UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period for 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 incorporation (I.R.S. Employer
or organization) Identification No.)
10172 Linn Station Road
Louisville, Kentucky 40223
--------------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
(502) 426-4800
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) 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.
[X] Yes [ ] No
As of May 9, 2000 there were approximately 3,187,000 shares of common stock
outstanding.
<PAGE>
TABLE OF CONTENTS
-----------------
PART I
------
Pages
-----
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 3
Consolidated Statements of Operations for the three
and nine months ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17-24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
PART II
-------
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
2
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
--------------------
<TABLE>
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<CAPTION>
As of As of
September 30, 2000 December 31, 1999 *
------------------------- ------------------------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Cash and equivalents $ 546,015 $ 619,022
Membership initiation fees and other accounts receivable,
net of allowance of $103,659 and $75,000, respectively 1,482,290 1,406,376
Notes receivable 1,539,922 2,139,857
Inventory 57,111,281 55,438,644
Property and equipment, net of accumulated depreciation of
$675,811 and $478,962 578,213 505,219
Investment in unconsolidated affiliate 3,995,207 4,151,307
Other assets 802,216 833,578
------------------------ ----------------------
TOTAL ASSETS $ 66,055,144 $ 65,094,003
======================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accounts payable and accrued expenses $ 3,412,202 $ 1,857,760
Accounts payable - affiliates 3,176,252 1,194,395
Mortgages and notes payable 27,045,026 28,342,811
Notes payable - affiliate 399,457 -
Lot deposits 202,500 161,500
Deferred revenues 49,154 62,628
------------------------ ----------------------
TOTAL LIABILITIES 34,284,591 31,619,094
------------------------ ----------------------
COMMITMENTS AND CONTINGENCIES (Note 12)
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 (22,396,031) (20,691,675)
------------------------ ----------------------
TOTAL STOCKHOLDERS' EQUITY 31,770,553 33,474,909
------------------------ ----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 66,055,144 $ 65,094,003
======================== ======================
</TABLE>
* Reference is made to the Fund's audited financial statements in the Form
10-K as filed with the Securities and Exchange Commission on March 30,
2000.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(UNAUDITED)
----------
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------- -------------------------------------
2000 1999 2000 1999
----------------- ------------------ ----------------- -----------------
REVENUES
--------
<S> <C> <C> <C> <C>
Lot sales, net of discounts $ 3,267,564 $ 3,927,744 $ 9,477,235 $ 8,650,462
Cost of sales 2,402,629 2,542,662 7,199,453 5,851,315
------------ ---------- ----------- ----------
Gross profit 864,935 1,385,082 2,277,782 2,799,147
------------ ---------- ----------- ----------
Interest and miscellaneous income 48,889 36,351 257,536 210,966
------------ ---------- ----------- ----------
TOTAL REVENUES 913,824 1,421,433 2,535,318 3,010,113
------------ ---------- ----------- ----------
EXPENSES
--------
Selling, general and administrative -
affiliated 616,182 489,946 1,913,399 1,520,999
Selling, general and administrative 746,627 430,772 1,783,405 1,478,355
Interest expense 31,240 55,128 124,356 217,869
Other taxes and licenses 11,371 4,041 71,120 16,416
Depreciation and amortization 13,581 13,005 46,812 76,185
Loss from investment in unconsolidated
affiliate 103,474 160,757 300,582 347,736
------------ ---------- ----------- ----------
TOTAL EXPENSES 1,522,475 1,153,649 4,239,674 3,657,560
------------ ---------- ----------- ----------
Net (loss) income before federal income
tax (608,651) 267,784 (1,704,356) (647,447)
Federal income tax expense - - - -
------------ ---------- ----------- ----------
Net (loss) income $ (608,651) $ 267,784 $ (1,704,356) $ (647,447)
============ ========== =========== ==========
Net (loss) income per share of
common stock $ (0.19) $ 0.08 $ (0.53) $ (0.20)
============ ========== =========== ==========
Weighted average number of shares 3,187,333 3,187,333 3,187,333 3,187,333
============ ========== =========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
---------
<CAPTION>
Nine Months Ended
September 30,
---------------------------------------
2000 1999
------------------ -----------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
-----------------------------------------------------
<S> <C> <C>
Net loss $ (1,704,356) $ (647,447)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization expense 290,553 236,370
Loss from investment in unconsolidated affiliate 300,582 347,736
Changes in assets and liabilities:
Membership initiation fees and other accounts receivable (75,914) 128,237
Notes receivable 599,935 965,760
Inventory (1,672,637) (2,638,311)
Accounts payable and accrued expenses 1,554,442 (122,496)
Accounts payable - affiliates 1,981,857 -
Lot deposits 41,000 24,077
Deferred revenues (36,563) (57,761)
Other assets (13,474) 139,467
------------ -------------
Net cash provided by (used in) operating activities 1,265,425 (1,624,368)
------------ -------------
CASH FLOW USED IN INVESTING ACTIVITIES
--------------------------------------
Purchase of property and equipment (269,843) (209,407)
Capital contribution to unconsolidated affiliate (144,482) (38,000)
------------ -------------
Net cash used in investing activities (414,325) (247,407)
------------ -------------
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES
-----------------------------------------------------
Advances to/from affiliates - (15,751)
Proceeds from mortgage and notes payable 8,284,187 10,765,180
Proceeds from notes payable - affiliated 451,457 408,326
Payments on mortgages and notes payable (9,581,972) (9,571,561)
Payments on notes payable - affiliated (52,000) -
Other assets (25,779) (41,305)
------------ -------------
Net cash (used in) provided by financing activities (924,107) 1,544,889
------------ -------------
Net decrease in cash and equivalents (73,007) (326,886)
------------ -------------
CASH AND EQUIVALENTS, beginning of period 619,022 1,061,609
------------ -------------
CASH AND EQUIVALENTS, end of period $ 546,015 $ 734,723
============ =============
Cash paid for interest $ 499,056 $ 122,879
============ =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
<PAGE>
NTS MORTGAGE INCOME FUND
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
The unaudited financial statements and schedules included herein should be read
in conjunction with the Fund's 1999 Annual Report on Form 10-K, as filed with
the Securities and Exchange Commission on March 30, 2000. 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, 2000 and
1999.
