,
the
interest rate for the unpaid balance of the Bonds
was
reduced by 1% to a
n
annual interest rate of
8%
The Bonds were rated
A3 by
Midroog Limited, an Israeli
rating company affiliated with Moody’s Investor Services
.
The Bonds may only be traded in
Israel
.
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, commencing on September 2,
2008.
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 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 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 ISA and the TASE for the listing for trade of the Bonds on
the TASE.
On November 2, 2008, the Company entered into an Underwriting
Agreement (the “Underwriting Agreement”) with Excellence Underwriters and First
International Underwriters in connection with the publication of the Prospectus
and the listing of the Bonds on the TASE. Pursuant to the terms of the December
12, 2007 Agreement and the Underwriting Agreement,
in connection with Excellence
Underwriters and First International Underwriters service as Pricing
Underwriters, including the services rendered by them to the Company in
connection with the Bonds offering, publication of the Prospectus and listing of
the Bonds on the TASE, the Company paid Excellence Underwriters and First
International Underwriters a fee equal to 3% of the proceeds of the offering.
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 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, the Company 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,
the Company 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, the Company 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, the Company entered into a Third Amendment, pursuant to which the Company
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
OPERATIONS
Financial Information - Percentage of
Revenues
|
|
Nine
months ended
September
30,
|
|
|
Three months
ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of
Revenues
|
|
|
51.1
|
%
|
|
|
43.2
|
%
|
|
|
52
.1
|
%
|
|
|
40.4
|
%
|
Gross
Profit
|
|
|
48.9
|
%
|
|
|
56.8
|
%
|
|
|
47.9
|
%
|
|
|
59.6
|
%
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
Development
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
Marketing and
Selling
|
|
|
14.1
|
%
|
|
|
24.4
|
%
|
|
|
13
|
%
|
|
|
25.7
|
%
|
General and
Administrative
|
|
|
27.4
|
%
|
|
|
25.8
|
%
|
|
|
27.3
|
%
|
|
|
26.8
|
%
|
Non-recurring
expense
|
|
|
0.3
|
%
|
|
|
-
|
|
|
|
0.7
|
%
|
|
|
-
|
|
Total Operating
Expenses
|
|
|
41.8
|
%
|
|
|
50.3
|
%
|
|
|
41.1
|
%
|
|
|
52.6
|
%
|
Income (loss) before
Taxes
|
|
|
-0.6
|
%
|
|
|
5.3
|
%
|
|
|
2.8
|
%
|
|
|
6.2
|
%
|
Net Income
(loss)
|
|
|
0.4
|
%
|
|
|
4
|
%
|
|
|
2.5
|
%
|
|
|
4.7
|
%
|
COMPARISON OF THE NINE MONTHS PERIODS
ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30, 2007
Revenues
. Revenues for the nine months
ended September 30, 2008 increased 91.5% to $67,608,521 from $35,298,441 for the
same period in 2007. The increase of $32,310,080 in the consolidated revenues is
attributed to $36,220,141 increase in our revenues in the
United States
and $1,144,920 increase in
Israel
which is offset by a $5,054,981
decrease in revenues in the
United Kingdom
. In the first nine months of 2008,
revenues in the United States as a percentage of total revenues increased to
67.5% from 26.7% for the same period in 2007, whereas revenues in the United
Kingdom and Israel as a percentage of total revenues decreased to 21.8% and
10.7% from 56.1% and 17.2%, respectively.
Revenues in the
United States
for the nine months ended September 30,
2008 increased 384.6% to $45,636,605 from $9,416,464 for the same period in
2007. Approximately $37,500,000 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 nine months ended September 30,
2008 decreased 25.5% to $14,747,449 from $19,802,430 for the same period in
2007. The decrease in sales in the
UK
was attributable to a change in the
tariff structure by the mobile operator O2 and to the devaluation of the GBP to
the U.S. dollar during the third quarter of 2008.
Revenues in
Israel
for the nine months ended September 30,
2008 increased 18.8% to $7,224,467 from $6,079,547 for the same period in 2007.
This increase is mainly attributed to revaluation of the
NIS
to the U.S dollar and ongoing marketing
efforts.
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 nine months ended September 30, 2008
increased 126.7% to $34,536,276 from $15,232,960 for the same period in 2007.
Cost of revenues as a percentage of revenues in the nine months ended September
30, 2008 increased to 51.1% from 43.2% in the same period in
2007.
Cost of revenues as a percentage of
revenues in the
United
States
in the nine months
ended September 30, 2008 increased to 56.2% from 47.3% 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 first three quarters of 2008,
include the cost of Auracall which was acquired
in its entirety
on August 15, 2007 and was consolidated
for only half of the third quarter of 2007. As a result of the consolidation of
low cost 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 40.3% compared to 43.4% in the same period in 2007. Such decrease in
the cost of revenues was offset by a devaluation of the GBP to the U.S. dollar
during the third quarter of 2008. 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 nine months ended September 30,
2008 increased to 40.5% from 35.8% 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 nine months ended September 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 nine months ended
September 30, 2008 increased 10.7% to $9,517,132 from $8,598,893 for the same
period in 2007. Marketing and selling expenses as a percentage of revenues
decreased to 14.1% for the nine months ended September 30, 2008 from 24.4% for
the same period in 2007. Approximately $2,085,000 in marketing expenses for the
nine months ended September 30, 2008 is contributed by NTS which was
consolidated for the first time in the first quarter of 2008. An increase
of approximately $425,000 in
Israel
is attributed to ongoing marketing
campaigns during the first nine months of
2008. A
decrease of approximately $1,600,000 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 nine months ended September 30, 2008
increased 103.3% to $18,506,824 from $9,102,552 for the same period in 2007.
Approximately $10,000,000 in general and administrative expenses for the nine
months ended September 30, 2008 is contributed by NTS which was
consolidated for the first time in the first quarter of
2008.
Non-
recurring
Expense
.
On March 17,
2008,
Xfone 018
Ltd. (“
Xfone
018
”
) entered into an
Agreement of Principles with Tiv Taam Holdings 1 Ltd.
(“
Agreement of
Principles
”)
for the acquisition of
control
over Tadiran Telecom-Communication Services In Israel
-
Limited Partnership
(“Tadir
an
Telecom LP”)
.
During the third
quarter of 2008,
negotiations between
Xfone
018
, Tiv
Taam and the management and employees of Tadiran Telecom LP have
ceased
. As a result, we
recoded one-time expenses of $189,610 consist primarily of financial, legal and
accounting fees.
Financing
Expenses
. Financing
expenses, net, for the nine months ended September 30, 2008 increased to
$5,031,403 from $380,347 for the same period in 2007. Approximately $3,200,000
of the increase in the financial expenses is attributed to the effect of
fluctuation in the exchange rate of the
NIS
on our Bonds which are stated in
NIS
and linked to the Israeli CPI and
approximately $1,
200
,000 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
nine months ended September 30, 2008 was ($244,589) compared to net profit of
$1,421,301 for the same period in 2007.
Earning (Loss) Per
Share.
Diluted net loss per
share of common stock for the nine months ended September 30, 2008 was ($0.014),
compared to diluted net income per share of common stock $0.124 for the same
period in 2007.
COMPARISON OF THE THREE MONTH PERIODS
ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30, 2007
Revenues
. Revenues for the quarter ended
September 30, 2008 increased 113.8% to $25,962,701 from $12,144,919 for the same
period in 2007. This increase in the consolidated revenues is attributed to an
increase of $15,360,481 and $458,617 in the
United States
and
Israel
, respectively, which is offset by a
decrease of $2,001,316 in the revenues in the
U.K.
In the third quarter of 2008,
revenues in the
United
States
as a percentage of
total revenues increased to 70% from 23.1% for the same period in 2007, whereas
revenues in the
United
Kingdom
and
Israel
as a percentage of total revenues
decreased to 20.1% and 9.9% from 59.5% and 17.4%,
respectively.
Revenues in the
United States
for the quarter ended September 30,
2008 increased 547.5% to $18,165,987 from $2,805,506 for the same period in
2007. Approximately $15,350,000 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. 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 September 30,
2008 decreased 27.7% to approximately $5,226,924 from $7,228,240 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 September 30,
2008 increased 21.7% to approximately $2,569,790 from $2,111,173 for the same
period in 2007. This increase is mainly attributed to the revaluation of the
NIS
to the U.S dollar and to ongoing
marketing efforts.
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 September 30, 2008
increased 175.4% to approximately $13,519,015 from $4,909,717 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 September 30, 2008, increased to 52.1% from 40.4%
in the same period in 2007.
Cost of revenues as a percentage of
revenues in the
United
States
for the three months
ended September 30, 2008 increased to 55.4% from 46.7% 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 third quarter of 2008 include
the cost of Auracall which was acquired
in its entirety
on August 15, 2007 and was not
consolidated in the same period of 2007. Despite the consolidation of low cost
products which were sold by Auracall and ongoing product improvements, cost of
revenues as percentage of revenues in the three months ended September 30, 2008
increased to 46.3% compared to 39.4% 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 September 30,
2008 increased to 40% from 35.6% 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 September 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 at the same level during the fourth
quarter 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
September 30, 2008 increased 8.1% to $3,378,328 from $3,124,387 for the same
period in 2007. Marketing and selling expenses as a percentage of revenues
decreased to 13% for the quarter ended September 30, 2008 from 25.7% for the
same period in 2007. Approximately $850,000 in marketing expenses for the
quarter ended September 30, 2008 is contributed by NTS which was
consolidated for the first time in the first quarter of 2008. An increase
of approximately $175,000 in
Israel
is attributed to ongoing marketing
campaigns during the third quarter of
2008. A
decrease of approximately $1,100,000 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 September 30, 2008
increased 117.8% to approximately $7,091,436 from $3,255,822 for the same
period in 2007. Approximately $4,300,000 in General and Administrative expenses
for the quarter ended September 30, 2008 is contributed by NTS which was
consolidated for the first time in the first quarter of
2008.
