NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
(Unaudited)
Note 1 - Organization and Nature of Business
|
A.
|
NTS, Inc. (“NTSI” or “the Company”) was incorporated in the State of Nevada, U.S.A. in September 2000 as Xfone, Inc. The Company provides through its subsidiaries, integrated communications services which include voice, video and data over its Fiber-To-The-Premise (“FTTP”) and other networks. The Company currently has operations in Texas, Mississippi and Louisiana. Effective as of February 1, 2012, the Company changed its name to “NTS, Inc.” and as of February 2, 2012 the Company's common shares began trading on the NYSE MKT (f/k/a NYSE Amex) and the Tel Aviv Stock Exchange (“TASE”) under a new ticker symbol “NTS”. The name change is a reflection of the Company's refined and enhanced business strategy which began with its acquisition of NTS Communications, Inc. (“NTSC”) in 2008 and its focus on the build out of its high-speed FTTP network.
|
NTSI’s wholly-owned subsidiaries as of March 31, 2014 were as follows:
|
●
|
NTSC and its seven wholly-owned subsidiaries, NTS Construction Company, Garey M. Wallace Company, Inc., Midcom of Arizona, Inc., Communications Brokers Inc., NTS Telephone Company, LLC, NTS Management Company, LLC and PRIDE Network, Inc.
|
|
●
|
Xfone USA, Inc. and its two wholly-owned subsidiaries, eXpeTel Communications, Inc. and Gulf Coast Utilities, Inc. (collectively, “Xfone USA”).
|
As of March 31, 2014, the Company reported a working capital deficit of $16,504,684 compared to a working capital deficit of $15,480,918 as of December 31, 2013.
The Company believes that increased revenues from the higher margin Fiber-To-The-Premise network together with increasing operating efficiency will result in increased profitability and cash flows, which will lead to improvement in the working capital deficit to meet its anticipated cash requirements for at least the next 12 months. If, however, the Company does not generate sufficient cash from operations, or if the Company incurs additional unanticipated liabilities or the Company is unable to renew and extend a portion of its short-term liabilities, the Company may be required to seek additional financing or sell equity or debt on terms which may not be as favorable as it could have otherwise obtained. No assurance can be given that any refinancing, additional borrowing or sale of equity or debt will be possible when needed or that the Company will be able to negotiate acceptable terms. In addition, the Company’s access to capital is affected by prevailing conditions in the financial and equity capital markets, as well as the Company’s own financial condition. While management believes that the Company will be able to meet its liquidity needs for at least the next 12 months, no assurance can be given that the Company will be able to do so.
NTS, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
(Unaudited)
Note 2 - Significant Accounting Policies
The condensed consolidated 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 condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) and include the accounts of the Company and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the US Securities and Exchange Commission. Certain information, including note disclosures, normally included in financial statements which are prepared in accordance with US GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included are adequate to make the information presented not misleading.
In management’s opinion, the condensed consolidated balance sheets as of March 31, 2014 (unaudited) and December 31, 2013 (audited), the unaudited condensed consolidated statements of operations for the three months ended March 31, 2014 and 2013, and the unaudited condensed consolidated statements of cash flows for the three months ended March 31, 2014 and 2013, contained herein, reflect all adjustments, consisting solely of normal recurring items, which are necessary for the fair presentation of the Company's financial position, results of operations and cash flows on a basis consistent with that of the Company's prior audited consolidated financial statements. However, the results of operations for the interim periods may not be indicative of results to be expected for the full fiscal year. Therefore these financial statements should be read in conjunction with the audited financial statements and notes thereto and summary of significant accounting policies included in the Company’s Form 10-K for the year ended December 31, 2013.
The Company has evaluated subsequent events occurring through the date on which this Quarterly Report on Form 10-Q was filed.
|
B.
|
Cash and Cash Equivalents
|
Cash and cash equivalents consist of cash and temporary investments with maturities of three months or less when purchased.
NTS, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
(Unaudited)
Note 2 - Significant Accounting Policies (cont.)
