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NTS, INC. - 10-K - 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 Annual 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
Financial Statements and Notes attached hereto, and the other financial data
appearing elsewhere in this Annual 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".
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--------------------------------------------------------------------------------OVERVIEW
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. At the annual meeting of
shareholder held on December 29, 2011, the Company's shareholders approved to
change the Company's name to "NTS, Inc.". The change of the Company's name
became effective on February 1, 2012 and as of February 2, 2012 the Company's
shares of Common Stock are traded on the NYSE Amex and the TASE under the new
ticker symbol "NTS". The name change is a reflection of the Company's refined
and enhanced business strategy which began with its acquisition of NTS
Communications, Inc. ("NTSC") in 2008 and its focus on the build out of its
high-speed, fiber to the premise ("FTTP") network.
Our principal executive offices are located in Lubbock, Texas.
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 on
November based on the number of CoBridge's customers who failed to pay their
accounts or cancelled service (offset by customers who convert to NTSC's service
in relevant markets). The Company is still in negotiations with CoBridge to
agree on the final purchase price.
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 Wollforth 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 convert to NTSC's service in relevant markets). The Company has
not yet agreed on the final purchase price with Reach.
Divestitures
Subsequent to the year ended December 31, 2009, our Board made a strategic
decision to concentrate on our operations in the US. As a result of this
decision, we decided to divest our operations in the UK and Israel. The assets,
liabilities and results of operations of the UK and Israel operations have been
classified as discontinued operations for all periods presented.
Discontinued operations in the UK. On January 29, 2010, we entered into an
agreement (the "Agreement") with Abraham Keinan, a former significant
shareholder and Chairman of the Board ("Keinan"), and AMIT K LTD, a company
registered in England & Wales which at that time was wholly owned and controlled
by Keinan ("Buyer"), for the sale of Swiftnet Limited ("Swiftnet"), Auracall
Limited ("Auracall"), Equitalk.co.uk Limited ("Equitalk") and Story Telecom,
Inc. and its wholly owned U.K. subsidiary, Story Telecom Limited (collectively,
"Story Telecom") (collectively, the "UK Subsidiaries"), which we owned (the
"Transaction"). Pursuant to the Agreement, the consideration paid by Buyer
and/or Keinan to us would be comprised of the following components:
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1. A release of us from the repayment of the loan from
Iddo Keinan, the son of Mr. Keinan and an employee
of Swiftnet, dated December 10, 2009, pursuant to
which Iddo Keinan extended to Swiftnet a loan of
£860,044 ($1,344,073);
2. A redemption of the credit facility which the
Company had obtained from Bank Leumi (UK) Plc. for
£150,000 ($234,420), thereby releasing us from our
obligation to Bank Leumi (UK) Plc.;
3. An annual earn-out payment over the following years
beginning on the consummation of the Transaction.
Earn-out payment will commence after the
accumulative EBITDA of the UK Subsidiaries, over the
years beginning on the consummation of the
Transaction, has reached an aggregate amount equal
to £1,010,044 ($1,557,440) and payable not later
than March 31 of each successive year, calculated as
follows: the product of (A) twenty percent (20%) and
(B) the accumulative EBITDA of the UK Subsidiaries
for the applicable year (the "Earn-Out Payments").
The aggregate Earn-Out Payments shall be equal to
but shall not exceed $1,858,325 in the aggregate;
and
4. Cancellation of intercompany balances between us and
the UK Subsidiaries amounting to $1,009,037.
On July 29, 2010 we completed the disposition of the UK Subsidiaries.
As a result of the Agreement to sell the UK Subsidiaries, the assets and
liabilities related to the UK Subsidiaries have been classified as "held for
sale" in our financial statements in accordance with ASC 360, Accounting for the
Impairment or Disposal of Long-Lived Assets. ASC 360 requires an asset group
that is held for sale to be recorded at the lower of its carrying amount or fair
value less costs to sell. As a result of classifying our UK Subsidiaries as
discontinued operations, we recorded a goodwill impairment of $800,000 during
2010.