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 of the Fund ("NTS Management"). The
Advisor and NTS Management are affiliates of and are under common control
with NTS Corporation.
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.
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 wholly-owned subsidiary of the Fund. NTS Residential Realty, Inc.,
a Kentucky corporation and an Affiliate of the Sponsor of the Fund, was
formed on April 6, 1999, to act as a broker and agent for NTS/LFII for the
sale of lots within the Lake Forest North project, and as a broker and
agent for the sale of new homes within the Lake Forest North project.
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 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 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 a broker and agent for approved builders in the Fawn
Lake project for the sale of new homes.
6
<PAGE>
1. Organization - Continued
------------------------
The Fund purchased a 50% interest in the Orlando Lake Forest Joint Venture
(the "Joint Venture") effective August 16, 1997. Prior to becoming a Joint
Venture partner, the Fund had been the Joint Venture's primary creditor.
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. Lake Forest Realty, Inc., an Affiliate of and under common control
with the Fund's Sponsor, will continue to act as a broker and agent for the
Joint Venture for the sale of lots within the Orlando Lake Forest project.
2. Basis of Accounting
-------------------
The Fund's records are maintained on the accrual basis of accounting in
accordance with Generally Accepted Accounting Principles ("GAAP") in the
United States.
3. Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The consolidated financial statements of the Fund include the assets,
liabilities, revenues and expenses of its 100% owned subsidiaries. The
consolidated statements of operations include the results of acquired
businesses accounted for under the purchase method of accounting from the
date of acquisition. Investments of 50% or less in affiliated companies are
accounted for under the equity method. All significant intercompany
transactions have been eliminated.
4. Use of Estimates in Preparation of Financial Statements
-------------------------------------------------------
The preparation of financial statements in conformity with GAAP 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.
5. Revenue Recognition
-------------------
The Fund and its subsidiaries recognize revenue and related costs from lot
sales using the accrual method in accordance with GAAP, 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.
6. 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
7
<PAGE>
6. Inventory - Continued
---------------------
costs are allocated to individual lots sold using their 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
and the use of estimates to determine sales values, development costs and
absorption periods, it is reasonably possible that any one component used
in estimating could change in the near term. Any changes in estimates are
accounted for prospectively over the life of the project.
Inventory consists of approximately the following as of September 30, 2000:
<TABLE>
NTS/LFII NTS/VA Consolidated
----------------------- ----------------------- -------------------------
<S> <C> <C> <C>
Land held for future
development, under
development, and completed lots $ 2,619,000 $ 24,454,000 $ 27,073,000
Country club (net of membership
initiation fees) 10,984,000 10,692,000 21,676,000
Amenities 2,324,000 6,038,000 8,362,000
--------------------- -------------------- --------------------
$ 15,927,000 $ 41,184,000 $ 57,111,000
===================== ==================== ====================
</TABLE>
Inventory consists of the following as of December 31, 1999:
<TABLE>
NTS/LFII NTS/VA Consolidated
----------------------- ----------------------- -------------------------
<S> <C> <C> <C>
Land held for future development,
under development and
completed lots $ 3,772,000 $ 23,517,000 $ 27,289,000
Country club (net of membership
initiation fees) 10,847,000 9,431,000 20,278,000
Amenities 2,296,000 5,576,000 7,872,000
--------------------- -------------------- --------------------
$ 16,915,000 $ 38,524,000 $ 55,439,000
===================== ==================== ====================
</TABLE>
NTS/LFII and NTS/VA capitalized in inventory approximately $2,225,000 of
interest and real estate taxes for the nine months ended September 30,
2000. Interest and real estate taxes incurred were approximately
$2,388,000.
NTS/LFII and NTS/VA capitalized in inventory approximately $2,047,000 of
interest and real estate taxes for the nine months ended September 30,
1999. Interest and real estate taxes incurred were approximately
$2,321,000.
Inventory for 2000, as reflected above, includes approximately $31,219,000,
net of $9,543,000 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.
8
<PAGE>
6. Inventory - Continued
---------------------
Inventory for 1999, as reflected above, includes approximately $29,444,000,
net of $9,166,000 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.