Accounts receivable are recorded at net realizable value consisting of the carrying amount less the allowance for uncollectible accounts.
The Company uses the allowance method to account for uncollectible accounts receivable balances. Under the allowance method, the estimate of uncollectible customer balances is made using factors such as the credit quality of the customer and the economic conditions in the market. An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection. When an account balance is past due and attempts have been made to collect the receivable through legal or other means the amount is considered uncollectible and is written off against the allowance balance.
Accounts receivable are presented net of an allowance for doubtful accounts of $1,441,032 and $1,534,185 at March 31, 2014 and December 31, 2013, respectively.
|
D.
|
Other Intangible Assets
|
Other intangible assets consist of a license to provide communication services in the US.
Customer relations related to mergers and acquisitions are amortized over a period between 2-13 years from the date of the purchase.
Basic earnings per share (EPS) is computed by dividing net loss 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. Warrants and options were excluded from the calculation of diluted income per share for the three months ended March 31, 2013 since they would have an anti-dilutive effect, in that the sum of the stock option prices and unrecognized compensation expense in the treasury stock method was greater than the average closing market price for the common shares during this period. Warrants and options were excluded from the calculation of diluted loss per share for the three months ended March 31, 2014 since they would have an anti-dilutive effect due to the Company's net loss which was reported for the three months ended March 31, 2014.
|
F.
|
Stock-Based Compensation
|
The Company accounts for stock-based compensation in accordance with FASB ASC No. 718-10, "Compensation - Stock Compensation". Stock-based compensation expense recognized during the period is based on the value of the portion of share-based awards that are ultimately expected to vest during the period. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The fair value of restricted stock is determined based on the number of shares granted and the closing price of the Company’s common stock on the date of grant. Compensation expense for all share-based payment awards is recognized using the straight-line amortization method over the vesting period.
NTS, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
(Unaudited)
Note 2 - Significant Accounting Policies (cont.)
The Company and its subsidiaries account for income taxes in accordance with FASB ASC No. 740, “Income Taxes.” This topic 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 basis 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.
Deferred tax liabilities and assets are classified as current or non-current based on the classification of the related asset or liability for financial reporting, or according to the expected reversal dates of the specific temporary differences if not related to an asset or liability for financial reporting.
The Company uses a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return. The first step is recognition: the Company determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the Company presumes that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in one or more of the following: an increase in a liability for income taxes payable, a reduction of an income tax refund receivable, a reduction in a deferred tax asset, or an increase in a deferred tax liability.
NTS, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
(Unaudited)
Note 2 - Significant Accounting Policies (cont.)
|
H.
|
Derivative Instruments
|
The Company and its subsidiaries account for derivative instruments and hedging activities in accordance with FASB ASC No. 815, "Derivatives and Hedging". ASC 815 requires entities to provide qualitative disclosures about the objectives and strategies for using derivatives, quantitative data about the fair value of any gains and losses on derivative contracts, and details of credit risk related contingent features in their hedged positions. ASC 815 also requires entities to disclose more information about the location and amounts of derivative instruments in financial statements; how derivatives and related hedges are accounted for; and how the hedges affect the entity's financial position, financial performance, and cash flows.
The Company recognizes all of its derivative instruments as either assets or liabilities on the balance sheet at fair value. For derivative instruments that are designated and qualify as a cash flows hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any gain or loss on a derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item is recognized in current earnings during the period of change. For the period ended March 31, 2014, the Company’s forward contracts did not qualify for hedge accounting and as such, changes in the fair value of the derivative instrument were reported in current period earnings. During January 2012, the Company entered into two foreign currency hedging transactions of $596,842 maturing on May 29, 2012 to buy NIS 2,303,809, and $4,306,570 maturing on November 28, 2012 to buy NIS 16,640,591, in order to hedge against the risk of principal and interest payments of its bonds during 2012 and June 2013. As of March 31, 2013, the Company recognized the unearned gain of $44,509 in financing expenses in the Condensed Consolidated Statement of Operations against an increase in its Current maturities of bonds in the Condensed Consolidated Balance Sheet.
|
I.
|
Recent Accounting Pronouncements
|
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740), which clarifies the presentation requirements of unrecognized tax benefits when a net operating loss carry forward, a similar tax loss, or a tax credit carry forward exists at the reporting date. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 and should be applied prospectively. The adoption of this standard did not have a material impact to the Company's consolidated financial statements.
