UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(Mark
One)
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 31, 2008
Or
o
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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)
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|
|
|
(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) (Zip Code)
806-771-5212
(Registrant’s
telephone number, including area code)
Securities
registered under Section 12(b) of the Act:
Title
of each class registered:
|
|
Name
of each exchange on which registered:
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Common
Stock
|
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NYSE
Amex LLC
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Common
Stock
|
|
Tel
Aviv Stock Exchange
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Securities
registered under Section 12(g) of the Act:
None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
o
No
þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
o
No
þ
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
þ
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
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
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
|
Accelerated
filer
o
|
Non-accelerated
filer
o
(Do
not check if smaller reporting company)
|
Smaller
reporting company
þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
o
No
þ
As of
June 30, 2008, 18,376,075 shares of common stock were outstanding. The aggregate
market value of the common stock held by non-affiliates of the registrant, as of
June 30, 2008, the last business day of the 2
nd
fiscal
quarter, was approximately $41,709,229 based on the closing price of $2.99 for
the registrant’s common stock as reported on the NYSE Amex LLC (formerly, the
American Stock Exchange and the NYSE Alternext US LLC). Shares of common stock
held by each director, each officer and each person who owns 10% or more of the
outstanding common stock have been excluded from this calculation in that such
persons may be deemed to be affiliates. The determination of affiliate status is
not necessarily conclusive.
As of
March 30, 2009, there were 18,376,075 shares of our common stock issued and
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
TABLE
OF CONTENTS
Part
I
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3
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24
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24
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24
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28
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29
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Part
II
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30
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34
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34
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60
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61
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98
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98
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99
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Part
III
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100
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108
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121
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124
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139
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Part
IV
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141
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148
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PART
I
ITEM
1.
BUSINESS
General
As used
in this Annual Report, references to “the Company”, “we”, “our”, “ours” and “us”
refer to Xfone, Inc. and consolidated subsidiaries, unless otherwise indicated.
References to “Xfone” refer to Xfone, Inc. In addition, references to our
“financial statements” are to our consolidated financial statements except as
the context otherwise requires.
We
prepare our financial statements in United States dollars and in accordance with
generally accepted accounting principles as applied in the United States,
referred to as U.S. GAAP. In this Annual Report, references to “$” and “dollars”
are to United States dollars, “£”, “UKP”, or “GBP” are to British Pound
Sterling, and references to “NIS” and “shekels” are to New Israeli
Shekels.
Background
Xfone,
Inc.
Xfone,
Inc. was incorporated in Nevada, U.S.A. in September 2000. We are a holding and
managing company with operations in the United States, the United Kingdom and
Israel offering a wide range of services, including: local, long distance and
international telephony services; video; prepaid and postpaid calling cards;
cellular services; Internet services; messaging services (Email/Fax Broadcast,
Email2Fax and Cyber-Number); and reselling opportunities. We serve customers
worldwide.
In
February 2007, we moved our principal executive offices from the UK to Flowood,
Mississippi, and shared executive office space with our wholly owned U.S.
subsidiary, Xfone USA, Inc. In May 2008, the headquarters of Xfone USA and our
principal executive offices moved from the Flowood, Mississippi location to
Lubbock, Texas, to the existing headquarters of NTS Communications, Inc., which
we acquired in February 2008. See “NTS Communications, Inc.” below.
Our
Common Stock is traded on the NYSE Amex LLC (“NYSE Amex”) and the Tel Aviv Stock
Exchange (“TASE”) under the symbol “XFN”. On March 30, 2009, the closing
price of our Common Stock was $0.51 (NYSE Amex) / NIS
2.132 (TASE).
We have
two wholly owned subsidiaries in the United Kingdom, three wholly owned
subsidiaries in the United States, and one majority owned subsidiary in Israel.
These subsidiaries, and their consolidated subsidiaries, are shown in the
following diagram:
Swiftnet
Limited
On
October 4, 2000, we acquired Swiftnet Limited which had a business plan to
provide comprehensive range of telecommunication services and products,
integrated through one website. Swiftnet was incorporated in 1990 under the laws
of the United Kingdom and is headquartered in London, England. Until 1999, the
main revenues for Swiftnet were derived from messaging and fax broadcast
services. During 2000, Swiftnet shifted its business focus to voice services and
now offers a comprehensive range of calling services to resellers and end
customers. Utilizing automation and proprietary software packages, Swiftnet’s
strategy is to grow without the need for heavy investments and with lower
expenses for operations and registration of new customers.
Xfone
018 Ltd.
On April
15, 2004, we established an Israel based subsidiary, Xfone Communication Ltd.,
which changed its name to Xfone 018 Ltd. in March 2005. 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. We have been providing international telecom
services in Israel through Xfone 018 since mid-December 2004. In July 2008, we
launched an experimental deployment of our local telecom services, and
introduced our Internet access services in December 2008.
WS
Telecom, Inc. / Xfone USA, Inc.
On May
28, 2004, we entered into an agreement and Plan of Merger to acquire WS Telecom,
Inc., a Mississippi corporation, and its two wholly owned subsidiaries, eXpeTel
Communications, Inc. and Gulf Coast Utilities, Inc., through the merger of WS
Telecom with and 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
utilizes integrated multi-media offerings - combining digital voice, data and
video services over broadband technologies to deliver services to customers
throughout its service areas. Xfone USA is currently licensed to provide
telecommunications services in Florida, Louisiana and Mississippi. During fiscal
2008, Xfone USA was also licensed in Alabama and Georgia, however, we withdrew
these licenses during the first quarter of fiscal 2009.
I-55
Internet Services, Inc.
On August
18, 2005, we entered into an Agreement and Plan of Merger to acquire I-55
Internet Services, Inc. ("I-55 Internet Services"), a Louisiana corporation (the
“I-55 Internet Merger Agreement”). On September 13, 2005, we filed a Form 8-K
discussing the impact of Hurricane Katrina on the transaction contemplated by
the I-55 Internet Merger Agreement. On October 10, 2005, we entered into a First
Amendment to the Merger Agreement, by and among I-55 Internet Services, Xfone,
Xfone USA, our wholly-owned United States subsidiary, and Hunter McAllister and
Brian Acosta, key employees of I-55 Internet Services, in order to induce Xfone,
and Xfone USA not to terminate the I-55 Internet Merger Agreement due to the
material adverse effect that Hurricane Katrina has had on the assets and
business of I-55 Internet Services. As part of the amendment and since, at that
time, the merger of I-55 Internet Services with and into Xfone USA had not been
consummated yet, in the interim, the parties agreed and entered into on October
11, 2005 a Management Agreement (the “I-55 Internet Management Agreement”) that
provided that I-55 Internet Services hired and appointed Xfone USA as manager to
be responsible for the operation and management of all of I-55 Internet Services
business operations, including among other things personnel, accounting,
contracts, policies and budget. In consideration of the management services
provided under the I-55 Internet Management Agreement, I-55 Internet Services
assigned and transferred to Xfone USA all revenues generated and expenses
incurred in the ordinary course of business during the term of the I-55 Internet
Management Agreement. The term of the I-55 Internet Management Agreement
commenced on October 11, 2005 and continued until the consummation of the merger
on March 31, 2006.
In
conjunction with the consummation of the merger and in exchange for all of the
capital stock of I-55 Internet Services, we issued a total of 789,863 shares of
our Common Stock valued at $2,380,178 and 603,939 warrants exercisable for a
period of five years into shares of our Common Stock, with an exercise price of
$3.31, valued based on the Black Scholes option-pricing model (the “Xfone Stock
and Warrant Consideration”). A portion of the Xfone Stock and Warrant
Consideration issued at closing was placed in an escrow account, to be held
pending certain adjustments. The Company subsequently made the following
two claims against such escrow account: Claim #1: The Company made a claim
on March 27, 2007 to adjust the total consideration based upon the changes in
customer billings as determined pursuant to a formula set forth in the First
Amendment to the Merger Agreement (the “Customer Billing Adjustment Amount”),
which the Company had determined was $247,965.57. Claim #2: The Company
determined an undisclosed liability, in accordance with Article 6.03 of the I-55
Internet Services, Inc. Merger Agreement (as amended), in the amount of $147,550
and on November 28, 2006, sent a claim for this amount. The Shareholder
Representatives of I-55 Internet Services disputed the amounts in both claims
submitted and so the parties entered into negotiations on May 2, 2007, where
they agreed to reduce the amount claimed in Claim #1 by $104,948.46, which
represents adjustments made to the 90-Day column, Trade Accounts, and certain
accounts that had previously been listed as having 90-Day balances but were
subsequently confirmed as not having 90-Day balances, and by the final amount
billed to EBI Comm, Inc. (“EBI”) in 2005 prior to the assets of EBI being
purchased by Xfone USA, and agreed to reduce the original Loss amount claimed in
Claim #2 by $6,800.00, representing additional services purchased with Zipa,
Inc. under the direction of Xfone USA during the Management Agreement period
from October 2005 through March 2006. Upon settlement of the claims, two Joint
Deposition Notices for the escrow agent, Trustmark National Bank, were delivered
to the Shareholder Representatives of I-55 Internet Services for execution,
however, a Shareholder Representative refused to execute the notices pending
approval of the claims by the shareholders of I-55 Internet Services. On
June 7, 2007, the shareholders met and rejected the figure agreed upon with
respect to Claim #1 and accepted the figure agreed upon with respect to Claim
#2. On or about May 12, 2008, after further negotiations, Xfone USA and
I-55 agreed to value Claim #1 at $143,017.11 and Claim #2 at $140,750.00 for a
total agreed loss of $283,767.11. This resulted in the Company’s receipt
of 62,850 shares of Xfone Common Stock and 44,470 Xfone Stock Warrants from
the Escrow Account in satisfaction of these claims (the “Returned Xfone
Stock and Warrant Consideration”) and the balance of the Xfone Common Stock and
Xfone Stock Warrants remaining in the Escrow Account was distributed to the
selling I-55 Internet shareholders and the escrow account was closed out on June
16, 2008. The components of the Returned Xfone Stock and Warrant Consideration
were cancelled by the Company on June 3, 2008.
In
conjunction with that certain Letter Agreement dated October 10, 2005 with MCG
Capital Corporation, a major creditor of I-55 Internet Services, and upon the
consummation of the merger on March 31, 2006, we issued to MCG Capital 667,998
shares of our Common Stock, valued at fair value of $2,010,006, in return for
retiring its loan with I-55 Internet Services.
I-55
Internet Services provided Internet access and related services, such as
installation of various networking equipment, website design, hosting and other
Internet access installation services, throughout the Southeastern United States
to individuals and businesses located predominantly in rural markets in
Louisiana and Mississippi. As a result of the merger with and into Xfone USA,
these services are now available in expanded markets throughout Louisiana and
Mississippi. The Internet service offerings include dial-up, DSL, high speed
dedicated Internet access, web services, email, the World Wide Web, Internet
relay chat, file transfer protocol and Usenet news access to both residential
and business customers. The I-55 Internet Services offerings provided various
prices and packages that allowed I-55 Internet Services subscribers to customize
their subscription with services that met customers’ particular requirements.
Xfone USA now provides bundled services of voice and data (broadband Internet)
to customers throughout its service areas.
I-55
Telecommunications, LLC
On August
26, 2005, we entered into an Agreement and Plan of Merger to acquire I-55
Telecommunications, LLC ("I-55 Telecommunications"), a Louisiana corporation
(the “I-55 Telecom Merger Agreement”). On September 13, 2005, we filed a Form
8-K discussing the impact of Hurricane Katrina on the transaction contemplated
by the I-55 Telecom Merger Agreement. In order to demonstrate our intention to
continue on with the transaction contemplated by the I-55 Telecom Merger
Agreement, the parties entered into on October 12, 2005 a Management Agreement
(the “I-55 Telecom Management Agreement”) that provided that I-55
Telecommunications hired and appointed Xfone USA as manager to be responsible
for the operation and management of all of I-55 Telecommunications’ business
operations. In consideration of the management services provided under the I-55
Telecom Management Agreement, I-55 Telecommunications assigned and transferred
to Xfone USA all revenues generated and expenses incurred in the ordinary course
of business during the term of the I-55 Telecom Management Agreement. The term
of the I-55 Telecom Management Agreement commenced on October 12, 2005 and
continued until the consummation of the merger on March 31, 2006.
In
conjunction with the consummation of the merger and in exchange for all of the
capital stock of I-55 Telecommunications, LLC, we issued a total of 223,702
shares of our Common Stock valued at $671,687 and 79,029 warrants exercisable
for a period of five years into shares of our Common Stock, with an exercise
price of $3.38, valued based on the Black Scholes option-pricing model (the
“Xfone Stock and Warrant Consideration”). A portion of the Xfone Stock and
Warrant Consideration issued at closing was placed in an escrow account. The
Company determined a breach of the representations and warranties in the Merger
Agreement resulting from the failure of I-55 Telecommunications to disclose the
liability due and payable to the Louisiana Universal Service Fund (“LA USF”)
through the period of October 2005, at which time Xfone USA undertook the
management role of I-55 Telecommunications. Pursuant to Section 1(g) of the
Escrow Agreement dated as of March 31, 2006 by and among Xfone USA, the Escrow
Agent, and the President and Sole Member of I-55 Telecommunications, and in
accordance with Article 6.02 of the Merger Agreement, Xfone USA notified the
other parties that it believed that it had suffered a Loss of $30,625.52,
pursuant to the provisions of Article 6.02 of the Merger Agreement dated as of
August 26, 2005. Having not received any response from the President and Sole
Member of I-55 Telecommunications, nor from his counsel, on October 15, 2007,
and after the allotted response time allowed, Xfone USA instructed the Escrow
Agent (Trustmark National Bank) to deliver from the Escrow Fund of the President
and Sole Member of I-55 Telecommunications, to the Company, 7,043 shares of
Common Stock and 4,838 Xfone Stock Warrants. The 7,043 shares of Common Stock
and 4,838 Xfone Stock Warrants were returned to the Company for cancellation on
October 31, 2007.
In
conjunction with certain Agreements to Purchase Promissory Notes dated October
31, 2005 / February 3, 2006 with Randall Wade James Tricou; Rene Tricou - Tricou
Construction; Rene Tricou - Bon Aire Estates; Rene Tricou - Bon Aire Utility;
and Danny Acosta, creditors of I-55 Telecommunications (the “Creditors”), and
upon the consummation of the merger on March 31, 2006, we issued to the
Creditors an aggregate of 163,933 restricted shares of Common Stock and an
aggregate of 81,968 warrants, exercisable at $3.38 per share, at a total value
of $492,220, in return for retiring their individual loans with I-55
Telecommunications.
I-55
Telecommunications provided voice, data and related services throughout
Louisiana and Mississippi to both individuals and businesses. Prior to the
merger with and into Xfone USA, I-55 Telecommunications was a licensed facility
based CLEC operating in Louisiana and Mississippi with a next generation class 5
carrier-switching platform. I-55 Telecommunications provided a complete package
of local and long distance services to residential and business customers across
both states. As a result of the merger, Xfone USA has now expanded its On-Net
(facilities) service area, through I-55 Telecommunications, into New Orleans,
Louisiana and surrounding areas, including Hammond, Louisiana. Xfone USA is
expanding its sales offices to include New Orleans, in an effort to continue
revenue growth and increase market share in the revitalized city, as well as
into Hammond, Louisiana. The competition in secondary markets, such as Jackson,
Mississippi, as opposed to Tier 1 markets such as Atlanta, Georgia, is also
rapidly declining due to the removal of UNE-P and the decline in the competitive
local exchange providers that had been dependent on UNE-P as their only source
for providing competitive local telephone services in those markets. This
provides for a unique opportunity for Xfone USA to gain market share, by
utilizing its existing network and to expand its facilities into these
opportunity areas becoming a primary alternative to the monopoly Incumbent Local
Exchange Company.
EBI
Comm, Inc.
On
January 1, 2006, Xfone USA, Inc., our wholly owned subsidiary, entered into an
Agreement with EBI Comm, Inc. (“EBI”), a privately held Internet Service
Provider, to purchase the assets of EBI. EBI provided a full range of Internet
access options for both commercial and residential customers in north
Mississippi. Based in Columbus, Mississippi, EBI’s services included Dial-up,
DSL, T1 Dedicated Access and Web Hosting. The customer base, numbering
approximately 1,500 Internet users, is largely concentrated in the Golden
Triangle area, which includes Columbus, West Point and Starkville, Mississippi.
The acquisition was structured as an asset purchase, providing for Xfone USA to
pay EBI total consideration equal to 50% of the monthly collected revenue from
the customer base during the first 12 months, beginning January 2006. Acquired
assets include the customer base and customer lists, trademarks and all related
intellectual property, fixed assets and all account receivables. As a result of
further negotiations between us and EBI, we have agreed to pay the total
consideration of this acquisition in cash in the amount of $85,699 in monthly
payments of $10,000 until paid in full, and we made the first of such payments
on June 1, 2007 and final payment on January 25, 2008. The acquisition was not
significant from an accounting perspective.
Canufly.net,
Inc.
On
January 10, 2006 (effective as of January 1, 2006), Xfone USA, Inc., our wholly
owned subsidiary, entered into an Asset Purchase Agreement with Canufly.net,
Inc. (“Canufly.net”), an Internet Service Provider based in Vicksburg,
Mississippi, and its principal shareholder, Mr. Michael Nassour. Canufly.net
provided residential and business customers with high-speed Internet services
and utilized the facilities-based network of Xfone USA, as an alternative to
BellSouth, to provide Internet connectivity to its customers. Canufly.net also
provided Internet services through a small wireless application in certain areas
in Vicksburg, Mississippi. The transaction was closed on January 24, 2006. We
agreed to pay a total purchase price of up to $710,633, payable as follows:
(i) $185,000 in cash payable in twelve equal monthly payments, the first
installment was paid at closing, and as of December 31, 2006, the entire amount
was paid in full and in accordance with the Asset Purchase Agreement;
(ii) $255,633 in cash, paid at closing, to pay off the loan with the
B&K Bank; (iii) 33,768 restricted shares of Common Stock and 24,053
warrants exercisable at $2.98 per share for a period of five years were issued
to the shareholders of Canufly.net during May 2006. Following the closing in
2006 and due to the satisfaction of certain earn out provisions in the Asset
Purchase Agreement the Company issued in March 2007 an additional 20,026
restricted shares of Common Stock and 14,364 warrants exercisable at $2.98 per
share for a period of five years to the shareholders of Canufly.net. The
acquisition was not significant from an accounting perspective.
Story
Telecom
On May
10, 2006, we, Story Telecom, Inc., Story Telecom Limited, Story Telecom
(Ireland) Limited, Nir Davison, and Trecastle Holdings Limited, a company owned
and controlled by Mr. Davison, entered into a Stock Purchase Agreement. Pursuant
to the Stock Purchase Agreement, we increased our ownership interest in Story
Telecom from 39.2% to 69.6% in a cash transaction valued at $1,200,000. $900,000
of the total consideration was applied to payables owed by Story Telecom to us
and our subsidiary Swiftnet Limited for back-end telecommunications services.
The balance of $300,000 was paid to Story Telecom to be used as working
capital.
Story
Telecom, Inc., a telecommunication service provider, operated in the United
Kingdom through its two wholly owned subsidiaries, Story Telecom Limited and
Story Telecom (Ireland) Limited (which was dissolved on February 23, 2007).
Following the acquisition, Story Telecom operates as a division of our
operations in the United Kingdom. The stock purchase pursuant to the Stock
Purchase Agreement was completed on May 16, 2006. The transaction contemplated
by the Stock Purchase Agreement was not significant from an accounting
perspective.
On March
25, 2008, we purchased from Mr. Davison and Trecastle Holdings Limited, the
shares of common stock of Story Telecom, Inc. that each party owned,
respectively, for an aggregate purchase price of £270,000 ($538,083), pursuant
to the terms of a Securities Purchase Agreement entered into between the parties
on that date. Upon acquisition of the shares of common stock of Story Telecom,
Inc. from Mr. Davison and Trecastle Holdings, Story Telecom, Inc. became our
wholly owned subsidiary.
Equitalk.co.uk
Limited
On May
25, 2006, we and the shareholders of Equitalk.co.uk Limited, a privately held
telephone company based in the United Kingdom (“Equitalk”) entered into an
Agreement relating to the sale and purchase of Equitalk (the “Equitalk
Agreement”). The Equitalk Agreement provided for us to acquire Equitalk in a
restricted Common Stock and warrant transaction valued at $1,650,000. The
acquisition was completed on July 3, 2006, and on that date Equitalk became our
wholly owned subsidiary. In conjunction with the completion of the acquisition
and in exchange for all of the capital stock of Equitalk, we issued a total of
402,192 restricted shares of our Common Stock and a total of 281,872 warrants
exercisable at $3.025 per share for a period of five years. Founded in December
1999, Equitalk, a VC-financed company, was the first fully automated e-telco in
the United Kingdom. Equitalk provides both residential and business customers
with low-cost IDA and CPS voice services, broadband and
teleconferencing.
Auracall
Limited
On August
15, 2007, the Company, Swiftnet Limited, our wholly owned U.K.-based subsidiary
(“Swiftnet”), and Dan Kirschner entered into a definitive Share Purchase
Agreement to be completed on the same date, pursuant to which Swiftnet purchased
from Mr. Kirschner the 67.5% equity interest in Auracall Limited (“Auracall”)
that he beneficially owned, thereby increasing Swiftnet’s ownership interest in
Auracall from 32.5% to 100%. Swiftnet had acquired the 32.5% interest in
Auracall through several transactions that occurred since October 16, 2001. The
purchase price for the shares was £810,918 (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.
NTS
Communications, Inc.
On August
22, 2007, we entered into a Stock Purchase Agreement (the “NTS Purchase
Agreement”) with NTS Communications, Inc. (“NTS”), a provider of integrated
voice, data and video solutions headquartered in Lubbock, Texas, and the owners
of approximately 85% of the equity interests in NTS, to acquire NTS.
Subsequently, all of the remaining shareholders of NTS executed the Agreement,
bringing the total percentage of equity interests in NTS owned by NTS
shareholders that entered into the Agreement (the “NTS Sellers”) to
100%. On February 14, 2008, we entered into a First Amendment to the
NTS Purchase Agreement to amend the agreement to further extend the expiration
date for the closing of our acquisition of NTS. On February 26, 2008,
we entered into a Second Amendment to the NTS Purchase Agreement which amended,
among other things, the definition and elements of Working Capital, as such term
is defined in the NTS Purchase Agreement, and increased the escrow amount. On
April 25, 2008, we entered into a Third Amendment, pursuant to which we agreed
to an extension of time for the calculation and payment of the post
closing working capital adjustment under the NTS Purchase
Agreement.
The
acquisition closed on February 26, 2008. Upon closing of the
acquisition, NTS and its six wholly owned subsidiaries, NTS Construction
Company, Garey M. Wallace Company, Inc., Midcom of Arizona, Inc., Communications
Brokers, Inc., NTS Telephone Company, LLC, and NTS Management Company, LLC,
became our wholly owned subsidiaries.
The
purchase price for the acquisition set forth in the NTS Purchase Agreement was
approximately $42,000,000 (excluding acquisition related costs), plus (or less)
(i) the difference between NTS’ estimated working capital and the working
capital target for NTS as set forth in the NTS Purchase Agreement, and (ii) the
difference between amounts allocated by NTS for its fiber optic network
build-out project anticipated in Texas and any indebtedness incurred by NTS in
connection with this project, each of which was subject to our advance written
approval. After applying this formula, the final aggregate purchase
price was calculated as $41,900,000, and was paid as follows:
·
|
$35,414,715
was paid in cash; and
|
·
|
2,366,892
shares of our Common Stock were issued to certain NTS Sellers who elected
to reinvest all or a portion of their allocable sale price in our Common
Stock, pursuant to the terms of the NTS Purchase Agreement. Our Board of
Directors determined, in accordance with the NTS Purchase Agreement, the
number of shares of our Common Stock to be delivered to each participating
NTS Seller by dividing the portion of such NTS Seller’s allocable sale
price that the NTS Seller elected to receive in shares of our Common Stock
by 93% of the average closing price of our Common Stock on the American
Stock Exchange for the ten consecutive trading days preceding the trading
day immediately prior to the Closing Date (i.e., $2.74). The aggregate
sales price reinvested by all such NTS Sellers was
$6,485,284.
|
Cybergate,
Inc.
On
November 26, 2008, Xfone USA, Inc., our wholly owned subsidiary, entered into a
Sale and Purchase Agreement (the “Agreement”) with Cybergate, Inc.
(“Cybergate”), pursuant to which Cybergate agreed to sell to Xfone USA, and
Xfone USA agreed to purchase, all of Cybergate’s assets, as set forth in the
agreement (the “Assets”). Cybergate is a provider of Internet
services, including Internet access, web and server hosting, data services and
e-mail. Pursuant to the Agreement Xfone USA also agreed to assume
certain of the liabilities of Cybergate. The purchase price was an amount equal
to 50% of collected receivables derived from the Assets up to $500,000.00, which
is to be paid to Cybergate in monthly installments equal to 50% of the prior
month’s collected receivables derived from the Assets as the same shall be
billed on a regular basis by Xfone USA. The Agreement contains
customary representations and warranties by the parties, as well as covenants
and conditions which are customary for transactions of this nature. The
Agreement and the closing of the sale and purchase have an effective date of
November 1, 2008. The acquisition was not significant from an
accounting perspective.
Our
Principal Services and
Their
Markets
United
States
We
provide through our United States operations (NTS Communications and Xfone USA)
the following telecommunication products / services:
Services
provided by NTS Communications
Retail
Services
·
|
Local Services
: NTS
delivers local telephony service to its customers through an “on-net”
UNE-L connection, including voice mail, caller ID, forwarding, 3-way
calling, blocking, and PBX services. In addition, NTS sells
”off-net” total service resale lines which contribute less
than 10% of total local service revenue. NTS
provides UNE-L services in Lubbock, Abilene, Amarillo, Midland, Odessa,
Pampa, Plainview, and Wichita Falls, Texas. NTS provides local
services via FTTP in Lubbock and Wolfforth. NTS provides resold
local services throughout Texas via its resale agreement with
AT&T.
|
·
|
Retail Long Distance
Services
: NTS offers a full range of long distance services to its
customers, including competitively priced switched long distance
(including intrastate, interstate, and international), toll-free service,
dedicated T-1 long distance and calling cards. The vast
majority of its customers are concentrated in West
Texas. Approximately 10% of long distance customers are in
Arizona, New Mexico, Oklahoma, Kansas, and
Colorado.
|
·
|
Internet Data Services
:
NTS began offering broadband service in 1999. Download speeds
range from 500 Kilobits to 100 Megabits per second, depending on the end
user’s distance from an NTS collocation or the type of facilities used to
deliver the service. NTS launched dial-up service in
1985. NTS provides broadband and dial-up Internet service in
all of its Texas markets.
|
·
|
Fiber-Based Services (“Fiber to
the Premise or FTTP”)
: As an integrated telecom provider, NTS is
capable of providing quality triple play (voice, digital video & data)
on one bill at competitive prices to its FTTP customers. NTS
offers a full selection of video services, including basic cable, video on
demand, HDTV and DVR. NTS is a member of the National Cable
Television Cooperative and as a member obtains favorable programming rates
from most major networks. NTS provides FTTP service in Lubbock
and Wolfforth, Texas.
|
·
|
Customer Premise Equipment
(“CPE”)
: NTS resells a variety of CPE and CPE related services to
its customers. Primarily, these sales involve NTS acting as an
authorized dealer for Toshiba phone systems. These systems are sold to
customers either on a stand-alone basis, or in conjunction with the
purchase of local, long distance, and/or data services from the
company.
|
Wholesale
Services
·
|
Private Line Services
:
NTS offers aggregation and resale of leased fiber transport network from
AT&T and other fiber network operators. This service is
mostly provided for carrier customers that need direct network
connectivity, as well as enterprises that require dedicated branch office
connections. Services are generally offered under 1-year
contracts for a fixed amount per month. NTS provides private
line service nationwide.
|
·
|
Wholesale Switched Termination
Services
: NTS sells its wholesale-switched minutes to local telecom
companies who do not have the volume to warrant attractive pricing from
AT&T and other large carriers. NTS provides multi-regional
switched termination, switched toll free origination and wholesale
Internet access services to various carrier customers. Services
are generally offered for a fixed amount per minute. NTS
provides wholesale switched termination services to customers via network
connections in NTS POPs and switch
sites.
|
Internet
Based Customer Service
·
|
Our
Internet based customer service (found at www.ntscom.com) includes full
details on all our retail products and
services.
|
Our US
based subsidiary, NTS Communications, Inc., owns and operates its own
facilities-based telecommunications switching system.
Future
Plans
Levelland/Smyer
FTTP Opportunity
NTS,
through its wholly owned subsidiary, NTS Telephone Company, LLC, is in the
process of extending its FTTP network to the nearby communities of Levelland
(located 30 miles west of Lubbock) and Smyer (approximately 15 miles west of
Lubbock). Upon project completion, these communities will add
approximately 6,200 passings to the NTS FTTP footprint and bring total FTTP
passings to approximately 21,000. NTS Telephone Company, LLC, has
received approval from the Rural Utilities Service (“RUS”) for an $11.8 million,
17-year debt financing to complete this overbuild. The RUS loan is
non-recourse to NTS and all other NTS subsidiaries and interest is charged at
the average rate of U.S. government obligations (equivalent to approximately
2.5% a year at today’s rates). Data from marketing surveys indicated
a very strong demand for triple play (voice, data/Internet, and video) service
offerings and projected a market penetration for NTS of 69% in approximately
three years from project completion. NTS’ capital investment in the
project is a $2.5 million equity contribution that serves as credit support for
the loan. NTS will provision voice, data, and video services for NTS
Telephone Company. NTS will receive a management fee from NTS
Telephone Service equal to 15% of its revenues. NTS began marketing its
triple-play service to limited areas of Levelland in the first quarter of 2009
with more areas becoming available as overbuild construction is completed.
NTS completed Phase 2 of the project during 2008 and is currently nearing
completion of Phase 3. Project completion could be delayed by any number of
factors including but not limited to weather and the availability of contractors
and materials.
Services
provided by Xfone USA
·
|
Local Telephone Service:
Using our own network in concentrated local areas throughout Mississippi
and Louisiana and utilizing the underlying network of BellSouth
Telecommunications, Inc. (the new ATT), outside of our local areas, we
provide local dial tone and calling features, such as hunting, call
forwarding and call waiting to both business and residential customers
throughout Louisiana and Mississippi, including T-1 and PRI local
telephone services to business
customers.
|
·
|
Long Distance Service:
We use our own network where available and QWEST, a nationwide long
distance carrier, as our underlying long distance network provider. In
conjunction with Local Telephone Services, we provide Long Distance
Services to our residential and business customers. We provide two
different categories of long distance services - Switched Services to both
residential and small business customers, which include 1+ Outbound
Service, Toll Free Inbound Service and Calling Card Service. For larger
business customers we also provide Dedicated Services such as T-1 and PRI
Services. Our long distance services are only available to customers who
use our local telephone services.
|
·
|
Internet/Data Service:
We provide high-speed broadband Internet access to residential and
business customers utilizing our own integrated digital data network and
utilizing the broadband gateway network of the new ATT. Our DSL service
provides up to 3 Mbps of streaming speed combined with Dynamic IP
addresses, as well as multiple mailboxes and Web space. Our DSL services
also include spam filter, instant messaging, pop-up blocking, web mail
access, and parental controls. We also provide dial-up Internet access
service for quick and dependable connection to the web. Our Internet/Data
services are stand-alone products or are bundled with our voice services
for residential and business
customers.
|
·
|
Customer Service:
Customer Service is paramount at Xfone USA and is one of our major
differentiating characteristics, thus tantamount to being one of our
product offerings. Customers have been conditioned to accept poor customer
service from the larger monopoly companies because they have never had any
real choice in service providers, especially in the residential market.
Our attentive customer service department is an additional “product
offering” which sells - as well as retains - customers. The full scope of
communications service entails network service, customer service, and
repair service.
|
·
|
Customer Premise Equipment
(“CPE”)
: Xfone USA also resells a variety of CPE and CPE related
services to its customers. Primarily, these sales involve
acting with NTS Communications, Inc., as an authorized dealer for Toshiba
phone systems. These systems are sold to customers either on a stand-alone
basis, or in conjunction with the purchase of local, long distance, and/or
data services from the company.
|
Our US
based subsidiary, Xfone USA, Inc., owns and operates its own facilities-based
telecommunications carrier class-switching platform.
United
Kingdom
We
provide through our United Kingdom operations (Swiftnet, Equitalk, Story Telecom
and Auracall) the following telecommunication products / services:
Services
provided by Swiftnet
Telephony
Services
·
|
Carrier Pre Select
(CPS):
CPS is a telephony service which enables customers to
benefit from our low call usage charges, without having to make any
changes to their existing telephone lines or numbers. The service allows
customers to route all their outgoing calls over our network. This gives
them access to competitive call rates and a wide range of services.
Customers using CPS only pay line rental to their service operator, while
we bill them for all call charges. CPS is available nationally provided
the customer is connected to a BT local
exchange.
|
·
|
Indirect Access:
This is
a telephony service which enables customers to benefit from our low call
usage charges, without having to make any changes to their existing
telephone lines or numbers. The service allows customers to route a
specific outgoing call over our network by using the prefix code
“1689.”
|
·
|
Calling Cards:
This
service is available to all our subscribers. The Calling Card works by
using an access number and a PIN code, and offers a convenient and easy
way to make calls virtually anywhere in the UK, as well as from 27 other
destinations worldwide.
|
Messaging
Services
·
|
Email2Fax:
Allows users
to send fax messages directly from their email or web
software.
|
·
|
Cyber-Number:
Allows
users to receive fax messages directly to their email software via a
personal number.
|
·
|
Email/Fax Broadcast:
This service allows the user to send multiple personalized faxes and
emails to thousands of users in
minutes.
|
Internet
Based Customer Service
·
|
Our
Internet based customer service and on-line registration (found at
www.swiftnet.co.uk) includes full details on all our products and
services.
|
Our UK
based subsidiary, Swiftnet Limited owns and operates its own facilities-based
telecommunications switching system.
Services
Provided by Equitalk.co.uk
Telephony
Services
·
|
Carrier Pre Select
(CPS):
CPS is a telephony service which enables customers to
benefit from our low call usage charges, without having to make any
changes to their existing telephone lines or numbers. The service allows
customers to route all their outgoing calls over our network. This gives
them access to competitive call rates and a wide range of services.
Customers using CPS only pay line rental to their service operator, while
we bill them for all call charges. CPS is available nationally provided
the customer is connected to a BT local
exchange.
|
·
|
Indirect Access:
This is
a telephony service which enables customers to benefit from our low call
usage charges, without having to make any changes to their existing
telephone lines or numbers. The service allows customers to route a
specific outgoing call over our network by using the prefix code
“1664.”
|
·
|
Internet/Data Service:
We provide high-speed Internet access to residential customers utilizing
the digital data network of Griffin Internet. Our ADSL service provides up
to 8 Mbps of streaming speed combined with Static IP addresses, as well as
multiple mailboxes. Our Internet/Data services are bundled with our voice
services for residential and business
customers.
|
·
|
Conference Service:
We
provide web-managed low cost teleconferencing services through our
partnership with Auracall Limited. Up to 10 people can call in to a
conference circuit and be joined together by dialing the same PIN. There
is no need to reserve a conference call in advance and each caller pays
for their own call.
|
Internet
Based Customer Service and Billing Interface
·
|
Our
Internet based customer service and billing interface (found at
www.equitalk.co.uk) includes on-line registration, full account control,
and payment and billing functions and information
retrieval.
|
Services
provided by Story Telecom
·
|
Prepaid Calling Cards
:
Story Telecom initiates, markets and distributes Prepaid Calling Cards
that are served by our switch and systems. Story Telecom supplies the
Prepaid Calling Cards to retail stores through its network of dealers. The
Calling Card enables the holder to call anywhere in the world by dialing
either a toll free number or a local access number from any telephone that
routes the holder’s call to our Interactive Voice Response System that
automatically asks for the holder’s private PIN code, validates the code
dialed by the customer, and tells the credit balance of the card. The
holder is then instructed to dial to his or her desired destination, at
which time our Interactive Voice Response System tells the holder how long
he or she can speak according to the balance on the card and what the cost
per minute is. The holder of the card can use the card repeatedly until
the balance is zero.
|
·
|
Story Direct and Story
Mobile
: These services allow any individual with either a BT line
or a mobile phone to make international calls at a lower cost and without
prepayment for setting up an account with another carrier. These services
can be accessed by any business or residential user through Story Telecom
website, found at www.storytelecom.com. When customers need to make an
international or national call they can dial the appropriate designed
number for that country and save on calling rates over the current BT
published rates or their network operator’s rates by gaining access to our
switch and providing savings on a per minute
basis.
|
·
|
Text & Talk
: This
service allows any individual with a mobile phone to make international
calls at a lower cost by purchasing calling credit via a Premium Rate
Text. When customers need to make an international or national call they
can dial an access number followed by their destination
number.
|
Internet
Based Customer Service and Billing Interface
·
|
Our
Internet based customer service (found at www.storytelecom.co.uk) includes
full details on all our products and
services.
|
Services
provided by Auracall
·
|
Free
Time
: This service allows any individual with a BT line
to make international calls at a lower cost and without prepayment for
setting up an account with another carrier. The Auracall service can be
accessed by any business or residential user through our website at
www.auracall.com. When customers need to make an international or national
call they can dial the appropriate designed number for that country and
save on calling rates over the current BT published rates by gaining
access to our switch and providing savings on a per minute
basis.
|
·
|
T-Talk
: This
service allows any individual with a mobile phone to make international
calls at a lower cost by purchasing calling credit via a Premium Rate
Text. When customers need to make an international or national call they
can dial an access number followed by their destination
number.
|
Internet
Based Customer Service and Billing Interface
·
|
Our
Internet based customer service (found at www.auracall.co.uk) includes
full details on all our products and
services.
|
Israel
We
provide through our Israeli operations (Xfone 018) the following
telecommunication products / services:
·
|
International Telephony
Services:
We provide international telephony services with the
prefix code of “018”. We provide these services both to our subscribers
and to occasional customers. The service is offered to both residential
and business customers.
|
·
|
Local Telephony
Services:
We provide to Israeli subscribers local telephony
services with the prefix code of “078-818”. The service is
offered to both residential and business customers in the framework of an
experimental deployment of Local Telephone Services utilizing Voice over
Broadband (VoB) technology.
|
·
|
XFONECARD:
We provide an
international toll free calling card service, available in over 40
countries around the globe.
|
·
|
SIMPLE:
The SIMPLE is a
pre programmed, rechargeable, mobile SIM card which can be used with any
unlocked GSM (Global System for Mobiles) mobile phone virtually anywhere
in the world. SIMPLE allows us to deliver call savings, by diverting the
customer dialing command away from the local mobile operator that the
phone is connected to, and instead it sends the call to one of the mobile
operators with whom we hold a special agreement. We offer for sale or rent
three types of SIM Cards which may be used in over 120 countries around
the globe - "SIMPLE+", "SIMPLE World" and "SIMPLE Europe". We also
offer a special SIM Card for use in the U.S.A- "SIMPLE
USA".
|
·
|
International Telephony
Access:
We provide international telephony access to the Israeli
telephone network by selling incoming call minutes to various
international operators across the
globe.
|
·
|
Internet
Services:
We
provide
Internet
access services which include various surfing speeds
via any kind of available
infrastructure (ADSL, Cable, etc.)
.
|
Internet
Based Customer Service
·
|
Our
Internet based customer service and on-line registration (found at
www.018.co.il) includes full details on all our products and
services.
|
Our
Israel based subsidiary Xfone 018 owns and operates its own facilities-based
telecommunications carrier class-switching platform.
Our
Distribution and Marketing
Methods
We use
the following distribution methods to market our services:
·
|
We
use employed, direct sales executives to sell to medium to large size
business customers; these sales executives have quota attainment
requirements and receive a monthly salary, allowance and are paid
commissions;
|
·
|
We
actively recruit independent contractor agents and resellers who purchase
telephone traffic directly from us at a discount, and who then resell this
telephone traffic to their customers at a mark-up according to their own
price lists;
|
·
|
We
utilize agents that sell our services directly to customers at our
established prices; these agents receive a commission of approximately
5%-12% of the total sale amount less any bad
debts;
|
·
|
We
use third party direct sales organizations (telesales and door-to-door) to
register new customers;
|
·
|
We
cooperate with major companies and worker’s
councils;
|
·
|
We
have retail and wholesale sales offices; employees at these sales offices
receive annual salaries and
commissions;
|
·
|
We
use direct marketing, including by newspaper, radio and television
advertisements;
|
·
|
We
attend telecommunications trade shows to promote our services;
and
|
·
|
We
utilize the Internet as an additional distribution channel for our
services.
|
Our
Billing
Practices
We charge
our customers based on a monthly fixed amount or on actual usage by full or
partial minutes. Our rates vary with distance, duration, time, type of call, and
product or service provided, but are not dependent upon the facilities selected
for the call transmission. The standard terms for our customers require either
pre-payments or payments due as early as 16 or as late as 30 days from the date
of the invoice, or within 90 days from when the invoice is issued by the local
operator. Our supplier’s standard terms are payment within 30 to 90 days from
invoice date; however, some new suppliers ask for shorter payment
terms.
Divisions
We
operate the following divisions:
·
|
Partner Division -
Our
Partner Division operates as a separate profit center by attempting to
recruit new resellers and agents to market our products and services and
to provide support and guidance to resellers and
agents.
|
·
|
Customer Service Division
-
In the United Kingdom and the United States we operate a live
customer service center that operates 24 hours a day, 7 days a week. In
Israel our customer service center operates 6 days a
week.
|
·
|
Operations Division -
Our Operations Division provides the following operational functions to
our business: (a) 24 hour/7 day a week technical support;
(b) inter-company network; (c) hardware and software
installations; and (d) operating switch and other
platforms.
|
·
|
Administration Division
-
Our Administration Division provides the billing, collection,
credit control, and customer support aspects of our
business.
|
·
|
Research and Development
Division -
The function of our Research and Development Division is
to develop and improve our billing system, switch and telephony platforms,
websites and special
projects.
|
·
|
Marketing Division -
Our
Marketing Division is responsible for our marketing and selling campaigns
that target potential and existing retail
customers.
|
Geographic
Markets
Our
primary geographic markets are the United States, the United Kingdom and Israel.
However, we serve customers worldwide.
Competitive Bu
siness
Conditions
The
U.S. Market
NTS
operates in a highly competitive environment which is generally characterized by
the dominance of the Incumbent Local Exchange Carrier (ILEC). With
respect to its primary Texas markets, the dominant ILEC is AT&T (formerly
Southwestern Bell Telephone Company). NTS also competes with the
Incumbent Cable TV Provider (ICTVP) in markets where that carrier provides
voice, data and/or video services. In its core Texas markets, the
ICTVP is SuddenLink Communications or Time Warner
Communications. Within these same core markets, NTS also competes
with a variety of widely dispersed smaller Competitive Local Exchange Carriers
(CLEC). With respect to its data and long distance products, the
company competes with various national and regional players including AT&T,
Verizon, Qwest, Level 3 and others.
Xfone
USA, also operates in a highly competitive markets in Mississippi and Louisiana.
In these markets Xfone USA competes against the dominate
ILEC, BellSouth Telecommunications, as well as many smaller
CLECs.
The
U.K. Market
The
communications and information services industry in the U.K. is highly
competitive and varied. In 2008, we had only approximately 0.026% of the market
share of the United Kingdom telecommunication market (not including mobiles
revenues), based on our revenues of approximately £10 million during 2008,
compared with the total U.K. market revenues of approximately £38 billion
(including mobiles revenues). The source of the market size is the United
Kingdom communications regulatory body, known as Ofcom, the website of which may
be accessed at www.ofcom.org.uk (the latest statistics are for
2007).
The
Israeli Market
Since the
opening of the international telephony market in Israel to competition in 1996,
and until 2004, only three companies have provided international telephony
services in Israel. The market, estimated at that time to be 2 billion minutes
per year, was more or less equally divided between the three companies. On July
4, 2004, the Ministry of Communications of the State of Israel granted our
subsidiary, Xfone 018 a license to provide international telecom services in
Israel. We started providing services in Israel through Xfone 018 as of
mid-December 2004. In 2004, two other new providers of international telephony
services launched their services. The international telephony market is highly
competitive and therefore all six providers had to offer low prices in order to
attract or retain subscribers and call minutes.
During
2006, two significant mergers occurred in the Israeli international telephony
market, leaving only four companies in the competition. The aforementioned
mergers enabled Xfone 018 to execute, as of December 2006, a new business
strategy, according to which it re-priced its services by distinguishing the
rates for its subscribed customers from the rates for its non-subscribed
customers. The new strategy has proved to be successful, and in 2007 and 2008
Xfone 018 revenues were significantly increased.
In 2008,
the Israeli international telephony market was estimated to be 3 billion minutes
(incoming and outgoing). We estimate our market share as of December 31, 2008,
as approximately 5.5% of the Israeli market.
The local
telephony market in Israel is dominated by six major competitors, two of which
own the physical infrastructures and are required by law to offer use of these
infrastructures to other competitors. In July 2008, Xfone 018 entered that
market in an experimental capacity.
Internet
services via ADSL and/or Cable became available to the general public in Israel
in 2001. Since then prices have dropped considerably and steadily, resulting, at
the end of 2008, in a household penetration rate of approximately 72% and
approximately 1.68 million broadband lines, according to the
MOCSIL.
In
Israel, Internet infrastructure and Internet access services are provided
separately. The Internet access services market, into which Xfone 018 has
recently entered, is divided between six major competitors.
Principal
Suppl
iers
In 2008,
our principal suppliers of telephone routing and switching services according to
the percentage of the costs of revenues were:
·
|
British
Telecommunications - 4.2%
|
·
|
Bezeq
The Israel Telecommunication Corp - 2
%
|
We are
dependent on several of our suppliers, including those that provide significant
hardware and software products and support. However, these suppliers are
required to provide us with services according to the relevant regulations and
their licenses to operate as a telecommunications provider in the relevant
jurisdictions.
Major
Customers
We have
six major types of customers:
·
|
Residential -
in the
U.S. - pre-subscribed customers, including for local, long distance,
internet and cable television services; outside of the U.S. -
pre-subscribed customers and customers who must dial a special code to
access our switch or acquire a box that dials
automatically.
|
·
|
Commercial -
we serve
small to complex business customers around the
world.
|
·
|
Governmental agencies -
Including the United Nations World Economic Forum, certain embassies and
the Bank of Israel. We also provide cities, counties, schools and
universities in Texas with a host of services, including local, long
distance, internet and private line
services.
|
·
|
Resellers -
We provide
resellers with our telephone and messaging services for a wholesale
price. We also provide long haul switched termination to a
variety of companies throughout the United States who resell our
services.
|
·
|
Telecommunications companies
-
We provide our services through telecommunication companies (such
as British Telecom and Bezeq The Israel Telecommunication Corp) which
collect the fees relating to such services and forward them to
us.
|
·
|
Mobile Users -
including
customers who can access our switch utilizing our access number and
thereafter are able to make low-cost international calls; customers who
purchase, via a reversed billed SMS, pre-paid credit for international
calls and those using our international roaming SIM
cards.
|
Certain
Telecommunication operators act as collection channels for the Company. In 2008,
we had two major collection channels, one in the U.K. and one in Israel.
Collections through these channels accounted to approximately 4.4% and 4.9% of
our total revenues in 2008, respectively, and 22% and 6% of our total revenues
in 2007, respectively. With respect to collection of monies for us, these
Telecommunication operators are not deemed to be customers of the Company.
In 2008
our largest non-affiliated reseller was WorldNet Global Communications Ltd.
which generated under 1% of our total revenues. We provide WorldNet Global
Communications with the billing system. We anticipate that WorldNet will
continue to contribute approximately the same amount of UKP to our revenues in
year 2009.