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 $1,458,000, which is
expected to be offset by member initiation fees. During the nine months
ended September 30, 2000, approximately $693,000 of the Fawn Lake Country
Club deficit and $375,000 of the Lake Forest Country Club deficit was
capitalized as a cost of inventory. During the nine months ended September
30, 1999, approximately $683,000 of the Fawn Lake Country Club deficit and
$412,000 of the Lake Forest Country Club deficit was capitalized as a cost
of inventory.
7. Investment in Unconsolidated Affiliate
--------------------------------------
Effective as of August 16, 1997, the Fund became a partner in the Joint
Venture. The other partners in the Joint Venture 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. The
Joint Venture will continue to operate under its current legal name as the
Orlando Lake Forest Joint Venture.
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.
The Fund contributed to the Joint Venture 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 the Joint Venture.
The net income or net loss of the Joint Venture is allocated based on the
respective Partner's percentage interest, as defined in the Joint Venture
agreement. As of September 30, 2000, the Fund's percentage interest was
50%, and the Fund's investment balance in the Joint Venture was
approximately $3,995,000 and $4,151,000 as of September 30, 2000 and
December 31, 1999, respectively. The Fund's share of the Joint Venture's
net loss for the three and nine months ended September 30, 2000, was
approximately $103,000 and $301,000, respectively. The Fund's share of the
Joint Venture's net loss for the three and nine months ended September 30,
1999, was approximately $161,000 and $348,000, respectively.
9
<PAGE>
7. Investment in Unconsolidated Affiliate - Continued
--------------------------------------------------
Presented below are condensed balance sheets for the Joint Venture as of
September 30, 2000 and December 31, 1999, and statements of operations for
the three and nine months ended September 30, 2000 and 1999:
<TABLE>
September 30, 2000 December 31, 1999
------------------------------ ------------------------------
Balance Sheets
--------------
<S> <C> <C>
Notes receivable $ 194,000 $ 296,000
Inventory 14,250,000 14,755,000
Other, net 265,000 266,000
----------------------------- -----------------------------
Total assets $ 14,709,000 $ 15,317,000
============================= =============================
Mortgages and notes payable 4,665,000 5,299,000
Other liabilities 2,054,000 1,715,000
Equity 7,990,000 8,303,000
----------------------------- -----------------------------
Total liabilities and equity $ 14,709,000 $ 15,317,000
============================= =============================
</TABLE>
<TABLE>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------- -------------------------------------------
2000 1999 2000 1999
------------------- -------------------- -------------------- -------------------
Statements of Operations
------------------------
<S> <C> <C> <C> <C>
Lot sales, net of discounts $ 1,189,000 $ 482,000 $ 3,065,000 $ 2,270,000
Cost of sales (909,000) (354,000) (2,362,000) (1,686,000)
Other expenses, net (487,000) (450,000) (1,304,000) (1,279,000)
-------------- ----------------- ------------------ ---------------
Net loss $ (207,000) $ (322,000) $ (601,000) $ (695,000)
============== ================= ================== ===============
</TABLE>
8. Mortgages and Notes Payable
---------------------------
Mortgages and notes payable consist of the following:
<TABLE>
September 30, 2000 December 31, 1999
----------------------- -----------------------
<S> <C> <C>
Mortgage loan payable to a bank in the amount of
$10,700,000, bearing interest at the Prime Rate + 1.5%, due
December 1, 2002, secured by inventory of NTS/VA,
generally principal payments consist of approximately 91% of
the Gross Receipts of lot sales, personally guaranteed by Mr.
J. D. Nichols, Chairman of the Board of the Fund's Sponsor,
up to $3,000,000 and a $2 million letter of credit from a third
party lender with the beneficiary being the bank. $ 10,555,296 $ 9,777,485
(Continued on next page)
10
<PAGE>
8. Mortgages and Notes Payable - Continued
---------------------------------------
September 30, 2000 December 31, 1999
----------------------- -----------------------
Note payable to a bank in the amount of $9,500,000,
bearing interest at the Prime Rate + 1%, payable monthly,
due December 31, 2002, 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. The Note
contains certain covenants, which among other things
prohibits the net worth of NTS/LFII from decreasing by 20%
or more throughout the term of the agreement. $ 5,815,312 $ 6,817,188
Note payable to a bank in the amount of $9,000,000,
bearing interest at 8.25%, payable monthly, due
November 1, 2004, secured by a Certificate of Deposit owned
by NTS Financial Partnership, an affiliate of the Fund. 6,696,959 6,696,959
Mortgage loan payable to a bank in the amount of $4,000,000,
bearing interest at the Prime Rate + .5%, payable monthly,
due July 31, 2002, secured by the Lake Forest Country Club
and golf course, principal reductions of $300,000 every six
months, guaranteed by NTS Corporation, the Fund's Sponsor. 2,500,000 2,870,000
Warehouse Line of Credit Agreements with three banks bearing
interest at the Prime Rate + 1%, the Prime Rate + .75% and
the Prime Rate + .5%, due December 15, 2000, $109,835,
September 18, 2000, and $396,594, secured by notes
receivable, principal payments consist of payment received
from notes receivable securing the obligation. The $109,835
Warehouse Line of Credit agreement is guaranteed by NTS Corporation. 506,429 936,645
Note payable in the amount of $1,174,800, bearing interest
at a Prime Rate + .5%, secured by a note receivable,
due in monthly installments of $5,000 commencing
February 1, 1999 with any outstanding principal and accrued interest
due and payable in full on December 29, 2000. 789,087 1,119,800
Other 181,943 124,734
---------------------- ----------------------
$ 27,045,026 $ 28,342,811
====================== ======================
</TABLE>
The Prime Rate was 9.5% and 8.5% at September 30, 2000 and December 31,
1999, respectively.