Non-
recurring
Expense
.
On March 17,
2008,
Xfone 018
Ltd. (“
Xfone
018
”
) entered into an
Agreement of Principles with Tiv Taam Holdings 1 Ltd.
(“
Agreement of
Principles
”)
for the acquisition of
control
over Tadiran Telecom-Communication Services In Israel
-
Limited Partnership
(“Tadir
an
Telecom LP”)
.
During the third
quarter of 2008,
negotiations between
Xfone
018
, Tiv
Taam and the management and employees of Tadiran Telecom LP have
ceased
. As a result, we
recoded one-time expenses of $189,610 consist primarily of financial, legal and
accounting fees.
Financing
Expenses
. Financing
expenses, net, for the quarter ended September 30, 2008 increased to $1,035,823
from $73,652 for the same period in 2007. Of such increase, $301,704 is
attributed to the effect of fluctuation in the exchange rate of the
NIS
on our Bonds which are stated in
NIS
and linked to the Israeli CPI, and
$652,139 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 which report in
NIS
and GBP as their
functional currencies.
Net
Income.
Net profit for the
quarter ended September 30, 2008 was $637,639 compared to net profit of $565,467
for the same period in 2007.
Earning Per
Share.
Diluted net profit
per share of common stock for the quarter ended September 30, 2008 was $0.035,
compared to diluted net profit of $0.049 for the same period in
2007.
LIQUIDITY AND CAPITAL
RESOURCES
Cash and cash equivalents as of
September 30, 2008, amounted to $4,872,507 compared to $5,835,608 as of December
31, 2007, a decrease of $963,101. Net cash provided by operating activities
in the nine months ended September 30, 2008, was $351,635 including the payment
of semi-annual interest coupon of the Company's bonds amounting to $1,334,924.
Cash used for investing activities in the nine months ended September
30, 2008 was $19,114,322, and is primarily 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 nine months
ended September 30, 2008 was $18,503,714, and is primarily attributable to
issuance of shares and warrants for cash of $14,496,037, proceeds from long-term
line of credit from a bank and the repayment of financial obligations of
$1,742,651 including the full repayment of the loan from Laurus Master
Fund.
Our capital investments are primarily
for the build-out of our fiber network, 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 September 30, 2008,
the minimum future lease payments are:
Date
|
|
|
|
2008
|
|
$
|
56,329
|
|
2009
|
|
|
44,528
|
|
|
|
$
|
100,857
|
|
We will 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 (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,
based on the exchange rate
as of December 13, 2007
)
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
that is 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 is 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 are linked to
the Israeli Consumer Price Index.
On
November 4, 2008, the Company filed a public prospectus (the “Prospectus”) with
the Israel Securities Authority (the “ISA”) and the
Tel Aviv Stock Exchange
("TASE")
for
listing of the Bonds for trading on the TASE.
On November 11, 2008 (the “Date of
Listing”), the Bonds
commenced trading on the
TASE. From the Date of Issuance until
the Date of Listing, the Bonds accrued annual interest at a rate of 9%. As
of the Date of Listing,
the
interest rate for the unpaid balance of the Bonds
was
reduced by 1% to a
n
annual interest rate of
8%
The Bonds were rated
A3 by
Midroog Limited, an Israeli
rating company affiliated with Moody’s Investor Services
.
The Bonds may only be traded in
Israel
.
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 of NTS Communications, Inc., 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, 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, commencing on September 2, 2008.
On July 17, 2007, Story Telecom Limited,
our
UK
subsidiary, agreed to loan us up to
£400,000 ($613,220
) 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 matures on July 16, 2009,
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, the Company borrowed £350,000 ($536,567
) and £50,000 ($76,652), 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
($153,305
) were made on
October 9, 2007. As of September 30, 2008, the aggregate outstanding borrowings
were £500,000 ($766,525
).
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 shares of Xfone Common Stock and
44,470 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 its fixed assets in the form
of installment loan agreements. The total aggregate amount of these loans as of
September 30, 2008 is $126,752.
Our U.S subsidiary, NTS Communications,
Inc., has short-term bank facilities of $4,000,000 and $910,147 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 September 30, 2008 is
$7,449,369.
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, Xfone, Inc. and its subsidiaries Swiftnet Limited and
Xfone 018
Ltd., individually and/or jointly,
agreed to guarantee all undisputed debts owed 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, the Company
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, the Company 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. On September 26, 2008, the Company repaid the loan to Laurus
Master Fund in full.
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 ($76,652
).
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
($229,957
). As part of the
agreement a Debenture charge was raised on all the assets of Equitalk.
During the third quarter of 2008,
Equitalk paid-off the loan to Barclays Bank in full.
Israeli subsidiary
Our
Israel
based subsidiary,
Xfone 018
Ltd. has received credit facilities
from Bank Hapoalim B.M. in
Israel
in order to finance its activities. As
of September 30, 2008, the credit facilities include a revolving credit line of
500,000
NIS
($
128,999
), a short-term credit line of 2,250,000
NIS
($
580,495
), and long-term credit line of
1,290,000
NIS
($
332,817
). In addition, the bank made available
to
Xfone
018
a
long-term facility of 3,150,000
NIS
($
812,693
) 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 the Company’s common stock owned by Mr. Keinan, and an undertaking to
provide Bank Hapoalim with an additional financial guarantee of up to $500,000
under certain circumstances. The Company agreed to indemnify
Abraham Keinan
and/or
Guy Nissenson
on account of any damage and/or loss
and/or expense (including legal expenses) that they may incur in connection with
the stock pledge and/or any other obligation made by them to Bank Hapoalim in
connection with the collateral; (f) The Company and Swiftnet Limited issued a
Letter of Guarantee, unlimited in amount, in favor of the bank, guaranteeing all
debt and indebtedness of
Xfone 018
towards the bank; (g) subordination of
the Minority Partner Loan (as defined below). As of September 30, 2008,
Xfone 018
has a balance due of
1,836,919
NIS
($
473,921
) under the credit facility
.
According to an agreement between us,
Xfone 018
Ltd. and the 26% minority interest
partner in
Xfone
018
(the “Minority
Partner”), the Minority Partner provided in
2004 a
bank guarantee of 10,000,000 NIS
($2,579,979
) 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 September 30, 2008, the
balance of the Minority Partner Loan is 2,003,148
NIS
($516,808
).
According to the above-mentioned Term
Note and agreement with Minority Partner, as of September 30, 2008, the Company
provided to
Xfone
018
a
shareholder loan in an aggregate amount
of $1,305,797.
As of September 30, 2008, our Israeli
subsidiary activities were financed by the shareholders loans and by using 1,144
NIS ($335) 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 ($83,204
) 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 September 30, 2008 is
$
56
,368.
IMPACT OF INFLATION AND CURRENCY
FLUCTUATIONS
21.8% and 10.7% of our revenues in the
first three quarters of 2008 were derived from our
U.K.
and Israeli operations, respectively,
compared to 56.1% and 17.2% in the same period, in
2007. In
the first nine months of 2008,
approximately 30
% of the
direct traffic costs in Israel were in GBP and the rest were in NIS compared to
35
% in the same period in
2007. We believe that the
U.S.
and Israeli portions of our revenues
will increase in the next quarter of 2008.
For continuing transactions made in
currencies other then US dollar, we use a current conversion rate. For
non-contingent past transactions made in currencies other then US dollar, we use
the conversion rate of the time of transaction.
Our revenues and costs of revenues are
mainly in U.S. dollars.
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 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 nine months period ended September 30, 2008, the revaluation of the
NIS
in relation with the U.S. dollar and
the inflation increased our outstanding debt by approximately
$3,516,000 and $1,522,000 respectively. During the three months period
ended September 30, 2008, the devaluation of the NIS in relation with the U.S.
dollar and the inflation increased (decreased) our outstanding debt by
approximately ($357,000) and $662,000 respectively. We 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
the Company operates would affect our operational results if we will not be able
to match our revenues with growing expenses caused by
inflation.
Item
3.
|
Quantitative
and
Qualitative Disclosures
about Market
Risk
|
Not
applicable.
Item
4T.
|
Controls
and Procedures
|
(a) Management’s Quarterly Report on
Internal Control over Financial Reporting.
As of the
end of the period covered by this Quarterly Report, we carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer/Principal Accounting Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon this evaluation, our Chief Executive Officer and
Chief Financial Officer/Principal Accounting Officer have concluded that
information required to be disclosed is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer/Principal
Accounting Officer, to allow for timely decisions regarding required disclosure
of material information required to be disclosed in the reports that we file or
submit under the Exchange Act. Our disclosure controls and procedures are
designed to provide reasonable assurance of achieving these objectives and our
Chief Executive Officer and Chief Financial Officer/Principal Accounting Officer
have concluded that our disclosure controls and procedures are effective to a
reasonable assurance level of achieving such objectives. However, it should
be noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.
(b) Changes in Internal Control Over
Financial Reporting.
There
were no changes in our internal control over financial reporting identified in
connection with the evaluation described above during the period covered by
this Quarterly Report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II
:
OTHER
INFORMATION
Item
1.
|
Legal
Proceedings
|
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.
Not
applicable.
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
None.
Item
3.
|
Defaults
upon Senior Securities
|
None.
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
None.
Item
5.
|
Other
Information
|
None.
Exhibit
Number
|
Description
|
2.
|
Agreement and plan of
reorganization dated September 20, 2000, between the Company and Swiftnet
Limited. (1)
|
3.1
|
Articles of Incorporation of the
Company.(1)
|
3.2a
|
Bylaws of the
Company.(1)
|
3.2b
|
Amended Bylaws of the
Company.(4)
|
3.3
|
Memorandum of Association of
Swiftnet Limited.(1)
|
3.4
|
Articles of Association of
Swiftnet Limited.(1)
|
3.6
|
Bylaws of Xfone USA,
Inc.(7)
|
3.8.
|
Amended and Restated Bylaws of the
Company dated March 12, 2006.(22)
|
3.9
|
Reamended and Restated Bylaws of
the Company dated February 5, 2007.(32)
|
4.
|
Specimen Stock
Certificate.(1)
|
5.
|
Opinion of Gersten Savage
LLP.
