UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FROM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 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 June 30, 2000
and December 31, 1999 3
Consolidated Statements of Operations for the three
and six months ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18-25
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 26
PART II
-------
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
2
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
--------------------
<TABLE>
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<CAPTION>
As of As of
June 30, 2000 December 31, 1999 *
------------------------- ------------------------
(Unaudited)
ASSETS
------
<S> <C> <C>
Cash and equivalents $ 900,578 $ 619,022
Membership initiation fees and other accounts receivable,
net of allowance of $80,000 and $75,000, respectively 1,614,806 1,406,376
Notes receivable 1,684,719 2,139,857
Inventory 56,411,422 55,438,644
Property and equipment, net of accumulated depreciation of
$594,281 and $478,962 603,978 505,219
Investment in unconsolidated affiliate 3,979,199 4,151,307
Other assets 899,037 833,578
------------------------ ---------------------
TOTAL ASSETS $ 66,093,739 $ 65,094,003
======================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accounts payable and accrued expenses $ 3,695,891 $ 1,857,760
Accounts payable - affiliates 2,719,643 1,194,395
Mortgages and notes payable 26,939,135 28,342,811
Lot deposits 329,917 161,500
Deferred revenues 29,949 62,628
------------------------ ---------------------
TOTAL LIABILITIES 33,714,535 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 (21,787,380) (20,691,675)
------------------------ ---------------------
TOTAL STOCKHOLDERS' EQUITY 32,379,204 33,474,909
------------------------ ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 66,093,739 $ 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 Six Months Ended
June 30, June 30,
--------------------------------------- -------------------------------------
2000 1999 2000 1999
----------------- ------------------ ----------------- -----------------
REVENUES
--------
<S> <C> <C> <C> <C>
Lot sales, net of discounts $ 3,710,222 $ 2,277,933 $ 6,209,671 $ 4,722,718
Cost of sales 2,753,605 1,648,770 4,796,824 3,308,653
------------ ------------ ----------- ------------
Gross profit 956,617 629,163 1,412,847 1,414,065
------------ ------------ ----------- ------------
Interest and miscellaneous income 113,584 100,944 208,647 174,615
------------ ------------ ----------- ------------
TOTAL REVENUES 1,070,201 730,107 1,621,494 1,588,680
------------ ------------ ----------- ------------
EXPENSES
--------
Selling, general and administrative -
affiliated 667,409 446,891 1,297,217 1,031,053
Selling, general and administrative 683,869 583,265 1,036,778 1,047,583
Interest expense 40,483 46,789 93,116 162,741
Other taxes and licenses 47,733 7,325 59,749 12,375
Depreciation and amortization 19,652 41,447 33,231 63,180
Loss from investment in unconsolidated
affiliate 98,575 108,023 197,108 186,979
------------ ------------ ----------- ------------
TOTAL EXPENSES 1,557,721 1,233,740 2,717,199 2,503,911
------------ ------------ ----------- ------------
Net loss before federal income tax (487,520) (503,633) (1,095,705) (915,231)
Federal income tax expense -- -- -- --
------------ ------------ ----------- ------------
Net loss $ (487,520) $ (503,633) $ (1,095,705) $ (915,231)
------------ ------------ ----------- ------------
Net loss per share of common stock $ (0.15) $ (0.16) $ (0.34) $ (0.29)
============ ============ =========== ============
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>
Six Months Ended
June 30,
---------------------------------------
2000 1999
------------------ -----------------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES
------------------------------------------------------
<S> <C> <C>
Net loss $ (1,095,705) $ (915,231)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Depreciation and amortization expense 177,788 150,120
