|
NTS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) FORWARD-LOOKING STATEMENTS
The information set forth in this Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") contains certain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995, including,
among others (i) expected changes in NTS, Inc.'s (referred to herein as the
"Company", or "NTSI", "we", "our", "ours" and "us") revenues and profitability,
(ii) prospective business opportunities and (iii) our strategy for financing our
business. Forward-looking statements are statements other than historical
information or statements of current condition. Some forward-looking statements
may be identified by use of terms such as "believes", "anticipates", "intends"
or "expects". These forward-looking statements relate to our plans, objectives
and expectations for future operations. Although we believe that our
expectations with respect to the forward-looking statements are based upon
reasonable assumptions within the bounds of our knowledge of our business and
operations, in light of the risks and uncertainties inherent in all future
projections, the inclusion of forward-looking statements in this Quarterly
Report should not be regarded as a representation by us or any other person that
our objectives or plans will be achieved.
You should read the following discussion and analysis in conjunction with the
Condensed Consolidated Financial Statements and Notes attached hereto, and the
other financial data appearing elsewhere in this Quarterly Report.
Our revenues and results of operations could differ materially from those
projected in the forward-looking statements as a result of numerous factors,
including, but not limited to, the following: the risk of significant natural
disaster, the inability of the Company to insure against certain risks,
inflationary and deflationary conditions and cycles, currency exchange rates,
and changing government regulations domestically and internationally affecting
our businesses.
US Dollars are denoted herein by "USD", New Israeli Shekels are denoted herein
by "NIS", and the UK Pound Sterling is denoted herein by "GBP".
OVERVIEW
NTS, Inc. ("NTSI") was incorporated in the State of Nevada, U.S.A. in September
2000 under the name 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.
We currently have 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 shares of Common Stock are traded on the NYSE MKT
(f/k/a NYSE Amex) and the 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. ("NTSC") in 2008 and its focus
on the build out of our high-speed FTTP network.
Our principal executive offices are located in Lubbock, Texas.
24
--------------------------------------------------------------------------------Purchase of assets and liabilities of CoBridge Telecom, LLC
On April 25, 2011, NTSC entered into an Asset Purchase Agreement (the
"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
pursuant to the terms of the Agreement. CoBridge provided cable television
service in those communities via coaxial cable facilities and the Company
acquired these assets to accelerate its penetration in these markets. As part of
the transaction, NTSC also agreed to assume certain contracts of CoBridge which
are necessary to continue operation of the assets that were acquired. 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). On July 24, 2012, NTSC and CoBridge agreed on the
final purchase price of $962,970 and cost of $39,187 in connection with the
provision of transition services to NTSC. The increase in the purchase price of
$88,400 is included as "other expenses" in the Condensed Consolidated Statements
of Operations.
Purchase of assets and liabilities of Reach Broadband
On September 16, 2011, NTSC entered into an Asset Purchase Agreement (the
"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 Wolfforth Texas pursuant to
the terms of the Agreement. Reach provided those communities with cable
television service via coaxial cable facilities and Internet service via a
wireless network and the Company acquired these assets to accelerate its
penetration in these markets. The sale and purchase closed on December 1, 2011,
but is subject to a purchase price adjustment based on the number of Reach's
customers who failed to pay their accounts or cancelled service (offset by
customers who converted to NTSC's service in relevant markets). The Company has
not yet agreed on the final purchase price with Reach.