(50)
|
10.1
|
Agreement dated May 11, 2000,
between Swiftnet Limited and Guy Nissenson.(1)
|
10.2
|
Employment Agreement dated January
1, 2000 with Bosmat Houston. (1)
|
10.3
|
Loan Agreement dated August 5,
2000, with Swiftnet Limited, Guy Nissenson, and Nissim
Levy.(1)
|
10.4
|
Promissory Note dated September
29, 2000, between the Company and Abraham
Keinan.(1)
|
10.5
|
Stock Purchase Agreement dated
June 19, 2000, between Swiftnet Limited, Abraham Keinan, and Campbeltown
Business Ltd. (1)
|
10.6
|
Consulting Agreement dated May 11,
2000 between Swiftnet Limited and Campbeltown Business
Ltd.(1)
|
10.7
|
Agreement dated July 30, 2001,
with Campbeltown Business Ltd.(1)
|
10.8
|
Contract dated June 20, 1998, with
WorldCom International Ltd.(1)
|
10.9
|
Contract dated April 11, 2000,
with VoiceNet Inc.(1)
|
10.10
|
Contract dated April 25, 2000,
with InTouchUK.com Ltd.(1)
|
10.11
|
Letter of Understanding dated July
30, 2001, from Campbeltown Business Ltd. to the
Company.(2)
|
10.12
|
Agreement dated April 6, 2000,
between Adar International, Inc./Mr.
Sidney
J. Golub and Swiftnet Limited.
(2)
|
10.13
|
Lease Agreement dated December 4,
1991, between Elmtree Investments Ltd. and Swiftnet
Limited.(2)
|
10.14
|
Lease Agreement dated October 8,
2001, between Postwick Property Holdings Limited and Swiftnet Limited.
(2)
|
10.15
|
Agreement dated September 30,
2002, between the Company, Swiftnet Limited., and Nir
Davison.(5)
|
10.16
|
As to Form: Shares and Warrant
Purchase Agreement, Irrevocable Proxy, Warrant A, Warrant B and
Registration Rights Agreement of Selling Shareholders Platinum Partners
Value Arbitrage Fund LP, Countrywide Partners LLC and WEC Partners LLC.
(6)
|
10.17
|
As to Form: Shares and Warrant
Purchase Agreement, Irrevocable Proxy, Warrant A, Warrant B and
Registration Rights Agreement of Selling Shareholders Simon Langbart,
Robert Langbart, Arik Ecker, Zwi Ecker, Michael Derman, Errol
Derman, Yuval Haim Sobel, Zvi Sobel, Tenram Investment Ltd., Michael
Zinn, Michael Weiss. (6)
|
10.18
|
As to Form: Shares and Warrant
Purchase Agreement, Irrevocable Proxy, Warrant A, Warrant B and
Registration Rights Agreement of Selling Shareholders Southridge Partners
LP and Southshore Capital Fund Ltd. (6)
|
10.19
|
As to Form: Shares and Warrant
Purchase Agreement, Irrevocable Proxy, Warrant A, Warrant B and
Registration Rights Agreement of Selling Shareholders Crestview Capital
Master LLC. (6)
|
10.20
|
As to Form: Shares and Warrant
Purchase Agreement, Irrevocable Proxy, Warrant A, Warrant B and
Registration Rights Agreement of Selling Shareholders Adam Breslawsky,
Oded Levy, Michael Epstein, Steven Frank, Joshua Lobel, Joshua Kazan and
The Oberon Group LLC. (6)
|
10.21
|
Newco (Auracall Limited) Formation
Agreement.(6)
|
10.22
|
Agreement with ITXC
Corporation.(6)
|
10.23
|
Agreement with Teleglobe
International.(6)
|
10.23.1
|
Amendment to Agreement with
Teleglobe International.(6)
|
10.24
|
Agreement with British
Telecommunications.(6)
|
10.25
|
Agreement with Easyair Limited
(OpenAir).(6)
|
10.26
|
Agreement with
Worldnet.(6)
|
10.27
|
Agreement with Portfolio
PR.(6)
|
10.28
|
Agreement with Stern and
Company.(6)
|
10.29
|
Letter to the Company dated
December 31, 2003, from Abraham Keinan.(6)
|
10.30
|
Agreement between Swiftnet Limited
and Dan Kirschner.(8)
|
10.31
|
Agreement and Plan of
Merger.(7)
|
10.32
|
Escrow
Agreement.(7)
|
10.33
|
Release
Agreement.(7)
|
10.34
|
Employment Agreement date March
10, 2005, between Xfone USA, Inc. and Wade
Spooner.(7)
|
10.35
|
Employment Agreement date March
10, 2005, between Xfone USA, Inc. and Ted
Parsons.(7)
|
10.36
|
First Amendment to Agreement and
Plan of Merger (to acquire WS Telecom,
Inc.).(11)
|
10.37
|
Finders Agreement with The Oberon
Group, LLC.(11)
|
10.38
|
Agreement with The Oberon Group,
LLC.(11)
|
10.39
|
Management Agreement between WS
Telecom, Inc. and Xfone USA, Inc.(8)
|
10.40
|
Engagement Letter to Tommy R.
Ferguson, Confidentiality Agreement, and Executive Inventions Agreement
dated August 19, 2004. (11)
|
10.41
|
Voting Agreement dated September
28, 2004.(11)
|
10.42
|
Novation Agreement executed
September 27, 2004.(11)
|
10.43
|
Novation Agreement executed
September 28, 2004.(11)
|
10.44
|
Investment Agreement dated August
26, 2004, with Ilan Shoshani.(12)
|
10.44.1
|
Addendum and Clarification to the
Investment Agreement with Ilan Shoshani dated September 13, 2004.
(12)
|
10.45
|
Agreement dated November 16, 2004,
with Elite Financial Communications Group.(13)
|
10.46
|
Financial Services and Business
Development Consulting Agreement dated November 18, 2004, with Dionysos
Investments (1999) Ltd. (13)
|
10.47
|
Agreement and Plan of Merger to
acquire I-55 Internet Services, Inc. dated August 18,
2005.(14)
|
10.48
|
Agreement and Plan of Merger to
acquire I-55 Telecommunications, LLC dated August 26,
2005.(15)
|
10.49
|
Securities Purchase Agreement,
dated September 27, 2005, by and between the Company and Laurus Master
Fund, Ltd. (16)
|
10.50
|
Secured Convertible Term Note,
dated September 27, 2005, by the Company in favor of Laurus Master Fund,
Ltd.; Adjustment Provision Waiver Agreement, dated September 27, 2005, by
and between the Company and Laurus Fund, Ltd.
(16)
|
10.51
|
Common Stock Purchase Warrant,
dated September 27, 2005, by the Company in favor of Laurus Master Fund,
Ltd. (16)
|
10.52
|
Registration Rights Agreement,
dated September 27, 2005, by and between the Company and Laurus Master
Fund, Ltd. (16)
|
10.53
|
Master Security Agreement, dated
September 27, 2005, by and between the Company, Xfone USA, Inc., eXpeTel
Communications, Inc., Gulf Coast Utilities, Inc., and Laurus Master Fund,
Ltd. (16)
|
10.54
|
Stock Pledge Agreement, dated
September 27, 2005, by and between the Company, Xfone USA, Inc., and
Laurus Master Fund, Ltd. (16)
|
10.55
|
Subsidiary Guarantee dated
September 27, 2005, by Xfone USA, Inc., eXpeTel Communications, Inc. and
Gulf Coast Utilities, Inc. in favor of Laurus Master Fund, Ltd.
(16)
|
10.56
|
Funds Escrow Agreement, dated
September 27, 2005, by and between the Company, Laurus Master Fund, Ltd.
and Loeb & Loeb LLP; Disbursement Letter, dated September 27, 2005.
(16)
|
10.57
|
Incremental Funding Side Letter,
dated September 27, 2005, by and between the Company and Laurus Master
Fund, Ltd. (16)
|
10.58
|
Securities Purchase Agreement
dated September 28, 2005, by and between the Company and Crestview Capital
Mater, LLC, Burlingame Equity Investors, LP, Burlingame Equity Investors
II, LP, Burlingame Equity Investors (Offshore), Ltd., and Mercantile
Discount - Provident Funds. (16)
|
10.59
|
Registration Rights Agreement,
dated September 28, 2005, by and between the Company and Crestview Capital
Mater, LLC, Burlingame Equity Investors, LP, Burlingame Equity Investors
II, LP, Burlingame Equity Investors (Offshore), Ltd., and Mercantile
Discount - Provident Funds. (16)
|
10.60
|
Common Stock Purchase Warrant,
dated September 28, 2005, by the Company in favor of the Crestview Capital
Mater, LLC, Burlingame Equity Investors, LP, Burlingame Equity Investors
II, LP, Burlingame Equity Investors (Offshore), Ltd., and Mercantile
Discount - Provident Funds. (16)
|
10.61
|
Escrow Agreement, dated September
28, 2005, by and between the Company, the Purchasers and Feldman Weinstein
LLP. (16)
|
10.62
|
Management Agreement dated October
11, 2005.(17)
|
10.63
|
First Amendment to Agreement and
Plan of Merger (to acquire I-55 Internet Services, Inc.), dated October
10, 2005. (17)
|
10.64
|
Letter Agreement with MCG Capital
Corporation dated October 10, 2005.(17)
|
10.65
|
Securities Purchase Agreement,
dated November 23, 2005, between the Company and Mercantile Discount -
Provident Funds, Hadar Insurance Company Ltd., The Israeli Phoenix
Assurance Company Ltd. and Gaon Gemel Ltd. (18)
|
10.66
|
Registration Rights Agreement,
dated November 23, 2005, between the Company and Mercantile Discount -
Provident Funds, Hadar Insurance Company Ltd., The Israeli Phoenix
Assurance Company Ltd. and Gaon Gemel Ltd. (18)
|
10.67
|
Common Stock Purchase Warrant,
dated November 23, 2005, by the Company in favor of Mercantile Discount -
Provident Funds, Hadar Insurance Company Ltd., The Israeli Phoenix
Assurance Company Ltd. and Gaon Gemel Ltd. (18)
|
10.68
|
Escrow Agreement, dated November
23, 2005, between the Company, the Escrow Agent, and Mercantile Discount -
Provident Funds, Hadar Insurance Company Ltd., The Israeli Phoenix
Assurance Company Ltd. and Gaon Gemel Ltd. (18)
|
10.69
|
Management Agreement with I-55
Telecommunications, LLC dated October 12,
2005.(19)
|
10.70
|
Agreement - General Terms and
Conditions with EBI Comm, Inc., dated January 1,
2006.(21)
|
10.71
|
Asset Purchase Agreement with
Canufly.net, Inc., dated January 10, 2006.(21)
|
10.72
|
Stock Purchase Agreement dated May
10, 2006, by and among the Company, Story Telecom, Inc., Story Telecom
Limited, Story Telecom (Ireland) Limited, Nir Davison, and Trecastle
Holdings Limited. (23)
|
10.73
|
Agreement dated May 25, 2006, by
and among the Company and the shareholders of Equitalk.co.uk Limited.
