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TMCNet:  NTS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[November 14, 2012]

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.

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