Collectively,
in 2008 the United States accounts for approximately 69.3% of our revenues, the
United Kingdom accounts for approximately 20.2% of our revenues and Israel
accounts for approximately 10.5% of our revenues.
Our
integrated revenue approach led to revenue from each source as described above
and is partially driven by the activities of other revenue sources. Our revenues
are dependent upon the following factors: price competition in telephone rates;
access provided to our services by other telecoms companies and the prices for
that access; demand for our services; individual economic conditions in our
markets; and our ability to market our services.
Patents and T
radem
arks
In
the U.S.
The Mark
“
XFONE
” was registered
by the United States Patent and Trademark Office (the “USPTO”) on July 15,
2008.
The Mark,
“
NTS Communications
”
related to the provision of telephone telecommunications services in the United
States, was registered by the USPTO on September 4, 1984, and renewed through
the year 2014.
The Mark,
“
NTS Communications (with
design)
” related to the provision of telephone communications services in
the United States, was registered by the USPTO on October 12, 1993, and has been
renewed through the year 2013.
The Mark,
“
NTS-ONLINE (with
design)
” related to the provision of web hosting, on-line message boards
and information, was registered by the USPTO on August 15, 2000.
On
February 6, 2007, NTS filed an application with the USPTO to register the Mark,
“
NTS-ONLINE
” related to
the provision of expanded telecom services, web hosting services, and domain
name services. The application also seeks to eliminate the design
associated with the mark. On May 27, 2008, the USPTO issued a Notice of
Allowance. NTS’ Statement of Use was accepted by the USPTO on January 3, 2009.
The mark was registered by the USPTO on February 10, 2009.
On April
22, 2005, Xfone USA received notification from the USPTO that as of April 12,
2005, its Mark, “
eXpeTel
” was registered by
that government agency.
In
the U.K
On
September 14, 2000, Equitalk received notification from the Trademarks Registry
Office of Great Britain that its trademark, “
Equitalk
”, was registered by
that government agency.
On
January 9, 2004, we received notification from the Trademarks Registry Office of
Great Britain that as of August 8, 2003, our trademark, “
Xfone
”, was registered by that
government agency.
In
Israel
On August
6, 2007, Xfone 018 received notification from the Israeli Patent Office that as
of March 30, 2007, its Mark, “
Xfone
018
”, was registered by that
government agency.
We do not
have any other patents or registered trademarks.
Regulatory
Matters
We
provide our services in many countries, all of which have different regulations,
standards and controls related to licensing, telecommunications, import/export,
currency and trade. We believe that we are in substantial compliance with these
laws and regulations.
In
the U.S
Xfone USA
is currently licensed as a CLEC and an Inter-exchange Carrier to provide local
telephone and long distance services in the states of Florida, Louisiana and
Mississippi. During fiscal 2008, Xfone USA was also licensed in Alabama and
Georgia, however, we withdrew these licenses during the first quarter of fiscal
2009. Internet and data services provided by Xfone USA are not regulated
services.
As of
March 10, 2005, and upon consummation of the merger of WS Telecom, with and into
Xfone USA, we became subject to applicable US state and federal
telecommunications laws and regulations. Compliance with such laws involved
higher costs than we had in Europe.
On March
9, 2005, the Mississippi Public Service Commission (“MSPSC”) issued an Order
opening a Generic Change of Law Proceeding (“MSPSC Proceeding”) to consider
amendments to existing Interconnection Agreements between BellSouth
Telecommunications, Inc. and all CLECs in Mississippi. As an interested party
and as a CLEC, Xfone USA petitioned and was granted permission to intervene in
the MSPSC Proceeding for regulatory purposes. On October 26, 2005, the MSPSC
held its hearing on the MSPSC Proceeding and took the results of the proceeding
under advisement. On October 20, 2006 the MSPSC issued its Order in this matter,
requiring various changes to Interconnection Agreements between BellSouth
Telecommunications, Inc. and all CLECs in Mississippi, including the
Interconnection Agreement under which Xfone USA operates. The issues addressed
by the MSPSC in this proceeding were regulatory in nature and did not involve
monetary damages.
From time
to time Xfone USA may be required to seek regulatory approval before applicable
state public utility commissions of certain transactions, including business
combinations with other telecommunications providers. During 2005, upon request
of Xfone USA, the MSPSC and the Louisiana Public Service Commission granted
regulatory approval of the sale and transfer of the assets and the customer base
of I-55 Telecommunications to Xfone USA. This transaction was closed on March
31, 2006.
Certain
required annual regulatory reports to be filed by Xfone USA with the MSPSC were
not made in a timely manner. The most recent filings have been made and we
are working diligently to remediate all other omissions. Xfone
USA still faces some risk that these late filings could result in a monetary
penalty.
On
February 14, 2008, Xfone and NTS received domestic and international Section 214
authorization from the United States Federal Communications Commission to
transfer control of NTS to the Company.
NTS has
certain domestic and international Section 214 authority, which authorizes NTS
to provide long distance service in the United States.
NTS is
registered re-seller of long-distance services in the states of Arizona,
Colorado, Kansas, New Mexico, Oklahoma and Texas. NTS is also
registered to provide local services in New Mexico and
Texas. Further, in Texas, NTS has the authority to provide local
telecommunications services throughout the state of Texas, to provide cable
television services in Lubbock and Wolfforth, and has permits to provide video
services in designated areas within Lubbock, Wolfforth, Smyer and Levelland. In
addition, NTS has entered into 9-1-1 Emergency Service Agreements with the
applicable 9-1-1 entities in the markets it serves.
On May
19, 2008 a petition was filed with the Federal Communications Commission (In the
Matter of NTS Communications, Inc., Petition for Extension of Waiver of Section
76.1204(a)(1) of the Commission’s Rules, CS Docket No. 97-80 filed May 19,
2008). This Petition seeks a two-year extension of the relief previously
granted from Commission Rules banning the use of integrated set-top boxes by
cable service providers. The original waiver, granted on July 23, 2007,
expired on July 1, 2008.
On June
27, 2008, a petition was filed with the Federal Communications Commission (In
the Matter of Xfone USA, Inc., Petition for Waiver of Sections 54.307(c) and
54.802(a) of the Commissions Rules, CS Docket No. 96-45, filed June 27,
2008). This Petition seeks relief from the failure to timely file reports
necessary to receive FUSF reimbursement for the provision of telecommunications
service in high cost areas of Mississippi. If granted, Xfone USA
anticipates it will receive approximately $100,000.00 in unpaid
reimbursements.
The May
19, 2008 and June 27, 2008 petitions are currently pending.
Effect of Probable Governmental
Regulations
As an ETC
(Eligible Telecommunications Carrier), there are numerous actions proposed at
both the state and federal level which could limit NTS and Xfone USA’s future
access to reimbursement from various Universal Service Funds
(“USF”). NTS currently only receives minimal reimbursement from USF
for its provision of Lifeline and LinkUp services While Xfone USA received
significant support for services provided in high cost areas of
Mississippi. These measures could limit NTS and Xfone USA’s ability
to obtain reimbursement for services provided in high cost areas. In
areas where it has not deployed its own last mile facilities, NTS and Xfone USA
continue to rely on AT&T for access to high cap interoffice and last mile
copper loop facilities. AT&T’s obligation to provide these
facilities is created by the Federal Telecommunications Act of 1996 and
corresponding regulations of the FCC and memorialized in interconnection
agreements between NTS and Xfone USA and Incumbent Local Exchange
Carriers. Should laws or regulations be changed to limit and or
eliminate competitive access to these essential facilities, NTS business could
be adversely affected. The FCC has been considering access charge
reform to address issues created by VoIP traffic, namely the compensation due,
if any, to terminating carriers for VoIP originated calls. Resolution
of this issue will clarify legal and regulatory uncertainty about the treatment
of these calls and could have the effect of opening the door to new markets for
NTS’ wholesale switched services.
In
the U.K
In 1996,
Swiftnet Limited, which became our subsidiary in 2000, was granted a license to
operate a telecommunications system from the Secretary of State for Trade and
Industry of the United Kingdom. On July 25, 2003, the regulatory situation
within the United Kingdom changed dramatically with the ending of the licensing
regime and the withdrawal and revocation of the Telecommunication
Act.
The
licensing regime has been replaced by a general authorization regime with the
introduction of the General Conditions of Entitlement.
Swiftnet
Limited, Equitalk.co.uk Limited, Auracall Limited and Story Telecom Limited are
now affected by regulations introduced by the Office of Communications
(“Ofcom”). Ofcom is the regulator for the UK communications industries, with
responsibilities across television, radio, telecommunications and wireless
communications services. Our UK businesses are also affected by the rules set by
regulator for Premium Rate Services (Phonepay Plus - www.phonepayplus.org.uk).
We do not believe that any regulations introduced by Ofcom or Phonepay Plus will
significantly interfere with or substantially impair our business.
In
Israel
On April
15, 2004, we established Xfone Communication Ltd. and renamed it to Xfone 018
Ltd in March 2005. On July 4, 2004 the Ministry of Communications of the State
of Israel (the "MOCSIL") granted Xfone 018 a license to provide international
telecom services in Israel (the "International Telecommunications Services
License"). The International Telecommunications Services License may be revoked
by this agency in the occurrence of certain events such as breach of
telecommunication laws and regulations or breach of certain provisions of the
license.
On May
31, 2006, Xfone 018 was granted permission by the MOCSIL to commence an
experimental deployment of International Telephone Services utilizing Voice over
Broadband (VoB) technology. On May 31, 2007 the permission expired. On May 4,
2008, the MOCSIL approved an amendment to the International Telecommunications
Services License which included International Telephone Services utilizing Voice
over Broadband (VoB) technology within our International Telecommunications
Services License.
On August
21, 2006, the MOCSIL granted Xfone 018 a license to operate in Israel as an ISP,
thus enabling Xfone 018 to provide Internet access, Email and EDI (electronic
data interchange) services.
On August
2, 2007, Xfone 018 was granted permission by the MOCSIL to provide international
SMS services.
On
November 7, 2007, the MOCSIL granted Xfone 018 a license to commence an
experimental deployment of Local Telephone Services utilizing Voice over
Broadband (VoB) technology. Unless extended by the MOCSIL, the license will
expire on April 30, 2009.
On May
24, 2007, the MOCSIL informed Xfone 018 that it is considering imposing on it a
financial sanction as a result of Xfone 018’s failure to provide the new
"Mobilization of Telephone Numbers" service (the "Service"), as of September 1,
2006, as required by law. On June 14, 2007, Xfone 018 responded to the MOCSIL
and explained the reasons for the delay in the implementation of the Service, In
December 2007, the Service was implemented in Israel by all telecom service
providers, including Xfone 018. Xfone 018 has not received any additional
communications from the MOCSIL in this regard since its implementation of the
Service, and accordingly, believes the matter to be resolved.
Effect
of Probable Governmental Regulations
There are
numerous actions proposed in 2008 by the Grunow Committee, an advisory committee
appointed by the Ministry of Communications of the State of Israel, which could
affect our business in the future. Below are the significant recommendations of
the committee that could apply to us if adopted:
·
|
Naked
ADSL: A proposal was made to separate between the telephony and
internet access in the "Last Mile". Said proposal, which was recently
adopted, could be beneficial to Xfone 018, as it would provide Xfone 018
with the opportunity to penetrate the market with its VOB local calls
services.
|
·
|
Unbundling:
A proposal has been made to force the existing infrastructure providers to
enable other providers to use their infrastructure in fair prices to
encourage competition. If adopted, this could affect Xfone 018’s business
by allowing it to offer a wider range of services at attractive
prices.
|
·
|
MVNO: A
proposal has been made to open the Israeli market to new virtual players
in the mobile arena. If adopted, this could affect Xfone 018’s
business by allowing it to penetrate a new market, which constitutes more
than 50% of the Israeli communication
market.
|
·
|
International
Calls: A proposal has been made to enable mobile operators to supply
international calls based on agreed access charge from the international
carriers. If adopted, this could negatively affect Xfone 018’s business by
enlarging the number of its
competitors.
|
·
|
WIMAX: A
proposal has been made to issue WIMAX frequencies in order to establish
new access networks in Israel. If adopted, this could be beneficial
to Xfone 018’s business by allowing it to penetrate and gain a new market
share by direct access.
|
Research and Dev
elopme
nt
Activities
During
fiscal years ended December 31, 2007 and 2008 we spent $49,101, $47,609,
$60,094, respectively, on research and development activities. Other than
developing and expanding our telecommunications applications and our websites,
we do not intend to undertake any significant research and development
activities in 2009.
Cost of Compliance with
Environmental Laws
During
2007, NTS incurred approximately $31,000 in expenses related to the
encapsulation of asbestos insulation located on certain of the basement piping
and basement boiler jacket of the Metro Tower, a property owned in Lubbock,
Texas, and in connection with the replacement of the roof of the building to
remediate a potential interior mold problem with originated from a roof
leak. NTS will from time to time incur additional similar expenses in
the future to monitor and encapsulate, where necessary, isolated areas of
asbestos. On March 21, 2008, NTS received notice that the remediation project at
Metro Tower had been completed, and accordingly does not anticipate
significant future expenses related to mold remediation at this property over
and above those normally associated with customary and usual building
maintenance.
We
currently have no other costs associated with compliance with environmental
regulations. We do not anticipate any other future costs associated with
environmental compliance; however, there can be no assurance that we will not
incur such costs in the future.
Employees
We
currently have 319 employees in the United States, 28 employees in the United
Kingdom, and 44 employees in Israel.
ITEM
1A.
RISK FACTORS
Not
applicable.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2. PROPERTIES
Our
principal executive offices are located at 5307 W Loop 289, Lubbock,
Texas 79414, USA.
In the
U.S
Real
Property Owned by NTS and subsidiaries
Our Video
headend and operations center is located at 8902 Alcove Avenue, Wolfforth,
Texas 79382. This is a single story 3,500 square foot building
built in 2004. The building is used for equipment storage warehouse,
office space, and the video and data headend. A satellite farm is
located adjacent to the building. The building sits on two (2) fenced
acres within a ten (10) acre lot.
Our
retail and Toshiba sales offices, is located in the Metro Tower, which is a
20-story building located at 1220 Broadway, Lubbock, Texas 79401. The
building also houses local switching, local provisioning and outside
technicians. Each floor of the building measures approximately 5,000 square
feet. We lease office space in the building to various businesses including
many technology and telecommunications companies. We also lease roof
space to companies to house communications antennas.
We
own two buildings at 615 N. Price Road, Pampa, Texas 79065. One
single story building is used as office space for sales and
technicians. The first building measures an estimated 3,552
square feet. The second building is a single story 9 bay garage with a
small shop area and is used for equipment storage. The second building
measures an estimated 3,000 square feet.
We own a
building at 400 S. Columbia, Plainview, Texas 79072. The single story
building measures an estimated 1,000 square feet and is used as office space for
sales and technicians.
We own a
7,700 square foot single story building at 601 College Avenue, Levelland, Texas,
79336. The building will house our operations in
Levelland.
Real
Property Leased through NTS and subsidiaries
·
|
Our
corporate offices, Network Control Center, Customer Care, and
Internet help desk are located at 5307 W. Loop 289, Lubbock, TX, measuring
45,072 sq. ft. on three floors with annual triple net base rent of
$518,328. The lease expires July 31, 2013 and contains three
(3) options for five (5) year renewal terms. We believe the building has
sufficient space for its operations.
|
|
|
·
|
Local
sales offices located at 801 S. Fillmore, Suite 130, Amarillo, TX,
measuring 3,958 sq. ft. with annual rent of $45.516. The lease
expires on 11/20/2010 and has no renewal option.
|
|
|
·
|
Point
of Presence (“POP”) site and fiber node located at 201 E Main, Ste. 104,
El Paso Texas, measuring 950 sq. ft. (including 850 linear feet of
conduit) with annual rent of $52,250. The lease expires
02/28/2010 and contains one (1) option for five (5) year renewal
term.
|
|
|
·
|
Local
sales office located at 450E 10 Desta Drive Midland, TX, measuring
2,981 sq. ft. with annual rent of $27,574. The lease expires
02/29/2011 and contains one (1) option for a two (2) year renewal
term.
|
|
|
·
|
POP,
switch site and fiber node located at 500 Chestnut, Suite 936, Abilene,
TX, measuring 4,763 sq. ft. (including roof space for one (1) GPS antenna)
with annual rent of $47,520. The lease expires 12/30/2009 and
contains one (1) option for four (4) year renewal term.
|
|
|
·
|
Local
sales office located at 400 Pine Street, Suite 980, Abilene, TX measuring
2,205 sq. ft. with annual rent of $52,920.00 through August 2010 and
$28,872 from September 2010 through August 2011. The lease will expire
August 2011, with an option to renew for one (1) additional
year.
|
|
|
·
|
POP
located at 201 Robert S. Kerr, Suite 1070, Oklahoma City, OK, measuring
4,092 sq. ft. with annual rent of $16,926. The lease expires
04/30/2011 and we now rent on a month-to-month basis.
|
|
|
·
|
Equipment
room located at 8212 Ithaca, Room W-12, Lubbock, TX, of approximately 16
sq. ft. of wall space with annual rent of $480. The lease is on a
month-to-month term.
|
|
|
·
|
Local
sales and technician offices located at 4214 Kell, Suite 104 Wichita
Falls, TX, measuring 2,400 sq. ft. with annual rent of $39,600. The
lease expires in August 2011 and has options to renew for two
(2) additional 36 month terms.
|
|
|
·
|
POP
site located at United Center, 1049 N. 3rd, Abilene, TX, measuring
approximately 300 sq. ft. with annual rent of $6,600. The lease
is on a month-to-month term.
|
|
|
·
|
POP,
switch site, and fiber node located at Petroleum Building, 203 W. 8th
Street Suite 102, Amarillo, TX, measuring 3,056 sq. ft. with annual rent
of $36,672. The lease is on a month-to-month
term.
|
|
|
·
|
POP,
switch site, and fiber node located at 710 Lamar Street, Suite 10-25,
Wichita Falls, TX, measuring approximately 890 sq. ft. plus 200 sq. ft. to
house a gas generator at 714 Travis, 6th Floor, Wichita Falls.
Annual rent for both spaces totals $11,377. The lease expires
04/30/2010 and has two (2) options for three (3) year renewal
terms.
|
|
|
·
|
POP
and switch site located at 4316 Bryan, Dallas, TX, measuring 3,816 sq. ft.
with annual rent of $155,870. The lease expires on 10/31/2009
and has no renewal option.
|
|
|
Real
Property Leased through Xfone USA
|
·
|
Local
sales and operations center located at 2506 Lakeland Drive, Flowood,
Mississippi 39232, measuring 4,753 sq. ft. The lease will expire
on September 30, 2011 with no option to renew. The monthly base rent is
$5,941.
|
|
|
·
|
Upper
level customer support, field technicians and the company’s web design
division located at 211 E. Thomas Street in downtown Hammond, Louisiana.
We recently executed a new 3-year lease. The lease expires on November 20,
2010. The monthly lease payments are $5,000 including
utilities.
|
|
|
·
|
Equipment
storage located at Suite 1015 at 650 Poydras Office Building. The
lease expires on May 15, 2011. The monthly lease payments are
$16,750.
|
|
|
·
|
Sales
office located at 3636 S. I-10 Service Road, Suite 214, Metairie,
Louisiana. The premises measures 2,022 square feet. The lease will expire
September 30, 2011, with one option to renew for an additional three-year
term. The monthly base rent is $2,907.
|
|
|
·
|
Baton
Rouge Sales Office and sales support is located at 3636 South Sherwood
Forest Boulevard, measuring 2,100 sq. ft. The lease for the premises was
executed in June 2007 for a 3-year term beginning July 1, 2007, and is due
to expire in June 2010. The yearly lease payments are
$28,644.
|
|
|
·
|
Housing
of communication equipment is located at 408 West Thomas Street, Hammond,
Lourisiana, measuring 2,500 sq. ft. The term of the lease is August
1, 2008 through July 31, 2013, and the payments are $4,400 per
month.
|
|
|
·
|
We
lease a fiber riser at 1515 Poydras in New Orleans, LA for $1,000.00 per
month. The term of the lease is
month-to-month.
|
·
|
We
hold 21 collocations facilities in Texas through NTS, and 8 collocations
facilities in Mississippi and 6 collocations facilities in Louisiana
through Xfone USA.
|
Easements
and Private Rights of Way through NTS and subsidiaries
·
|
Perpetual
Construction and Utility Easement from Benny Judah for facility hut at
10508 Topeka, Lubbock, Texas, 79424.
|
|
|
·
|
Perpetual
Construction and Utility Easement from CDC-Lubbock, LLC, for a manhole at
10
th
& T in Lubbock, Texas.
|
|
|
·
|
Perpetual
Facilities Easement from Stellar Land Company, Ltd., for a facilities
cabinet in the Vintage Township Addition to the City of Lubbock,
Texas.
|
|
|
|
Perpetual
Underground Utility Easement from Stellar Land Company, Ltd., for
underground facilities in the Vintage Township Addition to the City of
Lubbock.
|
|
|
·
|
Right
of Way Use Permit: City of Midland, Texas, Right of Way Use Permit for S.
Marienfeld Street and W. Missouri
Avenue.
|
In the
U.K
The
headquarters of Swiftnet, Equitalk, Auracall and Story Telecom are located at
960 High Road, London N12 9RY - United Kingdom. We lease space on the fifth
and sixth floors. For our office on the fifth floor we renewed our lease for a
period of ten years on December 20, 2002, with a five-year cancellation option.
Our current lease for the fifth floor expires on December 20, 2012 and the
annual lease payments are £49,134 ($69,574). This 3,000 square foot facility has
a switch and computer room, open plan office and a board room. In December 2006,
we took a lease for the sixth floor, ending on April 5, 2009. In March 2007, we
extended this lease for 10 years, ending April 5, 2019, with a 5-year
cancellation option. This 3,000 square foot facility has an open-plan
administration area plus two offices and a computer room. The annual lease
payments are £40,119 ($56,809).
On
November 1, 2007, Auracall acquired serviced office facilities at Charlottenstr
68, 10117, Berlin, Germany. These offices are in the central business district
and include reception and meeting facilities, purchased on a ‘pay as you use’
basis, plus business address and mail forwarding services. The contract can be
terminated with one month’s notice.
On
November 1, 2007, Swiftnet entered in to a 24 month agreement to lease a single
rack space on the Second Floor of Telehouse North, Coriander Avenue,
London E14 2AA at a cost of £850 ($1,204) per month (including
power).
In
Israel
The
headquarters of Xfone 018 are located at 1 Haodem Street, Petach Tikva, Israel.
This 3,593 square foot facility is located in the third floor and has offices, a
board room, a computer room, an operation room and a call center with costumer
service stations. These premises are leased on a five-year term which is due to
expire on August 1, 2009. However, we have the option to extend the term of the
lease for an additional five-year period, subject to prior notice to be given no
later than June 1, 2009. The monthly lease payments for the first 7 months of
2008 were set at a rate of $6 per 1 square meter (10.76 square foot). As of
August 1, 2008, the monthly lease payments are set at a rate of NIS 26 ($6) per
1 square meter (10.76 square foot), with an annual increase of 5%.
As of
September 1, 2006, Xfone 018 also leases an additional 2,367 square foot
facility with offices and a boardroom, in the first floor of the same building,
under the same monthly rate as the lease described above. These premises are
leased on a thirty-five months term which is due to expire on August 1, 2009.
However, we have the option to extend the term of the lease for an additional
five-year period, subject to a prior notice to be given no later than June 1,
2009.
As of
January 1, 2009, an additional 451 square foot facility with offices, in the
first floor of the same building, is leased. These premises are leased on a
seven months term which is due to expire on August 1, 2009. However, we have the
option to extend the term of the lease for an additional five-year period,
subject to a prior notice to be given no later than June 1, 2009. The lease
payments are NIS 1,100 ($260) per month.
Xfone,
Inc. has guaranteed all Xfone 018 obligations under these lease
agreements.
Our
offices are in good condition and are sufficient to conduct our
operations.
We do not
intend to renovate, improve or develop any properties; however, from time to
time we improve leased office space in order to comply with local legislation
and to provide an office environment necessary to conduct business in the
markets in which we operate. We are not subject to competitive conditions for
property. We have no policy with respect to investments in real estate or
interests in real estate and no policy with respect to investments in real
estate mortgages. We have no policy with respect to investments in securities of
or interests in persons primarily engaged in real estate
activities.
ITEM
3. LEGAL PR
OCE
EDINGS
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.
Omer Fleisig vs. Israel 10 - Shidury Haruts Hahadash Ltd. and Xfone 018
Ltd.
On
December 16, 2008, Omer Fleisig filed a request to approve a claim as a class
action (the "Class Action Request") against Xfone 018 Ltd. ("Xfone 018"), a 69%
owned Israel based subsidiary of the Company, and Israel 10 - Shidury Haruts
Hahadash Ltd., an entity unrelated to the Company ("Israel 10"), in the District
Court in Petach Tikva, Israel. Fleisig attempted to participate in a
television call-in game show, which was produced by Israel 10,
using Xfone
018’s international telecom services. The claim alleges that although Fleisig's
two attempts to participate in the show were unsuccessful because he received a
busy signal when trying to call in, he was billed by Xfone 018 for both
attempts. Fleisig seeks damages for the billed attempts. He was billed
approximately $2.50 for the calls. The Class Action Request states total damages
of NIS 24,750,000 (approximately $5,856,602) which reflects Fleisig's estimation
of damages caused to all participants in the game show which (pursuant to the
Class Action Request) allegedly received a busy signal while trying
to call in to the game during a certain period defined in the
Class Action Request. All parties are currently attempting to reach an
understanding regarding the scope of the Class Action Request and its
justification, if at all. As of March 31, 2009, this matter is
pending.
III.
Teresa Leffler vs. Marshall Wingard and Xfone USA
On February 24, 2009, Teresa Leffler, a former
employee of Xfone USA, Inc., filed a complaint with the Circuit court of Rankin
County, Mississippi, alleging sexual discrimination and
sexual
harassment by a former employee of Xfone USA and
Xfone USA. The filing of the complaint follows Ms. Leffler’s receipt of a Notice
of Right to Sue (the “Notice”) issued by the U.S. Equal Employment Opportunity
Commission (the “EEOC”) on November 21, 2008. The Notice also stated that
the EEOC was terminating its processing of the charge. The Company intends
to vigorously contest and defend the allegations against it in this
matter.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
On
December 16, 2008, an Annual Meeting of Stockholders of the Company was held at
the offices of Gersten Savage LLP in New York, New York. The following four
items were approved by our stockholders at the Annual Meeting:
1. The
re-election of the following three Class A directors, each such director to
serve until the 2011 Annual Meeting of Stockholders and until his successor is
duly elected and qualified or until his earlier resignation, removal or
death:
Director
|
Abraham
Keinan
|
Guy
Nissenson
|
Shemer
Shimon Schwarz
|
The other
directors, Eyal Josef Harish, Aviu Ben-Horrin, Itzhak Almog, Morris Mansour and
Israel Singer did not stand for re-election at this meeting. They will next
stand for re-election at our 2009 Annual Meeting of Stockholders.
2. The
appointment of Stark, Winter, Schenkein & Co., LLP as our Independent
Certified Public Accountants, for the fiscal year ending December 31, 2008, and
the first three quarters of the fiscal year ending December 31,
2009.
3. The
approval and authorization of the issuance of an aggregate of 321,452 warrants
to purchase shares of our common stock to Wade Spooner, former President and
Chief Executive Officer of Xfone USA, Inc., pursuant to the terms of a certain
Separation Agreement and Release dated August 15, 2008 between Mr. Spooner,
Xfone USA, Inc. and the Company, as well as the issuance of the aggregate
321,452 shares of our common stock upon exercise of such common stock purchase
warrants; and
4. The
approval and authorization of the issuance of an aggregate of 160,727 warrants
to purchase shares of our common stock to Ted Parsons, former Executive Vice
President and Chief Marketing Officer of Xfone USA, Inc., pursuant to the terms
of a certain Separation Agreement and Release dated August 15, 2008 between Mr.
Parsons, Xfone USA, Inc. and the Company, as well as the issuance of the
aggregate 160,727 shares of our common stock upon exercise of such common stock
purchase warrants.
Following
is a summary of the votes cast at the meeting:
Item
|
|
Votes
For
|
|
Votes
Against
|
|
Abstain
|
Re-election
of Abraham Keinan
|
|
13,407,470
|
|
1,748,111
|
|
-
|
Re-election
of Guy Nissenson
|
|
13,965,933
|
|
1,189,644
|
|
-
|
Re-election
of Shemer Shimon Schwarz
|
|
13,965,731
|
|
1,189,856
|
|
-
|
Approval
of appointment of Stark, Winter, Schenkein & Co., LLP
|
|
14,398,105
|
|
834,399
|
|
3,624
|
Issuance
of Warrants to Wade Spooner
|
|
10,438,503
|
|
989,518
|
|
27,111
|
Issuance
of Warrants to Ted Parsons
|
|
10,446,423
|
|
981,598
|
|
27,111
|
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHO
LDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our
Common Stock was quoted and began trading on the NYSE Amex LLC (formerly named
the American Stock Exchange and the NYSE Alternext US LLC) (the “NYSE Amex”) on
June 8, 2005 under the symbol “XFN.”
As of
July 24, 2006, our Common Stock is also quoted and traded under the symbol “XFN”
on the Tel Aviv Stock Exchange (“TASE”).
On March
30, 2009, the closing price of our Common Stock was $0.51 (NYSE Amex) / NIS
2.132 (TASE).
There is
a limited trading market for our Common Stock. There is no assurance that a
regular trading market for our Common Stock will develop or if developed that it
will be sustained. A shareholder in all likelihood, therefore, may not be able
to resell his securities should he or she desire to do so when eligible for
public resale. Furthermore, it is unlikely that a lending institution will
accept our securities as pledged collateral for loans unless a regular trading
market develops.
Below is
the market information pertaining to the range of the high and low closing price
of our Common Stock for each quarter since 2007. The quotations reflect
inter-dealer prices, without retail markup, markdown or commission and may not
represent actual transactions.
Period
|
|
Low
|
|
|
High
|
|
2008
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
0.57
|
|
|
$
|
2.70
|
|
Third
Quarter
|
|
$
|
2.60
|
|
|
$
|
3.09
|
|
Second
Quarter
|
|
$
|
2.90
|
|
|
$
|
3.90
|
|
First
Quarter
|
|
$
|
2.82
|
|
|
$
|
3.60
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
2.84
|
|
|
$
|
3.88
|
|
Third
Quarter
|
|
$
|
2.34
|
|
|
$
|
3.05
|
|
Second
Quarter
|
|
$
|
2.50
|
|
|
$
|
3.70
|
|
First
Quarter
|
|
$
|
2.40
|
|
|
$
|
2.89
|
|
|
|
|
|
|
|
|
|
|
The
source of the above information is
http://www.nyse.com
.
Holders
On March
30, 2009, there were 320 holders of record of our Common Stock.
Dividends
No cash
dividend was declared in 2005, 2006, 2007, or 2008.
Securities
Authorized For Issuance under Equity Compensation Plans
Equity
Compensation Plan Information
as
of December 31, 2008
Plan
category
|
|
Number
of Securities to be Issued upon Exercise of Outstanding Options, Warrants
and Rights
|
|
Weighted
Average Exercise Price of Outstanding Options, Warrants and
Rights
|
|
|
Number
of Securities Remaining Available for Future Issuance under the
Plan
|
|
|
|
(a)
|
|
(b)
|
|
|
(c)
|
|
Equity
compensation plans approved by security holders(1)
|
|
|
13,863,888
|
|
|
|
3.62
|
|
|
|
7,123,595
|
|
Equity
compensation plans not approved by security holders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
|
|
|
|
3.62
|
|
|
|
7,123,595
|
|
(1) Represents
the number of shares issuable under the Company’s 2004 Stock Option Plan (the
“2004 Plan”) and 2007 Stock Incentive Plan (the “2007 Plan”). On November 24,
2004, our board of directors approved and adopted the principal items forming
our 2004 Plan which is designated for the benefit of employees, officers,
directors, consultants and subcontractors of the Company including its
subsidiaries. On November 1, 2005, the 2004 Plan was approved by our board of
directors, and on March 13, 2006 by our shareholders, at a Special Meeting.
Under the 2004 Plan, the Plan Administrator is authorized to grant options to
acquire up to a total of 5,500,000 shares of Common Stock. On October 28, 2007,
our Board of Directors adopted and approved the Company’s 2007 Plan, and on
December 17, 2007, our shareholders approved this plan at the Annual Meeting of
stockholders. The 2007 Plan authorizes the issuance of awards for up to a total
of 8,000,000 shares of our Common Stock underlying such awards.
Recent
Sales of Unregistered Securities
On
February 26, 2008, and in conjunction with a December 13, 2007 Subscription
Agreements we issued an aggregate of 2,600,000 restricted shares of Common Stock
to: (i) certain investors affiliated with or who are customers of Gagnon
Securities LLC: Atkinson Investment Management - 20,115 shares; Benjamin Atkinsn
& Paula Atkinsn JTWROS - 1,645 shares; Mr. Neil J. Gagnon & Mrs. Lois E.
Gagnon JTWROS - 3,435 shares; Gagnon Securities LLC P/S Plan & Trust DTD
4/26/01, Neil Gagnon & Maureen Drew - 1,165 shares; Mrs. Wendy L. Allen
& Mr. Peter L. Allen JTWROS - 2,500 shares; Brian Joseph Gagnon - 5,000
shares; Darwin Partnership - 20,000 shares; Fallen Angel Partnership - 40,000
shares; Gagnon Family Partnership - 35,000 shares; The Lois E. & Neil J.
Gagnon Foundation Inc - 20,690 shares; Mr. Neil Gagnon - 150,000 shares; Neil J.
Gagnon IRA/R/O Bear Stearns Sec Corp Cust - 25,000 shares; Mrs. Lois E. Gagnon -
100,000 shares; Mrs. Virginia Gagnon - 1,200 shares; Gagnon 1999 Grandchildren's
Trust STS 2/1/99 Maureen Drew TTEE - 32,000 shares; Gagnon Securities LLC P/S
Plan & Trust DTD 10/1/00 N. Gagnon & M. Drew TTEES - 1,600 shares;
Gagnon Investment Associates Master Fund - 326,000 shares; Amy Lynn Stauffer -
3,300 shares; Darwin Partnership - 31,515 shares; Fallen Angel Partnership -
54,365 shares; Neil J. Gagnon IRA - 6,490 shares; Mr. Neil Gagnon & Mrs.
Lois Gagnon JTWROS - 7,785 shares; Gagnon Securit s LLC P/S Plan and Trust DTD
4/26/01 Neil Gagnon & Maureen Drew – 685 shares; Upland Associates L. P. -
59,755 shares; Maureen Keyes Revocable Living Trust Agreement DTD 6/28/07,
Maureen Keyes Trustee - shares;640 Mr, Dwight Lee IRA/SEP Bear
Stearns Sec CorpCust – 115 shares; Mr. Henry C. Beinstein - 50,000 shares; and
(ii) XFN-RLSI Investments, LLC, an entity affiliated with Richard L. Scott
Investments, LLC, a U.S. institutional investor - 1,600,000 shares. We relied
upon the exemption from registration provided by Section 4(2) of the Act. We
believed that the exemption was available because: (i) the offer and sale
of the securities did not involve a public offering or an underwriter;
(ii) the shares issued were restricted as to transfer and the certificates
representing the shares were marked with a restrictive legend; and
(iii) the investor represented that he was sophisticated enough to evaluate
the merits of his investment.
On
February 26, 2008, and in conjunction with the acquisition of NTS
Communications, we issued an aggregate of 2,366,892 shares of our Common Stock
to certain former shareholders of NTS 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: Dawn Lin Ambrose - 12,123 shares; Trustmark National
Bank As Escrow Agent For Dawn Lin Ambrose - 2,191 shares; Barbara A. Baldwin -
561,313 shares; Trustmark National Bank As Escrow Agent For Barbara A. Baldwin -
101,460 shares; David W. Cleveland - 347,965 shares; Trustmark National Bank As
Escrow Agent For David W. Cleveland - 62,896 shares; Richard A. & Sandra V.
Crosswhite - 61,819 shares; Trustmark National Bank As Escrow Agent For Richard
A. & Sandra V. Crosswhite - 11,174 shares; Frank R. & Polly C. Farrar -
38,636 shares; Trustmark National Bank As Escrow Agent For Frank R. & Polly
C. Farrar - 6,984 shares; Nelson & Deborah C. Fox - 1,855 shares; Trustmark
National Bank As Escrow Agent For Nelson & Deborah C. Fox - 336 shares;
Jerry E. & Martha S. Hoover - 10,102 shares; Trustmark National Bank As
Escrow Agent For Jerry E. & Martha S. Hoover - 1,826 shares; Robert D. &
Ethel Mcleod - 18,503 shares; Trustmark National Bank As Escrow Agent For Robert
D. & Ethel Mcleod - 3,344 shares; David Fate Moore Trust - 452,922 shares;
Trustmark National Bank As Escrow Agent For David Fate Moore Trust - 81,867
shares; Shawn Troy Wallace T St - 452,922 shares; Trustmark National Bank As
Escrow Agent For Shawn Troy Wallace Trust - 81,867 shares; Brad Worthington -
16,093 shares; Trustmark National Bank As Escrow Agent For Brad Worthington -
2,909 shares; Brad & Tracy Worthington - 30,307 shares; Trustmark National
Bank As Escrow Agent For Brad & Tracy Worthington - 5,478 shares. We relied
upon the exemption from registration provided by Section 4(2) of the Act. We
believed that the exemption was available because: (i) the offer and sale
of the securities did not involve a public offering or an underwriter;
(ii) the shares issued were restricted as to transfer and the certificates
representing the shares were marked with a restrictive legend; and
(iii) the investor represented that he was sophisticated enough to evaluate
the merits of his investment.
On March
18, 2008, and in conjunction with Employment Agreements dated February 26, 2008,
we granted under our 2007 Stock Incentive Plan the following options:
Barbara Baldwin, President, CEO and Director of our U.S. subsidiaries NTS
Communications and Xfone USA - 250,000 options; Brad Worthington, Executive Vice
President - Chief Operating Officer of NTS Communications - 400,000 options;
Jerry Hoover, Executive Vice President - Chief Financial Officer of NTS
Communications and Treasurer of Xfone USA - 400,000 options. Each option is
immediately exercisable, expires five years from the grant date, and has an
exercise price of $2.794. We relied upon the exemption from registration
provided by Section 4(2) of the Act. We believed that the exemption was
available because the offer and sale of the securities did not involve a public
offering or an underwriter.
On March
25, 2008, and in conjunction with a December 13, 2007 private offering of NIS
100,382,100 bonds (Series A) (the “Bonds”) to Israeli institutional investors,
we issued the Bonds holders, for no additional consideration, an aggregate of
956,020 (non-tradable) warrants, each exercisable at an exercise price of $3.50
with a term of 4 years, beginning on September 2, 2008 (the "Warrants").
The Warrants were issued as follows: Provident fund of the employees of the
Hebrew University of Jerusalem Ltd - 10,000 warrants; Millennium
provident/education funds - 20,000 warrants; Millennium provident funds - 45,000
warrants; Millennium employees termination funds - 1,900 warrants; Shomera
Insurance Co. Ltd - 10,000 warrants; Bank of Jerusalem - 19,500 warrants;
Provident fund of the Union Bank - 9,000 warrants; Hilat Shoam - Shoam tagmulim
- 8,350 warrants; Hilat Shoam - Shoam pitsuim - 6,000 warrants; Hilat Shoam -
Shoam ishtalmut - 2,150 warrants; Prisma provident fund - Prisma Si'on - Savings
fund for self - employed persons - 10,000 warrants; Prisma provident fund -
Prisma Ya'ad - Savings fund for self - employed persons - 3,000 warrants; Prisma
provident fund - Prisma Pitzuyim - General Track II - Central Severance Pay Fund
- 25,000 warrants; Prisma provident fund - Signon Savings Fund Bond Track -
1,500 warrants; Prisma provident fund - Signon Savings Fund Index Track - 3,500
warrants; Prisma provident fund - Prisma Zahav - Cautious Investments - 2,500
warrants; Prisma provident fund - Prisma Katzir - 9,500 warrants; Prisma
provident fund - Prisma Teutsa - 5,000 warrants; Prisma provident
fu - Prisma Keren Or - 30,000 warrants; Union bank of Israel - Nostro
- 10,500 warrants; IBI provident fund general - 9,870 warrants; Perfect
provident fund Ltd - Perfect Central Compensation Fund - 1,300 warrants; Perfect
provident fund Ltd - Perfect Provident Fund - 28,950 warrants; Perfect provident
fund Ltd - Perfect Study Fund - 17,350 warrants; Tamir Fishman Provident and
Education Funds Ltd., for Tamir Fishman Severance Pay Fund - General - 920
warrants; Tamir Fishman Provident and Education Funds Ltd., for Tamir Fishman
Provident Fund - General - 9,690 warrants; Tamir Fishman Provident and Education
Funds Ltd., for Tamir Fishman Provident Fund - Shares - 810 warrants; Tamir
Fishman Provident and Education Funds Ltd., for Tamir Fishman Provident Fund -
Bonds - 1,360 warrants; Tamir Fishman Provident and Education Funds Ltd., for
Tamir Fishman Education Fund - General - 7,640 warrants; Tamir Fishman Provident
and Education Funds Ltd., for Tamir Fishman Education Fund - Shares - 510
warrants; Tamir Fishman Provident and Education Funds Ltd., for Tamir Fishman
Severance Pay Fund - Value - 1,060 warrants; Tamir Fishman Pr ident and
Education Funds Ltd., for Tamir Fishman Education Fund - Bonds - 810 warrants;
Menora Mivtachim Participating Policies - 70,000 warrants; Menora Mivtachim
Participating Policies - 6,000 warrants; Menora Mivtachim Participating Policies
- 4,000 warrants; Menora Mivtachim Insurance ltd - 40,000 warrants; Menora
mivtachim heshtalmut ("Mivtachim" - Maba Le'mishtalem) - 5,000 warrants; Masad
heshtalmut - 800 warrants; Morag - meerkazit le'pizuim - 2,500 warrants; Menora
Gemel Amir Dalled - 6,000 warrants; Menora Gemel Amir Allef - 700 warrants;
Menora Gemel Peles Allef - 1,000 warrants; Menora Gemel Peles Dalled - 3,000
warrants; Menora Gemel clali - 4,000 warrants; Menora Gemel General B - 1,500
warrants; Menora heshtalmut clali - 3,000 warrants; Menora heshtalmut General B
- 1,000 warrants; Menora merkazit lepituim clali - 1,300 warrants; Menora
merkazit lepituim clali b - 200 warrants; Hadas Mercantile provident fund –
Index - 1,100 warrants; Hadas Mercantile education fund - General - 15,350
warrants; Hadas Mercantile education fund - Bonds - 300 warrants; Hadas
Mercantile illnes payment fund - 850 warrants; Hadas Mercantile provident fund -
General - 8,000 warrants; Mercantile Workers Provident fund 5,500
warrants; Bar Yaziv Provident fund Ltd - 42,000 warrants; Hadas Mercantile
central severance fund - 5,900 warrants; Yevul Kibutz Members Provident fund -
1,000 warrants; Keren hahisachon litsva hakeva limited - 28,600 warrants; Migdal
Platinum Tagmulim Klali - 5,300 warrants; Migdal Platinum Kaal Maoz - 3,800
warrants; Migdal Gemel Platinum Ltd - Bonds - 7,500 warrants; Migdal Gemel
Platinum Ltd – General - 5,300 warrants; Yashir investment house (provident
funds) trustee account for Yashir hishtalmut klali - 9,900 warrants; Yashir
investment house (provident funds) trustee account for Yashir gemel klali -
16,000 warrants; Yashir investment house (provident funds) trustee account for
Yashir pitzuim klali - 1,680 warrants; Yashir investment house (provident funds)
trustee account for Yashir hishtalmut agach - 900 warrants; Yashir investment
house (provident funds) trustee account for Yashir gemel agach - 1,400 warrants;
Yashir investment house (provident funds) trustee account for etgarim gemel
klali - 9,540 warrants; Yashir investment house (provident funds) trustee
account for etgarim pitzuim klali - 4,380 warrants; Yashir investment house (p
vident funds) trustee account for etgarim gemel madad - 220 warrants; Yashir
investment house (provident funds) trustee account for etgarim pitzuim madad -
1,030 warrants; Yashir I.D.I insurance company - Nostro - 21,200 warrants;
Yashir I.D.I insurance company trustee account for agach klali - 1,600 warrants;
Yashir Provident fund trustee account for Yashir miron - 16,200 warrants; Yashir
Provident fund trustee account for Yashir merkazit le Pitzuim - 13,000 warrants;
Yashir Provident fund trustee account for Yashir atidot - 13,000 warrants;
Yashir Provident fund trustee account for Yashir Mishtalem B - 12,500 warrants;
Yashir Provident fund trustee account for Yashir teuza - 300 warrants; Yashir
Provident fund trustee account for Yashir matan - 300 warrants; Yashir Provident
fund trustee account for Yashir menifa - 300 warrants; Yashir Provident fund
trustee account for Yashir keren hashefa - 21,000 warrants; Yashir Provident
fund trustee account for Yashir Mishtalem A - 18,000 warrants; Yashir Provident
fund trustee account for Yashir hamelacha - 200 warrants; Yashir Provident fund
trustee account for Yashir pitzuim hamelacha - 0 warrants; The
Phoenix Insurance Company Ltd - Unit Link - 38,000 warrants; The Phoenix
Provident Fund - 7,600 warrants; The Phoenix Provident Fund - For Education -
11,400 warrants; The Phoenix Pension and provident fund - 38,000 warrants; Harel
Insurance Company Ltd - 28,000 warrants; Harel Insurance Company Ltd - 11,900
warrants; Dikla Insurance Company Ltd - 2,400 warrants; Dikla Insurance Company
Ltd - 660 warrants; Harel Pension Fund Management Company Ltd - 16,700 warrants;
Harel Pension Fund Management Company Ltd - 400 warrants; Harel Insurance
Company Ltd - 4,360 warrants; Harel Insurance Company Ltd - 180 warrants; Harel
Insurance Company Ltd - 120 warrants; Nativ Keren Pensia Shel Poalei Veovdei
Mifelei Meshek Hahistadrut Ltd - 2,000 warrants; Harel Provident Funds ltd -
25,280 warrants; Harel Provident Funds ltd - 5,740 warrants; Harel Provident
Funds ltd - 400 warrants; Atidit Provident Funds ltd - 160 warrants; Harel
Provident Funds ltd - 2,800 warrants; Harel Provident Funds ltd - 2,960
warrants; Harel Provident Funds ltd - 380 warrants; Atidit Provident Funds ltd -
180 warrants; Atidit Provident Funds ltd - 100 warrants; Atidit Provident Funds
ltd - 280 warrants. The offering of the Bonds was not registered under the Act,
as it was made in accordance with Regulation S promulgated under the Act
(“Regulation S”). We believed that the exemption was available
because each of the institutional investors (i) 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; (ii) 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;
(iii) 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; (iv) 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; and (v) 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.
On April
7, 2008, Rafael Dick, the former Managing Director of our Israeli subsidiary
Xfone 018 Ltd. exercised 4,105 options under the Company's 2004 Stock Option
Plan, at an exercise price of $3.50 per share.
On June
3, 2008, the Company cancelled 62,850 shares of its Common Stock, and 44,470
warrants which were returned to it by Trustmark National Bank, acting as escrow
agent in conjunction with an escrow set up in connection with the
consummation of the Company’s acquisition of I-55 Internet Services, Inc.
on March 31, 2006. The Company made the following two claims against the
escrow account: Claim #1: The Company made a claim on March 27, 2007
to adjust the total consideration based upon the changes in customer billings as
determined pursuant to a formula set forth in the First Amendment to the Merger
Agreement, which the Company had determined was $247,965.57. Claim #2: The
Company determined an undisclosed liability, in accordance with Article 6.03 of
the I-55 Internet Services, Inc. Merger Agreement (as amended), in the amount of
$147,550 and on November 28, 2006, sent a claim for this amount.
