UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
(Mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------------- -----------------------
Commission File Number 0-18550
--------------------------------------------------------
NTS MORTGAGE INCOME FUND
(Exact name of registrant as specified in its charter)
Delaware 61-1146077
- --------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10172 Linn Station Road
Louisville, Kentucky 40223
- --------------------------------- ----------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number,
including area code: (502) 426-4800
----------------------------
Not Applicable
- ------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--- ---
As of November 1, 1998 there were approximately 3,187,000 shares of common stock
outstanding.
<PAGE>
TABLE OF CONTENTS
-----------------
Pages
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 3
Consolidated Statements of Operations
For the three and nine months ended
September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows
For the nine months ended
September 30, 1998 and 1997 5
Notes To Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
- 2 -
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<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<CAPTION>
As of As of
September 30, December 31,
1998 1997*
------------- ------------
ASSETS
<S> <C> <C>
Cash and equivalents $ 760,506 $ 1,413,445
Membership initiation fees and other
accounts receivable 1,892,891 1,625,489
Notes receivable 2,833,386 3,573,162
Inventory 53,493,020 51,917,990
Property and equipment, net of accumulated
depreciation of $187,059 (1998)and $45,788 533,595 452,913
(1997)
Investment in unconsolidated affiliate
(Note 6) 4,464,705 4,525,369
Other assets 1,041,678 676,000
------------ ------------
Total assets $ 65,019,781 $ 64,184,368
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,949,837 $ 3,040,468
Advances from affiliates (Note 8) 57,600 600,542
Notes payable - affiliates (Note 8) 5,259,427 5,309,492
Notes and mortgage loans payable 22,896,627 19,195,741
Lot deposits 68,645 97,500
Deferred revenues 169,894 146,789
------------ ------------
Total liabilities 30,402,030 28,390,532
------------ ------------
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock, $0.001 par value,
6,000,000 shares authorized;
3,187,333 shares issued and
outstanding 3,187 3,187
Additional paid-in-capital 54,163,397 54,163,397
Accumulated deficit (19,548,833) (18,372,748)
------------ ------------
Total stockholders' equity 34,617,751 35,793,836
------------ ------------
Total liabilities and stockholders'
equity $ 65,019,781 $ 64,184,368
============ ============
The accompanying notes are an integral part of these financial statements
* Reference is made to the Fund's audited financial statements in the Form 10-K
as filed with the Securities and Exchange Commission on April 15, 1998.
</TABLE>
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<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- ------------
REVENUES:
<S> <C> <C> <C> <C>
Lot sales, net of discounts $ 1,270,092 $ -- $ 4,408,781 $ --
Cost of sales 870,874 -- 3,223,388 --
----------- ----------- ----------- -----------
Gross profit 399,218 -- 1,185,393 --
Interest income on affiliated
mortgage loans receivable -- 967,896 -- 2,617,126
Fee income on affiliated
mortgage loans and other
financial services -- 250 -- 7,959
Recovery of provision for loan
losses -- 1,500,000 382,096 1,500,000
Interest income on cash
equivalents and miscellaneous
income 116,637 7,993 337,618 25,320
----------- ----------- ----------- -----------
515,855 2,476,139 1,905,107 4,150,405
----------- ----------- ----------- -----------
EXPENSES:
Advisory fee (Note 8) -- 131,520 -- 418,950
Selling and general 369,552 -- 954,697 --
Selling and general -
affiliates (Note 8) 268,859 -- 845,939 --
Overhead reimbursements
(Note 8) 117,418 -- 312,566 --
Interest expense 93,872 319,764 305,710 970,268
Interest expense - affiliates
(Note 8) 103,964 88,153 228,494 263,904
Professional and administrative 34,093 72,621 126,112 197,621
Professional and administrative
- affiliates (Note 8) 13,241 -- 38,131 --
Other taxes and licenses 20,250 5,895 32,465 19,010
Depreciation and amortization
expense 51,869 19,233 126,414 53,803
(Income) loss from investment
in unconsolidated affiliate (47,080) 3,731,782 110,664 3,731,782
----------- ----------- ----------- -----------
1,026,038 4,368,968 3,081,192 5,655,338
----------- ----------- ----------- -----------
Income (loss) before income tax
expense (510,183) (1,892,829) (1,176,085) (1,504,933)
Income tax expense -- (2,650) -- (6,350)
----------- ----------- ----------- -----------
Net income (loss) $ (510,183) $(1,895,479) $(1,176,085) $(1,511,283)
=========== =========== =========== ===========
Net income (loss) per share of
common stock $ (0.16) $ (0.59) $ (0.37) $ (0.47)
=========== =========== =========== ===========
Weighted average number of
shares 3,187,333 3,187,333 3,187,333 3,187,333
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1998 1997
------ ------
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ (1,176,085) $(1,511,283)
Adjustments to reconcile net income (loss) to net
cash provided by (used for)operating activities:
Accretion of discount on affiliated mortgage loans
receivable -- (95,932)
Depreciation and amortization expense 126,414 53,803
Loss from investment in unconsolidated affiliate 110,664 3,731,782
Recovery on provision for loan losses -- (1,500,000)
Changes in assets and liabilities:
Interest receivable - affiliates -- 480,778
Membership initiation fees and other receivables (267,402) --
Notes receivable 739,776 --
Inventory (1,575,030) --
Other assets (228,182) 16,020
Accounts payable (1,090,631) 36,473
Lot deposits (28,855) --
Deferred revenues 23,105 199
------------ -----------
Net cash provided by (used for)operating activities (3,366,226) 1,211,840
------------ -----------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES
Principal collections on affiliated mortgage loans
receivable -- 9,299,287
Investment in affiliated mortgage loans receivable -- (5,700,037)
Purchase of property and equipment (133,043) --
------------ -----------
Net cash provided by (used for) investing activities (133,043) 3,599,250
------------ -----------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES
Advances from affiliates 563,669 --
Payments on advances from affiliates (1,106,611) --
Proceeds from notes payable - affiliates 2,424,519 1,142,041
Payments on notes and mortgage loans payable -
affiliates (2,474,584) (1,597,466)
Proceeds from notes and mortgage loans payable 13,853,022 510,913
Payments on notes payable (10,152,136) (5,074,694)
Dividends paid -- (175,305)
Other assets (211,549) 40,366
Capital contribution to unconsolidated affiliate (50,000) --
------------ -----------
Net cash provided by (used for) financing activities 2,846,330 (5,154,145)
------------ -----------
Net decrease in cash and equivalents (652,939) (343,055)
CASH AND EQUIVALENTS, beginning of period 1, 413,445 716,793
------------ -----------
CASH AND EQUIVALENTS, end of period $ 760,506 $ 373,738
============ ===========
The accompanying notes are an integral part of these financial statements
</TABLE>
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<PAGE>
NTS MORTGAGE INCOME FUND
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
The financial statements and schedules included herein should be read in
conjunction with the Fund's 1997 Annual Report on Form 10-K. In the opinion of
the Fund's management, all adjustments (only consisting of normal recurring
accruals) necessary for a fair presentation have been made to the accompanying
financial statements for the three and nine months ended September 30, 1998 and
1997.
The results of operations for the interim periods are not necessarily an
indication of the results to be expected for the full 1998 fiscal year.
1. Organization
------------
NTS Mortgage Income Fund (the "Fund"), a Delaware corporation, was formed
on September 26, 1988. The Fund operated as a real estate investment
trust (REIT) under the Internal Revenue Code of 1986 (the "Code"), as
amended, from its inception through December 31, 1996. The Fund began
operating as a "C" corporation under the Code for tax purposes effective
January 1, 1997. NTS Corporation is the sponsor of the Fund (the
"Sponsor"). NTS Advisory Corporation is the advisor to the Fund (the
"Advisor"), and NTS Residential Management Company is the manager to the
Fund ("NTS Management"). The Advisor and NTS Management are affiliates of
and are under common control with NTS Corporation.
The Fund acquired a 50% interest in the Orlando Lake Forest Joint Venture
effective August 16, 1997 in exchange for indebtedness owed to the Fund.
Prior to becoming a joint venture partner, the Fund had been the Joint
Venture's primary creditor.
The Fund's subsidiaries are NTS/Lake Forest II Residential Corporation
(NTS/LFII) and NTS/Virginia Development Company (NTS/VA). These
subsidiaries were acquired effective October 1, 1997. The acquisitions
were accounted for under the purchase method of accounting. Prior to
making the acquisitions, the Fund had been the primary creditor of these
entities.
The following unaudited pro forma information for the Fund for the
periods shown below gives effect to the NTS/LFII and NTS/VA acquisitions
as if they had occurred as of the beginning of 1997.
Nine Months Ended
September 30,
-------------------------
1998 1997
----------- -----------
Lot sales $ 4,408,781 $ 5,294,148
Cost of sales (3,223,388) (3,847,956)
Recovery of provision for loan
losses 382,096 1,500,000
Other income (expenses), net (2,743,574) (2,823,473)
----------- -----------
Net loss $(1,176,085) $ 122,719
=========== ===========
Net loss per share of common stock $ (0.37) $ 0.04
=========== ===========
Weighted average number of shares 3,187,333 3,187,333
=========== ===========
- 6 -
<PAGE>
1. Organization - Continued
------------------------
The unaudited pro forma information assumes the acquisitions occurred
January 1, 1997 and, accordingly, includes adjustments for interest
income on affiliated mortgage loans receivable, interest expense, certain
administrative costs and income taxes. The unaudited pro forma financial
data is presented for information purposes only and is not necessarily
indicative of the results of operations that actually would have been
achieved had the acquisition of NTS/LFII and NTS/VA been consummated at
the beginning of the period presented.
2. Use of Estimates in Preparation of Financial Statements
-------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
3. Revenue Recognition and Reserves for Loan Losses
------------------------------------------------
The Fund and its subsidiaries recognize revenue and related costs from
lot sales using the accrual method in accordance with generally accepted
accounting principles, which is when payment has been received and title,
possession and other attributes of ownership have been transferred to the
buyer, and the Fund and its subsidiaries are not obligated to perform
significant activities after the sale. The Fund and its subsidiaries
generally require a minimum down payment of at least 10% of the sales
price of the lot.
Interest income from mortgage loans and notes receivable was reported as
earned on the accrual basis of accounting. If the Fund had any reason to
doubt the collectability of any principal or interest amounts due
pursuant to the terms of the mortgage loans or notes, appropriate
reserves would have been established for any principal and accrued
interest amounts deemed unrealizable. Statements of Financial Accounting
Standards Nos. 114 and 118 require that impaired loans be measured based
on the present value of expected future cash flows discounted at each
loan's effective interest rate, at each loan's observable market price or
at the fair value of the collateral if the loan is collateral dependent.