(24)
|
10.74
|
Securities Purchase Agreement,
dated June 19, 2006, by and between the Company and the Purchasers.
(25)
|
10.75
|
Registration Rights Agreement,
dated June 19, 2006, by and between the Company and the Purchasers.
(25)
|
10.76
|
Common Stock Purchase Warrant,
dated June 19, 2006, by the Company in favor of the
Purchasers.(25)
|
10.77
|
Escrow Agreement, dated June 19,
2006, by and between the Company, the Escrow Agent, and the Purchasers.
(25)
|
10.78
|
Form of Indemnification Agreement
between the Company and its Directors and
Officers.(27)
|
10.79
|
Agreement to Purchase Promissory
Note dated October 31, 2005, with Randall Wade James
Tricou.(27)
|
10.80
|
Agreement to Purchase Promissory
Note dated October 31, 2005, with Rene Tricou - Tricou Construction.
(27)
|
10.81
|
Agreement to Purchase Promissory
Note dated October 31, 2005, with Rene Tricou - Bon Aire Estates.
(27)
|
10.82
|
Agreement to Purchase Promissory
Note dated October 31, 2005, with Rene Tricou - Bon Aire Utility.
(27)
|
10.83
|
Agreement to Purchase Promissory
Note dated February 3, 2006, with Danny
Acosta.(27)
|
10.84
|
Letter Agreement dated November
15, 2005, with Oberon Securities, LLC.(27)
|
10.85
|
Letter Agreement dated June 15,
2006, with Oberon Securities, LLC.(27)
|
10.86
|
Second Amendment to Agreement and
Plan of Merger (to acquire WS Telecom, Inc.), dated June 28, 2006.
(27)
|
10.87
|
General Contract for Services
dated January 1, 2005, by and between the Company and Swiftnet Limited.
(27)
|
10.88
|
Service Agreement dated December
6, 2005, by and between the Company and Elite Financial Communications
Group, LLC. (27)
|
10.89
|
Agreement for Market Making in
Securities dated July 31, 2006, by and between the Company and Excellence
Nessuah Stock Exchange Services Ltd. (27)
|
10.90
|
Shareholders Loan Agreement, dated
September 27, 2006, by and between Auracall Limited, Swiftnet Limited, and
Dan Kirschner. (28)
|
10.91
|
Service Agreement, dated November
7, 2006, by and between the Company and Institutional Marketing Services,
Inc. (28)
|
10.92
|
Consultancy Agreement, dated
November 20, 2006, by and between the Company and Crestview Capital
Partners, LLP. (29)
|
10.93
|
Agreement dated December 24, 2006,
by and between the Company, Halman-Aldubi Provident Funds Ltd., and
Halman-Aldubi Pension Funds Ltd. [translation from Hebrew].
(31)
|
10.94
|
First Amendment to Financial
Services and Business Development Consulting Agreement dated February 8,
2007, by and between the Company and Dionysos Investments (1999) Ltd.
(33)
|
10.95
|
Agreement dated February 8, 2007,
by and between the Company, Swiftnet Limited, Campbeltown Business, Ltd.,
and Mr. Abraham Keinan. (33)
|
10.96
|
First Amendment to General
Contract for Services, dated March 14, 2007, by and between the Company
and Swiftnet Limited. (34)
|
10.97
|
Employment Agreement, dated March
28, 2007, between Swiftnet Limited and Abraham
Keinan.(34)
|
10.98
|
Consulting Agreement, dated March
28, 2007, between the Company and Abraham
Keinan. (34)
|
10.99
|
Employment Agreement, dated March
28, 2007, between Swiftnet Limited and Guy
Nissenson.(34)
|
10.100
|
Consulting Agreement, dated March
28, 2007, between the Company and Guy
Nissenson.(34)
|
10.101
|
Settlement Agreement and Release
dated May 31, 2007, by and among Embarq Logistics, Inc, Xfone USA, Inc.
and the Company. (35)
|
10.102
|
Promissory Note dated May 31,
2007, by Xfone USA, Inc.(35)
|
10.103
|
Parent Guarantee dated as of May
31, 2007 by the Company in favor of Embarq Logistics,
Inc.(35)
|
10.104
|
Share Purchase Agreement dated
August 15, 2007, by and between Dan Kirschner, as Seller, Swiftnet
Limited, as Buyer, and Xfone, Inc. (36)
|
10.105
|
Inter-Company Loan Agreement dated
August 15, 2007, by and between Auracall Limited, as Lender, and Swiftnet
Limited, as Borrower. (36)
|
10.106
|
Stock Purchase Agreement dated
August [20], 2007, by and among the Company, NTS Communications, Inc., and
the Shareholders of NTS Communications, Inc.
(37)
|
10.107
|
Letter of Joint Venture dated June
15, 2007, by and among the Company and NTS Holdings,
Inc.(37)
|
10.107.1
|
Form of Free Cash Flow
Participation Agreement to be Entered into between the Company and NTS
Holdings, Inc. Upon Consummation of the Acquisition.
(37)
|
10.107.2
|
Form of Employment Agreement to be
entered into between NTS Communications, Inc. and Barbara Baldwin upon
Consummation of the Acquisition. (37)
|
10.107.3
|
Form of Employment Agreement to be
entered into between NTS Communications, Inc. and Jerry Hoover upon
Consummation of the Acquisition. (37)
|
10.107.4
|
Form of Employment Agreement to be
entered into between NTS Communications, Inc. and Brad Worthington upon
Consummation of the Acquisition.
(37)
|
10.108
|
Employment Contract signed on
August 26, 2007, by and between the Company’s Israeli based Subsidiary
Xfone 018 ltd. and Roni Haliva. (38)
|
10.109
|
Subscription Agreement for the
Purchase of Shares of Common Stock of the Company Dated October 23, 2007.
(39)
|
10.110
|
Subscription Agreement for the
Purchase of Shares of Common Stock of the Company Dated November 1, 2007.
(41)
|
10.111
|
Form of Subscription Agreement for
the Purchase of Units Consisting of Two Shares of Common Stock and One
Common Stock Purchase Warrant. (42)
|
10.112
|
Form of Common Stock Purchase
Warrant.(42)
|
10.113
|
First Amendment to Stock Purchase
Agreement.(43)
|
10.114.1
|
Employment agreement dated as
of February 26, 2008, by and among NTS Communications, Inc. and Barbara
Baldwin. (44)
|
10.114.2
|
Employment agreement dated as
of February 26, 2008, by and among NTS Communications, Inc. and Jerry
Hoover. (44)
|
10.114.3
|
Employment agreement dated as
of February 26, 2008, by and among NTS Communications, Inc. and Brad
Worthington .(44)
|
10.115
|
Free cash flow participation
agreement dated as of February 26, 2008, by and among Xfone, Inc. and NTS
Holdings, Inc. (44)
|
10.116
|
Escrow agreement dated as of
February 26, 2008, by and among Xfone, Inc., Chris Chelette, Robert Healea
and Kevin Buxkemper the NTS shareholders representatives, and Trustmark
National Bank, as Escrow Agent. (44)
|
10.117
|
Release, effective as of
February 26, 2008, entered into by each of Barbara Baldwin, Jerry Hoover
and Brad Worthington (44)
|
10.118
|
Noncompetition, nondisclosure and
nonsolicitation agreement dated as of February 26, 2008, by and among
Xfone, Inc., Telephone Electronics Corporation, Joseph D. Fail, Chris
Chelette, Robert Healea, Joey Garner, and Walter Frank.
(44)
|
10.119
|
Second amendment to
stock purchase agreement entered into by each of February 26, 2008 by
and among Xfone, Inc., NTS Communications, Inc. and Chris Chelette, Robert
Healea and Kevin Buxkemper, as the NTS shareholders representatives.
(44)
|
10.120
|
Modification of Financial
Consulting Agreement between Xfone, Inc. and Oberon Securities, LLC in
connection with NTS Communications Transaction.
(45)
|
10.121
|
Fees Due to Oberon Securities, LLC
from Xfone, Inc. in connection with services provided in conjunction with
the acquisition of NTS Communications, Inc. (45)
|
10.122
|
Agreement of Principles dated
March 17, 2008 by and between Xfone 018 Ltd. and Tiv Taam Holdings 1 Ltd.