RESULTS OF OPERATIONS
Financial Information - Percentage of Revenues:
Three months ended Nine months ended
September 30, September 30,
2012 2011 2012 2011
Revenues:
Services on Fiber-To-The-Premise network 31.9 % 23.4 % 29.7 % 21.9 %
Leased local loop services and other 68.1 % 76.6 % 70.3 % 78.1 %
Total Revenues 100 % 100 % 100 % 100 %
Expenses:
Cost of services (excluding depreciation % % % %
and amortization) 45.1 48.4 46.0 48.7
Selling, general and administrative 34.6 % 35.6 % 35.0 % 36.6 %
Depreciation and amortization 12.1 % 10.0 % 10.7 % 9.0 %
Financing expenses, net 8.9 % (2.9) % 8.6 % 6.6 %
Other expenses 0.5 % 0.8 % 1.1 % 0.9 %
Total expenses 101.2 % 91.9 % 101.4 % 101.8 %
Income (loss) from continued operations
before taxes (1.2) % 8.1 % (1.4) % (1.8) %
Net Income (loss) from continued
operations (1.2) % 6.9 % (1.4) % (1.0) %
Income tax benefit (expense) 0.7 % 0.8 % 1.0 % (1.2) %
Net Income (loss) (0.2) % 6.0 % (0.7) % (1.4) %
25--------------------------------------------------------------------------------COMPARISON OF THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2012 AND SEPTEMBER 30,
2011
Revenues. Revenues for the nine month period ended September 30, 2012 increased
by 4.6% to $44,934,434 from $42,958,016 for the same period in 2011. Revenues
from our Fiber-To-The-Premise ("FTTP") network in the nine months ended
September 30, 2012 increased 41.9% to $13,341,551 from $9,403,832 in the same
period in 2011. As percentage of total sales, FTTP revenues in the nine months
period ended September 30, 2012 increased to 29.7% from 21.9% for the same
period in 2011. The growth of FTTP revenues is expected to continue due to the
progress in the build out of our FTTP network in the communities which are
located in the areas of the PRIDE Network projects, a subsidiary of NTSC.
Revenues from our leased local loop include revenues from wholesale, other
carriers and other non-FTTP customers. Revenues from leased local loop in the
nine month period ended September 30, 2012 decreased 5.8% to $31,592,883 from
$33,554,184 for the same period in 2011. As percentage of total sales, leased
local loop revenues in the nine months period ended September 30, 2012 decreased
to 70.3% from 78.1% for the same period in 2011. The decrease in revenues was
caused by the aggressive promotional packages and incentives launched by
competitors and were partially offset with revenues from assets that were
purchased from CoBridge and Reach. The transactions with CoBridge and Reach were
closed in July 1, 2011 and December 1, 2011, respectively, and revenues from
these assets were recorded from the closing date as non-FTTP revenues. We
generated cable television services revenue of $1,675,137 for the nine month
period ended September 30, 2012 from the acquisition of Cobridge and Reach's
assets in the West Texas area. We expect that the decline in revenues from
non-FTTP residential customer will continue in the last quarter of 2012, but
will be offset by the increase in revenues in FTTP from business and residential
customers.
Cost of services (excluding depreciation and amortization). Cost of services
consists primarily of facilities and traffic time purchased from other telephone
companies and content for our video services. Cost of services for the nine
month period ended September 30, 2012, decreased 1.2% to $20,677,513 from
$20,925,151 for the same period in 2011. Cost of services, as a percentage of
revenues in the nine month period ended September 30, 2012, decreased to 46.0%
from 48.7% in the same period in 2011. We expect that the cost of services, as a
percentage of revenues, will decline as we increase the portion of revenues
generated from our high-margin FTTP services. FTTP services are provided over
our fully owned fiber network and therefore we do not incur third party costs
for leased network lines. As the revenue mix changes towards greater percentage
of the high-margin FTTP revenues, and a lesser percentage of the low-margin
revenues from non-FTTP residential customers and wholesale, the cost of
services, as a percentage of revenues, is expected to decline.
Selling, General and Administrative Expenses. Selling expenses consist primarily
of compensation costs for our sales, administrative and management employees.
Selling, general and administrative expenses for the nine month period ended
September 30, 2012, is $15,738,473 compared to $15,730,833 for the same period
in 2011. As percentage of revenues, selling, general and administravite expenses
decrease by 1.6% as we redirected resources to support our growth in the FTTP
markets and we have moved most of the installation and maintenance work to
subcontractors. We expect that these changes will allow us to be more efficient
on the construction work and reduce the payroll and payroll-related expenses in
the last quarter of 2012.
Depreciation and amortization. Depreciation and amortization expense for the
nine month period ended September 30, 2012, increased 24.6% to $4,799,447 from
$3,850,446 for the same period in 2011. The increase was due to the large
investments in the development of the FTTP networks.