4. Inventory
---------
Inventory is stated at the lower of cost or net realizable value.
Inventory includes all direct costs of land, land development, and
amenities, including interest, real estate taxes, and certain other costs
incurred during the development period, less amounts charged to cost of
sales. Inventory costs are allocated to individual lots sold using the
relative sales values. The use of the relative sales value method to
record cost of sales requires the use of estimates of sales values,
development costs and absorption periods over the life of the project.
Given the long-term nature of the projects and inherent economic
volatility of residential real estate, it is reasonably possible that
such estimates could change in the near term. Any changes in estimates
would be accounted for prospectively over the life of the project.
- 7 -
<PAGE>
4. Inventory - Continued
---------------------
Inventory consists of the following:
September 30, December 31,
1998 1997
----------- -------------
Land held for future
development, under
development and
completed lots $28,689,413 $28,661,525
Country clubs (net of
membership initiation
fees) 17,940,259 17,480,011
Amenities 6,863,348 5,776,454
---------- ----------
$53,493,020 $51,917,990
========== ==========
NTS/LFII and NTS/VA capitalized in inventory approximately $1,534,000 of
interest and real estate taxes for the nine months ended September 30,
1998. Interest and real estate taxes incurred were approximately
$1,879,000.
Inventory for 1998, as reflected above, includes $26,057,476, net of
$8,117,217 of country club membership initiation fees, of costs incurred
to date for the development of the Fawn Lake Country Club and the Lake
Forest Country Club. During the nine months ended September 30, 1998,
approximately $454,000 of the Fawn Lake Country Club deficit and
approximately $284,000 of the Lake Forest Country Club deficit was
capitalized as a cost of inventory.
Pursuant to an agreement between NTS/LFII and the Lake Forest Country
Club regarding the cost to develop the Country Club, NTS/LFII is to
receive all initiation fees from membership sales for a period not to
exceed 12 years from the date of the agreement (ending 2003). The
remaining cost to be incurred for the current projected Country Club
operating deficit for the period covered by the agreement is
approximately $2,300,000 which is expected to be offset by member
initiation fees.
5. Investment in Unconsolidated Affiliate
--------------------------------------
Effective as of August 16, 1997, the Fund became a partner in the Orlando
Lake Forest Joint Venture (OLFJV). The other partners in OLFJV are
Orlando Lake Forest, Inc., Orlando Capital Corporation and OLF II
Corporation, all of whom are Affiliates of and are under common control
with the Fund's Sponsor. OLFJV will continue to operate under its current
legal name as the Orlando Lake Forest Joint Venture.
OLFJV owns the Orlando Lake Forest project, a single-family residential
community located in Seminole County, Florida (near Orlando). OLFJV will
continue to own and develop the Orlando Lake Forest project.
The Fund contributed to the OLFJV as a capital contribution its interest
in the principal and interest of the first mortgage loan on the Orlando
Lake Forest project, and obtained a 50% interest in the Joint Venture.
The NTS entities named above hold cumulatively the remaining 50% interest
in OLFJV.
The net income or net loss of the OLFJV is allocated based on the
respective partner's percentage interest, as defined in the joint venture
agreement. As of September 30, 1998, the Fund's percentage interest was
50%, and the Fund's investment balance in OLFJV was $4,464,705. The
Fund's share of OLFJV's net income (loss) for the three and nine months
ended September 30, 1998 was $47,080 and $(110,664), respectively.
- 8 -
<PAGE>
5. Investment in Unconsolidated Affiliate - Continued
--------------------------------------------------
Generally Accepted Accounting Principles require that investments be
recorded at the lower of carrying value or fair market value. The
application of these principles resulted in a non-cash charge of
approximately $3.7 million in the third quarter of 1997. All estimates
used in this evaluation represent management's best estimate based on the
facts present at the date of such evaluations.
