General
As used in this Annual Report, references to “the Company”, “we”, “our”, “ours” and “us” refer to NTS, Inc. and consolidated subsidiaries, unless otherwise indicated or unless the context otherwise requires. References to “NTSI” refer to NTS, Inc. References to “NTSC” refer to NTS Communications, 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
NTS, Inc. (f/k/a Xfone, Inc.)
NTS, Inc. was incorporated in the State of Nevada, U.S.A. in September 2000 as Xfone, Inc. We are a holding and managing company providing, through our subsidiaries, integrated communications services which include voice, video and data over our Fiber-To-The-Premise (“FTTP”) and other networks.
Several years ago, our Board of Directors made a strategic decision to concentrate our operations in the United States; accordingly, in the summer of 2010 we discontinued and disposed of our operations in the United Kingdom and Israel. We currently have operations in Texas, Mississippi and Louisiana and we also serve customers in Arizona, Colorado, Kansas, New Mexico, and Oklahoma.
Effective as of February 1, 2012, we changed our name from “Xfone, Inc.” to “NTS, Inc.” and as of February 2, 2012 our shares of common stock are traded on the NYSE MKT LLC (f/k/a NYSE Amex LLC) (“NYSE MKT”) and the Tel Aviv Stock Exchange Ltd. (“TASE”) under the new ticker symbol “NTS”. The name change is a reflection of our refined and enhanced business strategy which began with our acquisition of NTS Communications, Inc. in 2008 and our focus on the build out of our high-speed FTTP network.
On March 25, 2014, the closing price of our common stock was $1.99 (NYSE MKT) / NIS 6.946 (TASE).
Our principal executive offices are located at 1220 Broadway, Lubbock, Texas 79401 and our telephone number is (806) 771-5212.
Our offices in Israel are located at 11 Rabbi Akiva Street, Modi'in Illit, 7183811 and our telephone number there is + 972 (0)8-622-9582.
For our corporate website please visit www.ntscom.com. Our website is not part of this Annual Report.
Proposed Merger
As reported in our Current Report on Form 8-K filed with the SEC on October 21, 2013, on October 20, 2013, we 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, our Chairman, President and Chief Executive Officer, entered into a Voting Agreement with Holdings and us (the “Voting Agreement”). Pursuant to the Voting Agreement, Mr. Nissenson has agreed, among other things, to vote the shares of our common stock held by him:
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in favor of the Merger Agreement proposal;
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against alternative transactions; and
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in favor of any action in furtherance of the transactions contemplated by the Merger Agreement.
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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 our 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 equityholders 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.
Our Organizational Structure
Following the sale of our UK and Israeli operations in 2010, we have two wholly owned subsidiaries in the United States. These subsidiaries, and their consolidated subsidiaries, are shown in the following diagram:
NTS Communications, Inc.
Background
On August 22, 2007, we entered into a Stock Purchase Agreement (the “NTSC Purchase Agreement”) with NTS Communications, Inc., a provider of integrated telecommunications solutions headquartered in Lubbock, Texas, and the owners of approximately 85% of the equity interests in NTSC, to acquire NTSC. Subsequently, all of the remaining shareholders of NTSC executed the NTSC Purchase Agreement, bringing the total percentage of equity interests in NTSC owned by NTSC shareholders that entered into the NTSC Purchase Agreement (the “NTSC Sellers”) to 100%. On February 14, 2008, we entered into a First Amendment to the NTSC Purchase Agreement to amend the agreement to further extend the expiration date for the closing of our acquisition of NTSC. On February 26, 2008, we entered into a Second Amendment to the NTSC Purchase Agreement which amended, among other things, the definition and elements of Working Capital, as such term is defined in the NTSC Purchase Agreement, and increased the escrow amount. On April 25, 2008, we entered into a Third Amendment to the NTSC Purchase Agreement, pursuant to which we agreed to an extension of time for the calculation and payment of the post-closing working capital adjustment under the NTSC Purchase Agreement.
The acquisition closed on February 26, 2008. Upon closing of the acquisition, NTSC 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. On April 3, 2009, NTSC formed a seventh wholly owned subsidiary in Texas, called PRIDE Network, Inc.
