FREE CASH FLOW PARTICIPATION AGREEMENT
EXHIBIT
10.107.1
This
Cash
Flow Participation Agreement (this "Agreement") is executed as of _________
___,
2007 by XFone, Inc., a Nevada corporation ("XFone"), and NTS Holdings,
Inc., a
Texas corporation ("Holdings") to be effective on the date of consummation
of
the transactions contemplated by the Stock Purchase Agreement (as defined
herein) (the “Effective Date”).
RECITALS
Holdings
and XFone are joint venturers in connection with the acquisition of NTS
Communications, Inc. (“NTS”). Concurrently with the execution and
delivery of this Agreement, XFone is purchasing the issued and outstanding
common stock of NTS pursuant to and in accordance with that certain Stock
Purchase Agreement dated ________ __, 2007 among NTS, XFone, and the
shareholders of the Company which are parties thereto (the "NTS Stock Purchase
Agreement"). XFone and Holdings’ entering this Agreement is a
condition to the fulfillment of their joint venture for the consummation
of the
stock acquisition of the stock of NTS. XFone and Holdings wish to
enter into this free cash flow participation arrangement upon the terms
and
conditions set forth in this Agreement.
AGREEMENT
The
parties, intending to be legally bound, agree as follows:
1. DEFINITIONS
Capitalized
terms not expressly defined in this Agreement shall have the meanings ascribed
to them in the Stock Purchase Agreement. For the purposes of this
Agreement, the following terms have the meanings specified or referred
to in
this Section 1.
"Agreement"--this
Cash Flow Participation Agreement, as amended from time to time.
“Amortization
Expense”– the cumulative amortization expense of the US Operations
as determined by XFone’s independent auditors in accordance with GAAP and
consistent with the financial statements for the US Operations, beginning
with
the Effective Date through the end of the fiscal year in which the Effective
Date occurred and each fiscal year thereafter.
“Capital
Expenditures”– the cumulative capital expenditures of the US
Operations as determined by XFone’s independent auditors in accordance with GAAP
and consistent with the financial statements for the US Operations, beginning
with the Effective Date through the end of the fiscal year in which the
Effective Date occurred and each fiscal year thereafter.
“Capitalized
Expenses”–
the
cumulative expenses of the US Operations which are capitalized rather than
expensed at the time such expenses are incurred as determined by XFone’s
independent auditors in accordance with GAAP and consistent with the financial
statements for the US Operations, beginning with the Effective Date through
the
end of the fiscal year in which the Effective Date occurred and each fiscal
year
thereafter.
“Change
in Working Capital”– the cumulative positive or
negative change in Working Capital of the US Operations as determined by
XFone’s
independent auditors in accordance with GAAP and consistent with the financial
statements for the US Operations, beginning with the Effective Date through
the
end of the fiscal year in which the Effective Date
occurred and each fiscal year thereafter.
“Current
Assets” shall mean the sum of those accounts required to
be
included in the determination of current assets in accordance with GAAP
and
consistent with the financial Statements for the US Operations; provided
that
the foregoing accounts shall be adjusted appropriately to exclude intercompany
or similar duplicating accounts.
“Current
Liabilities” shall mean all the
liabilities of the US Operations required to be included in the determination
of
current liabilities in accordance with GAAP and consistent with the financial
statements for the US Operations.
“Depreciation
Expense”– the cumulative depreciation expense (other than
depreciation attributable to capitalized leases) of the US Operations as
determined by XFone’s independent auditors in accordance with GAAP and
consistent with the financial statements for the US Operations, beginning
with
the Effective Date through the end of the fiscal year in which the Effective
Date occurred and each fiscal year
thereafter.
"Effective
Date"--the date stated in the first paragraph of the
Agreement.
“Excess
Free Cash Flow”– The amount by which the Free Cash Flow of the US
Operations exceeds (a) the Invested Capital plus (b) the cumulative Excess
Free
Cash Flow in all prior years for which a Participation Amount has previously
been paid.