[Free Translation from Hebrew]. (46)
|
10.123
|
Compromise Agreement dated March
25, 2008, between Xfone, Inc., Story Telecom, Inc., Story Telecom Limited,
Trecastle Holdings Limited and Nir Davison. (47)
|
10.124
|
Securities Purchase Agreement
dated March 25, 2008, between Xfone, Inc., Trecastle Holdings Limited and
Nir Davison. (47)
|
10.125
|
Third Amendment to Stock Purchase
Agreement entered into as of April 25, 2008 by and among Chris Chelette,
Robert Healea and Kevin Buxkemper, as Sellers’ Representative, NTS
Communications, Inc. and Xfone, Inc. (48)
|
10.126
|
Irrevocable Option
Agreement dated as of July 1, 2008 by and between Abraham
Keinan and Guy Nissenson (49)
|
10.127
|
Indenture, entered into on
December 13, 2007, as amended and restated on October 27, 2008, between
Xfone, Inc. and Ziv Haft Trusts Company Ltd. (free translation from
Hebrew).
(51)
|
10.128
|
Form of warrant (free translation
from Hebrew).
(51)
|
10.129
|
Underwriting
Agreement between Xfone, Inc., Excellence Nessuah Underwriting (1993) Ltd.
and The First International & Co. - Underwriting and Investments
Ltd.,
dated November 2, 2008
(free translation from Hebrew).
(52)
|
16.1
|
Letter dated January 31, 2006 from
Chaifetz & Schreiber, P.C. to the Securities and Exchange Commission.
(20)
|
21.1
|
List
of Subsidiaries (Amended as of March 31, 2008) (26)
|
23
|
Consent
of Stark Winter Schenkein & Co., LLP dated August 28, 2008
(50)
|
23.1
|
Consent
of Chaifetz & Schreiber,
P.C.(30) (22.1)
|
23.2
|
Consent
of Gersten Savage LLP - incorporated in the legal opinion filed as Exhibit
5.
|
23.3
|
Consent
of Postlethwaite & Netterville, APAC dated February 7,
2006.(21.1)
|
23.4
|
Consent
of Postlethwaite & Netterville, APAC dated February 7,
2006.(21.1)
|
23.5
|
Consent
of Phillips & Associates, CPA's dated August 28, 2008.
(50)
|
23.6
|
Consent
of Yarel & Partners C.P.A. (Isr.) dated August 28, 2008.
(50)
|
31.1
|
|
31.2
|
|
32.1
|
|
32.2
|
|
|
(1)
|
Denotes previously filed exhibits:
filed on August 10, 2001 with Xfone, Inc.’s SB-2 Registration
Statement.
|
|
(2)
|
Denotes previously filed exhibits:
filed on October 16, 2001 with Xfone, Inc.’s SB-2/Amendment 1 Registration
Statement.
|
|
(4)
|
Denotes previously filed exhibit:
filed on December 5, 2002 with Xfone, Inc.’s Form
8-K.
|
|
(5)
|
Denotes previously filed exhibit:
filed on March 3, 2003 with Xfone, Inc.’s SB-2/Post Effective Amendment 2
Registration Statement.
|
|
(6)
|
Denotes previously filed exhibit:
filed on April 15, 2004 with Xfone’s, Inc. SB-2 Amendment 1 Registration
Statement.
|
|
(7)
|
Denotes previously filed exhibit:
filed on June 1, 2004 with Xfone, Inc.’s Form
8-K.
|
|
(8)
|
Denotes previously filed exhibit:
filed on June 7, 2004 with Xfone, Inc.’s SB-2/Amendment 2 Registration
Statement.
|
|
(9)
|
Denotes previously filed exhibit:
filed on August 11, 2004 with Xfone’s, Inc. SB-2 Amendment 3 Registration
Statement.
|
|
(10)
|
Denotes previously filed exhibit:
filed on September 13, 2004 with Xfone’s, Inc. SB-2 Amendment 4
Registration Statement.
|
|
(11)
|
Denotes previously filed exhibits:
filed on October 4, 2004 with Xfone, Inc.’s Form
8-K
|
|
(12)
|
Denotes previously filed exhibits:
filed on November 29, 2004 with Xfone, Inc.’s Form
8-K.
|
|
(13)
|
Denotes previously filed exhibits;
filed on March 31, 2005 with Xfone, Inc.’s Form
10-KSB.
|
|
(14)
|
Denotes previously filed exhibit:
filed on August 22, 2005 with Xfone, Inc.’s Form
8-K.
|
|
(15)
|
Denotes previously filed exhibit:
filed on August 31, 2005 with Xfone, Inc.’s Form
8-K.
|
|
(16)
|
Denotes previously filed exhibits:
filed on October 3, 2005 with Xfone, Inc.’s Form
8-K.
|
|
(17)
|
Denotes previously filed exhibits:
filed on October 11, 2005 with Xfone, Inc.’s Form 8-K/A
#1.
|
|
(18)
|
Denotes previously filed exhibits:
filed on November 29, 2005 with Xfone, Inc.’s Form
8-K.
|
|
(19)
|
Denotes previously filed exhibit:
filed on January 23, 2006 with Xfone, Inc.’s Form 8-K/A
#3.
|
|
(20)
|
Denotes previously filed exhibit:
filed on January 31, 2006 with Xfone, Inc.’s Form 8-K/A
#1.
|
|
(21)
|
Denotes previously filed exhibit:
filed on January 31, 2006 with Xfone, Inc.’s Form
8-K.
|
|
(21.1)
|
Denotes previously filed exhibits:
filed on February 7, 2006 with Xfone, Inc.’s Form SB-2 Amendment
3.
|
|
(22)
|
Denotes previously filed exhibit:
filed on March 15, 2006 with Xfone, Inc.’s Form
8-K.
|
|
(22.1)
|
Denotes previously filed exhibit:
filed on March 31, 2006 with Xfone, Inc.’s Form
10-KSB.
|
|
(23)
|
Denotes previously filed exhibit:
filed on May 16, 2006 with Xfone, Inc.’s Form
8-K.
|
|
(24)
|
Denotes previously filed exhibit:
filed on May 30, 2006 with Xfone, Inc.’s Form
8-K.
|
|
(25)
|
Denotes previously filed exhibits:
filed on June 20, 2006 with Xfone, Inc.’s Form
8-K.
|
|
(26)
|
Denotes previously filed exhibit;
filed on April 15, 2008 with Xfone, Inc.’s Form
10-KSB/A.
|
|
(27)
|
Denotes previously filed exhibits:
filed on July 31, 2006 with Xfone, Inc.’s Form
8-K.
|
|
(28)
|
Denotes previously filed exhibits:
filed on November 14, 2006 with Xfone, Inc.’s Form
10-QSB.
|
|
(29)
|
Denotes previously filed exhibit:
filed on November 22, 2006 with Xfone, Inc.’s Form
8-K.
|
|
(30)
|
Denotes previously filed exhibits:
filed on November 30, 2006 with Xfone, Inc.’s Form
SB-2.
|
|
(31)
|
Denotes previously filed exhibit:
filed on December 28, 2006 with Xfone, Inc.’s Form
8-K.
|
|
(32)
|
Denotes previously filed exhibit:
filed on February 5, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(33)
|
Denotes previously filed exhibits:
filed on February 8, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(34)
|
Denotes previously filed exhibits;
filed on March 30, 2007 with Xfone, Inc.’s Form
10-KSB.
|
|
(35)
|
Denotes previously filed exhibits:
filed on May 31, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(36)
|
Denotes previously filed exhibits:
filed on August 15, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(37)
|
Denotes previously filed exhibits:
filed on August 22, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(38)
|
Denotes previously filed exhibit:
filed on August 27, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(39)
|
Denotes previously filed exhibit:
filed on October 23, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(40)
|
Denotes previously filed exhibit:
filed on October 25, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(41)
|
Denotes previously filed exhibit:
filed on November 5, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(42)
|
Denotes previously filed exhibits:
filed on December 14, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(43)
|
Denotes previously filed exhibit:
filed on February 14, 2008 with Xfone, Inc.’s Form
8-K.
|
|
(44)
|
Denotes previously filed exhibits:
filed on February 26, 2008 with Xfone, Inc.’s Form
8-K.
|
|
(45)
|
Denotes previously filed exhibits:
filed on March 6, 2008 with Xfone, Inc.’s Form
8-K.
|
|
(46)
|
Denotes previously filed exhibit:
filed on March 17, 2008 with Xfone, Inc.’s Form
8-K.
|
|
(47)
|
Denotes previously filed exhibits:
filed on March 25 with Xfone, Inc.’s Form 8-K.
|
|
(48)
|
Denotes previously filed exhibit:
filed on May 1, 2008 with Xfone, Inc.‘s Form
8-K.
|
|
(49)
|
Denotes previously filed exhibit:
filed on July 1, 2008 with Xfone, Inc.‘s Form
8-K.
|
|
(50)
|
Denotes previously filed exhibits:
filed on August 28, 2008 with Amendment No. 1 to Xfone, Inc.’s
Registration Statement on Form S-1.
|
|
(51)
|
Denotes previously filed exhibit:
filed on October 28, 2008 with Xfone, Inc.‘s Form
8-K.
|
|
(52)
|
Denotes previously filed exhibit:
filed on November 4, 2008 with Xfone, Inc.‘s Form
8-K.
|
SI
GNAT
URES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
XFONE, INC.
|
|
|
|
|
|
|
By:
|
/s/ Guy
Nissenson
|
|
|
|
Guy
Nissenson
|
|
|
|
President, Chief Executive Officer
and Director
(principal executive
officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Niv
Krikov
|
|
|
|
Niv Krikov
Principal Accounting Officer,
Treasurer and
Chief Financial
Officer
(principal accounting and
financial officer)
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INDEX
TO EXHIBITS
Exhibit
Number
|
Description
|
2.
|
Agreement and plan of
reorganization dated September 20, 2000, between the Company and Swiftnet
Limited. (1)
|
3.1
|
Articles of Incorporation of the
Company.(1)
|
3.2a
|
Bylaws of the
Company.(1)
|
3.2b
|
Amended Bylaws of the
Company.(4)
|
3.3
|
Memorandum of Association of
Swiftnet Limited.(1)
|
3.4
|
Articles of Association of
Swiftnet Limited.(1)
|
3.6
|
Bylaws of Xfone USA,
Inc.(7)
|
3.8.
|
Amended and Restated Bylaws of the
Company dated March 12, 2006.(22)
|
3.9
|
Reamended and Restated Bylaws of
the Company dated February 5, 2007.(32)
|
4.
|
Specimen Stock
Certificate.(1)
|
5.
|
Opinion of Gersten Savage
LLP.