On or about May 12, 2008, Xfone USA and the shareholder
representatives of I-55 Internet Services reached an
agreement to value Claim #1 at $143,017.11 and Claim #2 at $140,750.00 for
a total agreed loss of $283,767.11. This resulted in the Company’s
receipt of 62,850 total shares of Xfone Common Stock and 44,470 of Xfone Stock
Warrants from the Escrow Account in satisfaction of these
claims.
ITEM
6. SELEC
TED
FINANCIAL DATA
Not
applicable.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF F
INAN
CIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
The
information set forth in this 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 Annual 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 Annual 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. We are a holding and
managing company providing international voice, video and data communications
services with operations in the United States, the United Kingdom and Israel
offering a wide range of services, including: local, long distance and
international telephony services; video; prepaid and postpaid calling cards;
cellular services; Internet services; messaging services (Email/Fax Broadcast,
Email2Fax and Cyber-Number); and reselling opportunities. We serve customers
worldwide.
In
February 2007, we moved our principal executive offices from the UK to Flowood,
Mississippi, and shared executive office space with our wholly owned U.S.
subsidiary, Xfone USA, Inc. In May 2008 the headquarters of Xfone USA and our
principal executive offices recently moved from the Flowood, Mississippi
location to Lubbock, Texas, to the existing headquarters of NTS Communications,
Inc., which we acquired in February 2008.
On
October 4, 2000, we acquired Swiftnet Limited which had a business plan to
provide comprehensive range of telecommunication services and products,
integrated through one website. Swiftnet was incorporated in 1990 under the laws
of the United Kingdom and is headquartered in London, England. Until 1999, the
main revenues for Swiftnet were derived from messaging and fax broadcast
services. During 2000, Swiftnet shifted its business focus to voice services and
now offers a comprehensive range of calling services to resellers and end
customers. Utilizing automation and proprietary software packages, Swiftnet’s
strategy is to grow without the need for heavy investments and with lower
expenses for operations and registration of new customers.
On April
15, 2004, we established an Israel based subsidiary, Xfone Communication Ltd.,
which changed its name to Xfone 018 Ltd. in March 2005. 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. We have been providing international telecom
services in Israel through Xfone 018 since mid-December 2004. In July 2008, we
launched an experimental deployment of our local telecom services, and
introduced our Internet access services in December 2008.
On May
28, 2004, we entered into an agreement and Plan of Merger to acquire WS Telecom,
Inc., a Mississippi corporation, and its two wholly owned subsidiaries, eXpeTel
Communications, Inc. and Gulf Coast Utilities, Inc., through the merger of WS
Telecom with and 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
utilizes integrated multi-media offerings - combining digital voice, data and
video services over broadband technologies to deliver services to customers
throughout its service areas. Xfone USA is currently licensed to provide
telecommunications services in Florida, Louisiana and Mississippi. During fiscal
2008, Xfone USA was also licensed in Alabama and Georgia, however, we withdrew
these licenses during the first quarter of fiscal 2009.
On August
18, 2005, we entered into an Agreement and Plan of Merger to acquire I-55
Internet Services, Inc. ("I-55 Internet Services"), a Louisiana corporation (the
“I-55 Internet Merger Agreement”). On September 13, 2005, we filed a Form 8-K
discussing the impact of Hurricane Katrina on the transaction contemplated by
the I-55 Internet Merger Agreement. On October 10, 2005, we entered into a First
Amendment to the Merger Agreement, by and among I-55 Internet Services, Xfone,
Xfone USA, our wholly-owned United States subsidiary, and Hunter McAllister and
Brian Acosta, key employees of I-55 Internet Services, in order to induce Xfone
and Xfone USA not to terminate the I-55 Internet Merger Agreement due to the
material adverse effect that Hurricane Katrina has had on the assets and
business of I-55 Internet Services. As part of the amendment and since, at that
time, the merger of I-55 Internet Services with and into Xfone USA had not been
consummated yet, in the interim, the parties agreed and entered into on October
11, 2005 a Management Agreement (the “I-55 Internet Management Agreement”) that
provided that I-55 Internet Services hired and appointed Xfone USA as manager to
be responsible for the operation and management of all of I-55 Internet Services
business operations, including among other things personnel, accounting,
contracts, policies and budget. In consideration of the management services
provided under the I-55 Internet Management Agreement, I-55 Internet Services
assigned and transferred to Xfone USA all revenues generated and expenses
incurred in the ordinary course of business during the term of the I-55 Internet
Management Agreement. The term of the I-55 Internet Management Agreement
commenced on October 11, 2005 and continued until the consummation of the merger
on March 31, 2006.
In
conjunction with the consummation of the merger and in exchange for all of the
capital stock of I-55 Internet Services, we issued a total of 789,863 shares of
our Common Stock valued at $2,380,178 and 603,939 warrants exercisable for a
period of five years into shares of our Common Stock, with an exercise price of
$3.31, valued based on the Black Scholes option-pricing model (the “Xfone Stock
and Warrant Consideration”). A portion of the Xfone Stock and Warrant
Consideration issued at closing was placed in an escrow account, to be held
pending certain adjustments. The Company subsequently made the following
two claims against such escrow account: Claim #1: The Company made a claim
on March 27, 2007 to adjust the total consideration based upon the changes in
customer billings as determined pursuant to a formula set forth in the First
Amendment to the Merger Agreement (the “Customer Billing Adjustment Amount”),
which the Company had determined was $247,965.57. Claim #2: The Company
determined an undisclosed liability, in accordance with Article 6.03 of the I-55
Internet Services, Inc. Merger Agreement (as amended), in the amount of $147,550
and on November 28, 2006, sent a claim for this amount. The Shareholder
Representatives of I-55 Internet Services disputed the amounts in both claims
submitted and so the parties entered into negotiations on May 2, 2007, where
they agreed to reduce the amount claimed in Claim #1 by $104,948.46, which
represents adjustments made to the 90-Day column, Trade Accounts, and certain
accounts that had previously been listed as having 90-Day balances but were
subsequently confirmed as not having 90-Day balances, and by the final amount
billed to EBI Comm, Inc. (“EBI”) in 2005 prior to the assets of EBI being
purchased by Xfone USA, and agreed to reduce the original Loss amount claimed in
Claim #2 by $6,800.00, representing additional services purchased with Zipa,
Inc. under the direction of Xfone USA during the Management Agreement period
from October 2005 through March 2006. Upon settlement of the claims, two Joint
Deposition Notices for the escrow agent, Trustmark National Bank, were delivered
to the Shareholder Representatives of I-55 Internet Services for execution,
however, a Shareholder Representative refused to execute the notices pending
approval of the claims by the shareholders of I-55 Internet Services. On
June 7, 2007, the shareholders met and rejected the figure agreed upon with
respect to Claim #1 and accepted the figure agreed upon with respect to Claim
#2. On or about May 12, 2008, after further negotiations, Xfone USA and
I-55 agreed to value Claim #1 at $143,017.11 and Claim #2 at $140,750.00 for a
total agreed loss of $283,767.11. This resulted in the Company’s receipt
of 62,850 shares of Xfone Common Stock and 44,470 Xfone Stock Warrants from
the Escrow Account in satisfaction of these claims (the “Returned Xfone
Stock and Warrant Consideration”) and the balance of the Xfone Common Stock and
Xfone Stock Warrants remaining in the Escrow Account was distributed to the
selling I-55 Internet shareholders and the escrow account was closed out on June
16, 2008. The components of the Returned Xfone Stock and Warrant Consideration
were cancelled by the Company on June 3, 2008.
In
conjunction with that certain Letter Agreement dated October 10, 2005 with MCG
Capital Corporation, a major creditor of I-55 Internet Services, and upon the
consummation of the merger on March 31, 2006, we issued to MCG Capital 667,998
shares of our Common Stock, valued at fair value of $2,010,006, in return
for retiring its loan with I-55 Internet Services
.
I-55
Internet Services provided Internet access and related services, such as
installation of various networking equipment, website design, hosting and other
Internet access installation services, throughout the Southeastern United States
to individuals and businesses located predominantly in rural markets in
Louisiana and Mississippi. As a result of the merger with and into Xfone USA,
these services are now available in expanded markets throughout Louisiana and
Mississippi. The Internet service offerings include dial-up, DSL, high speed
dedicated Internet access, web services, email, the World Wide Web, Internet
relay chat, file transfer protocol and Usenet news access to both residential
and business customers. The I-55 Internet Services offerings provided various
prices and packages that allowed I-55 Internet Services subscribers to customize
their subscription with services that met customers’ particular requirements.
Xfone USA now provides bundled services of voice and data (broadband Internet)
to customers throughout its service areas.
On August
26, 2005, we entered into an Agreement and Plan of Merger to acquire I-55
Telecommunications, LLC ("I-55 Telecommunications"), a Louisiana corporation
(the “I-55 Telecom Merger Agreement”). On September 13, 2005, we filed a Form
8-K discussing the impact of Hurricane Katrina on the transaction contemplated
by the I-55 Telecom Merger Agreement. In order to demonstrate our intention
to continue on with the transaction contemplated by the I-55 Telecom Merger
Agreement, the parties entered into on October 12, 2005 a Management Agreement
(the “I-55 Telecom Management Agreement”) that provided that I-55
Telecommunications hired and appointed Xfone USA as manager to be responsible
for the operation and management of all of I-55 Telecommunications’ business
operations. In consideration of the management services provided under the I-55
Telecom Management Agreement, I-55 Telecommunications assigned and transferred
to Xfone USA all revenues generated and expenses incurred in the ordinary course
of business during the term of the I-55 Telecom Management Agreement. The term
of the I-55 Telecom Management Agreement commenced on October 12, 2005 and
continued until the consummation of the merger on March 31, 2006.
In
conjunction with the consummation of the merger and in exchange for all of the
capital stock of I-55 Telecommunications, LLC, we issued a total of 223,702
shares of our Common Stock valued at $671,687 and 79,029 warrants exercisable
for a period of five years into shares of our Common Stock, with an exercise
price of $3.38, valued based on the Black Scholes option-pricing model (the
“Xfone Stock and Warrant Consideration”). A portion of the Xfone Stock and
Warrant Consideration issued at closing was placed in an escrow account. The
Company determined a breach of the representations and warranties in the Merger
Agreement resulting from the failure of I-55 Telecommunications to disclose the
liability due and payable to the Louisiana Universal Service Fund (“LA USF”)
through the period of October 2005, at which time Xfone USA undertook the
management role of I-55 Telecommunications. Pursuant to Section 1(g)
of the Escrow Agreement dated as of March 31, 2006 by and among Xfone USA, the
Escrow Agent, and the President and Sole Member of I-55 Telecommunications, and
in accordance with Article 6.02 of the Merger Agreement, Xfone USA notified the
other parties that it believed that it had suffered a Loss of $30,625.52,
pursuant to the provisions of Article 6.02 of the Merger Agreement dated as of
August 26, 2005. Having not received any response from the President and
Sole Member of I-55 Telecommunications, nor from his counsel, on October 15,
2007, and after the allotted response time allowed, Xfone USA instructed the
Escrow Agent (Trustmark National Bank) to deliver from the Escrow Fund of the
President and Sole Member of I-55 Telecommunications, to the Company, 7,043
shares of Common Stock and 4,838 Xfone Stock Warrants. The 7,043
shares of Common Stock and 4,838 Xfone Stock Warrants were returned to the
Company for cancellation on October 31, 2007.
In
conjunction with certain Agreements to Purchase Promissory Notes dated October
31, 2005 / February 3, 2006 with Randall Wade James Tricou; Rene Tricou - Tricou
Construction; Rene Tricou - Bon Aire Estates; Rene Tricou - Bon Aire Utility;
and Danny Acosta, creditors of I-55 Telecommunications (the “Creditors”), and
upon the consummation of the merger on March 31, 2006, we issued to the
Creditors an aggregate of 163,933 restricted shares of Common Stock and an
aggregate of 81,968 warrants, exercisable at $3.38 per share, at a total value
of $492,220, in return for retiring their individual loans with I-55
Telecommunications.
I-55
Telecommunications provided voice, data and related services throughout
Louisiana and Mississippi to both individuals and businesses. Prior to the
merger with and into Xfone USA, I-55 Telecommunications was a licensed facility
based CLEC operating in Louisiana and Mississippi with a next generation class 5
carrier switching platform. I-55 Telecommunications provided a complete package
of local and long distance services to residential and business customers across
both states. As a result of the merger, Xfone USA has now expanded its On-Net
(facilities) service area, through I-55 Telecommunications, into New Orleans,
Louisiana and surrounding areas, including Hammond, Louisiana. Xfone USA is
expanding its sales offices to include New Orleans, in an effort to continue
revenue growth and increase market share in the revitalized city, as well as
into Hammond, Louisiana. The competition in secondary markets, such as
Jackson, Mississippi, as opposed to Tier 1 markets such as Atlanta, Georgia,
is also rapidly declining due to the removal of UNE-P and the decline in
the competitive local exchange providers that had been dependent on UNE-P as
their only source for providing competitive local telephone services in those
markets. This provides for a unique opportunity for Xfone USA to gain
market share, by utilizing its existing network and to expand its facilities
into these opportunity areas becoming a primary alternative to the monopoly
Incumbent Local Exchange Company.
On
September 27, 2005, a Securities Purchase Agreement was entered for a $2,000,000
financial transaction by and among us, Xfone USA, Inc., eXpeTel Communications,
Inc., Gulf Coast Utilities, Inc. and Laurus Master Fund, Ltd. The investment
took the form of a convertible term note secured by our United States assets.
The Term Note had a 3 year term, bore interest at a rate equal to
prime plus 1.5% per annum, and was convertible, under certain conditions, into
shares of our common stock at an initial conversion price equal to $3.48 per
share. In conjunction with the financial transaction, we issued to Laurus Master
Fund 157,500 warrants which are exercisable at $3.80 per share for a period of
five years. The closing of the financial transaction was on September 28, 2005.
As of August 1, 2007, Laurus Master Fund, Ltd. assigned to Valens U.S. SPV I,
LLC a principal amount equal to $169,925.11 of the Term Note, and to Valens
Offshore Fund SPV I, Ltd. a principal amount equal to $549,289.76 of the Term
Note. The Term Note was fully paid off in cash on September 26,
2008.
On
September 28, 2005, a Securities Purchase Agreement was entered for a $2,212,500
financial transaction by and among us, Crestview Capital Master, LLC, Burlingame
Equity Investors, LP, Burlingame Equity Investors II, LP, Burlingame Equity
Investors (Offshore), Ltd., and Mercantile Discount - Provident Funds. Upon the
closing of the financial transaction on October 31, 2005, we issued to the
investors an aggregate of 885,000 shares of common stock at a purchase price of
$2.50 per share together with, 221,250 warrants exercisable at $3.00 per share
and 221,250 warrants exercisable at $3.25 per share. The financial transaction
resulted in dilution in the percentage of common stock owned by the Company’s
existing shareholders, although the price paid was in excess of the net tangible
book value per share and accordingly was not economically dilutive.
On
November 23, 2005, a Securities Purchase Agreement was entered for a $810,000
financial transaction by and among us, Mercantile Discount-Provident Funds,
Hadar Insurance Company Ltd., the Israeli Phoenix Assurance Company Ltd., and
Gaon Gemel Ltd. In conjunction with the financial transaction, we issued an
aggregate of 324,000 shares of common stock at a purchase price of $2.50 per
share together with 81,000 warrants exercisable at $3.00 per share for a period
of five years and 81,000 warrants exercisable at $3.25 per share for a period of
five years. The financial transaction was closed on April 6, 2006. The financial
transaction resulted in dilution in the percentage of common stock owned by the
Company’s existing shareholders, although the price paid was in excess of the
net tangible book value per share and accordingly was not economically
dilutive.
On
January 1, 2006, Xfone USA, Inc., our wholly owned subsidiary, entered into an
Agreement with EBI Comm, Inc. (“EBI”), a privately held Internet Service
Provider, to purchase the assets of EBI. EBI provided a full range of Internet
access options for both commercial and residential customers in north
Mississippi. Based in Columbus, Mississippi, EBI’s services included Dial-up,
DSL, T1 Dedicated Access and Web Hosting. The customer base, numbering
approximately 1,500 Internet users, is largely concentrated in the Golden
Triangle area, which includes Columbus, West Point and Starkville, Mississippi.
The acquisition was structured as an asset purchase, providing for Xfone USA to
pay EBI total consideration equal to 50% of the monthly collected revenue from
the customer base during the first 12 months, beginning January 2006. Acquired
assets include the customer base and customer lists, trademarks and all related
intellectual property, fixed assets and all account receivables. As a result of
further negotiations between us and EBI, we have agreed to pay the total
consideration of this acquisition in cash in the amount of $85,699 in monthly
payments of $10,000 until paid in full, and we made the first of such payments
on June 1, 2007 and final payment on January 25, 2008. The acquisition was not
significant from an accounting perspective.
On
January 10, 2006 (effective as of January 1, 2006), Xfone USA, Inc., our wholly
owned subsidiary, entered into an Asset Purchase Agreement with Canufly.net,
Inc. (“Canufly.net”), an Internet Service Provider based in Vicksburg,
Mississippi, and its principal shareholder, Mr. Michael Nassour. Canufly.net
provided residential and business customers with high-speed Internet services
and utilized the facilities-based network of Xfone USA, as an alternative to
BellSouth, to provide Internet connectivity to its customers. Canufly.net also
provided Internet services through a small wireless application in certain areas
in Vicksburg, Mississippi. The transaction was closed on January 24, 2006. We
agreed to pay a total purchase price of up to $710,633, payable as follows: (i)
$185,000 in cash payable in twelve equal monthly payments, the first installment
was paid at closing, and as of December 31, 2006, the entire amount was paid in
full and in accordance with the Asset Purchase Agreement; (ii) $255,633 in cash,
paid at closing, to pay off the loan with the B&K Bank; (iii) 33,768
restricted shares of Common Stock and 24,053 warrants exercisable at $2.98 per
share for a period of five years were issued to the shareholders of Canufly.net
during May 2006. Following the closing in 2006 and due to the satisfaction of
certain earn out provisions in the Asset Purchase Agreement the Company
issued in March 2007 an additional 20,026 restricted shares of Common Stock and
14,364 warrants exercisable at $2.98 per share for a period of five years to the
shareholders of Canufly.net. The acquisition was not significant from an
accounting perspective.
On May
10, 2006, we, Story Telecom, Inc., Story Telecom Limited, Story Telecom
(Ireland) Limited, Nir Davison, and Trecastle Holdings Limited, a company owned
and controlled by Mr. Davison, entered into a Stock Purchase Agreement. Pursuant
to the Stock Purchase Agreement, we increased our ownership interest in Story
Telecom from 39.2% to 69.6% in a cash transaction valued at $1,200,000. $900,000
of the total consideration was applied to payables owed by Story Telecom to us
and our subsidiary Swiftnet Limited for back-end telecommunications services.
The balance of $300,000 was paid to Story Telecom to be used as working capital.
Story Telecom, Inc., a telecommunication service provider, operated in the
United Kingdom through its two wholly owned subsidiaries, Story Telecom Limited
and Story Telecom (Ireland) Limited (which was dissolved on February 23, 2007).
Following the acquisition, Story Telecom operates as a division of our
operations in the United Kingdom. The stock purchase pursuant to the Stock
Purchase Agreement was completed on May 16, 2006. The transaction contemplated
by the Stock Purchase Agreement was not significant from an accounting
perspective.
On March
25, 2008, in connection with a settlement of a legal proceeding initiated by Mr.
Nir Davison and due to come before the UK Employment Tribunal Service, we
purchased from Mr. Davison and Trecastle Holdings Limited, the shares of common
stock of Story Telecom, Inc. that each party owned, respectively, for an
aggregate purchase price of £270,000 ($538,083), pursuant to the terms of a
Compromise Agreement and a Securities Purchase Agreement entered into between
the parties on that date. Upon acquisition of the shares of common stock of
Story Telecom, Inc. from Mr. Davison and Trecastle Holdings, Story Telecom, Inc.
became our wholly owned subsidiary.
On May
25, 2006, we and the shareholders of Equitalk.co.uk Limited, a privately held
telephone company based in the United Kingdom (“Equitalk”) entered into an
Agreement relating to the sale and purchase of Equitalk (the “Equitalk
Agreement”). The Equitalk Agreement provided for us to acquire Equitalk in a
restricted Common Stock and warrant transaction valued at $1,650,000. The
acquisition was completed on July 3, 2006, and on that date Equitalk became our
wholly owned subsidiary. In conjunction with the completion of the acquisition
and in exchange for all of the capital stock of Equitalk, we issued a total of
402,192 restricted shares of our Common Stock and a total of 281,872 warrants
exercisable at $3.025 per share for a period of five years. Founded in December
1999, Equitalk, a VC-financed company, was the first fully automated e-telco in
the United Kingdom. Equitalk provides both residential and business customers
with low-cost IDA and CPS voice services, broadband and
teleconferencing.
On June
19, 2006, we entered into a Securities Purchase Agreement to sell to Central
Fund for the Payment of Severance Pay of the First International Bank of Israel
Ltd.; Meiron Provident Fund for Self Employed Persons of the First International
Bank of Israel Ltd.; Atidoth Provident and Compensation Fund of the First
International Bank of Israel Ltd.; Tohelet Provident and Compensation Fund of
the first International Bank of Israel Ltd.; Mishtalem Funds for Continuing
Education of the First International Bank of Israel Ltd.; Keren
Hashefa Provident and Compensation Fund of the First International Bank of
Israel Ltd.; Hamelacha Provident and Compensation Fund of the First
International Bank of Israel Ltd.; Teuza Provident and Compensation Fund of the
First International Bank of Israel Ltd.; Kidma Provident Funds Management
Company Ltd. for Menifa Provident Fund for Bank of Israel Employees; and
Security Pension Fund for Artisans Industrialists and Self Employed Persons Ltd.
an aggregate of 344,825 restricted shares of common stock, at a purchase price
of $2.90 per share, together with an aggregate of 172,415 warrants to purchase
shares of common stock, at an exercise price of $3.40 per share and with a term
of five years. The financial transaction was closed on September 28, 2006. The
financial transaction resulted in dilution in the percentage of common stock
owned by the Company’s existing shareholders, although the price paid was in
excess of the net tangible book value per share and accordingly was not
economically dilutive.
On
December 24, 2006, the Company entered into an Agreement to sell to
Halman-Aldubi Provident Funds Ltd. and Halman-Aldubi Pension Funds Ltd. an
aggregate of 344,828 restricted shares of its common stock, at a purchase price
of $2.90 per share, together with an aggregate of 172,414 warrants to purchase
shares of its common stock, at an exercise price of $3.40 per share and with a
term of five years. The financial transaction was closed on February 8, 2007.
The financial transaction resulted in dilution in the percentage of common stock
owned by the Company’s existing shareholders, although the price paid was in
excess of the net tangible book value per share and accordingly was not
economically dilutive.
On August
15, 2007, the Company, Swiftnet Limited, our wholly owned U.K.-based subsidiary
(“Swiftnet”), and Dan Kirschner entered into a definitive Share Purchase
Agreement to be completed on the same date, pursuant to which Swiftnet purchased
from Mr. Kirschner the 67.5% equity interest in Auracall Limited (“Auracall”)
that he beneficially owned, thereby increasing Swiftnet’s ownership interest in
Auracall from 32.5% to 100%. Swiftnet had acquired the 32.5% interest in
Auracall through several transactions that occurred since October 16, 2001. The
purchase price for the shares was £810,918 (approximately $1,616,158), payable
as follows: £500,000 (approximately $996,500) was paid in cash upon signing of
the Share Purchase Agreement, and the remaining £304,000, plus interest of
£6,918 (approximately $619,658), was payable in monthly installments beginning
in September 2007 and continued through March 2008. In connection with the
acquisition, Auracall and Swiftnet entered into an Inter-Company Loan Agreement,
pursuant to which Auracall agreed to lend Swiftnet £850,000 (approximately
$1,694,050) for the sole purpose of and in connection with Swiftnet’s
acquisition of the Auracall shares. The loan is unsecured, bears interest at a
rate of 5% per annum, and is to be repaid in five years (i.e., August 15, 2012),
but may be repaid earlier without charge or penalty. As a result of the terms of
the transaction, Mr. Kirschner no longer serves as Auracall’s Managing Director
or as a member of its board of directors.
On
October 23, 2007, the Company entered into Subscription Agreements with 15
investors affiliated with Gagnon Securities, Inc. who agreed to purchase an
aggregate of 1,000,000 shares of the Company’s common stock, par value $0.001
per share at a price of $3.00 per share, for a total subscription amount of
$3,000,000. This offering was made by the Company, acting without a placement
agent, pursuant to the Company’s Registration Statement on Form SB-2 (File No.
333-143618) which was declared effective by the U.S. Securities and Exchange
Commission on August 6, 2007. The 1,000,000 shares were issued on November
6, 2007. Following the effectiveness of the Registration Statement on Form
SB-2 (File No. 333-143618) described above, pursuant to which the offerings on
October 23, 2007 and November 4, 2007 described above were made, the Company did
not file a prospectus supplement within the required time period containing the
final fixed offering price of $3.00 per share due to an unintentional
error. This constituted a technical violation of Section 5(b)(2) of
the Securities Act. The Company filed Current Reports on Form 8-K on October 23,
2007 and November 5, 2007 following its entry into the related subscription
agreements with the purchasers of the shares, and filed a Post-Effective
Amendment on November 7, 2007, each of which disclosed such final fixed
price. The Post-Effective Amendment filed on November 7, 2007 was
never declared effective by the SEC. The Company is relying upon the
cure provision provided by Rule 424(b)(8) under the Securities Act in order to
cure such violation. The Company believes that such violation was
cured under Rule 424(b)(8) upon filing of the Post-Effective Amendment, as it
made a good faith effort to file such Post-Effective Amendment as soon as
practicable upon discovery of the unintentional failure to file the prospectus
supplement, and because the filing with the SEC of the Post-Effective Amendment
and other filings related to the sale of the shares satisfied the prospectus
delivery requirements of Section 5(b)(2) under the “access equals delivery”
model adopted by the SEC.
On
November 4, 2007, the Company entered into Subscription Agreements with: (i) XFN
- RLSI Investments, LLC, an entity affiliated with Richard L. Scott Investments,
LLC, a U.S. institutional investor, which agreed to purchase 250,000 shares of
the Company’s common stock, par value $0.001 per share at a price of $3.00 per
share, for a total subscription amount of $750,000 (the “U.S. Offering”); and
(ii) certain Israeli institutional investors, which agreed to purchase an
aggregate of 700,000 shares of the Company’s Common Stock, at a price of $3.00
per share, for a total subscription amount of $2,100,000 (the “Israeli
Offering”). The U.S. Offering and Israeli Offering were made by the Company
pursuant to the Company’s Registration Statement on Form SB-2 (File No.
333-143618) which was declared effective by the U.S. Securities and Exchange
Commission on August 6, 2007. Following the effectiveness of the
Registration Statement on Form SB-2 (File No. 333-143618) described above,
pursuant to which the offerings on October 23, 2007 and November 4, 2007
described above were made, the Company did not file a prospectus supplement
within the required time period containing the final fixed offering price of
$3.00 per share due to an unintentional error. This constituted a
technical violation of Section 5(b)(2) of the Securities Act. The Company filed
Current Reports on Form 8-K on October 23, 2007 and November 5, 2007 following
its entry into the related subscription agreements with the purchasers of the
shares, and filed a Post-Effective Amendment on November 7, 2007, each of which
disclosed such final fixed price. The Post-Effective Amendment filed
on November 7, 2007 was never declared effective by the SEC. The
Company is relying upon the cure provision provided by Rule 424(b)(8) under the
Securities Act in order to cure such violation. The Company believes
that such violation was cured under Rule 424(b)(8) upon filing of the
Post-Effective Amendment, as it made a good faith effort to file such
Post-Effective Amendment as soon as practicable upon discovery of the
unintentional failure to file the prospectus supplement, and because the filing
with the SEC of the Post-Effective Amendment and other filings related to the
sale of the shares satisfied the prospectus delivery requirements of Section
5(b)(2) under the “access equals delivery” model adopted by the SEC. The
U.S. Offering was made by the Company acting without a placement agent. The
Israeli Offering was made by the Company with the services of First
International & Co. - Underwriting & Investments Ltd., one of the
Israeli investors, acting as placement agent, for which it was entitled to a
placement fee equal to 5% (plus VAT) of the gross proceeds of the Israeli
Offering. In addition, the Company paid 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.
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 an annual interest rate of
8%
The Bonds
may only be traded in Israel. The Bonds were rated A3 by Midroog Limited,
an Israeli rating company which is a subsidiary of Moody’s Investor Services. On
February 19, 2009, Midroog filed its annual monitoring report (the “Monitoring
Report”) with the Tel-Aviv Stock Exchange. According to the Monitoring Report,
Midroog’s rating committee reaffirmed the A3 rating assigned to the Bonds.
However, the rating committee decided on a negative outlook on the rating of the
Bonds, largely, but not exclusively, due to the increase of the risk level in
the business environment in which the Company operates, resulting from the
increasing recession in the United States and the threat it poses on the
Company's business, since the Company’s core activity is based in the U.S.
While the Monitoring Report recognizes that the Company shows relative
stability in its financial results and adherence to its expected cash flow
coverage ratios, it cites the Company s currency exposure resulting from the New
Israeli Shekel index-linked bonds in relation to the U.S. dollar, which is the
Company’s major activity currency.
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,
beginning 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 has declared and confirmed, that it is incorporated and active in
Israel, and that it is not a U.S. Person, and that it is not located outside of
Israel at the time of the filing of the offer. Each of the
institutional investors has declared that it knows that it will not be allowed
to take action to sell the Bonds and Warrants in the U.S. and/or to a U.S.
Person. Each of the institutional investors has declared and confirmed that the
Bonds, Warrants and shares that may result from the exercise of the Warrants,
are not acquired for the purpose of “distribution” (as this term is defined in
the US securities laws) in the U.S.
According
to an agreement entered into as of December 12, 2007, between the Company and
Excellence Nessuah Underwriting (1993) Ltd. (“Excellence Underwriters”) and
First International & Co. - Underwriting and Investments Ltd. (“First
International Underwriters”) (the "December 12, 2007 Agreement"), Excellence
Underwriters and First International Underwriters undertook to serve as the
pricing underwriters for the prospectus to be filed with the 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 Bonds offering,
pursuant to that certain First Amendment to Financial Services and Business
Development Consulting Agreement by and among the Company and Dionysos dated
February 8, 2007. During 2008 a total amount of $152,486 was paid to
Dionysos as success fee.
To the
Company’s best knowledge and based on information that was provided to it by
Excellence Underwriters and First International Underwriters, the requirements
of the Israeli law have been fulfilled regarding the prohibition on conflicts of
interest between an underwriter and its associates and between an underwriter
and an issuer, including in connection with a sale through a non-uniform
offer.
On August
22, 2007, we entered into a Stock Purchase Agreement (the “NTS Purchase
Agreement”) with NTS Communications, Inc. (“NTS”), a provider of integrated
voice, data and video solutions headquartered in Lubbock, Texas, and the owners
of approximately 85% of the equity interests in NTS, to acquire NTS.
Subsequently, all of the remaining shareholders of NTS executed the Agreement,
bringing the total percentage of equity interests in NTS owned by NTS
shareholders that entered into the Agreement (the “NTS Sellers”) to
100%. On February 14, 2008, we entered into a First Amendment
to the NTS Purchase Agreement to amend the agreement to further extend the
expiration date for the closing of our acquisition of NTS. On
February 26, 2008, we entered into a Second Amendment to the NTS Purchase
Agreement which amended, among other things, the definition and elements of
Working Capital, as such term is defined in the NTS Purchase Agreement, and
increased the escrow amount. On April 25, 2008, we entered into a Third
Amendment, pursuant to which we agreed to an extension of time
for the calculation and payment of the post closing working capital
adjustment under the NTS Purchase Agreement.
The
acquisition of NTS 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 of
NTS, 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 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
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. As of December 31,
2008 all payments were paid.
On
November 26, 2008, Xfone USA, Inc., entered into a Sale and Purchase Agreement
(the “Agreement”) with Cybergate, Inc. (“Cybergate”), pursuant to which Xfone
USA purchased all of Cybergate’s customers base, agreements, fixed assets,
account receivables and certain intangible assets (the “Assets”). Cybergate is a
provider of Internet services including Internet access, web and server hosting,
data services and e-mail. Pursuant to the Agreement Xfone USA also agreed to
assume certain immaterial liabilities of Cybergate. The purchase price was an
amount equal to 50% of collected receivables derived from the Assets up to
$500,000.00, which is to be paid to Cybergate in monthly installments equal to
50% of the prior month’s collected receivables derived from the Assets as the
same shall be billed on a regular basis by Xfone USA. The Agreement
contains customary representations and warranties by the parties, as well as
covenants and conditions which are customary for transactions of this nature The
Agreement and the closing of the sale and purchase have an effective date of
November 1, 2008. The acquisition was not significant from an
accounting perspective.
RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2008
Our
primary geographic markets are the United States, the United Kingdom and
Israel. However, we serve customers worldwide.
U.S.
Operations – 2008
In 2008,
approximately 69.4% of our revenues were derived from our operations in the
United States.
Our U.S.
subsidiary, Xfone USA, Inc. provides voice, data and related services throughout
Louisiana and Mississippi to both residential and business customers. Xfone USA
is a licensed facility based CLEC operating in Louisiana and Mississippi with
multiple next generation class 5-carrier switching platforms. Xfone USA offers a
complete package of local, long distance and broadband services to residential
and business customers across both states.
With
continued cross-selling to existing Xfone USA customers as well as projected
expansion into specific targeted wire centers, our goal is to continue revenue
growth and increase market share. Competition in rural markets continues to
decline due to the removal of UNE-P and the decline in the number of competitive
local exchange providers that had been dependent on UNE-P as their only source
for providing competitive local telephone services in those communities. We
believe that this provides for a unique opportunity for Xfone USA to continue to
gain market share, by utilizing its existing network and to expand it facilities
into these areas becoming a primary alternative to the monopoly Incumbent Local
Exchange Company.
The
overall trend for 2008 continued to show improving wire line margins in the
Business markets and maintaining margins in the Residential (Consumer) markets
for facilities based providers. Mergers and acquisitions continued
throughout 2007 and 2008, as a component for offsetting the line loss felt
throughout the CLEC industry due to the UNE-P regulatory changes. We expect that
the industry will see continued merger and acquisition activity in 2009 and
beyond for companies that have cash and public equity resources. These
transactions will continue to change the landscape in the telecommunications
industry. Our view is shared by any number of telecommunications
analysts who also believe that there will be more consolidation
opportunities over the next several years in both wire line and wireless
markets.
Demands
in the market show continued interest in providing Telco TV, VOIP products and
rapid growth in the broadband market, heating up competition with the Regional
Bell Carriers and cable providers. DSL and other broadband services should
continue to grow due to aggressive pricing with higher bandwidth speeds becoming
the norm.
Xfone
USA’s business plan for 2009 continues to include expansion of market share in
both Business and Residential markets with focus in its specific geographic
service areas, which are primarily in Mississippi and Louisiana, and in those
markets where the company has deployed its own network and Central Offices
(CO’s), which are the highest margin areas. The Business markets will continue
to be expanded through available Direct Sales and Independent sales efforts,
while the Residential markets will be expanded through radio, direct mail, email
marketing and other low cost advertising and message delivery
opportunities.
The
Company’s business plan in 2008 also included growth through acquisitions, which
made sense for several reasons: (i) faster results in achieving large top line
revenue performance; (ii) significant synergies impact from consolidating
corporate functions; and (iii) relatively easy integration of acquired companies
because of facilities and network architecture.
As a
facility-based integrated communications carrier, we believe that Xfone USA is
well positioned in 2009 to continue to take advantage of the regulatory
opportunities afforded to facilities-based providers as a result of the FCC TRRO
ruling in 2005, as well as to take advantage of the consolidation momentum
started in 2006.
Our other
U.S. subsidiary, NTS Communications, Inc. provides integrated voice, data and
video solutions. NTS operates the largest “non-ILEC” telecommunications network
in West Texas, providing local, long distance, broadband data, and video and
private line services to approximately 39,000 residential and business
customers.
Like
Xfone USA, NTS operates in a highly competitive environment which is generally
characterized by the dominance of the Incumbent Local Exchange Carrier
(ILEC). With respect to its primary Texas markets, the dominant ILEC
is AT&T (formerly Southwestern Bell Telephone Company). NTS also
competes with the Incumbent Cable TV Provider (ICTVP) in markets where that
carrier provides voice, data and/or video services. In its core Texas
markets, the ICTVP is SuddenLink Communications or Time Warner
Communications. Within these same core markets, NTS also competes
with a variety of widely dispersed smaller Competitive Local Exchange Carriers
(CLEC). With respect to its data and long distance products, the
company competes with various national and regional players including AT&T,
Verizon, Qwest, Level 3 and others.
NTS,
through its wholly owned subsidiary, NTS Telephone Company, LLC, is in the
process of extending its FTTP network to the nearby communities of Levelland
(located 30 miles west of Lubbock) and Smyer (approximately 15 miles west of
Lubbock). Upon project completion, these communities will add
approximately 6,200 passings to the NTS FTTP footprint and bring total FTTP
passings to approximately 21,000. NTS Telephone Company, LLC, has
received approval from the Rural Utilities Service (“RUS”) for an $11.8 million,
17-year debt financing to complete this overbuild. The RUS loan is
non-recourse to NTS and all other NTS subsidiaries and interest is charged at
the average rate of U.S. government obligations (equivalent to approximately
2.5% a year at today’s rates). Data from marketing surveys indicated
a very strong demand for triple play (voice, data/Internet, and video) service
offerings and projected a market penetration for NTS of 69% in approximately
three years from project completion. NTS’ capital investment in the
project is a $2.5 million equity contribution that serves as credit support for
the loan. NTS will provide voice, data, and video services for NTS
Telephone Company. NTS will receive a management fee from NTS
Telephone Company equal to 15% of its revenues. NTS began marketing its
triple-play service to limited areas of Levelland in the first quarter of 2009
with more areas becoming available as overbuild construction is completed.
NTS completed physical construction of the first three phases of this
project in 2008 and is currently nearing the beginning of Phase
4. Project completion should occur in 2009, however, this could be
delayed by any number of factors including but not limited to weather and the
availability of contractors and materials. Of note, in the first
quarter of 2009, the company signed its first FTTP customer in
Levelland. Our expectation is that significant new revenues should
come online throughout 2009 on an incremental basis as additional network
build-outs phases are completed.
U.K.
Operations – 2008
In 2008,
approximately 20.4% of our revenues were derived from our operations in the
United Kingdom.
Our U.K.
subsidiary, Swiftnet Limited operates switching and computer systems
offering a range of innovative, in-house developed telecommunications services.
Swiftnet's strategy is to grow without the need for heavy investments and with
lower operational expenses through the use of
automation. A comprehensive range of telecommunication services
and products are sold directly to end-users, through a web
site integrating all of Swiftnet's services. The services
are mainly telephone-related services to customers dialing local and
international destinations. Swiftnet provides value added services such as fax
broadcast, email to fax and various other messaging services. Swiftnet
also provides services for a range of resellers and partners to sell to
their customers. These resellers and partners include Auracall Limited, Story
Telecom Limited and Equitalk.co.uk Limited. Swiftnet's telecommunications
services are used by subscribers in the U.K. and worldwide.
Our U.K.
subsidiary, Equitalk.co.uk Limited is an automated e-telco providing
post-paid, telecommunications services to customers across the whole of the
U.K. These customers are typically making calls within the UK. Equitalk’s
strategy is to grow through the acquisition of customers directly through sales
and marketing activities.
Our U.K.
subsidiary, Story Telecom Limited provides international
calling services through calling cards and special access numbers
available for use from mobile phones and landlines. Story
Telecom's strategy is to grow through the addition of products and
services targeted at customers making international calls.
Our U.K.
subsidiary, Auracall Limited provides international calling services
through special access numbers available for use from mobile
phones and landlines. Auracall’s strategy is to grow through the promotion
of existing and new products via a network of agents.
In 2008,
we had only approximately 0.026% of the market share of the United Kingdom
telecommunication market (not including mobiles revenues), based on our revenues
of £10 million during 2008, compared with the approximately £38 billion
telecommunication market (not including mobiles revenues) in the United
Kingdom.
We had
four major types of customers in the U.K.: Residential, Commercial, Governmental
agencies and Resellers. In 2008, our largest non-affiliated reseller
was WorldNet Global Communications Ltd. which generated under 1% of our total
revenues. We provide WorldNet Global Communications with the billing system. We
anticipate that WorldNet will continue to contribute approximately the same
amount of UKP to our revenues in year 2009.
However,
should our agreements involving WorldNet be cancelled, our revenues will be
negatively affected.
Israeli
Operations – 2008
In 2008,
approximately 10.2% of our revenues were derived from our operations in
Israel.
Since the
opening of the international telephony market in Israel to competition in 1996,
and until 2004, only three companies have provided international telephony
services in Israel. The market, estimated at that time to be 2 billion minutes
per year, was more or less equally divided between the three companies. On July
4, 2004, the Ministry of Communications of the State of Israel granted our
majority-owned subsidiary, Xfone 018 a license to provide international telecom
services in Israel. We started providing services in Israel through Xfone 018 as
of mid-December 2004. In 2004, two other new providers of international
telephony services launched their services. The international telephony market
is highly competitive and therefore all six providers had to offer low prices in
order to attract or retain subscribers and call minutes.
During
2006, two significant mergers occurred in the Israeli international telephony
market, leaving only four companies in the competition. The aforementioned
mergers enabled Xfone 018 to execute, as of December 2006, a new business
strategy, according to which it re-priced its services by distinguishing the
rates for its subscribed customers from the rates for its non-subscribed
customers. The new strategy has proved to be successful, and in 2007 and 2008
Xfone 018 revenues were significantly increased.
Xfone 018
is operating with significantly lower overhead than its three competitors in the
Israeli market by utilizing and building on our previous business models. We
therefore believe that Xfone 018 will increase its market share in the
international communication market, will generate a greater part of our revenues
and will have a major contribution to our expected growth.
In 2008,
the Israeli international telephony market was estimated to be 3 billion minutes
(incoming and outgoing). We estimate our market share as of December 31, 2008,
as approximately 5.5% of the Israeli market.
The local
telephony market in Israel is dominated by six major competitors, two of which
own the physical infrastructures and are required by law to offer use of these
infrastructures to other competitors. In July 2008, Xfone 018 entered that
market in an experimental capacity.
Internet
services via ADSL and/or Cable became available to the general public in Israel
in 2001. Since then prices have dropped considerably and steadily, resulting, at
the end of 2008, in a household penetration rate of approximately 72% and
approximately 1.68 million broadband lines, according to the
MOCSIL.
In
Israel, Internet infrastructure and Internet access services are provided
separately. The Internet access services market, into which Xfone 018 has
recently entered, is divided between six major competitors.
We have
two major types of customers in Israel: Residential and Commercial.
.
COMPARISON
FINANCIAL INFORMATION YEARS ENDED DECEMBER 31, 2008 AND 2007 - PERCENTAGE OF
REVENUES:
|
|
Year
Ended
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost
of Revenues
|
|
|
52
|
%
|
|
|
44
|
%
|
Gross
Profit
|
|
|
48
|
%
|
|
|
56
|
%
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
Research
and Development
|
|
|
0
|
%
|
|
|
0
|
%
|
Marketing
and Selling
|
|
|
14
|
%
|
|
|
24
|
%
|
General
and Administrative
|
|
|
28
|
%
|
|
|
28
|
%
|
Non-
recurring loss
|
|
|
0
|
%
|
|
|
-6
|
%
|
Total
Operating Expenses
|
|
|
42
|
%
|
|
|
58
|
%
|
Income
(loss) before Taxes
|
|
|
2
|
%
|
|
|
-4
|
%
|
Net
Income (loss)
|
|
|
2
|
%
|
|
|
-3
|
%
|
COMPARISON
OF THE YEARS ENDED DECEMBER 31, 2008 AND 2007
Revenues.
Revenues for the
year ended December 31, 2008 increased 102% to $90,338,980 from $44,723,934 for
the same period in 2007. The increase of $45,615,046 in consolidated revenues is
attributed to $50,425,928 increase in our revenues in the United States
and a $1,058,842 increase in Israel which is partially offset by a
$5,869,724 decrease in revenues in the United Kingdom. In 2008 revenues in the
United States as a percentage of total revenues increased to 69.4% from 27.5%
for the same period in 2007, whereas revenues in the United Kingdom and Israel
as a percentage of total revenues decreased to 20.4% and 10.2% from 54.3% and
18.3%, respectively.
Revenues
in the United States for the year ended December 31, 2008 increased 410.3% to
$62,716,819 from $12,290,891 for the same period in 2007. Approximately
$52,300,000 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 partially offset by a decrease of approximately $1,880,000 in
revenues from other carriers and due to attrition of residential
customers.
Revenues
in the United Kingdom for the year ended December 31, 2008 decreased 24.2% to
$18,393,886 from $24,263,610 for the same period in 2007. Approximately 76%
(being $4,400,000) of the decrease is attributed to a change in the tariff
structure by the mobile operator O2 and approximately 24% (being $1,400,000) of
the decrease is attributed to the devaluation of the GBP to the U.S. dollar
during 2008.
Revenues
in Israel for the year ended December 31, 2008 increased 13% to $9,288,275 from
$8,169,433 for the same period in 2007. This increase is mainly attributed to
ongoing marketing efforts and revaluation of the NIS to the U.S
dollar.
Cost of Revenues.
Cost of
revenues consists primarily of traffic time purchased from telephone companies
and other related charges. Cost of revenues for the year ended December 31, 2008
increased 140.1% to $47,132,313 from $19,626,322 for the same period in 2007.
Cost of revenues as a percentage of revenues in the year ended December 31, 2008
increased to 52.2% from 43.9% in the same period in 2007.
Cost of
revenues as a percentage of revenues in the United States in the year ended
December 31, 2008 increased to 56.5% from 48% 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 year ended December 31, 2008, include the cost of
Auracall which was acquired in its entirety on August 15, 2007 and was
consolidated for four and a half months in 2007. Cost of revenues as percentage
of revenues decreased to 42.1% compared to 44.1% in the same period in 2007. The
decrease in cost of revenues and a percentage of revenues was achieved as a
result ofthe consolidation of low cost products which were sold by Auracall,
together with ongoing product improvements. Due to the fact that a certain part
of our cost of revenues in the UK is nominated in USD, the decrease in the cost
of revenues was offset by a devaluation of the GBP to the U.S. dollar during the
second half of 2008. Furthermore, as a result of 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 year ended December 31,
2008 increased to 42.6% from 37% in the same period in 2007. Approximately 79%
of the decrease is attributed to introduction of commission- based services,
which have generated lower gross margins, and 21% of the decrease is attributed
to the revaluation of the NIS in relation with the U.S. dollar.
Research and Development
.
Research and development expenses consist of labor costs of our research and
development manager and other related costs and represent our product
improvements efforts. Research and development expenses were $60,094 for the
year ended December 31, 2008, which is an increase of 26.2% compared to our
research and development costs of $47,609 during the year ended December 31,
2007. We estimate that research and development expenses will remain at or near
the same level in 2009.
Marketing and Selling
Expenses.
Marketing and selling expenses consist primarily of commissions
to agents and resellers. Other marketing and selling expenses are related to
compensation attributed to employees engaged in marketing and selling
activities, promotion, advertising and related expenses. Marketing and selling
expenses for the year ended December 31, 2008, increased 14.1% to $12,422,391
from $10,886,883 for the same period in 2007. The increase in the marketing and
selling expenses is primarily attributed to our operations in the U.S and
Israel. Marketing and selling expenses as a percentage of revenues decreased to
14.1% for the year ended December 31, 2008 from 24.4% for the same period in
2007. Approximately $3,154,000 in marketing expenses for the year ended December
31, 2008 is contributed by NTS which was consolidated for the first
time in the first quarter of 2008. An increase of approximately $745,000 in
Israel is attributed to ongoing marketing campaigns during 2008. A decrease of
approximately $2,400,000 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 legal, accounting and consulting fees. General and administrative expenses
for the year ended December 31, 2008 increased 108.5% to $25,720,376 from
$12,335,759 for the same period in 2007. Approximately $14,209,000 in general
and administrative expenses for the year ended December 31, 2008 is contributed
by NTS which was consolidated for the first time in the first quarter
of 2008.