NTS, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
(Unaudited)
Note 3 - Notes payable
|
1.
|
|
On October 6, 2011, the Company entered into a term loan, guarantee and security agreement (the “Original ICON Agreement”), as amended by the Amended & Restated Consent, Waiver & Amendment Agreement dated November 1, 2011 by and between the following: (1) ICON Agent, LLC (the “Agent”), acting as agent for the Lenders signatory thereto; (2) the Company, as Guarantor; (3) Xfone USA, Inc., NTS Communications, Inc., Gulf Coast Utilities, Inc., eXpeTel Communications, Inc., NTS Construction Company, Garey M. Wallace Company, Inc., Midcom of Arizona, Inc., Communications Brokers, Inc., and NTS Management Company, LLC, acting as Borrowers and Guarantors; and (4) PRIDE Network, Inc., and NTS Telephone Company, LLC (together with the Borrowers and Guarantors acting as Credit Parties) that provided for a secured term loan in the amount of $7,500,000 (the "First ICON Loan").
On June 22, 2012, the Company entered into Amendment No. 1 to the Original ICON Agreement (“Amendment No. 1”) providing for:
(i) An additional secured term loan in the amount of $3,500,000, for the payment of all liabilities owed to Burlingame (the "Second ICON Loan"),
(ii) A secured delayed draw loan in the amount of $3,100,000, for the purchase of equipment in connection with the Company's project to construct a fiber network in Wichita Falls, Texas (the "Third ICON Loan"), and
(iii) Certain other amendments to the Original ICON Agreement and the First ICON Loan as described in Amendment No. 1.
Each of the First ICON Loan, Second ICON Loan and Third ICON Loan bear interest at 12.75% per annum.
The fundings of the First ICON Loan and Second ICON Loan were made on October 27, 2011 and June 22, 2012, respectively.
On August 9, 2012, the Company entered into Amendment No. 2 to the Original ICON Agreement providing for revised amortization schedules of the First ICON Loan and the Second ICON Loan (“Amendment No. 2”).
On September 27, 2012, the Company drew down the Third ICON Loan in the amount of $3,100,000.
On February 12, 2013, the Company entered into Amendment No. 3 to the Original ICON Agreement (“Amendment No. 3”) providing for:
(i)
An additional secured delayed draw term loan in the aggregate amount of $6,000,000, bearing interest of 12.75% per annum for the purchase of equipment in connection with the Company’s project to expand its fiber network in the region of West Texas (the “Fourth ICON Loan”),
(ii) Revised amortization schedules of the First ICON Loan, Second ICON Loan and Third ICON Loan (as described below), and
(iii) Certain other amendments to the Original ICON Agreement (as amended by Amendment No. 1 and Amendment No. 2), described in Amendment No. 3.
|
NTS, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
(Unaudited)
Note 3 - Notes payable (Cont.)
|
Pursuant to Amendment No. 3, the principal amount of the First ICON Loan is payable in 69 consecutive monthly installments with the first 27 monthly payments being payments of accrued interest only. The principal amount of the Second ICON Loan is payable in 61 consecutive monthly installments with the first 19 monthly payments being payments of accrued interest only. The principal amount of the Third ICON Loan is payable in 58 consecutive monthly installments with the first 16 monthly payments being payments of accrued interest only.
On March 28, 2013, the Company entered into Amendment No. 4 to the Original ICON Agreement which contains some definitional clarifications. On the same day, the Company drew down on the Fourth ICON Loan in the aggregate amount of $1,700,000 which was the first draw down under the Fourth ICON Loan. The principal amount of the first draw down under the Fourth ICON Loan is payable in 51 consecutive monthly installments with the first nine monthly payments being payments of accrued interest only.