About NTSC
NTSC is an integrated telecommunications service provider that owns and operates its own fiber optic and leased facilities-based, long haul and metropolitan telecommunications networks. NTSC provides, including through its subsidiaries, business and residential customers with high quality broadband, managed data, video, local, and long distance services within its service areas. The company also provides long distance, data, and private line services to numerous communications carriers. NTSC is currently authorized to provide interexchange service in Arizona, Colorado, Kansas, Louisiana, New Mexico, Oklahoma, and Texas. NTSC is also authorized to provide local service in Louisiana, New Mexico, and Texas, and video service only in Louisiana and Texas.
Xfone USA, Inc.
Background
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 then newly formed wholly owned subsidiary Xfone USA, Inc. (“Xfone USA”). The merger was consummated on March 10, 2005.
Between 2006 and 2008, Xfone USA consummated a series of mergers and acquisitions. In January 2006, Xfone USA acquired the assets of Canufly.net, Inc., an internet service provider based in Vicksburg, Mississippi. In March 2006, I-55 Internet Services, Inc., a provider of internet access and related services in Southeastern United States, and I-55 Telecommunications, LLC, a provider of voice, data and related services in Louisiana and Mississippi, merged with and into Xfone USA. In January 2008, Xfone USA acquired the assets of EBI Comm, Inc., a provider of internet services in north Mississippi. In November 2008, Xfone USA acquired the assets and assumed certain liabilities of Cybergate, Inc., a provider of internet services. The transactions with Canufly.net, EBI Comm, and Cybergate were not significant from an accounting perspective.
About Xfone USA
Xfone USA (d/b/a NTS Communications) 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. Xfone USA utilizes integrated multi-media offerings - combining digital voice and data services over broadband technologies to deliver services to customers throughout its service areas. Xfone USA is currently licensed to provide telecommunications services in Louisiana and Mississippi.
Recent Acquisitions
CoBridge Telecom, LLC
On April 25, 2011, NTSC entered into an Asset Purchase Agreement with CoBridge Telecom, LLC, (“CoBridge”), pursuant to which CoBridge agreed to sell NTSC all of CoBridge’s assets in and around the communities of Colorado City, Levelland, Littlefield, Morton, and Slaton Texas according to the terms of that agreement. CoBridge provided cable television service in those communities via coaxial cable facilities. As part of the transaction, NTSC also agreed to assume certain liabilities of CoBridge which are necessary to continue operation of the CoBridge’s assets. The sale and purchase closed on July 1, 2011 but the purchase price was adjusted in November 2011 based on the number of CoBridge’s customers who failed to pay their accounts or cancelled service (offset by customers who converted to NTSC’s service in relevant markets). This adjustment was made final by agreement of the parties in July 2012. The acquisition is not significant from an accounting perspective.
Reach Broadband
On September 16, 2011, NTSC entered into an Asset Purchase Agreement with RB3, LLC, and Arklaoktex, LLC, each doing business as Reach Broadband (“Reach”), pursuant to which Reach agreed to sell NTSC all of Reach’s assets in and around the communities of Abernathy, Anton, Brownfield, Hale Center, Idalou, Levelland, Littlefield, Meadow, New Deal, O’Donnell, Olton, Reese, Ropesville, Shallowater, Smyer, Tahoka, and Wollforth Texas according to the terms of that agreement. Reach provided those communities with cable television service via coaxial cable facilities and Internet service via a wireless network. As part of the transaction, NTSC also agreed to assume certain liabilities of Reach which are necessary to continue operation of Reach’s assets. The sale and purchase closed on December 1, 2011. The acquisition is not significant from an accounting perspective.
Discontinued Operations
The United Kingdom
On January 29, 2010, we entered into an agreement with Abraham Keinan (our former Chairman of the Board of Directors and former significant shareholder) and AMIT K LTD. (a company registered in England & Wales which at that time was wholly owned and controlled by Mr. Keinan) for the sale by us of the entire issued share capital of Swiftnet Ltd., Equitalk.co.uk Ltd., Auracall Ltd. and Story Telecom. The transaction closed on July 29, 2010.
Israel
On August 31, 2010, we completed the disposition of our 69% interest in Xfone 018 Ltd. pursuant to a certain agreement, dated May 14, 2010 (as amendment and supplement), by and between us, Newcall Ltd. (the former 26% minority owner of Xfone 018), Margo Pharma Ltd. (the former 5% minority owner of Xfone 018), and Marathon Telecom Ltd., the buyer of Xfone 018.