Based on the borrowing rates currently available to the Fund for mortgages
with similar loans and average maturities, the fair value of the long-term
debt is approximately $26,881,000.
11
<PAGE>
8. Mortgages and Notes Payable - Continued
---------------------------------------
On October 31, 2000, NTS/VA and NTS/LFII entered into a loan agreement with
a financial institution for a combined principal sum of up to $18,000,000
and used approximately $5,930,000 and $10,494,000 to pay the entire
principal balance of the NTS/LFII and NTS/VA loans, respectively. The new
loan is secured by the NTS/LFII and NTS/VA projects, a $2 million letter of
credit issued by a third party lender with the NTS/VA and NTS/LFII lender
stated as the beneficiary, a guarantee by the Fund for the full
$18,000,000, and a personal guarantee by J.D. Nichols for 50% of the
outstanding loan balance. Additionally, the Joint Venture will be required
to apply 50% of the net sales proceeds from the lot sales in the Joint
Venture's project once the present loan on this project is paid in full.
The lender requires contracts on lots with gross proceeds exceeding 80% of
a section's development costs before advancing funds for a newly developed
section at NTS/VA. The loan is a reducing revolver and the maximum amount
outstanding at the end of each year shall be as follows:
December 31, 2000 $18,000,000
December 31, 2001 $16,500,000
December 31, 2002 $11,000,000
December 31, 2003 $ 7,000,000
December 31, 2004 $ 4,000,000
9. Related Party Transactions
--------------------------
As of September 30, 2000, the Sponsor and an Affiliate owned 110,406 shares
of the Fund, collectively. 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.
Property Management Agreements
------------------------------
The ongoing operation and management of the Lake Forest North and Fawn Lake
projects will be conducted by NTS Management under the terms of (i) a
property management agreement executed on December 30, 1997, and dated as
of October 1, 1997, by and among the Fund, NTS/LFII and NTS Management for
the Lake Forest North project, and (ii) a property management agreement
executed on December 30, 1997, and dated as of October 1, 1997, by and
among the Fund, NTS/VA and NTS Management for the Fawn Lake project
(collectively, the "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
NTS/LFII and NTS/VA, will be entitled to an overhead recovery, and will
accrue an incentive payment payable, all as provided therein.
12
<PAGE>
9. Related Party Transactions - Continued
--------------------------------------
Property Management Agreements - Continued
------------------------------------------
These expense reimbursements include direct and pro-rated costs incurred in
the management and operation of NTS/LFII and NTS/VA. Such costs include
compensation costs of management, accounting, professional, engineering and
development, marketing and office personnel employed by NTS Management
and/or certain of its affiliates, as well as various non-payroll related
operating expenses. Compensation costs are for those individuals who
rendered services full time on and off site of the residential projects and
with respect to the residential projects, but who have multiple residential
projects responsibilities, some of which may be affiliated entities of NTS
Management. For services provided by individuals not on site, or those with
multiple residential projects responsibilities, costs are pro-rated by NTS
Management and allocated to the appropriate residential project. As
permitted by the Property Management Agreements, the Fund was charged the
following amounts for the three and nine months ended September 30, 2000
and 1999. These amounts are reflected in selling, general and
administrative - affiliated on the accompanying consolidated statements of
operations:
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ ---------------------------------------
2000 1999 2000 1999
----------------- --------------- ----------------- -------------------
Personnel related costs:
-----------------------
<S> <C> <C> <C> <C>
Financing and accounting $ 72,000 $ 26,000 $ 206,000 $ 94,000
Data Processing 24,000 5,000 64,000 16,000
Human Resources 12,000 9,000 33,000 26,000
Executive and administrative services 39,000 50,000 105,000 156,000
Construction Management 4,000 4,000 14,000 11,000
Sales and Marketing 230,000 183,000 846,000 674,000
Legal 8,000 12,000 22,000 30,000
------------- ----------- ------------ ------------
Total personnel related costs 389,000 289,000 1,290,000 1,007,000
------------- ----------- ------------ ------------
Marketing 65,000 43,000 144,000 99,000
Rent 18,000 4,000 48,000 25,000
Other general and administrative 8,000 8,000 41,000 42,000
------------- ----------- ------------ ------------
Total expense reimbursements $ 480,000 $ 344,000 $ 1,523,000 $ 1,173,000
============= =========== ============ ============
</TABLE>
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. For the three months ended September 30, 2000 and
1999, overhead recovery incurred was approximately $136,000 and $146,000,
respectively. For the nine months ended September 30, 2000 and 1999,
overhead recovery incurred was approximately $390,000 and $348,000. These
amounts are classified with selling, general and administrative -
affiliated in the accompanying consolidated statements of operations.