Non- recurring Loss.
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 (“Tadiran Telecom LP”). During the third quarter of 2008,
negotiations between Xfone 018, Tiv Taam and the management and employees of
Tadiran Telecom LP ceased. As a result, we recoded one-time expenses of $189,610
which consisted primarily of financial, legal and accounting fees.
On March 19, 2008, the UK court handed down judgment in the dispute
between Swiftnet and MCI and awarded £1,278,942 ($2,564,036) plus legal costs
and interest in favor of MCI. The Company's financial statements for 2007
have carried the full amount Swiftnet calculated that it owed to MCI based on
the data held in Swiftnet’s billing systems. The net effect of that judgment
included estimation of the Company's legal fees, MCI’s legal costs and interest
payable was approximately £1,427,737 ($2,856,803) which was presented as a
non-recurring loss in the Statement Of Operations.
Financing Expenses.
Financing
expenses, net, for the year ended December 31, 2008 increased to $2,862,132 from
$515,562 for the same period in 2007. Approximately $1,700,000 is attributed to
the interest payable on the Bonds. The remaining increase in the financial
expenses, net of approximately $650,000, 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 (Loss).
Net income
for the year ended December 31, 2008 was $2,047,237 compared with a net loss of
$1,283,892 for the same period in 2007. This is primarily due to the
consolidation of NTS for the first time in the first quarter of 2008 and the
revaluation of the NIS to the U.S dollar.
Earning (Loss) Per Share.
Basic and diluted net profit per share of common stock for the year ended
December 31, 2008 was $0.116 compared to basic and diluted net loss per
share of 0.109 for the same period in 2007.
BALANCE
SHEET
Comparison
of the balance sheet as of December 31, 2008 and December 31, 2007
Current Assets
. Current assets
amounted to $17,999,587 as of December 31, 2008, as compared with $41,269,446 as
of December 31, 2007. The decrease in the current assets is mainly attributable
to the decrease in restricted cash in the amount of $25,562,032 provided by
issuance of debentures. This cash was used for the NTS acquisition.
Fixed Assets.
Fixed assets
net, amounted to $50,020,597 as of December 31, 2008, as compared with
$5,747,758 as of December 31, 2007. The increase is mainly attributed to fixed
assets that were consolidated as a result of the acquisition of NTS as
of February 26, 2008, which contributed $41,781,426.
Current Liabilities.
As of
December 31, 2008, current liabilities amounted to $26,440,029, as compared with
$18,061,934 as of December 31, 2007. The increase in current liabilities is
mainly attributed to the consolidation for the first time in the first quarter
of 2008 of NTS and the revaluation of NIS in relation to the US dollar, which is
partially offset by the devaluation of the GBP in relation to the US
dollar.
Long-term liabilities
.
As of December 31,
2008, long-term liabilities amounted to $33,720,145, as compared with
$23,279,296 as of December 31, 2007. The increase in long-term liabilities is
mainly attributed to the consolidation for the first time in the first quarter
of 2008 of NTS and the revaluation of NIS in relation to the U.S. dollar, which
is being partially offset by the redemption of one eighth of the Bonds principle
on December 1, 2008.
LIQUIDITY
AND CAPITAL RESOURCES
Cash and
cash equivalents as of December 31, 2008 amounted to $3,078,474, compared to
$5,835,608 as of December 31, 2007, a decrease of $2,757,134. Net cash
provided by operating activities in the year ended December 31, 2008, was
$3,382,816 including two payments of semi-annual interest coupon of our Bonds
amounting to $2,509,875. Cash used for investing activities in the year ended
December 31, 2008 was $20,006,241, and is primarily attributable to
the purchase of fixed assets of $8,446,396 and to the acquisition of NTS of
$38,640,829 less proceeds from the issuance of Bonds during December 2007 of
$27,467,049 which were held in escrow in short term bank deposits. Net cash
provided in financing activities for the year ended December 31, 2008 was
$15,666,895, and is primarily attributable to issuance of shares and warrants
for cash of $14,513,478, payment of bonds of $3,318,309, proceeds from long-term
line of credit from a bank of $7,212,863 and the repayment of financial
obligations of $3,176,853 including repayment of one eighth of the Bond
principal and the full repayment of the loan from Laurus Master
Fund.
Our
capital investments are primarily for the purchase of equipment and software for
services that we provide or intend to provide.
Capital
lease obligations: We are the lessee of switching and other telecom equipment
under capital leases expiring on various dates from 2009 through
2012.
As of
December 31, 2008, the minimum future lease payments are:
|
|
|
|
Year
|
|
|
|
|
2009
|
|
$
|
288,688
|
|
2010
|
|
|
158,738
|
|
2011
|
|
|
127,158
|
|
2012
|
|
|
21,700
|
|
Total
(present value)
|
|
$
|
596,284
|
|
We shall
continue to finance our operations and fund the current commitments for capital
expenditures mainly from the cash provided from operating activities and from
private and/or public placements.
Xfone,
Inc.
On
December 13, 2007 (the “Date of Issuance”), we 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, we 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 an
annual interest rate of 8%
The Bonds
may only be traded in Israel. The Bonds were rated A3 by Midroog Limited,
an Israeli rating company which is a subsidiary of Moody’s Investor Services. On
February 19, 2009, Midroog filed its annual monitoring report (the “Monitoring
Report”) with the Tel-Aviv Stock Exchange. According to the Monitoring Report,
Midroog’s rating committee reaffirmed the A3 rating assigned to the Bonds.
However, the rating committee decided on a negative outlook on the rating of the
Bonds, largely, but not exclusively, due to the increase of the risk level in
the business environment in which we operate, resulting from the increasing
recession in the United States and the threat it poses on our business, since
our core activity is based in the U.S. While the Monitoring Report
recognizes that we show relative stability in our financial results and
adherence to our expected cash flow coverage ratios, it cites our currency
exposure resulting from the New Israeli Shekel index-linked bonds in relation to
the U.S. dollar, which is our major activity currency.
On
February 26, 2008, we 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 our 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, we issued 2,366,892 shares of our Common Stock to certain
former NTS Shareholders who elected to reinvest all or a portion of their
allocable sale price in our Common Stock, pursuant to the terms of the Purchase
Agreement. Our Board of Directors determined, in accordance with the
Purchase Agreement, the number of shares of our 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 our Common Stock by 93% of the average closing price of our Common
Stock on the NYSE Amex 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, we 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, 2008008.
On July
17, 2007, Story Telecom Limited, our UK subsidiary, agreed to loan us up to
£400,000 ($787,175) that it had as cash surplus in its bank account. The loan
bears fixed interest rate at 4% over the interest payable by the bank for
deposits under the same terms. The loan 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, we borrowed
£350,000 ($688,778) and £50,000 ($98,397), respectively, of the loan. On October
8, 2007, Story Telecom agreed to increase the loan ceiling by £300,000 to a
maximum of £700,000. Further borrowings of £100,000 ($196,794) were made on
October 9, 2007. As of December 31, 2008, the aggregate outstanding borrowings
were £500,000 ($729,629).
On
December 1, 2008, we borrowed 400,000 NIS (approximately $105,208) (the “Loan”)
from an individual lender unrelated to the Company pursuant to a Loan Agreement
entered into on the same date, for general working capital purposes and/or for
our repurchase of the Bonds. The Loan is to be repaid no later than 12
months from the date of the Loan, or December 1, 2009. The Loan bears interest
at an annual rate of 8% and is (including any interest accrued thereon) linked
to the Israeli Consumer Price Index. The interest is payable quarterly, at the
end of each three-month period, commencing from the Loan date and continuing
until the Loan is fully repaid. The first interest payment on the amount of
7,985 NIS (approximately $1,889) was made on March 20, 2009.
We have a
credit facility from Bank Leumi (UK) plc (“Bank Leumi”), of up to £150,000
($212,353), which we obtained on November 26, 2008 for general working capital
purposes (the “Credit Facility”). The Credit Facility is available for six
months, and will be reviewed by Bank Leumi in May 2009. The Credit
Facility is secured by a bank guarantee given to Bank Leumi by FIBI London. The
guarantee is based upon a £150,000 deposit by Iddo Keinan, son of Abraham
Keinan, our Chairman of the Board, and employee of our wholly-owned UK based
subsidiary, Swiftnet Limited, with FIBI London. The Credit Facility bears
interest at a rate based on the London Interbank Offered Rate (“LIBOR”), plus
one percent per annum, payable at the end of each three-month interest period.
If we were to draw funds in excess of the agreed £150,000 amount without prior
consent of Bank Leumi, we will be charged interest at the Base Rate, which is
currently 5.5% plus 5% per annum for Sterling balances. During fiscal
2008, we have drawn down the full £150,000 ($212,353) of this Credit
Facility. As of December 31, 2008, no payments of principal or interest
have been made.
US
subsidiaries
Our U.S.
subsidiary, Xfone USA, Inc., has certain loan facilities with certain liens on
our fixed assets in the form of installment loan agreements. The total aggregate
amount of these loans as of December 31, 2008 is $104,028.
Upon the
assignment of the Interconnection Agreement between WS Telecom, Inc. and
BellSouth Telecommunications, Inc. to Xfone USA, Inc., and consummation of the
merger on March 10, 2005, we, the ultimate parent company and our subsidiaries,
Swiftnet Limited and Xfone 018 Ltd., individually and/or jointly, agreed to
guarantee all undisputed debts owing to BellSouth Telecommunications by Xfone
USA in accordance with the assigned Interconnection Agreement. The guarantee was
given on December 16, 2004, and became effective upon the consummation of the
merger on March 10, 2005.
On
September 27, 2005, we entered into a Securities Purchase Agreement for a
$2,000,000 financial transaction with Xfone USA, Inc., eXpeTel
Communications, Inc., Gulf Coast Utilities, Inc. and Laurus Master Fund, Ltd.
The investment, which took the form of a convertible term note secured by our
United States assets, had a 3 year term and bore interest at a rate equal to
prime plus 1.5% per annum. The Term Note was convertible, under certain
conditions, into shares of our common stock at an initial conversion price equal
to $3.48 per share. In conjunction with the financial transaction, we issued to
Laurus Master Fund 157,500 warrants which are exercisable at $3.80 per share for
a period of five years. The closing of the financing was on September 28, 2005.
As of August 1, 2007, Laurus Master Fund, Ltd. assigned to Valens U.S. SPV I,
LLC a principal amount equal to $169,925.11 of the Term Note, and to Valens
Offshore Fund SPV I, Ltd. a principal amount equal to $549,289.76 of the Term
Note. The Term Note was fully paid off in cash on September 26,
2008.
Our U.S
subsidiary, NTS Communications, Inc., has short-term bank facilities of
$4,000,000 and approximately $3,000,000 notes payable for the purchase of
certain fixed assets. These notes payable are secured by fixed assets in the
form of installment loan agreements.
Our U.S
subsidiary, NTS Telephone Company, LLC, a wholly owned subsidiary of
NTS Communications, Inc. has received approval from the Rural Utilities
Service (“RUS”), a division of the United States Department of
Agriculture, for an $11.8 million, 17-year debt facility to complete a
telecommunications overbuild project in Levelland, Texas. The RUS loan is
non-recourse to NTS and all other NTS subsidiaries and is cost-of-money
loan, bearing interest at the average rate for 10-year U.S.
Treasury obligations. Advances are requested as the construction
progresses, and the interest rate is set based upon the prevailing rate at
the time of each individual advance. The current average rate
is approximately 2.75%.
The total
aggregate amount of these loans as of December 31, 2008 is
$1,404,971.
UK
subsidiaries
On April
18, 2002 Bank Leumi (UK) plc issued company credit cards to two directors of
Swiftnet Limited, and by way of securing the balances on these cards, took
a First Party Charge over Swiftnet to the sum of £50,000 ($98,397).
As of
April 10, 2003, Equitalk.co.uk Limited, our U.K. based subsidiary since July
2006, has received loan facilities from Barclays Bank plc in the form of a
Government Small Firms Loan Guarantee Scheme Loan Agreement whereby
Barclays would lend Equitalk £150,000 ($285,191). The loan plus interest is
repaid monthly and payments are up to date. As part of the agreement a
Debenture charge was raised on all the assets of Equitalk. As of December 31,
2008 the loan was fully repaid.
Israeli
subsidiary
Xfone 018
Ltd. has received credit facilities from Bank Hapoalim B.M. in Israel in order
to finance its activities. As of December 31, 2008, the credit facilities
include a revolving credit line of NIS 500,000 ($128,999), a short-term credit
line of NIS 2,250,000 ($580,495), and long-term credit line of NIS 1,290,000
($332,817). In addition, the bank made available to Xfone 018 a long-term
facility of NIS 3,150,000 ($812,693) to procure equipment. In 2008 the credit
facilities were 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 our 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. We agreed to indemnify Abraham
Keinan and/or Guy Nissenson on account of any damage and/or loss and/or expense
(including legal expenses) that they may incur in connection with the stock
pledge and/or any other obligation made by them to Bank Hapoalim in connection
with the collateral; (f) We 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 December 31, 2008, Xfone 018 has a
balance due of 1,382,228 NIS ($363,553) under the foregoing credit
facility.
On March
16, 2009, Xfone 018 assigned to the bank, by way of pledge, its rights pursuant
to the agreement with the credit company Poalim Express Ltd. On March 17, 2009,
Xfone 018 received the bank's approval for an increase in its short-term credit
line to a total facility of 5,250,000 NIS ($1,242,310). Xfone 018
undertook to comply, as of March 31, 2009, with certain covenants concerning its
capital and the annual ratio between its total liabilities and
EBITDA.
On March
26, 2009 we received the bank's confirmation according to which the following
guarantees are waived: (a) subordination of a Term Note of $800,000 (appears
above as "(c)"); (b) a pledge on 1,000,000 shares of our 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 (appears above
as "(e)"); and (c) subordination of the Minority Partner Loan (appears above as
"(g)").
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 NIS 10,000,000 ($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, we agreed to indemnify the
Minority Partner for any damage caused to him due to the forfeiture of the bank
guarantee with the Ministry of Communications on account of any act and/or
omission of Xfone 018, provided that the said act or omission is performed
against the opinion of the Minority Partner or without his knowledge. On
March 26, 2009, a payment of NIS 380,162 ($89,958) was made to the Minority
Partner as consideration for interest loss imposed on the Minority Partner
in connection with providing the bank guarantee.
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
was established for four years, unless otherwise agreed between the parties,
with annual interest of 4% and linkage to the Israeli consumer price index. As
of December 31, 2008, the balance of the Minority Partner Loan is NIS 1,947,890
($512,333). On March 26, 2009, a repayment, by way of off set, of
NIS 995,433 ($235,550) was made to the Minority Partner in connection
with the Minority Partner Loan.
According
to the above-mentioned $800,000 Term Note and agreement with Minority Partner,
as of December 31, 2008, the Company provided to Xfone 018 a shareholder loan in
an aggregate amount of $1,225,606.
As of
December 31, 2008, our Israeli subsidiary activities were financed by the
shareholders loans and by using NIS 1,382,228 ($363,553) of the credit
facility from Bank Hapoalim.
On
November 5, 2007, Bank Hapoalim B.M. in Israel provided a bank guarantee of NIS
322,500 ($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 December 31, 2008 is $57,619.
On
December 11, 2008, we signed a Letter of Guarantee (the “Guarantee”), pursuant
to which we agreed to guarantee the obligations of Xfone 018 under a certain
contract dated March 13, 2008 (the “Contract”), entered into by and between
Xfone 018 and Tikshoov Digital Ltd. (“Tikshoov”) and a certain Agreement dated
December 11 2008, entered into by and between Xfone 018 and Tikshoov (the
“Agreement”). Pursuant to the Contract, Xfone 018 provides telephone
services to Tikshoov for participants in a television call-in game show. Xfone
018 collects the telephone service fees from the participants and delivers the
fees to Tikshoov, after deducting applicable monthly fees and
costs. Pursuant to the Guarantee, if for any reason Xfone 018 fails
to comply with its obligations under the Contract and pursuant to the Agreement
in whole or in part, we will pay to Tikshoov directly any amounts due and
outstanding. We have agreed to make any payments pursuant to the
Guarantee within three (3) business days upon Tikshoov's first demand, without
deducting any amounts that we may claim from Tikshoov and free of any taxes or
withholdings. The Guarantee terminates and becomes null and void upon
the full satisfaction of Xfone 018's obligations.
IMPACT
OF INFLATION AND CURRENCY FLUCTUATIONS
20.4% and
10.2% of our revenues in the 2008 were derived from our U.K. and Israeli
operations, respectively, compared to 54.3% and 18.3% in the same period, in
2007. In 2008, approximately 37.4% of the direct traffic costs in Israel were in
GBP and the rest were in NIS compared to 32% in the same period in 2007. We
believe that the U.S. and Israeli portions of our revenues will increase in
2009.
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 Consumer Price Index,
during 2008, the revaluation of the NIS in relation with the U.S. dollar and the
inflation increased our outstanding debt by approximately $765,000 and
$1,119,000 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 we operates would affect our operational results
if we will not be able to match our revenues with growing expenses caused by
inflation.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE
DISCLOSURES
ABOUT MARKET RISK
Not
applicable.
ITEM
8. FINANCIAL STATEMENTS AND
SUP
PLEMENTARY
DATA
FINANCIAL
STATEMENTS
Xfone,
Inc. and Subsidiaries
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
As
of December 31, 2008
|
CONTENTS
|
Report
of Independent Registered Public Accounting Firm
|
62
|
|
|
Report
of Independent Registered Public Accounting Firm to the Shareholders and
Board of Directors of Xfone 018 Ltd.
|
63
|
|
|
Balance
Sheets
|
64
|
|
|
Statements
of Operations
|
66
|
|
|
Statements
of Changes in Shareholders' Equity
|
67
|
|
|
Statements
of Cash Flows
|
68
|
|
|
Notes
to Consolidated Financial Statements
|
70
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
Xfone,
Inc.
We have
audited the accompanying consolidated balance sheets of Xfone, Inc. as of
December 31, 2008 and 2007, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. We did not audit the
financial statements of Xfone 018, Ltd., a 69% owned subsidiary, which
statements reflect 4.7% of total consolidated assets as of December 31, 2008 and
10.2% of consolidated revenues for the year ended December 31, 2008. Those
financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Xfone 018, Ltd. as of December 31, 2008 and 2007 and for the years then
ended is based solely on the report of the other auditor.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, and based on that of the other auditor, the consolidated financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of Xfone, Inc. as of December 31, 2008 and 2007,
and the consolidated results of its operations and cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Stark
Winter Schenkein & Co., LLP
Stark
Winter Schenkein & Co., LLP
Denver,
Colorado
March 31,
2009
Report
of Independent Registered Public Accounting Firm
To
the Shareholders and Board of Directors of
Xfone
018 Ltd.
We
have audited the accompanying balance sheets of Xfone 018 Ltd. ("the Company")
as of December 31, 2008 and 2007 and the related statements of operations,
shareholders' equity (deficiency) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion
In
our opinion, the financial statements referred to above, present fairly, in all
material respects, the financial position of the Company as of December 31,
2008 and 2007 and the result of the operations, shareholders' equity
(deficiency) and cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
|
Yarel
+ Partners
C.P.A
(Isr.)
/s/ Yarel +
Partners
|
Tel-Aviv,
Israel
March 26,
2009
|
An
Independent Member of BKR
International
|
Xfone,
Inc. and Subsidiaries
|
|
CONSOLIDATED
BA
LANCE SHEETS
|
|
|
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,078,474
|
|
|
$
|
5,835,608
|
|
Restricted
cash
|
|
|
-
|
|
|
|
25,562,032
|
|
Accounts
receivable, net
|
|
|
7,834,003
|
|
|
|
5,886,499
|
|
Prepaid
expenses and other receivables
|
|
|
4,291,637
|
|
|
|
3,554,431
|
|
Deferred
taxes
|
|
|
2,795,473
|
|
|
|
430,876
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
17,999,587
|
|
|
|
41,269,446
|
|
|
|
|
|
|
|
|
|
|
INVENTORY
|
|
|
302,547
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
-
|
|
|
|
7,190
|
|
|
|
|
|
|
|
|
|
|
BONDS
ISSUANCE COSTS
|
|
|
1,696,278
|
|
|
|
1,753,503
|
|
|
|
|
|
|
|
|
|
|
DEFERRED
TAXES
|
|
|
2,146,010
|
|
|
|
16,018
|
|
|
|
|
|
|
|
|
|
|
OTHER
LONG TERM ASSETS
|
|
|
474,408
|
|
|
|
306,540
|
|
|
|
|
|
|
|
|
|
|
FIXED
ASSETS, NET
|
|
|
50,020,597
|
|
|
|
5,747,758
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS, NET
|
|
|
3,051,839
|
|
|
|
1,076,784
|
|
|
|
|
|
|
|
|
|
|
GOODWILL
|
|
|
27,413,481
|
|
|
|
16,872,088
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
103,104,747
|
|
|
$
|
67,049,327
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
Xfone,
Inc. and Subsidiaries
|
CONSOLIDATED
BALANCE SHEETS (CONTINUED)
|
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
Short-term
bank credit and current maturities of notes payable
|
|
$
|
5,295,014
|
|
|
$
|
1,094,339
|
|
Trade
payables
|
|
|
9,689,330
|
|
|
|
8,287,420
|
|
Other
liabilities and accrued expenses
|
|
|
7,674,870
|
|
|
|
5,322,045
|
|
Current
maturities of obligations under capital leases
|
|
|
288,688
|
|
|
|
89,654
|
|
Current
maturities of bonds
|
|
|
3,492,127
|
|
|
|
3,268,476
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
26,440,029
|
|
|
|
18,061,934
|
|
|
|
|
|
|
|
|
|
|
DEFERRED
TAXES
|
|
|
8,362,920
|
|
|
|
1,103
|
|
|
|
|
|
|
|
|
|
|
NOTES
PAYABLE, NET OF CURRENT MATURITIES
|
|
|
4,113,093
|
|
|
|
1,013,808
|
|
|
|
|
|
|
|
|
|
|
BONDS
PAYABLES
|
|
|
20,062,127
|
|
|
|
22,083,892
|
|
|
|
|
|
|
|
|
|
|
OBLIGATIONS
UNDER CAPITAL LEASES
|
|
|
307,596
|
|
|
|
31,893
|
|
|
|
|
|
|
|
|
|
|
OTHER
LONG TERM LIABILITIES
|
|
|
537,252
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
SEVERANCE
PAY
|
|
|
122,362
|
|
|
|
148,600
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
214,795
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
60,160,174
|
|
|
|
41,341,230
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Common
stock of $0.001 par value:
|
|
|
|
|
|
|
|
|
75,000,000
shares authorized December 31, 2008;
|
|
|
|
|
|
|
|
|
13,467,928
and 18,376,075 issued and outstanding at December 31, 2007 and
December 31, 2008, respectively
|
|
|
18,376
|
|
|
|
13,468
|
|
Additional
paid-in capital
|
|
|
43,312,744
|
|
|
|
26,494,985
|
|
Foreign
currency translation adjustment
|
|
|
(2,953,651)
|
|
|
|
(1,564,814
|
)
|
Stock
compensation fund
|
|
|
(539,746)
|
|
|
|
(295,155
|
)
|
Retained
earnings
|
|
|
3,106,850
|
|
|
|
1,059,613
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
42,944,573
|
|
|
|
25,708,097
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
103,104,747
|
|
|
$
|
67,049,327
|
|
|
|
|
|
|
|
|
|
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
STATEMENTS
OF OPERATIONS
|
|
|
|
Years
Ended
|
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
90,338,980
|
|
|
$
|
44,723,934
|
|
Cost
of revenues
|
|
|
47,132,313
|
|
|
|
19,626,322
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
43,206,667
|
|
|
|
25,097,612
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
60,094
|
|
|
|
47,609
|
|
Marketing
and selling
|
|
|
12,422,391
|
|
|
|
10,886,883
|
|
General
and administrative
|
|
|
25,720,376
|
|
|
|
12,335,759
|
|
Non-
recurring loss
|
|
|
189,610
|
|
|
|
2,856,803
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
38,392,471
|
|
|
|
26,127,054
|
|
|
|
|
|
|
|
|
|
|
Operating
profit (loss)
|
|
|
4,814,196
|
|
|
|
(1,029,442
|
)
|
Financing
expenses, net
|
|
|
(2,862,132)
|
|
|
|
(515,562
|
)
|
Equity
in income of affiliated company
|
|
|
-
|
|
|
|
132,867
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before minority interest and taxes
|
|
|
1,952,064
|
|
|
|
(1,412,137
|
)
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(221,985)
|
|
|
|
(297,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before taxes
|
|
|
1,730,079
|
|
|
|
(1,709,997
|
)
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (expense)
|
|
|
317,158
|
|
|
|
426,105
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
2,047,237
|
|
|
$
|
(1,283,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net profit (loss) per share
|
|
$
|
0.116
|
|
|
$
|
(0.109
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
net profit (loss) per share
|
|
$
|
0.116
|
|
|
$
|
(0.109
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares used for computing:
|
|
|
|
|
|
Basic
profit (loss) per share
|
|
|
17,624,249
|
|
|
|
11,777,645
|
|
|
|
|
|
|
|
|
|
|
Diluted
profit (loss) per share
|
|
|
17,624,249
|
|
|
|
11,777,645
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATEMENTS
OF CHANGES IN SHAREHOLDERS'
EQUITY
|
For
the years ended December 31, 2007 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Ordinary
Shares
|
|
|
Common
Stock
|
|
|
Additional pain in
capital
|
|
|
Foreign
currency
translation
adjustments
|
|
|
Deferred
Stock
Compensation
|
|
|
Retained
Earnings
|
|
|
Total
Shareholders'
Equity
|
|
Balance
at January 1, 2007
|
|
|
11,153,817
|
|
|
$
|
11,154
|
|
|
$
|
19,009,693
|
|
|
$
|
(1,380,701
|
)
|
|
$
|
(511,393
|
)
|
|
$
|
2,343,505
|
|
|
$
|
19,472,258
|
|
Amortization
of deferred compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
216,238
|
|
|
|
|
|
|
|
|
|
Stock
issued during the period, net of issuance expenses :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
cash
|
|
|
2,294,828
|
|
|
|
2,295
|
|
|
|
6,489,955
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,492,250
|
|
For
acquisitions
|
|
|
20,026
|
|
|
|
20
|
|
|
|
(20
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercise
of options
|
|
|
6,300
|
|
|
|
6
|
|
|
|
22,044
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,050
|
|
Shares
cancelled
|
|
|
(7,043)
|
|
|
|
(7)
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Currency
translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(184,113
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(184,113
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,283,892
|
)
|
|
|
(1,283,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
13,467,928
|
|
|
$
|
13,468
|
|
|
$
|
26,494,985
|
|
|
$
|
(1,564,814
|
)
|
|
$
|
(295,155
|
)
|
|
$
|
1,059,613
|
|
|
$
|
25,708,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2008
|
|
|
13,467,928
|
|
|
|
13,468
|
|
|
|
26,494,985
|
|
|
|
(1,564,814)
|
|
|
|
(295,155)
|
|
|
|
1,059,613
|
|
|
|
25,708,097
|
|
Deferred
stock compensation, net
|
|
|
|
|
|
|
|
|
|
|
2,312,263
|
|
|
|
|
|
|
|
(899,756)
|
|
|
|
|
|
|
|
1,412,507
|
|
Amortization
of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
655,165
|
|
|
|
|
|
|
|
655,165
|
|
Stock
issued during the period, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
issuance expenses :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
cash
|
|
|
2,600,000
|
|
|
|
2,600
|
|
|
|
8,029,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,032,501
|
|
For
acquisitions
|
|
|
2,366,892
|
|
|
|
2,367
|
|
|
|
6,461,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,463,536
|
|
Exercise
of options
|
|
|
4,105
|
|
|
|
4
|
|
|
|
14,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,367
|
|
Shares
cancelled
|
|
|
(62,850)
|
|
|
|
(63)
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Fair
value of warrants granted to bonds holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Currency
translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,388,837)
|
|
|
|
|
|
|
|
|
|
|
|
(1,388,837)
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,047,237
|
|
|
|
2,047,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
18,376,075
|
|
|
$
|
18,376
|
|
|
$
|
43,312,744
|
|
|
$
|
(2,953,651)
|
|
|
$
|
(539,746)
|
|
|
$
|
3,106,850
|
|
|
$
|
42,944,573
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Years
Ended
|
|
|
|
December
31 ,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
2,047,237
|
|
|
$
|
(1,283,892
|
)
|
Adjustments
required to reconcile net income to net cash provided by (used in)
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,979,915
|
|
|
|
1,211,798
|
|
Compensation in
connection with the issuance of warrants and options issued for
professional services
|
|
|
655,165
|
|
|
|
216,238
|
|
Minority
interest
|
|
|
221,985
|
|
|
|
297,860
|
|
Accrued
interest and exchange rate on bonds
|
|
|
(2,843,410
|
)
|
|
|
-
|
|
Changes
in earnings of equity investments
|
|
|
-
|
|
|
|
(132,868
|
)
|
Decrease
(increase) in account receivables
|
|
|
772,021
|
|
|
|
2,796,353
|
|
Decrease
(increase) in inventories
|
|
|
58,833
|
|
|
|
-
|
|
Decrease
(increase) in long term receivables
|
|
|
111,316
|
|
|
|
373,258
|
|
Increase
in prepaid expenses and other receivables
|
|
|
(1,075,683
|
)
|
|
|
(1,703,548
|
)
|
Increase
(decrease) in trade payables
|
|
|
2,420,775
|
|
|
|
663,601
|
|
Decrease in
accrual for non-recurring loss
|
|
|
(3,689,394
|
)
|
|
|
-
|
|
Increase
(decrease) in other liabilities and accrued expenses
|
|
|
(1,159,826
|
)
|
|
|
2,523,797
|
|
Increase
(decrease) in severance pay
|
|
|
(27,973
|
)
|
|
|
57,160
|
|
Decrease
in deferred taxes
|
|
|
1,929,295
|
|
|
|
(180,026
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
3,400,256
|
|
|
|
4,839,731
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from investing activities:
|
|
|
|
|
|
|
|
|
Investment
in short- term deposit
|
|
|
-
|
|
|
|
(24,998,173
|
)
|
Proceeds
from short term deposit
|
|
|
27,467,049
|
|
|
|
-
|
|
Purchase
of other assets
|
|
|
|
|
|
|
-
|
|
Purchase
of equipment
|
|
|
(8,446,396
|
)
|
|
|
(1,322,908
|
)
|
Non
recurring acquisition expenses
|
|
|
(189,610
|
)
|
|
|
-
|
|
Change
in prepaid acquisition costs
|
|
|
-
|
|
|
|
(479,502
|
)
|
Change
in long- term receivables
|
|
|
493,752
|
|
|
|
-
|
|
Acquisition
of Auracall
|
|
|
|
|
|
|
(612,607
|
)
|
Acquisition
of minority interest in Story Telecom, Inc.
|
|
|
(690,207
|
)
|
|
|
-
|
|
Acquisition
of NTS Communications, Inc. including acquisition expenses
|
|
|
(38,640,829
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing
activities
|
|
|
(20,006,241
|
)
|
|
|
(27,413,190
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
STATEMENTS
OF CASH FLOWS (Continued)
|
|
|
|
|
|
|
|
Years
Ended
|
|
|
December
31 ,
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
Cash
flow from financing activities:
|
|
|
|
|
|
|
Repayment
of long term loans from banks and others
|
|
|
(2,044,053
|
)
|
|
|
(274,796
|
)
|
Increase
in capital lease obligation
|
|
|
203,490
|
|
|
|
(105,968
|
)
|
Increase
(decrease) in short-term bank credit, net
|
|
|
4,069,338
|
|
|
|
(1,821,597
|
)
|
Proceeds
from long term loans from banks
|
|
|
3,143,525
|
|
|
|
199,437
|
|
Repayment
of bonds
|
|
|
(3,318,309
|
)
|
|
|
-
|
|
Repayment
of convertible notes
|
|
|
(914,942
|
)
|
|
|
(776,283)
|
|
Issuance
of bonds, net of issuance expenses
|
|
|
-
|
|
|
|
22,821,827
|
|
Proceeds
from exercise of options
|
|
|
14,368
|
|
|
|
22,050
|
|
Proceeds
from issuance of shares and detachable warrants, net of issuance
expenses
|
|
|
14,496,038
|
|
|
|
7,465,555
|
|
Net
cash provided by (used in) financing activities
|
|
|
15,649,455
|
|
|
|
27,530,225
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(1,800,604
|
)
|
|
|
(339,550
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(2,757,134
|
)
|
|
|
4,617,216
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at the beginning of year
|
|
|
5,835,608
|
|
|
|
1,218,392
|
|
Cash
and cash equivalents at the end of year
|
|
$
|
3,078,474
|
|
|
$
|
5,835,608
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
Supplemental
disclosure of cash flows activities:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
3,065,042
|
|
|
$
|
129,308
|
|
|
|
|
|
|
|
|
|
|
Tax
paid
|
|
$
|
2,262
|
|
|
$
|
986
|
|
|
|
|
|
|
|
|
|
|
Non-cash transactions
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
$
|
-
|
|
|
$
|
830,000
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of assets and liabilities of Cybergate, Inc.
|
|
$
|
500,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets via capital lease
|
|
$
|
-
|
|
|
$
|
26,510
|
|
|
|
|
|
|
|
|
|
|
Capitalization
of finance expenses related with acquisition costs of NTS
Communications
|
|
$
|
955,016
|
|
|
$
|
213,179
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and 2007
|
|
Note
1 - Organization and Nature of Business
|
A.
|
Xfone,
Inc. ("Xfone" or "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, United Kingdom and Israel. Xfone serves
customers worldwide.
|
Xfone's
holdings in subsidiaries as of December 31, 2008 were as follows:
|
●
|
NTS
Communications, Inc. and its six wholly owned subsidiaries, NTS
Construction Company, Garey M. Wallace Company, Inc., Midcom of Arizona,
Inc., Communications Brokers Inc., and NTS telephone Company, LLC and NTS
management Company, LLC (collectively "NTS") - wholly owned U.S.
subsidiary.
|
|
●
|
Xfone
USA, Inc. and its two wholly owned subsidiaries, eXpeTel Communications,
Inc. and Gulf Coast Utilities, Inc. (collectively, "Xfone USA") -
wholly owned U.S. subsidiary.
|
|
●
|
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.
|
|
●
|
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, Story
Telecom UK 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 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
DECEMBER
31, 2008 and 2007
|
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 filed
a Withdrawal of Claim with the United Kingdom Employment Tribunal 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
DECEMBER
31, 2008 and 2007
|
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 NYSE Amex LLC (formerly, the American Stock
Exchange and 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 Purchase
Agreement.
|
Xfone,
Inc. and Subsidiaries
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and 2007
|
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
|
|
|
8,076,113
|
|
Long
Term liabilities
|
|
|
9,317,151
|
|
Total
liabilities acquired
|
|
|
17,393,264
|
|
|
|
|
|
|
Net
assets assumed
|
|
$
|
28,152,174
|
|
|
|
|
|
|
Acquired
net assets (100%)
|
|
$
|
28,152,174
|
|
|
|
|
|
|
Purchase
price:
|
|
|
|
|
Cash
paid, net(**)
|
|
$
|
34,860,668
|
|
Fair
market value of stock and options issued
|
|
|
1,412,507
|
|
Acquisition
costs
|
|
|
4,081,154
|
|
Total
|
|
|
40,354,329
|
|
|
|
|
|
|
Customer
Relationship
|
|
|
2,344,000
|
|
|
|
|
|
|
License
|
|
|
250,000
|
|
|
|
|
|
|
Goodwill
|
|
$
|
9,608,155
|
|
|
|
|
|
|
*
Allocation period has been ended
**
Includes $6,485,284 that was received for the issuance of
2,366,892 shares of the Company's
common stock.
|
|
D.
|
On
November 26, 2008, Xfone USA, Inc., entered into a Sale and Purchase
Agreement (the “Agreement”) with Cybergate, Inc. (“Cybergate”), pursuant
to which Xfone USA purchased all of Cybergate’s operations. Cybergate
is a provider of Internet services including Internet access, web and
server hosting, data services and e-mail. The purchase price was an amount
equal to 50% of collected receivables derived from Cybergate's operations
up to $500,000, which is to be paid to Cybergate in monthly installments
equal to 50% of the prior month’s collected receivables derived from
Cybergate's operations as the same shall be billed on a regular basis by
Xfone USA. The Agreement and the closing of the sale and
purchase have an effective date of November 1, 2008. The
acquisition was not significant from an accounting
perspective.
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and 2007
|
|
Note 2 -
Significant Accounting
Policies
The
financial statements are prepared in accordance with generally accepted
accounting principles in the United States. The significant accounting policies
followed in the preparation of the financial statements, applied on a consistent
basis, are as follows:
|
A.
|
Principles
of Consolidation and Basis of Financial Statement
Presentation
|
The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America
("GAAP") and include the accounts of the Company and its wholly-owned
subsidiaries. All significant inter-company balances and transactions have been
eliminated in consolidation. A minority interest in the loss of a subsidiary
will be recorded according to the respective equity interest of the minority and
up to its exposure and/or legal obligation to cover the subsidiary losses in
case of equity reduced to zero or below.
|
B.
|
Foreign
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 (“SFAS No.
52”), the change in functional currency will be accounted for prospectively;
therefore, there is no effect on the historical consolidated financial
statements. The translated amounts for non-monetary assets at December 31, 2006,
became the accounting basis for those assets as of January 1, 2007.
The
determination of the functional currency for the Company's foreign subsidiaries
is made based on the appropriate economic factors. In addition a substantial
portion of the Company's costs are incurred in U.S. dollars. The Company's
management believes that the U.S. dollar is the primary currency of the economic
environment in which it operate. Thus, the Company's functional and reporting
currency and the functional and reporting currency of certain of its
subsidiaries is the U.S. dollar.
Accordingly,
monetary accounts maintained in currencies other than the U.S. dollar are
re-measured into U.S. dollars in accordance with SFAS No. 52. All gains and
losses of the re-measurement of monetary balance sheet items are reflected in
the consolidated statements of operations as financial income or expenses as
appropriate. The Company's functional currency is US$, the Company's financial
records are maintained in US$, and the Company's financial statements are
prepared in US$. The functional currency of Swiftnet, Equitalk, Story Telecom
and Auracall is GBP, the financial records of these subsidiaries are maintained
in GBP and the financial statements of these subsidiaries are prepared in GBP.
The functional currency of Xfone 018 is New Israeli Shekels ("NIS"), the
financial records of Xfone 018 are maintained in NIS, and the financial
statements of Xfone 018 are prepared in NIS.
Foreign
currency transactions during the period are translated into each company's
denominated currency at the exchange rates ruling at the transaction dates.
Gains and losses resulting from foreign currency transactions are included in
the consolidated statement of operations. Assets and liabilities denominated in
foreign currencies at the balance sheet date are translated into each company's
denominated currency at period-end exchange rates. All exchange differences are
dealt with in the consolidated statements of operations. The financial
statements of the Company's operations based outside of the United States have
been translated into US$ in accordance with SFAS No. 52. When translating
functional currency financial statements into US$, period-end exchange rates are
applied to the consolidated balance sheets, while average period rates are
applied to consolidated statements of operations. Translation gains and losses
are recorded in translation reserve as a component of shareholders'
equity.
At
December 31, 2007 restricted cash include proceeds from the issuance of
securities to Israeli institutional investors, for total gross proceeds of NIS
100,382,100 (approximately $25,562,032) par value bonds (Series A). The proceeds
were invested in weekly interest-bearing deposits and were transferred to the
Company's control upon the fulfillment of the following conditions: (i) that the
Company raised an aggregate of at least $20.0 million in equity financings; and
(ii) that the conditions for the consummation of the acquisition of NTS
Communications, Inc had been met. These conditions were satisfied during
February 2008.
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and 2007
|
|
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, an estimate of uncollectible
customer balances is made using factors such as the credit quality of the
customer and the economic conditions in the market. An allowance for doubtful
accounts is determined with respect to those amounts that the Company has
determined to be doubtful of collection. When an account balance is past due and
attempts have been made to collect the receivable through legal or other means
the amount is considered uncollectible and is written off against the allowance
balance.
As of
December 31, 2008 and 2007 the accounts receivable are presented net of an
allowance for doubtful accounts of $1,251,946 and $1,090,572 respectively. Bad
debt expenses for the years ended December 31, 2008 and 2007 are $1,058,803 and
$641,477 respectively.
Fixed
Assets are stated at cost. Depreciation is calculated based on a straight-line
method over the estimated useful lives of the assets. Annual rates of
depreciation are as follows:
|
|
Useful
Life
|
|
Communication
equipment
|
|
3-15
years
|
|
Fiber
Network
|
|
30
years
|
|
Construction
Equipment
|
|
5
years
|
|
Equipment
held under lease
|
|
4-15 years
|
|
Office
furniture and equipment
|
|
5-15
years
|
|
Development
costs
|
|
3
years
|
|
Computer
equipment
|
|
5-7
years
|
|
Motor
vehicles
|
|
4-5
years
|
|
Building
and plant
|
|
4-30
years
|
|
Depreciation
expenses amounted to $3,319,725 and $1,044,722 for the years ended
December 31, 2008 and 2007, respectively.
|
F.
|
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.
Amortization
expenses amounted to $660,190 and $167,076 for the years ended December 31,
2008 and 2007, respectively.
The
amortizations for the next four years are as follows:
|
|
|
|
2009
|
|
$
|
750,479
|
|
2010
|
|
|
663,112
|
|
2011
|
|
|
572,862
|
|
2012
|
|
|
604,329
|
|
|
|
|
2,590,782
|
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and 2007
|
|
Note 2 -
Significant Accounting Policies
(Cont.)
The
Company periodically evaluates the recoverability of the carrying amount of
long-lived assets (including property, plant and equipment, and intangible
assets with determinable lives) whenever event or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. The
Company evaluates events or changes in circumstances based on a number of
factors including operating results, business plans and forecasts, general and
industry trends and, economic projections and anticipated cash flows.
Impairment, if any, is assessed when the undiscounted expected future cash flows
derived from an asset are less than its carrying amount. Impairment losses are
measured as the amount by which the carrying value of an asset exceeds its fair
value and are recognized in earnings. The Company also continually evaluates the
estimated useful lives of all long-lived assets and periodically revises such
estimates based on current events.
At
December 31, 2008, the Company believes its long- lived assets are
recoverable.
The
Company's source of revenues results from charges to customers for the call
minutes they use while on the Company's telecommunications system. Such revenues
are recognized at the time this service is rendered. Amounts prepaid by
customers are deferred and recorded as a liability and then recorded as revenue
when the customer utilizes the service. Messaging services customers are charged
on a per minute basis, per fax page or email. Commissions to agents are
accounted as marketing costs for the Company.
Revenue
for services is recognized when the related services are provided. Payments
received in advance are deferred until the service is provided.
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Basic
earning per share (EPS) is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
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
DECEMBER
31, 2008 and 2007
|
|
|
L.
|
Stock-Based
Compensation
|
Effective
the beginning of the first quarter of fiscal year 2006, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 123(R),
“Share-Based Payment” (“SFAS 123(R)”) using the modified prospective transition
method. The Company previously applied APB 25, “Accounting for Stock Issued to
Employees” and related interpretations and provided the required pro forma
disclosures required under SFAS 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”). The Company elected to adopt the modified
prospective application method as provided by SFAS 123(R), and, accordingly, the
Company recorded compensation costs as the requisite service rendered for the
unvested portion of previously issued awards that remain outstanding at the
initial date of adoption and any awards issued, modified, repurchased or
cancelled after the effective date of SFAS 123(R). The Company use the
Black-Scholes option pricing model which requires extensive use of accounting
judgment and financial estimates, including estimates of the expected term
participants will retain their vested stock options before exercising them, the
estimated volatility of its common stock price over the expected term, and the
number of options that will be forfeited prior to the completion of their
vesting requirements. Application of alternative assumptions could produce
significantly different estimates of the fair value of stock-based compensation
and consequently, the related amounts recognized in the Consolidated Statements
of Operations.
|
M.
|
Goodwill
and Indefinite-Lived Purchased Intangible
Assets
|
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.
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and 2007
|
|
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.
Inventories
consist primarily of telephone equipment available for sale and are stated at
cost using the "First-In-First-Out" method.
|
P.
|
Recent
Accounting Pronouncements
|
1.
|
In
May 2008, the FASB issued FAS 163 (“FAS 163”), “Accounting for Financial
Guarantee Insurance Contracts—an interpretation of FASB Statement No.
60
”.
This
Statement interprets Statement 60 and amends existing accounting
pronouncements to clarify their application to the financial guarantee
insurance contracts included within the scope of this
Statement. FAS 163 is not expected to have a material impact on
the Company’s consolidated financial
statements.
|
2.
|
In
May 2008, the FASB issued FAS 162 (“FAS 162”), “The Hierarchy of Generally
Accepted Accounting Principles.” This statement identifies the sources of
accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with GAAP. Although this
statement formalizes the sources and hierarchy of GAAP within the
authoritative accounting literature, it does not change the accounting
principles that are already in place. This statement will be effective 60
days following the SEC’s approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.” FAS
162 is not expected to have a material impact on the Company’s
consolidated financial statements.
|
3.
|
In
April 2008, the FASB issued FSP FAS 142-3,
Determination of the Useful
Life of Intangible Assets
(“FSP FAS 142-3”). FSP FAS No. 142-3
amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under FAS 142,
Goodwill and Other Intangible
Assets
(“FAS 142”). The intent of FSP FAS 142-3 is to improve the
consistency between the useful life of a recognized intangible asset under
FAS 142 and the period of expected cash flows used to measure the fair
value of the asset under FAS 141(R) and other applicable accounting
literature. FSP FAS 142-3 is effective for financial statements issued for
fiscal years beginning after December 15, 2008 and must be applied
prospectively to intangible assets acquired after the effective date. The
Company has not determined the impact, if any, of the adoption of FSP FAS
142-3.
|
4.
|
Effective
January 1, 2008, we adopted the provisions of FAS 157,
Fair Value
Measurements,
except as it applies to those nonfinancial assets and
nonfinancial liabilities as noted in proposed FSP FAS
157-b. The partial adoption of FAS 157 did not have a material
impact on our consolidated financial position, results of operations or
cash flows. FAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. This
statement does not require any new fair value measurements, but provides
guidance on how to measure fair value by providing a fair value hierarchy
used to classify the source of the information. In February 2008, the FASB
issued FASB Staff Position (“FSP”) 157-2,
Effective Date of
FASB Statement No. 157,
which delays the effective
date of FAS 157 for all nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least
annually).
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and 2007
|
|
5.
|
In
March 2008, the FASB issued FAS No. 161,
Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133,
which requires additional disclosures
about the objectives of the derivative instruments and hedging activities,
the method of accounting for such instruments under FAS 133 and its
related interpretations, and a tabular disclosure of the effects of such
instruments and related hedged items on our financial position, financial
performance, and cash flows. FAS 161 is effective for us beginning
January 1, 2009. We are currently assessing the potential impact that
adoption of FAS 161 may have on our financial
statements.
|
6.
|
Effective
January 1, 2008, we adopted the provisions of FAS 159,
The Fair Value Option for
Financial Assets and Financial Liabilities
. The adoption
did not have a material impact on our consolidated financial position,
results of operations or cash flows. FAS 159 gives us the
irrevocable option to carry many financial assets and liabilities at fair
values, with changes in fair value recognized in
earnings.
|
7.
|
In
December 2007, the FASB issued FAS 141R,
Business Combinations
,
which replaces FAS 141. The statement retains the purchase method of
accounting for acquisitions, but requires a number of changes, including
changes in the way assets and liabilities are recognized in the purchase
accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the
capitalization of in-process research and development at fair value, and
requires the expensing of acquisition-related costs as incurred. FAS 141R
is effective for us beginning January 1, 2009 and will apply
prospectively to business combinations completed on or after that
date.
|
8.
|
In
December 2007, the FASB issued FAS 160,
Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51,
which changes the accounting and reporting for minority interests.