Our Principal Services and Their Markets
We provide through our subsidiaries the following telecommunication products / services:
Services provided by NTS Communications and its subsidiaries
Retail Services
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Local Services
: NTSC 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, NTSC sells “off-net” total service resale lines. NTSC provides UNE-L services in Lubbock, Abilene, Amarillo, Midland, Odessa, Pampa, Plainview, and Wichita Falls, Texas. NTSC provides local services via FTTP in Lubbock, Wolfforth, Levelland, Littlefield, Plainview, Burkburnett, Slaton, Iowa Park, Brownfield, Lamesa, Ropesville, Wichita Falls, and Smyer, Texas. NTSC provides resold local services throughout Texas via its resale agreement with AT&T.
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Retail Long Distance Services
: NTSC 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. A minority of its long distance customers are in Arizona, New Mexico, Oklahoma, Kansas, and Colorado.
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Internet Data Services
: NTSC provides broadband and dial-up Internet service in all of its Texas markets. Download speeds for broadband range from 500 Kilobits to 100 Megabits per second, depending on the end user’s distance from an NTSC collocation or the type of facilities used to deliver the service. NTSC also offers Web hosting and wide area networking solutions for business applications.
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Fiber-Based Services (“Fiber to the Premise” or “FTTP”)
: As an integrated telecom provider, NTSC is capable of providing quality triple play (voice, digital video & data) on one bill at competitive prices to its FTTP customers. NTSC offers a full selection of video services, including basic cable, video on demand, HDTV and DVR. NTSC is a member of the National Cable Television Cooperative and as such obtains favorable programming rates from most major networks. NTSC provides FTTP service in Lubbock, Levelland, Littlefield, Brownfield, Burkburnett, Ropesville, Slaton, Smyer, Whitharral, Wichita Falls, Burkburnett, Iowa Park, Plainview, Lamesa, and Wolfforth, Texas.
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Cable Television (“CATV”)
: In addition to providing video service via its FTTP network, NTSC offers CATV via a coaxial cable network in Anton, Brownfield, Colorado City, Hale Center, Idalou, Levelland, Littlefield, Meadow, Morton, New Deal, O’Donnell, Olton, Ropesville, Shallowater, Slaton, Smyer, Tahoka, and Wolfforth Texas. NTSC offers a wide selection of video services via its CATV offering basic cable, over 250 channels including premium sports and movie channels, and Pay Per View.
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Customer Premise Equipment (“CPE”)
: NTSC resells a variety of CPE and CPE related services to its customers. Primarily, these sales involve NTSC 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. In addition NTSC sells a variety of other electronics such as HD displays, surveillance equipment, paging systems, nurse call systems, routers switches and internetworking gear.
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Wholesale Services
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Private Line Services
: NTSC 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. NTSC provides private line service nationwide.
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Wholesale Switched Termination Services
: NTSC 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. NTSC 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. NTSC provides wholesale switched termination services to customers via network connections in NTSC POPs and switch sites.
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Internet Based Customer Service
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Our Internet based customer service (found at www.ntscom.com) includes full details on all our retail products and services.
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NTS Communications owns and operates its own facilities-based telecommunications switching system.
FTTP Network Extensions / Stimulus Fundings
Levelland/Smyer, Texas
NTSC, through its wholly owned subsidiary, NTS Telephone Company, LLC (d/b/a NTS of Levelland), has extended its FTTP network to the nearby communities of Levelland (located approximately 30 miles west of Lubbock) and Smyer (approximately 15 miles west of Lubbock). An “FTTP passing” represents the number of premises capable of being served by the Company’s deployed fiber optic distribution plant, with or without the addition of a fiber optic drop cable from the closest network access point to the premises. NTS Telephone Company, LLC received from the Rural Utilities Service (“RUS”), a division of the U.S. Department of Agriculture an $11.5 million debt facility to complete this build-out. The RUS loan is non-recourse to NTSC and all other NTSC subsidiaries and interest is charged at the average rate of U.S. government obligations. NTSC’s initial capital investment in the project was a $2.5 million equity contribution. NTSC provides voice, data, and video services for NTS Telephone Company and also provides billing, sales and marketing, back and front offices services to this subsidiary. NTSC receives a management fee from NTS Telephone Company equal to 15% of its revenues. NTSC began marketing its triple-play service in limited areas of Levelland in 2009 and construction was completed on April 8, 2010. NTSC intends to continue to work diligently to secure sales and complete installations in pursuit of its take rate goals.