13
<PAGE>
9. Related Party Transactions - Continued
--------------------------------------
Property Management Agreements - Continued
------------------------------------------
The Management Agreements also provide the opportunity 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 if certain financial
obligations are met. 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 Joint Venture would have been sufficient to enable the
Fund to return to the shareholders of the Fund an amount which, after
adding thereto all other payments previously distributed to such
shareholders of the Fund, is at least equal to the shareholders' original
capital contribution. As of September 30, 2000, the Fund had raised
approximately $63,690,000 and had paid distributions of approximately
$23,141,000. As of September 30, 2000, no amount had been accrued as an
incentive payment in the Fund's consolidated financial statements.
Advances and Notes Payable Affiliates
-------------------------------------
The Fund has received advances from Affiliates of the Fund's Sponsor, net
of repayments, totaling $6,090,293 as of December 31, 1998. On November 6,
1999, the Fund repaid these advances from the Affiliates by obtaining a
loan in the amount of $9,000,000, and used approximately $6,697,000 of the
loan to pay the entire principal balance and accrued interest due to the
Affiliates. For the nine months ended September 30, 2000, the Fund has
received advances from Affiliates of the Fund's sponsor net of repayments,
of approximately $399,000 For the three and nine months ended September 30,
1999, the interest expense to the Affiliates totaling approximately
$131,000 and $375,000, respectively was capitalized in inventory.
As presented in the accompanying consolidated balance sheets as of
September 30, 2000 and December 31, 1999, accounts payable - affiliates of
approximately $3,176,000 and $1,194,000, respectively is owed to NTS
Development Company and NTS Management for salary and overhead
reimbursements. NTS Development Company and NTS Management have agreed to
defer amounts owed to them by the Fund as of September 30, 2000, and those
amounts that will accrue during fiscal 2000 through the period ending
January 1, 2001, other than as permitted by cash flows of the Fund. There
can be no assurances that this level of support will continue past January
1, 2001.
10. 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 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.
14
<PAGE>
10. Income Taxes - Continued
------------------------
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, 2000 and December 31, 1999, will not be realized.
As of December 31, 1999, the Fund had a federal net operating loss carry
forward of approximately $3,853,000 expiring from 2012 through 2014. The
net operating loss carry forward was fully reserved on the Fund's financial
statements.
11. 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 notes receivable and debt
instruments approximated the book value because a substantial portion of
the underlying instruments are variable rate notes.
12. Commitments and Contingencies
-----------------------------
The Fund, as an owner of real estate, is subject to various environmental
laws of federal and local governments. Compliance by the Fund with existing
laws has not had a material adverse effect on the Fund's financial
condition and results of operations. However, the Fund cannot predict the
impact of new or changed laws or regulations on its current properties or
on properties that it may acquire in the future.
The Fund does not believe there is any litigation threatened against the
Fund other than routine litigation arising out of the ordinary course of
business, some of which is expected to be covered by insurance, none of
which is expected to have a material adverse effect on the consolidated
financial statements of the Fund.
NTS/LFII and NTS/VA have various letters of credit outstanding to
governmental agencies and utility companies totaling approximately
$1,880,000 and $2,633,000 as of September 30, 2000 and December 31, 1999,
respectively. 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 homeowner's association
amenities at NTS/LFII will be substantially complete by May 2003. Based on
engineering studies and projections, NTS/LFII will incur additional costs,
excluding interest, of approximately $400,000 during 2003 to complete the
homeowner's association amenities. No costs are estimated to be incurred
during the years 2000, 2001 and 2002.
15
<PAGE>
12. Commitments and Contingencies - Continued
-----------------------------------------
It is estimated that the country club and homeowners' association amenities
at NTS/VA will be substantially complete by December 2008. Based on
engineering studies and projections, NTS/VA will incur additional costs,
excluding interest, of approximately $10,605,000 to complete the county
club and homeowners' association amenities for the project. These costs are
estimated to be incurred as follows: $1,045,000 for 2000, $710,000 for
2001, $1,210,000 for 2002, $2,640,000 for 2003, $2,940,000 for 2004,
$690,000 for 2005, $810,000 for 2006, $290,000 for 2007, and $270,000 for
2008.
13. 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 defined
in the Fund's Prospectus. As of September 30, 2000, the Fund has raised
approximately $63,690,000 and has paid distributions of $23,141,000.
The liability of the Guarantor under the above guaranty 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.
14. Provisions for Write-down to Net Realizable Value
-------------------------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of'" specifies circumstances in which certain long-lived assets
must be reviewed for impairment. If the carrying amount of an asset exceeds
the sum of its expected future cash flows, the asset's carrying value must
be written down to fair value. Application of this standard during the
period ended September 30, 2000 and 1999 did not result in an impairment
loss.
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Management's Discussion and Analysis of Financial condition and Results of
Operations ("MD&A") is structured in three major sections. The first section
provides information related to liquidity and capital resources. The second
section analyzes consolidated cash flows and financial conditions. The final
section analyzes results of operations on a consolidated basis. A discussion of
certain market risks also follows. MD&A should be read in conjunction with the
Financial Statements in Item 1 and the Cautionary Statements below.