Financing Expenses. Financing expenses, net, for the nine months period ended
September 30, 2012, increased 37.2% to $3,884,990 from $2,831,573 for the same
period in 2011. Financing expenses consist of interest payable on our financial
obligations, and the measurement of the Bonds, which are stated in NIS and
linked to the Israeli Consumer Price Index (the "CPI"). The increase in
financing expenses is a result of additional advances from the United States
Department of Agriculture in the amount of $14,203,853 during the first nine
months of 2012 compared to $11,504,124 in the same period in 2011, the
additional loans from ICON, and the revaluation of 2.4% in the USD against the
NIS and adjustment to the inflation of 2.1% during the nine month period ended
September 30, 2012, versus the revaluation of 4.6% in the USD against the NIS
and adjustment to the inflation of 2.4% in the same period in 2011. Financing
expenses in the third quartrer of 2011 also include expenses related to warrants
that were issued to Burlingame Equity Investors, LP ("Burlingame") during March
2010, and the difference between the allocated relative fair value and the
principal amount of the March 2010 loan from Burlingame.
26
--------------------------------------------------------------------------------
Other Expenses (income). Other expenses (income) for the nine month period ended
September 30, 2012, increased 10.4% to $447,577 from $405,299 for the same
period in 2011. Other expenses (income) consist of real estate taxes, which were
offset with the gain of $221,643 from the buy back of our bond by NTSC
and expense of $88,400 due to adjustment of the final purchase price of
Cobridge. We expect that real estate taxes will increase as we continue to open
our offices in PRIDE markets.
Income taxes. We conduct our business in several states in the US. Therefore,
our operating income is subject to varying rates of state tax in the US.
Consequently, our effective tax rate is dependent upon the geographic
distribution of our earnings or losses. However, we expect that our income taxes
will not materially vary in relation to the geographic distribution of our
profits inside the US. Due to non-deductible compensation related to stock
options and non-deductible amortization of intangible assets, our effective tax
rate was 51.4% (including gain from buy back of bond) and 37.1% (including
corporate expenses related to the discontinued operation in Israel) for the nine
month period ended September 30, 2012 and 2011, respectively.
COMPARISON OF THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2012 AND SEPTEMBER 30,
2011
Revenues. Revenues for the quarter ended September 30, 2012, increased 2.2% to
$14,926,046 from $14,601,642 for the same period in 2011. Revenues from our
Fiber-To-The-Premise ("FTTP") network in the quarter ended September 30, 2012,
increased 39.2% to $4,755,779 from $3,417,271 in the same period in 2011. As
percentage of total sales, FTTP revenues in the quarter ended September 30,
2012, increased to 31.9% from 23.4% for the same period in 2011. The growth of
FTTP revenues is expected to continue due to the progress in the build out of
our FTTP network in the communities which are located in the areas of the PRIDE
Network projects, a subsidiary of NTSC.
Revenues from our leased local loop include revenues from wholesale, other
carriers and other non-FTTP customers. Revenues from leased local loop in the
quarter ended September 30, 2012, decreased 9.1% to $10,170,267 from $11,184,371
for the same period in 2011. As percentage of total sales, leased local loop
revenues in the quarter ended September 30, 2012 decreased to 68.1% from 76.6%
for the same period in 2011. The decrease in revenues was caused by the
aggressive promotional packages and incentives launched by competitors and were
partially offset with revenues from assets that were purchased from CoBridge and
Reach. The transactions with CoBridge and Reach were closed in July 1, 2011 and
December 1, 2011, respectively, and revenues from these assets were recorded
from the closing date as non-FTTP revenues. We generated cable television
services revenue of $508,499 for the three month period ended September 30, 2012
from the acquisition of Cobridge and Reach's assets in the West Texas area. We
expect that the decline in revenues from non-FTTP residential customer will
continue in the last quarter of 2012, but will be offset by the increase in
revenues in FTTP from business and residential customers.
Cost of services (excluding depreciation and amortization). Cost of services
consists primarily of facilities and traffic time purchased from other telephone
companies and content for our video services. Cost of services for the quarter
ended September 30, 2012, decreased 4.7% to $6,734,583 from $7,063,847 for the
same period in 2011. Cost of services, as a percentage of revenues in the
quarter ended September 30, 2012, decreased to 45.1% from 48.4% in the same
period in 2011. We expect that the cost of services, as a percentage of
revenues, will decline as we increase the portion of revenues generated from our
high-margin FTTP services. FTTP services are provided over our fully owned fiber
network and therefore we do not incur third party costs for leased network
lines. As the revenue mix changes towards greater percentage of the high-margin
FTTP revenues and lesser percentage of the low-margin revenues from non-FTTP
residential customers and wholesale, the cost of services, as a percentage of
revenues, is expected to decline.