Loss from investment in unconsolidated affiliate 197,108 186,979
Changes in assets and liabilities:
Membership initiation fees and other accounts receivable (208,430) 118,804
Notes receivable 455,138 708,182
Inventory (972,778) (2,077,723)
Accounts payable and accrued expenses 1,838,131 16,821
Accounts payable - affiliates 1,525,248 --
Lot deposits 168,417 37,902
Deferred revenues (32,679) (82,237)
Other assets (105,149) 162,059
------------- -------------
Net cash provided by (used for) operating activities 1,947,089 (1,694,324)
------------- -------------
CASH FLOW USED FOR INVESTING ACTIVITIES
---------------------------------------
Purchase of property and equipment (214,078) (153,299)
Capital contribution to unconsolidated affiliate (25,000) (25,000)
------------- -------------
Net cash used for investing activities (239,078) (178,299)
------------- -------------
CASH FLOWS (USED FOR) PROVIDED BY FINANCING ACTIVITIES
------------------------------------------------------
Advances to/from affiliates -- (3,957)
Proceeds from mortgage and notes payable 4,769,916 6,612,976
Proceeds from notes payable - affiliated -- 387,141
Payments on mortgages and notes payable (6,173,592) (5,390,085)
Other assets (22,779) (7,479)
------------- -------------
Net cash (used for) provided by financing activities (1,426,455) 1,598,596
------------- -------------
Net increase (decrease) in cash and equivalents 281,556 (274,027)
------------- -------------
CASH AND EQUIVALENTS, beginning of period 619,022 1,061,609
------------- -------------
CASH AND EQUIVALENTS, end of period $ 900,578 $ 787,582
============= =============
Cash paid for interest $ 91,921 $ 186,728
============= =============
</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 six months ended June 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 June 30, 2000:
<TABLE>
NTS/LFII NTS/VA Consolidated
--------------------- -------------------- --------------------
<S> <C> <C> <C>
Land held for future
development, under
development, and completed lots $ 2,141,000 $25,079,000 $27,220,000
Country club (net of membership
initiation fees) 10,775,000 10,171,000 20,946,000
Amenities 2,294,000 5,951,000 8,245,000
----------- ----------- -----------
$15,210,000 $41,201,000 $56,411,000
=========== =========== ===========
</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 $1,463,000 of
interest and real estate taxes for the six months ended June 30, 2000.
Interest and real estate taxes incurred were approximately $1,583,000.
NTS/LFII and NTS/VA capitalized in inventory approximately $1,268,000 of
interest and real estate taxes for the six months ended June 30, 1999.
Interest and real estate taxes incurred were approximately $1,468,000.
Inventory for 2000, as reflected above, includes approximately $30,358,000,
net of $9,412,000 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 $1,870,000, which is
expected to be offset by member initiation fees. During the six months
ended June 30, 2000, approximately $459,000 of the Fawn Lake Country Club
deficit and $164,000 of the Lake Forest Country Club deficit was
capitalized as a cost of inventory. During the six months ended June 30,
1999, approximately $373,000 of the Fawn Lake Country Club deficit was
capitalized as a cost of inventory. During the six months ended June 30,
1999, the Lake Forest Country Club had a profit of approximately $99,000,
which reduced capitalized 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 June 30, 2000, the Fund's percentage interest was 50%, and
the Fund's investment balance in the Joint Venture was approximately
$3,979,000 and $4,151,000 as of June 30, 2000 and December 31, 1999,
respectively. The Fund's share of the Joint Venture's net loss for the
three and six months ended June 30, 2000, was approximately $99,000 and
$197,000, respectively. The Fund's share of the Joint Venture's net loss
for the three and six months ended June 30, 1999, was approximately
$108,000 and $187,000, respectively.