Minority interests will be re-characterized as non-controlling interests
and will be reported as a component of equity separate from the parent’s
equity, and purchases or sales of equity interests that do not result in a
change in control will be accounted for as equity transactions. In
addition, net income attributable to the non-controlling interest will be
included in consolidated net income on the face of the income statement
and, upon a loss of control, the interest sold, as well as any interest
retained, will be recorded at fair value with any gain or loss recognized
in earnings. FAS 160 is effective for us beginning January 1, 2009 and
will apply prospectively, except for the presentation and disclosure
requirements, which will apply retrospectively. We are currently assessing
the potential impact that adoption of FAS 160 may have on our financial
statements.
|
Note 3 - Prepaid Expenses, Other
Receivables and Deposits
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Prepaid
acquisition costs
|
|
|
-
|
|
|
|
692,681
|
|
Unbilled
revenues
|
|
|
1,211,445
|
|
|
|
280,364
|
|
Prepaid
expenses
|
|
|
1,411,368
|
|
|
|
1,453,910
|
|
Tax
authorities
|
|
|
736,702
|
|
|
|
331,105
|
|
Other
receivables
|
|
|
932,122
|
|
|
|
796,371
|
|
|
|
$
|
4,291,637
|
|
|
$
|
3,554,431
|
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and 2007
|
|
Note 4 - Fixed
Assets
|
|
|
|
|
|
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Cost
|
|
|
|
|
|
|
Communication
equipment
|
|
$
|
68,614,751
|
|
|
$
|
,214,315
|
|
Fiber
network
|
|
|
31,579,191
|
|
|
|
-
|
|
Construction
equipment
|
|
|
2,652,294
|
|
|
|
-
|
|
Equipment
held under capital lease
|
|
|
2,184,224
|
|
|
|
103,392
|
|
Office
furniture and equipment
|
|
|
4,765,127
|
|
|
|
2,121,971
|
|
Development
costs
|
|
|
10,208,181
|
|
|
|
781,614
|
|
Computer
equipment
|
|
|
519,865
|
|
|
|
686,955
|
|
Motor
vehicles
|
|
|
955,384
|
|
|
|
179,041
|
|
Building
and plant
|
|
|
7,636,405
|
|
|
|
685,730
|
|
|
|
|
129,115,422
|
|
|
|
9,773,018
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Depreciation
|
|
|
|
|
|
|
|
|
Communication
equipment
|
|
|
56,902,873
|
|
|
|
1,372,233
|
|
Fiber
network
|
|
|
7,861,254
|
|
|
|
|
|
Construction
equipment
|
|
|
2,049,532
|
|
|
|
|
|
Equipment
held under capital lease
|
|
|
1,756,484
|
|
|
|
24,267
|
|
Office
furniture and equipment
|
|
|
327,004
|
|
|
|
1,690,335
|
|
Development
costs
|
|
|
8,163,705
|
|
|
|
344,800
|
|
Computer
equipment
|
|
|
303,303
|
|
|
|
414,712
|
|
Motor
vehicles
|
|
|
726,338
|
|
|
|
30,324
|
|
Building
and Plant
|
|
|
1,004,332
|
|
|
|
148,589
|
|
|
|
|
79,094,825
|
|
|
|
4,025,260
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,020,597
|
|
|
$
|
5,747,758
|
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and 2007
|
|
Note
5 - Other Assets
|
|
|
|
|
|
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Cost:
|
|
|
|
|
|
|
Goodwill
|
|
|
27,413,481
|
|
|
|
16,872,088
|
|
Customer
relations
|
|
|
3,326,448
|
|
|
|
982,448
|
|
Trade
name
|
|
|
73,478
|
|
|
|
73,478
|
|
License
|
|
|
619,015
|
|
|
|
330,365
|
|
|
|
|
31,432,422
|
|
|
|
18,258,379
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization:
|
|
|
|
|
|
|
|
|
Customer
relations
|
|
|
855,776
|
|
|
|
232,475
|
|
Trade
name
|
|
|
27,573
|
|
|
|
17,145
|
|
License
|
|
|
83,753
|
|
|
|
59,887
|
|
|
|
|
967,102
|
|
|
|
309,507
|
|
|
|
|
|
|
|
|
|
|
Other
assets, net
|
|
|
30,465,320
|
|
|
|
17,948,872
|
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and 2007
|
|
Note 6 - Other Liabilities and
Accrued Expenses
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Corporate
taxes
|
|
|
322,321
|
|
|
|
62,648
|
|
Government
authorities
|
|
|
2,094,946
|
|
|
|
372,156
|
|
Payroll
and other taxes
|
|
|
951,296
|
|
|
|
94,232
|
|
Accrued
expense
|
|
|
3,953,890
|
|
|
|
4,495,861
|
|
Deferred
revenues
|
|
|
202,595
|
|
|
|
|
|
Others
|
|
|
149,822
|
|
|
|
297,148
|
|
|
|
|
7,674,870
|
|
|
|
5,322,045
|
|
Note
7 - Notes Payable
|
|
Annual
Interest
|
|
|
|
|
|
|
|
|
|
rate
|
|
|
December
31
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Convertible
note (1)
|
|
Prime
+ 1.5%
|
|
|
|
-
|
|
|
|
623,643
|
|
Note
payable to others
|
|
|
5%
- 8
|
%
|
|
|
555,271
|
|
|
|
327,587
|
|
Bank
loan
|
|
|
0
|
%
|
|
|
-
|
|
|
|
50,120
|
|
Bank
Loan
|
|
WSJ
Prime
|
|
|
|
2,502,642
|
|
|
|
-
|
|
Loans
payable over 3-5 years
|
|
Prime
+ 1.0%
|
|
|
|
363,553
|
|
|
|
615,041
|
|
Loan
(2)
|
|
Israeli
Consumer Price Index + 4.0%
|
|
|
|
512,333
|
|
|
|
491,756
|
|
Non-recourse
loan (3)
|
|
|
2.75
|
%
|
|
|
1,404,971
|
|
|
|
-
|
|
|
|
|
|
|
|
|
5,338,770
|
|
|
|
2,108,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
less
current portion
|
|
|
|
|
|
|
1,225,677
|
|
|
|
1,094,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
term portion
|
|
|
|
|
|
|
4,113,093
|
|
|
|
1,013,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and 2007
|
|
Note 7 - Notes
Payable (Cont.)
1.
|
On
September 27, 2005, a Securities Purchase Agreement (the "Securities
Purchase Agreement") was entered into for a $2,000,000 financial
transaction by and among the Company, Xfone USA, Inc., eXpeTel
Communications, Inc., Gulf Coast Utilities, Inc. and Laurus Master Fund,
Ltd. The investment, which took the form of a Convertible Term Note
secured by the Company's United States assets, had a 3 year term and bore
interest at a rate equal to prime plus 1.5% per annum. The Term Note was
convertible, under certain conditions, into shares of the Company's common
stock at an initial conversion price equal to $3.48 per share. In
conjunction with this financial transaction, 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. The Securities Purchase Agreement provides that for so
long as twenty five percent (25%) of the principal amount of the Term Note
was outstanding, the Company, without the prior written consent of Laurus
Master Fund, could not, and could not permit any of the Subsidiaries (as
defined in the Securities Purchase Agreement) to directly or indirectly
declare or pay any dividends, other than dividends paid to the Company or
any of its wholly-owned Subsidiaries. The Term Note was fully paid off in
cash on September 26, 2008.
|
2.
|
According
to an agreement between the Company, Xfone 018 Ltd. and the Company’s 26%
minority interest partner in Xfone 018 (the “Minority Partner”), the
Minority Partner provided in the fourth quarter of 2004, a
shareholder loan of approximately $400,000 to Xfone 018 (the “Minority
Partner Loan”). The Minority Partner Loan was established for four years,
unless otherwise agreed between the parties, with annual interest of 4%
and linkage to the Israeli Consumer Price Index. As of December
31, 2008, the balance of the Minority Partner Loan is 1,947,890 NIS
($512,333). On March 26, 2009, upon a resolution of Xfone 018's Board
of Directors of same date, the Minority Partner Loan was partially paid
off by way of set-off with a NIS 343,680 (approximately $81,325) loan
that Xfone 018 provided the Minority Partner on December 24,
2008.
|
3.
|
NTS
Telephone Company, LLC, a wholly owned subsidiary of
NTS Communications, Inc. has received approval from the Rural
Utilities Service (“RUS”), a division of the United States Department of
Agriculture, for an $11.8 million, 17-year debt facility to complete
a telecommunications overbuild project in Levelland, Texas. The RUS loan
is non-recourse to NTS and all other NTS subsidiaries and is
cost-of-money loan, bearing interest at the average rate
for 10-year U.S. Treasury obligations. Advances are
requested as the construction progresses, and the interest rate is
set based upon the prevailing rate at the time of each individual
advance. The current average rate is approximately 2.75%.
|
The notes
payable mature as follows:
Year
|
|
|
|
2009
|
|
$
|
1,225,6771
|
|
2010
|
|
|
2,257,774
|
|
2011
|
|
|
148,204
|
|
2012
|
|
|
71,674
|
|
2013
and therefter
|
|
|
1,635,441
|
|
|
|
$
|
5,338,770
|
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and
2007
|
Note
8- Bonds
On
December 13, 2007, the Company issued a total of NIS 100,382,100
($25,562,032) Series A Bonds (the “Bonds”) to Israeli institutional
investors. The principal of the Bonds is repaid in 8 equal annual payments on
the 1st of December of every year from 2008 until 2015 (inclusive). 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 an annual interest rate of 8%.
The interest on the Bonds is paid semi-annually on the 1st of June and on the
1st of December of every year from 2008 until 2015 (inclusive). The
principal and interest of the Bonds is linked to the Israeli Consumer Price
Index.
Additionally,
the Company issued the holders of the Bonds, for no additional consideration,
956,020 (non-tradable) Warrants, each exercisable at an exercise price of $3.50
with a term of 4 years, beginning on September 2, 2008.
The
Company attributed the composition of the proceeds from the offering as
follows:
Bonds
Series A
|
|
$
|
24,588,726
|
|
Stock
Purchase Warrants (1)
|
|
|
973,306
|
|
Total
|
|
$
|
25,562,032
|
|
(1)
|
Presented
as part of shareholders' equity.
|
|
B.
|
Aggregate
maturities are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
3,492,127
|
|
2010
|
|
$
|
3,343,688
|
|
2011
|
|
$
|
3,343,688
|
|
2012
and thereafter
|
|
$
|
13,374,751
|
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and
2007
|
Note
9 - Capital Lease Obligations
The
assets and liabilities under capital leases are recorded at the lower of the
present value of the minimum lease payments or the fair value of the asset. The
assets are depreciated over their estimated productive lives. Depreciation of
assets under capital leases is included in depreciation expense.
Future
minimum lease payments under capital leases as of December 31, 2008
are:
2009
|
|
$
|
288,688
|
|
2010
|
|
|
158,738
|
|
2011
|
|
|
127,158
|
|
2012
|
|
|
21,700
|
|
|
|
|
|
|
Total
|
|
$
|
596,284
|
|
|
|
|
|
|
Total
minimum lease payments
|
|
$
|
637,697
|
|
Less:
amount representing interest
|
|
|
(41,413
|
)
|
|
|
|
|
|
Present
value of net minimum lease payment
|
|
$
|
596,284
|
|
Note
10- Employee Benefit Plan
The
Company maintains an employee's savings and retirement plan under Section 401(k)
of the Internal Revenue Code. All full-time U.S. employees who have
completed six months of service become eligible to participate in the
semi-annual plan that is nearest to their entry dates. The Company's
contribution to the plan, as determined by the Board of Directors, is
discretionary and is limited to a portion of the employee's contribution. The
Company contributed $409,981 and $33,313 during the years ended December 31,
2008 and 2007, respectively.
Note 1
1
- Income
Taxes
The
Company accounts for income taxes under the provisions of SFAS 109. SFAS No. 109
requires the recognition of deferred tax assets and liabilities for both the
expected impact of differences between the financial statement and tax basis of
assets and liabilities and for the expected future tax benefit to be derived
from tax loss and tax credit carry forward. The Company does not file
consolidated tax returns.
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and
2007
|
The
following table reflects the Company's deferred tax assets and
(liabilities):
|
|
|
|
|
|
|
|
|
December
31
|
|
Deferred
Tax Liabilities:
|
|
2008
|
|
|
2007
|
|
Accelerated
tax write off of fixed assets
|
|
|
8,362,920
|
|
|
|
1,103
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Assets:
|
|
|
|
|
|
|
|
|
Carry
forward losses
|
|
|
3,604,417
|
|
|
|
363,768
|
|
Accrued
vacation and severance pay
|
|
|
1,337,066
|
|
|
|
67,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred taxes liabilities
|
|
|
3,421,437
|
|
|
|
429,773
|
|
The
provision for income taxes differs from the amount computed by applying the
statutory income tax rates to income before taxes as follows:
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Income
tax computed at statutory rate
|
|
|
588,225
|
|
|
|
(628,809
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of tax authority adjustments
|
|
|
27,651
|
|
|
|
35,642
|
|
Current
income (losses) for which no deferred tax expense (benefit) has been
recorded
|
|
|
-
|
|
|
|
39,860
|
|
Difference
between income reported for tax purposes and income for financial
reporting purposes - net
|
|
|
307,401
|
|
|
|
30,073
|
|
Deferred
taxes on losses (utilization of losses)
|
|
|
(553,545
|
)
|
|
|
(506,877
|
)
|
Taxes
on losses for which a valuation allowance was not provided
|
|
|
|
|
|
|
603,686
|
|
Taxes
in respect of prior years
|
|
|
(52,574
|
)
|
|
|
320
|
|
Provision
for income taxes
|
|
|
317,158
|
|
|
|
(426,105
|
)
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and
2007
|
Note
12 - Contingent Liabilities, Commitments and Guarantees
Contingent
liabilities
A.
Commitments
1.
|
Pursuant
to a Company’s Board of Directors’ resolution dated December 25, 2006, on
March 28, 2007, the Company and its Chairman of the Board, Mr. Abraham
Keinan entered into a consulting agreement, to be effective as of January
1, 2007 (the “Keinan Consulting Agreement”).
The
Keinan Consulting Agreement provides that Mr. Keinan shall render the
Company advisory, consulting and other services in relation to the
business and operations of the Company (excluding its business and
operations in the United Kingdom).
In
consideration of the performance of the Services pursuant to the Keinan
Consulting Agreement, the Company initially paid Mr. Keinan a monthly fee
of £10,000 ($14,160), which was increased by the Board of Directors
following the recommendation of the Audit Committee and the Compensation
Committee to £16,000 ($22,656) effective as of June 1, 2008 (the “Fee”).
In addition to the Fee, the Company shall pay directly and/or reimburse
Mr. Keinan for his Expenses.
|
2.
|
Pursuant
to a Company’s Board of Directors’ resolution dated December 25, 2006, on
March 28, 2007, the Company and its President, CEO and Director, Mr. Guy
Nissenson entered into a consulting agreement, to be effective as of
January 1, 2007 (the “Nissenson Consulting Agreement”).
The
Nissenson Consulting Agreement provides that Mr. Nissenson shall render
the Company advisory, consulting and other services in relation to the
business and operations of the Company (excluding its business and
operations in the United Kingdom).
In
consideration of the performance of the Services pursuant to the Nissenson
Consulting Agreement, the Company shall pay Mr. Nissenson a monthly fee of
£10,000 ($14,160), which was increased by the Board of Directors following
the recommendation of the Audit Committee and the Compensation Committee
to £16,000 ($22,656) effective as of June 1, 2008 (the “Fee”). In addition
to the Fee, the Company shall pay directly and/or reimburse Mr. Keinan for
his Expenses.
|
3.
|
Mr.
Haim Nissenson, father of Mr. Guy Nissenson, the Company’s President,
Chief Executive Officer, and Director, is the Managing Director of
Dionysos Investments (1999) Ltd. (“Dionysos”). Dionysos is owned and
controlled by certain members of the Nissenson family, other than Mr. Guy
Nissenson. On February 8, 2007, pursuant to the recommendations of the
Audit Committee of the Company and the resolutions of its Board of
Directors dated December 25, 2006 and February 4, 2007, the Company and
Dionysos entered into a First Amendment (the “First Amendment”) to
the Dionysos Consulting Agreement entered into with the Company on
November 18, 2004. Pursuant to the First Amendment, Dionysos s was
compensated by the Company for the Services provided to the Company in the
amount of GBP 8,000 ($16,876) per month, beginning on January 1, 2007 and
was entitled for a success fee for any investments in the Company made by
Israeli investors during fiscal year 2007, provided such investments were
a direct or indirect result of the Services provided to the Company. The
success fee was equal to 0.5% (half percent) of the gross proceeds of such
investments.
On
January 28, 2008, in accordance with the recommendation of the Audit
Committee and in recognition of and following the successful efforts of
Dionysos in raising capital for the Company in Israel during 2007 the
Board of Directors of the Company approved and confirmed by resolution the
engagement of Dionysos to serve as the Company’s consultant for the fiscal
year ended December 31, 2008 at the same level of compensation which was
agreed to and paid for the fiscal year ended December 31,
2007.
On
January 15, 2009, pursuant to the recommendation of the Audit Committee of
the Company and the resolution of the Board of Directors, the Company and
Dionysos entered into a Second Amendment to the Consulting Agreement (the
“Second Amendment”). The Second Amendment confirmed the automatic
renewal of the Consulting Agreement for an additional two-year period and
set the same compensation levels for fiscal 2009 and 2010 that were
established for fiscal 2007 and 2008. Accordingly, Dionysos will
continue to be paid £8,000 (approximately $16,876), based on the exchange
rate as of January 15, 2009) per month, plus reimbursements for expenses,
and will receive a success fee of 0.5% of the gross proceeds for any
investments in the Company made by Israeli investors during fiscal 2009
and/or 2010 that result from Dionysos’ services to the
Company.
The
parties also agreed that in or about December 2010, the Audit Committee
and Board of Directors would review and reconsider for approval the
above-mentioned compensation for any future term(s).
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and
2007
|
4. Stock
Purchase Agreement
On June
19, 2000, Swiftnet Limited entered into a Stock Purchase Agreement with Abraham
Keinan and Campbeltown Business Ltd. a company owned and controlled by Guy
Nissenson and his family. This agreement provides that:
|
·
|
Abraham
Keinan confirmed that all his businesses activities and initiatives in the
field of telecommunications are conducted through Swiftnet, and would
continue for at least 18 months after the conclusion of this
transaction.
|
|
·
|
Campbeltown
Business declared that it is not involved in any business that competes
with Swiftnet and would not be involved in such business at least for 18
months after this transaction is concluded.
|
|
·
|
Campbeltown
Business would invest $100,000 in Swiftnet, in exchange for 20% of the
total issued shares of Swiftnet;
|
|
·
|
Campbeltown
Business would also receive 5% of the Company's issued and outstanding
shares following the Company's acquisition with Swiftnet. In June 2000,
Campbeltown Business invested the $100,000 in Swiftnet. Xfone acquired
Swiftnet and Campbeltown received 720,336 shares of the Company's common
stock for its 20% interest in Swiftnet.
|
|
·
|
Swiftnet
and Abraham Keinan would guarantee that Campbeltown Business' 20% interest
in the outstanding shares of Swiftnet would be exchanged for at least 10%
of the Company's outstanding shares and that Campbeltown Business would
have in total at least 15% of the Company's total issued shares after the
Company's acquisition occurred.
|
|
·
|
Campbeltown
Business would have the right to nominate 33% of the members of the
Company's board of directors and Swiftnet's board of directors. When
Campbeltown Business ownership in the Company's common stock was less than
7%, Campbeltown Business would have the right to nominate only 20% of the
Company's board members but always at least one member. In the case that
Campbeltown Business ownership in the Company's common stock was less than
2%, this right would expire.
|
|
·
|
Campbeltown
Business would have the right to nominate a vice president in Swiftnet.
Mr. Guy Nissenson was nominated as of the time of the June 19, 2000
agreement. If for any reason Guy Nissenson will leave his position,
Campbeltown Business and Abraham Keinan will agree on another nominee. The
Vice President will be employed with suitable
conditions.
|
|
·
|
Campbeltown
Business will have the right to participate under the same terms and
conditions in any investment or transaction that involve equity rights in
Swiftnet or the Company conducted by Abraham Keinan at the relative
ownership portion.
|
|
·
|
Keinan
and Campbeltown Business have signed a right of first refusal agreement
for the sale of their shares.
|
|
5.
|
The
Company leases its facilities in the USA, UK, and Israel under
operating lease agreement, which will expire in 2009 and thereafter. The
minimum lease payments under non-cancelable operating leases are as
follows:
|
Year
ended December 31,
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
394,796
|
|
2010
|
|
|
208,603
|
|
2011
|
|
|
151,091
|
|
2012
|
|
|
132,238
|
|
2013
and thereafter
|
|
|
29,272
|
|
|
|
|
916,000
|
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and
2007
|
6.
|
The
Company has commission agreements with various agents that are entitled to
commission of approximately 5%-12% of the total sale amount after
deduction of any bad debts.
|
B.
|
Royalties
commitment
The
Company has been granted license from the Ministry of Communication for
the provision of international telecommunication services in Israel for 20
years until July 2024. At the end of each of the license period, the
Minister of Communications may extend the period of the license for one or
more successive periods of ten years.
According
to the license terms, the Company is obligated to pay royalties to the
State of Israel at the rate of 1.5% of the royalty-bearing income in 2009.
The rate of these royalties will be reduced by 0.5% to a rate of 1% in
2010. The Company's 26% minority interest partner in the
Company’s Israeli subsidiary provided the State of Israel with a bank
guarantee of NIS 10 million to ensure compliance with the provisions of
the license.
|
Other
Commitments
1.
|
The
Board of Directors has resolved to indemnify the directors and officers of
the Company in respect of damages that they may incur in connection
with the Company being a public company, to the extent that these damages
are not covered by the directors’ and officers’ liability
insurance.
|
Liens
and guarantees
1.
|
Xfone
018 Ltd. has received credit facilities from Bank Hapoalim B.M. in Israel
in order to finance its activities. As of December 31, 2008, the credit
facilities include a revolving credit line of 500,000 NIS ($118,315), a
short-term credit line of 2,250,000 NIS ($532,418), and long-term credit
line of 1,290,000 NIS ($364,098). In addition, the bank made available to
Xfone 018 a long-term facility of 3,150,000 NIS ($745,385) to procure
equipment. In 2008, the credit facilities were secured with: (a) a
floating charge on Xfone 018 assets, securities, banknotes, unissued
capital stock, reputation, and any property and right including profits
thereof Xfone 018 has or may have at any time and in any manner; (b) a
fixed charge on its telecommunication equipment (including switches) and
insurance rights thereof; (c) subordination of a Term Note of $800,000.
This Term Note was executed in July 2004 by Xfone 018 in favor of the
Company; (d) assignment of rights by way of pledge on the Partner
Communications Company Ltd. contract, the Cellcom Israel Ltd. contract,
the Pelephone Communications Ltd. contract, and the credit companies
contracts with Xfone 018; (e) personal collateral by Abraham Keinan and
Guy Nissenson, which includes a pledge on 1,000,000 shares of common stock
of the Company owned by Mr. Keinan, and an undertaking to provide Bank
Hapoalim with an additional financial guarantee of up to $500,000 under
certain circumstances. The Company agreed to indemnify Abraham Keinan
and/or Guy Nissenson on account of any damage and/or loss and/or expense
(including legal expenses) that they may incur in connection with the
stock pledge and/or any other obligation made by them to Bank Hapoalim in
connection with the collateral; (f) The Company and Swiftnet Limited
issued a Letter of Guarantee, unlimited in amount, in favor of the bank,
guaranteeing all debt and indebtedness of Xfone 018 towards the bank; (g)
subordination of the Minority Partner Loan (as defined below). As of
December 31, 2008, Xfone 018 has a balance due of 1,382,228 NIS
($363,552) under the foregoing credit facility.
On
March 16, 2009, Xfone 018 assigned to the bank, by way of pledge, its
rights pursuant to the agreement with the credit company Poalim Express
Ltd. On March 17, 2009, Xfone 018 received the bank's approval for an
increase in its short-term credit line to a total
facility
of
5,250,000 NIS ($1,242,310). Xfone 018 undertook to comply, as of March 31,
2009, with certain covenants concerning its capital and the annual ratio
between its total liabilities and EBITDA.
On
March 26, 2009 the Comapny received the bank's confirmation according to
which the following guarantees are waived: (a) subordination of a Term
Note of $800,000 (appears above as "(c)"); (b) a pledge on 1,000,000
shares of common stock of the Company owned by Mr. Keinan, and an
undertaking to provide Bank Hapoalim with an additional financial
guarantee of up to $500,000 under certain circumstances (appears above as
"(e)"); and (c) subordination of the Minority Partner Loan(appears above
as "(g)").
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and
2007
|
2.
|
According
to an agreement between the Company, Xfone 018 Ltd. and the Company's 26%
minority interest partner in Xfone 018 (the “Minority Partner”), the
Minority Partner provided in 2004 a bank guarantee of 10,000,000 NIS
($2,366,303) 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.
|
3.
|
On
November 5, 2007, Bank Hapoalim B.M. in Israel provided a bank guarantee
of 322,500 NIS ($76,313) 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.
|
4.
|
On
December 11, 2008, the Company signed a Letter of Guarantee (the
“Guarantee”), pursuant to which the Company agreed to guarantee the
obligations of Xfone 018 under a certain contract dated March 13, 2008
(the “Contract”), entered into by and between Xfone 018 and Tikshoov
Digital Ltd. (“Tikshoov”) and a certain Agreement dated December 11 2008,
entered into by and between Xfone 018 and Tikshoov (the
“Agreement”). Pursuant to the Contract, Xfone 018 provides telephone
services to Tikshoov for participants in a television call-in game show.
Xfone 018 collects the telephone service fees from the participants and
delivers the fees to Tikshoov, after deducting applicable monthly fees and
costs. Pursuant to the Guarantee, if for any reason Xfone 018 fails
to comply with its obligations under the Contract and pursuant to the
Agreement in whole or in part, the Company will pay to Tikshoov directly
any amounts due and outstanding. The Company has agreed to make any
payments pursuant to the Guarantee within three (3) business days upon
Tikshoov's first demand, without deducting any amounts that the Company
may claim from Tikshoov and free of any taxes or withholdings. The
Guarantee terminates and becomes null and void upon the full satisfaction
of Xfone 018's obligations.
|
5.
|
Guarantee
provided in respect of lease of construction equipment by NTS
Communications, in the amount of $7,397 as of December 31,
2008.
|
6.
|
Our
U.S subsidiary, NTS Communications, Inc., has a $4,000,000 revolving line
of credit. The note is secured by an assignment of all accounts
receivable, with interest equal to the Wall Street Journal prime. The note
was matured on March 10, 2009.
|
7.
|
Our
U.S subsidiary, NTS Communications, Inc., has $3,083,533 notes payable for
the purchase of certain fixed assets. These notes payable are secured by
fixed assets in the form of installment loan
agreements.
|
Note
13 - Capital Structure, Stock Options
1.
Shares and Warrants
|
A.
|
The
holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The common
stock has no pre-emptive or conversion rights or other subscription
rights. There are no sinking fund provisions applicable to the common
stock.
|
|
B.
|
On
January 16, 2007, and in conjunction with a December 24, 2006 Securities
Purchase Agreement the Company issued an aggregate of 172,414 warrants to
Halman-Aldubi Provident Funds Ltd. and Halman-Aldubi Pension Funds Ltd.
The warrants are exercisable on a one to one basis into restricted shares
of the Company’s common stock, at an exercise price of $3.40, and have a
term of five years. On February 1, 2007, and in conjunction with a
December 24, 2006 Securities Purchase Agreement the Company issued an
aggregate of 344,828 restricted shares of the Company’s common stock, at a
purchase price of $2.90 per share, to Halman-Aldubi Provident Funds Ltd.
and Halman-Aldubi Pension Funds Ltd.
|
|
C.
|
On
March 20, 2007, following the closing of the acquisition of the assets of
Canufly.net in 2006, and due to the satisfaction of certain earn out
provisions in the Asset Purchase Agreement, the Company issued to the
shareholders of Canufly.net additional 20,026 restricted shares of common
stock and 14,364 warrants exercisable at $2.98 per share for a period of
five years.
|
|
D.
|
On
October 23, 2007, the Company entered into Subscription Agreements with 15
investors affiliated with Gagnon Securities, Inc. which agreed to
purchase an aggregate of 1,000,000 shares of the Company's common stock at
a price of $3.00 per share, for a total subscription amount of
$3,000,000. The 1,000,000 shares were issued on November 6,
2007.
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and
2007
|
Note
13 - Capital Structure, Stock Options (Cont.)
Shares and Warrants
(Cont.)
|
E.
|
On
November 4, 2007, the Company entered into Subscription Agreements with:
(i) XFN - RLSI Investments, LLC, an entity affiliated with Richard L.
Scott Investments, LLC, a U.S. institutional investor, which agreed to
purchase 250,000 shares of the Company's common stock at a price of
$3.00 per share, for a total subscription amount of $750,000; and (ii)
certain Israeli institutional investors, which agreed to purchase an
aggregate of 700,000 shares of the Company's common stock, at a price
of $3.00 per share, for a total subscription amount of $2,100,000 . The
950,000 shares were issued on November 13, 2007.
|
|
F.
|
In
conjunction with the consummation of the merger and in exchange for all of
the capital stock of I-55 Telecommunications, LLC, the Company issued
a total of 223,702 shares of common stock valued at $671,687 and 79,029
warrants exercisable for a period of five years into shares of common
stock, with an exercise price of $3.38 (the “Xfone Stock and Warrant
Consideration”). A portion of the Xfone Stock and Warrant Consideration
issued at closing was placed in an escrow. The Company determined a breach
of the representations and warranties in the Merger Agreement resulting
from the failure of I-55 Telecommunications to disclose the liability due
and payable to the Louisiana Universal Service Fund (“LA USF”)
through the period of October 2005, at which time Xfone USA undertook the
management role of I-55 Telecommunications. Pursuant to Section 1(g) of
the Escrow Agreement dated as of March 31, 2006 by and among Xfone
USA, the Escrow Agent, and the President and Sole Member of I-55
Telecommunications, and in accordance with Article 6.02 of the Merger
Agreement, Xfone USA notified the other parties that it believed that it
had suffered a loss of $30,626 pursuant to the provisions of Article 6.02
of the Merger Agreement dated as of August 26, 2005. Having not received
any response from the President and Sole Member of I-55
Telecommunications, nor from his counsel, on October 15, 2007, and after
the allotted response time allowed, Xfone USA instructed the Escrow Agent
(Trustmark National Bank) to deliver from the Escrow Fund of the President
and Sole Member of I-55 Telecommunications, to the Company, 7,043 shares
of Common Stock and 4,838 Xfone Stock Warrants. The 7,043 shares of Common
Stock and 4,838 Xfone Stock Warrants were returned to the Company for
cancellation on October 31, 2007.
|
|
G.
|
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.
|
|
H.
|
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 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 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 (now NYSE Amex) 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.
|
|
I.
|
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.
|
|
J.
|
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.
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and 2007
|
Note 13 - Capital
Structure, Stock Options (Cont.)
Shares and Warrants
(Cont.)
|
K.
|
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.
|
|
L.
|
On
December 16, 2008 the annual meeting of stockholders approved and
authorized the issuance of an aggregate of 321,452 warrants to purchase
shares of the Company’s common stock to Wade Spooner, former President and
Chief Executive Officer of Xfone USA, Inc., pursuant to the terms of a
certain Separation Agreement and Release dated August 15, 2008 between Mr.
Spooner, Xfone USA, Inc. and the Company, as well as the issuance of the
aggregate 321,452 shares of the Company’s common stock upon exercise of
such common stock purchase warrants. The issuance of the warrants is
pending the Company’s receipt of a new approval from the Tel Aviv Stock
Exchange.
|
|
M.
|
On
December 16, 2008 the annual meeting of stockholders approved and
authorized the issuance of an aggregate of 160,727 warrants to purchase
shares of the Company’s common stock to Ted Parsons, former Executive Vice
President and Chief Marketing Officer of Xfone USA, Inc., pursuant to the
terms of a certain Separation Agreement and Release dated August 15, 2008
between Mr. Parsons, Xfone USA, Inc. and the Company, as well as the
issuance of the aggregate 160,727 shares of the Company’s common stock
upon exercise of such common stock purchase warrants. The issuance of the
warrants is pending the Company’s receipt of a new approval from the Tel
Aviv Stock Exchange.
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and 2007
|
|
Note
13 - Capital Structure, Stock Options (Cont.)
Shares
and Warrants (Cont.)
|
|
Number
of warrants
|
|
|
Weighted
average exercise price
|
|
Warrants outstanding
at the beginning of the year
|
|
|
6,104,159
|
|
|
$
|
3.72
|
|
Granted
|
|
|
1,438,199
|
|
|
$
|
3.5
|
|
Forfeited
|
|
|
(44,470
|
)
|
|
$
|
3.31
|
|
Warrants outstanding
and exercisable at the end of the year
|
|
|
7,497,888
|
|
|
|
3.68
|
|
2.
Stock Option Plan
|
A.
|
In
November 2004, Xfone's Board of Directors approved the adoption of the
principal items forming Xfone's 2004 stock option plan (The “2004 Plan”)
for the benefit of employees, officers, directors, consultants and
subcontractors of the Company including its subsidiaries. The 2004
Plan was approved by a special meeting of shareholders on March 13, 2006.
The purpose of the 2004 Plan is to enable the Company to attract and
retain the best available personnel for positions of substantial
responsibility, to provide an incentive to such persons presently engaged
with the Company and to promote the success of the Company business. The
2004 Plan provides for the grant of options an aggregate of 5,500,000
shares of Xfone's common stock. The 2004 Plan is administered by the
board that determines the persons to whom options are granted, the number
of options that are granted, the number of shares to be covered by each
option, the options may be exercised and whether the options is an
incentive or non-statutory option.
|
|
H.
|
On
June 5, 2007, the Company’s Board of Directors approved a grant of 20,000
options to Israel Singer, and a grant of 20,000 options to Morris Mansour.
The options were granted under and subject to the Company’s 2004 Stock
Option Plan with the following terms: Date of Grant - June 5, 2007;
Exercise Price - $3.50 per share; Vesting Date - 12 months from the Date
of Grant; Expiration Date - 5 years from the Vesting
Date.
|
|
I.
|
On
June 5, 2007, the Company’s Board of Directors approved a grant of 200,000
options to Brian Acosta, the Chief Technical Officer of Xfone USA, under
the Company’s 2004 Plan. The options are granted under the following
terms: Date of Grant - June 5, 2007; Exercise Price - $3.146 per share;
Vesting Date - (a) 25,000 options on March 31, 2009; (b) 50,000 options on
March 31, 2010; and (c) 125,000 options on March 31, 2011; Expiration Date
- 5 years from the Vesting Date; Termination - in the event of termination
of employment prior to the completion of Mr. Acosta’s second year of
employment with Xfone USA, then 175,000 of the aforementioned options
shall automatically terminate; in the event of termination of employment
during Mr. Acosta’s third year of employment with Xfone USA, then 125,000
of the aforementioned options shall automatically
terminate.
|
|
J.
|
On
June 5, 2007, the Company’s Board of Directors approved a grant of 200,000
options to Hunter McAllister, the Vice President Business Development of
Xfone USA, under the Company’s 2004 Plan. The options are granted under
the following terms: Date of Grant
-
June
5, 2007; Exercise Price
-
$3.146
per share; Vesting Date
-
(a)
25,000 options on March 31, 2009; (b) 50,000 options on March 31, 2010;
and (c) 125,000 options on March 31, 2011; Expiration Date
-
5
years from the Vesting Date; Termination
-
in
the event of termination of employment prior to the completion of Mr.
McAllister’s second year of employment with Xfone USA, then 175,000 of the
aforementioned options shall automatically terminate; in the event of
termination of employment during Mr. McAllister’s third year of employment
with Xfone USA, then 125,000 of the aforementioned options shall
automatically terminate.
|
|
K.
|
On
October 28, 2007, the Company’s Board of Directors adopted and approved
the Company’s 2007 Stock Incentive Plan (the "2007 Plan") which is
designated for the benefit of employees, directors, and consultants of the
Company and its affiliates. The 2007 Plan was approved on December 17,
2007, at an Annual Meeting of shareholders of the Company. The 2007 Plan
authorizes the issuance of awards for up to a total of 8,000,000 shares of
the Company’s common stock underlying such awards.
|
|
L.
|
On
August 26, 2007, the Company entered into a contractual obligation to
grant the General Manager of Xfone 018 the following number of options to
purchase shares of the Company’s common stock under the 2007 plan, (the
“Plan”):
(1) Within
30 days of adoption of the Plan, the Company will grant options to
purchase 300,000 shares of Common Stock, at an exercise price of $3.50 per
share, of which (i) options to purchase 75,000 shares will vest on August
26, 2008,; and (ii) options to purchase 18,750 shares will be vest at the
end of every 3 month period thereafter.
(2) At
the end of each calendar year between 2008 and 2011, and upon the
achievement by Xfone 018 100% of its Targets for each such year, the
General Manager of Xfone 018 will be granted options to purchase 25,000
shares of the Company’s Common Stock under the Plan, for an exercise price
of $3.50 per share, which will be exercisable 30 days after the Company
publishes its annual financial statements for such year.
The
options will expire 120 days after termination of employment with Xfone
018.
|
|
M.
|
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.
|
|
N.
|
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.
|
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and 2007
|
|
Note
13 - Capital Structure, Stock Options (Cont.)
Stock
Option Plan (Cont.)
|
|
Number
of options
|
|
|
Weighted
average exercise price
|
|
Options
outstanding at the beginning of the year (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 year
|
|
|
6,366,000
|
|
|
$
|
3.55
|
|
|
|
|
|
|
|
|
|
|
Options
vested and exercisable
|
|
|
4,810,313
|
|
|
$
|
2.74
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options granted
|
|
|
|
|
|
$
|
1.24
|
|
(a)
|
Include
options under contractual obligation as specified in note 13.2
(L)
|
(b)
|
Include
options under contractual obligation as specified in note 13.2
(N)
|
The
following table summarizes information about options vested and exercisable at
December 31, 2008:
|
Options
vested and exercisable
|
Range
price ($)
|
Number
of options
|
Weighted
average remaining contractual life (years)
|
Weighted
average exercise price
|
$2.794
|
1,050,000
|
4.16
|
$2.794
|
$3.146
– $3.500
|
3,760,313
|
2.27
|
$3.500
|
Note
14 - Earnings Per Share
|
|
Year
Ended December 31 , 2008
|
|
|
|
Weighted
Average
|
|
|
|
Income
|
|
Shares
|
|
Per
Share
|
|
|
|
|
|
|
|
Amounts
|
|
Net
Income
|
|
$
|
2,047,237
|
|
|
|
|
|
|
Basic
EPS:
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
$
|
2,047,237
|
|
17,624,249
|
|
$
|
0.116
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Options
and warrants (*)
|
|
|
-
|
|
-
|
|
|
-
|
|
Diluted
EPS:
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
$
|
2,047,237
|
|
17,624,249
|
|
$
|
0.116
|
|
|
|
Year
Ended December 31 , 2007
|
|
|
|
Weighted
Average
|
|
|
|
Income
|
|
Shares
|
Per
Share
|
|
|
|
|
|
|
Amounts
|
|
Net
Income
|
|
$
|
(1,283,892
|
)
|
|
|
|
|
Basic
EPS:
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
$
|
(1,283,892
|
)
|
11,777,645
|
|
(0.109
|
)
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
Options
and warrants (*)
|
|
-
|
|
-
|
|
|
|
Diluted
EPS:
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
$
|
(1,283,892)
|
)
|
11,777,645
|
|
(0.109
|
)
|
(*)
Anti-diluted
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and 2007
|
|
Note
15 - Related Party Transactions
|
|
Years
ended
|
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Campbeltown
Business Ltd.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
|
|
$
|
-
|
|
|
$
|
4,302
|
|
Accrued
Expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abraham
Keinan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
|
|
|
263,181
|
|
|
|
254,350
|
|
Accrued
expenses
|
|
|
46,696
|
|
|
|
20,050
|
|
|
|
|
|
|
|
|
|
|
Guy
Nissenson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
|
|
|
250,334
|
|
|
|
242,490
|
|
Accrued
expenses
|
|
|
46,696
|
|
|
|
20,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auracall
Limited:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related
revenues (*)
|
|
|
-
|
|
|
|
3,324,726
|
|
Commissions
(*)
|
|
|
-
|
|
|
|
417,907
|
|
|
|
|
|
|
|
|
|
|
Dionysos
Investments (1999) Limited:
|
|
|
|
|
|
|
|
|
Fees
|
|
|
151,016
|
|
|
|
183,363
|
|
Accrued
Expenses
|
|
|
25,956
|
|
|
|
146,542
|
|
|
|
|
|
|
|
|
|
|
Balance:
|
|
|
|
|
|
|
|
|
Guy
Nissenson
|
|
|
-
|
|
|
|
-
|
|
Abraham
Keinan
|
|
|
-
|
|
|
|
(7,205
|
)
|
(*)
Amount represents the period for which Auracall Limited was not
consolidated into the Company's financial reports.
Xfone,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 and 2007
|
|
Note
16 - Economic Dependency and Credit Risk
|
A.
|
Certain
Telecommunication operators act as collection channels for the Company. In
2008, the Company had two major collection channels, one in the U.K. and
one in Israel. Collections through these channels accounted to
approximately 4.4% and 4.9% of the Company’s total revenues in 2008,
respectively, and 22% and 6% of the Company’s total revenues in 2007,
respectively. With respect to collection of monies for the Company, these
Telecommunication operators are not deemed to be customers of the Company.
|
|
B.
|
Approximately,
45%, 4.2% and 2% of the Company's purchases are from three suppliers for
the year ended December 31, 2008, and 25%, 20%, 7% are from three
suppliers for the year ended December 31,
2007.
|
Note
17 - Segment Information
The
percentage of the Company's revenues is derived from the following geographical
segments:
|
|
Years
Ended
|
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
United
Kingdom
|
|
$
|
18,393,886
|
|
|
$
|
24,263,610
|
|
United
States
|
|
|
62,716,819
|
|
|
|
12,290,891
|
|
Israel
|
|
|
9,228,275
|
|
|
|
8,169,433
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
90,338,980
|
|
|
|
44,723,934
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
7,745,190
|
|
|
|
10,696,915
|
|
United
States
|
|
|
35,457,045
|
|
|
|
5,904,797
|
|
Israel
|
|
|
3,930,078
|
|
|
|
3,024,610
|
|
|
|
|
|
|
|
|
|
|
Total
cost of revenues
|
|
|
47,132,313
|
|
|
|
19,626,322
|
|
|
|
|
|
|
|
|
|
|
Direct
Gross Profit:
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
10,648,696
|
|
|
|
13,566,695
|
|
United
States
|
|
|
27,259,774
|
|
|
|
6,386,094
|
|
Israel
|
|
|
5,298,197
|
|
|
|
5,144,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,206,667
|
|
|
|
25,097,612
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
8,447,281
|
|
|
|
12,556,993
|
|
United
States
|
|
|
23,603,645
|
|
|
|
6,466,501
|
|
Israel
|
|
|
4,109,450
|
|
|
|
2,963,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,160,376
|
|
|
|
21,986,955
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit:
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
2,201,415
|
|
|
|
1,009,702
|
|
United
States
|
|
|
3,656,129
|
|
|
|
(80,407
|
)
|
Israel
|
|
|
1,188,747
|
|
|
|
2,181,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,046,291
|
|
|
|
3,110,657
|
|
|
|
|
|
|
|
|
|
|
Non-
recurring loss
|
|
|
-
|
|
|
|
2,856,803
|
|
|
|
|
|
|
|
|
|
|
Expenses
related to Headquarter in the US
|
|
|
2,232,095
|
|
|
|
1,283,296
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
$
|
4,814,196
|
|
|
$
|
(1,029,442
|
)
|
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOU
NTA
NTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On
January 18, 2006, the Audit Committee of our Board of Directors, in accordance
with its rotation of independent auditors policy, replaced Chaifetz &
Schreiber, P.C. as our independent auditors and appointed Stark Winter
Schenkein & Co., LLP (“SWS”), an independent member of BKR International, as
our Company’s independent auditors. There were no reportable events,
disagreements or dissatisfaction with Chaifetz & Schreiber to report as
defined in Item 304(a)(2) of Regulation S-K. Chaifetz & Schreiber were
replaced as part of our Company policy of rotating its lead and reviewing audit
partners after five consecutive years. On January 31, 2006, we filed with the
U.S. Securities and Exchange Commission an amended Current Report on Form 8-K
disclosing the appointment of SWS as our new auditors. On December 28,
2006, our stockholders approved the appointment of SWS as our Independent
Certified Public Accountants for the fiscal year ending December 31, 2006, and
the first three quarters of the fiscal year ending December 31,
2007.
SWS
served as our Independent Certified Public Accountants for the fiscal years
ending December 31, 2006 and 2007, and for the first three quarters of the
fiscal year ending December 31, 2008. On October 30, 2008, the Audit Committee
approved the appointment of SWS as our Independent Certified Public Accountants
for the fiscal year ending December 31, 2008, and the first three quarters of
the fiscal year ending December 31, 2009. On December 16, 2008, at
our 2008 Annual Meeting of Shareholders, our stockholders approved the
appointment of SWS for the ensuing year.
ITEM
9A. CONTROLS AND PRO
CEDURES
(a) Management’s
Evaluation of Disclosure Controls and Procedures
As of the
end of the period covered by this Annual 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) Management’s
Report on Internal Control over Financial Reporting
Our
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s
internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. The Company’s internal control over financial
reporting includes those policies and procedures that:
(i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
Company;
(ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and directors;
and
(iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a
material effect on the financial statements.
Because
of the inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated Framework. Management’s
assessment included an evaluation of the design of our internal control over
financial reporting and testing of the operational effectiveness of these
controls.
Based on
this assessment, management has concluded that as of December 31, 2008, our
internal control over financial reporting was effective to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
(c) Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting during our
fiscal quarter ended December 31, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM
9B.
OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE
OFFICERS
,
AND CORPORATE
GOVERNANCE
Board of
Directors
The Board
of Directors oversees our management and our business affairs in order to ensure
that our stockholder’s interests are best served. Our Board does not involve
itself in our day-to-day operations. It establishes with management the
objectives and strategies to be implemented and monitors management’s general
performance and conduct.
Our Board
is comprised of the following nine members as of March 31, 2009:
Name
of Director
|
|
Director
Since:
|
|
Will
next stand for re-election at the Annual Meeting of Stockholders
in:
|
Abraham Keinan
,
Chairman of the
Board
|
|
Inception
|
|
2011
|
Guy Nissenson
,
President and Chief Executive
Officer
|
|
Inception
|
|
2011
|
Shemer
Shimon Schwarz
|
|
December
19, 2002
|
|
2011
|
Eyal
Josef Harish
|
|
December
19, 2002
|
|
2009
|
Aviu
Ben-Horrin
|
|
November
23, 2004
|
|
2009
|
Itzhak
Almog
|
|
May
18, 2006
|
|
2009
|
Morris
Mansour
|
|
December
28, 2006
|
|
2009
|
Israel
Singer
|
|
December
28, 2006
|
|
2009
|
Arie
Rosenfeld
|
|
January
16, 2009
|
|
2009
(1)
|
(1) On
January 15, 2009, the Company’s Board of Directors, pursuant to the
recommendation of the Company's Nominating Committee of same date, appointed Mr.