Selling, General and Administrative Expenses. Selling expenses consist primarily
of compensation costs for our sales, administrative and management employees.
Selling, general and administrative expenses for the quarter ended September 30,
2012, decreased 0.7% to $5,165,190 from $5,202,866 for the same period in 2011.
The decrease in the expenses resulted mainly from outsourcing most of our
installation and maintenance work in the FTTP markets to subcontractors, which
was offset by an increase in sales commission related to the increase in new
FTTP revenues. As a percentage of revenues, selling, general and administrative
expenses decreased by 1%. We expect that these changes will allow us to be more
efficient on the construction work and reduce the payroll and payroll-related
expenses in the last quarter of 2012.
27
--------------------------------------------------------------------------------
Depreciation and amortization. Depreciation and amortization expenses for the
quarter ended September 30, 2012, increased 24.7% to $1,813,006 from $1,453,983
for the same period in 2011. The increase was due to the large investments in
the development of the FTTP networks.
Financing Expenses. Financing expenses, net, for the quarter ended September 30,
2012, increased to $1,324,054 compared to financing income, net, of $421,121 for
the same period in 2011. The increase in the financing expenses resulted mainly
from an increase in financing expenses on new loans and advances. Financing
expenses consist of interest payable on our financial obligations, and the
measurement of the Bonds, which are stated in NIS and linked to the Israeli CPI.
The increase in financing expenses is a result of the advances of long-term
loans from the United States Department of Agriculture to build the network in
the PRIDE markets and the long-term loans from ICON as well as the devaluation
of 0.3% in the USD against the NIS and adjustment to the inflation of 0.9%
during the quarter ended September 30, 2012, versus the revaluation of 8.7% in
the USD against the NIS and adjustment to the inflation of 0.6% in the same
period in 2011. Financing expenses in the third quarter of 2011 also include
expenses related to warrants that were issued to Burlingame on March 2010, and
the difference between the allocated relative fair value and the principal
amount of the March 2010 loan from Burlingame.
Other Expenses (income). Other expenses (income) for the quarter ended September
30, 2012, decreased 39.6% to $69,701 from $115,453 for the same period in 2011,
as a result of $221,643 gain from the buy back of bond by NTSC which was offset
by an adjustment of $88,400 to the final purchase price of Cobridge.
Income taxes. We conduct our business in several states in the US. Therefore,
our operating income is subject to varying rates of state tax in the US.
Consequently, our effective tax rate is dependent upon the geographic
distribution of our earnings or losses. However, we expect that our income taxes
will not materially vary in relation to the geographic distribution of our
profits inside the US. Due to non-deductible compensation related to stock
options and non-deductible amortization of intangible assets, our effective tax
rate was 82.5% (including gain from buy back of bond) and 16.7% (including
corporate expenses related to the discontinued operation in Israel) for the
quarter ended September 30, 2012 and 2011, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of September 30, 2012, amounted to $8,685,702,
compared to $6,563,514 as of December 31, 2011, an increase of $2,122,188. Net
cash used in operating activities during the nine months ended September 30,
2012, was $293,315, a decrease of $3,201,921 compared to $2,908,606 which was
provided by operating activities during the nine months ended September 30,
2011. The decrease in cash flow from operating activities is mostly related to
the following changes in working capital: (1) an increase in accounts receivable
of $2,094,474 during the quarter ended September 30, 2012, compared to an
increase of $1,165,652 in the same period of 2011; (2) an increase in prepaid
expenses and other receivables of $887,704 in the quarter ended September 30,
2012, compared to a decrease of $1,082,020 in the same period of 2011; (3) an
increase in the provision for bad debt of $295,903 during the quarter ended
September 30, 2012, compared to an increase of $303,296 in the same period of
2011; (4) a decrease in other liabilities and accrued expenses of $270,356 in
the quarter ended September 30, 2012, compared to a decrease of $815,064 during
the same period of 2011 and (5) a decrease in trade payables of $2,191,948
during the quarter ended September 30, 2012, compared to a decrease of $130,742
during the same period of 2011. Net cash used for investing activities in the
quarter ended September 30, 2012, was $11,565,717 compared to $10,334,495 in the
same period of 2011. Of that amount, $8,994,079 is attributable to the build out
of our FTTP projects in Levelland, TX and the PRIDE Network projects and
$2,571,638 to the purchase of other equipment. Net cash provided by financing
activities for the quarter ended September 30, 2012, was $13,981,220 and is
primarily attributable to proceeds from long-term loans from the United States
Department of Agriculture, and the Loan Agreement with ICON, which are offset by
repayment of the long-term loans from the United States Department of
Agriculture, capital lease obligations and loans from a Burlingame.