Texas South Plains; Burkburnett and Iowa Park, Texas; St. Helena, Washington, and Tangipahoa Parishes in Southern Louisiana
In March 2010, we were notified that the applications of our wholly owned subsidiary, PRIDE Network, Inc. (“PRIDE Network”), for RUS funding from the U.S. Department of Agriculture under the Broadband Initiative Program for the FTTP build out of PRIDE Network’s projects in Texas, had been approved. PRIDE Network was selected to receive approximately $63.7 million in RUS funding for these projects, which will be split between loans of approximately $35.53 million and grants of approximately $28.14 million.
In September 2010, we were notified that another application of PRIDE Network for additional funding under the Broadband Initiative Program for the FTTP build out of its project in Louisiana had been approved. PRIDE Network was selected to receive approximately $36.2 million in additional RUS funding which will be split between a loan of approximately $18.46 million and a grant of approximately $17.74 million.
This funding was a significant milestone in our strategy to grow the FTTP business. The grants and loans created an opportunity for us to expand the rollout of our state-of-the-art FTTP infrastructure to bring broadband services to the Texas south plains, to the communities of Burkburnett and Iowa Park, Texas, and to St. Helena, Washington, and Tangipahoa Parishes in Southern Louisiana. Additionally, it is anticipated that these projects will help stimulate the economic growth of these communities by creating hundreds of new jobs associated with the network build out.
When completed, the PRIDE Network is expected to add 30,000 FTTP passings to the NTSC network bringing Company-wide FTTP passings to over 50,000. To date, we completed our FTTP PRIDE network in Lamesa, Littlefield, Plainview, Burkburnett, Iowa Park, Brownfield, Slaton, and Whitharral, Texas and in Hammond, Louisiana, and started to record revenues from these markets which are expected to increase during 2014.
The fundings are contingent upon PRIDE Network meeting the terms of the loans, grants or loans/grants agreement.
NTSC also commenced 3 metro build projects in Abilene, Amarillo, Wichita Falls, all located in Texas. The builds are focused primarily on business customers and should add more than 3,500 passings to our network by 2014. The builds are financed through a delayed draw down term loan with ICON Agent, LLC.
Services provided by Xfone USA
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Local Telephone Service:
Using its own network in concentrated local areas throughout Mississippi and Louisiana and utilizing the underlying network of BellSouth Telecommunications, Inc. (the new ATT), outside of Xfone USA’s local areas, Xfone USA provides 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.
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Long Distance Service:
Xfone USA uses its own network where available and QWEST, a nationwide long distance carrier, as its underlying long distance network provider. In conjunction with Local Telephone Services, Xfone USA provides Long Distance Services to its residential and business customers. Xfone USA provides 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 Xfone USA also provides Dedicated Services such as T-1 and PRI Services. Xfone USA’s long distance services are only available to customers who use its local telephone services.
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Internet/Data Service:
Xfone USA provides high-speed broadband Internet access to residential and business customers utilizing its own integrated digital data network and utilizing the broadband gateway network of the new ATT. Xfone USA’s DSL service provides up to 3 Mbps of streaming speed combined with Dynamic IP addresses, as well as multiple mailboxes and Web space. Xfone USA DSL services also include spam filter, instant messaging, pop-up blocking, web mail access, and parental controls. Xfone USA also provides dial-up Internet access service for quick and dependable connection to the web. Xfone USA’s Internet/Data services are stand-alone products or are bundled with its voice services for residential and business customers.
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Customer Service:
Customer Service is paramount at Xfone USA and is one of its major differentiating characteristics, thus tantamount to being one of its 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. Xfone USA’s 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.
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Customer Premise Equipment (“CPE”)
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Xfone USA also resells a variety of CPE and CPE related services to its customers. Primarily, these sales involve acting with NTSC 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. In addition, the company sells a variety of other electronics such as HD displays, surveillance equipment, paging systems, nurse call systems, routers switches and internetworking gear.