Cautionary Statements
---------------------
Some of the statements included in this Item 2 may be considered
"forward-looking statements" since such statements relate to matters which have
not yet occurred. For example, phrases such as "the Fund anticipates,"
"believes" or "expects" indicate that it is possible that the event anticipated,
believed or expected may not occur. Should such event not occur, then the result
which the Fund expected also may not occur or occur in a different manner, which
may be more or less favorable to the Fund. The Fund does not undertake any
obligations to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances.
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 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 Joint Venture, in which
the Fund has a 50% interest, are engaged in the development and sale of
residential subdivision 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 the Joint Venture 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, Joint
Venture 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
control its professional and administrative expenses. Furthermore, the debt
service regarding the Fund's borrowings is
17
<PAGE>
Cautionary Statements - Continued
---------------------------------
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.
Liquidity and Capital Resources
-------------------------------
The Fund's current source of liquidity is primarily the ability of its
subsidiaries 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 Joint Venture in which the
Fund has a 50% interest. The various development loans call for principal
payments ranging from 72% to 91% of gross receipts from lot sales.
Consolidated Cash Flows and Financial Condition
-----------------------------------------------
<TABLE>
Nine Months Ended September 30,
---------------------------------------------------------
2000 1999
--------------------------- --------------------------
<S> <C> <C>
Operating activities $ 1,265,425 $ (1,624,368)
Investing activities (414,325) (247,407)
Financing activities (924,107) 1,544,889
-------------------------- -------------------------
Net (decrease) in cash and equivalents $ (73,007) $ ( 326,886)
========================== =========================
</TABLE>
Operating Activity
------------------
Cash provided by operating activities was approximately $1,265,000 for the nine
months ended September 30, 2000. The primary components of the cash provided by
operating activities were a net loss of approximately $1,704,000 and net
additions to inventory of approximately $1,673,000, partially offset by an
increase to accounts payable to affiliates of approximately $1,982,000 owed to
NTS Development Company and NTS Management for salary and overhead
reimbursements, an increase in accounts payable and accrued expenses of
approximately $1,554,000, and collections of notes receivable of approximately
$600,000. NTS Development Company and NTS Management have agreed to defer
amounts owed to them by the Fund as of September 30, 2000 and those amounts that
will accrue through January 1, 2001.
Cash used for operating activities was approximately $1,624,000 for the nine
months ended September 30, 1999. The primary components of the use of cash for
operating activities were a net loss of approximately $647,000 and net additions
to inventory of approximately $2,638,000, partially offset by collections of
notes receivable of approximately $966,000.
Investing Activity
------------------
Cash used for investing activities was approximately $414,000 for the nine
months ended September 30, 2000. The primary components of the use of cash for
investing activities were additional capital contributions to an unconsolidated
affiliate of approximately $144,000 and capital additions, primarily at the
NTS/LF II and NTS/VA golf operations, of approximately $270,000.
18
<PAGE>
Consolidated Cash Flows and Financial Condition - Continued
-----------------------------------------------------------
Investing Activity - Continued
------------------------------
Cash used for investing activities was approximately $247,000 for the nine
months ended September 30, 1999. The primary components of the use of cash for
investing activities were an additional capital contribution to the Joint
Venture of $38,000 and capital additions, primarily at the NTS/LF II and NTS/VA
golf operations, of approximately $209,000.
Financing Activity
------------------
Cash used for financing activities was approximately $924,000 for the nine
months ended September 30, 2000. The primary components of the use of cash for
financing activities were net payments on mortgages and notes payable from gross
receipts of lot sales relating to the development loans for NTS/LFII and NTS/VA
of approximately $1,298,000, and net proceeds on notes payable - affiliated of
approximately $399,000 which were used primarily to fund activities of NTS/VA.
Cash provided by financing activities was approximately $1,545,000 for the nine
months ended September 30, 1999. The primary components of the cash provided by
financing activities were net borrowings on mortgages and notes payable to
affiliates relating to the development loans for NTS/LFII and NTS/VA of
approximately $1,194,000, which were used primarily to fund activities of
NTS/VA, and proceeds on notes payable - affiliated of approximately $408,000
which were used primarily to fund activities of NTS/VA.
On October 31, 2000, NTS/VA and NTS/LFII entered into a loan agreement with a
financial institution for a combined principal sum of up to $18,000,000 and used
approximately $5,930,000 and $10,494,000 to pay the entire principal balance of
the NTS/LFII and NTS/VA loans, respectively. The new loan is secured by the
NTS/LFII and NTS/VA projects, a $2 million letter of credit issued by a third
party lender with the NTS/VA and NTS/LFII lender stated as the beneficiary, a
guarantee by the Fund for the full $18,000,000, and a personal guarantee by J.D.
Nichols for 50% of the outstanding loan balance. Additionally, the Joint Venture
will be required to apply 50% of the net sales proceeds from the lot sales in
the Joint Venture's project once the present loan on this project is paid in
full. The lender requires contracts on lots with gross proceeds exceeding 80% of
a section's development costs before advancing funds for a newly developed
section. The loan is a reducing revolver and the maximum amount outstanding at
the end of each year shall be as follows:
December 31, 2000 $18,000,000
December 31, 2001 $16,500,000
December 31, 2002 $11,000,000
December 31, 2003 $ 7,000,000
December 31, 2004 $ 4,000,000
Management's projections for NTS/VA and NTS/LFII indicate that the developments
will reach the maximum funding level of $18 million allowed by this loan during
the fourth quarter of 2000. The Fund's management believes that this development
activity will be responsible for generating sales sufficient to repay the loan
and maintain it at or below the funding limit in the fourth quarter of 2000.