"Excess
Free Cash Flow Date"– the date at which Excess Free Cash Flow
shall have been achieved by the US Operations.
"Fiscal
Year"– XFone's fiscal year, as it exists on the Effective Date or
as changed from time to time.
"Free
Cash Flow" – The cumulative cash flow of the
US Operations as determined by XFone’s independent auditors according to the
following formula: Net Income plus Depreciation Expense
plus Amortization Expense plus/minus Change in Working Capital
minus Capital Expenditures minus Capitalized Expenses plus
Other Non-Cash Expenses minus Other Non-Cash Income, plus any Sale
Proceeds.
“Future
Acquisitions”– any and all acquisitions and related transactions
made by XFone, directly or indirectly through its Subsidiaries which become
a
part of its US Operations, including any acquisition structured as a merger,
consolidation, recapitalization, purchase or sale of assets or capital
stock,
share exchange, or any similar transaction or business combination made
by XFone
at any time following the Stock Purchase.
“GAAP”
means United States generally accepted accounting principles as in effect
from
time to time, consistently applied.
“Invested
Capital”– the invested capital of XFone
determined as the sum of the following: 1) the Purchase Price and
Transaction Costs of the Stock Purchase; 2) the Purchase Price and Transaction
Costs of all Future Acquisitions; and 3) through the Excess Free Cash Flow
Date,
an annual return on XFone’s Invested Capital of eight percent (8%) per
year.
“Net
Income”– The cumulative net income/loss of the US Operations as
determined by XFone’s independent auditors in accordance with GAAP and
consistent with the financial statements for the US Operations, beginning
with
the Effective Date through the end of the fiscal year in which the Effective
Date occurred and each fiscal year
thereafter.
“Other
Non-Cash Expenses”– the cumulative non-cash expenses of the US
Operations other than depreciation and amortization expenses as
determined by XFone’s independent auditors in accordance with GAAP and
consistent with the financial statements for the US Operations, beginning
with
the Effective Date through the end of the fiscal year in which the Effective
Date occurred and each fiscal year
thereafter.
“Other
Non-Cash Income” -- the cumulative non-cash income of the US
Operations as determined by XFone’s independent auditors in accordance with GAAP
and consistent with the financial statements for the US Operations, beginning
with the Effective Date through the end of the fiscal year in which the
Effective Date occurred and each fiscal year
thereafter.
"XFone
Common Stock" shall mean shares of the common stock of
XFone.
"Person"--any
individual, corporation (including any non-profit corporation), general
or
limited partnership, limited liability company, joint venture, estate,
trust,
association, organization, or governmental body.
"Purchase
Price"— shall mean the aggregate amount payable by XFone to any
Person in connection with the closing of the Stock Purchase or any Future
Acquisition(s), (whether in the form of cash, stock, options, warrants,
or any
combination thereof) as set forth in the definitive agreement or any documents
executed in connection therewith, including any employment, consulting
or
non-compete agreements applicable to such acquisition; provided that for
purposes of valuing any non-cash consideration, such consideration shall
be
valued at the value it is assigned in the definitive agreement for such
transaction, or if no value is assigned for options or warrants, then they
shall
be valued as of the closing date pursuant to the Black-Scholes option-pricing
model, assuming a 90% volatility of the underlying security.
“Sale
Proceeds”– means the net proceeds when received of a bona fide
sale of any part but not all of the US Operations to a third party not
affiliated with XFone or Holdings and, to the extent such Sale Proceeds
creates
the right to a Participation Amount under this Agreement, such Participation
Amount shall be paid in the form received by XFone from the acquiring third
party in connection with such sale.
"Stock
Purchase"— the contemplated transactions pursuant to the NTS Stock
Purchase Agreement.