Discontinued operations in Israel. On August 31, 2010 (the "Closing Date"), we
completed the disposition (the "Transaction") of our 69% interest in Xfone 018
Ltd. ("Xfone 018") pursuant to an agreement, dated May 14, 2010 (including any
amendment and supplement thereto, the "Agreement"), by and between us, Newcall
Ltd. (the former 26% minority owner of Xfone 018) ("Newcall"), Margo Pharma Ltd.
(the former 5% minority owner of Xfone 018), and Marathon Telecom Ltd., the
buyer of Xfone 018 ("Marathon Telecom").
The original gross purchase price to be paid by Marathon Telecom under the
Agreement was $7,850,000. On the Closing Date, the parties agreed to reduce the
gross purchase price to $7,802,000 and deposited with a trustee (the "Trustee")
an amount equal to 15% of the reduced gross purchase price (the "Deposit"), such
Deposit is to act as collateral for the indemnification of Marathon Telecom
pursuant to the provisions of Section 17 of the Agreement. As of the date of
this Annual Report 75% of the Deposit was released and disbursed by the Trustee.
The disbursement of the balance is pending on the results of a certain lawsuit
which was filed against Xfone 018.
In connection with the consummation of the Transaction, Xfone 018 repaid all
outstanding debts owed to its bank, to us and to Newcall, and we received 69% of
the net proceeds from the sale. The gross proceeds to the Company were
approximately $4,900,000. In connection with the Transaction, on September 13,
2010 we paid $118,985 as finder's fee to Mr. Ilan Shoshani, the owner of
Newcall.
As a result of the agreement to sell Xfone 018, the assets and liabilities
related to Xfone 018 have been classified as "held for sale" in our financial
statements in accordance with ASC 360, Accounting for the Impairment or Disposal
of Long-Lived Assets. ASC 360 requires an asset group that is held for sale to
be recorded at the lower of its carrying amount or fair value less costs to
sell.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2011
NTS Communications, Inc.
Our Texas based subsidiary, NTSC, is an integrated telecommunications service
provider that owns and operates its own fiber optic and leased facilities-based,
long haul and metropolitan telecommunications networks. NTSC provides business
and residential customers with high quality broadband, managed data, video,
local, and long distance services within its service areas. NTSC also provides
long distance, data, and private line services to numerous communications
carriers. NTSC is currently authorized to provide interexchange service in
Arizona, Colorado, Kansas, Louisiana, New Mexico, Oklahoma, and Texas. NTSC is
also authorized to provide local service only in Louisiana, New Mexico and
Texas, and video service only in Louisiana and Texas. NTSC operates the largest
"non-ILEC" telecommunications network in West Texas.
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NTSC operates in a highly competitive environment which is generally
characterized by the dominance of the Incumbent Local Exchange Carrier (ILEC).
With respect to its primary Texas markets, the dominant ILEC is either AT&T
(formerly Southwestern Bell Telephone Company) or Windstream Communications.
NTSC also competes with the Incumbent Cable TV Provider (ICTVP) in markets where
that carrier provides voice, data and/or video services. In its core Texas
markets, the ICTVP is SuddenLink Communications, Time Warner Communications, or
other smaller operators. Within these same core markets, NTSC also competes with
a variety of widely dispersed smaller Competitive Local Exchange Carriers
(CLEC). With respect to its data and long distance products, the company
competes with various national and regional players including AT&T, Verizon,
Suddenlink Qwest, Level 3 and others.
Levelland/Smyer, Texas
NTSC, through its wholly owned subsidiary, NTS Telephone Company, LLC, has
extended its FTTP network to the nearby communities of Levelland (located
approximately 30 miles west of Lubbock) and Smyer (approximately 15 miles west
of Lubbock). These communities have added approximately 6,000 passings to the
NTSC FTTP footprint and bring total FTTP passings to approximately 21,000. NTS
Telephone Company has received approval from the Rural Utilities Service ("RUS")
for an $11.8 million, 17-year debt financing to complete this overbuild. The RUS
loan is non-recourse to NTSC and all other NTSC subsidiaries and interest is
charged at the average rate of U.S. government obligations (equivalent to
approximately 3.67% a year at today's rates). NTSC's initial capital investment
in the project was a $2.5 million equity contribution. NTSC provisions voice,
data, and video services for NTS Telephone Company and also provides billing,
sales and marketing, back and front offices services to this subsidiary. NTSC
receives a management fee from NTS Telephone Company equal to 15% of its
revenues. NTSC began marketing its triple-play service to limited areas of
Levelland in 2009 and construction was completed on April 8, 2010. NTSC will
continue to work diligently to secure sales and complete installations in
pursuit of its take rate goals. With its existing cash flows and continued
growth, we expect that Levelland and Smyer will contribute additional revenues
throughout 2012 and well into the future.