On June 27, 2013, the Company entered into Amendment No. 5 to the Original ICON Agreement which makes certain technical amendments to the Original ICON Loan Agreement and waives a certain condition for the availability of the Fourth ICON Loan.
In addition, on June 27, 2013, the Company drew down on the Fourth ICON Loan in the aggregate amount of $4,300,000 which was the second draw down under the Fourth ICON Loan. The principal amount of the second draw down under the Fourth ICON Loan is payable in 48 consecutive monthly installments with the first six monthly payments being payments of accrued interest only.
On May 15, 2014, the Company entered into Amendment No. 6 to the Original ICON Agreement which makes certain technical amendments to the Original ICON Loan Agreement.
Each of the foregoing loans are secured by a lien against all of each Borrower's and Guarantor's property and assets, whether real or personal, tangible or intangible, and whether now owned or hereafter acquired, or in which it now has or at any time in the future may acquire any right, title, or interest; provided, however, that none of the assets of PRIDE Network, Inc. and NTS Telephone Company are being used as collateral for the loans and are specifically excluded.
The Company is required to maintain fixed charge coverage ratio of not less than 1.15 to 1.00 for the trailing four fiscal quarter period most recently ended if at any time cash was less than $2,000,000 at March 31, 2014 or $3,000,000 as of the last day of any other fiscal quarter. Pursuant to Amendment No. 3, senior leverage ratio should not exceed 2.25 to 1.00 from June 30, 2012 through March 31, 2013, 2.00 to 1.00 from June 30, 2013 through December 31, 2013, and 1.75 to 1.00 from March 31, 2014 and thereafter. As of March 31, 2014, the Company complied with the foregoing financial covenants.
The total outstanding amount of the loans as of March 31, 2014 is $19,848,750. As of March 31, 2014, there are no amounts available for future draws.
|
NTS, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
(Unaudited)
Note 3 - Notes payable (Cont.)
|
2.
|
|
NTS Telephone Company, LLC, a wholly-owned subsidiary of NTSC, received from the Rural Utilities Service (“RUS”), a division of the United States Department of Agriculture, $11.5 million debt facility to complete a telecommunications overbuild project in Levelland, Texas. The principal of the RUS loan is repaid monthly starting one year from the advance date until full repayment after 17 years. Each advance bears interest that will become fixed at the date of advance at the average yield on outstanding marketable obligations of the United States having the final maturity comparable to the final maturity of the advance. The loans are non-recourse to NTSC and all other NTSC subsidiaries and are secured by NTS Telephone's assets which were $15.5 million at March 31, 2014. As of March 31, 2014, the current average weighted interest rate on the outstanding advances was 3.52%.
The total outstanding amount of these loans as of March 31, 2014 and December 31, 2013 are $8,711,118 and $8,839,862, respectively. The loans are to be repaid in monthly installments until 2024.
|
|
3.
|
|
PRIDE Network, Inc., a wholly-owned subsidiary of NTSC, received approval from the Broadband Initiative Program of the American Recovery and Reinvestment Act, for a total $99.9 million funding in the form of $45.9 million in grants and $54 million in 19 to 20 year loans. The total aggregate amount of these loans and grants as of March 31, 2014 is $38,586,644 and $32,228,292, respectively. Each advance bears interest that will become fixed at the date of the advance at the average yield on outstanding marketable obligations of the United States having the final maturity comparable to the final maturity of the advance. The funding created an opportunity for the Company to expand the rollout of its FTTP infrastructure, known as the PRIDE Network to northwestern Texas and southern Louisiana. Construction work of PRIDE Network's FTTP infrastructure started in October 2010. The loans are non-recourse to NTSC and all other NTSC subsidiaries and are secured by PRIDE Network's assets which were $50.8 million at March 31, 2014. As of March 31, 2014, the current average weighted interest rate on the outstanding advances was 2.69%. As of March 31, 2014, the total amount of loans and grants available in the future was $15,406,395 and $13,648,626, respectively.