19
<PAGE>
Consolidated Cash Flows and Financial Condition - Continued
-----------------------------------------------------------
Financing Activity - Continued
------------------------------
The Fund's management believes that this loan will provide adequate liquidity
for the operations and continued development of NTS/VA and NTS/LFII in
accordance with the funding limits described in the table above.
Results of Operations
---------------------
Revenues
--------
On an overall basis, the Fund experienced a loss for the three and nine months
ended September 30, 2000, of approximately $(609,000) and $(1,704,000), or
$(0.19) and $(0.53) per weighted average shares, respectively. The fund
experienced a profit (loss) for the three and nine months ended September 30,
1999 of approximately $268,000 and $(647,000), or $0.08 and $(0.20),
respectively.
Revenue for the three months ended September 30, 2000, includes approximately
$3,248,000 in lot sales consisting of approximately $743,000 and $2,505,000 from
NTS/LFII and NTS/VA, respectively. During this period 35 lots were sold for an
average selling price of approximately $93,000. Additionally, revenue for the
three months ended September 30, 2000, includes approximately $20,000 collected
on an installment sale from NTS/VA.
Revenue for the three months ended September 30, 1999, includes approximately
$3,928,000 in lot sales consisting of approximately $1,715,000 and $2,213,000
from NTS/LFII and NTS/VA, respectively. During this period 44 lots were sold for
an average selling price of approximately $89,000.
Revenue for the nine months ended September 30, 2000, includes approximately
$9,365,000 in lot sales consisting of approximately $4,881,000 and $4,484,000
from NTS/LFII and NTS/VA, respectively. During this period 94 lots were sold for
an average selling price of approximately $100,000. Additionally, revenue for
the nine months ended September 30, 2000, includes approximately $112,000
collected on an installment sale from NTS/VA.
Revenue for the nine months ended September 30, 1999, includes approximately
$8,650,000 in lot sales consisting of approximately $5,397,000 and $3,253,000
from NTS/LF II and NTS/VA, respectively. During this period 95 lots were sold
for an average selling price of approximately $91,000.
Managements feels that the higher average selling price of lots closed for the
three and nine months ended September 30, 2000, as compared to the same period
in 1999, is a result of a dominant market position at NTS/LFII in the
Louisville, Kentucky market along with developing and selling more premium golf
course property at NTS/LFII.
20
<PAGE>
Results of Operations - Continued
---------------------------------
Revenues - Continued
--------------------
Cost of sales for the three months ended September 30, 2000 and 1999 were
approximately $2,403,000 and $2,543,000, respectively. Cost of sales for the
nine months ended September 30, 2000 and 1999 were approximately $7,199,000 and
$5,851,000, respectively.
Presented below are the gross profit margins for the three and nine months ended
September 30, 2000 and 1999:
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- ----------------------------------
2000 1999 2000 1999
----------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
NTS/LF II 19% 29% 19% 29%
NTS/VA 29% 41% 29% 41%
Combined gross profit margins 26% 35% 24% 32%
</TABLE>
The difference in the cost of sales percentage of NTS/LFII compared to NTS/VA
and the difference in the lot sales mix will create a proportionate change in
the combined gross profit margin throughout a given year. The decrease in gross
profit margin is a function of a change in the estimates of sales values,
development costs and absorption periods over the life of the project. The
estimates are performed at the end of each fiscal year and the resulting cost of
sales percentages are applied prospectively. Management assesses the basis for
these annual projections at the end of each quarter and if changes in facts and
circumstances warrant interim adjustments are made to the cost of sales
percentages prospectively. As of September 30, 2000, Management anticipates the
costs of sales percentages reflected in these financial statements and
conversely the gross margins presented in the above table to be the percentages
applied for the remainder of fiscal 2000. In comparing the gross margin
percentages for the three and nine months ended September 30, 2000 and 1999,
respectively, Management's estimates have changed relative to the ultimate sales
values, development costs and absorption periods, and inherent economic
volatility of residential real estate they now believe will be realized during
the duration of the projects. Management feels that the decrease in the gross
profit margin for 2000 compared to 1999 will more likely than not be a permanent
decrease.
The Fund periodically reviews the value of land and inventories and determines
whether any write- downs are needed to reflect declines in value. The Fund did
not record any write-downs during the nine months ended September 30, 2000 and
1999. The estimated net realizable value of real estate inventories represents
Management's best 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 on future events and conditions that may cause actual
results to differ from amounts presently estimated.
Interest income on cash equivalents and miscellaneous income includes interest
income earned from short-term investments made by the Fund with cash reserves
for the nine months ended September 30, 2000 and 1999.