6. Notes and Mortgage Loans Payable
--------------------------------
Notes and mortgage loans payable consist of the following:
September 30, December 31,
1998 1997
------------- -------------
Mortgage loan payable to a bank in the
amount of $10,700,000, bearing interest at
the Prime Rate + 1 1/2%, due December 1,
2002, secured by inventory of NTS/VA,
generally principal payments consist of
approximately 91% of the Gross Receipts of
lot sales, guaranteed by Mr. J. D. Nichols,
Chairman of the Board of the Fund's
Sponsor, up to $3,000,000 $10,057,969 $8,005,034
Mortgage loan payable to a bank in the
amount of $8,000,000, bearing interest at
the Prime Rate + 1%, due October 31, 2003,
secured by inventory of NTS/LFII, generally
principal payments consist of approximately
90% of the Gross Receipts of lot sales,
guaranteed by Mr. J. D. Nichols up to 50%
of the credit facility 6,491,197 --
Mortgage loan payable to a bank in the
amount of $4,000,000, bearing interest at
the Prime Rate + 1/2%, payable monthly, due
July 31, 2002, secured by the Lake Forest
Country Club and golf course, annual
principal reductions of $300,000 every six
months are guaranteed by NTS Corporation,
the Fund's Sponsor 3,360,000 3,950,000
Warehouse Line of Credit Agreements with
three banks bearing interest at the Prime
Rate + 1%, the Prime Rate + 3/4% and the
Prime Rate + 1/2%, due December 15, 1998
($557,549),September 30, 1999 ($1,681,022)
and February 28, 1999 ($489,166), secured
by notes receivable, principal payments
consist of payments received from notes
receivable securing the obligation 2,727,737 3,495,299
Note payable to a bank in the amount of
$13,800,000, bearing interest at the Prime
Rate + 1%, payable monthly, due December
27, 1997, secured by a collateral
assignment of the Fund's mortgages on Lake
Forest and Fawn Lake, paid in full on
January 7, 1998 -- 3,607,283
Mortgage loan payable to a bank, bearing
interest at the Prime Rate + 1%, due August
4, 1999, secured by land, guaranteed by NTS
Corporation 150,000 --
(Continued next page)
- 9 -
<PAGE>
6. Notes and Mortgage Loans Payable - Continued
--------------------------------------------
September 30, December 31,
1998 1997
------------ ------------
Equipment loan in the amount of $50,180,
bearing interest at a rate of 2.9%, due
May 1, 2001, secured by equipment for use at
the Lake Forest Country Club $ 44,818 $ --
Equipment loan in the amount of $27,736,
bearing interest at a rate of 5.94%, due
April 1, 2000, secured by equipment
purchased for use at the Lake Forest
Country Club 15,196 21,970
Equipment loan in the amount of $165,276,
bearing interest at the rate of 8.75%, due
January 14, 1999, secured by golf course
maintenance equipment 15,623 60,123
Equipment loan in the amount of $42,435,
bearing interest at the rate of 10.5%, due
October 15, 1999, secured by golf course
maintenance equipment 15,212 24,778
Equipment loan in the amount of $34,555,
bearing interest at the rate of 10.5%, due
October 15, 1999, secured by golf course
maintenance equipment 12,004 20,063
Equipment loan in the amount of $19,194,
bearing interest at the rate of 10.5%, due
October 15, 1999, secured by golf course
maintenance equipment 6,871 11,191
----------- -----------
$22,896,627 $19,195,741
=========== ===========
The Prime Rate was 8.25% at September 30, 1998 and 8.5% at December 31, 1997.
The $557,549 and $489,166 Warehouse Line of Credit agreements are
guaranteed by NTS Corporation.
7. Related Party Transactions
--------------------------
As of September 30, 1998, the Sponsor or an Affiliate owned 105,955
shares of the Fund. The Fund has entered into, or had been subject to in
prior periods, the following agreements with various Affiliates of the
Sponsor regarding the ongoing operation of the Fund.
Advisory Agreement
------------------
During 1997, pursuant to the Advisory Agreement, the Fund paid the
Advisor (NTS Advisory Corporation) a Management Expense Allowance
(Advisory Fee) relating to services performed for the Fund in an amount
equal to 1% of the Fund's Net Assets, per annum, which amount was
increased annually by an amount corresponding to the percentage increase
in the Consumer Price Index. The Advisory Fee was $131,520 and $418,950
for the three and nine months ended September 30, 1997, respectively.
Effective October 1, 1997, the Fund no longer incurs an Advisory Fee but
is responsible for the actual general and administrative costs pursuant
to certain property management agreements discussed below.
- 10 -
<PAGE>
7. Related Party Transactions - Continued
--------------------------------------
Property Management Agreements
------------------------------
The ongoing operation and management of the Lake Forest North and Fawn
Lake projects will be conducted by NTS Residential Management Company
(NTS Management) under the terms of two Property Management Agreements.
NTS Management is a wholly-owned subsidiary of NTS Development Company.
NTS Development Company is a wholly-owned subsidiary of the Fund's
Sponsor. The Management Agreements have an initial term through December
31, 2003, subject to extension under certain conditions, and are
renewable for successive six (6) year terms thereafter. Under the
Management Agreements,
NTS Management will be reimbursed for costs incurred in the operation and
management of the Lake Forest North and Fawn Lake projects, and will
accrue an incentive payment payable as provided therein.
Pursuant to the Management Agreements, reimbursements of approximately
$269,000 and $846,000 were made to NTS Management or an Affiliate during
the three months and nine months ended September 30, 1998, respectively,
for actual personnel, marketing and administrative costs as they relate
to NTS/LFII and NTS/VA. These reimbursements are reflected as Selling and
General - Affiliates in the accompanying Consolidated Statements of
Operations. In addition, reimbursements of approximately $13,000 and
$38,000 were made to an Affiliate of the Fund's Sponsor during the three
months and nine months ended September 30, 1998, respectively, for the
actual personnel and administration costs as they relate to the Fund.
Additionally, NTS Management is entitled to an Overhead Recovery, which
is a reimbursement for overhead expenses attributable to the employees
and the efforts of NTS Management under the Management Agreements, in an
amount equal to 3.75% of the projects' gross cash receipts, as defined in
the Management Agreements. Approximately $117,000 and $313,000 was
incurred as an Overhead Recovery during the three months and nine months
ended September 30, 1998, respectively. The amounts are classified as
Overhead Reimbursements in the accompanying Consolidated Statements of
Operations.