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Xfone USA 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:
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We use full time, Account Executives “AE’s” to sell to Small, Mid-Market & Enterprise business customers in our fiber & legacy Competitive Local Exchange Company (“CLEC”) markets. Additionally, a subset of AE’s working within our PRIDE FTTU markets focus on selling directly to consumers. All AE’s carry quota which vary based on their responsibilities, titles and type of market assigned to them. AE’s receive a base salary paid bi-monthly in addition to any commissions that may have been earned under the specific compensation plan that an AE falls under;
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We actively pursue opportunities with other carriers; Incumbent Local Exchange Companies (“ILEC’s”), CLEC’s, Internet Service Providers (“ISP’s”), Multiple System Operators (“MSO’s”) and agents who purchase wholesale Origination & Termination, Point to Point Circuits, Carrier Metro Ethernet, Long Haul, Dedicated Internet Access, Dark Fiber, Interconnect CPE & Internetworking equipment such as routers & switches directly from us and then resell these wholesale services and products at a mark-up to end-users under their own brand. This is strictly a “white labeled” offering and these entities generate their own invoices from Call Detail Records (“CDR’s”) that we provide them. We call this division “National Accounts” and also refer to it as “Carrier Wholesale”. Our Carrier Sales Manager is a specialist and has over 20 years of experience;
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We utilize traditional agents & Value Added Resellers (“VAR’s”) that sell our services directly to end-users at our established prices; these agents receive an ongoing residual commission of approximately 5%-12% of the total Monthly Recurring Charges (“MRC’s”
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based on their individual contracts on collected revenues less any bad debt;
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We have used and in the future may engage third party direct sales organizations (telesales and door-to-door) to register new customers when internal human capital is not available or when we want to target a specific service area aggressively for a period of time for the purpose of increasing market share or a sales blitz around a new product offering;
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We have retail and wholesale sales offices; employees at these sales offices receive annual salaries and commissions;
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We deploy direct marketing resources including but not limited to: internet/social networking, advertising through newspaper, radio, television, outdoor boards, digital signage, direct mail campaigns, door hangers, community events and sponsorships, chambers affinity groups and alumni associations;
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We attend telecommunications trade shows to network and to promote our products and services; and
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We utilize the internet as an additional distribution channel for our services.
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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. 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:
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Customer Service Division -
We maintain a live customer service center that operates 24 hours a day, 7 days a week.
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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.
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Administration Division -
Our Administration Division provides the billing, collection, credit control, and customer support aspects of our business.
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Marketing Division -
Our Marketing Division is responsible for our marketing and selling campaigns that target potential and existing retail customers.
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Geographic Markets
Our primary geographic markets are Texas, Mississippi and Louisiana, United States. However, we also serve customers in Arizona, Colorado, Kansas, New Mexico, and Oklahoma.
Competitive Business Conditions
NTSC 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 either AT&T (formerly Southwestern Bell Telephone Company) or Windstream Communications. NTSC 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, Time Warner Communications, or other smaller operators. Within these same core markets, NTSC 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, Suddenlink, Qwest, Level 3 and others.
Xfone USA also operates in highly competitive markets in Mississippi and Louisiana. In these markets Xfone USA competes against the dominant ILEC, AT&T (formerly BellSouth Telecommunications), as well as many smaller CLECs.
Principal Suppliers
In fiscal year 2013, our principal supplier of telephone routing and switching services constituted 36% of our costs of revenues.
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 in accordance with the relevant regulations and their licenses to operate as a telecommunications provider in the relevant jurisdictions.
Major Customers
We have four major types of customers:
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Residential -
We serve residential customers with various services including voice, broadband and narrow band internet access and cable television services.
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Commercial -
We serve small, medium and large businesses with multiple variations of our voice, broadband, video, private line, and information technology solutions.
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Governmental agencies -
We provide various governmental entities with a broad range of services, including voice, video, internet, managed data, and private line services.
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Wholesale -
We provide other carriers with various switched and non-switched voice and data services on a wholesale basis. We also provide long haul transport, metro access, and switched termination services to a variety of communications companies throughout the United States.
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We are not dependent upon any major customer. However, our revenues are dependent upon certain factors, including: price competition; access provided to our services by other telecom companies and the prices for that access; demand for our services; economic conditions in our markets; and our ability to market our services.