21
<PAGE>
Results of Operations - Continued
---------------------------------
Expenses
--------
The ongoing operation and management of NTS/LFII and NTS/VA will be conducted by
NTS Management under the terms of (i) a property management agreement executed
on December 30, 1997, and dated as of October 1, 1997, by and among the Fund,
NTS/LFII and NTS Management for the Lake Forest North project, and (ii) a
property management agreement executed on December 30, 1997 and dated as of
October 1, 1997, by and among the Fund, NTS/VA and NTS Management for the Fawn
Lake project (collectively, the "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, will be entitled to an overhead recovery, and will accrue an incentive
payment payable, all as provided therein.
The expenses related to the Management Agreements are presented as selling,
general and administrative - affiliated on the accompanying consolidated
statements of operations. As defined in the Management Agreements, the expenses
are classified in two ways, expense recovery and overhead recovery. The expense
recovery includes direct and pro-rated costs incurred in the management and
operation of NTS/LFII and NTS/VA. Such costs include compensation costs of
management, accounting, professional, engineering and development, marketing and
office personnel employed by NTS management and/or certain of its affiliates as
well as various non- payroll related operating expenses. Compensation costs are
for those individuals who rendered services full time on and off site of the
residential projects and with respect to the residential projects, but who have
multiple residential projects responsibilities, some of which may be affiliated
entities of NTS Management. For services provided by individuals not on site, or
those with multiple residential projects responsibilities, costs are pro-rated
by NTS Management and allocated to the appropriate residential project.
Reimbursements for expense recovery of approximately $480,000 and $344,000 were
accrued to NTS Management or an Affiliate during the three months ended
September 30, 2000 and 1999, respectively, for actual personnel, marketing and
administrative costs as they relate to NTS/LFII, NTS/VA and the Fund. For the
nine months ended September 30, 2000 and 1999, the expense recovery accrued to
NTS Management or an affiliate was approximately $1,523,000 and $1,173,000.
Reimbursements for expense recovery increased approximately $136,000 for the
three months ended September 30, 2000, as compared to the same period in 1999.
Reimbursements for expense recovery increased approximately $350,000 for the
nine months ended September 30, 2000, as compared to the same period in 1999.
The increase is primarily a result of an increase in sales and marketing efforts
at NTS/LFII and commissions paid to sales agents employed by NTS/LFII and
NTS/VA, and an increase in finance and accounting staff at NTS/LFII and NTS/VA.
22
<PAGE>
Results of Operations - Continued
---------------------------------
Expenses - Continued
--------------------
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. For the nine months ended September 30, 2000 and 1999, overhead
recovery incurred was approximately $390,000 and $348,000. This increase is a
result of an increase in the gross cash receipts for the nine months ended
September 30, 2000, as compared to the same period in 1999.
Selling, general and administrative expenses include directors' fees, legal,
outside accounting, other investor related cost, repairs and maintenance cost.
Selling, general and administrative expenses also include those costs incurred
directly by NTS/VA for marketing related activities.
For the three months ended September 30, 2000 and 1999, the amounts incurred for
selling, general and administrative expenses were approximately $747,000 and
$431,000, respectively. For the nine months ended September 30, 2000 and 1999,
the amounts incurred for selling, general and administrative expenses were
approximately $1,783,000 and $1,478,000. The increase in the selling, general
and administrative expenses is primarily a result of an increase in advertising
at NTS/VA for the three and nine months ended September 30, 2000 compared to the
same period in 1999.
Increases and decreases in interest expense generally correspond directly to
increases and decreases in the outstanding balances of the Fund's borrowings and
its subsidiaries borrowings as well as in the capitalization percentage. For the
three months ended September 30, 2000 and 1999, approximately $715,000 and
$738,000, was capitalized in inventory and approximately $31,000 and $55,000,
respectively, was expensed. For the nine months ended September 30, 2000 and
1999, approximately $2,091,000 and $1,924,000 was capitalized in inventory and
approximately $124,000 and $218,000, respectively, was expensed. The increase in
total interest is primarily due to increases in the Fund's interest rate on its
variable rate mortgage loans.
Depreciation expense relates to equipment used for development activity which is
being depreciated over five to seven years.
No benefit for income taxes was provided during the nine months ended September
30, 2000 and 1999, as the Fund has recorded a valuation allowance equal to the
amount of the recorded benefit. The Fund has determined that it is more likely
than not that the net deferred tax asset will not be realized.
23
<PAGE>
Results of Operations - Continued
---------------------------------
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
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 on future events and conditions that may cause actual results to
differ from amounts presently estimated. The Fund did not record any write-downs
during the nine months ended September 30, 2000 and 1999.
24
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Our primary market risk exposure with regard to financial instruments is changes
in interest rates. The Fund's debt instruments bear interest at both variable
and fixed rates as discussed in Note 8 of the Fund's financial statements. At
September 30, 2000, a hypothetical 100 basis point increase in interest rates
would result in an approximate $207,000 increase in interest expense and an
approximate $127,000 decrease in the fair value of debt for the nine months then
ended. During the three and nine months ended September 30, 2000, the majority
of interest expense incurred was capitalized in inventory.
25
<PAGE>
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
Not applicable.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits:
Exhibit 27. Financial Data Schedule
Exhibit 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:
Not applicable.
26
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NTS Mortgage Income Fund
-----------------------------------
(Registrant)
/s/ Brian F. Lavin
-----------------------------------
Brian F. Lavin
President and Director of the
Mortgage Income Fund
Date: November 14, 2000
27
<PAGE>