(50)
|
10.1
|
Agreement dated May 11, 2000,
between Swiftnet Limited and Guy Nissenson.(1)
|
10.2
|
Employment Agreement dated January
1, 2000 with Bosmat Houston. (1)
|
10.3
|
Loan Agreement dated August 5,
2000, with Swiftnet Limited, Guy Nissenson, and Nissim
Levy.(1)
|
10.4
|
Promissory Note dated September
29, 2000, between the Company and Abraham
Keinan.(1)
|
10.5
|
Stock Purchase Agreement dated
June 19, 2000, between Swiftnet Limited, Abraham Keinan, and Campbeltown
Business Ltd. (1)
|
10.6
|
Consulting Agreement dated May 11,
2000 between Swiftnet Limited and Campbeltown Business
Ltd.(1)
|
10.7
|
Agreement dated July 30, 2001,
with Campbeltown Business Ltd.(1)
|
10.8
|
Contract dated June 20, 1998, with
WorldCom International Ltd.(1)
|
10.9
|
Contract dated April 11, 2000,
with VoiceNet Inc.(1)
|
10.10
|
Contract dated April 25, 2000,
with InTouchUK.com Ltd.(1)
|
10.11
|
Letter of Understanding dated July
30, 2001, from Campbeltown Business Ltd. to the
Company.(2)
|
10.12
|
Agreement dated April 6, 2000,
between Adar International, Inc./Mr.
Sidney
J. Golub and Swiftnet Limited.
(2)
|
10.13
|
Lease Agreement dated December 4,
1991, between Elmtree Investments Ltd. and Swiftnet
Limited.(2)
|
10.14
|
Lease Agreement dated October 8,
2001, between Postwick Property Holdings Limited and Swiftnet Limited.
(2)
|
10.15
|
Agreement dated September 30,
2002, between the Company, Swiftnet Limited., and Nir
Davison.(5)
|
10.16
|
As to Form: Shares and Warrant
Purchase Agreement, Irrevocable Proxy, Warrant A, Warrant B and
Registration Rights Agreement of Selling Shareholders Platinum Partners
Value Arbitrage Fund LP, Countrywide Partners LLC and WEC Partners LLC.
(6)
|
10.17
|
As to Form: Shares and Warrant
Purchase Agreement, Irrevocable Proxy, Warrant A, Warrant B and
Registration Rights Agreement of Selling Shareholders Simon Langbart,
Robert Langbart, Arik Ecker, Zwi Ecker, Michael Derman, Errol
Derman, Yuval Haim Sobel, Zvi Sobel, Tenram Investment Ltd., Michael
Zinn, Michael Weiss. (6)
|
10.18
|
As to Form: Shares and Warrant
Purchase Agreement, Irrevocable Proxy, Warrant A, Warrant B and
Registration Rights Agreement of Selling Shareholders Southridge Partners
LP and Southshore Capital Fund Ltd. (6)
|
10.19
|
As to Form: Shares and Warrant
Purchase Agreement, Irrevocable Proxy, Warrant A, Warrant B and
Registration Rights Agreement of Selling Shareholders Crestview Capital
Master LLC. (6)
|
10.20
|
As to Form: Shares and Warrant
Purchase Agreement, Irrevocable Proxy, Warrant A, Warrant B and
Registration Rights Agreement of Selling Shareholders Adam Breslawsky,
Oded Levy, Michael Epstein, Steven Frank, Joshua Lobel, Joshua Kazan and
The Oberon Group LLC. (6)
|
10.21
|
Newco (Auracall Limited) Formation
Agreement.(6)
|
10.22
|
Agreement with ITXC
Corporation.(6)
|
10.23
|
Agreement with Teleglobe
International.(6)
|
10.23.1
|
Amendment to Agreement with
Teleglobe International.(6)
|
10.24
|
Agreement with British
Telecommunications.(6)
|
10.25
|
Agreement with Easyair Limited
(OpenAir).(6)
|
10.26
|
Agreement with
Worldnet.(6)
|
10.27
|
Agreement with Portfolio
PR.(6)
|
10.28
|
Agreement with Stern and
Company.(6)
|
10.29
|
Letter to the Company dated
December 31, 2003, from Abraham Keinan.(6)
|
10.30
|
Agreement between Swiftnet Limited
and Dan Kirschner.(8)
|
10.31
|
Agreement and Plan of
Merger.(7)
|
10.32
|
Escrow
Agreement.(7)
|
10.33
|
Release
Agreement.(7)
|
10.34
|
Employment Agreement date March
10, 2005, between Xfone USA, Inc. and Wade
Spooner.(7)
|
10.35
|
Employment Agreement date March
10, 2005, between Xfone USA, Inc. and Ted
Parsons.(7)
|
10.36
|
First Amendment to Agreement and
Plan of Merger (to acquire WS Telecom,
Inc.).(11)
|
10.37
|
Finders Agreement with The Oberon
Group, LLC.(11)
|
10.38
|
Agreement with The Oberon Group,
LLC.(11)
|
10.39
|
Management Agreement between WS
Telecom, Inc. and Xfone USA, Inc.(8)
|
10.40
|
Engagement Letter to Tommy R.
Ferguson, Confidentiality Agreement, and Executive Inventions Agreement
dated August 19, 2004. (11)
|
10.41
|
Voting Agreement dated September
28, 2004.(11)
|
10.42
|
Novation Agreement executed
September 27, 2004.(11)
|
10.43
|
Novation Agreement executed
September 28, 2004.(11)
|
10.44
|
Investment Agreement dated August
26, 2004, with Ilan Shoshani.(12)
|
10.44.1
|
Addendum and Clarification to the
Investment Agreement with Ilan Shoshani dated September 13, 2004.
(12)
|
10.45
|
Agreement dated November 16, 2004,
with Elite Financial Communications Group.(13)
|
10.46
|
Financial Services and Business
Development Consulting Agreement dated November 18, 2004, with Dionysos
Investments (1999) Ltd. (13)
|
10.47
|
Agreement and Plan of Merger to
acquire I-55 Internet Services, Inc. dated August 18,
2005.(14)
|
10.48
|
Agreement and Plan of Merger to
acquire I-55 Telecommunications, LLC dated August 26,
2005.(15)
|
10.49
|
Securities Purchase Agreement,
dated September 27, 2005, by and between the Company and Laurus Master
Fund, Ltd. (16)
|
10.50
|
Secured Convertible Term Note,
dated September 27, 2005, by the Company in favor of Laurus Master Fund,
Ltd.; Adjustment Provision Waiver Agreement, dated September 27, 2005, by
and between the Company and Laurus Fund, Ltd.
(16)
|
10.51
|
Common Stock Purchase Warrant,
dated September 27, 2005, by the Company in favor of Laurus Master Fund,
Ltd. (16)
|
10.52
|
Registration Rights Agreement,
dated September 27, 2005, by and between the Company and Laurus Master
Fund, Ltd. (16)
|
10.53
|
Master Security Agreement, dated
September 27, 2005, by and between the Company, Xfone USA, Inc., eXpeTel
Communications, Inc., Gulf Coast Utilities, Inc., and Laurus Master Fund,
Ltd. (16)
|
10.54
|
Stock Pledge Agreement, dated
September 27, 2005, by and between the Company, Xfone USA, Inc., and
Laurus Master Fund, Ltd. (16)
|
10.55
|
Subsidiary Guarantee dated
September 27, 2005, by Xfone USA, Inc., eXpeTel Communications, Inc. and
Gulf Coast Utilities, Inc. in favor of Laurus Master Fund, Ltd.
(16)
|
10.56
|
Funds Escrow Agreement, dated
September 27, 2005, by and between the Company, Laurus Master Fund, Ltd.
and Loeb & Loeb LLP; Disbursement Letter, dated September 27, 2005.