Texas South Plains; Burkburnett and Iowa Park, Texas; St. Helena, Washington,
and Tangipahoa Parishes in Southern Louisiana
In March 2010, we were notified that the applications of our wholly owned
subsidiary, PRIDE Network, Inc. ("PRIDE Network"), for RUS funding from the U.S.
Department of Agriculture under the Broadband Initiative Program for the FTTP
build out of PRIDE Network's projects in Texas, have been approved. PRIDE
Network was selected to receive approximately $63.7 million in RUS funding for
these projects, which will be split between loans of approximately $35.53
million and grants of approximately $28.14 million.
In September 2010, we were notified that another application of PRIDE Network
for additional funding under the Broadband Initiative Program for the FTTP build
out of its project in Louisiana had been approved. PRIDE Network was selected to
receive approximately $36.2 million in additional RUS funding which will be
split between a loan of approximately $18.46 million and a grant of
approximately $17.74 million.
The funding is a significant milestone in our strategy to grow the FTTP
business. The grants and loans will enable us to expand the rollout of our
state-of-the-art FTTP infrastructure to bring broadband services to the Texas
south plains, to the communities of Burkburnett and Iowa Park, Texas, and to St.
Helena, Washington, and Tangipahoa Parishes in Southern Louisiana. Additionally,
it is anticipated that these projects will help stimulate the economic growth of
these communities by creating hundreds of new jobs associated with the network
build out.
When completed, the PRIDE Network is expected to add approximately 30,000 FTTP
passings to the NTSC network bringing company-wide FTTP passings to over 50,000.
With the commencement of construction of the PRIDE Network in northwestern Texas
we anticipate that we will increase revenues from this project during 2012.
The fundings are contingent upon PRIDE Network meeting the terms of the loans,
grants or loans/grants agreement.
Xfone USA, Inc.
Our Mississippi based subsidiary, Xfone USA, Inc. ("Xfone USA"), is an
integrated telecommunications service provider that owns and operates its own
facilities-based, telecommunications switching system and network. Xfone USA
provides residential and business customers with high quality local, long
distance and high-speed broadband Internet services. Xfone USA utilizes
integrated multi-media offerings - combining digital voice and data services
over broadband technologies to deliver services to customers throughout its
service areas. Xfone USA is currently licensed to provide telecommunications
services in Louisiana and Mississippi.
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Like NTSC, Xfone USA also operates in highly competitive markets. In these
markets Xfone USA competes against the dominate ILEC, AT&T (formerly BellSouth
Telecommunications), as well as many smaller CLECs. With continued cross-selling
to existing Xfone USA customers, augmented by the soon to be constructed PRIDE
Louisiana FTTP network, our goal is to continue revenue growth and increase
market share.
The overall trend for 2011 continued to show improving wire line margins in the
business markets and maintaining margins in the residential (consumer) markets
for facilities based providers.
Our markets continue to show strong interest in faster broadband and competition
from facilities based providers continues to be the dominant theme. We compete
favorably with the Regional Bell Carriers and incumbent cable providers using an
approach that is flexible and customer focused. Broadband services are expected
to continue to grow due to an ongoing need for faster broadband services by both
business and residential customers.
Our business plan in 2012 also includes growth through potential bolt-on
acquisitions, which make sense for several reasons: (i) faster results in
achieving large top line revenue performance; (ii) significant synergies impact
from consolidating corporate functions; and (iii) relatively easy integration of
acquired companies because of our existing facilities and network architecture.