Rosenfeld as a director, effective as of January 16, 2009, to serve until
standing for election at the next succeeding annual meeting of the Company’s
shareholders and/or until his successor is duly elected and qualified or
until his earlier resignation, removal or death. Mr. Rosenfeld was elected
to fill one of the vacancies created by an increase, from eight to ten, of the
maximum authorized number of directors on the Board of Directors, which was
approved by the Company’s Board of Directors on January 15, 2009. Mr. Rosenfeld
will stand for his first election by our stockholders at the 2009 Annual
Meeting.
Biographical
information for each director is set forth below under “Information Regarding
the Current Directors and Executive Officers.”
Board
Structure
On
October 25, 2007, the Board adopted amendments to our Bylaws in order to, among
other things, provide that the Board shall be comprised of not less than two
(2), and no more than eight (8) directors, and to create a classified board by
dividing the Board’s membership into three classes: Class A (three (3)
directors), Class B (three (3) directors) and Class C (two (2)
directors). On December 17, 2007, our stockholders re-elected the
eight directors then serving to Classes A, B and C created on October 25, 2007,
to serve until re-elected or the election and qualification of their successors,
or until their earlier resignation, removal or death. The three
classes had staggered terms of office and in accordance therewith, the Class A
directors would serve for one year, and then would be up for re-election for a
three-year term at the 2008 Annual Meeting of Stockholders, the directors
serving in Class B of the Board would serve for two years, and then would be up
for re-election for a three-year term at the 2009 Annual Meeting of
Stockholders, and the directors serving in Class C of the Board would serve for
three years, and then would be up for re-election for another three-year term at
the 2010 Annual Meeting of Stockholders.
Subsequently,
the Board of Directors re-evaluated the structure of the Board, and felt that it
would be in the best interests of the Company and its stockholders if each
director served for a one-year term only. Accordingly, on January 15, 2009, the
Board of Directors approved and adopted the Company’s Reamended and Restated
Bylaws (the “2009 Amended Bylaws”), which, among other things, de-classified the
Board from its previous 3-class structure. The 2009 Amended Bylaws provided that
each director elected or re-elected at an Annual Meeting of Stockholders would
serve until the next Annual Meeting, except for Abraham Keinan, Guy Nissenson
and Shemer Shimon Schwarz, who were re-elected at the Company’s 2008 Annual
Meeting of Stockholders as Class A directors in accordance with the previous
classified structure, and will therefore next stand for re-election at the 2011
Annual Meeting of Stockholders. The 2009 Amended Bylaws also increased the Board
size to be comprised of not less than two (2) and no more than ten (10)
directors.
Directors
are elected at the annual meeting of stockholders by a plurality of votes and a
separate vote for the election and/or re-election of directors shall be held at
each annual meeting for each directorship having nominees for election and/or
re-election at such annual meeting. Directors may resign at any time by
delivering his/her resignation to the Chairman of the Board of Directors, such
resignation to specify whether it will be effective at a particular time, upon
receipt or at the pleasure of the Board of Directors (if no such specification
is made, it shall be deemed effective at the pleasure of the Board of
Directors). When one or more directors resigns from the Board of Directors,
effective at a future date, a majority of the directors then in office,
including those who have so resigned, shall have power to fill such vacancy or
vacancies, the vote thereon to take effect when such resignation or resignations
shall become effective, and each director so chosen shall hold office for the
unexpired portion of the term of the director whose place shall be vacated and
until his/her successor shall have been duly elected and qualified or until his
earlier resignation, removal or death. Any director may be removed by the
affirmative vote of not less than ninety percent (90%) of the outstanding shares
of the Company then entitled to vote, with or without cause, at any time, at a
special or an annual meeting of stockholders, or by a written
consent.
Information
Regarding the Current Directors and Executive Officers
The
following table lists the current members of the Board of Directors and their
current positions with the Company. It also includes information about our
executive officers who are not directors. Our Board of Directors elects our
executive officers. Biographical information for each director and executive
officer is provided below.
Name
|
|
Age
|
|
Director
/ Officer
|
Abraham
Keinan
|
|
59
|
|
Chairman
of the Board of Directors, since our inception.
|
Guy
Nissenson
|
|
34
|
|
Director,
President and Chief Executive Officer since our
inception.
|
Shemer
S. Schwartz
|
|
34
|
|
Director,
since December 19, 2002, and is an independent director and a member of
our Audit Committee and our Compensation Committee.
|
Eyal
J. Harish
|
|
56
|
|
Director,
since December 19, 2002, and is an independent director since January 21,
2009.
|
Itzhak
Almog
|
|
70
|
|
Director,
since May 18, 2006, and is an independent director and Chairman of our
Audit Committee and our Nominating Committee.
|
Aviu
Ben-Horrin
|
|
60
|
|
Director,
since November 23, 2004, and is an independent
director.
|
Israel
Singer
|
|
60
|
|
Director,
since December 28, 2006, and is an independent director and a member of
our Audit Committee.
|
Morris
Mansour
|
|
61
|
|
Director,
since December 28, 2006, and is an independent director and Chairman
of our Compensation Committee and a member of our Nominating
Committee.
|
Arie
Rosenfeld
|
|
65
|
|
Director,
since January 16, 2009, and is an independent director
|
Niv
Krikov
|
|
38
|
|
Principal
Accounting Officer since May 9, 2007 and Treasurer and Chief Financial
Officer since August 13,
2007.
|
Mr.
Abraham Keinan has been our Chairman of the Board of Directors since our
inception. Abraham Keinan founded Swiftnet in February 1990. Mr. Keinan has been
the Chairman of the Board of Directors of Swiftnet since its inception. From
1991 to October 2003, Mr. Keinan was Swiftnet’s Managing Director. In or about
January 2002, Mr. Keinan became a Director of Auracall. Mr. Keinan has been a
Director of Xfone 018 since its inception in April 2004. In March 2005, Mr.
Keinan became the Chairman of the Board of Directors of Xfone 018. Mr. Keinan
has been a Director of Xfone USA since its inception in May 2004. Mr. Keinan has
been a Director of Story Telecom since May 2006. Mr. Keinan has been a Director
of Equitalk.co.uk. since July 2006. In February 2008, Mr. Keinan became a
Director of NTS Communications. In 1975, Mr. Keinan received a Bachelor of
Science Degree in Mechanical Engineering from Ben-Gurion University,
Beer-Sheeva - Israel.
Mr. Guy
Nissenson has been our President, Chief Executive Officer and Director since our
inception. Mr. Nissenson joined Swiftnet in October 1999 and became a Director
of Swiftnet in May 2000. He had been the Managing Director of Swiftnet from
October 2003 until July 2006. In October 2002, Mr. Nissenson became a Director
of Story Telecom. In or about January 2002, Mr. Nissenson became a Director of
Auracall. Mr. Nissenson has been a Director of Xfone 018 since its inception in
April 2004. Mr. Nissenson has been a Director of Xfone USA since its inception
in May 2004. In March 2005, Mr. Nissenson became the Chairman of the Board of
Directors of Xfone USA. Mr. Nissenson has been a Director of Equitalk.co.uk.
since July 2006. In February 2008, Mr. Nissenson became a Director of NTS
Communications and its Chairman of the Board. Mr. Nissenson was a marketing
manager of RADA Electronic Industries Ltd. in Israel from May 1997 to October
1998. Mr. Nissenson was an audit and control officer with the rank of Lieutenant
of the Israel Defense Forces - Central Drafting Base and other posts from March
1993 to May 1997. In July 2000, Mr. Nissenson received a Bachelor of Science
Degree in Business Management from Kings College - University of London. In
September 2001, Mr. Nissenson received a Master of Business Administration in
International Business from Royal Holloway at the University of London in
London, United Kingdom.
Mr.
Shemer S. Schwartz has been a member of our Board of Directors since December
19, 2002, and is an independent director and a member of the Audit Committee and
the Compensation Committee. Mr. Schwartz has been a Director of Xfone 018 since
its inception in April 2004. Mr. Schwartz had been a Director of Xfone USA from
March 2005 until February 2008. From March 2003 to January 2008, Mr.
Schwartz was the co-founder and research and development expert of XIV
Ltd., a data storage start up company located in Tel-Aviv, Israel. XIV Ltd. was
acquired by IBM in January 2008 and since that time, Mr. Schwartz has led
research and development of the XIV Ltd. storage project at IBM. From November
2001 to March 2003, Mr. Schwartz has been an Application Team Leader of RF
Waves, an Israel based high technology company in the field of wireless
communication. From 1996 to 2001, Mr. Schwartz was a Captain in the Research and
Development Center of the Israel Defense Forces Intelligence. In July 1995,
Mr. Schwartz received a BS degree in Physics and Mathematics from the
Hebrew University in Jerusalem. In September 2003, Mr. Schwartz received an
MS degree in Computer science from the Tel-Aviv University in Tel-Aviv,
Israel.
Dr. Eyal
J. Harish has been a member of our Board of Directors since December 19, 2002.
Dr. Harish has been a Director of Xfone 018 since its inception in April 2004.
Dr. Harish had been a Director of Xfone USA from March 2005 until February 2008.
From 1982 to present, Dr. Harish has been in his own private practice in Israel
as a dentist. Prior to becoming a dentist, from 1974 to 1980, Dr. Harish was an
Administration Manager with Consortium Holdings, an Israel based communications
company. Dr. Harish is the former brother-in-law of Mr. Keinan, our Chairman of
the Board.
Mr.
Itzhak Almog has been a member of our Board of Directors since May 18, 2006, and
is an independent director and Chairman of the Audit Committee and the
Nominating Committee. From 2002 until his retirement in 2007, Mr. Almog was an
independent business consultant, specializing in international marketing and
management. From 1993 to 2002, Mr. Almog was the President and CEO of Comverge
Control Systems Ltd., an Israel based start up company, which developed
innovative solutions for Electric Utilities. From 1990 to 1993, Mr. Almog was
the President of Tasco Electronic Services, Inc., a US based Hi-Tech company,
specializing in Automatic Test machines for commercial and military Aviation.
Mr. Almog was an officer with the rank of Rear Admiral in the Israel Defense
Forces and served in various commanding posts in the Israeli Navy. In 1980 Mr.
Almog received a BA in Modern Middle East History from the
Tel Aviv University in Tel Aviv. In 1984 Mr. Almog received a Master
of Business Administration from the Tel Aviv University in Tel
Aviv.
Mr. Aviu
Ben-Horrin has been a member of our Board of Directors since November 23, 2004,
and is an independent director. Mr. Ben-Hurrin had been a member of our Audit
Committee from November 24, 2004 until January 17, 2007. From 2001 to present,
Mr. Ben-Horrin directs, controls and manages various real estate projects
together with Bonei RMAG Ltd. and MPK Ltd. From 1996 to 2001, Mr. Ben-Horrin
managed real estate projects for Lear Or Ltd. and was an engineering consultant
for Orik Ltd., a construction company. From 1994 to 1996, Mr. Ben-Horrin worked
for the Ministry of Construction and Housing of the state of Israel as a manager
of various projects. From 1975 to 1992, Mr. Ben-Horrin was an officer with the
rank of Colonel in the Israel Defense Forces and served in various engineering
and commanding posts. In 1975, Mr. Ben-Horrin received a BS in Mechanical
Engineering from the Technion University in Haifa. In 1987, Mr. Ben-Horrin
received a BA in Economics from the Bar-Ilan University in Ramat
Gan.
Mr.
Israel Singer has been a member of our Board of Directors since December 28,
2006, and is an independent director and a member of the Audit Committee since
January 17, 2007. Mr. Singer is an elected member of the Ramat Gan City council.
During 2006 Mr. Singer had been the managing director of the academic center
“Raanana College” in Israel. During the years 2004-2005 Mr. Singer was a
consultant to the Education Committee of the “Israeli Knesset” (the Israeli
Parliament). From 1985 to 2003, Mr. Singer was the principal of the
“Blich High School” in Ramat Gan. From 1992 to 1998 Mr. Singer was a member
of the board of directors of Rada Electronic Industries Ltd. In 1973, Mr. Singer
received a B.Sc. in Physics from the Tel Aviv University in Tel Aviv,
Israel. In 1978, Mr. Singer received an M.Sc. in High - Energy Physics from the
Tel Aviv University in Tel Aviv, Israel.
Mr.
Morris Mansour has been a member of our Board of Directors since December 28,
2006, and is an independent director and the Chairman of the Compensation
Committee and a member of the Nominating Committee. Mr. Mansour has
been a Director of Superderivatives, Inc., a leading company in developing and
marketing options and derivatives pricing systems in forex, interest rates,
commodities etc, since 2001. Since 2000 he has been a Director of Soffair
Financial Services, a company engaged in investment, property and finance. From
1995 to 1999 Mr. Mansour was a financial advisor for several private companies
which invested in hi-tech start-up companies, and property. From 1986 to 1988
and from 1993 to 1994, Mr. Mansour was Director and General Manager of “Le Shark
Ltd.,” a major clothing brand in the United Kingdom. From 1980 to 1985, Mr.
Mansour was the Credit Manager of Bank Hapoalim B.M. in the United Kingdom and a
senior member of its Management Committee. In 1972, Mr. Mansour received a B.A.
in Economics and International Relations from the Hebrew University in
Jerusalem, Israel.
Mr. Arie
Rosenfeld was appointed to the Board effective as of January 16, 2009, and is an
independent director. He is currently involved with a number of
high-tech companies around the world. Since April 2008, Mr. Rosenfeld has served
as Chairman of Software Imaging Ltd., an imaging software company in Oxford,
U.K. Mr. Rosenfeld also serves as managing partner of DOR Ventures s.c.a.,
a venture capital fund based in Brussels, Belgium (since May 2000), and
strategic consultant to Dainippon Screen Manufacturing Co., a company providing
manufacturing equipment to the semiconductor industry, based in Kyoto, Japan
(since June 1996). Between May 2005 and December 2008, Mr. Rosenfeld served as
Chairman of Printar Ltd., manufacturer of digital printing equipment for the PCB
industry, based in Rehovoth, Israel. From June 1997 to June 2007, Mr.
Rosenfeld served as chairman of the board of XAAR plc, a supplier of ink-jet
heads to industrial printer manufacturers in Asia, Europe and the U.S., based in
Cambridge, U.K. (LSE: XAR). From 1988 to 1995, Mr. Rosenfeld served as
President, CEO and a director of Scitex Corporation Ltd., a multi-national
company providing visual information communication products for the graphic arts
and digital printing industries, headquartered in Israel. Scitex
Corporation Ltd. was later sold to Creo Products Inc. of Vancouver, Canada.
Mr. Rosenfeld has received an MBA from INSEAD in Fontainebleau, France,
and a B.Sc. degree in electronics engineering from the Technion – Israel
Institute of Technology in Haifa, Israel.
Mr. Niv
Krikov has been our Vice President Finance since March 13, 2007, and our
Principal Accounting Officer since May 9, 2007. On August 13, 2007, in
accordance with a resolution of the Board of Directors of the Company, the
Company elected Mr. Krikov, as its Treasurer and Chief Financial Officer.
Following his election, Mr. Krikov no longer serves as Vice President Finance of
the Company, but continues to serve as its Principal Accounting Officer. Prior
to joining the Company, Mr. Krikov held the following financial and accounting
positions: Corporate Controller of Nur Macroprinter Ltd., a publicly traded
company (OTCBB: NURMF.PK) acting as a manufacturer of wide format digital
printers, where Mr. Krikov was responsible, among other duties, for the
preparation of all financial reports (2005 to March 2007); Controller and later
Credit and Revenues Manager of Alvarion Ltd. (NASDAQ: ALVR), a developer and
manufacturer of wireless communication equipment (2002 to 2005); Auditor at the
Israeli public accounting firm of Kost Forer Gabbay & Kasierer, an affiliate
of the international public accounting firm Ernst & Young (1997 to 2001).
Mr. Krikov holds a B.A. degree in Economics and Accounting from the
Tel Aviv University and a LL.M degree from the Faculty of Law at the
Bar Ilan University and is licensed as a CPA in Israel.
Signifi
cant Employees
Mrs.
Barbara Baldwin, 46 years of age, is President and Chief Executive Officer of
NTS Communications and is President and Chief Executive Officer of Xfone USA, a
position she was appointed to on February 28, 2008 replacing Wade
Spooner. Ms. Baldwin was appointed to the Board of Directors of NTS
Communications on 1991 and to the Board of Directors of Xfone USA on February
28, 2008. She also serves in the following capacities of the
following subsidiaries of NTS: Director and Managing Member of NTS Management
Company, LLC; President of Communications Brokers, Inc.; Director and President
of NTS Construction Company; President of Midcom of Arizona, Inc.; and Director
and President of Garey M. Wallace, Inc. Ms. Baldwin also serves as
Director and President of NTS Properties, LC, a former subsidiary of NTS
Communications, and a Director of NTS Holdings Incorporated. She has
been employed by NTS Communications since 1982, and has held a variety of
positions with NTS Communications, including being directly responsible for
sales and marketing, management information systems, customer service and
account administration. She has served as President of NTS
Communications since 1994 and as President and CEO of NTS Communications since
2000. Ms. Baldwin holds a B.B.A. and an M.B.A. from
Texas Tech University in Lubbock, Texas.
Mr. Brad
Worthington, 43 years of age, is Executive Vice President and Chief Operating
Officer of NTS Communications. Mr. Worthington had been a member of
the Board of Directors of NTS Communications from 1994 through 2008. Mr.
Worthington received his B.S. Ed. From Southwest Texas State University in 1987
and his J.D. from Texas Tech University School of Law in 1990. He is
licensed to practice law in the State of Texas. Mr. Worthington is a
member of the State Bar of Texas, and the Lubbock County Bar Association and is
admitted to practice in the Federal District Court for the Northern District of
Texas. Mr. Worthington served as General Counsel for NTS
Communications from 1990 until 2000. As General Counsel Mr.
Worthington was responsible for advising senior staff on various legal and
regulatory issues, preparation and review of contracts, contract and business
negotiations. Mr. Worthington was named Executive Vice President in
1994 and Chief Operating Officer in 2000. Mr. Worthington also serves
in the following capacities of the following subsidiaries of NTS: Director and
Managing Member of NTS Management Company, LLC; Secretary of Communications
Brokers, Inc.; Secretary of NTS Construction Company; Secretary of Midcom of
Arizona, Inc.; and Director and Secretary of Garey M. Wallace Company,
Inc. Mr. Worthington also serves as Director and Vice President of
NTS Properties, LC, and Director of NTS Holdings Incorporated.
Mr. Jerry
E. Hoover, 60 years of age, is Executive Vice President, Treasurer and Chief
Financial Officer of NTS Communications and Treasurer of Xfone USA. Mr. Hoover
graduated from Texas Tech University in 1971 and shortly afterward
began a career in public accounting. Mr. Hoover has been a Certified
Public Accountant for over 30 years and for the last 20 years has worked with
accounting issues unique to the telecommunications industry. In
addition, he has also taught accounting, taxation, and auditing at the
university level. Mr. Hoover was a principal in a major Lubbock
accounting firm where he began doing work for NTS Communications in
1984. He joined NTS Communications on an in-house basis in 1994 as
Executive Vice President and Treasurer, and was named Chief Financial Officer in
2000. Mr. Hoover also serves in the following capacities of the
following subsidiaries of NTS: Director and Manager of NTS Management
Company, LLC; Treasurer of Communications Brokers, Inc.; Treasurer of NTS
Telephone Company, LLC; Treasurer of Midcom of Arizona, Inc.; and Treasurer of
Garey M. Wallace Company, Inc. Mr. Hoover also serves as the Sole
Manager of NTS Telephone Company, LLC; Director and Secretary Treasurer of NTS
Properties, LC, and as Director of NTS Holdings Incorporated.
Mr. John
Mark Burton, 44 years of age, was appointed as the Managing Director of Swiftnet
at the completion of the acquisition of Equitalk.co.uk on July 3, 2006. He
founded Equitalk.co.uk, the UK’s first fully automated e-telco, in 2000 and has
been serving as its Managing Director since then. On August 3, 2006, Mr. Burton
was appointed to the Board of Directors of Swiftnet. On August 7, 2006, Mr.
Burton was elected as a Chairman to the Board of Directors of Story Telecom,
Inc. and Story Telecom Limited (collectively, "Story Telecom"), and on March 31,
2008 he was appointed as Story Telecom's Managing Director. On August 14, 2007,
Mr. Burton was appointed as Managing Director and appointed to the Board of
Directors of Auracall. Prior to founding Equitalk, Mr. Burton founded Nexus
Telecom Limited in 1995. Under his leadership as Managing Director, Nexus
designed an award-winning server-based soft switch that gained UK Regulatory and
IBM Approval. Prior to Nexus, Mr. Burton worked as Business Development Manager
for Griffin International (a telecom messaging company). He has also served as
R&D Manager at Nortel Networks with responsibility for engineers in the UK,
US and Far East designing a next generation, open architecture PBX. Mr. Burton
is a graduate of the University of Liverpool where he earned a BEng degree in
Electronic Engineering. He holds an MBA from Cranfield School of Management and
a CEng MIEE designation from the Institute of Electrical
Engineers. He is a Member of the British Institute of
Directors.
Mr. Roni
Haliva, 43 years of age, was appointed as the Managing Director of our Israel
based subsidiary, Xfone 018, on August 26, 2007. Mr. Haliva has over 20 years of
experience in the telecommunication market. During the last two years, he was
Senior Vice President of Bezeq International Ltd., a leading telecommunication
services provider in Israel. Prior to this position, he established the
marketing and sales division of Malam Group, one of the major IT service
providers in Israel, and served as Senior Vice President with overall
responsibility for the business development, marketing & sales of the
company. Prior to Malam, Mr. Haliva worked as VP Marketing and Sales for Siemens
Israel, which is the Regional Company representing the global Siemens
conglomerate in Israel. He has also served in various managerial duties in
Bezeq, the local exchange carrier in Israel. Mr. Haliva received a Bsc. degree
in computers engineering from the Technion (The Israel Institute of Technology).
He also holds an MBA from the Ben Gurion University in
Israel.
Mrs.
Bosmat Houston, 48 years of age, has been our Research and Development Manager
since our inception. She joined Swiftnet in September 1991 as its Research and
Development Manager. Mrs. Houston received a Bachelor of Science Degree in
Computer Science from the Technion - Institution of Technology,
Haifa Israel in 1986.
Family Relationships
Dr. Eyal
J. Harish, one of our directors, is a former brother-in-law of Mr. Abraham
Keinan, our Chairman of the Board.
Mr. Iddo
Keinan, son of Mr. Abraham Keinan, our Chairman of the Board, has been employed
by our wholly owned UK based subsidiary, Swiftnet Limited since
1998.
Mr. Guy
Nissenson, our President, Chief Executive Officer, and Director, and other
members of the Nissenson family own and control Campbeltown Business Ltd., our
major shareholder and a former consultant.
Mr. Haim
Nissenson, father of Mr. Guy Nissenson, our President, Chief Executive Officer,
and Director, is the Managing Director of Dionysos Investments (1999) Ltd., our
consultant. Dionysos Investments is owned and controlled by certain members of
the Nissenson family, other than Guy Nissenson.
Involvement
in
Certain Legal Proceedings
No
director, person nominated to become a director, executive officer, promoter or
control person of the Company has, during the last five years: (i) been
convicted in or is currently subject to a pending criminal proceeding (excluding
traffic violations and other minor offenses); (ii) been a party to a civil
proceeding of a judicial or administrative body of competent jurisdiction and as
a result of such proceeding was or is subject to a judgment, decree or final
order enjoining future violations of, or prohibiting or mandating activities
subject to any Federal or state securities or banking or commodities laws
including, without limitation, in any way limiting involvement in any business
activity, or finding any violation with respect to such law, nor (iii) has
any bankruptcy petition been filed by or against the business of which such
person was an executive officer or a general partner, whether at the time of the
bankruptcy or for the two years prior thereto.
Board
Independence
The
Company applies the standards of the NYSE Amex, the stock exchange upon which
the Company’s Common Stock is listed in the U.S., for determining the
independence of the members of its Board of Directors and Board committees. The
Board has determined that, as of March 30, 2009, the following directors are
independent within these rules: Shemer S. Schwartz, Itzhak Almog, Aviu
Ben-Horrin, Israel Singer, Morris Mansour, Eyal Harish and Arie
Rosenfeld.
Board
Meetings and Attendance
During
fiscal 2008, the Company’s Board of Directors held 15 physical and telephonic
meetings. The Board also approved certain actions by unanimous written
consent. With the exception of the directors listed below, all incumbent
directors attended, either in person or via telephone, at least 75% of all
meetings of the Board that were held in fiscal 2008 during the period in which
they served as a director.
Mr. Aviu
Ben-Horrin attended at least 73% of all meetings of the Board during fiscal
2008; Mr. Israel Singer attended at least 73% of all meetings of the Board
during fiscal 2008; and Mr. Morris Mansour attended at least 45% of all meetings
of the Board during fiscal 2008.
Committees
of the Board of Directors
Audit
Committee
We have
an Audit Committee that was formed in a November 24, 2004 Board of Directors
meeting. The Audit Committee is composed of three directors: Messrs. Almog,
Schwartz and Singer (all three are considered independent directors). Mr. Almog
who satisfies the “financial sophistication” requirement was appointed as the
Chairman of the Audit Committee. The Audit Committee makes decisions regarding
our audit, the appointment of auditors, and the inclusion of financial
statements in our periodic reports. Issues regarding our 2004 Stock Option Plan
and 2007 Stock Incentive Plan are decided by the entire Board of Directors,
including the members of the Audit Committee.
The Audit
Committee is governed by a charter which was originally adopted on November 24,
2004. On January 28, 2008, in accordance with its responsibility to annually
review the adequacy of its charter, the Audit Committee and the Board approved
amendments to the charter to update it to comply with rules and regulations
applicable to the Company that have changed since the charter was last reviewed
and to make certain technical, clarifying and non-substantive changes. A copy of
the Committee’s current charter as amended is available on the Company’s
website, at
www.xfone.com
.
During
fiscal 2008, the Audit Committee held 8 physical and telephonic meetings. All
incumbent directors serving on the Audit Committee attended, either in person or
via telephone, at least 75% of all meetings of the Audit Committee that were
held in fiscal 2008 during the period in which they served on the committee,
with the exception of Mr. Singer, who attended at
least 60% of such meetings.
Nominating
Committee
In
addition, we have a Nominating Committee of our Board of Directors, which was
established by our Board on December 30, 2007. The primary functions of the
Nominating Committee are to assist the Board by identifying individuals
qualified to become Board members, to recommend to the Board the director
nominees for the Company’s annual meetings of shareholders, and to recommend to
the Board director nominees for each Board committee. The Nominating
Committee is comprised of at least two members satisfying the independence
requirements of the U.S. Securities and Exchange Commission and the NYSE Amex.
Messrs. Itzhak Almog (Chairman) and Morris Mansour were appointed by the Board
as members of the Nominating Committee, to serve in such capacities until their
resignation, retirement, removal by the Board, or until their successors are
appointed.
The
Nominating Committee is governed by a charter which was adopted by the Board on
December 30, 2007, and then amended on January 15, 2009. The January
15, 2009 amendments replaced references to the “American Stock
Exchange” with “NYSE Alternext US LLC,” the name by which the stock
exchange was then known, revised applicable provisions regarding shareholder
recommendations and nominations of director candidates to be consistent with the
2009 Amended Bylaws (as described above) and with the Company’s Policy
Regarding Shareholder
Recommendations and Nominations for Director Candidates (the “Policy”), which
was adopted by the Board on January 15, 2009 (described below), made
certain technical, clarifying and non-substantive changes. A copy of
the current charter of the Nominating Committee is available on our website, at
www.xfone.com
.
During
fiscal 2008, the Nominating Committee did not hold any physical or telephonic
meetings.
In
addition to its charter, the Nominating Committee operates in accordance with
the Policy. A copy of the Policy is available on our website, at
www.xfone.com
.
Under the charter and Policy, the Nominating Committee considers candidate
recommendations submitted to the Company by any relevant source, including
recommendations submitted by the Company's stockholders in accordance with the
Policy, management and relevant third parties. Candidate
recommendation submitted by the Company’s stockholders shall be considered by
the Nominating Committee in the same manner as candidates recommended to the
Nominating Committee from other sources.
In
evaluating nominees, the Nominating Committee considers such factors as it deems
appropriate, such as the current Board composition and whether the candidate
would qualify as independent, as well as the candidate’s experience and skills,
professional and personal ethics and values, professional commitments, and the
existence of any conflicts of interests.
Stockholders
may recommend director candidates by submitting the recommendation in writing by
letter to Xfone, Inc., Attention: Corporate Secretary, at the Company’s offices
at 5307 W. Loop 289, Lubbock, Texas 79414, Fax: (806)-788-3398 / Email:
alon@xfone.com. Such written letter must include the candidate’s name, home and
business contact information, detailed biographical data, relevant
qualifications, information regarding any relationships between the candidate
and the Company within the last three (3) years, and a written indication by the
recommended candidate of her/his willingness to serve. Such recommendations must
also include a statement from the recommending shareholder in support of the
candidate, particularly within the context of the criteria for Board membership,
as described in the charter, including issues of character, integrity, judgment,
diversity of experience, independence, area(s) of expertise, corporate
experience, length of service, potential conflict(s) of interest and other
commitments, and personal references.
As
described in the Policy, stockholders of record (and holders who hold stock
though a nominee) may also nominate directors for election to the Board at an
annual meeting at which directors are to be elected and/or re-elected by
following the procedures and meeting the deadlines and other requirements set
forth in Article 2.4 of our 2009 Amended Bylaws, and/or the rules and
regulations of the U.S. Securities and Exchange Commission.
Compensation
Committee
On
December 30, 2007, our Board of Directors also established a Compensation
Committee. The Compensation Committee was created to assist the Board in the
discharge of its responsibilities with respect to the compensation of the
Company’s directors and officers. The Compensation Committee is comprised of at
least two members satisfying the independence requirements of the U.S.
Securities and Exchange Commission and the NYSE Amex. In addition, each member
of the Compensation Committee is required to be a “nonemployee director,” within
the meaning of Rule 16b-3 issued by the SEC, and an “outside director,” within
the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended.
Messrs Morris Mansour (Chairman) and Shemer S. Schwartz were appointed by the
Board as members of the Nominating Committees, to serve in such capacities until
their resignation, retirement, removal by the Board, or until their successors
are appointed.
The
Compensation Committee is governed by a charter which was adopted by the Board
on December 30, 2007. A copy of the current charter of the Compensation
Committee is available on our website, at
www.xfone.com.
During
fiscal 2008, the Compensation Committee held 2 physical and telephonic meetings.
The Compensation Committee also approved certain actions by unanimous written
consent. All incumbent directors serving on the Compensation Committee attended,
either in person or via telephone, at least 75% of all meetings of the
Compensation Committee that were held in fiscal 2008 during the period in which
they served on the committee.
Audit
Committee Financial Expert
The Board
has determined that Mr. Itzhak Almog is an “audit committee financial
expert” as that term is defined by the SEC and the NYSE Amex, and is
“independent” from the Company’s management as that term is defined under the
NYSE Amex rules.
Stockholder
Commu
nications with the Board
The
Company has not implemented a policy or procedure by which its stockholders can
communicate directly with our Directors. Nevertheless, every effort has
been made to ensure that the views of stockholders are heard by the Board of
Directors or individual Directors, as applicable, and that appropriate responses
are provided to stockholders in a timely manner. The Company believes it is
responsive to stockholder communications, and therefore the Company has not
considered it necessary to adopt a formal process for stockholder communications
with the Board of Directors. During the upcoming year the Board of Directors
will continue to monitor whether it would be appropriate to adopt such a
process.
Section
16(a) Bene
ficial Ownership Reporting Compliance
Under the
securities laws of the United States, our directors, executive (and certain
other) officers, and any persons holding ten percent or more of our Common Stock
must report on their ownership of the Common Stock and any changes in that
ownership to the SEC. Specific due dates for these reports have been
established. During the fiscal year ended December 31, 2008, we believe that all
reports required to be filed by Section 16(a) were filed on a timely
basis.
Code
of Conduct and Ethics
The Audit
Committee of the Board of Directors has adopted and approved a Code of Conduct
and Ethics (the “Code”) to apply to all of our directors, officers and
employees. The Code, which was ratified by the Board, is intended to promote
ethical conduct and compliance with laws and regulations, to provide guidance
with respect to the handling of ethical issues, to implement mechanisms to
report unethical conduct, to foster a culture of honesty and accountability, to
deter wrongdoing and to ensure fair and accurate financial reporting. The Code
became effective on August 15, 2006.
The Code
was previously filed on a Current Report on Form 8-K which we filed with the SEC
on August 15, 2006, and is also available on our website at
www.xfone.com
.
ITEM
11.
EXECUTIVE COMPENSATION
Summary
Compensation
The
following table summarizes all compensation received for services rendered to
the Company during the fiscal years ended December 31, 2006, 2007 and 2008 by
our Chief Executive Officer and two other executive officers other than our
Chief Executive Officer who were serving as our executive officers at December
31, 2006, 2007 and 2008 (collectively, our “Named Executive
Officers”).
Summary
Compensation Table
Name
and Principal Position
|
Year
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan Compensation
($)
|
|
|
Non-qualified
Deferred Compensation Earnings
($)
|
|
All
Other Compensation (10)
($)
|
|
Total
($)
|
Abraham Keinan
,
Chairman
of the Board
|
2008
|
89,082
|
(1)
|
|
-
|
|
|
-
|
|
|
-
|
|
293,912
|
(2)
|
|
-
|
|
15,965
|
(3)
|
398,959
|
|
2007
|
96,043
|
(1)
|
|
|
|
|
|
|
|
|
|
254,350
|
(2)
|
|
|
|
18,796
|
(3)
|
369,189
|
|
2006
|
94,032
|
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
100,710
|
(4)
|
|
|
-
|
|
35,920
|
(3)
|
230,662
|
Guy
Nissenson
,
President,
CEO, and Director
|
2008
|
89,082
|
(5)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
290,048
|
(6)
|
|
|
-
|
|
6,982
|
(7)
|
386,112
|
|
2007
|
96,043
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
242,490
|
(6)
|
|
|
|
|
31,294
|
(7)
|
338,533
|
|
2006
|
94,032
|
(5)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
163,381
|
(8)
|
|
|
-
|
|
26,341
|
(7)
|
283,754
|
Niv Krikov
,
Treasurer,
CFO and Principal
Accounting Officer (9)
|
2008
|
110,421
|
|
|
|
28,617
|
|
|
|
-
|
|
|
|
-
|
|
-
|
|
|
|
-
|
|
-
|
|
139,038
|
|
2007
|
76,030
|
|
|
|
3,650
|
|
|
|
-
|
|
|
|
-
|
|
-
|
|
|
|
-
|
|
-
|
|
79,680
|
|
2006
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
N/A
|
|
|
|
N/A
|
|
N/A
|
|
N/A
|
(1)
|
Salary
paid to Mr. Keinan by our U.K. based wholly owned subsidiary, Swiftnet
Limited, in connection with his employment as Chairman of the Board. Mr.
Keinan has been the Chairman of the Board of Directors of Swiftnet since
its inception in 1990. The amount shown in the table above for 2006 was
paid in British Pound Sterling (£48,000) and has been translated into U.S.
dollars for convenience purposes using the rate of exchange of the U.S.
dollar at December 31, 2006. The representative rate of exchange of the £
at December 31, 2006 was £1 = $1.959. The amounts shown in the table above
for 2007 and 2008 were paid in British Pound Sterling (£48,000 each) and
have been translated into U.S. dollars using the average rate of exchange
of the U.S. dollar during 2007 and 2008. The average rate of exchange of
the £ during 2007 and 2008 was £1 = $2.001 and £1 = $1.856,
respectively.
|
(2)
|
Pursuant
to a Company’s Board of Directors’ resolution dated December 25, 2006, on
March 28, 2007, the Company and Mr. Keinan entered into a consulting
agreement, effective as of January 1, 2007 (the “Keinan Consulting
Agreement”). The Keinan Consulting Agreement provides that Mr. Keinan
shall render the Company advisory, consulting and other services in
relation to the business and operations of the Company (excluding its
business and operations in the United Kingdom). In consideration of the
performance of the Services pursuant to the Keinan Consulting Agreement,
the Company agreed to pay Mr. Keinan a monthly fee of £10,000 ($18,516)
which was increased by the Board of Directors following the recommendation
of the Audit Committee and the Compensation Committee in accordance with
the terms described below to £16,000 ($29,627) effective as of June 1,
2008 (the “Fee”). Mr. Keinan invoices the Company at the end of each
calendar month, and the Company makes the monthly payments upon receipt of
such invoices. The amount shown reflects the
eligibility of Mr. Keinan pursuant to the Keinan Consulting
Agreement. As of December 31, 2008 there is $46,696 outstanding balance
which is expected to be paid during April
2009.
|
(3)
|
The
amount shown for 2006 reflects airfare expenses incurred by the Company
for the travels of Mr. Keinan’s wife and payments for a leased car for Mr.
Keinan’s use during 2006. The amounts shown for 2007 and 2008 reflect
payments for a leased car for Mr. Keinan’s use in 2007 and
2008.
|
(4)
|
On
April 2, 2002, our Board of Directors approved a bonus and success fee
whereby if the Company receives monthly revenues in excess of $485,000
then Mr. Keinan and our former consultant, Campbeltown Business Ltd. shall
receive 1% of such monthly revenues, up to a maximum of one million
dollars (the “Bonus and Success Fee”). On April 10, 2003, Mr. Keinan and
Campbeltown Business waived their right to receive 1% of the revenues
generated by Story Telecom. On February 8, 2007, an Agreement was entered
by and between the Company, Swiftnet, Campbeltown Business, and Mr. Keinan
(the “February 8, 2007 Agreement”). The February 8, 2007 Agreement
provides that effective as of January 1, 2007, the Bonus and Success Fee
is cancelled, and that Mr. Keinan and Campbeltown Business shall have no
further right to any percentage of our revenues. Mr. Keinan agreed to
receive a total amount of only $100,710 as Bonus and Success Fee for 2006,
which is reflected in the table above, and waived the
remainder.
|
(5)
|
Salary
paid to Mr. Nissenson by our U.K. based wholly owned subsidiary, Swiftnet,
in connection with his employment as Director of Business Development. Mr.
Nissenson joined Swiftnet in October 1999 and became a member of its Board
of Directors in May 2000. Mr. Nissenson had been the Managing Director of
Swiftnet from October 2003 until July 2006. The amount shown in the table
above for 2006 was paid in British Pound Sterling (£48,000) and has been
translated into U.S. dollars for convenience purposes using the rate of
exchange of the U.S. dollar at December 31, 2006. The representative rate
of exchange of the £ at December 31, 2006 was £1 = $1.959. The amount
shown in the table above for 2007 and 2008 were paid in British Pound
Sterling (£48,000) and has been translated into U.S. dollars using the
average rate of exchange of the U.S. dollar during 2007 and 2008. The
average rate of exchange of the £ during 2007 and 2008 was £1 = $2.001 and
£1 = $1.856, respectively.
|
(6)
|
Pursuant
to a Company’s Board of Directors’ resolution dated December 25, 2006, on
March 28, 2007, the Company and Mr. Nissenson entered into a consulting
agreement, effective as of January 1, 2007 (the “Nissenson Consulting
Agreement”). The Nissenson Consulting Agreement provides that Mr.
Nissenson shall render the Company advisory, consulting and other services
in relation to the business and operations of the Company (excluding its
business and operations in the United Kingdom). In consideration of the
performance of the Services pursuant to the Nissenson Consulting
Agreement, the Company agreed to pay Mr. Nissenson a monthly fee of
£10,000 ($18,516) which was increased by the Board of Directors following
the recommendation of the Audit Committee and the Compensation Committee
in accordance with the terms described below to £16,000 ($29,627)
effective as of June 1, 2008 (the “Fee”). Mr. Nissenson invoices the
Company at the end of each calendar month, and the Company makes the
monthly payments immediately upon receipt of such invoices. The
amount shown reflects the eligibility of Mr. Nissenson pursuant to the
Nissenson Consulting Agreement. As of December 31, 2008 there is $46,696
outstanding balance which is expected to be paid during April
2009.
|
(7)
|
The
amounts shown in the table above reflect airfare expenses incurred by the
Company for the travels of Mr. Nissenson’s wife during 2006, 2007 and
2008.
|
(8)
|
On
May 11, 2000, Swiftnet and Mr. Keinan entered into a consulting agreement
with Campbeltown Business that provided that Swiftnet will hire
Campbeltown Business as its financial and business development consultant
and will pay Campbeltown Business £2,000 per month together with an
additional monthly performance bonus based upon Swiftnet attaining certain
revenue levels (the “Consulting Agreement”). On April 2, 2002, our Board
of Directors approved a bonus and success fee whereby if the Company
receives monthly revenues in excess of $485,000 then Mr. Keinan and
Campbeltown Business shall receive 1% of such monthly revenues, up to a
maximum of one million dollars (the “Bonus and Success Fee”). On April 10,
2003, Mr. Keinan and Campbeltown Business waived their right to receive 1%
of the revenues generated by Story Telecom. On February 8, 2007, an
Agreement was entered by and between the Company, Swiftnet, Campbeltown
Business, and Mr. Keinan (the “February 8, 2007 Agreement”). The February
8, 2007 Agreement provides that effective as of January 1, 2007, the Bonus
and Success Fee is cancelled, and that Mr. Keinan and Campbeltown Business
shall have no further right to any percentage of our revenues. The
February 8, 2007 Agreement further provides that effective as of January
1, 2007, the Consulting Agreement is terminated. Campbeltown Business
agreed to receive a total amount of only $163,381 as compensation under
the Consulting Agreement and the Bonus and Success Fee for 2006, and
waived the remainder. Campbeltown Business Ltd., a private company
incorporated in the British Virgin Islands, is owned and controlled by Guy
Nissenson and other members of the Nissenson family. Guy Nissenson owns
20% of Campbeltown Business. The compensation is shown in the table above
as paid to Guy Nissenson due to his 20% ownership of Campbeltown
Business.
|
(9)
|
Mr.
Niv Krikov has been our Vice President Finance since March 13, 2007, and
our Principal Accounting Officer since May 9, 2007. On August 13, 2007, in
accordance with a resolution of the Board of Directors of the Company, the
Company elected Mr. Krikov as its Treasurer and Chief Financial Officer.
Following his election, Mr. Krikov no longer serves as Vice President
Finance of the Company, but continues to serve as its Principal Accounting
Officer.
|
(10)
|
The
Company acknowledges that on several occasions, consultants may be
required to travel frequently for a long duration around the world.
Therefore, in order to enable the consultants’ spouses to accompany them
on certain lengthy trips for a normal family life, the Company bears
travel expenses for the consultants’
spouses.
|
Outstanding
Equity Awards at 2008
Fiscal Year-End
The
following table sets forth certain information concerning option awards and
stock awards held by our Named Executive Officers as of December 31, 2008. Our
Named Executive Officers did not hold any stock awards as of December 31,
2008.
|
|
Option
Awards
|
|
|
Stock
Awards
|
|
Name
|
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
|
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
|
|
|
Option
Exercise Price
($)
|
|
|
Option
Expiration Date
|
|
|
Number
of Shares or Units of Stock that Have Not Vested
(#)
|
|
|
Market
Value of Shares or Units of Stock that Have Not Vested
($)
|
|
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
that Have Not Vested
(#)
|
|
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
Other Rights that Have Not Vested
($)
|
|
Abraham
Keinan
|
|
|
1,500,000
|
(1)
|
|
|
–
|
|
|
|
–
|
|
|
|
3.50
|
|
|
Nov.
24, 2010
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Guy
Nissenson
|
|
|
1,500,000
|
(1)
|
|
|
–
|
|
|
|
–
|
|
|
|
3.50
|
|
|
Nov.
24, 2010
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Niv
Krikov
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
(1)
|
These
options were granted on November 24, 2004, vested in full on November 24,
2005, and will expire on November 24,
2010.
|
Employment
Agreements; Termination of E
mployment and Change-in-Control
Arrangements
Executive
Officers
The
employment arrangements of Mr. Abraham Keinan, our Chairman of the Board, and
Mr. Guy Nissenson, our President, Chief Executive Officer, and Director, are
described in detail under Item 13 of this Annual Report, captioned “Certain
Relationships and Related Transactions, and Director Independence.”
Niv
Krikov
Effective
August 13, 2007, in accordance with Board resolutions of the same date, we
elected Mr. Niv Krikov, who was serving as our Vice President Finance and
Principal Accounting Officer, to serve as our Treasurer and Chief Financial
Officer. Following this election, Mr. Krikov no longer serves as Vice President
Finance. Mr. Krikov is entitled to the following employment terms for
his positions of Treasurer, Chief Financial Officer and Principal Accounting
Officer: A monthly gross salary of NIS 33,000 (approximately $7,809) (the
“Salary”); Executive insurance - we allocate 13.3% of the Salary (8.3% for
severance payments and 5% for remuneration), and Mr. Krikov allocates 5% of the
Salary. The insurance includes a loss of working capacity coverage (up to 2.5%)
that we pay; Continuing education fund - we allocate 7.5% of the Salary and Mr.
Krikov allocates 2.5% of the Salary; a Company car, including fuel expenses; a
Company mobile phone; 19 days of paid vacation per each employment year. The
timing of the vacation will be coordinated with our Chief Executive Officer.
Recuperation payments as provided by the applicable collective agreement in
Israel. Mr. Krikov will be granted options to purchase a certain
amount of shares of our Common Stock as to be recommended by our Chief Executive
Officer and approved of the Board of Directors. Such options are intended to be
granted under and subject to the Company’s 2007 Stock Incentive Plan. We and Mr.
Krikov may terminate the employment of Mr. Krikov upon 30 days prior notice. Mr.
Krikov is based at our subsidiary’s executive offices in Israel.
On May
29, 2008, the Board of Directors, following the recommendation of the
Compensation Committee, granted a bonus of $30,000 to Mr. Krikov in
consideration for his efforts and services to us to date. All other
employment terms of Mr. Krikov, including the amount of his Salary, remain
unchanged.
Significant
Employees
Barbara
Baldwin, Jerry Hoover and Brad Worthington
NTS
Communications, Inc. ("NTS") entered into Employment Agreements with each of
Barbara Baldwin, who, prior to our acquisition of NTS, served as NTS’ President
and CEO, Jerry Hoover, who, prior to our acquisition of NTS, served as NTS’
Executive Vice President - Chief Financial Officer, and Brad Worthington, who,
prior to our acquisition of NTS, served as NTS’ Executive Vice President - Chief
Operating Officer (each an “NTS Officer,” and collectively the “NTS Officers”).
The Employment Agreements provide for continued employment of the NTS Officers
with NTS in their respective capacities, and are for five-year terms each,
effective as of February 26, 2008.
The
Employment Agreements provide for initial annual salaries for Ms. Baldwin of
$273,000, and $243,840 for each of Messrs. Hoover and Worthington, and annual
salaries (not less than the NTS Officer’s respective initial annual salary) to
be determined by NTS’ Board of Directors for each year of employment thereafter.
In addition, the NTS Officers are entitled to one-time signing bonuses in the
amount of $500,000 for Ms. Baldwin and $243,840 for each of Messrs. Hoover and
Worthington on the effective date of the Employment Agreements.
Pursuant
to the terms of the Employment Agreements, the NTS Officers were granted the
following stock option awards under the Company’s 2007 Stock Incentive Plan on
February 26, 2008: Ms. Baldwin was granted options to purchase 250,000 shares of
our Common Stock, and each of Messrs. Hoover and Worthington was granted options
to purchase 400,000 shares of our Common Stock. Each option is immediately
exercisable, expires five years from the grant date, and has an exercise price
of $2.794, which is 10% over the average closing price of our Common Stock for
the ten trading days immediately preceding August 22, 2007, the execution date
of the Purchase Agreement. Additionally, the Employment Agreements provide that
at the end of each NTS Officer’s second year of his or her employment, he or she
will be granted options to purchase 267,000 shares of our Common Stock, which
will be immediately exercisable at $5.00 per share, and will expire five years
from such grant date.