“Subsidiaries”–
shall
mean, with respect to any Person (the “parent”) at any date, any
corporation, limited liability company, partnership, association or other
entity
the accounts of which would be consolidated with those of the parent in
the
parent’s consolidated financial statements if such financial statements were
prepared in accordance with GAAP as of such date, as well as any other
corporation, limited liability company, partnership, association or other
entity
of which securities or other ownership interests representing more than
50% of
the equity securities or more than 50% of the voting securities or, in
the case
of a partnership, more than 50% of the general partnership interests are,
as of
such date, owned, controlled or held, directly or indirectly, by one or
more of
the parent and its Subsidiaries.
“Transaction
Costs”– all costs and expenses (including but not limited to legal
fees) incurred by XFone in connection with the Stock Purchase and/or any
Future
Acquisitions.
“US
Operations”– the combined United States domestic operations of
XFone USA, Inc. and its Subsidiaries and NTS Communications, Inc. and its
Subsidiaries together with any Future Acquisitions.
“Working
Capital” means the positive difference between the
Current Assets of the US Operations and the Current Liabilities of the
US
Operations.
2. FREE
CASH
FLOW PARTICIPATION RIGHTS.
(a) General. Upon
the occurrence of the Excess Free Cash Flow Date, Holdings will be eligible
to
receive for the Fiscal Year in which the Excess Free Cash Flow Date occurs
and
each Fiscal Year thereafter five percent (5%) of the Excess Free Cash Flow
of US
Operations as calculated by the Company’s certified public accountant (the
"Participation Amount"). The Participation Amount will be payable to
Holdings no later than thirty (30) calendar days following completion of
audited
financial statements for XFone, Inc. for each such Fiscal Year. The
Participation Amount shall be subject to all applicable withholding and
other
applicable taxes as required by law.
(b) Example. Assume
XFone has Invested Capital of $50 million (comprised of Purchase Price of $42
million and Transaction Costs of $8 million (bonuses, options, and other
transaction costs), that there have been no Future Acquisitions or Sale
Proceeds
and the Free Cash Flow of the US Operations is $20 million per
year. At the end of Year 1, XFone’s Invested Capital would be $54
million ($50 million x 1.08). Since the Invested Capital exceeds the
$20 million Free Cash Flow, there is no Excess Free Cash Flow from which
a
Participation Amount would be required hereunder. Likewise, in Years
2 and 3 when XFone’s Invested Capital is equivalent to $58.32 million and $63
million, respectively, no Participation Amount would be triggered since
the Free
Cash Flow is only $40 million for Year 2 and $60 million for Year
3. However, in Year 4 when XFone’s Invested Capital is equivalent to
$68 million and the US Operations’ Free Cash Flow is $80 million, Holdings would
be entitled to a Participation Amount based on the Excess Free Cash Flow
of $12
million. Accordingly, for Year 4 Holdings would be eligible to
receive a Participation Amount of $600,000 representing 5% of the Excess
Free
Cash Flow. Beginning in year 5 XFone would no longer accrue an 8%
return on its Invested Capital. If the Free Cash Flow in Year 5 is
$20 million, then the Excess Free Cash Flow would be $20 million ($100M
Free
Cash Flow - $68M Invested Capital - $12M Excess Free Cash Flow from prior
years)
and Holdings would be entitled to a Participation Amount of $1,000,000
representing 5% of the Excess Free Cash Flow. If the Free Cash Flow
in Year 6 is a negative $1 million and the Free Cash Flow in Year 7 is
$5
million and there is an acquisition in Year 7 equal to $1 million, then
Holdings
would not be entitled to a Participation Amount in Year 6 since the Excess
Free
Cash Flow is a negative $1 million ($99M Free Cash Flow - $68M Invested
Capital
- $32M Excess Free Cash Flow from Prior Years), but Holdings would be entitled
to a Participation Amount in Year 7 of $150,000 representing 5% of the
Excess
Free Cash Flow in Year 7 of $3 million ($104M Free Cash Flow - $69M Invested
Capital - $32M Excess Free Cash Flow from Prior Years).
3. TERM
OF
AGREEMENT.