COMPARISON FINANCIAL INFORMATION YEARS ENDED DECEMBER 31, 2011 AND 2010 -
PERCENTAGE OF REVENUES:
Year Ended
December 31,
2011 2010
Revenues
Services on Fiber-To-The-Premise network 22.6 % 17.1 %
Leased local loop services and other 77.4 % 82.9 %
Total Revenues 100 % 100 %
Expenses:Cost of services (excluding depreciation and amortization) 48.6 %
49.3 %
Selling, general and administrative 36.5 % 39.5 %
Depreciation and amortization 9.3 % 7.6 %
Financing expenses, net 5.9 % 9.7 %
Other expenses 1.2 % 1.2 %
Acquisition costs 0.3 % -
Total expenses 101.8 % 107.3 %
Loss from continued operations before taxes and
non-controlling interest (1.8) % (7.3) %
Loss from continued operations (1.8) % (4.2) %
Net loss attributed to shareholders (2.0) % (7.8) %
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Revenues. Revenues for the year ended December 31, 2011 decreased by 2.2% to
$57,657,834 from $58,943,709 for the same period in 2010. Revenues from our
Fiber-To-The-Premise ("FTTP") network in the year ended December 31, 2011
increased 29.0% to $13,022,548 from $10,092,894 in the same period in 2010. As
percentage of total sales, FTTP revenues in the year ended December 31, 2011
increased to 22.6% from 17.1% for the same period in 2010. The growth of FTTP
revenues is expected to continue due to the increase in our market share in
Levelland, TX and the communities which are located in the area of the PRIDE
Network projects.
Revenues from our leased local loop include revenues from Wholesale, other
carriers and other non-FTTP customers. Revenues from leased local loop in the
year ended December 31, 2011 decreased 8.6% to $44,635,286 from $48,850,815 for
the same period in 2010. As percentage of total sales, leased local loop
revenues in the year ended December 31, 2011 decreased to 77.4% from 82.9% for
the same period in 2010. The decrease in our non-FTTP revenues mainly resulted
from decrease in sale of peripheral telecommunication equipment, termination of
wholesale traffic and attrition of residential customers. The decrease in the
non-FTTP revenues was 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 expect that the decline
in revenues from non-FTTP residential customer will continue in 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 year
ended December 31, 2011 decreased 3.6% to $28,025,723 from $29,079,801 for the
same period in 2010. Cost of services, as a percentage of revenues in the year
ended December 31, 2011, decreased to 48.6% from 49.3% in the same period in
2010. The decrease in the cost of services, as a percentage of revenues, is the
result of an increase in high-margin FTTP revenues and a decrease in low-margin
revenues from non-FTTP residential customers and wholesale. We expect that the
cost of services, as percentage of revenues, will decline as we increase the
portion of revenues generated from our high-margin FTTP services.
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 year ended December 31,
2011, decreased 9.6% to $21,040,426 from $23,282,049 for the same period in
2010. The decrease in the expenses resulted mainly from reduction in personnel
and savings in the corporate expenses as a result of the divestiture of the UK
and Israeli operations in addition to the decrease in payroll and sales
commission. General and administrative expenses include stock options
compensation which relates to stock options that were granted to our employees
and directors and vest during the reported period. Total stock option
compensation in selling, general and administrative expenses for the year ended
December 31, 2011 decreased by $246,708 (or 38.1 %) to $400,385 from $647,093
for the same period in 2010.
Depreciation and Amortization. Depreciation and amortization expenses increased
by $897,102 (or 20.1%) to $ 5,350,973 from $4,453,871 for the same period in
2010. The increase in 2011 was due to the large investments in the development
of the FTTP networks and the purchase of fixed and intangible assets from
CoBridge and Reach.