9
<PAGE>
7. Investment in Unconsolidated Affiliate - Continued
--------------------------------------------------
Presented below are condensed balance sheets for the Joint Venture as of
June 30, 2000 and December 31, 1999, and statements of operations for the
three and six months ended June 30, 2000 and 1999:
<TABLE>
June 30, 2000 December 31, 1999
------------------------------ ----------------------------
Balance Sheets
--------------
<S> <C> <C>
Notes receivable $ 194,000 $ 296,000
Inventory 14,751,000 14,755,000
Other, net 189,000 266,000
----------------------------- --------------------------
Total assets $ 15,134,000 $ 15,317,000
============================= ==========================
Mortgages and notes payable 5,209,000 5,299,000
Other liabilities 1,967,000 1,715,000
Equity 7,958,000 8,303,000
----------------------------- --------------------------
Total liabilities and equity $ 15,134,000 $ 15,317,000
============================= ==========================
</TABLE>
<TABLE>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------- -------------------------------------------
2000 1999 2000 1999
------------------- -------------------- -------------------- -------------------
Statements of Operations
------------------------
<S> <C> <C> <C> <C>
Lot sales, net of discounts $ 1,067,000 $ 871,000 $ 1,877,000 $ 1,788,000
Cost of sales (822,000) (617,000) (1,454,000) (1,331,000)
Other expenses, net (442,000) (470,000) (817,000) (831,000)
-------------- ---------------- ------------------- ---------------
Net loss $ (197,000) $ (216,000) $ (394,000) $ (374,000)
============== ================ =================== ===============
</TABLE>
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 June 30, 2000 and 1999 did not result in any impairment loss.
8. Mortgages and Notes Payable
---------------------------
<TABLE>
Mortgages and notes payable consist of the following:
June 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. $ 10,296,175 $ 9,777,485
(Continued on next page)
10
<PAGE>
8. Mortgages and Notes Payable - Continued
---------------------------------------
June 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. $ 5,582,165 $ 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. 2,670,000 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, $111,107,
September 18, 2000, $525,498 and February 28, 2000, $0,
secured by notes receivable, principal payments consist of
payment received from notes receivable securing the
obligation. 636,605 936,645
Note payable in the amount of $1,174,800, bearing
interest at a Prime Rate + .5%, secured by 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. 849,404 1,119,800
Other 207,827 124,734
--------------------- --------------------
$ 26,939,135 $ 28,342,811
===================== ====================
</TABLE>
The Prime Rate was 9.5% and 8.5% at June 30, 2000 and December 31, 1999,
respectively.
The $111,107 Warehouse Line of Credit agreement is guaranteed by NTS
Corporation.
11
<PAGE>
8. Mortgages and Notes Payable - Continued
---------------------------------------
Principal balance requirements regarding the $10.7 and $9.5 million credit
facilities are as follows:
$10.7 Million Facility
December 31, 1999 $ 10,700,000
December 31, 2000 $ 7,800,000
December 31, 2001 $ 5,900,000
December 31, 2002 $ 4,500,000
$9.5 Million Facility
December 31, 1999 $ 7,500,000
December 31, 2000 $ 4,500,000
December 31, 2001 $ 2,000,000
The NTS/VA lender has agreed to allow NTS/VA to maintain a maximum
outstanding development loan balance of $10.7 million through August 31,
2000, without considering the obligation in default due to non-compliance
with the maximum funding levels called for in the original loan agreement.
Management's projections indicate that the present development plans will
require a funding level which will result in an outstanding debt balance as
of December 31, 2000, of approximately $13.2 million. Management's
projection for NTS/VA indicates the development will reach the maximum
funding level allowed by the current development loan of $10.7 million
during 2000 and will in fact require additional funding to achieve its 2000
development plan, which includes projected sales of $7.6 million. In the
event short-term capital needs dictate the need for cash to reduce the
outstanding obligation relative to the NTS/VA development loan, the loan is
secured by an approximately $2 million letter of credit issued by a third
party lender with the NTS/VA lender stated as the beneficiary, and a $3
million personal guarantee by Mr. J.D. Nichols, both of which could provide
the necessary capital to help ensure compliance with the maximum funding
levels set forth in the original development loan.
On July 25, 2000, a commitment letter was issued by the NTS/VA lender,
which states that they have agreed to lend NTS/VA and NTS/LFII a combined
principal sum of $18,000,000. The loan will be secured by 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 enter into
an agreement by which it will agree 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 Fund expects this loan to close during
the third or fourth quarter of 2000. 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
12
<PAGE>
9. Related Party Transactions
--------------------------
As of June 30, 2000, the Sponsor and an Affiliate owned 107,053 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.