|
|
|
|
|
|
|
|
The loans are to be repaid in monthly installments until 2030. The total outstanding amounts of these loans as of March 31, 2014 and December 31, 2013 are $35,768,390 and $35,346,753, respectively.
|
NTS, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
(Unaudited)
Note 4 - Bonds payable
On December 13, 2007, the Company issued a total of NIS 100,382,100 (approximately $25,562,032, based on the exchange rate as of December 13, 2007) unsecured 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 are linked to the Israeli Consumer Price Index (“CPI”). The known adjusted CPI at March 31, 2014 was 119.1.
The components of the bonds payable are as follows:
|
|
March 31,
2014
|
|
|
|
|
|
Outstanding balance (in NIS)
|
|
|
25,095,525
|
|
Accrued interest (in NIS)
|
|
|
660,047
|
|
Increase in debt due to CPI adjustments (in NIS)
|
|
|
4,458,206
|
|
Total outstanding debt (in NIS)
|
|
|
30,213,778
|
|
|
|
|
|
|
Exchange rate
|
|
|
3.487
|
|
|
|
|
|
|
Total outstanding debt (USD)
|
|
$
|
8,664,691
|
|
Debt discount related to warrants
|
|
|
(207,222
|
)
|
Bonds held by subsidiary
|
|
|
(633,005
|
)
|
|
|
|
|
|
Total outstanding debt
|
|
|
7,824,464
|
|
|
|
|
|
|
Less current portion
|
|
|
4,318,599
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
3,505,865
|
|
NTS, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
(Unaudited)
Note 4 - Bonds payable (Cont.)
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. In November 2011, following the completion of the rights offering, the exercise price of these warrants was adjusted to $2.04 per share. The warrants expired in September 2012.
The Company attributed the composition of the proceeds from the Bonds offering as follows:
Bonds Series A
|
|
$
|
24,588,726
|
|
Stock Purchase Warrants (1)
|
|
|
973,306
|
|
Total
|
|
$
|
25,562,032
|
|
(1)
|
Presented as part of Additional Paid-in Capital.
|
The resulting debt discount and bonds issuance costs are being amortized into interest expense over the life of the Bonds.
On November 5, 2013, Midroog Limited, an Israeli rating company which is a subsidiary of Moody’s Investor Services (“Midroog”) filed with the TASE an annual monitoring report, reaffirming the Ba1 rating of the Series A Bonds, however, Midroog’s rating committee decided on a developing outlook on the rating of the Series A Bonds in light of the Company’s pending merger agreement with Tower Three Partners LLC ("Tower Three") as described in Note 7 below.
Note 5 - Capital Structure
During the first quarter of 2014, options holders exercised their right to purchase 33,425 of the Company’s Common Stocks at an average exercise price of $1.10 per share. At March 31, 2014, the total issued and outstanding Common Stock of $0.001 par value per share is 43,452,272.
NTS, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
(Unaudited)
Note 6 - Legal proceedings
Class Actions Related to the Merger Agreement
Between October 23, 2013 and November 20, 2013, six complaints styled as class actions and relating to the Merger were filed in Nevada state court (Eighth Judicial District, Clark County) against the Company, its officers and directors, Tower Three, T3 North Intermediate Holdings, LLC ("Holdings"), a Nevada limited liability company and North Merger Sub, Inc. ("Merger Sub"), a Nevada corporation and wholly owned subsidiary of Holdings. On December 20, 2013, plaintiffs filed a Consolidated Amended Class Action Complaint (the “Consolidated Amended Complaint”) alleging that the individual defendants breached their fiduciary duties of care, good faith, fair dealing, loyalty and full and candid disclosure in connection with the process surrounding the Merger and that Tower Three, Holdings and Merger Sub aided and abetted these alleged breaches of fiduciary duty. The Consolidated Amended Complaint seeks, among other things, preliminary and permanent injunctive relief against the Merger.