The
Employment Agreements may be terminated upon the death of the NTS Officers, for
cause (immediately upon notice from NTS to the NTS Officer), for good reason
(following thirty days’ prior notice from NTS to the NTS Officer), for any
reason other than for good reason, or upon the disability of the NTS Officer,
each as defined in the Employment Agreements. The NTS Officers are entitled to
the following payments upon such termination:
1. If
the NTS Officer terminates the Employment Agreement for good reason, NTS will
pay the NTS Officer his or her salary for the remainder of the employment term,
except that if the NTS Officer obtains other employment during that time, such
salary payments will be reduced by the amount received with respect to such
other employment.
2. If
the NTS Officer terminates his employment for any reason other than for good
reason, the NTS Officer will be entitled to receive his or her salary only
through the date such termination is effective, and any unexercised vested
options to purchase our Common Stock and rights to receive any additional
options to purchase our Common Stock shall be cancelled.
3. If
NTS terminates the Employment Agreement for cause, the NTS Officer will be
entitled to receive his or her salary through the date such termination is
effective, and any options for our Common Stock issued in any year subsequent to
Employment Year 1 shall be cancelled.
4. If
the Employment Agreement is terminated because of the NTS Officer’s death, the
NTS Officer will be entitled to receive his or her salary through the end of the
calendar month in which his or her death occurs, and any right to receive any
additional options to purchase our Common Stock shall be cancelled.
5. If
the Employment Agreement expires after the performance of the full term and NTS
and the NTS Officer cannot agree on the terms for an extension of the Employment
Agreement or a new employment agreement to replace the Employment Agreement, and
the NTS Officer terminates employment, then the NTS Officer will be entitled to
receive as severance pay his or her salary for a period of three (3) months
following the date of such termination.
6. If
the Employment Agreement is terminated by either party as a result of the NTS
Officer’s disability, NTS will pay the NTS Officer his or her salary through the
remainder of the calendar month during which such termination is effective and
any right to receive any additional options for our Common Stock shall be
cancelled.
In the
event of any termination of employment by the NTS Officers for any reason other
than death, disability or for good reason, the NTS Officers have agreed to pay
to NTS the following amounts as liquidated damages:
Employment
Year during which such termination occurs:
|
|
Ms.
Baldwin
|
|
|
Mr.
Hoover
|
|
|
Mr.
Worthington
|
|
Year
1
|
|
$
|
773,000
|
|
|
$
|
487,680
|
|
|
$
|
487,680
|
|
Year
2
|
|
$
|
618,400
|
|
|
$
|
390,144
|
|
|
$
|
390,144
|
|
Year
3
|
|
$
|
463,800
|
|
|
$
|
292,608
|
|
|
$
|
292,608
|
|
Year
4
|
|
$
|
309,200
|
|
|
$
|
195,072
|
|
|
$
|
195,072
|
|
Year
5
|
|
$
|
154,600
|
|
|
$
|
97,536
|
|
|
$
|
97,536
|
|
The NTS
Officers are permitted to participate in such life insurance, hospitalization,
major medical, and other executive benefit plans of NTS that may be in effect
from time to time. However, the NTS Officers’ accrual of, or participation in
plans providing for, such benefits will cease on the effective date of the
termination of the Employment Agreement, and the NTS Officer will be entitled to
accrued benefits pursuant to such plans only as provided in such
plans.
The NTS
Officers have also agreed to confidentiality and non-disclosure of confidential
information during and following the employment period, as well as customary
non-competition and non-interference for the greater of (i) five (5) years
from the date of the Employment Agreement or (ii) the employment period and
for a period of two (2) years following the date that the employment
ends.
The
Employment Agreements also provide piggyback registration rights for the NTS
Officers from the effective date of the Employment Agreement through the
expiration or termination of the Employment Agreements, to register for resale
the shares of our Common Stock they own as a result of exercising any of the
options granted pursuant to the Employment Agreements. The 1,000,000 shares
underlying the abovementioned options were subsequently registered for resale,
on a Registration Statement on Form S-1 which we filed with the SEC (File No.
333-150305), which was declared effective by the SEC on September 2,
2008.
John
Mark Burton
A July 3,
2006 Service Agreement between the Company, Swiftnet Limited and John Mark
Burton (otherwise known as “Executive” in the service agreement), the Managing
Director of our UK based subsidiaries, Swiftnet, Equitalk.co.uk, Auracall, and
Story Telecom, provides for an employment term for Mr. Burton for an indefinite
period, terminable by either party giving to the other three months notice, if
given during the first six months of the agreement, and thereafter, Swiftnet
must provide Mr. Burton with no less than six months notice, and Mr. Burton must
provide Swiftnet with no less than three months written notice, to terminate the
agreement.
The
agreement provides that Mr. Burton is entitled to a salary at a rate of £70,000
(approximately $99,120) per year, inclusive of any directors’ fees payable to
him, payable by equal monthly installments in arrears on the last day of each
month. In addition, Mr. Burton is entitled to bonus compensation as
follows:
1.
Within
fourteen (14) days from the date of the agreement, we will grant the Executive,
under our 2004 Stock Option Plan, 300,000 options for restricted shares of
Common Stock, at a strike price of $3.50 per share. Such options shall vest as
follows: 75,000 options on the first anniversary of this agreement and 18,750
each quarter thereafter during which he is employed by Swiftnet. Such options
may be exercised at any time before the tenth anniversary of the date of the
agreement.
2.
On or
before August 31, 2006, the Executive will be paid a bonus of £4,000 ($5,664) if
he has produced a business plan that the Board approves for execution in
writing.
3.
On or
before October 31, 2006, the Executive will be paid a bonus equal to twelve
percent (12%) of the revenues referable for the month of September 2006 from
former customers of Equitalk, which have transferred to Swiftnet and whose CLIs
and other details have been entered into Swiftnet’s system and set up so as to
ensure that their calls are routed by means of Swiftnet’s switch by 30 September
2006. If such former customers have not paid in relation to such revenues by
December 31, 2006, then the Executive shall repay to Swiftnet within thirty (30)
days, the portion of the bonus that relates to the non-collected
revenues.
4.
If the
share capital of Swiftnet, the Company or any Associated Company of either is
admitted to a recognized investment exchange in the United Kingdom (a “Listing”)
at any time during the course of the Executive’s employment, the Executive will
be paid a bonus of one point thirty three percent (1.33%) of the amount raised
on such a Listing. Such bonus will be subject to any applicable law and
appropriate approvals from the American Stock Exchange, the SEC and/or a UK
Recognized Stock Exchange and shall be paid as soon as reasonably practicable
following the date of the Listing by way of the grant of options or warrants
(exercisable at any time within 5 years of the date of grant subject to any
lock-in periods agreed as part of the Listing process) exercisable into
restricted shares of our Common Stock. Such options or warrants will be priced
at the issue price of the Listing, according to the Black Scholes option -
pricing model, with a volatility of ninety percent (90%).
5.
If
Swiftnet, the Company or any Associated Company acquires the shares, assets of
undertaking of any company or business in the United Kingdom (an “Acquisition”)
at any time during the course of the Executive’s employment, the Executive will
be paid a bonus of one point thirty three percent (1.33%) of the value of the
Acquisition. Such bonus will be subject to any applicable law and appropriate
approvals from the American Stock Exchange and/or the SEC and shall be paid as
soon as reasonably practicable following the date of the Acquisition and may be
satisfied by Swiftnet by procuring that we allot restricted shares of Common
Stock to the Executive to the value of such bonus.
6.
On or
before August 31, 2006, the Executive and Swiftnet will agree a bonus scheme
linked to his individual performance. An on-target bonus of £4,000 per month
will be payable for each month, such targets to be set so as to reward the
Executive for improving the profitability and revenue of Swiftnet, whilst giving
him a realistic chance of reaching them. The bonus will be paid monthly in
arrears and there shall be no entitlement to receive any bonus once the
Executive’s employment has terminated. We and the Executive will agree a formula
to pay the Executive a reduced bonus if targets are not met and an increased
bonus if targets are exceeded.
7.
The
Executive is entitled to the same piggyback registration rights with respect to
our securities allotted to the Executive under the service agreement, as those
enumerated in Clause 3.5 and Schedule 13 of the May 25, 2006 Agreement to
purchase Equitalk.co.uk.
The
service agreement further provides for payment of a sum equal to 7.5% of the
Executive’s salary for way of a contribution to his personal pension scheme, and
provides for medical insurance, a company car, reimbursement for reasonable
business expenses, customary ancillary benefits. Mr. Burton has agreed to
preserve all confidential and proprietary information relating to Swiftnet’s
business during and after the term of his employment, and he has also agreed to
a non-competition provision that is in effect during the term of his employment
and for a period of 6 months after termination, and a non-solicitation
provisions that is in effect during the term of the service agreement and for a
period of 1 year after termination.
Swiftnet
may at any time and in its absolute discretion (whether or not any notice of
termination has been given by Swiftnet) terminate the service agreement with
immediate effect and make a payment in lieu of notice, for termination under
certain circumstances. This payment shall comprise the Executive’s basic salary
(at the rate payable when this option is exercised) and any bonus, pension
contributions or any other benefits and shall be subject to deductions for
income tax and national insurance contributions as appropriate (the “Payment in
Lieu”). The Executive will not, under any circumstances, have any right to
payment in lieu unless the Company has exercised its option to pay in lieu of
notice. The Payment in Lieu may, at Swiftnet’s sole discretion, be made at the
date that the termination of the Executive’s employment is effected by Swiftnet.
During any such period the Executive is required to keep Swiftnet informed on a
monthly basis as to his earnings and the Executive agrees that Swiftnet may
deduct any monies he earns as a consultant or employee during that period from
the Payment in Lieu.
Swiftnet
may also suspend the Executive for up to ninety (90) days on full pay to allow
it to investigate any complaint made against the Executive in relation to his
employment with Swiftnet.
On July
11, 2006, and in conjunction with his service agreement, our Board of Directors
approved the grant of 300,000 options, under and subject to its 2004 Stock
Option Plan, to Mr. Burton. The options are convertible on a one to one basis
into restricted shares of our Common Stock, at an exercise price of $3.50, and
have a term of ten years. The vesting of the options will be over a period of 4
years as follows: 75,000 options were vested on July 3, 2007. Thereafter, 18,750
options are vested every 3 months for the following 3 years.
On
January 15, 2009, Swiftnet and Mr. Burton entered into an agreement amending
certain terms of his July 3, 2006 Service Agreement (the “2009
Amendment”). The 2009 Amendment provided, among other things,
that:
1. Mr.
Burton’s annual salary was increased to £76,000 (approximately $107,616)
effective January 1, 2009;
2. Mr.
Burton is eligible to earn a EBITDA Generation cash bonus of £24,000
(approximately $33,984) for achieving a certain pre-established EBITDA for
Swiftnet for 2009 based on the agreed upon UK Consolidated 2009
budget. If the target EBITDA is not met, then Mr. Burton’s bonus will
be adjusted as follows:
a.
|
If
the EBITDA target is missed by x%, then the EBITDA Generation Bonus
payable will be £24,000 x (1-x%).
|
b.
|
If
the EBITDA target is missed by more than 25%, then no bonus is
payable.
|
c.
|
If
the EBITDA target is exceeded, then Mr. Burton will be paid 5% of the
additional EBITDA generated, up to a maximum of
£50,000.
|
3. Mr.
Burton is eligible to earn a cash bonus for achieving an increase in US
consolidated sales during the year ended December 31, 2009, over and above the
sales for the year ended December 31, 2008. This bonus will be equal to 1.5% of
the increase in sales, but is capped at £100,000. This annual bonus
is payable only if the EBITDA target has been exceeded, and the new sales have a
positive gross margin.
4. Bonuses
are payable within 15 days of the date by which the UK consolidated audited
accounts for 2009 are approved by the UK companies boards. Late
payments of bonuses earn interest at Barclays Base rate plus 2%.
5. Mr.
Burton’s remuneration package will be reviewed annually in December of each
year, and any changes will be effective as of January 1 of the following
year.
Roni
Haliva
An
employment contract dated August 26, 2007 (the “Contract”) between Xfone 018
Ltd., our majority-owned Israel based subsidiary, and Roni Haliva, its General
Manager, provides that Mr. Haliva will be paid a base salary of NIS 36,000
(approximately $8,519) per month, linked to the rate of increase of the Israeli
Consumer Prices Index, and will also be entitled to annual bonus payments which
will be determined based upon Xfone 018’s achievement of certain performance
targets related to its annual budget (the “Targets”) as proposed by Mr. Haliva
and fixed by Xfone 018’s Board of Directors annually (the “Success
Bonuses”).
Mr.
Haliva also was paid a budget preparation bonus of NIS 6,000 (approximately
$1,420) for the months of September, October and November of 2007. The Contract
also provides for allocations to a pension plan and continuing education fund
for Mr. Haliva’s benefit, as well as the receipt of convalescent pay, payments
in connection with a sale of Xfone 018’s shares or business under certain
circumstances, use of a company car, and other customary ancillary benefits. Mr.
Haliva has agreed to preserve all confidential and proprietary information
relating to Xfone 018’s business during and after the term of his employment,
and he has agreed to non-competition and non-solicitation provisions that are in
effect during the term of the Contract and for one year thereafter.
Mr.
Haliva will also be entitled to receive the following number of options to
purchase shares of our Common Stock under the Company’s 2007 Stock Incentive
Plan. The options are described in Appendix A to the Contract, which was
approved by our Board of Directors and we entered into on August 26,
2007:
1.
Within 30
days of adoption of the 2007 Stock Incentive Plan, Mr. Haliva will be granted
options to purchase 300,000 shares of Common Stock, at an exercise price of
$3.50 per share, of which (i) options to purchase 75,000 shares will be
exercisable after 12 months have elapsed from the commencement of his
employment, but not before the qualifying date (the “First Exercise Date”); and
(ii) options to purchase 18,750 shares will be exercisable at the end of
every 3 month period, beginning after 3 months have elapsed from the First
Exercise Date.
2.
At the
end of each calendar year between 2008 and 2011, and upon the achievement by
Xfone 018 100% of its Targets for each such year, Mr. Haliva will be granted
options to purchase 25,000 shares of our Common Stock under the 2007 Stock
Incentive Plan, for an exercise price of $3.50 per share, which will be
exercisable 30 days after we publish our annual financial statements for such
year.
All
options will expire 120 days after termination of Mr. Haliva’s employment with
Xfone 018.
The
Contract may be terminated by either party at any time, upon 120 days prior
written notice during the first year of Mr. Haliva’s employment, and upon 180
days prior written notice during the second year of employment and
thereafter.
As of
March 31, 2009, Mr. Haliva was granted Success Bonuses for fiscal year 2008 in
the aggregate amount of NIS 148,663 (approximately $35,178). Of that amount, NIS
24,022 (approximately $5,684) was paid in 2009.
Bosmat
Houston
The
employment agreement dated January 1, 2000, as amended from time to time through
salary review letters, between Swiftnet Limited and Bosmat Houston, Research and
Development Manager, provides for employment for an unspecified term on an “at
will” basis. Either Swiftnet of Ms. Houston may terminate the agreement upon
three-months written notice; however, if Ms. Houston is in violation of the
agreement, Swiftnet may terminate her employment without notice. The agreement
provides that Ms. Houston be paid an annual salary of £54,000 (approximately
$76,464) payable monthly on the first day of each month. Ms. Houston has agreed
to preserve all confidential and proprietary information relating to the
Company’s business during and for a period of 3 years after the term of her
employment. She has also agreed to non-competition provision for a period of one
year after termination of the agreement.
On
February 6, 2005, Ms. Houston was granted options to purchase 150,000 shares of
our Common Stock under the 2004 Stock Option Plan at an exercise price of $3.50
per share, vesting over a period of 4 years as follows: 25% of the options are
vested after a year from the date of grant. Thereafter, 1/16 of the options are
vested every 3 months for the following 3 years. The options expire 5.5 years
from the date of grant.
Agreements
with Wade Spooner and Ted Parsons, former employees of Xfone USA,
Inc.
Background
In
connection with our acquisition of WS Telecom, Inc., and its merger with and
into Xfone USA, Inc. which was consummated on March 10, 2005, an Employment
Agreement was entered into between Xfone USA and each of Wade Spooner, WS
Telecom Inc.’s President and Chief Executive Officer (the “Spooner Employment
Agreement”), and Ted Parsons, WS Telecom’s Executive President and Chief
Marketing Officer (the “Parsons Employment Agreement’). Mr. Spooner
served as Xfone USA’s President and Chief Executive Officer, and Mr. Parsons
served as Xfone USA’s Executive President and Chief Marketing Officer, from
March 10, 2005 through the date of expiration of their Employment Agreement on
March 10, 2008. On March 11, 2008, Xfone USA notified each of Mr.
Spooner and Mr. Parsons in writing that Xfone USA was not renewing his
Employment Agreement, and their respective employment with Xfone USA ended at
the close of business on March 11, 2008.
Spooner Separation Agreement
and Spooner Warrants Issued Thereunder
On August
15, 2008, we, Xfone USA and Mr. Spooner entered into a Separation Agreement and
Release (the “Spooner Separation Agreement”). Pursuant to the Separation
Agreement, Mr. Spooner forever released and discharged us, Xfone USA, NTS
Communications, Inc., the Oberon Group, LLC and their respective affiliates
(including subsidiaries), shareholders, directors, officers, employees, agents
and attorneys (in their individual and representative capacities), including,
without limitation Guy Nissenson, Barbara Baldwin and Adam Breslawsky
(collectively the “Released Entities and Persons”), and Xfone USA has forever
released and discharged Mr. Spooner and his agents and attorneys (in their
individual and representative capacities) from any and all claims, demands,
losses, damages, actions, causes of action, suits, debts, promises, liabilities,
obligations, liens, costs, expenses, attorney’s fees, indemnities,
subrogations (contractual or equitable) or duties, of any nature,
character or description whatsoever, arising from or relating to, directly or
indirectly, Mr. Spooner’s employment and discontinuation of employment with
Xfone USA.
The
Spooner Separation Agreement provided that Mr. Spooner was entitled to an
aggregate 321,452 Common Stock purchase warrants, as follows (collectively, the
“Spooner Warrants’):
1. 300,000
non-tradable warrants (“Spooner New Warrants”) to purchase shares of our
restricted Common Stock for a term of five (5) years from the date of
issuance, convertible on a one-to-one basis at a strike price of
$3.63 per share; and
2. 21,452
non-tradable warrants convertible on a one to one basis into our restricted
Common Stock, of which 2,483 warrants will expire on December 30, 2010 and have
a strike price of $3.04 per share, and the remaining 18,969 of the warrants will
expire on March 31, 2011 and have a strike price of $3.26 per share
(collectively, the “Spooner Additional Acquisition Bonus Warrants”), issuable in
full settlement and satisfaction of any Acquisition Bonus Warrants due to Mr.
Spooner under Section 3.4 of his Employment Agreement.
The
issuance of the Spooner Warrants was subject to the approval of the NYSE Amex,
the TASE and/or any other applicable exchange or market where our Common Stock
is traded. We received approval from the NYSE Amex on March 27, 2009.
Approval from the TASE had been granted on August 27, 2008, but expired on
February 25, 2009. The issuance of the Spooner Warrants is pending our receipt
of new approval from the TASE.
Mr.
Spooner was also granted piggyback registration rights with respect to the
shares underlying the Spooner Warrants for a period of five years from the date
of the Spooner Separation Agreement.
In
addition, Xfone USA agreed to pay Mr. Spooner $210,000.00 in cash, payable in
twenty four (24) bi-monthly payments of $8,750.00 on the 15
th
and the
last day of each month or on the next business day if a payment date falls on
either a weekend or holiday, beginning on August 23, 2008. To date,
Xfone USA has paid Mr. Spooner $122,500 pursuant to the terms of the Spooner
Separation Agreement.
Pursuant
to the Spooner Separation Agreement the terms and conditions of the
confidentiality, non-compete and non-interference provisions provided for in Mr.
Spooner’s Employment Agreement were ratified and remain in full force and
effect. Under the Employment Agreement, Mr. Spooner agreed to
preserve all confidential and proprietary information relating to Xfone USA’s
business, including executive inventions after the term of his employment, and
he agreed to non-competition and non-non-interference provisions that are in
effect for two years after the date of his termination of
employment.
Mr.
Spooner has agreed to return to Xfone USA all documents (and all copies thereof)
and any and all other Xfone USA property in Spooner’s possession, custody or
control, and to cooperate, for a period of one year from the date of the Spooner
Separation Agreement, in connection with any action or proceeding which relates
to the Company and/or its affiliates. Xfone USA agreed to pay Mr.
Spooner a consulting fee of $200 per hour for each hour exceeding 5 hours per
month and reimburse Mr. Spooner for reasonable out-of-pocket expenses
pre-approved by us (such as hotel and travel expenses) incurred by Mr. Spooner
in connection with such cooperation following its receipt of Mr. Spooner's
appropriately itemized request. Consulting payments and expense
reimbursement shall be paid on the 15th of the month following the month in
which such fee or expense was incurred, or on the next business day if a payment
date falls in either a weekend or holiday.
Any
breach of Mr. Spooner’s obligations under certain sections of his Employment
Agreement or Separation Agreement that are not cured as provided in the
Separation Agreement, will result in a forfeiture of the cash payment,
forfeiture of the Spooner New Warrants, and will give Xfone USA the right to
purchase any of our Common Stock acquired by exercise of any of the Spooner New
Warrants granted pursuant to the Separation Agreement at the strike price
therefore.
Parsons Separation Agreement
and
Parsons Warrants Issued
Thereunder
On August
15, 2008, we, Xfone USA and Mr. Parsons entered into a Separation Agreement and
Release (the “Parsons Separation Agreement”). Pursuant to the Parsons Separation
Agreement, Mr. Parsons forever released and discharged us, Xfone USA, NTS
Communications, Inc., the Oberon Group, LLC and their respective affiliates
(including subsidiaries), shareholders, directors, officers, employees, agents
and attorneys (in their individual and representative capacities), including,
without limitation Guy Nissenson, Barbara Baldwin and Adam Breslawsky
(collectively the “Released Entities and Persons”), and Xfone USA has forever
released and discharged Mr. Parsons and his agents and attorneys (in their
individual and representative capacities) from any and all claims, demands,
losses, damages, actions, causes of action, suits, debts, promises, liabilities,
obligations, liens, costs, expenses, attorney’s fees, indemnities,
subrogations (contractual or equitable) or duties, of any nature,
character or description whatsoever, arising from or relating to, directly or
indirectly, Mr. Parsons’ employment and discontinuation of employment with Xfone
USA.
The
Parsons Separation Agreement provided that Mr. Parsons is entitled to an
aggregate 160,727 Common Stock purchase warrants, as follows (collectively, the
“Parsons Warrants’):
1. 150,000
non-tradable warrants (“Parsons New Warrants”) to purchase shares of our
restricted Common Stock for a term of five (5) years from the date of issuance,
convertible on a one-to-one basis at a strike price of $3.63 per share;
and
2. 10,727
non-tradable warrants convertible on a one to one basis into our restricted
Common Stock, of which 1,242 warrants will expire on December 30, 2010 and have
a strike price of $3.04 per share, and the remaining 9,485 of the warrants will
expire on March 31, 2011 and have a strike price of $3.26 per share
(collectively, the “Parsons Additional Acquisition Bonus Warrants”), issuable in
full settlement and satisfaction of any Acquisition Bonus Warrants due to Mr.
Parsons under Section 3.4 of his Employment Agreement.
The
issuance of the Parsons Warrants was subject to the approval of the NYSE Amex,
the TASE and/or any other applicable exchange or market where our Common Stock
is traded. We received approval from the NYSE Amex on March 27, 2009.
Approval from the TASE had been granted on August 27, 2008, but expired on
February 25, 2009. The issuance of the Parsons Warrants is pending our receipt
of new approval from the TASE.
Mr.
Parsons was also granted piggyback registration rights with respect to the
shares underlying the Parsons Warrants for a period of five years from the date
of the Parsons Separation Agreement.
In
addition, Xfone USA agreed to pay Mr. Parsons $115,340.00 in cash, payable in
twenty four (24) bi-monthly payments of $4,805.84 on the 15
th
and the
last day of each month or on the next business day if a payment date falls on
either a weekend or holiday, beginning on August 23, 2008. To date,
Xfone USA has paid Mr. Parsons $67,282 pursuant to the terms of the Parsons
Separation Agreement.
Pursuant
to the Parsons Separation Agreement the terms and conditions of the
confidentiality, non-compete and non-interference provisions provided for in Mr.
Parsons’ Employment Agreement were ratified and remain in full force and
effect. Under his Employment Agreement, Mr. Parsons agreed to
preserve all confidential and proprietary information relating to Xfone USA’s
business, including executive inventions after the term of his employment, and
he agreed to non-competition and non-non-interference provisions that are in
effect for two years after the date of his termination of
employment.
Mr.
Parsons has agreed to return to Xfone USA all documents (and all copies thereof)
and any and all other Xfone USA property in Parsons’ possession, custody or
control, and to cooperate, for a period of one year from the date of the
Separation Agreement, in connection with any action or proceeding which relates
to the Company and/or its affiliates. Xfone USA agreed to pay Mr.
Parsons a consulting fee of $100 per hour for each hour exceeding 5 hours per
month and reimburse Mr. Parsons for reasonable out-of-pocket expenses
pre-approved by us (such as hotel and travel expenses) incurred by Mr. Parsons
in connection with such cooperation following its receipt of Mr. Parsons'
appropriately itemized request. Consulting payments and expense
reimbursement shall be paid on the 15th of the month following the month in
which such fee or expense was incurred, or on the next business day if a payment
date falls in either a weekend or holiday.
Any
breach of his obligations under certain sections of the Parsons Employment
Agreement or the Parsons Separation Agreement that are not cured as provided in
the Separation Agreement, will result in a forfeiture of the cash payment,
forfeiture of the Parsons New Warrants, and will give Xfone USA the right to
purchase any of our Common Stock acquired by exercise of any of the Parsons New
Warrants granted pursuant to the Separation Agreement at the strike price
therefore.
Director
C
ompensation for 2008
Compensation
for Board Services and Reimbursement of Expenses
The
Company does not compensate Directors who also serve as executive officers of
the Company for their services on the Board. During fiscal 2008, the Company
compensated all its non-employed Directors for participation at meetings of the
Board and Committees of the Board as follows: (a) $250 - for physical
participation at each meeting of the Board or Committee of the Board; plus
(b) $100 - for participation via the telephone at each meeting of the Board
or Committee of the Board. In addition, the Company reimbursed its non-employed
Directors for expenses incurred in connection with Board services. These
expenses are reviewed and pre-approved by the President of the
Company.
The
following table reflects all compensation awarded to, earned by or paid to the
Company’s Directors for the fiscal year ended December 31, 2008.
Name
|
|
Fees
Earned or Paid in Cash (1)
($)
|
|
|
Stock
Awards
($)
|
|
|
Options
Awards
($)(2)
|
|
|
Non-Equity
Incentive Plan Compensation
($)
|
|
|
Nonqualified
Deferred Compensation Earnings
($)
|
|
|
All
Other Compensation
($)
|
|
|
Total
($)
|
|
Abraham
Keinan(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Guy
Nissenson(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Eyal
J. Harish(4)
|
|
|
1,150
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,150
|
|
Shemer
S. Schwartz (5)
|
|
|
2,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,250
|
|
Itzhak
Almog(6)
|
|
|
2,850
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,850
|
|
Aviu
Ben-Horrin(7)
|
|
|
1,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,250
|
|
Israel
Singer(8)
|
|
|
2,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,200
|
|
Morris
Mansour(9)
|
|
|
700
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
700
|
|
Arie
Rosenfeld(10)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(1)
|
These
amounts will be paid in April 2009.
|
(2)
|
The
amount shown in the table reflects the dollar amount recognized for fiscal
2008 financial statement reporting purposes of the outstanding stock
options granted to the directors in accordance with FAS
123R.
|
(3)
|
The
Company does not compensate Directors who also serve as executive officers
for their services on the Board. Accordingly, Mr. Keinan and Mr. Nissenson
did not receive any compensation for their service on the Company’s Board
during fiscal 2008.
|
(4)
|
As
of December 31, 2008, Mr. Harish held 75,000 options, fully exercisable at
an exercise price of $3.50 and with expiration date of November 24,
2010.
|
(5)
|
As
of December 31, 2008, Mr. Schwartz held 75,000 options, fully exercisable
at an exercise price of $3.50 and with expiration date of November 24,
2010.
|
(6)
|
As
of December 31, 2008, Mr. Almog held 25,000 options, fully exercisable at
an exercise price of $3.50 and with expiration date of October 30,
2012.
|
(7)
|
As
of December 31, 2008, Mr. Ben-Horrin held 25,000 options, fully
exercisable at an exercise price of $3.50 and with expiration date of
November 24, 2010.
|
(8)
|
As
of December 31, 2008, Mr. Singer held 20,000 options, which vested in full
on June 5, 2008, one year from grant date, are exercisable at an exercise
price of $3.50, and will expire on June 5,
2013.
|
(9)
|
As
of December 31, 2008, Mr. Mansour held 20,000 options, which vested in
full on June 5, 2008, one year from grant date, are exercisable at an
exercise price of $3.50, and will expire on June 5,
2013.
|
(10)
|
As
of December 31, 2008, Mr. Rosenfeld held no
options.
|
ITEM
12. SECU
RITY
OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following table sets forth, as of March 30, 2009, certain information with
respect to the beneficial ownership of our Common Stock by each stockholder
known by us to be the beneficial owner of more than 5% of our Common Stock and
by each of our current directors and executive officers. Each person has sole
voting and investment power with respect to the shares of Common Stock, except
as otherwise indicated. Information relating to beneficial ownership of Common
Stock by our principal stockholders and management is based upon information
furnished by each person using “beneficial ownership” concepts under the rules
of the Commission. Under these rules, a person is deemed to be a beneficial
owner of a security if that person has or shares voting power, which includes
the power to vote or direct the voting of the security, or investment power,
which includes the power to invest or dispose, or to direct the investment
or disposition of, the security. The person is also deemed to be a beneficial
owner of any security of which that person has a right to acquire beneficial
ownership within 60 days. Under the Commission rules, more than one person may
be deemed to be a beneficial owner of the same securities, and a person may be
deemed to be a beneficial owner of securities as to which he or she may not have
any pecuniary beneficial interest. We are unaware of any contract or arrangement
which could result in a change in control of the Company.
The
following table assumes, based on our stock records, that there are 18,376,075
shares issued and outstanding as of March 30, 2009.
Title
of
Class
|
Name,
Title & Address of Beneficial Owner
|
|
Amount
of
Beneficial
Ownership
|
|
Nature
of
Ownership
|
|
Percent
of
Class
|
|
Common
|
Abraham
Keinan
(1)(3)
Chairman
of the Board
4
Wycombe Gardens
London
NW11 8AL
United
Kingdom
|
|
|
4,808,000
|
|
Direct
|
|
|
24.19
|
%
|
Common
|
Guy
Nissenson
(2)(3)
President,
Chief Executive Officer, and Director,
3A
Finchley Park
London
N12 9JS
United
Kingdom
|
|
|
2,815,000
|
|
Direct/Indirect
|
|
|
14.16
|
%
|
Common
|
Eyal J.
Harish
(4)
Director
18
Bloch St.
Tel
Aviv, Israel
|
|
|
75,000
|
|
Direct
|
|
|
0.41
|
%
|
Common
|
Shemer S.
Schwartz
(5)
Director
5
Israel Galili St.
Kefar
Saba, Israel
|
|
|
83,900
|
|
Direct
|
|
|
0.45
|
%
|
Common
|
Aviu
Ben-Horrin
(6)
Director
40
Jabotinski St.
Kefar
Sava, Israel
|
|
|
25,000
|
|
Direct
|
|
|
0.14
|
%
|
Common
|
Itzhak
Almog
(7)
Director
7/A
Moledet St.
Hod
Hasharon, Israel
|
|
|
25,000
|
|
Direct
|
|
|
0.14
|
%
|
Common
|
Morris
Mansour
(8)
Director
31
Tenterden Gardens
London NW4
1TG, United Kingdom
|
|
|
20,000
|
|
Direct
|
|
|
0.11
|
%
|
Common
|
Israel
Singer
(9)
Director
63
Ben Eliezer St.
Ramat
Gan, Israel
|
|
|
20,000
|
|
Direct
|
|
|
0.11
|
%
|
Common
|
Arie
Rosenfeld
Director
9,
Clos de Wagram
1180
Brussels, Belgium
|
|
|
0
|
|
N/A
|
|
|
--
|
|
Common
|
Directors
and Executive Officers as a group (9 persons)
|
|
|
7,666,500
|
|
Direct
|
|
|
39.71
|
%
|
Common
|
Scott
Richard L(10)
700
11th street South, Suite 101
Naples,
FL 34102
|
|
|
3,443,121
|
|
Indirect
|
|
|
17.96
|
%
|
Common
|
Gagnon
Securities LLC(11)(12)
1370
Ave. of the Americas, Suite 2400
New
York, NY 10019
|
|
|
1,896,156
|
|
Indirect
|
|
|
10.28
|
%
|
Common
|
Neil
Gagnon(11)(12)
1370
Ave. of the Americas, Suite 2400
New
York, NY 10019
|
|
|
2,712,137
|
|
Direct/Indirect
|
|
|
14.42
|
%
|
(1)
|
Until
June 23, 2004, Abraham Keinan indirectly held 1,302,331 shares of our
Common Stock through Vision Consultants Limited, a Nassau, Bahamas
incorporated company that is 100% owned by Mr. Keinan. On June 23, 2004,
the shares held by Vision Consultants Limited were transferred to Mr.
Keinan as an individual. In addition, certain stockholders provided Mr.
Keinan and Mr. Nissenson with irrevocable proxies representing a total of
2.25% of our Common Stock. On November 24, 2004, our board of directors
issued 1,500,000 options to Mr. Keinan on the following terms: Option
exercise price - $3.5, vesting date - 12 month from the date of grant,
expiration date - 5 years from the vesting date. Mr. Keinan’s 4,808,000
shares of Common Stock include 1,500,000 shares issuable upon the exercise
of options, exercisable within 60 days from the date of this Annual
Report.
|
(2)
|
Guy
Nissenson, our President, Chief Executive Officer, and Director, holds
111,500 shares of our Common Stock and has indirect beneficial ownership
of 1,203,500 shares of our Common Stock and direct beneficial ownership of
1,500,000 shares issuable upon the exercise of options, exercisable within
60 days from the date of this Annual Report. In addition, certain
stockholders provided Mr. Nissenson and Mr. Keinan with irrevocable
proxies representing a total of 5.59% of our Common Stock. To the extent
that we issue any shares to Abraham Keinan, Campbeltown Business Ltd. has
the right to purchase or acquire such number of our shares on the same
terms and conditions so that the relative percentage ownership of Abraham
Keinan and Campbeltown Business Ltd. remains the same. On November 24,
2004, our board of directors issued 1,500,000 options to Mr. Nissenson on
the following terms: Option exercise price - $3.5, vesting date - 12 month
from the date of grant, expiration date - 5 years from the vesting
date.
|
(3)
|
Our
Chairman of the Board, Abraham Keinan, and our President, Chief Executive
Officer, and Director, Guy Nissenson, exercise significant control over
stockholder matters through a September 28, 2004 Voting Agreement between
Mr. Keinan, Mr. Nissenson and Campbeltown Business Ltd., an entity owned
and controlled by Mr. Nissenson and his family. This agreement is for a
term of 10 years and provides that: (a) Messrs Keinan and Nissenson
and Campbeltown Business, Ltd. agree to vote any shares of our Common
Stock controlled by them only in such manner as previously agreed by all
these parties; and (b) in the event of any disagreement regarding the
manner of voting, a party to the agreement will not vote any shares,
unless all the parties have settled the
disagreement.
|
(4)
|
Dr.
Eyal J. Harish is the former brother-in-law of Abraham Keinan, our
Chairman of the Board. Dr. Harish holds 75,000 shares issuable upon the
exercise of options, exercisable within 60 days from the date of this
Annual Report.
|
(5)
|
Mr.
Shemer S. Schwartz holds 8,900 shares of our Common Stock and 75,000
shares issuable upon the exercise of options, exercisable within 60 days
from the date of this Annual
Report.
|
(6)
|
Mr.
Aviu Ben-Horrin holds 25,000 shares issuable upon the exercise of options,
exercisable within 60 days from the date of this Annual
Report.
|
(7)
|
Mr.
Itzhak Almog holds 25,000 shares issuable upon the exercise of options,
exercisable within 60 days from the date of this Annual
Report.
|
(8)
|
Mr.
Morris Mansour holds 20,000 shares issuable upon the exercise of
options, exercisable within 60 days from the date of this Annual
Report.
|
(9)
|
Mr.
Israel Singer holds 20,000 shares issuable upon the exercise of
options, exercisable within 60 days from the date of this Annual
Report.
|
(10)
|
According
to a Form 4 filed on November 14, 2008, , Richard L Scott, the controlling
member of XFN RLSI Investments, LLC , located at 28 West 44
th
Street, Suite 1111, New York, NY 10036 (“XFN RLSI”), may be deemed to
beneficially own 2,643,121 shares of our Common Stock owned by XFN
RLSI. According to a Schedule 13D/A filed with the SEC on
September 8, 2008, Mr. Scott may also be deemed to beneficially own a
warrant owned by XFN RLSI to purchase an additional 800,000 shares of
Common Stock, for aggregate beneficial ownership of 3,443,121 shares. The
table reflects beneficial ownership of all shares and the
warrant.
|
(11)
|
According
to a Schedule 13G/A filed with the SEC on February 18, 2009 by Gagnon
Securities LLC and Neil Gagnon (the “Gagnon 13G/A”), Gagnon Securities
LLC, a registered investment adviser, in its role as investment manager to
several customer accounts, foundations, partnerships, trusts, and private
investment funds (collectively, the “Funds”) to which it furnishes
investment advice, may be deemed to beneficially own 1,896,156 shares of
our Common Stock which are owed by the Funds, which includes 72,132 shares
issuable upon exercise of warrants. Gagnon Securities LLC shares
investment and/or voting power with Mr. Gagnon, the managing member and
the principal owner of Gagnon Securities LLC, over certain of the
1,896,156 shares owned by the Funds, and shares investment discretion
and/or voting power over the remaining shares with persons other than Mr.
Gagnon. Gagnon Securities LLC has expressly disclaimed beneficial
ownership of all securities held in the Funds' accounts. No single
client's interest as reported in the customer accounts at Gagnon
Securities LLC exceeds 5% of our outstanding Common
Stock.
|
(12)
|
According
to the Gagnon 13G/A, Mr. Gagnon has sole voting power with respect to
1,424,946 shares of our Common Stock (which includes 254,545 shares
issuable upon exercise of warrants), shares voting power with respect to
1,202,275 shares of our Common Stock (which includes 157,323 shares
issuable upon exercise of warrants), has sole dispositive power with
respect to 1,424,946 shares of our Common Stock (which includes 251,300
shares issuable upon exercise of warrants), and shares dispositive power
with respect to 1,287,191 shares of our Common Stock (which includes
176,568 shares issuable upon exercise of warrants). Mr. Gagnon
has expressly disclaimed beneficial ownership of all securities held in
the Funds' accounts. No single client's interest as reported in the
customer accounts at Gagnon Securities LLC exceeds 5% of our outstanding
Common Stock.
|
As of the
date of this Annual Report, our Chairman of the Board, Abraham Keinan,
beneficially owns 18% of our Common Stock (excluding options). Our President,
Chief Executive Officer, and Director, Guy Nissenson beneficially owns
0.61% of our Common Stock and has significant influence over an additional 6.55%
of our Common Stock (excluding options), which is owned by Campbeltown Business
Ltd., an entity owned and controlled by Mr. Nissenson and his family. In
addition, certain stockholders provided Mr. Nissenson and Mr. Keinan with
irrevocable proxies representing a total of 5.59% of our Common Stock. Shemer S.
Schwartz, a director, beneficially owns 0.048% of our Common Stock (excluding
options). Our wholly owned subsidiary, Swiftnet Limited, beneficially owns 0.71%
of our Common Stock. Therefore, our management potentially may vote 31.508% of
our Common Stock, without giving effect to the issuance of any shares upon the
exercise of outstanding warrants or options. As such, our management
may have control over the outcome of matters submitted to a vote of the holders
of our Common Stock, including the election of our directors, amendments to our
articles of incorporation and bylaws and approval of significant corporate
transactions. Additionally, our management may be able to delay, deter or
prevent a change in our control that might be beneficial to our other
stockholders.
Equity
Compensation Plans
The
information with respect to our equity compensation plan is incorporated herein
by reference to Item 5 of Part II of this Annual Report.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
, AND
DIRECTOR
INDEPENDENCE
Swiftnet
Limited
General
Contract for Services
A General
Contract for Services by and between the Company and its wholly owned
subsidiary, Swiftnet Limited, provides that as of January 1, 2005, the Company
will provide Swiftnet the following services: Marketing, Finance and Operational
Consultancy work related to customers and transactions that are based in and
outside the United Kingdom. In return for these services, Swiftnet will pay the
Company the following consideration: 5% of the total turnover of Swiftnet; 5% on
money raised from sources outside the United Kingdom; and expenses. The General
Contract for Services may be terminated by either party upon 30 days prior
written notice to the other party.
On March
14, 2007, the Company and Swiftnet entered into a First Amendment to the General
Contract for Services (the “First Amendment”) to be effective as of January 1,
2006. The First Amendment provides that the Company will render Swiftnet the
following services; Day-to-day support to the Directors of Swiftnet in the
general management of the business (to include Marketing, Finance and
Operational advisory work), special projects (outside of the day-to-day
management of the business) required to achieve specific business development
goals (to include the new supplier relationships and the introduction of new
products and processes) and activities to secure financing for Swiftnet (from
outside the U.K.). In exchange for the services Swiftnet will pay the Company
according to the following schedule; 2.5% of the total turnover of Swiftnet, in
return for special projects: £750 per each Xfone executive per day, 5% of money
raised from sources outside the U.K., and expenses.
Story
Telecom Limited
Loan
On July
17, 2007, Story Telecom Limited, at that time our majority-owned UK subsidiary
and as of March 25, 2008 a wholly-owned subsidiary, agreed to loan us up to
£400,000 ($787,175) that it had as cash surplus in its bank account. The loan
bears fixed interest rate at 4% over the interest payable by the bank for
deposits under the same terms. The loan is for a one-year term but can be
accelerated by Story Telecom if it requires additional financing to continue to
operate as a going concern. The loan is guaranteed by our wholly owned UK
subsidiary, Swiftnet Limited and by amounts owed to us by Story Telecom. In
addition, Story Telecom has the right to set-off repayments under the loan
against sums due to us by Story Telecom. The loan is re-payable at any time upon
30 days’ notice. On July 18, 2007 and on September 25, 2007, we borrowed
£350,000 ($688,778) and £50,000 ($98,397), respectively, of the loan. On October
8, 2007, Story Telecom agreed to increase the loan ceiling by £300,000 to a
maximum of £700,000. Further borrowings of £100,000 ($196,794) were made on
October 9, 2007. As of December 31, 2008, the aggregate outstanding borrowings
were £500,000 ($729,629).
Xfone
018 Ltd.
Investment
Agreement with a Minority Partner
According
to an August 26, 2004 Investment Agreement between us, Xfone 018 Ltd. and our
26% minority interest partner in Xfone 018 (respectively, the “Investment
Agreement”, the “Minority Partner”), the Minority Partner provided in 2004 a
bank guarantee of NIS 10,000,000 ($2,822,467) to the Ministry of Communications
of the State of Israel which replaced an existing bank guarantee given by us in
connection with Xfone 018’s license to provide international telecom services in
Israel. As part of the Investment Agreement, we agreed to indemnify the Minority
Partner for any damage caused to him due to the forfeiture of the bank guarantee
with the Ministry of Communications on account of any act and/or omission of
Xfone 018, provided that the said act or omission is performed against the
opinion of the Minority Partner or without his knowledge. Further, we agreed
that if at the end of the first two years of Xfone 018’s business activity, its
revenues shall be less than $2,000,000 or if it shall cease business activity
(at any time), we shall secure the return of the bank guarantee to the Minority
Partner.
Pursuant
to the Investment Agreement, the Minority Partner provided in the fourth quarter
of year 2004, a shareholder loan of approximately $400,000 to Xfone 018 (the
“2004 Minority Partner Loan”). The 2004 Minority Partner Loan was established
for four years, unless otherwise agreed between the parties, with annual
interest of 4% and linkage to the Israeli Consumer Price Index. As
of December 31, 2008, the balance of the 2004 Minority Partner Loan was
NIS 1,947,890 ($512,333).
Pursuant
to the Investment Agreement, as of December 31, 2008, Xfone, Inc. provided
to Xfone 018 a shareholder loan in an aggregate amount of $455,606.
The
Investment Agreement provides that we shall be entitled to receive from Xfone
018 management fees equivalent to 5% of the operating profit of Xfone 018, in
return for the management services provided by us to Xfone 018. As of December
31, 2008, management fees in the amount of $62,539 were due and
paid.
Giora
Spigel Agreement
Pursuant
to a verbal agreement between Mr. Giora Spigel and us, the Board of Directors of
Xfone 018 approved on November 24, 2004, subject to the approval of the Ministry
of Communications of the State of Israel, that shares held by us, representing
5% ownership of Xfone 018, will be transferred to Margo Pharma Ltd. (formerly
Margo Sport Ltd.), a company owned by Mr. Spigel and his wife. Upon approval of
the Ministry of Communications of the State of Israel, such verbal agreement was
evidenced by a share transfer deed as required by the Israel Company Law -
1999.
Xfone 018
is currently owned 69% by us, 26% by Newcall Ltd. (a company owned by the
Minority Partner), and 5% by Margo Pharma Ltd.
Loan
to Xfone,Inc.
On
November 19, 2008, Xfone 018 provided us with a loan in the amount of NIS
3,500,000 (approximately $828,206) (the "Xfone Loan"). The Xfone Loan bears
interest at a rate of 0.25% above the interest payable by Xfone 018 to its bank
for utilizing its credit line, but not less than the interest payable by the
bank for NIS short-term deposits (the "Interest Rate"). Currently, the Interest
Rate is 3.8%. The Xfone Loan is to be repaid in four monthly non-equal payments
beginning on February 1, 2009. During fiscal 2008, we did not make any
payments of principal or interest. As of March 31, 2009, we are current
with these payments, and the outstanding principal balance is NIS 1,500,000
($354,946).
Loan
to Minority Partner
On
December 24, 2008, Xfone 018 provided the Minority Partner with a loan in the
amount of NIS 343,680 (approximately $81,325) (the "2008 Loan to Minority
Partner"). The 2008 Loan to Minority Partner is interest-free. On March 26,
2009, upon a resolution of Xfone 018's Board of Directors of same date, the 2008
Loan to Minority Partner was paid off in full by way of set-off with the 2004
Minority Partner Loan.
Letter
of Guarantee relating to Tikshoov Digital Ltd.
On
December 11, 2008, we signed a Letter of Guarantee (the “Guarantee”), pursuant
to which we agreed to guarantee the obligations of Xfone 018 under a certain
contract dated March 13, 2008 (the “Contract”), entered into by and between
Xfone 018 and Tikshoov Digital Ltd. (“Tikshoov”) and a certain Agreement dated
December 11 2008, entered into by and between Xfone 018 and Tikshoov (the
“Agreement”). Pursuant to the Contract, Xfone 018 provides telephone
services to Tikshoov for participants in a television call-in game show. Xfone
018 collects the telephone service fees from the participants and delivers the
fees to Tikshoov, after deducting applicable monthly fees and
costs. Pursuant to the Guarantee, if for any reason Xfone 018 fails
to comply with its obligations under the Contract and pursuant to the Agreement
in whole or in part, we will pay to Tikshoov directly any amounts due and
outstanding. We have agreed to make any payments pursuant to the
Guarantee within three (3) business days upon Tikshoov's first demand, without
deducting any amounts that we may claim from Tikshoov and free of any taxes or
withholdings. The Guarantee terminates and becomes null and void upon
the full satisfaction of Xfone 018's obligations.