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 six months ended
13
<PAGE>
9. Related Party Transactions - Continued
--------------------------------------
Property Management Agreements - Continued
------------------------------------------
June 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 Six Months Ended
June 30, June 30,
------------------------------------ ---------------------------------------
2000 1999 2000 1999
----------------- --------------- ----------------- -------------------
Personnel related costs:
------------------------
<S> <C> <C> <C> <C>
Financing and accounting $ 63,000 $ 29,000 $ 134,000 $ 68,000
Data Processing 20,000 10,000 41,000 11,000
Human Resources 10,000 7,000 21,000 17,000
Executive and administrative services 31,000 30,000 66,000 105,000
Construction Management 7,000 4,000 10,000 8,000
Sales and Marketing 315,000 194,000 616,000 490,000
Legal 7,000 2,000 14,000 18,000
-------- -------- --------- ---------
Total personnel related costs 453,000 276,000 902,000 717,000
-------- -------- --------- ---------
Marketing 39,000 33,000 79,000 56,000
Rent 14,000 9,000 29,000 22,000
Other general and administrative 10,000 9,000 33,000 34,000
-------- -------- --------- ---------
Total expense reimbursements $ 516,000 $ 327,000 $1,043,000 $ 829,000
======== ======== ========= =========
</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. Overhead recovery for the three and six months ended
June 30, 2000, was approximately $151,000 and $254,000, respectively.
Overhead recovery for the three and six months ended June 30, 1999, was
approximately $120,000 and $202,000, respectively. These amounts are
classified with selling, general and administrative - affiliated in the
accompanying consolidated statements of operations.
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 June 30, 2000, the Fund had raised
approximately $63,690,000 and had paid distributions of approximately
$23,141,000. As of June 30, 2000, no amount had been accrued as an
incentive payment in the Fund's consolidated financial statements.
14
<PAGE>
9. Related Party Transactions - Continued
--------------------------------------
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 three and six months ended June 30, 1999, the interest
expense to the Affiliates totaling approximately $124,000 and $244,000,
respectively was capitalized in inventory.
As presented in the accompanying consolidated balance sheets as of June 30,
2000 and December 31, 1999, accounts payable - affiliates of approximately
$2,720,000 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 June 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 Account 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 June 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.
15
<PAGE>
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
$2,633,000 as of June 30, 2000 and December 31, 1999. 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 $300,000 during 2003 to complete the
homeowner's association amenities. No costs are estimated to be incurred
during the years 2000, 2001 and 2002.
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 $10,913,000 to complete the county
club and homeowners' association amenities for the project. These costs are
estimated to be incurred as follows: $2,245,000 for 2000, $801,000 for
2001, $527,000 for 2002, $2,340,000 for 2003, $2,940,000 for 2004, $690,000
for 2005, $810,000 for 2006, $290,000 for 2007, and $270,000 for 2008.
16
<PAGE>
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 June 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 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.
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
------------------------------------------------------------------------
of Operations
-------------
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 the Joint Venture. The
Fund contributed its interest in the first mortgage loan on the Orlando Lake
Forest project and obtained a 50% interest in the Joint Venture.
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 REIT
effective January 1, 1997.
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.
18
<PAGE>
Cautionary Statements - Continued
---------------------------------
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 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>
Six Months Ended June 30,
---------------------------------------------------------
2000 1999
--------------------------- --------------------------
<S> <C> <C>
Operating activities $ 1,947,089 $ (1,694,324)
Investing activities (239,078) (178,299)
Financing activities (1,426,455) 1,598,596
-------------------------- ------------------------
Net increase (decrease) in cash and equivalents $ 281,556 $ ( 274,027)
========================== ========================
</TABLE>
Operating Activity
------------------
Cash provided by operating activities was approximately $1,947,000 for the six
months ended June 30, 2000. The primary components of the cash provided by
operating activities were a net loss of approximately $1,096,000 and net
additions to inventory of approximately $973,000, partially offset by an
increase to accounts payable to affiliates of approximately $1,525,000 owed to
NTS Development Company and NTS Management for salary and overhead
reimbursements, an increase
19
<PAGE>
Consolidated Cash Flows and Financial Condition - Continued
-----------------------------------------------------------
Operating Activity - Continued
------------------------------
in accounts payable and accrued expenses of approximately $1,838,000, and
collections of notes receivable of approximately $455,000. The increase in
accounts payable and accrued expenses was partially a result of costs incurred
for a new development section at NTS/VA of approximately $933,000. NTS
Development Company and NTS Management have agreed to defer amounts owed to them
by the Fund as of June 30, 2000 and those amounts that will accrue through
January 1, 2001.