On February 19, 2014, the parties to the litigation entered into a memorandum of understanding (the “MOU”) reflecting an agreement in principle to resolve the claims asserted in the litigation (the “Settled Claims”). The MOU provides, among other things, that plaintiffs will withdraw their motion for preliminary injunction and will not seek to enjoin consummation of the Merger or any transactions contemplated by the Merger Agreement and that the parties will enter into a stipulation of settlement. The stipulation of settlement will be subject to customary conditions, including court approval. If the settlement is finally approved, the Settled Claims will be dismissed with prejudice. As part of the settlement, the defendants in the litigation deny all allegations of wrongdoing and deny that the disclosures in the Proxy Statement were inadequate, but NTS has agreed to provide certain supplemental disclosures. The settlement will not affect the timing of the Special Meeting of NTS stockholders or the Merger, or the amount of consideration to be paid in the Merger.
The defendants believe that no further disclosure is required under applicable laws; however, to avoid the risk of the litigation delaying or adversely affecting the Merger and to minimize the expense of defending such action, the Company has agreed, pursuant to the terms of the MOU, to make certain supplemental disclosures related to the Merger. The Company and the other named defendants have vigorously denied, and continue vigorously to deny, that it has committed or aided and abetted in the commission of any violation of law or engaged in any of the wrongful acts that were or could have been alleged in the litigation, and expressly maintain that, to the extent applicable, it diligently and scrupulously complied with its fiduciary and other legal duties and are providing these supplemental disclosures solely to seek to eliminate the burden and expense of further litigation, to put to rest claims relating to the Merger that have been or could have been asserted, and to avoid any possible delay to the closing of the Merger that might arise from further litigation.
Eliezer Tzur et al. vs. 012 Telecom Ltd. et al.
On January 19, 2010, Eliezer Tzur et al. (the “Petitioners”) filed a request to approve a claim as a class action (the “Class Action Request”) against Xfone 018 Ltd. (“Xfone 018”), NTS’ former 69% Israel-based subsidiary, and four other Israeli telecom companies, all of which are entities unrelated to NTS (collectively with Xfone 018, the “Defendants”), in the Central District Court, Israel (the “Israeli Court”). The Petitioners’ claim alleges that the Defendants have not fully fulfilled their alleged legal requirement to bear the cost of telephone calls by customers to the Defendants’ respective technical support centers. One of the Petitioners, Mr. Eli Sharvit (“Mr. Sharvit”), seeks damages from Xfone 018 for the cost such telephone calls allegedly made by him during the 5.5-year period preceding the filing of the Class Action Request, which he assessed at NIS 54.45 (approximately $15). The Class Action Request, to the extent it pertains to Xfone 018, states total damages of NIS 7,500,000 (approximately $2,099,076) which reflects the Petitioners’ estimation of damages caused to all customers that (pursuant to the Class Action Request) allegedly called Xfone 018’s technical support number during a certain period defined in the Class Action Request.
NTS, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
(Unaudited)
Note 6 - Legal proceedings (Cont.)
Eliezer Tzur et al. vs. 012 Telecom Ltd. et al. (Cont.)