Financing Expenses. Financing expenses, net, for the year ended December 31,
2011 decreased by approximately 40.8% to $3,380,320 from $5,708,491 for the same
period in 2010. Financing expenses consist of interest payable on our financial
obligations, the measurement of the Bonds which are stated in NIS and linked to
the Israeli Consumer Price Index (the "CPI"). It also includes the effect of the
currency exchange rate on intercompany balances with our former subsidiaries
which report in NIS and GBP as their functional currencies, until the
divestiture of these subsidiaries during the third quarter of 2010. The decrease
in financing expenses is a result of a devaluation of 7.7% in the USD against
the NIS and adjustment to the inflation of 2.6% during the year ended December
31, 2011 versus the devaluation of 6.1% in the USD against the NIS and
adjustment to the inflation of 6.5% in the same period in 2010. Financial
expenses also includes expenses related to warrants that were issued to
Burlingame Equity Investors, LP ("Burlingame") on March 2010 and expenses of the
difference between the allocated relative fair value and the principal amount of
the loan from Burlingame from March 2010.
Other Expenses. Other expenses for the year ended December 31, 2011 decreased by
approximately 8.9% to $664,790 from $730,093 for the same period in 2010. Other
expenses consist of real estate taxes.
Acquisition Costs. Acquisition costs for the year ended December 31, 2011 of
$205,047 was related to the acquisition 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 amorization of intangible assets, our effective tax
rate was 0.7% and 42.1% for the year ended December 31, 2011 and 2010,
respectively. The increase in income tax expense relates to state income tax
expense and permanent differences between tax and book.
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--------------------------------------------------------------------------------BALANCE SHEET
Comparison of the balance sheet as of December 31, 2011 and December 31, 2010
Current Assets. Current assets amounted to $13,680,188 as of December 31, 2011,
as compared with $8,199,647 as of December 31, 2010. The increase in the current
assets is mainly attributable to the proceeds from the Rights Offering and the
agreement with ICON.
Fixed Assets. Fixed assets net, amounted to $71,250,071 as of December 31, 2011,
as compared with $58,544,792 as of December 31, 2010. The increase is mainly
attributed to the purchase of telecommunication equipment for our expansion,
mainly for the build-out of our fiber network in Levelland and the PRIDE Network
projects.
Current Liabilities. As of December 31, 2011, current liabilities amounted to
$17,276,881, as compared with $19,619,673 as of December 31, 2010. The decrease
in current liabilities is mainly attributed to repayment of bank credit line.
Long-term liabilities. As of December 31, 2011, long-term liabilities amounted
to $46,583,297, as compared with $31,518,843 as of December 31, 2010. The
increase in long-term liabilities is mainly attributed to proceeds from United
States Department of Agriculture in connection with the build-out of our fiber
network in Levelland and northwestern Texas, proceeds from loan agreement with
ICON Agent, LLC and the proceeds from long-term loan from a shareholder which
are offset by the repayment of the annual principal on our bonds.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of December 31, 2011 amounted to $6,563,514,
compared to $1,217,427 as of December 31, 2010, an increase of $5,346,087. Net
cash provided by operating activities in the year ended December 31, 2011 was
$2,413,203 a decrease of $891,519 compared to $3,304,722 which were provided by
operating activities in the year ended December 31, 2010. The decrease in cash
flow from operating activities is mostly related to the following changes in the
working capital: (1) a decrease in accounts receivable of $106,954 in the year
ended December 31, 2011 compared to an increase of $1,360,352 in the same period
of 2010; (2) increase in prepaid expenses and other receivables of $766,092 in
the year ended December 31, 2011 compared to a decrease of $171,638 in the same
period of 2010; (3) an increase in the provision for bad debt of $492,833 in the
year ended December 31, 2011 compared to an increase of $194,839 in the same
period of 2010; (4) an increase in long term receivables of $152,179 in the year
ended December 31, 2011 compared to a decrease of $12,162 in the same period of
2010; and (5) a decrease in other liabilities and accrued expenses of $495,459
in the year ended December 31, 2011 compared to an increase of $719,722 in the
same period of 2010. Cash used for investing activities in the year ended
December 31, 2011 was $16,070,143 compared to $6,578,422 in the same period of
2010. Of that amount, $13,822,336 is attributable to the build out of our FTTP
projects in Levelland, TX and the PRIDE Network projects and $2,472,375 to the
purchase of other equipment. Net cash provided by financing activities for the
year ended December 31, 2011 was $19,003,027 and is primarily attributable to
proceeds from long-term loans from the United States Department of Agriculture,
proceeds from the Rights Offering and the Loan Agreement with ICON which are
offset by repayment loan from a bank.