Cash used for operating activities was approximately $1,694,000 for the six
months ended June 30, 1999. The primary components of the use of cash for
operating activities were a net loss of approximately $915,000 and net additions
to inventory of approximately $2,078,000, partially offset by collections of
notes receivable of approximately $708,000, and an increase in other assets of
approximately $162,000.
Investing Activity
------------------
Cash used for investing activities was approximately $239,000 for the six months
ended June 30, 2000. The primary components of the use of cash for investing
activities were an additional capital contribution to an unconsolidated
affiliate of $25,000 and capital additions, primarily at the NTS/LF II and
NTS/VA golf operations, of approximately $214,000.
Cash used for investing activities was approximately $178,000 for the six months
ended June 30, 1999. The primary components of the use of cash for investing
activities were an additional capital contribution to the Joint Venture of
$25,000 and capital additions, primarily at the NTS/LF II and NTS/VA golf
operations, of approximately $153,000.
Financing Activity
------------------
Cash used for financing activities was approximately $1,426,000 for the six
months ended June 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 $1,404,000.
Cash provided by financing activities was approximately $1,599,000 for the six
months ended June 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 $1,223,000, which were used primarily to fund activities of
NTS/VA, and proceeds on notes payable of approximately $387,000 which were used
primarily to fund activities of NTS/VA.
20
<PAGE>
Consolidated Cash Flows and Financial Condition - Continued
-----------------------------------------------------------
Financing Activity - Continued
------------------------------
The NTS/VA lender has agreed to allow NTS/VA to maintain a maximum outstanding
development loan balance of $10.7 million through August 31, 2000, without
considering the obligation in default due to non-compliance with the maximum
funding levels called for in the original loan agreement. Management's
projections indicate that the present development plans will require a funding
level which will result in an outstanding debt balance as of December 31, 2000,
of approximately $13.2 million. Management's projection for NTS/VA indicates the
development will reach the maximum funding level allowed by the current
development loan of $10.7 million during 2000 and will in fact require
additional funding to achieve its 2000 development plan, which includes
projected sales of $7.6 million. In the event short-term capital needs dictate
the need for cash to reduce the outstanding obligation relative to the NTS/VA
development loan, the loan is secured by an approximately $2 million letter of
credit issued by a third party lender with the NTS/VA lender stated as the
beneficiary, and a $3 million personal guarantee by Mr. J.D. Nichols, both of
which could provide the necessary capital to help ensure compliance with the
maximum funding levels set forth in the original development loan.
On July 25, 2000, a commitment letter was issued by the NTS/VA lender, which
states that they have agreed to lend NTS/VA and NTS/LFII, a combined principal
sum of $18,000,000. The loan will be secured by 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 enter into an agreement by which it will agree 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 Fund expects this
loan to close during the third or fourth quarter of 2000. 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
The Fund's management believes that the loan contemplated by the commitment
letter will provide adequate liquidity for the operations and continued
development of NTS/VA and NTS/LFII.
Results of Operations
---------------------
Revenues
--------
On an overall basis, the Fund experienced a loss for the three and six months
ended June 30, 2000, of approximately $ (488,000) and $ (1,096,000), or $ (0.15)
and $ (0.34) per weighted average shares, respectively. The fund experienced a
loss for the three and six months ended June 30, 1999 of approximately
$(504,000) and $(915,000), or $(0.16) and $(0.29), respectively.
21
<PAGE>
Results of Operations - Continued
---------------------------------
Revenues - Continued
--------------------
Revenue for the three months ended June 30, 2000, includes approximately
$3,634,000 in lot sales consisting of approximately $2,223,000 and $1,411,000
from NTS/LFII and NTS/VA, respectively. During this period 34 lots were sold for
an average selling price of approximately $107,000. Additionally, revenue for
the three months ended June 30, 2000, includes approximately $76,000 collected
on an installment sale from NTS/VA.