On February 22, 2011, Xfone 018 and Mr. Sharvit entered into a settlement agreement, which following the instructions of the Israeli Court was supplemented on May 3, 2011 and amended on July 18, 2011 and on March 21, 2012 (the “Settlement Agreement”). Pursuant to the Settlement Agreement, Xfone 018 agreed to compensate its current and past registered customers of international calling services who called its telephone service center from July 4, 2004 until February 21, 2010, due to a problem with the international calling services, and were charged for such calls. The compensation includes a right for a single, up to ten minutes, free of charge, international call to one landline destination around the world, and shall be valid for a period of six months. In addition, Xfone 018 agreed to pay Mr. Sharvit a one-time special reward in the amount of NIS 10,000 (approximately $2,827) (the “Reward”). Xfone 018 further agreed to pay Mr. Sharvit attorneys' fee for professional services in the amount of NIS 40,000 (approximately $11,309) plus VAT (the “Attorneys Fee”). In return, Mr. Sharvit and the members of the Represented Group (as defined in the Settlement Agreement) agreed to waive any and all claims in connection with the Class Action Request. As required by Israeli law in such cases, the Settlement Agreement is subject to the approval of the Israeli Court. On April 30, 2012, the Israeli Court appointed a CPA as an examiner to review and assess the Settlement Agreement (the “Examiner”). The Examiner was instructed to advise the Israeli Court whether in his opinion the Settlement Agreement is reasonable. On October 18, 2012 the Examiner submitted his assessment to the Israeli Court. According to the Examiner's assessment, there are a number of impediments that will deter the Represented Group from making use of the right to a free call described above including the low value of the call and its limited utility. According to the Examiner, the appropriate solution would have been to compensate the specific affected customers for the damage caused. However, since the Examiner recognizes that, pursuant to Xfone 018's claims, the foregoing solution is impractical, the Examiner proposes to consider revising the manner in which the alleged damage, which he estimates at NIS 98,000 (approximately $27,707), will be paid for by Xfone 018. Following the Examiner’s assessment, Xfone 018 and Mr. Sharvit have agreed to amend the Settlement Agreement, by giving the Israeli Court the discretion to decide whether Xfone 018 shall grant the free call benefit described above or donate a sum of NIS 49,000 (approximately $13,854) to Ezer Mizion, a non-profit organization (“Ezer Mizion”) (the “Amended Settlement Agreement”). The Amended Settlement Agreement has been submitted to the Israeli Court, which ruled that a notice to the general public concerning the Amended Settlement Agreement shall be published in two daily papers. The said notices have been published and the period for submitting objections to the Amended Settlement Agreement has expired. On July 2, 2013, the Israeli Court requested that the Attorney General submit its position with respect to the Amended Settlement Agreement, after which it is expected that the Israeli Court will issue its final decision. In the response submitted by the Attorney General to the Court, the Attorney General stated that he leaves to the Court`s discretion to decide whether or not to approve the Amended Settlement Agreement. The Attorney General further noted that: (i) the first alternative for compensation (free call benefit) is dissatisfactory; (ii) per the second alternative for compensation (a donation of NIS 49,000), there is a significant gap between the damages assessed by the Examiner (NIS 98,000) and the sum of the donation; the Attorney General noted that the sum of the compensation should be reviewed based on the fact that, according to the Attorney General, the Petitioners have a good cause for their claim; (iii) in the event that the court will approve a compensation by way of donation (the second alternative), Xfone 018 should not be entitled to a claim for any tax credits in connection with the sum of the donation; and (iv) the Attorneys Fee is disproportionate to the sum of the donation (NIS 49,000).
On May 14, 2010, the Company entered into an agreement (including any amendment and supplement thereto, the “Marathon Agreement”) with Marathon Telecom Ltd. for the sale of our majority (69%) holdings in Xfone 018. Pursuant to Section 10 of the Marathon Agreement, the Company is fully and exclusively liable for any and all amounts, payments or expenses incurred by Xfone 018 as a result of the Class Action Request. Section 10 of the Marathon Agreement provides that the Company shall bear any and all expenses or financial costs which are entailed by conducting the defense on behalf of Xfone 018 and/or the financial results thereof, including pursuant to a judgment or settlement (it was agreed that in the event that Xfone 018 will be obligated to provide services at a reduced price, the Company shall bear only the cost of such services). Section 10 of the Marathon Agreement further provides that the defense by Xfone 018 shall be performed in full cooperation with the Company and with mutual assistance. It is agreed between the Company and Xfone 018 that subject to and upon the approval of the Settlement Agreement by the Israeli Court, the Company shall bear and/or pay: (i) the costs of the free call benefit or donation described above; (ii) the Reward; (iii) the Attorneys Fee; (iv) Xfone 018 attorneys' fees for professional services in connection with the Class Action Request, estimated at approximately NIS 75,000 (approximately $21,204); and (v) any other related costs (such as publication expenses and the Examiner’s fees).