Capital lease obligations. We are the lessee of switching and other telecom
equipment under capital leases expiring on various dates through 2016.
28
--------------------------------------------------------------------------------
As of September 30, 2012, we reported a working capital deficit of $2,638,738
compared to a working capital deficit of $3,596,693 on December 31, 2011. On
June 22, 2012 we entered into Amendment No. 1 to the Original ICON Agreement
providing for an additional secured term loan in the amount of $3,500,000 and
a secured delayed draw term loan in the amount of $3,100,000. We used the
proceeds of the additional term loan solely for the payment and satisfaction in
full of all liabilities owed to Burlingame Equity Investors LP, including but
not limited to the Burlingame Note. On September 27, 2012, we drew down the
delayed draw term loan in the amount of $3,100,000. We intend to use the
proceeds of the delayed draw term loan for the purchase of equipment in
connection with our project to construct a fiber network in Wichita Falls,
Texas. We believe that increased revenues from our higher margin
Fiber-To-The-Premise network togethere with cost saving activities and reduction
in the number of employees will result in increased profitability and cash
flows, which will lead to improvement in the working capital deficit to meet our
anticipated cash requirements for at least the next 12 months. If, however, we
do not generate sufficient cash from operations, or if we incur additional
unanticipated liabilities or we are unable to renew and/or extend a portion of
our short-term liabilities, we may be required to seek additional financing or
sell equity or debt on terms which may not be as favorable as we 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 we will
be able to negotiate acceptable terms. In addition, our access to capital is
affected by prevailing conditions in the financial and equity capital markets,
as well as our own financial condition. While management believes that we will
be able to meet our liquidity needs for at least the next 12 months, no
assurance can be given that we will be able to do so.
The following table represents our contractual obligations and commercial
commitments, excluding interest expense, as of September 30, 2012:
Payments Due by Period
Less than More than
Contractual Obligations Total 1 Year 1-3 Years 4-5 Years 5 Years
Domestic Note Payable $ 15,318,887 $ 1,160,809 $ 4,640,578 $ 9,517,500 $ -
Notes Payable from the United
States Department of
Agriculture 35,531,099 1,439,794 2,879,588 2,879,588 28,332,129
Bonds 14,313,905 3,845,472 7,333,150 3,135,283 -
Capital leases 749,183 458,051 269,244 21,888 -
Operating leases 1,669,101 1,066,380 526,629 76,092 -
Total contractual cash
obligations $ 67,582,175 $ 7,970,506 $ 15,649,189 $ 15,630,351 $ 28,332,129
29--------------------------------------------------------------------------------
NTS, Inc.
The Series A Bonds
On December 13, 2007 (the "Date of Issuance"), we issued non-convertible bonds
to Israeli institutional investors, for total gross proceeds of NIS 100,382,100
(approximately $25,562,032, based on the exchange rate as of December 13, 2007)
(the "Series A Bonds"). The Series A Bonds were issued for an amount equal to
their par value.
The Series A Bonds accrue interest annually that 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 of the Series A Bonds is repaid in eight equal annual
payments on the 1st of December of every year from 2008 until 2015 (inclusive).
The principal and interest of the Series A Bonds are linked to the Israeli CPI.
On November 4, 2008, we filed a public prospectus (the "Prospectus") with the
Israel Securities Authority and the TASE for listing of the Series A Bonds for
trading on the TASE. On November 11, 2008 (the "Date of Listing"), the Series A
Bonds commenced trading on the TASE. From the Date of Issuance until the Date of
Listing, the Series A Bonds accrued annual interest at a rate of 9%. As of the
Date of Listing, the interest rate for the unpaid balance of the Series A Bonds
was reduced by 1% to an annual interest rate of 8%.
On March 25, 2008, we issued the holders of the Series A Bonds, for no
additional consideration, 956,020 (non-tradable) warrants, each exercisable at
an exercise price of $2.04 (as adjusted in November 2011) with a term of 4
years, commencing on September 2, 2008. These warrants were cancelled on
September 4, 2012.