Capital lease obligations: We are the lessee of switching and other telecom
equipment under capital leases expiring on various dates through 2014.
As of December 31, 2011, we reported a working capital deficit of $3,596,693
compared to a deficit of $11,420,026 on December 31, 2010. In order to decrease
the deficit in our working capital, we raised approximately $13.4 million in
Rights Offering and long-term loan. We believe that increase in revenues from
our Fiber-To-The-Premise network will increase in profitability which will lead
to additional improvement in the working capital deficit.
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--------------------------------------------------------------------------------The following table represents our contractual obligations and commercial
commitments, excluding interest expense, as of December 31, 2011.
Payments Due by Period
Less than More than
Contractual Obligations Total 1 Year 1-3 Years 4-5 Years 5 Years
Domestic Note Payable $ 8,752,474 $ 707,382 $ 2,888,842 $ 5,156,250 $ -
Other notes payable 3,262,546 - 3,262,546 - -
Notes Payable from the United
States Department of
Agriculture 22,438,952 1,058,907 2,117,813 2,117,812 17,144,420
Bonds 14,626,119 3,723,127 7,268,661 3,634,331 -
Capital leases 871,009 475,162 395,847 - -
Operating leases 3,231,598 1,904,351 1,143,101 184,146 -
Total contractual cash
obligations $ 53,182,698 $ 7,868,929 $ 17,076,810 $ 11,092,539 $ 17,144,420
We believe that funds expected to be generated from operations, the
renegotiation of borrowing capacity and the control of capital spending will be
sufficient to meet our anticipated cash requirements for operating needs 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 extend a portion of our short-term credit line and notes payable,
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.
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 annual interest 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
Consumer Price Index (CPI).
On November 4, 2008, we filed a public prospectus (the "Prospectus") with the
Israel Securities Authority (the "ISA") 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%.
The Series A Bonds may only be traded in Israel. The Series A Bonds are
currently rated Baa3 with a negative outlook by Midroog Limited, an Israeli
rating company which is a subsidiary of Moody's Investor Services.
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.
-27-
--------------------------------------------------------------------------------Securities Purchase Agreement
On March 23, 2010, we entered into a Securities Purchase Agreement (the
"Purchase Agreement") with an existing shareholder, Burlingame Equity Investors,
LP ("Burlingame"), for the issuance of the following securities for an aggregate
purchase price of $6,000,000:
(1) A senior promissory note in the aggregate principal
amount of $3,500,000, maturing on March 22, 2013.
Interest accrues at an annual rate of 10% and is payable
quarterly. The note is not secured and has equal
liquidation rights with our Series A Bonds issued in
Israel on December 13, 2007. On May 2, 2011, the
maturity date of the senior promissory note was extended
to March 22, 2013.The note is included in our long-term
Notes Payables.
(2) 2,173,913 shares of our Common Stock at a price of $1.15
per share for a total purchase price of $2,500,000.
(3) A warrant to purchase 950,000 shares of our Common
Stock, which shall be exercisable at a price of $1.1 per
share and shall expire on November 2, 2017 (as adjusted
in November 2011). The number of shares issuable upon
exercise of the Warrant, and/or the applicable exercise
price, may be proportionately adjusted in the event of a
stock dividend, distribution, subdivision, combination,
merger, consolidation, sale of assets, spin-off or
similar transactions.
We allocated the total aggregate purchase price of $6,000,000 to the three
components above based on their relative fair value. After such allocation, the
senior promissory note was recorded at $2,556,240; the shares were recorded at
$2,918,920; and the warrants at $524,840. The total fair value of the warrants
is $765,181 using the Black-Scholes pricing model which was allocated between
equity and debt according to the allocation of fair value of each component. The
assumptions used in the valuation model are: volatility of 48.4%; risk-free
interest 2.44%; dividend yield 0%; and expected life of 5 years.
On May 2, 2011, the maturity date of the senior promissory note was extended
from March 22, 2012 to March 22, 2013.