The Management Agreements also call for NTS Management to receive an
Incentive Payment, as defined in the Management Agreements, equal to 10%
of the Net Cash Flows of the projects. The Incentive Payment will not
begin accruing until after the cumulative cash flows of NTS/LFII, NTS/VA
and the Fund's share of the cash flow of the Orlando Lake Forest Joint
Venture would have been sufficient to enable the Fund to return to the
then existing shareholders of the Fund an amount which, after adding
thereto all other payments actually remitted or distributed to such
shareholders of the Fund, is at least equal to the shareholders' Original
Capital Contribution, as defined in the Fund's Prospectus. As of
September 30, 1998, the Fund had raised approximately $63,690,000 and had
paid distributions of approximately $23,141,000. As of September 30,
1998, no amount had been accrued as an Incentive Payment in the Fund's
consolidated financial statements.
Advances and Notes Payable Affiliates
-------------------------------------
NTS/VA had received advances from Affiliates of the Fund's Sponsor, net
of repayments, totaling $600,542 as of December 31, 1997. Interest on the
advances had accrued at the Prime Rate. The advances were repaid to the
Affiliates in the second quarter of 1998. Interest incurred to the
Affiliates was $0 and $21,273 for the three and nine months ended
September 30, 1998, respectively.
The Fund has received non-interest bearing advances, net of repayments,
from an unconsolidated Affiliate of $57,600 as of September 30, 1998. The
Fund has received advances from Affiliates of the Fund's Sponsor, net of
repayments, totaling $5,259,427 and $5,309,492 as of September 30, 1998
and December 31, 1997, respectively. As of September 30, 1998, the
advances bear interest at approximately the Prime Rate and mature May 1,
2006. Interest expense to the Affiliates was $103,964 and $88,153 for the
three months ended September 30, 1998 and 1997, respectively, and
$228,494 and $263,904 for the nine months ended September 30, 1998 and
1997, respectively.
- 11 -
<PAGE>
8. Income Taxes
------------
The Fund adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109), effective January 1, 1997. SFAS
109 requires recognition of deferred tax assets and liabilities for the
expected future tax consequence of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
Fund's book and tax bases of assets and liabilities and tax
carry-forwards using enacted tax rates in effect for the year in which
the differences are expected to reverse. The principal tax carry-forwards
and temporary differences giving rise to the Fund's deferred taxes
consist of tax net operating loss carry-forwards, valuation allowances
and differences in inventory basis for book and tax.
A valuation allowance is provided when the probability that the deferred
tax asset to be realized does not meet the criteria established by the
Financial Accounting Standards Board. The Fund has determined, based on a
history of operating losses by its subsidiaries and its expectations for
the future, that it is more likely than not that the net deferred tax
assets at September 30, 1998 and December 31, 1997, will not be realized.
As of December 31, 1997, the Fund has a federal net operating loss
carryforward of approximately $387,000 expiring in 2012.
9. Financial Instruments
---------------------
The book values of cash and cash equivalents, trade receivables and trade
payables are considered to be representative of their respective fair
values because of the immediate or short-term maturity of these financial
instruments. The fair value of the Fund's debt instruments approximated
the book value because a substantial portion of the underlying
instruments are variable rate notes which re-price frequently.
10. Commitments and Contingencies
-----------------------------
NTS/LFII and NTS/VA have various letters of credit outstanding to
governmental agencies and utility companies totaling approximately
$2,341,000. The primary purpose of these documents is to ensure that the
work at the developments is completed in accordance with the construction
plans as approved by the appropriate governmental agency or utility
company.
It is estimated that development of the remaining homeowners association
amenities at the Lake Forest North project will be substantially complete
by May 2000. Based on engineering studies and projections, NTS/LFII will
incur additional costs, excluding interest, of approximately $500,000
during 2000 to complete the homeowners association amenities.
It is estimated that the country club and homeowners association
amenities at the Fawn Lake project will be substantially completed by
December 2002. Based on engineering studies and projections, NTS/VA will
incur additional costs, excluding interest, of approximately $3,465,000
to complete the country club and homeowners association amenities for the
project. These costs are estimated to be incurred as follows: $150,000
for 1998, $1,485,000 for 1999, $1,430,000 for 2000, zero for 2001 and
$400,000 for 2002.
11. Guaranties to the Fund
----------------------
NTS Guaranty Corporation (the "Guarantor"), an Affiliate of the Sponsor,
has guaranteed that investors of the Fund will receive, over the life of
the Fund, aggregate distributions from the Fund (from all sources) in an
amount at least equal to their Original Capital Contributions. As of
September 30, 1998, the Fund has raised approximately $63,690,000 and has
paid distributions of $23,141,000.
- 12 -
<PAGE>
11. Guaranties to the Fund - Continued
----------------------------------
The liability of the Guarantor under the above guaranties is expressly
limited to its assets and its ability to draw upon a $10 million demand
note receivable from Mr. J.D. Nichols, Chairman of the Board of Directors
of the Sponsor. There can be no assurance that Mr. Nichols will, if
called upon, be able to honor his obligation to the Guarantor. The total
amounts guaranteed by the Guarantor are in excess of its net worth, and
there is no assurance that the Guarantor will be able to satisfy its
obligation under these guaranties. The Guarantor may in the future
provide guaranties for other Affiliates of the Fund.
- 13 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
The NTS Mortgage Income Fund (the "Fund")commenced an offering to the public on
March 31, 1989 and was authorized to sell up to 2,500,000 shares of common stock
at $20.00 per share (subject to an increase to 5,000,000 shares at the option of
the Fund). Approximately 3,187,000 shares were sold representing approximately
$64 million in sales and approximately $9.5 million in selling expenses and
other offering costs. The net offering proceeds remaining, after payment of
brokerage commissions, organizational expenses and other costs, were used to
make Mortgage Loans and Temporary Investments and such other investments as
permitted by the Fund's Prospectus. Capitalized terms shall have the meaning
ascribed in the "Glossary" on pages 75 to 81 of the Fund's Prospectus, which is
filed herewith and incorporated by reference.