The Series A Bonds may only be traded in Israel. As of August 6, 2012, the
Series A Bonds are rated Ba1 with a stable outlook by Midroog Limited, an
Israeli rating company which is a subsidiary of Moody's Investor Services
("Midroog").
Loan agreement with ICON Agent, LLC
On October 6, 2011, we entered into a term loan, guarantee and security
agreement (the "Original ICON Agreement") between the following: (1) ICON Agent,
LLC, acting as agent for the Lenders signatory thereto; (2) we, 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, we entered into Amendment No. 1 to the Original ICON Agreement
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 our project to construct a fiber network in
Wichita Falls, Texas (the "Third ICON Loan"), and
(iii) Certain other amendments to the First ICON Loan described in Amendment No. 1.
30
--------------------------------------------------------------------------------Pursuant to Amendment No. 1, the principal amount of the First ICON Loan,
bearing interest of 12.75% per annum is payable in 68 consecutive monthly
installments with the first 20 monthly payments being payments of accrued
interest only. The principal amount of the Second ICON Loan, bearing interest of
12.75% per annum is payable in 60 consecutive monthly installments with the
first 12 monthly payments being payments of accrued interest only.
The fundings of the First ICON Loan and Second ICON Loan were made on October
27, 2011 and June 22, 2012 respectively and on August 9, 2012, we 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.
On September 27, 2012, we drew down the Third ICON Loan in the amount
of $3,100,000. The principal amount of the Third ICON Loan bears interest at
12.75 % per annum and is payable in 58 consecutive monthly installments with the
first 10 monthly payments being payments of accrued interest only.
Each of the loans is 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 and NTS Telephone
Company are being used as collateral for the loans and are specfically excluded.
We had to maintain a 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 $3,000,000 as of the last day of any fiscal quarter. Pursuant
to Amendment No. 1, senior leverage ratio should not exceed 2.00 to 1.00 from
June 30, 2012 through March 31, 2013, 1.75 to 1.00 from June 30, 2013 through
December 31, 2013, and 1.50 to 1.00 from March 31, 2014 and thereafter.
The total outstanding amount of the loans as of September 30, 2012 is
$14,100,000.
Securities Purchase Agreement
On March 23, 2010, we entered into a Securities Purchase Agreement (the
"Purchase Agreement") with an existing shareholder, Burlingame. As part of the
Purchase Agreement, we issued a senior promissory note in the aggregate
principal amount of $3,500,000, with a maturity date of March 22, 2012. Interest
accrued at an annual rate of 10% and was payable quarterly. The note was not
secured and had equal liquidation rights with our Series A Bonds issued in
Israel on December 13, 2007. We evaluated the fair value of each of the three
securities that were issued under the Purchase Agreement (i.e., the promissory
note, 2,173,913 shares of our common stock, and a warrant to purchase 950,000
shares of our common stock) and recorded the promissory note at its fair value
of $2,556,240. The difference between the fair value and the principal amount
was expensed ratably over the life of the promissory note.
On May 2, 2011, we entered into a First Amendment to the Promissory Note,
pursuant to which we and Burlingame agreed to extend the maturity date of the
Promissory Note from March 22, 2012 to March 22, 2013.
The effective interest rate of the Promissory Note was calculated at 22.1%. The
total amount of discount recognized was $252,796. The outstanding principal
amount of the Promissory Note of $3,500,000 (plus accrued interest) was paid off
on June 22, 2012.
31--------------------------------------------------------------------------------Buy-back plan
Our Board adopted a buy-back plan (the "Plan"), effective as of February 13,
2012, according to which we may, from time to time, repurchase our Bonds which
are traded on the TASE.
Under the Plan we are authorized to repurchase Series A Bonds for up to a total
amount of NIS 5 million (approximately USD 1.35 million) in transactions on the
TASE or outside the TASE, until December 31, 2012. Any repurchases of the Series
A Bonds will be financed from our internal sources. The Board has authorized our
management ("Management") to manage the performance of repurchases according to
the Plan, including the conduct of negotiations, at such times, scopes, prices
and other terms as Management deems fit. The timing, amounts and terms of any
Series A Bonds repurchased by us will be determined, at the discretion of
Management, based on market conditions, opportunities, economic advisability and
other customary criteria and factors.