Revenue for the three months ended June 30, 1999, includes approximately
$2,278,000 in lot sales consisting of approximately $1,953,000 and $325,000 from
NTS/LFII and NTS/VA, respectively. During this period 26 lots were sold for an
average selling price of approximately $88,000.
Revenue for the six months ended June 30, 2000, includes approximately
$6,118,000 in lot sales consisting of approximately $4,138,000 and $1,980,000
from NTS/LFII and NTS/VA, respectively. During this period 58 lots were sold for
an average selling price of approximately $105,000. Additionally, revenue for
the six months ended June 30, 2000, includes approximately $92,000 collected on
an installment sale from NTS/VA.
Revenue for the six months ended June 30, 1999, includes approximately
$4,723,000 in lot sales consisting of approximately $3,683,000 and $1,040,000
from NTS/LF II and NTS/VA, respectively. During this period 51 lots were sold
for an average selling price of approximately $93,000.
Managements feels that the higher average selling price of lots closed for the
three and six months ended June 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.
Cost of sales for the three months ended June 30, 2000 and 1999 were
approximately $2,754,000 and $1,649,000, respectively. Cost of sales for the six
months ended June 30, 2000 and 1999 were approximately $4,797,000 and
$3,309,000, respectively.
Presented below are the gross profit margins for the three and six months ended
June 30, 2000 and 1999:
<TABLE>
Three Months Ended June 30, Six Months Ended June 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% 28% 23% 30%
</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
22
<PAGE>
Results of Operations - Continued
---------------------------------
Revenues - Continued
--------------------
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 June 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 six months ended June 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 need to be recorded to reflect declines in value. The
Fund did not record any write-downs during the six months ended June 30, 2000
and 1999. 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.
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 six months ended June 30, 2000 and 1999.
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.
23
<PAGE>
Results of Operations - Continued
---------------------------------
Expenses - Continued
--------------------
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 $516,000 and $327,000 were
made to NTS Management or an Affiliate during the three months ended June 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 six months ended
June 30, 2000 and 1999, the expense recovery made to NTS Management or an
affiliate was approximately $1,043,000 and $829,000.
Reimbursements for expense recovery increased approximately $189,000 for the
three months ended June 30, 2000, as compared to the same period in 1999.
Reimbursements for expense recovery increased approximately $214,000 for the six
months ended June 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/VA
and commissions paid to sales agents employed by NTS/VA, partially offset by a
decrease in the executive and administrative costs at NTS/LFII and NTS/VA for
the six months ended June 30, 2000 only.
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 June 30, 2000 and 1999, overhead recovery
incurred was approximately $151,000 and $120,000, respectively. For the six
months ended June 30, 2000 and 1999, overhead recovery incurred was
approximately $254,000 and $202,000. This increase is a result of an increase in
the gross cash receipts for the three and six months ended June 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.
24
<PAGE>
Results of Operations - Continued
---------------------------------
Expenses - Continued
--------------------
For the three months ended June 30, 2000 and 1999, the amounts incurred for
selling, general and administrative expenses were approximately $684,000 and
$583,000, respectively. The increase in the selling, general and administrative
expenses is primarily a result of an increase in advertising at NTS/VA for the
three months ended June 30, 2000.
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 June 30, 2000 and 1999, approximately $695,000 and $600,000,
was capitalized in inventory and approximately $40,000 and $47,000,
respectively, was expensed. For the six months ended June 30, 2000 and 1999,
approximately $1,376,000 and $1,186,000 was capitalized in inventory and
approximately $93,000 and $163,000, 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 six months ended June 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.
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 six months ended June 30, 2000
and 1999. 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.
25
<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
June 30, 2000, hypothetical 100 basis point increase in interest rates would
result in an approximately $137,000 increase in interest expense, for the six
months then ended. During the three and six months ended June 30, 2000, the
majority of interest expense incurred was capitalized in inventory.
26
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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.
27
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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: August 14, 2000
28
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