(16)
|
10.57
|
Incremental Funding Side Letter,
dated September 27, 2005, by and between the Company and Laurus Master
Fund, Ltd. (16)
|
10.58
|
Securities Purchase Agreement
dated September 28, 2005, by and between the Company and Crestview Capital
Mater, LLC, Burlingame Equity Investors, LP, Burlingame Equity Investors
II, LP, Burlingame Equity Investors (Offshore), Ltd., and Mercantile
Discount - Provident Funds. (16)
|
10.59
|
Registration Rights Agreement,
dated September 28, 2005, by and between the Company and Crestview Capital
Mater, LLC, Burlingame Equity Investors, LP, Burlingame Equity Investors
II, LP, Burlingame Equity Investors (Offshore), Ltd., and Mercantile
Discount - Provident Funds. (16)
|
10.60
|
Common Stock Purchase Warrant,
dated September 28, 2005, by the Company in favor of the Crestview Capital
Mater, LLC, Burlingame Equity Investors, LP, Burlingame Equity Investors
II, LP, Burlingame Equity Investors (Offshore), Ltd., and Mercantile
Discount - Provident Funds. (16)
|
10.61
|
Escrow Agreement, dated September
28, 2005, by and between the Company, the Purchasers and Feldman Weinstein
LLP. (16)
|
10.62
|
Management Agreement dated October
11, 2005.(17)
|
10.63
|
First Amendment to Agreement and
Plan of Merger (to acquire I-55 Internet Services, Inc.), dated October
10, 2005. (17)
|
10.64
|
Letter Agreement with MCG Capital
Corporation dated October 10, 2005.(17)
|
10.65
|
Securities Purchase Agreement,
dated November 23, 2005, between the Company and Mercantile Discount -
Provident Funds, Hadar Insurance Company Ltd., The Israeli Phoenix
Assurance Company Ltd. and Gaon Gemel Ltd. (18)
|
10.66
|
Registration Rights Agreement,
dated November 23, 2005, between the Company and Mercantile Discount -
Provident Funds, Hadar Insurance Company Ltd., The Israeli Phoenix
Assurance Company Ltd. and Gaon Gemel Ltd. (18)
|
10.67
|
Common Stock Purchase Warrant,
dated November 23, 2005, by the Company in favor of Mercantile Discount -
Provident Funds, Hadar Insurance Company Ltd., The Israeli Phoenix
Assurance Company Ltd. and Gaon Gemel Ltd. (18)
|
10.68
|
Escrow Agreement, dated November
23, 2005, between the Company, the Escrow Agent, and Mercantile Discount -
Provident Funds, Hadar Insurance Company Ltd., The Israeli Phoenix
Assurance Company Ltd. and Gaon Gemel Ltd. (18)
|
10.69
|
Management Agreement with I-55
Telecommunications, LLC dated October 12,
2005.(19)
|
10.70
|
Agreement - General Terms and
Conditions with EBI Comm, Inc., dated January 1,
2006.(21)
|
10.71
|
Asset Purchase Agreement with
Canufly.net, Inc., dated January 10, 2006.(21)
|
10.72
|
Stock Purchase Agreement dated May
10, 2006, by and among the Company, Story Telecom, Inc., Story Telecom
Limited, Story Telecom (Ireland) Limited, Nir Davison, and Trecastle
Holdings Limited. (23)
|
10.73
|
Agreement dated May 25, 2006, by
and among the Company and the shareholders of Equitalk.co.uk Limited.
(24)
|
10.74
|
Securities Purchase Agreement,
dated June 19, 2006, by and between the Company and the Purchasers.
(25)
|
10.75
|
Registration Rights Agreement,
dated June 19, 2006, by and between the Company and the Purchasers.
(25)
|
10.76
|
Common Stock Purchase Warrant,
dated June 19, 2006, by the Company in favor of the
Purchasers.(25)
|
10.77
|
Escrow Agreement, dated June 19,
2006, by and between the Company, the Escrow Agent, and the Purchasers.
(25)
|
10.78
|
Form of Indemnification Agreement
between the Company and its Directors and
Officers.(27)
|
10.79
|
Agreement to Purchase Promissory
Note dated October 31, 2005, with Randall Wade James
Tricou.(27)
|
10.80
|
Agreement to Purchase Promissory
Note dated October 31, 2005, with Rene Tricou - Tricou Construction.
(27)
|
10.81
|
Agreement to Purchase Promissory
Note dated October 31, 2005, with Rene Tricou - Bon Aire Estates.
(27)
|
10.82
|
Agreement to Purchase Promissory
Note dated October 31, 2005, with Rene Tricou - Bon Aire Utility.
(27)
|
10.83
|
Agreement to Purchase Promissory
Note dated February 3, 2006, with Danny
Acosta.(27)
|
10.84
|
Letter Agreement dated November
15, 2005, with Oberon Securities, LLC.(27)
|
10.85
|
Letter Agreement dated June 15,
2006, with Oberon Securities, LLC.(27)
|
10.86
|
Second Amendment to Agreement and
Plan of Merger (to acquire WS Telecom, Inc.), dated June 28, 2006.
(27)
|
10.87
|
General Contract for Services
dated January 1, 2005, by and between the Company and Swiftnet Limited.
(27)
|
10.88
|
Service Agreement dated December
6, 2005, by and between the Company and Elite Financial Communications
Group, LLC. (27)
|
10.89
|
Agreement for Market Making in
Securities dated July 31, 2006, by and between the Company and Excellence
Nessuah Stock Exchange Services Ltd. (27)
|
10.90
|
Shareholders Loan Agreement, dated
September 27, 2006, by and between Auracall Limited, Swiftnet Limited, and
Dan Kirschner. (28)
|
10.91
|
Service Agreement, dated November
7, 2006, by and between the Company and Institutional Marketing Services,
Inc. (28)
|
10.92
|
Consultancy Agreement, dated
November 20, 2006, by and between the Company and Crestview Capital
Partners, LLP. (29)
|
10.93
|
Agreement dated December 24, 2006,
by and between the Company, Halman-Aldubi Provident Funds Ltd., and
Halman-Aldubi Pension Funds Ltd. [translation from Hebrew].
(31)
|
10.94
|
First Amendment to Financial
Services and Business Development Consulting Agreement dated February 8,
2007, by and between the Company and Dionysos Investments (1999) Ltd.
(33)
|
10.95
|
Agreement dated February 8, 2007,
by and between the Company, Swiftnet Limited, Campbeltown Business, Ltd.,
and Mr. Abraham Keinan. (33)
|
10.96
|
First Amendment to General
Contract for Services, dated March 14, 2007, by and between the Company
and Swiftnet Limited. (34)
|
10.97
|
Employment Agreement, dated March
28, 2007, between Swiftnet Limited and Abraham
Keinan.(34)
|
10.98
|
Consulting Agreement, dated March
28, 2007, between the Company and Abraham
Keinan. (34)
|
10.99
|
Employment Agreement, dated March
28, 2007, between Swiftnet Limited and Guy
Nissenson.(34)
|
10.100
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Consulting Agreement, dated March
28, 2007, between the Company and Guy
Nissenson.(34)
|
10.101
|
Settlement Agreement and Release
dated May 31, 2007, by and among Embarq Logistics, Inc, Xfone USA, Inc.
and the Company. (35)
|
10.102
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Promissory Note dated May 31,
2007, by Xfone USA, Inc.(35)
|
10.103
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Parent Guarantee dated as of May
31, 2007 by the Company in favor of Embarq Logistics,
Inc.(35)
|
10.104
|
Share Purchase Agreement dated
August 15, 2007, by and between Dan Kirschner, as Seller, Swiftnet
Limited, as Buyer, and Xfone, Inc. (36)
|
10.105
|
Inter-Company Loan Agreement dated
August 15, 2007, by and between Auracall Limited, as Lender, and Swiftnet
Limited, as Borrower. (36)
|
10.106
|
Stock Purchase Agreement dated
August [20], 2007, by and among the Company, NTS Communications, Inc., and
the Shareholders of NTS Communications, Inc.
(37)
|
10.107
|
Letter of Joint Venture dated June
15, 2007, by and among the Company and NTS Holdings,
Inc.(37)
|
10.107.1
|
Form of Free Cash Flow
Participation Agreement to be Entered into between the Company and NTS
Holdings, Inc. Upon Consummation of the Acquisition.
(37)
|
10.107.2
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Form of Employment Agreement to be
entered into between NTS Communications, Inc. and Barbara Baldwin upon
Consummation of the Acquisition. (37)
|
10.107.3
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Form of Employment Agreement to be
entered into between NTS Communications, Inc. and Jerry Hoover upon
Consummation of the Acquisition. (37)
|
10.107.4
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Form of Employment Agreement to be
entered into between NTS Communications, Inc. and Brad Worthington upon
Consummation of the Acquisition.
(37)
|
10.108
|
Employment Contract signed on
August 26, 2007, by and between the Company’s Israeli based Subsidiary
Xfone 018 ltd. and Roni Haliva. (38)
|
10.109
|
Subscription Agreement for the
Purchase of Shares of Common Stock of the Company Dated October 23, 2007.
(39)
|
10.110
|
Subscription Agreement for the
Purchase of Shares of Common Stock of the Company Dated November 1, 2007.
(41)
|
10.111
|
Form of Subscription Agreement for
the Purchase of Units Consisting of Two Shares of Common Stock and One
Common Stock Purchase Warrant. (42)
|
10.112
|
Form of Common Stock Purchase
Warrant.(42)
|
10.113
|
First Amendment to Stock Purchase
Agreement.(43)
|
10.114.1
|
Employment agreement dated as
of February 26, 2008, by and among NTS Communications, Inc. and Barbara
Baldwin. (44)
|
10.114.2
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Employment agreement dated as
of February 26, 2008, by and among NTS Communications, Inc. and Jerry
Hoover. (44)
|
10.114.3
|
Employment agreement dated as
of February 26, 2008, by and among NTS Communications, Inc. and Brad
Worthington .(44)
|
10.115
|
Free cash flow participation
agreement dated as of February 26, 2008, by and among Xfone, Inc. and NTS
Holdings, Inc. (44)
|
10.116
|
Escrow agreement dated as of
February 26, 2008, by and among Xfone, Inc., Chris Chelette, Robert Healea
and Kevin Buxkemper the NTS shareholders representatives, and Trustmark
National Bank, as Escrow Agent. (44)
|
10.117
|
Release, effective as of
February 26, 2008, entered into by each of Barbara Baldwin, Jerry Hoover
and Brad Worthington (44)
|
10.118
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Noncompetition, nondisclosure and
nonsolicitation agreement dated as of February 26, 2008, by and among
Xfone, Inc., Telephone Electronics Corporation, Joseph D. Fail, Chris
Chelette, Robert Healea, Joey Garner, and Walter Frank.
(44)
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10.119
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Second amendment to
stock purchase agreement entered into by each of February 26, 2008 by
and among Xfone, Inc., NTS Communications, Inc. and Chris Chelette, Robert
Healea and Kevin Buxkemper, as the NTS shareholders representatives.