(a) General. The
term of Holdings’ right to participate in the Excess Free Cash Flow of the US
Operations under this Agreement will be perpetual, beginning in the fiscal
year
of the Excess Free Cash Flow Date and extending in perpetuity, unless this
Agreement is earlier terminated as provided in subparagraph 3(b)
hereof.
(b) Termination
Upon Sale of US Operations and Buyout. In connection with a bona
fide sale of the entire US Operations, whether structured as a merger,
consolidation, recapitalization, purchase or sale of assets or capital
stock,
share exchange, or any similar transaction or business combination pursuant
to
which the US Operations are sold by XFone (as used in this subparagraph
(b), a
“Sale”) to a third party purchaser not affiliated with XFone or Holdings (as
used in this subparagraph (b), a “Purchaser”), this Agreement may, at the option
of the Purchaser:
1)
be
retained by the Purchaser;
2)
be
terminated by the Purchaser, but only under the following circumstances
and upon
the following buyout terms:
(i) If
the Sale involves the
Sale of the US Operations only, then the Purchaser may terminate this Agreement
upon the Purchaser’s buyout of this Agreement by paying to Holdings an amount
equal to five percent (5%) of the purchase price to be paid for the US
Operations as set forth in the definitive agreement governing such Sale
with
such amount paid in the same form as the purchase price being received
by XFone,
Inc..
(ii) If
the Sale involves
the sale of XFone, Inc. or substantially all the assets of XFone, Inc.,
then the
Purchaser may terminate this Agreement upon the Purchaser’s buyout of this
Agreement by paying to Holdings an amount as calculated pursuant to the
following formula: ((Revenues of US Operations for the fiscal year
immediately preceding the year in which the Sale occurs divided by
Revenues of XFone, Inc. for fiscal year immediately preceding the year
in which
the Sale occurs) times (five percent (5%) of the purchase of XFone, Inc.
as set forth in the definitive agreement governing such Sale)), with such
amount
paid in the same form as the purchase price being received by XFone,
Inc.
4. WAIVER
The
rights and remedies of the parties to this Agreement are cumulative and
not
alternative. Neither the failure nor any delay by either party in exercising
any
right, power, or privilege under this Agreement will operate as a waiver
of such
right, power, or privilege, and no single or partial exercise of any such
right,
power, or privilege will preclude any other or further exercise of such
right,
power, or privilege or the exercise of any other right, power, or privilege.
To
the maximum extent permitted by applicable law, (a) no claim or right
arising out of this Agreement can be discharged by one party, in whole
or in
part, by a waiver or renunciation of the claim or right unless in writing
signed
by the other party; (b) no waiver that may be given by a party will be
applicable except in the specific instance for which it is given; and
(c) no notice to or demand on one party will be deemed to be a waiver of
any obligation of such party or of the right of the party giving such notice
or
demand to take further action without notice or demand as provided in this
Agreement.
5. BINDING
EFFECT; DELEGATION OF DUTIES PROHIBITED
This
Agreement shall inure to the benefit of, and shall be binding upon, the
parties
hereto and their respective successors, assigns, heirs, and legal
representatives, including any entity with which XFone may merge or consolidate
or to which all or substantially all of its assets may be transferred.
The
duties and covenants of Holdings under this Agreement, being personal,
may not
be delegated.