Repurchases of the Bonds may be carried out by us and/or our subsidiaries,
either directly and/or through a third party. Bonds repurchased by us will be
canceled and removed from trading on the TASE and will not be permitted to be
reissued. The Board of Director's resolution is not a commitment to repurchase
any Bonds under the Plan. The Plan may be suspended or discontinued by us at any
time.
On July 4, 2012, NTSC, our wholly-owned subsidiary, purchased pursuant to the
Plan, in a single transaction outside the TASE, NIS 1,339,310 in par value of
Bonds at an aggregate purchase price of NIS 1,091,538 (approximately $278,596).
On September 23, 2012, NTSC, our wholly-owned subsidiary, purchased pursuant to
the Plan, in several transactions on the TASE, additional NIS 1,062,528 in par
value of Bonds at an aggregate purchase price of NIS 838,228 (approximately
$215,649). Pursuant to the indenture governing the Bonds, any Bonds purchased by
our subsidiary (as opposed to Bonds repurchased by us ourselves) are not
canceled or removed from trading on the TASE. The gain on the bonds purchased by
NTSC, our wholly-owned subsidiary, is $221,643.
US subsidiaries
NTS Telephone Company, LLC, a wholly owned subsidiary of NTSC has received
approval from the Rural Utilities Service ("RUS"), a division of the United
States Department of Agriculture, for an $11.8 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 initial advance date until
full repayment after 17 years. The loan bears interest 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 note is
non-recourse to NTSC and all other NTSC subsidiaries and is secured by NTS
Telephone's assets which were $13.9 million at September 30, 2012. As of
September 30, 2012, the annual average weighted interest rate on the outstanding
advances was 3.54%. The total aggregate amount of these loans as of September
30, 2012 is $9,772,062. The loans are to be repaid in monthly installments until
2024.
PRIDE Network, Inc., a wholly owned subsidiary of NTSC has received approval
from the Broadband Initiative Program of the American Recovery and Reinvestment
Act, for a total $99.9 million funding in form of $45.9 million in grants and
$54 million in 19 to 20-year loans. The loans bear interest at the U.S. Treasury
rate for comparable loans with comparable maturities. The funding is expected to
allow us to develop our FTTP infrastructure, known as the PRIDE Network
projects, in northwestern Texas and further expand it to communities in southern
Louisiana. Construction work of PRIDE Network's FTTP infrastructure started in
October 2010. The total aggregate amount of these loans and grants as of
September 30, 2012 is $25,759,037 and $20,978,341, respectively. The loans are
non-recourse to NTSC and all other NTSC subsidiaries and are secured by PRIDE
Network's assets which were $33.6 million at September 30, 2012. As of September
30, 2012, the annual average weighted interest rate on the outstanding advances
was 3.19%. As of September 30, 2012, the total amount of loan and grant to be
available in the future is $27,571,889 and $24,898,580, respectively.
32
--------------------------------------------------------------------------------
On April 25, 2011, NTSC, our wholly-owned subsidiary, entered into an Asset
Purchase Agreement (the "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 pursuant to the terms of the Agreement. As part of the agreement, a
note for $1,010,101 was issued on July 1, 2011 and is payable in 36 equal
monthly installments. The total outstanding amount of the note as of September
30, 2012 is $486,305.
On September 16, 2011, NTSC, our wholly-owned subsidiary, entered into an Asset
Purchase Agreement (the "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
Wolfforth Texas pursuant to the terms of the Agreement. As part of the
agreement, a note for $475,093 was issued on December 1, 2011 at an interest
rate of 7% per annum and is payable in 36 equal monthly installments. The total
outstanding amount of the note as of September 30, 2012 is $365,263.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
Following the divestiture of our UK and Israeli operations in 2010, all of our
assets, liabilities (except the Series A Bonds and other insignificant costs),
revenues and expenditures are in USD.
Notwithstanding having our Series A Bonds stated in NIS and linked to the
Israeli CPI, during the nine months ended September 30, 2012, our outstanding
liability was increased by $259,289 as a result of the adjustment to the Israeli
CPI and devaluation of the NIS in relation with the USD.
33--------------------------------------------------------------------------------
[ Back To middleeast.tmcnet.com.com's Homepage 's Homepage ]
|
Internet Telephony Magazine
Click here to read latest issue
CUSTOMER 
Cloud Computing Magazine
Click here to read latest issue
M2M Evolution Magazine
Call Center/CRM
Info Tech 
IP Communications 
Mobile 
Green 
Satellite 
Robotics 