(44)
|
10.120
|
Modification of Financial
Consulting Agreement between Xfone, Inc. and Oberon Securities, LLC in
connection with NTS Communications Transaction.
(45)
|
10.121
|
Fees Due to Oberon Securities, LLC
from Xfone, Inc. in connection with services provided in conjunction with
the acquisition of NTS Communications, Inc. (45)
|
10.122
|
Agreement of Principles dated
March 17, 2008 by and between Xfone 018 Ltd. and Tiv Taam Holdings 1 Ltd.
[Free Translation from Hebrew]. (46)
|
10.123
|
Compromise Agreement dated March
25, 2008, between Xfone, Inc., Story Telecom, Inc., Story Telecom Limited,
Trecastle Holdings Limited and Nir Davison. (47)
|
10.124
|
Securities Purchase Agreement
dated March 25, 2008, between Xfone, Inc., Trecastle Holdings Limited and
Nir Davison. (47)
|
10.125
|
Third Amendment to Stock Purchase
Agreement entered into as of April 25, 2008 by and among Chris Chelette,
Robert Healea and Kevin Buxkemper, as Sellers’ Representative, NTS
Communications, Inc. and Xfone, Inc. (48)
|
10.126
|
Irrevocable Option
Agreement dated as of July 1, 2008 by and between Abraham
Keinan and Guy Nissenson (49)
|
10.127
|
Indenture, entered into on
December 13, 2007, as amended and restated on October 27, 2008, between
Xfone, Inc. and Ziv Haft Trusts Company Ltd. (free translation from
Hebrew).
(51)
|
10.128
|
Form of warrant (free translation
from Hebrew).
(51)
|
10.129
|
Underwriting
Agreement between Xfone, Inc., Excellence Nessuah Underwriting (1993) Ltd.
and The First International & Co. - Underwriting and Investments
Ltd.,
dated November 2, 2008
(free translation from Hebrew).
(52)
|
16.1
|
Letter dated January 31, 2006 from
Chaifetz & Schreiber, P.C. to the Securities and Exchange Commission.
(20)
|
21.1
|
List
of Subsidiaries (Amended as of March 31, 2008) (26)
|
23
|
Consent
of Stark Winter Schenkein & Co., LLP dated August 28, 2008
(50)
|
23.1
|
Consent
of Chaifetz & Schreiber,
P.C.(30) (22.1)
|
23.2
|
Consent
of Gersten Savage LLP - incorporated in the legal opinion filed as Exhibit
5.
|
23.3
|
Consent
of Postlethwaite & Netterville, APAC dated February 7,
2006.(21.1)
|
23.4
|
Consent
of Postlethwaite & Netterville, APAC dated February 7,
2006.(21.1)
|
23.5
|
Consent
of Phillips & Associates, CPA's dated August 28, 2008.
(50)
|
23.6
|
Consent
of Yarel & Partners C.P.A. (Isr.) dated August 28, 2008.
(50)
|
31.1
|
|
31.2
|
|
32.1
|
|
32.2
|
|
|
(1)
|
Denotes previously filed exhibits:
filed on August 10, 2001 with Xfone, Inc.’s SB-2 Registration
Statement.
|
|
(2)
|
Denotes previously filed exhibits:
filed on October 16, 2001 with Xfone, Inc.’s SB-2/Amendment 1 Registration
Statement.
|
|
(4)
|
Denotes previously filed exhibit:
filed on December 5, 2002 with Xfone, Inc.’s Form
8-K.
|
|
(5)
|
Denotes previously filed exhibit:
filed on March 3, 2003 with Xfone, Inc.’s SB-2/Post Effective Amendment 2
Registration Statement.
|
|
(6)
|
Denotes previously filed exhibit:
filed on April 15, 2004 with Xfone’s, Inc. SB-2 Amendment 1 Registration
Statement.
|
|
(7)
|
Denotes previously filed exhibit:
filed on June 1, 2004 with Xfone, Inc.’s Form
8-K.
|
|
(8)
|
Denotes previously filed exhibit:
filed on June 7, 2004 with Xfone, Inc.’s SB-2/Amendment 2 Registration
Statement.
|
|
(9)
|
Denotes previously filed exhibit:
filed on August 11, 2004 with Xfone’s, Inc. SB-2 Amendment 3 Registration
Statement.
|
|
(10)
|
Denotes previously filed exhibit:
filed on September 13, 2004 with Xfone’s, Inc. SB-2 Amendment 4
Registration Statement.
|
|
(11)
|
Denotes previously filed exhibits:
filed on October 4, 2004 with Xfone, Inc.’s Form
8-K
|
|
(12)
|
Denotes previously filed exhibits:
filed on November 29, 2004 with Xfone, Inc.’s Form
8-K.
|
|
(13)
|
Denotes previously filed exhibits;
filed on March 31, 2005 with Xfone, Inc.’s Form
10-KSB.
|
|
(14)
|
Denotes previously filed exhibit:
filed on August 22, 2005 with Xfone, Inc.’s Form
8-K.
|
|
(15)
|
Denotes previously filed exhibit:
filed on August 31, 2005 with Xfone, Inc.’s Form
8-K.
|
|
(16)
|
Denotes previously filed exhibits:
filed on October 3, 2005 with Xfone, Inc.’s Form
8-K.
|
|
(17)
|
Denotes previously filed exhibits:
filed on October 11, 2005 with Xfone, Inc.’s Form 8-K/A
#1.
|
|
(18)
|
Denotes previously filed exhibits:
filed on November 29, 2005 with Xfone, Inc.’s Form
8-K.
|
|
(19)
|
Denotes previously filed exhibit:
filed on January 23, 2006 with Xfone, Inc.’s Form 8-K/A
#3.
|
|
(20)
|
Denotes previously filed exhibit:
filed on January 31, 2006 with Xfone, Inc.’s Form 8-K/A
#1.
|
|
(21)
|
Denotes previously filed exhibit:
filed on January 31, 2006 with Xfone, Inc.’s Form
8-K.
|
|
(21.1)
|
Denotes previously filed exhibits:
filed on February 7, 2006 with Xfone, Inc.’s Form SB-2 Amendment
3.
|
|
(22)
|
Denotes previously filed exhibit:
filed on March 15, 2006 with Xfone, Inc.’s Form
8-K.
|
|
(22.1)
|
Denotes previously filed exhibit:
filed on March 31, 2006 with Xfone, Inc.’s Form
10-KSB.
|
|
(23)
|
Denotes previously filed exhibit:
filed on May 16, 2006 with Xfone, Inc.’s Form
8-K.
|
|
(24)
|
Denotes previously filed exhibit:
filed on May 30, 2006 with Xfone, Inc.’s Form
8-K.
|
|
(25)
|
Denotes previously filed exhibits:
filed on June 20, 2006 with Xfone, Inc.’s Form
8-K.
|
|
(26)
|
Denotes previously filed exhibit;
filed on April 15, 2008 with Xfone, Inc.’s Form
10-KSB/A.
|
|
(27)
|
Denotes previously filed exhibits:
filed on July 31, 2006 with Xfone, Inc.’s Form
8-K.
|
|
(28)
|
Denotes previously filed exhibits:
filed on November 14, 2006 with Xfone, Inc.’s Form
10-QSB.
|
|
(29)
|
Denotes previously filed exhibit:
filed on November 22, 2006 with Xfone, Inc.’s Form
8-K.
|
|
(30)
|
Denotes previously filed exhibits:
filed on November 30, 2006 with Xfone, Inc.’s Form
SB-2.
|
|
(31)
|
Denotes previously filed exhibit:
filed on December 28, 2006 with Xfone, Inc.’s Form
8-K.
|
|
(32)
|
Denotes previously filed exhibit:
filed on February 5, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(33)
|
Denotes previously filed exhibits:
filed on February 8, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(34)
|
Denotes previously filed exhibits;
filed on March 30, 2007 with Xfone, Inc.’s Form
10-KSB.
|
|
(35)
|
Denotes previously filed exhibits:
filed on May 31, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(36)
|
Denotes previously filed exhibits:
filed on August 15, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(37)
|
Denotes previously filed exhibits:
filed on August 22, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(38)
|
Denotes previously filed exhibit:
filed on August 27, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(39)
|
Denotes previously filed exhibit:
filed on October 23, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(40)
|
Denotes previously filed exhibit:
filed on October 25, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(41)
|
Denotes previously filed exhibit:
filed on November 5, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(42)
|
Denotes previously filed exhibits:
filed on December 14, 2007 with Xfone, Inc.’s Form
8-K.
|
|
(43)
|
Denotes previously filed exhibit:
filed on February 14, 2008 with Xfone, Inc.’s Form
8-K.
|
|
(44)
|
Denotes previously filed exhibits:
filed on February 26, 2008 with Xfone, Inc.’s Form
8-K.
|
|
(45)
|
Denotes previously filed exhibits:
filed on March 6, 2008 with Xfone, Inc.’s Form
8-K.
|
|
(46)
|
Denotes previously filed exhibit:
filed on March 17, 2008 with Xfone, Inc.’s Form
8-K.
|
|
(47)
|
Denotes previously filed exhibits:
filed on March 25 with Xfone, Inc.’s Form 8-K.
|
|
(48)
|
Denotes previously filed exhibit:
filed on May 1, 2008 with Xfone, Inc.‘s Form
8-K.
|
|
(49)
|
Denotes previously filed exhibit:
filed on July 1, 2008 with Xfone, Inc.‘s Form
8-K.
|
|
(50)
|
Denotes previously filed exhibits:
filed on August 28, 2008 with Amendment No. 1 to Xfone, Inc.’s
Registration Statement on Form S-1.
|
|
(51)
|
Denotes previously filed exhibit:
filed on October 28, 2008 with Xfone, Inc.‘s Form
8-K.
|
|
(52)
|
Denotes previously filed exhibit:
filed on November 4, 2008 with Xfone, Inc.‘s Form
8-K.
|
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