Subscription Agreement
On March 23, 2010, we entered into a Subscription Agreement with certain
investors affiliated with Gagnon Securities LLC, an existing shareholder
(collectively, "Gagnon"), for the issuance of 500,000 shares of Common Stock at
a purchase price of $1.15 per share for an aggregate purchase price of $575,000.
We used the net proceeds from the transaction for working capital purposes.
Rights Offering
On July 6, 2011 our Board has approved a rights offering (the "Rights Offering")
in which our stockholders received non-transferable and non-tradable rights to
purchase one additional share of our Common Stock, par value $0.001 for each
share owned as of the record date, for a subscription price of $0.30 per share
(each, a "Right"). Our stockholders who exercised their Rights in full were also
eligible to exercise an oversubscription privilege to purchase, on a pro rata
basis, a portion of the unsubscribed shares, at the same price of $0.30 per
share, subject to certain limitations. The record date for the Rights Offering
was September 22, 2011 and the Rights Offering expired on October 26, 2011.
On November 2, 2011, we completed the Rights Offering and raised $6,020,132 from
our shareholders for 20,067,108 shares of our Common Stock. Taking into account
the oversubscription rights, there was a demand for 95% of the offered shares.
Because the Rights Offering was at a price per share which is lower than the
market price at the time of announcement, we have authorized a reduction of the
exercise price of our outstanding warrants by an average of 41.4% and approved
the issuance of additional 3,728,775 options to our directors and employees at
an exercise price of $1.10 per share. The adjustment of the exercise price of
the warrants and the issuance of additional options was done to maintain the
same value of the warrants and options prior to the announcement of the Rights
Offering based on the Black-Scholes model.
-28-
--------------------------------------------------------------------------------Loan agreement with ICON Agent, LLC
On October 6, 2011, we entered into a term loan, guarantee and security
agreement (the "Agreement") between the following: (1) ICON Agent, LLC, acting
as agent for the Lenders, ICON Equipment and Corporation Infrastructure Fund
Fourteen, L.P and Hardwood Partners, LLC.; (2) the Company, as Guarantor; (3)
Xfone USA, Inc., NTS Communications, Inc., Gulf Coast Utilities, Inc., eXpeTel
Communications, Inc., NTS Construction Company, Garey M. Wallace Company, Inc.,
Midcom of Arizona, Inc., Communications Brokers, Inc., and N.T.S. 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).
The principal amount of the loan is $7,500,000 (the "Loan") bearing interest of
12.75% payable in 60 consecutive monthly installments with the first 12 monthly
payments being payments of accrued interest only. The Loan 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; such as all accounts, all deposit accounts, all other
bank accounts and all funds on deposit therein; all money, cash and cash
equivalents, all investment property, all stock (other than the publicly traded
shares of Stock issued by NTSI), all goods (including inventory, equipment and
fixtures), all chattel paper, documents and instruments, all Books and Records,
all general intangibles (including all Intellectual Property, contract rights,
choses in action, payment intangibles and software), all letter-of-credit
rights, all commercial tort claims, all FCC Licenses, all supporting obligations
provided, however, that none of the assets of PRIDE Network, Inc. and NTS
Telephone Company, LLC are being used as collateral for the Loan and are
specifically excluded. The funding of the loan was made on October 27, 2011.
The Agreement requires us to maintain a Fixed Charge Coverage Ratio not less
than 1.15 to 1.00 for the trailing four Fiscal Quarter period most recently
ended if at any time cash is less than $3,000,000 as of the last day of any
Fiscal Quarter (or $3,500,000 as of the last day of the Fiscal Quarter ending
December 31, 2011) and Senior Leverage Ratio not to exceed 1.50 to 1.00 as of
the end of each Fiscal Quarter.
Amendments to Articles of Incorporation
On December 29, 2011, our shareholders approved an amendment (the "Amendment")
to our Articles of Incorporation (the "Articles") to change our name to "NTS,
Inc." and to increase our authorized capital to 150,000,000 shares of Common
Stock $0.001 par value per share. The Amendment became effective on February 1,
2012. We filed a Certificate of Amendment to the Articles with the Nevada
Secretary of State on January 25, 2012.