In the event the Amended Settlement Agreement is not approved by the Israeli Court, Xfone 018 intends to vigorously defend the Class Action Request.
NTS, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
(Unaudited)
Note 7 - Merger Agreement
As reported in the Current Report on Form 8-K filed with the SEC on October 21, 2013, the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with T3 North Intermediate Holdings, LLC, a Nevada limited liability company (“Holdings”) and North Merger Sub, Inc., a Nevada corporation and a wholly-owned subsidiary of Holdings (“Merger Sub”). Upon the terms and subject to the conditions set forth in the Merger Agreement, the Company will become a wholly-owned subsidiary of Holdings through a merger of Merger Sub with and into the Company, with the Company as the surviving corporation (the “Merger”). Holdings and Merger Sub are affiliates of Tower Three Partners LLC (“Tower Three”). Consummation of the Merger is subject to a number of closing conditions, including, among other things, (i) the adoption and approval of the Merger Agreement by the requisite vote of the Company’s stockholders; (ii) receipt of certain third party consents; (iii) the absence of any law or order prohibiting the Merger; (iv) the accuracy of the representations and warranties, subject to customary materiality qualifiers; and (v) the absence of a Material Adverse Effect (as defined in the Merger Agreement). Consummation of the Merger is not subject to a financing condition.
Simultaneously with the execution of the Merger Agreement, Guy Nissenson, the Company’s Chairman, President and Chief Executive Officer, entered into a Voting Agreement with Holdings and the Company (the “Voting Agreement”). Pursuant to the Voting Agreement, Mr. Nissenson has agreed, among other things, to vote the shares of the Company’s common stock held by him:
●
|
in favor of the Merger Agreement proposal;
|
●
|
against alternative transactions; and
|
●
|
in favor of any action in furtherance of the transactions contemplated by the Merger Agreement.
|
The Voting Agreement generally prohibits Mr. Nissenson from transferring his shares of common stock prior to the consummation of the Merger. The Voting Agreement will automatically terminate upon the first to occur of (i) the consummation of the Merger, or (ii) the termination of the Merger Agreement in accordance with its terms.
In addition, the sole member of Holdings and Mr. Nissenson have entered into a Rollover Agreement (the “Rollover Agreement”), whereby Mr. Nissenson has committed to contribute, immediately prior to the effective time of the Merger, an aggregate of 1,390,871 shares of the Company’s common stock to the sole member of Holdings in exchange for equity interests of such entity. Mr. Nissenson‘s commitments pursuant to such agreement are conditioned upon the satisfaction or waiver of the conditions to closing contained in the Merger Agreement and will take place immediately prior to the consummation of the Merger. In addition, it is expected that Mr. Nissenson will enter into an equity holders agreement that will, among other things, provide that Mr. Nissenson may serve on the board of directors of the sole member of Holdings for so long as he continues to own a specified amount of equity in such entity.
The parties to the Merger Agreement intend to complete the Merger in the second quarter of 2014. However, the Merger is subject to approvals and other conditions, and it is possible that factors outside the control of the parties could result in the Merger being completed at a later time, or not at all.
The Company and Tower Three have had discussions related to assistance with financing after the closing of the Merger Agreement, if necessary. While there is no formal or legal commitment from Tower Three to provide assistance, it is the Company’s belief financing will be available after the closing of the Merger Agreement, if needed.
NTS, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
(Unaudited)
Note 8 - Subsequent Event
Between April 28, 2014 and May 1, 2014, certain warrant holders exercised their right to purchase 395,000 of the Company’s Common Stocks at an exercise price of $1.865 per share. In addition, warrants to purchase 55,000 of the Company’s Common Stocks at an exercise price of $1.865 per share expired at the end of business day of May 1, 2014.