Patents and Trademarks
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 has been 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 October 2023.
The Mark, “
NTS-ONLINE (with design)
” related to the provision of web hosting was registered by the USPTO on August 15, 2000, and has been renewed through the year 2020.
On February 6, 2007, NTSC 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. NTSC’s Statement of Use was accepted by the USPTO on January 3, 2009. The mark was registered by the USPTO on February 10, 2009.
The Mark, “
XFONE
” related to the provision of telephone communications services and multiple user dial-up and dedicated access to the Internet in the United States, was registered by the USPTO on July 15, 2008.
The registration expired on July 15, 2013, and we elected not to file an application for renewal.
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.
The registration expired on August 8, 2013, and the Company elected not to file an application for renewal.
We do not have any other patents or registered trademarks.
Regulatory Matters
We provide our services in certain states, each of which may 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.
On February 14, 2008, NTSI and NTSC received domestic and international Section 214 authorization from the United States Federal Communications Commission (“FCC”
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to transfer control of NTSC to NTSI.
NTSC has certain domestic and international Section 214 authority, which authorizes NTSC to provide long distance service in the United States.
NTSC is a registered re-seller of long-distance services in the states of Arizona, Colorado, Kansas, New Mexico, Oklahoma and Texas. NTSC is also registered to provide local services in Louisiana, New Mexico and Texas. Further, in Texas, NTSC has the authority to provide local telecommunications services throughout the state of Texas, and has authorization to provide video services in designated areas within Lubbock, Anton, Brownfield, Burkburnett, Colorado City, Hale Center, Idalou, Levelland, Littlefield, Meadow, Morton, New Deal, O’Donnell, Olton, Ropesville, Shallowater, Slaton, Smyer, Tahoka, Whitharral, Wichita Falls, Wilson, and Wolfforth. In addition, NTSC has entered into 9-1-1 Emergency Service Agreements with the applicable 9-1-1 entities in the markets it serves.
NTSC also has authority to provide video services in certain communities in the following Parishes in the state of Louisiana: Livingston, St. Helena, St. Tammany, Tangipahoa, and Washington.
On May 19, 2008 a petition was filed with the FCC (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). 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. The May 19, 2008 petition is currently pending.
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 Louisiana and Mississippi. Internet and data services provided by Xfone USA are not regulated services.
Governmental Regulations
We are subject to regulatory oversight by the FCC for particular interstate matters and state public utility commissions (“PUCs”) for certain intrastate matters. We are also subject to various federal and state statutes that direct such regulations. We monitor proceedings at the FCC and PUCs as well as federal and state legislation that impact our business.
Communications services providers are regulated differently depending primarily upon the network technology used to deliver the service.
From time to time federal and state legislation is introduced dealing with various matters that could affect our business. It is difficult to predict what kind of legislation, if any, may be introduced and ultimately become law.
In 2011, the FCC released its Order Reforming USF and Intercarrier Compensation, which limits NTSC and Xfone USA’s future access to reimbursement from various Universal Service Funds (“USF”). At this time, in our opinion, it does not appear that the Order will have a material impact on NTSC or Xfone USA’s operations.
The FCC’s reform of intercarrier compensation continues progress toward implementation of a uniform national bill-and-keep framework for all telecommunications exchange traffic. These reforms continue to be subject to court challenges and further rulemaking. The final impact thereof remains unclear and we will continue to monitor developments carefully.
In areas where it has not deployed its own last mile facilities, NTSC 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 NTSC and Xfone USA and ILECs. Should laws or regulations be changed to limit and or eliminate competitive access to these essential facilities, our business could be adversely affected.
Employees
We currently have 196 employees in the United States and 3 employees in Israel.
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 us, our officers and directors, Tower Three, Holdings and Merger Sub. 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, we have agreed, pursuant to the terms of the MOU, to make certain supplemental disclosures related to the Merger. We and the other named defendants have vigorously denied, and continue vigorously to deny, that we have 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, we diligently and scrupulously complied with their 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.
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, we 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, we are 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 we 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, we 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 us and with mutual assistance. It is agreed between us and Xfone 018 that subject to and upon the approval of the Settlement Agreement by the Israeli Court, we 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.