Other Events
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 Series A
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, as available from time to
time. 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 and
opportunities, economic advisability and other customary criteria and factors.
Repurchases of the Series A Bonds may be carried out by us and/or our
subsidiaries, either directly and/or through a third party. Series A Bonds
repurchased by us will be canceled and removed from trading on the TASE and will
not be permitted to be reissued.
The Board's resolution is not a commitment to repurchase any Series A Bonds
under the Plan. The Plan may be suspended or discontinued by us at any time. As
of the date of this filing we have not repurchased any Series A Bonds.
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. Advances are provided
as the construction progresses, and the interest rate is set based upon the
prevailing rate at the time of each individual advance. The note is non-recourse
to NTSC and all other NTSC subsidiaries and is secured by NTS Telephone's assets
which were $13.3 million at December 31, 2011. As of December 31, 2011, the
annual average weighted interest rate on the outstanding advances was 3.54%. The
total aggregate amount of these loans as of December 31, 2011 is $10,312,900.
-29-
--------------------------------------------------------------------------------
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 will 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 December 31,
2011 is $12,126,052 and $8,799,477, respectively. The loans are non-recourse to
NTSC and all other NTSC subsidiaries and are secured by PRIDE Network's assets
which were $14.7 million at December 31, 2011. As of December 31, 2011, the
annual average weighted interest rate on the outstanding advances was 3.80%.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
Following the divestiture of our UK and Israeli operations, all of our assets,
liabilities (except the Series A Bonds), revenues and expenditures are in USD.
Notwithstanding having our Series A Bonds stated in NIS and linked to the
Israeli Consumer Price Index, during the year ended December 31, 2011, our
outstanding liability was decreased by approximately $929,139 as a result of the
revaluation of the NIS in relation with the USD. We may use foreign currency
exchange contracts and other derivatives instruments to be the appropriate tool
for managing such exposure.
New Accounting Pronouncements
See "New Accounting Pronouncements" set forth in Note 2 of the Notes to the
Consolidated Financial Statements under Item 8 of this Annual Report on Form
10-K, for information pertaining to recently adopted accounting standards or
accounting standards to be adopted in the future.
Critical Accounting Policies and Estimates
The significant accounting policies of the Company are described in Note 2 to
the consolidated financial statements and have been reviewed with the Audit
Committee of our Board. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expense during the reporting period.
Certain accounting estimates and assumptions are particularly sensitive because
of their importance to the consolidated financial statements and possibility
that future events affecting them may differ markedly. The accounting policies
of the Company with significant estimates and assumptions are described below.
Revenue Recognition
Revenues derived from local telephone, long-distance, data and video services
are recognized when services are provided. This is based upon either usage
(e.g., minutes of traffic/bytes of data processed), period of time (e.g.,
monthly service fees) or other established fee schedules.
-30-
--------------------------------------------------------------------------------
Service revenues also include billings to our customers for various regulatory
fees imposed on us by governmental authorities. Cash incentives given to
customers are recorded as a reduction of revenue. For contracts that involve the
bundling of services, revenue is allocated to the services based on their
relative fair value. We record the resale of third-party services and the sale
of equipment to customers as gross revenue when we are the primary obligor in
the arrangement.
Payments received in advance are deferred until the service is provided.
We believe that the accounting estimates related to deferred services are
"critical accounting estimates" because of their importance to the consolidated
financial statements.
Accounts Receivable Reserves
This reserve is an estimate of the amount of accounts receivable that are
uncollectible. The reserve is based on a combination of specific customer
knowledge, general economic conditions and historical trends. Management
believes the results could be materially different if economic conditions change
for our customers.
Long-lived Assets
The carrying value of long-lived assets is periodically assessed to insure their
carrying value does not exceed their estimated net realizable future value. This
assessment includes certain assumptions related to future needs for the asset to
help generate future cash flow. Changes in those assessments, future economic
conditions or technological changes could have a material adverse impact on the
carrying value of these assets.
Deferred Taxes
The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities and projected future taxable income in making this assessment.
Actual future operating results, as well as changes in our future performance,
could have a material adverse impact on the valuation reserves.
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