In August 1997, the Fund entered into an Amended and Restated Joint Venture
Agreement evidencing the Fund's admission as a partner in OLFJV. The Fund
contributed its interest in the principal of the first mortgage loan on the
Orlando Lake Forest project and obtained a 50% interest in OLFJV.
In December 1997, the Fund acquired all the issued and outstanding common
capital stock of NTS/LFII and NTS/VA, effective October 1, 1997, for a nominal
purchase price. Concurrent with this transaction, the existing indebtedness of
NTS/LFII and NTS/VA to the Fund was converted to equity as of October 1, 1997.
This marks the beginning of the Fund's operations focusing solely on the
continuing development, operations, marketing and sale of single-family,
residential real estate. As a result, the Fund no longer operates as a Real
Estate Investment Trust effective January 1, 1997.
Liquidity and Capital Resources
- -------------------------------
The Fund's primary source of liquidity had been from the interest earned on the
Mortgage Loans and on the Temporary Investments. The Fund's current source of
liquidity is primarily the ability of its subsidiaries (to which the Fund
formerly had outstanding Mortgage Loans)to draw upon their respective
development loans. Additional liquidity is provided by net proceeds retained
from residential lot closings by the properties owned by the Fund's subsidiaries
and OLFJV in which the Fund has a 50% interest. The various development loans
call for principal payments ranging from 67% to 91% of Gross Receipts from lot
sales.
NTS/LFII is the owner and developer of the Lake Forest North single-family
residential community located in Louisville, Kentucky, and will continue to own
and develop the Lake Forest North project to completion and orderly sale as a
wholly-owned subsidiary of the Fund.
NTS/VA is the owner and developer of the Fawn Lake single-family residential
community located near Fredericksburg, Virginia, and will continue to own and
develop the Fawn Lake project to completion and orderly sale as a wholly-owned
subsidiary of the Fund. Fawn Lake Realty, Inc. a division of NTS/Residential
Properties, Inc.- Virginia, a Virginia corporation and an Affiliate of NTS
Corporation, the Sponsor of the Fund, will continue to act as a broker and agent
for NTS/VA for the sale of lots within the Fawn Lake project, and as broker and
agent for approved builders in the Fawn Lake project for the sale of new homes.
The Joint Venture owns the Orlando Lake Forest project, a single-family
residential community located in Seminole County, Florida (near Orlando). The
Joint Venture will continue to own and develop the Orlando Lake Forest project.
NTS Realty Company of Florida, an Affiliate of and under common control with the
Fund's Sponsor, will continue to act as a broker and agent for OLFJV for the
sale of lots within the Orlando Lake Forest project.
- 14 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
Operating Activity
- ------------------
During the nine months ended September 30, 1998, cash used for operations was
$3,366,226. The Fund used $1,167,189 for cash expenses in excess of cash
revenues. NTS/LFII and NTS/VA used $1,575,030 of cash to increase inventory.
NTS/LFII and NTS/VA provided $472,374 of cash from the collection of initiation
fees and other receivables and notes receivable. In addition, payables decreased
$1,090,631 while lot deposits and deferred revenues decreased $5,750.
Cash provided by operations was $1,211,840 for the nine months ended September
30, 1997. This amount includes net income as reported coupled with a decrease in
interest receivable from affiliates.
Investing Activity
- ------------------
During the nine months ended September 30, 1998, the Fund was involved in
minimal investing activity.
During the nine months ended September 30, 1997, the Fund received repayment on
three mortgage loans and two temporary investments in the aggregate principal
amount of $9,299,287. Repayments on mortgage loans were generally equal to
approximately 83% of the Gross Receipts received on lot sales less closing
costs. The Fund made investments in three mortgage loans and one temporary
investment in the aggregate principal amount of $5,700,037.
Financing Activity
- ------------------
During the nine months ended September 30, 1998, the Fund and its subsidiaries
borrowed $13,853,022 from their various lenders. The Fund and its subsidiaries
repaid $6,544,853 of their borrowings from lot proceeds generated by NTS/LFII
and NTS/VA. In addition, $3,607,283 of borrowings were repaid using proceeds
from the NTS/LFII development loan. The Fund and its subsidiaries received
$2,988,188 in advances from affiliates and repaid $3,581,195 of notes and
advances from affiliates. The affiliated borrowings were repaid primarily using
proceeds from the NTS/LFII development loan. The Fund paid $211,549 for loan
costs and other assets during the nine months ended September 30, 1998.
During the nine months ended September 30, 1997, the Fund borrowed $510,913 on
its credit facilities. The Fund repaid $5,074,694 of its borrowings using
proceeds from loan repayments made by NTS/Lake Forest II Residential Corporation
and NTS/Virginia Development Company. The Fund borrowed $1,142,041 from an
Affiliate of the Fund's Sponsor. The Fund repaid $1,597,466 of its borrowings
from Affiliates using proceeds from loan repayments made by NTS/Lake Forest II
Residential Corporation, Orlando Lake Forest Joint Venture and NTS/Virginia
Development Company. The Fund paid dividends of $175,305 during the nine months
ended September 30, 1997.