Abraham
Keinan
Keinan
Share Issuance
On
September 1, 2000, we issued 1,730,000 shares of our Common Stock to our founder
and Chairman of the Board, Abraham Keinan, for services rendered to us in our
corporate formation. Mr. Keinan’s services consisted of the establishment of our
business concept and providing us with technical expertise. We valued Mr.
Keinan’s services at $247,390.
Keinan
Stock Ownership through Vision Consultants
Until
June 23, 2004, our Chairman of the Board, Mr. Abraham Keinan indirectly held
1,302,331 shares of our Common Stock through Vision Consultants Limited, a
Nassau, Bahamas incorporated company that is 100% owned by Mr. Keinan. On June
23, 2004, the shares held by Vision Consultants Limited were transferred to Mr.
Keinan as an individual.
Redemption
of Keinan Shares
On
December 29, 2005, the Board of Directors of the Company entered into an oral
stock purchase agreement with Mr. Keinan pursuant to which it repurchased
100,000 restricted shares of its Common Stock at a price of $2.50 per share
(market price at that day was $2.75 per share). The 100,000 shares were returned
to us for cancellation. The Agreement was approved by a majority of the
non-interested members of the Board of Directors.
On
December 25, 2006, the Board of Directors of the Company entered into an oral
stock purchase agreement with Mr. Keinan, pursuant to which the Company
repurchased from Mr. Keinan 100,000 restricted shares of its Common Stock at a
price of $2.70 per share (market price at that day was $2.80 per share). The
100,000 shares were returned to us for cancellation on December 26, 2006. The
Agreement was approved by all non-interested members of the Board of Directors,
following a review and discussion by the Company’s Audit Committee.
Keinan
Employment with Swiftnet
Our
Chairman of the Board, Mr. Abraham Keinan, has been employed by our wholly owned
UK based subsidiary, Swiftnet Limited since its inception in 1990. In 2005, Mr.
Keinan’s annual salary was £54,594 ($77,305). In 2006, Mr. Keinan’s annual
salary was £48,000 ($67,968). Mr. Keinan received in addition to his monthly
salary pension benefits and a company car. With respect to employment years
1990-2006, Mr. Keinan had no written employment agreement with
Swiftnet.
Keinan
Employment Agreement with Swiftnet
Pursuant
to a Company’s Board of Directors’ resolution dated December 25, 2006, on March
28, 2007, Swiftnet and Mr. Keinan entered into an employment agreement, to be
effective as of January 1, 2007 (the “Keinan Employment
Agreement”).
The
Keinan Employment Agreement provides that Mr. Keinan shall be employed as the
Chairman of the Board of Directors of Swiftnet. Keinan Employment Agreement
shall be in effect for an initial fixed term of five years, beginning on January
1, 2007, (the “Initial Effective Term”), and thereafter shall automatically be
renewed for additional terms of three years (each, an “Additional Effective
Term”). Notwithstanding the foregoing, each of Swiftnet and Mr. Keinan shall
have the right to terminate the automatic renewal of Keinan Employment
Agreement, for any reason whatsoever, by a termination notice in writing, to be
provided to the other party not less than six months prior to: (i) the
expiration of the Initial Effective Term, or (ii) the expiration of any
Additional Effective Term (the “Notice Period”). Notwithstanding the foregoing,
Mr. Keinan shall have the right to terminate the Keinan Employment Agreement,
for any reason whatsoever, and at any time, including during the Initial
Effective Term (“Early Termination”). In the event of Early Termination, the
Notice Period shall be of not less than eight months.
Under the
Keinan Employment Agreement, Swiftnet shall pay to Mr. Keinan during the term of
his engagement a salary at the rate of £48,000 ($67,968) per annum, such salary
to be paid in equal monthly installments in arrears on the last Friday of each
month. Swiftnet shall provide Mr. Keinan with an appropriate executive car or
car allowance with an effective annual cost to Swiftnet of up to £15,000
($21,240).
Swiftnet
shall pay Mr. Keinan contributions to the following schemes: (i) Health
care for him and his immediate family; (ii) Permanent health;
(iii) Life insurance arrangements (up to a maximum of four times salary);
(iv) Pension rights - Swiftnet shall contribute a monthly sum equal to 7.5%
of his salary; (v) Travel insurance.
Swiftnet
shall reimburse to Mr. Keinan all traveling, hotel, restaurant and other
expenses incurred by him in the proper performance of his duties under his
engagement.
If during
the period of the employment under the Keinan Employment Agreement Mr. Keinan
shall cease to be a director of Swiftnet, his employment shall continue and the
terms of the Keinan Employment Agreement (other than those relating to the
holding of office of director / chairman) shall continue in full
force.
The
Keinan Employment Agreement also contains special arrangements for sickness
benefits, holiday entitlement and provisions regarding non-competition;
intellectual property; confidentiality; conflict of interests and other standard
terms and conditions.
The
Keinan Employment Agreement was approved by all non-interested members of the
Board of Directors, following a review and discussion by the Company’s Audit
Committee.
Keinan
Consulting Agreement
Pursuant
to a Company’s Board of Directors’ resolution dated December 25, 2006, on March
28, 2007, the Company and Mr. Keinan entered into a consulting agreement, to be
effective as of January 1, 2007 (the “Keinan Consulting
Agreement”).
The
Keinan Consulting Agreement provides that Mr. Keinan shall render the Company
advisory, consulting and other services in relation to the business and
operations of the Company (excluding its business and operations in the United
Kingdom).
In
consideration of the performance of the Services pursuant to the Keinan
Consulting Agreement, the Company initially paid Mr. Keinan a monthly fee of
£10,000 ($14,160), which was increased by the Board of Directors following the
recommendation of the Audit Committee and the Compensation Committee in
accordance with the terms described below, to £16,000 ($22,656) effective as of
June 1, 2008 (the “Fee”). Mr. Keinan shall invoice the Company at the end of
each calendar month and the Company shall make the monthly payment immediately
upon receiving such invoice. Once a calendar year, and no later than December
15, the Company’s Board shall consider approving an increase to the Fee. Such
Board approval shall be subject to the prior review, oversight and
recommendation to the Board of both the Audit Committee and the Compensation
Committee of the Company (the “Compensation Committee”). However, in the event
the Company has not established a Compensation Committee, the review, oversight
and recommendation to the Board of the Audit Committee shall suffice. In
connection with the performance of this provision, the Audit Committee, the
Compensation Committee and the Board shall take into account, among other
factors, growth in the Company’s revenues and/or profits.
The
Company’s Board shall, from time to time, and not less than once a calendar
year, consider approving a grant of success bonus to Mr. Keinan (the “Bonus”).
Such Board approval shall be subject to the prior review, oversight and
recommendation to the Board of both the Audit Committee and the Compensation
Committee. However, in the event the Company has not established a Compensation
Committee, the review, oversight and recommendation to the Board of the Audit
Committee shall suffice. In connection with the performance of this provision,
the Audit Committee, the Compensation Committee and the Board shall take into
account, among other factors, growth in the Company’s revenues and/or profits
and/or successful completion of transactions or activities by the Company (such
as, but not limited to, reorganization, mergers, acquisitions, capital raisings
and cost cuts). Any Board member, except Mr. Keinan, may, at any time and from
time to time, initiate a Bonus grant to Mr. Keinan, and in such an event the
approving process shall be set in motion.
Mr.
Keinan waived his bonuses for 2007 and 2008 to which he was entitled pursuant to
this provision.
Immediately
upon the establishment by the Company of any new stock option or purchase plan
or other equity compensation arrangement pursuant to which options or stock may
be acquired by officers, directors, employees, or consultants of the Company
(collectively, the “Plan”), the Company’s Board shall consider approving a grant
of an appropriate amount of options (or any other applicable rights) under the
Plan to Mr. Keinan. Such Board approval shall be subject to the prior review,
oversight and recommendation to the Board of both the Audit Committee and the
Compensation Committee. However, in the event the Company has not established a
Compensation Committee, the review, oversight and recommendation to the Board of
the Audit Committee shall suffice.
In
addition to the Fee and the Bonus, the Company shall pay directly and/or
reimburse Mr. Keinan for his Expenses. For the purposes of the Keinan Consulting
Agreement, the term “Expenses” shall mean any and all amounts actually paid by
the Company and/or by Mr. Keinan, and/or to be paid by Mr. Keinan at his
direction, including, without limitation (i) costs associated with
telecommunication services and products, and (ii) costs associated with
transportation and/or travel (including, but not limited to, by plane, train,
rented car and taxi) and/or accommodation (including, but not limited to, at
rented flats and hotels) and/or any other board and lodging expenses (including,
but not limited to, food, restaurants and entertainment) which were and/or will
be incurred in connection with the performance of the Services pursuant to the
Keinan Consulting Agreement.
The
Company acknowledges that in order to render the Services pursuant to the Keinan
Consulting Agreement, Mr. Keinan may be required to travel frequently around the
world. Therefore, in order to enable Mr. Keinan a normal family life the Company
shall bear Expenses which are related to Mr. Keinan’s spouse.
Mr.
Keinan shall hold and use, in his sole discretion, credit cards in the name of
the Company (the “Credit Cards”). Due to Mr. Keinan’s position with the Company
(i.e. Chairman of the Board) he may from time to time use the Credit Cards to
make certain Company payments and pay certain Company expenses.
This
Keinan Consulting Agreement shall be in effect for an initial fixed term of five
years, beginning on January 1, 2007 (the “Initial Effective Term”), and
thereafter, unless terminated as provided below, shall automatically be renewed
for additional terms of three years (each, an “Additional Effective Term”).
Notwithstanding the foregoing, each of the Company and Mr. Keinan shall have the
right to terminate the automatic renewal of the Keinan Consulting Agreement, for
any reason whatsoever, by a termination notice in writing, to be provided to the
other party not less than six months prior to: (i) the expiration of the
Initial Effective Term, or (ii) the expiration of any Additional Effective
Term (the “Notice Period”). Notwithstanding the foregoing, as long as Mr. Keinan
shall command and/or control, directly and/or indirectly, including together
with others (as well as pursuant to that certain Voting Agreement dated
September 28, 2004, by and among Mr. Keinan, Guy Nissenson and Campbeltown
Business Ltd.) and/or by proxies, fifteen percent (15%) or more of the voting
rights of the Company, if the Company shall choose to exercise its right to
terminate the automatic renewal of the Keinan Consulting Agreement, the Notice
Period shall be of not less than twelve months. Notwithstanding the foregoing,
Mr. Keinan shall have the right to terminate the Keinan Consulting Agreement,
for any reason whatsoever, and at any time, including during the Initial
Effective Term (“Early Termination by Mr. Keinan“). In the event of Early
Termination by Mr. Keinan, the Notice Period shall be of not less than eight
months.
The
Keinan Consulting Agreement further provided that no later than June 30, 2007,
the Company and Mr. Keinan shall enter into a severance agreement providing for
an appropriate severance package for Mr. Keinan (the “Severance Agreement”). The
Severance Agreement shall, inter alia, cover events of termination of the
automatic renewal of the Keinan Consulting Agreement by the Company or Mr.
Keinan, termination of the Keinan Consulting Agreement by Mr. Keinan, and
scheduled retirement by Mr. Keinan. The Company has not yet entered into any
such agreement.
The
Keinan Consulting Agreement also contains provisions regarding non-competition;
intellectual property; confidentiality; conflict of interests; and other
standard terms and conditions.
The
Keinan Consulting Agreement was approved by all non-interested members of the
Board of Directors, following a review and discussion by the Company’s Audit
Committee.
Keinan
Bonus and Success Fee
On April
2, 2002, our Board of Directors approved a bonus and success fee whereby if we
receive monthly revenues in excess of $485,000 then Mr. Keinan and Campbeltown
Business shall receive 1% of such monthly revenues, up to a maximum of one
million dollars (the “Bonus and Success Fee”). On April 10, 2003, Mr. Keinan and
Campbeltown Business waived their right to receive 1% of the revenues generated
by Story Telecom. On February 8, 2007, an Agreement was entered by and between
the Company, Swiftnet, Campbeltown Business, and Mr. Keinan (the “February 8,
2007 Agreement”). The February 8, 2007 Agreement provides that effective as of
January 1, 2007, the Bonus and Success Fee is cancelled, and that Mr. Keinan and
Campbeltown Business shall have no further right to any percentage of our
revenues.
On June
28, 2004, our Board of Directors approved a bonus of £5,000 ($8,241) to Mr.
Keinan for his efforts in connection with obtaining the license to become an
international telecom service provider in Israel by Xfone 018.
Keinan
Loan
Since our
inception in September 2000, through December 31, 2000, we along with our
subsidiary, Swiftnet provided Abraham Keinan, our Chairman of the Board, with a
loan. This loan originally was reflected in a September 29, 2000 promissory note
payable in ten equal installments ending on January 1, 2011. This note is
non-interest bearing. We provided the loan to Mr. Keinan to promote his loyalty
and continued service as our Chairman of the Board of Directors. On December 29,
2005, Mr. Keinan repaid £123,966 ($261,512) which was due for the fiscal year
ended December 31, 2005. On December 26, 2006 Mr. Abraham Keinan, repaid the
final payment of £123,965 ($261,510) under the terms of his loan.
Indemnification
Xfone 018
Ltd., our Israeli subsidiary, obtained certain credit facilities from Bank
Hapoalim B.M. Prior to and during fiscal 2008, the credit facilities were
secured with a personal guarantee by Abraham Keinan and Guy Nissenson, which
included a pledge on 1,000,000 shares of Common Stock of the Company owned by
Mr. Keinan, and an undertaking to provide Bank Hapoalim with an additional
financial guarantee of up to $500,000 under certain circumstances. In addition,
we had 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 have
incurred in connection with the stock pledge and/or any other obligation made by
them to Bank Hapoalim in connection with the collateral. Mr. Keinan and Mr.
Nissenson were released from these guarantees in 2009.
Guy
Nissenson
Campbeltown
Business Ltd.
Consulting
Agreement
On May
11, 2000, Swiftnet Limited, which is now our wholly owned subsidiary, and our
Chairman of the Board of Directors, Abraham Keinan, entered into an 18-month
renewable consulting agreement with Campbeltown Business Ltd., a private company
incorporated in the British Virgin Island which is owned by Guy Nissenson, our
President, Chief Executive Officer, and Director and other family members of Mr.
Nissenson. This agreement provided that Swiftnet will hire Campbeltown Business
as its financial and business development consultant and will pay Campbeltown
Business £2,000 per month, along with an additional monthly performance bonus
based upon Swiftnet attaining the following revenue levels, for consulting
services in the area of business development and management
activities:
TARGET
AMOUNT OF REVENUES PER MONTH
|
ADDITIONAL
MONTHLY BONUS
|
Less
than £125,000 (approximately $177,000)
|
£0
|
Between
£125,000 - £150,000
(approximately
$177,000 - $212,400)
|
£1,250
(approximately $1,770)
|
Between
£150,000 - £175,000
(approximately
$212,400 - $247,800)
|
£2,500
(approximately $3,540)
|
Over
£175,000
(approximately
$247,800)
|
£2,750
(approximately $3,894)
|
The
agreement with Campbeltown Business involving the aforementioned monthly payment
of £2000, along with an additional monthly performance bonus, was separate from
a bonus and success fee arrangement that was approved by our Board of Directors
on April 2, 2002.
The May
11, 2000 agreement was for 18 months, but provided that it will be renewed by
mutual agreement of Swiftnet and Campbeltown Business. On November 5, 2001, May
11, 2003, November 10, 2004, and May 11, 2006 we renewed this agreement for
additional 18-month periods. On February 8, 2007, an Agreement was entered by
and between the Company, Swiftnet, Campbeltown Business, and Mr. Keinan (the
“February 8, 2007 Agreement”). The February 8, 2007 Agreement provides that
effective as of January 1, 2007, the aforementioned consulting agreement is
terminated.
Stock
Purchase Agreement
On June
19, 2000, Swiftnet Limited entered into a Stock Purchase Agreement with Abraham
Keinan and Campbeltown Business Ltd. a company owned and controlled by Guy
Nissenson and his family. This agreement provides that:
·
|
Abraham
Keinan confirmed that all his businesses, activities and initiatives in
the field of telecommunications are conducted through Swiftnet, and would
continue for at least 18 months after the conclusion of this
transaction.
|
·
|
Campbeltown
Business declared that it is not involved in any business that competes
with Swiftnet and would not be involved in such business at least for 18
months after this transaction is
concluded.
|
·
|
Campbeltown
Business would invest $100,000 in Swiftnet, in exchange for 20% of the
total issued shares of Swiftnet;
|
·
|
Campbeltown
Business would also receive 5% of our issued and outstanding shares
following our acquisition of Swiftnet. In June 2000, Campbeltown Business
invested the $100,000 in Swiftnet. We acquired Swiftnet and Campbeltown
received 720,336 shares of our Common Stock for its 20% interest in
Swiftnet.
|
·
|
Swiftnet
and Abraham Keinan would guarantee that Campbeltown Business’ 20% interest
in the outstanding shares of Swiftnet would be exchanged for at least 10%
of our outstanding shares and that Campbeltown Business would have in
total at least 15% of our total issued shares after our acquisition
occurred.
|
·
|
Campbeltown
Business would have the right to nominate 33% of the members of our board
of directors and Swiftnet’s board of directors. When Campbeltown Business
ownership in our Common Stock was less than 7%, Campbeltown Business would
have the right to nominate only 20% of our board members but always at
least one member. In the case that Campbeltown Business ownership in our
Common Stock was less than 2%, this right would
expire.
|
·
|
Campbeltown
Business would have the right to nominate a vice president in Swiftnet.
Mr. Guy Nissenson was nominated as of the time of the June 19, 2000
agreement. If for any reason Guy Nissenson will leave his position,
Campbeltown Business and Abraham Keinan will agree on another nominee. The
Vice President will be employed with suitable
conditions.
|
·
|
Campbeltown
Business will have the right to participate under the same terms and
conditions in any investment or transaction that involve equity rights in
Swiftnet or us conducted by Abraham Keinan at the relative ownership
portion.
|
·
|
Keinan
and Campbeltown Business have signed a right of first refusal agreement
for the sale of their shares.
|
·
|
Until
we conduct a public offering or are traded on a stock market, we are not
permitted to issue any additional shares or equity rights without a
written agreement from Campbeltown Business. This right expires when
Campbeltown no longer owns any equity interest or shares in our company or
our subsidiary, Swiftnet.
|
Bonus
and Success Fee
On April
2, 2002, our Board of Directors approved a bonus and success fee whereby if we
receive monthly revenues in excess of $485,000 then Mr. Keinan and Campbeltown
Business shall receive 1% of such monthly revenues, up to a maximum of one
million dollars (the “Bonus and Success Fee”). On April 10, 2003, Mr. Keinan and
Campbeltown Business waived their right to receive 1% of the revenues generated
by Story Telecom. This bonus and success fee was separate from our consulting
agreement with Campbeltown Business, involving a monthly payment of £2000, along
with an additional monthly performance bonus.
On
February 8, 2007, an Agreement was entered by and between the Company, Swiftnet,
Campbeltown Business, and Mr. Keinan (the “February 8, 2007 Agreement”). The
February 8, 2007 Agreement provides that effective as of January 1, 2007, the
Bonus and Success Fee is cancelled, and that Mr. Keinan and Campbeltown Business
shall have no further right to any percentage of our revenues.
Nissenson
Employment Agreements with Swiftnet
May
11, 2000 Employment Agreement
On May
11, 2000, Swiftnet Limited and our Chairman of the Board of Directors, Abraham
Keinan, entered into an employment agreement with Guy Nissenson, our President,
Chief Executive Officer, and Director (the “May 11, 2000 Employment Agreement”).
Under the terms of the agreement, Swiftnet employed Mr. Nissenson to provide
business development and sales and marketing services, at a base rate of £1000
per month (approximately $1,416). The May 11, 2000 Employment Agreement provided
that when Swiftnet reaches average sales of £175,000 per month for a consecutive
three-month period, Mr. Nissenson’s salary will increase to £2,000
(approximately $2,832) per month. The May 11, 2000 Employment Agreement further
provided that Mr. Nissenson will receive an unspecified number of options to
acquire our stock that is limited to 50% of the options that Mr. Keinan
receives. As such, the agreement protected Mr. Nissenson’s rights to have at
least 50% of the options rights that Mr. Keinan will have. Mr. Nissenson can
transfer the right of these options to another company or person at his
discretion. Swiftnet may only cancel these options if: (1) Mr. Nissenson no
longer works with Swiftnet; or (2) if within twelve months of Mr.
Nissenson’s employment with the company Swiftnet and any other companies that
may buy or merge into Swiftnet in the future, do not reach average revenues
(over a three consecutive month period) of at least £120,000. Because the
average sales per month exceeded £120,000 within a twelve-month period of Mr.
Nissenson’s employment, Swiftnet cannot cancel these options.
March
28, 2007 Employment Agreement
Pursuant
to a Company’s Board of Directors’ resolution dated December 25, 2006, on March
28, 2007, Swiftnet and Mr. Nissenson entered into an employment agreement, to be
effective as of January 1, 2007 (the “Nissenson Employment
Agreement”).
The
Nissenson Employment Agreement provides that Mr. Nissenson shall be employed as
Director of Business Development of Swiftnet. Nissenson Employment Agreement
shall be in effect for an initial fixed term of five years, beginning on January
1, 2007, (the “Initial Effective Term”), and thereafter shall automatically be
renewed for additional terms of three years (each, an “Additional Effective
Term”). Notwithstanding the foregoing, each of Swiftnet and Mr. Nissenson shall
have the right to terminate the automatic renewal of Nissenson Employment
Agreement, for any reason whatsoever, by a termination notice in writing, to be
provided to the other party not less than six months prior to: (i) the
expiration of the Initial Effective Term, or (ii) the expiration of any
Additional Effective Term (the “Notice Period”). Notwithstanding the foregoing,
Mr. Nissenson shall have the right to terminate the Nissenson Employment
Agreement, for any reason whatsoever, and at any time, including during the
Initial Effective Term (“Early Termination”). In the event of Early Termination,
the Notice Period shall be of not less than eight months.
Under the
Nissenson Employment Agreement, Swiftnet shall pay to Mr. Nissenson during the
term of his engagement a salary at the rate of £48,000 ($67,968) per annum, such
salary to be paid in equal monthly installments in arrears on the last Friday of
each month. Swiftnet shall provide Mr. Nissenson with an appropriate executive
car or car allowance with an effective annual cost to Swiftnet of up to £15,000
($21,240).
Swiftnet
shall pay Mr. Nissenson contributions to the following schemes: (i) Health
care for him and his immediate family; (ii) Permanent health;
(iii) Life insurance arrangements (up to a maximum of four times salary);
(iv) Pension rights - Swiftnet shall contribute a monthly sum equal to 7.5%
of his salary; (v) Travel insurance.
Swiftnet
shall reimburse to Mr. Nissenson all traveling, hotel, restaurant and other
expenses incurred by him in the proper performance of his duties under his
engagement.
If during
the period of the employment under the Nissenson Employment Agreement Mr.
Nissenson shall cease to be a director of Swiftnet, his employment shall
continue and the terms of the Nissenson Employment Agreement (other than those
relating to the holding of office of director) shall continue in full
force.
The
Nissenson Employment Agreement also contains special arrangements for sickness
benefits, holiday entitlement and provisions regarding non-competition;
intellectual property; confidentiality; conflict of interests and other standard
terms and conditions.
The
Nissenson Employment Agreement supersedes the May 11, 2000 Employment
Agreement.
The
Nissenson Employment Agreement was approved by all non-interested members of the
Board of Directors, following a review and discussion by the Company’s Audit
Committee.
Nissenson
Consulting Agreement
Pursuant
to a Company’s Board of Directors’ resolution dated December 25, 2006, on March
28, 2007, the Company and Mr. Nissenson entered into a consulting agreement, to
be effective as of January 1, 2007 (the “Nissenson Consulting
Agreement”).
The
Nissenson Consulting Agreement provides that Mr. Nissenson shall render the
Company advisory, consulting and other services in relation to the business and
operations of the Company (excluding its business and operations in the United
Kingdom).
In
consideration of the performance of the Services pursuant to the Nissenson
Consulting Agreement, the Company shall pay Mr. Nissenson a monthly fee of
£10,000 ($14,160), which was increased by the Board of Directors following the
recommendation of the Audit Committee and the Compensation Committee in
accordance with the terms described below, to £16,000 ($22,656) effective as of
June 1, 2008 (the “Fee”). Mr. Nissenson shall invoice the Company at the end of
each calendar month and the Company shall make the monthly payment immediately
upon receiving such invoice. Once a calendar year, and no later than December
15, the Company’s Board shall consider approving an increase to the Fee. Such
Board approval shall be subject to the prior review, oversight and
recommendation to the Board of both the Audit Committee and the Compensation
Committee of the Company (the “Compensation Committee”). However, in the event
the Company has not established a Compensation Committee, the review, oversight
and recommendation to the Board of the Audit Committee shall suffice. In
connection with the performance of this provision, the Audit Committee, the
Compensation Committee and the Board shall take into account, among other
factors, growth in the Company’s revenues and/or profits.
The
Company’s Board shall, from time to time, and not less than once a calendar
year, consider approving a grant of success bonus to Mr. Nissenson (the
“Bonus”). Such Board approval shall be subject to the prior review, oversight
and recommendation to the Board of both the Audit Committee and the Compensation
Committee. However, in the event the Company has not established a Compensation
Committee, the review, oversight and recommendation to the Board of the Audit
Committee shall suffice. In connection with the performance of this provision,
the Audit Committee, the Compensation Committee and the Board shall take into
account, among other factors, growth in the Company’s revenues and/or profits
and/or successful completion of transactions or activities by the Company (such
as, but not limited to, reorganization, mergers, acquisitions, capital raisings
and cost cuts). Any Board member, except Mr. Nissenson, may, at any time and
from time to time, initiate a Bonus grant to Mr. Nissenson, and in such an event
the approving process shall be set in motion.
Mr.
Nissenson waived his bonuses for 2007 and 2008 to which he was entitled pursuant
to this provision.
Immediately
upon the establishment by the Company of any new stock option or purchase plan
or other equity compensation arrangement pursuant to which options or stock may
be acquired by officers, directors, employees, or consultants of the Company
(collectively, “Plan”), the Company’s Board shall consider approving a grant of
an appropriate amount of options (or any other applicable rights) under the Plan
to Mr. Nissenson. Such Board approval shall be subject to the prior review,
oversight and recommendation to the Board of both the Audit Committee and the
Compensation Committee. However, in the event the Company has not established a
Compensation Committee, the review, oversight and recommendation to the Board of
the Audit Committee shall suffice.
In
addition to the Fee and the Bonus, the Company shall pay directly and/or
reimburse Mr. Nissenson for his Expenses. For the purposes of the Nissenson
Consulting Agreement, the term “Expenses” shall mean any and all amounts
actually paid by the Company and/or by Mr. Nissenson, and/or to be paid by Mr.
Nissenson at his direction, including, without limitation (i) costs
associated with telecommunication services and products, and (ii) costs
associated with transportation and/or travel (including, but not limited to, by
plane, train, rented car and taxi) and/or accommodation (including, but not
limited to, at rented flats and hotels) and/or any other board and lodging
expenses (including, but not limited to, food, restaurants and entertainment)
which were and/or will be incurred in connection with the performance of the
Services pursuant to the Nissenson Consulting Agreement.
The
Company acknowledges that in order to render the Services pursuant to the
Nissenson Consulting Agreement, Mr. Nissenson may be required to travel
frequently around the world. Therefore, in order to enable Mr. Nissenson a
normal family life the Company shall bear Expenses which are related to Mr.
Nissenson’s spouse.
Mr.
Nissenson shall hold and use, in his sole discretion, credit cards in the name
of the Company (the “Credit Cards”). Due to Mr. Nissenson’s position with the
Company (i.e. President and CEO) he may from time to time use the Credit Cards
to make certain Company payments and pay certain Company expenses.
This
Nissenson Consulting Agreement shall be in effect for an initial fixed term of
five years, beginning on January 1, 2007 (the “Initial Effective Term”), and
thereafter, unless terminated as provided below, shall automatically be renewed
for additional terms of three years (each, an “Additional Effective Term”).
Notwithstanding the foregoing, each of the Company and Mr. Nissenson shall have
the right to terminate the automatic renewal of the Nissenson Consulting
Agreement, for any reason whatsoever, by a termination notice in writing, to be
provided to the other party not less than six months prior to: (i) the
expiration of the Initial Effective Term, or (ii) the expiration of any
Additional Effective Term (the “Notice Period”). Notwithstanding the foregoing,
as long as Mr. Nissenson shall command and/or control, directly and/or
indirectly, including together with others (as well as pursuant to that certain
Voting Agreement dated September 28, 2004, by and among Mr. Nissenson, Abraham
Keinan and Campbeltown Business Ltd.) and/or by proxies, fifteen percent (15%)
or more of the voting rights of the Company, if the Company shall choose to
exercise its right to terminate the automatic renewal of the Nissenson
Consulting Agreement, the Notice Period shall be of not less than twelve months.
Notwithstanding the foregoing, Mr. Nissenson shall have the right to terminate
the Nissenson Consulting Agreement, for any reason whatsoever, and at any time,
including during the Initial Effective Term (“Early Termination by Mr. Nissenson
“). In the event of Early Termination by Mr. Nissenson, the Notice Period shall
be of not less than eight months.
The
Nissenson Consulting Agreement further provided that no later than June 30,
2007, the Company and Mr. Nissenson shall enter into a severance agreement
providing for an appropriate severance package for Mr. Nissenson (the “Severance
Agreement”). The Severance Agreement shall, inter alia, cover events of
termination of the automatic renewal of the Nissenson Consulting Agreement by
the Company or Mr. Nissenson, termination of the Nissenson Consulting Agreement
by Mr. Nissenson, and scheduled retirement by Mr. Nissenson. The Company has not
yet entered into any such agreement.
The
Nissenson Consulting Agreement also contains provisions regarding
non-competition; intellectual property; confidentiality; conflict of interests
and other standard terms and conditions.
The
Nissenson Consulting Agreement was approved by all non-interested members of the
Board of Directors, following a review and discussion by the Company’s Audit
Committee.
Nissenson
Bonus and Success Fee
On
December 29, 2005, the Company’s Board of Directors granted a bonus to Mr.
Nissenson for an aggregate amount of $220,000 (the “Bonus”). The Company’s Board
of Directors with the exception of Mr. Nissenson and Mr. Keinan who abstained
from voting, resolved and granted the Bonus to Mr. Nissenson for his exceptional
efforts and professional abilities to achieve the Company’s goals and determined
that it was in the best interest of the Company, moreover, the Company believes
that the Bonus was fair and proportionate to its President and Chief Executive
Officer’s commitment and achievements.
Mr.
Nissenson waived $22,610 of the Bonus.
Dionysos
Investments (1999) Ltd. Financial Services and Business Development Consulting
Agreement
A
Financial Services Consulting Agreement was entered into on November 18, 2004,
between Dionysos Investments (1999) Ltd., an Israeli company (“Dionysos
Investments”) and the Company with respect to certain services (the “Dionysos
Investments Consulting Agreement”). Mr. Haim Nissenson, a consultant
of the Company since its inception and father of Mr. Guy Nissenson, the
Company's President, Chief Executive Officer and Director, is the Managing
Director of Dionysos. Dionysos is owned and controlled by certain members of the
Nissenson family, other than Mr. Guy Nissenson.
Under the
Dionysos Investments Consulting Agreement, Dionysos Investments agrees to assist
the Company in connection with services related to financial activities,
financial reports, mergers & acquisitions and other business development
work (the “Services”). In the event the Company requests additional services,
the scope of such additional services shall be as agreed by the parties and
shall be governed by the Dionysos Investments Consulting Agreement.
The
Dionysos Investments Consulting Agreement provided that Dionysos Investments
will be compensated by the Company for the Services provided to the Company in
the amount of £3,000 ($4,248) per month beginning on the Effective Date of the
Dionysos Investments Consulting Agreement (the “Fees”). In addition, the Company
will reimburse Dionysos Investments, based on prior approval, for expenses
incurred, which expenses include travel, hotel, meals, courier, report
reproduction and other administrative costs when and where needed (the
“Expenses”). Compensation for any additional services provided by Dionysos
Investment for the Company shall be as agreed by the parties.
The
Effective Date of the Dionysos Investments Consulting Agreement is January 1,
2005 (the “Effective Date”). The term of the Dionysos Investments Consulting
Agreement is two years (the “Term”). According to the Dionysos Investments
Consulting Agreement, the Term will be automatically renewed for successive
two-year periods, unless either party provides written notice at least ninety
days prior to the end of the Term that such party does not wish to renew the
Dionysos Investments Consulting Agreement.
First
Amendment
On
February 8, 2007, pursuant to the recommendations of the Audit Committee of the
Company and the resolutions of its Board of Directors dated December 25, 2006,
and February 4, 2007, the Company and Dionysos Investments entered into a First
Amendment to the of the Dionysos Investments Consulting Agreement (the “First
Amendment”).
The First
Amendment provides that Section 2 of the Dionysos Investments Consulting
Agreement shall be amended in its entirety to provide as follows:
(i)
The
parties agree that Dionysos Investments will be compensated by the Company for
the Services provided to the Company in the amount of £8,000 ($11,328) per
month, beginning on January 1, 2007;
(ii)
In
addition, the Company will pay Dionysos Investments a one time success fee in
the amount of £10,000 ($14,160), for initiating, establishing and developing the
relationship between the Company and certain Israeli financial institutions
during fiscal years 2005-2006, relationships which resulted in significant
investments made by certain Israeli financial institutions;
(iii)
In
addition, the Company will pay Dionysos Investments a success fee for any future
investments in the Company made by Israeli investors during fiscal year 2007,
provided such investments were a direct or indirect result of the Services
provided to the Company. The success fee will be equal to 0.5% (half percent) of
the gross proceeds of such investments; and
(iv)
In
addition, the Company will reimburse Dionysos Investments, based on prior
approval by the Audit Committee of the Company, for expenses incurred, which
expenses will include travel, hotel, meals, courier, report reproduction and
other administrative costs when and where needed. Compensation for any
additional services provided by Dionysos Investments for the Company shall be as
agreed by the parties.
The
parties agreed that the abovementioned compensation will only apply to fiscal
year 2007, and then be reviewed and reconsidered by the Audit Committee and
Board of Directors of the Company in December 2007. In the event the Board of
Directors of the Company, exercising sole discretion, decides not to approve the
abovementioned compensation for fiscal year 2008, Dionysos Investments will have
the option, in its sole discretion, to terminate the Dionysos Investments
Consulting Agreement, or continue and provide the Services in return for the
same compensation which was paid to it in fiscal years 2005-2006 (i.e. fee of
£3,000 per month plus reimbursement of expenses).
The First
Amendment further declares that the Audit Committee and Board of Directors of
the Company approved the automatic renewal of the Term for an additional
two-year period, ending on December 31, 2008.
On
January 28, 2008, in accordance with the recommendation of the Audit Committee
and in recognition of and following the successful efforts of Dionysos in
raising capital for the Company in Israel during the Company’s 2007 fiscal year,
the Board of Directors of the Company approved and confirmed by resolution the
engagement of Dionysos to serve as the Company’s consultant for the fiscal year
ended December 31, 2008 at the same level of compensation which was agreed to
and paid for the fiscal year ended December 31, 2007.
Second
Amendment
On
January 15, 2009, pursuant to the recommendation of the Audit Committee of the
Company and the resolution of the Board of Directors, the Company and Dionysos
entered into a Second Amendment to the Consulting Agreement (the “Second
Amendment”). The Second Amendment confirmed the automatic renewal of the
Consulting Agreement for an additional two-year period and set the same
compensation levels for fiscal 2009 and 2010 that were established for fiscal
2007 and 2008. Accordingly, Dionysos will continue to be paid £8,000
(approximately $11,328) per month, plus reimbursements for expenses, and will
receive a success fee of 0.5% of the gross proceeds for any investments in the
Company made by Israeli investors during fiscal 2009 and/or 2010 that result
from Dionysos’ services to the Company.
The
parties also agreed that in or about December 2010, the Audit Committee and
Board of Directors would review and reconsider for approval the above-mentioned
compensation for any future term(s).
Voting
Agreement
Our
Chairman of the Board, Abraham Keinan, and our President, Chief Executive
Officer, and Director, Guy Nissenson, exercise significant control over
stockholder matters through a September 28, 2004 Voting Agreement between Mr.
Keinan, Mr. Nissenson and Campbeltown Business Ltd, an entity owned and
controlled by Mr. Nissenson and his family. This agreement, which is for a term
of 10 years, provides that: (a) Messrs. Keinan and Nissenson and
Campbeltown Business, Ltd. agree to vote any shares of our Common Stock
controlled by them only in such manner as previously agreed by all these
parties; and (b) in the event of any disagreement regarding the manner of
voting, a party to the agreement will not vote any shares, unless all the
parties have settled the disagreement.
Option
Agreement
On July
1, 2008, Abraham Keinan, our Chairman of the Board and Guy Nissenson, our
President, CEO and a director, entered into a certain Irrevocable Option
Agreement (the “Option Agreement”). Pursuant to the Option Agreement, Mr. Keinan
granted Mr. Nissenson (individually and/or together with the Nissenson
Investors, as such term is defined in the Option Agreement) an irrevocable and
exclusive option to purchase a minimum of 2,868,000 of the shares of Xfone
common stock, $0.001 par value per share, that he beneficially owns (the “Option
Shares”), at any time from the date of the Option Agreement through 5:00 p.m.
(British Time) on January 1, 2009, at a price per share of $3.4289277 (the
"Option"). The Option expired unexercised on January 1, 2009 pursuant
to its terms.
The
Option Agreement provided that in the event that Mr. Nissenson decided to
exercise the Option, Mr. Keinan also had the right to sell to the purchaser(s)
of the Option Shares up to an additional 340,000 shares of Xfone common stock
that he owned, at the same price as the Option Shares (the "Additional
Shares”). Additionally, the Option Agreement provided that upon the
purchase of the Option Shares and any Additional Shares, (i) Mr. Keinan would
immediately resign from all of his positions with Xfone and/or its subsidiaries,
(ii) would relinquish any rights under his agreements with us and our
subsidiaries, including fees, salary, bonuses, options (including but not
limited to outstanding and fully vested options), severance pay, etc., and (iii)
the Voting Agreement by and between Mr. Keinan, Mr. Nissenson and Campbeltown
Business Ltd. dated September 28, 2004 would terminate.
Iddo
Keinan
Mr. Iddo
Keinan, son of Mr. Abraham Keinan, our Chairman of the Board, has been employed
by our wholly owned UK based subsidiary, Swiftnet limited since
1998.
In 2006
Mr. Iddo Keinan served as the Commercial Director of Swiftnet, and his annual
salary was £54,459 ($77,114). On December 25, 2006, our Board of Directors
approved the continuing employment of Mr. Iddo Keinan by Swiftnet Limited, at an
annual salary of £36,000. Accordingly, in 2007 his annual salary was £36,000
($50,976), and in 2008 his annual salary was £36,000 ($50,976). On September 1,
2008, Mr. Keinan’s role changed to Wholesale Manager for Swiftnet.
Free
Cash Flow Participation Agreement with NTS Holdings, Inc.
The
Company entered into a Free Cash Flow Participation Agreement (the
“Participation Agreement”) with NTS Holdings, an entity owned by Barbara
Baldwin, President, CEO and Director of NTS Communications and Xfone USA, Jerry
Hoover, Executive Vice President - Chief Financial Officer of NTS Communications
and Treasurer of Xfone USA, and Brad Worthington, Executive Vice President -
Chief Operating Officer of NTS Communications, pursuant to which NTS Holdings
will be entitled to a payment from the Company of an amount equal to 5% of the
aggregate excess free cash flow generated by the Company’s U.S. Operations,
which is defined in the Participation Agreement as the operations of the Company
and its U.S. subsidiaries, which include Xfone USA, Inc. and NTS, and their
respective subsidiaries, as well as any U.S. entity that the Company acquires
directly, or indirectly through its subsidiaries in the future (a “Future
Acquisition”). NTS Holdings will be entitled to the participation amount
beginning at such time as the Company has received a full return of its initial
invested capital, plus an additional 8% return per year, in connection with the
NTS acquisition (as well as in connection with any Future
Acquisition).
The
Participation Agreement will remain in effect in perpetuity, unless earlier
terminated in accordance with its terms. Termination of the Participation
Agreement may occur upon a sale or buyout of the Company’s U.S. Operations, at
the option of the purchaser in any such transaction, and in the limited
circumstances set forth in the Participation Agreement.
Shareholder
Value, Ltd.
Shareholder
Value, Ltd. is a Texas limited partnership which owns 100% of the building in
Lubbock, Texas, from which NTS Communications leases its corporate offices,
Network Control Center, Customer Care and Internet help desk
locations. See “Item 2 – Description of Property” above. NTS Properties, LC is a
Texas limited liability company that serves as the general partner of
Shareholder Value, Ltd., and, in that capacity, owns 1% of Shareholder
Value, Ltd. The remaining 99% of Shareholder Value, Ltd. is owned by a small
group of investors, which includes several former shareholders of NTS
Communications who sold their respective interests in NTS Communications to
Xfone in connection with Xfone’s acquisition of NTS Communications in February
2008. Such shareholders include Telephone Electronics Corporation
(“TEC”), NTS Communications’ former majority shareholder, which owns
approximately 49.5% of Shareholder Value Ltd., Barbara Baldwin, President, CEO
and Director of NTS Communications and Xfone USA, who owns approximately 7.425%
of Shareholder Value, Ltd., Jerry Hoover, Executive Vice President, Treasurer
and Chief Financial Officer of NTS Communications and Treasurer of Xfone USA,
who owns approximately 4.95% of Shareholder Value, Ltd., and Brad Worthington,
Executive Vice President and Chief Operating Officer of NTS Communications, who
owns approximately 4.95% of Shareholder Value, Ltd.
NTS
Properties, LC, was a wholly owned subsidiary of NTS Communications prior to the
consummation of Xfone’s acquisition of NTS Communications in February
2008. As a closing condition of the acquisition transaction, NTS
Communication’s ownership interest in NTS Properties, LC was distributed
pro-rata to former shareholders of NTS Communications, including TEC, which
currently owns approximately 63.47% of NTS Properties, LC, and Ms. Baldwin, Mr.
Hoover and Mr. Worthington who currently own approximately 5.52%, 0.08% and
0.37% of NTS Properties, LC, respectively.
ITEM
14. PRINCIPAL AC
CO
UNTING FEES AND
SERVICES
Stark
Winter Schenkein & Co., LLP (“SWS”) served as our Independent Certified
Public Accountants for the fiscal years ending December 31, 2006 and 2007, and
for the first three quarters of the fiscal year ending December 31, 2008. On
October 30, 2008, the Audit Committee approved the appointment of SWS as our
Independent Certified Public Accountants for the fiscal year ending December 31,
2008, and the first three quarters of the fiscal year ending December 31, 2009,
and our shareholders approved this appointment on December 16,
2008.
Our Audit
Committee pre-approved all audit and non-audit services provided to us and
during the periods listed below. The Audit Committee approves discrete projects
on a case-by-case basis that may have a material effect on our operations and
also considers whether proposed services are compatible with the independence of
the public accountants.
Audit
and Non-Audit Fees
Aggregate
fees for professional services rendered to the Company by SWS as of or for the
two fiscal years ended December 31, 2008 and 2007 are set forth
below:
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year
|
|
|
|
2008
|
|
|
2007
|
|
|
Audit
Fees
|
|
$
|
165,000
|
|
|
$
|
133,668
|
|
Audit-Related
Fees
|
|
|
24,000
|
|
|
|
7,000
|
|
Tax
Fees
|
|
|
17,800
|
|
|
|
12,500
|
|
All
Other
|
|
|
1,000
|
|
|
|
2,725
|
|
Total
|
|
$
|
207,800
|
|
|
$
|
155,893
|
|
|
Audit Fees
Aggregate fees for professional services rendered by SWS in connection with its
audit of our consolidated financial statements for the fiscal years 2008 and
2007 and the quarterly reviews of our financial statements included in our Forms
10-Q.
Audit-related
Fees
Aggregate fees for professional services rendered by SWS in
connection with its review of our filings with the SEC (i.e. Forms 8-K and S-1)
and the Israel Securities Authority (i.e. Prospectus).
Tax Fees
Aggregate fees for professional consulting services rendered by SWS in
connection with our state and federal taxes.
All Other
Reimbursement for expenses in connection with professional services
rendered by SWS to us.
PART
IV
ITEM
15. EXHIBITS,
FINANCIAL STATEMENT
SCHEDULES
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)
|
|
|
3.11
|
Reamended
and Restated Bylaws of Xfone, Inc. dated January 15,
2009.(55)
|
4.
|
Specimen
Stock Certificate.(1)
|
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)
|
10.130
|
Market
Making Agreement dated December 24, 2008, by and between Xfone, Inc. and
Harel Finance Trade & Securities Ltd. [Free translation from
Hebrew] (54)
|
10.131
|
Second
Amendment to Financial Services and Business Development Consulting
Agreement dated January 15, 2009, by and between Xfone, Inc. and Dionysos
Investments (1999) Ltd. (55)
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
(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.
|
(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.
|
(31)
|
Denotes
previously filed exhibit: filed on December 28, 2006 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.
|
(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.
|
(54)
|
Denotes
previously filed exhibit: filed on December 24, 2008 with Xfone,
Inc.‘s Form 8-K.
|
(55)
|
Denotes
previously filed exhibit: filed on January 16, 2009 with Xfone,
Inc.‘s Form 8-K.
|
SIGNA
TU
RES
Pursuant
to the requirements of Section 13 or 15(d) 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
|
|
|
|
|
|
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
|
|
|
|
|
/s/
Abraham Keinan
|
Chairman
of the Board
|
March
31, 2009
|
Abraham
Keinan
|
|
/s/
Guy Nissenson
|
President,
Chief Executive Officer, and Director
|
March
31, 2009
|
Guy
Nissenson
|
|
/s/
Itzhak Almog
|
Director
and Chairman of the Audit Committee and the Nominating
Committee
|
March
31, 2009
|
Itzhak
Almog
|
|
/s/
Eyal J. Harish
|
Director
|
March
31, 2009
|
Eyal
J. Harish
|
|
/s/
Israel Singer
|
Director
and member of the Audit Committee
|
March
31, 2009
|
Israel
Singer
|
|
/s/
Niv Krikov
|
Treasurer,
Chief Financial Officer, and Principal Accounting Officer
|
March
31, 2009
|
Niv
Krikov
|
EXHIBIT
INDEX
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)
|
|
|
3.11
|
Reamended
and Restated Bylaws of Xfone, Inc. dated January 15,
2009.(55)
|
4.
|
Specimen
Stock Certificate.(1)
|
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)
|
10.130
|
Market
Making Agreement dated December 24, 2008, by and between Xfone, Inc. and
Harel Finance Trade & Securities Ltd. [Free translation from
Hebrew] (54)
|
10.131
|
Second
Amendment to Financial Services and Business Development Consulting
Agreement dated January 15, 2009, by and between Xfone, Inc. and Dionysos
Investments (1999) Ltd. (55)
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
(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.
|
(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.
|
(31)
|
Denotes
previously filed exhibit: filed on December 28, 2006 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.
|
(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.
|
(54)
|
Denotes
previously filed exhibit: filed on December 24, 2008 with Xfone,
Inc.‘s Form 8-K.
|
(55)
|
Denotes
previously filed exhibit: filed on January 16, 2009 with Xfone,
Inc.‘s Form 8-K.
|
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