6. NOTICES
All
notices, consents, waivers, and other communications under this Agreement
must
be in writing and will be deemed to have been duly given when (a) delivered
by hand (with written confirmation of receipt), (b) sent by facsimile (with
written confirmation of receipt), provided that a copy is mailed by registered
mail, return receipt requested, or (c) when received by the addressee, if
sent by a nationally recognized overnight delivery service (receipt requested),
in each case to the appropriate addresses and facsimile numbers set forth
below
(or to such other addresses and facsimile numbers as a party may designate
by
notice to the other parties):
If
to
XFone:
| c/o XFone, Inc. | |
|
Xxxxxxxxx
Xxxxx
|
|
|
000
Xxxx Xxxx
|
|
|
Xxxxxx,
X000XX
|
|
|
Xxxxxx
Xxxxxxx
|
|
|
Attention:
|
Xxx
Xxxxxxxxx
|
|
|
Telephone:
|
x00
000-000-0000
|
|
|
Facsimile:
|
x00
000-000-0000
|
|
|
Email:
|
xxx@xxxxx.xxx
|
with
a copy to:
| Xxxxxxx Xxxxxx Winter & Stennis, P.A. | |
|
000
Xxxxx Xxxxx Xxxxxx (39202)
|
|
|
P.
O. Xxx 000
|
|
|
Xxxxxxx,
XX 00000-0000
|
|
|
Attention:
|
Xxxx
X. Xxxxxx
|
|
|
Telephone:
|
000-000-0000
|
|
|
Facsimile:
|
601-949-4804
|
|
|
Email:
|
xxxxxxx@xxxxxxxxxxxxx.xxx
|
If
to
Holdings:
Xxxxxxx
Xxxxxxx, President
0000
X. Xxxx
000
Xxxxxxx,
Xxxxx 00000
Telephone: 000-000-0000
Facsimile: 000-000-0000
|
|
Email:
|
Xxxxxxx.xxxxxxx@xxxxxx.xxx
|
7. ENTIRE
AGREEMENT; AMENDMENTS
This
Agreement, the Stock Purchase Agreement, and the documents executed in
connection with the Stock Purchase Agreement, contain the entire agreement
between the parties with respect to the subject matter hereof and supersede
all
prior agreements and understandings, oral or written, between the parties
hereto
with respect to the subject matter hereof. This Agreement may not be amended
orally, but only by an agreement in writing signed by the parties
hereto.
8. GOVERNING
LAW
This
Agreement will be governed by the laws of the State of Texas without regard
to
conflicts of laws principles.
9. JURISDICTION
Any
action or proceeding seeking to enforce any provision of, or based on any
right
arising out of, this Agreement may be brought against either of the parties
in
the courts of the State of Texas in Lubbock County, Texas, or, if it has
or can
acquire jurisdiction, in the United States District Courts in Texas, and
each of
the parties consents to the jurisdiction of such courts (and of the appropriate
appellate courts) in any such action or proceeding and waives any objection
to
venue laid therein. Process in any action or proceeding referred to
in the preceding sentence may be served on either party anywhere in the
world.
10. SECTION
HEADINGS, CONSTRUCTION
The
headings of Sections in this Agreement are provided for convenience only
and
will not affect its construction or interpretation. All references to "Section"
or "Sections" refer to the corresponding Section or Sections of this Agreement
unless otherwise specified. All words used in this Agreement will be construed
to be of such gender or number as the circumstances require. Unless otherwise
expressly provided, the word "including" does not limit the preceding words
or
terms.
11. SEVERABILITY
If
any
provision of this Agreement is held invalid or unenforceable by any court
of
competent jurisdiction, the other provisions of this Agreement will remain
in
full force and effect. Any provision of this Agreement held invalid or
unenforceable only in part or degree will remain in full force and effect
to the
extent not held invalid or unenforceable.
12. COUNTERPARTS
This
Agreement may be executed in one or more counterparts, each of which will
be
deemed to be an original copy of this Agreement and all of which, when
taken
together, will be deemed to constitute one and the same agreement.
13. WAIVER
OF
JURY TRIAL
THE
PARTIES HERETO HEREBY WAIVE A JURY TRIAL IN ANY LITIGATION WITH RESPECT
TO THIS
AGREEMENT.
IN
WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of
the date above first written above.
|
XFONE:
|
HOLDINGS:
|
|
|
|
| XFone, Inc. | NTS Holdings, Inc. | |||
|
By:
|
By:
|
|||
|
Xxx
Xxxxxxxxx, President
|
Title:
|
|||
|
|
|