The Fund's cash and cash equivalents with amounts available from its development
loans and notes payable to Affiliates and amounts generated from future
operations are expected to be sufficient to meet the Fund's anticipated needs
for liquidity and capital resources.
Results of Operations
- ---------------------
Comparability
- -------------
On an overall basis, the Fund had a net loss of $1,176,085 or $0.37 per share of
common stock for the nine months ended September 30, 1998 and $510,183 or $0.16
per share of common stock for the three months ended September 30, 1998. The
historical financial statements are impacted by the Fund's lack of history as a
real estate development company, therefore, management believes that the Fund's
results of operations for the three and nine months ended September 30, 1998,
are not comparable with prior years and a discussion comparing these periods is
not included.
- 15 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
Revenues
- --------
Revenue for the nine months ended September 30, 1998 includes approximately
$4,400,000 of lot sales from NTS/LFII and NTS/VA. Cost of sales was
approximately $3,200,000 resulting in a gross profit of approximately 27%.
Revenue for the three months ended September 30, 1998 includes approximately
$1,300,000 of lot sales from NTS/LFII and NTS/VA. Cost of sales was
approximately $900,000 resulting in a gross profit of approximately 30%.
During the three and nine months ended September 30, 1997, the Fund's primary
revenue source was interest income earned on affiliated mortgage loans. The
average outstanding balance of the earning loans was approximately $65,000,000
and the average rate of interest earned by the Fund was approximately 5%.
The Fund had previously written-off a portion of the Phase-In Mortgage Loan to
OLFJV regarding Section 2 of that project. During the first quarter of 1998, the
Fund collected $382,096 of principal payments related to this loan.
Expenses
- --------
During 1997, the operating expenses of the Fund included a Management Expense
Allowance (Advisory Fee) of 1% of the Fund's Net Assets, per annum, which was
increased annually by an amount corresponding to the percentage increase in the
Consumer Price Index. Pursuant to the Advisory Agreement, the Advisory Fee was
paid to the Advisor (NTS Advisory Corporation) or its affiliate. The Advisory
Fee for the three and nine months ended September 30, 1997 was $131,520 and
$418,950, respectively. Effective October 1, 1997, the Fund will no longer incur
an Advisory Fee but will be responsible for the actual general and
administrative costs pursuant to certain property management agreements
discussed below.
The ongoing operation and management of the Lake Forest North and Fawn Lake
projects will be conducted by NTS Management under the terms of two Property
Management Agreements executed on December 30, 1997, and dated as of October 1,
1997. NTS Management is a wholly-owned subsidiary of NTS Development Company.
NTS Development Company is a wholly-owned subsidiary of the Fund's Sponsor. The
Management Agreements have an initial term through December 31, 2003, subject to
extension under certain conditions, and are renewable for successive six (6)
year terms thereafter. Under the Management Agreements, NTS Management will be
reimbursed for costs incurred in the operation and management of the Lake Forest
North and Fawn Lake projects, and will accrue an incentive payment payable as
provided therein.
Reimbursements of approximately $282,000 and $884,000 were made to NTS
Management or an Affiliate for the three and nine months ended September 30,
1998, respectively, for actual personnel, marketing and administrative costs as
they relate to NTS/LFII, NTS/VA and the Fund.
Additionally, NTS Management is entitled to an Overhead Recovery, which is a
reimbursement for overhead expenses attributable to the employees and the
efforts of NTS Management under the Management Agreements, in an amount equal to
3.75% of the projects' gross cash receipts, as defined in the Management
Agreements. Approximately $117,000 and $313,000 was incurred as an Overhead
Recovery for the three and nine months ended September 30, 1998, respectively.
Increases and decreases in interest expense generally correspond directly to
increases and decreases in the outstanding balances of the Fund and its
subsidiaries borrowings as well as a factor of the ration of interest expensed
to the total interest incurred.
Professional and administrative expenses include primarily directors' fees,
legal, outside accounting and investor processing fees, printing costs for
financial reports and salaries. Selling and general expenses for the three and
nine months ended September 30, 1998 include advertising, office supplies, rent
and other general expenses related to the operation of NTS/LFII and NTS/VA.
Selling and general expenses are zero for the three months and nine months ended
September 30, 1997 as the Fund did not own NTS/LFII and NTS/VA during these
periods.
- 16 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
Expenses - Continued
- --------------------
Depreciation expense relates to equipment used for development activity which is
being depreciated over 5-7 years. Amortization expense relates primarily to loan
costs which are being amortized over the life of the related loan.
No benefit for income taxes was provided during 1998 as the Fund has recorded a
valuation allowance equal to the amount of the benefit. The Fund has determined
that it is more likely than not that the net deferred tax asset will not be
realized.
Income tax expense is the Fund's estimated liability for Federal, state, and
local income taxes due on the amount of earnings which are in excess of
dividends for the three and nine months ended September 30, 1997.
Net Income (Loss)
- -----------------
The Fund's gross revenues for the nine months ended September 30, 1998 increased
approximately 79% from 1997 to 1998 (exclusive of an $382,000 and $1,500,000
recovery on provision for loan losses for 1998 and 1997 respectively). This
increase is due to the transition from a mortgage REIT that generated its
revenues from interest earned on mortgage loans to a real estate development
company that generates its revenues primarily from the sale of single-family
residential lots. The net loss for the three months ended September 30, 1998 of
$510,183 represents a decline from the net income of $1,811,748 generated for
the three months ended September 30, 1997. The net loss for the nine months
ended September 30, 1998 of $1,176,085 represents a decline from the net income
of $2,195,944 generated for the nine months ended September 30, 1997. In the
context of the restructuring of the operations of the Fund from a REIT to a real
estate development company, management believes that the results of operations
for 1998 are not comparable to the prior year.
Provisions for Write-down to Net Realizable Value
- -------------------------------------------------
The Fund periodically reviews the value of land and inventories and determines
whether any write-downs need to be recorded to reflect declines in value. The
Fund did not record any write-downs during the three and nine month periods
ended September 30, 1998. The estimated net realizable value of real estate
inventories represents management's estimate based on present plans and
intentions, selling prices in the ordinary course of business and anticipated
economic and market conditions. Accordingly, the realization of the value of the
Fund's real estate inventories is dependent upon future events and conditions
that may cause actual results to differ from amounts presently estimated.
Year 2000
- ---------
All divisions of NTS, the sponsor of the Fund, are reviewing the effort
necessary to prepare our information systems (IT) and non-information technology
with embedded technology (ET) for the Year 2000. The information technology
solutions have been addressed separate from the Year 2000 since the Sponsor saw
the need to move to more advanced management and accounting systems made
available by new technology and software developments during the decade of the
1990's.
The PILOT software system, purchased in the early 1990's, needed to be replaced
by a windows based network system both for our headquarters functions and other
locations. The real estate accounting system developed, sold, and supported by
the Yardi Company of Santa Barbara, California has been selected to supercede
PILOT. The Yardi system is compatible with Year 2000 and beyond. This system is
being implemented with the help of third party consultants and should be fully
operational by the third quarter of 1999.
- 17 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
Year 2000 - Continued
- ---------------------
The few remaining systems not addressed by these conversions are being modified
by our in-house staff of programmers. The Hewlett Packard 3000 system, used for
PILOT and custom applications, was purchased in 1997 and will be part of our new
network. It will be retained as long as necessary to assure smooth operations
and has been upgraded to meet Year 2000 requirements.
All risks identified with information technology are believed to be addressed by
these plans.
The cost of these advances in our systems technology is not all attributable to
the Year 2000 issue since we had already identified the need to move to a
network based system regardless of the Year 2000. The costs involved will be
approximately $115,000 over 1998 and 1999. These costs include hardware,
software, internal staff and outside consultants.
We are also currently addressing the Year 2000 readiness of third parties whose
business interruption could have a material negative impact on our business. All
significant vendors have indicated that they will be compliant by the end of
1999. Such assurances are being evaluated and documented.
Management has determined that at our current state of readiness, the need does
not presently exist for a contingency plan. We will continue to evaluate the
need for such a plan.
Despite diligent preparation, unanticipated third-party failures, more general
public infrastructure failures or failure to successfully conclude our
remediation efforts as planned could have a material adverse impact on our
results of operations, financial conditions and/or cash flows in 1999 and
beyond.
Cautionary Statements
- ---------------------
Any forward-looking statements included in Management's Discussion and Analysis
of Financial Condition and Results of Operations, or elsewhere in this report,
which reflect management's best judgement based on factors known, involve risks
and uncertainties. Readers are cautioned not to place undue reliance on any
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Fund undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Actual results could differ materially from those anticipated
in any forward-looking statements as a result of a number of factors, including
but not limited to those discussed below. Any forward-looking information
provided by the Fund pursuant to the safe harbor established by recent
securities legislation should be evaluated in the context of these factors.
The Fund's subsidiaries, NTS/LFII and NTS/VA, and the Orlando Lake Forest Joint
Venture, in which the Fund has a 50% interest, are engaged in the development
and sale of residential subdivision building lots, the pricing and sale of which
are subject to risks generally associated with real estate development and
applicable market forces beyond the control of the Fund and/or its subsidiaries,
including general and local economic conditions, competition, interest rates,
real estate tax rates, other operating expenses, the supply of and demand for
properties, zoning laws, other governmental rules and fiscal policies, and acts
of God. All of the properties owned by NTS/LFII, NTS/VA and OLFJV are encumbered
by development loans from third party lenders which, given the nature of the
risks incumbent in real estate investment and development activities as stated
above, are inherently subject to default should the ability of NTS/LFII, NTS/VA,
OLFJV and/or the Fund to make principal and interest payments under such
development loans become impaired.
There is the potential for occurrences which could affect the Fund's ability to
reduce, or limit the increase in, its professional and administrative expenses.
Furthermore, the debt service regarding the Fund's borrowings is variable based
on current interest rates, any fluctuations in which are beyond the control of
the Fund. These variances could, for example, impact the Fund's projected cash
and cash requirements as well as projected returns.
- 18 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
99 Additional Exhibits - Pages from the
Fund's Prospectus which have been
specifically incorporated by
reference and copies of which are
attached hereto which includes pages
75 to 81.
(b) Reports on Form 8-K
None.
- 19 -
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, NTS Mortgage Income Fund has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NTS Mortgage Income Fund
(Registrant)
------------------------------
/s/ Richard L. Good
------------------------------
Richard L. Good
President
/s/ Lynda J. Wilbourn
------------------------------
Lynda J. Wilbourn
Treasurer
Principal Accounting Officer
Date: December 21, 1998
- 20 -
<PAGE>
