For the quarterly period ended June 30, 2004
OR
Commission File Number 0-18550
NTS MORTGAGE INCOME FUND
(Exact name of registrant as specified in its charter)
| Delaware | 61-1146077 |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) |
| incorporation or organization) |
10172 Linn Station Road, Louisville, Kentucky 40223
(Address of principal executive offices)
(502) 426-4800
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act). Yes [ ] No [X]
As of June 30, 2004, the registrant had approximately 3,187,000 shares of common stock outstanding.
| Pages |
| Item 1. | Consolidated Financial Statements (Unaudited) | |||
| Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 | 4 | |||
| Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2004 and 2003 | 5 | |||
| Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 | 6 | |||
| Notes to Consolidated Financial Statements | 7-18 | |||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 19-28 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 28 | ||
| Item 4. | Controls and Procedures | 28 | ||
| Items 1 - 6 | 29-30 | |||
| Signatures | 31 |
2
Some of the statements included in this quarterly report on Form 10-Q, particularly those included in Part I, Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), may be considered “forward-looking statements” because the statements relate to matters which have not yet occurred. For example, phrases such as “we anticipate,” “believe” or “expect” indicate that it is possible that the event anticipated, believed or expected may not occur. If these events do not occur, the result which we expected also may, or may not, occur in a different manner, which may be more or less favorable to us. We do not undertake any obligation to update these forward-looking statements.
Any forward-looking statements included in MD&A, or elsewhere in this report, reflect our best judgment based on known factors, but involve risks and uncertainties. Actual results could differ materially from those anticipated in any forward-looking statements as a result of a number of factors, including but not limited to those described in our filings with the Securities and Exchange Commission, particularly our annual report on Form 10-K for the year ended December 31, 2003. Any forward-looking information provided by us pursuant to the safe harbor established by the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors.
3
As of As of
June 30, December 31,
2004 2003
------------------ -----------------
(UNAUDITED)
ASSETS
Cash and equivalents $ 863,867 $ 889,675
Membership initiation fees and other accounts receivable, net
of allowance of approximately $145,000 and $53,000,
respectively 603,876 698,663
Notes receivable 698,842 761,061
Inventory 30,819,436 34,704,677
Property and equipment, net of accumulated depreciation of
approximately $1,257,000 and $1,140,000, respectively 3,243,256 3,219,359
Investment in unconsolidated affiliate 2,188,778 1,918,415
Other assets 300,101 239,167
------------------ -----------------
TOTAL ASSETS $ 38,718,156 $ 42,431,017
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 2,237,422 $ 2,488,824
Accounts payable - affiliates 11,375,705 10,524,103
Mortgages and notes payable 6,426,061 10,301,524
Other liabilities 418,238 341,302
------------------ -----------------
TOTAL LIABILITIES 20,457,426 23,655,753
------------------ -----------------
COMMITMENTS AND CONTINGENCIES (Note 16)
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 (35,905,854) (35,391,320)
------------------ -----------------
TOTAL STOCKHOLDERS' EQUITY 18,260,730 18,775,264
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,718,156 $ 42,431,017
================== =================
The accompanying notes to consolidated financial statements are an integral part of these statements.
4
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2004 2003 2004 2003
-------------- ------------- ------------- --------------
REVENUES
Lot sales, net of discounts $ 5,765,779 $ 1,861,564 $ 8,801,734 $ 3,759,845
Cost of sales (4,698,972) (1,594,450) (7,197,094) (3,090,995)
-------------- ------------- ------------- --------------
Gross profit 1,066,807 267,114 1,604,640 668,850
-------------- ------------- ------------- --------------
Country Club revenue 443,099 420,452 752,375 676,940
Interest income on cash equivalents and
miscellaneous income 8,189 15,866 47,620 75,294
-------------- ------------- ------------- --------------
TOTAL REVENUES 1,518,095 703,432 2,404,635 1,421,084
-------------- ------------- ------------- --------------
EXPENSES
Selling, general and administrative - affiliates 624,295 463,284 1,102,333 1,015,340
Selling, general and administrative 415,183 443,130 830,243 770,049
Interest expense 119 17,610 287 24,933
Other taxes and licenses 32,792 (25) 37,493 25,701
Depreciation and amortization expense 28,913 39,344 59,662 78,425
Country Club operations 675,389 651,440 1,159,514 1,182,931
-------------- ------------- ------------- --------------
TOTAL OPERATING EXPENSES 1,776,691 1,614,783 3,189,532 3,097,379
-------------- ------------- ------------- --------------
Loss before other income and federal income tax (258,596) (911,351) (784,897) (1,676,295)
Income from investment in unconsolidated affiliate 190,354 28,669 270,363 87,520
-------------- ------------- ------------- --------------
Loss before federal income tax (68,242) (882,682) (514,534) (1,588,775)
Federal income tax -- -- -- --
-------------- ------------- ------------- --------------
Net loss $ (68,242)$ (882,682)$ (514,534)$ (1,588,775)
============== ============= ============= ==============
Per share of common stock:
Net loss per share $ (0.02)$ (0.28)$ (0.16)$ (0.50)
============== ============= ============= ==============
Weighted average number of shares 3,187,333 3,187,333 3,187,333 3,187,333
============== ============= ============= ==============
The accompanying notes to consolidated financial statements are an integral part of these statements.
5
Six Months Ended
June 30,
--------------------------------------
2004 2003
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (514,534)$ (1,588,775)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization expense 59,662 78,425
Income from investment in unconsolidated affiliate (270,363) (87,520)
Changes in assets and liabilities:
Membership initiation fees and other accounts receivable 94,787 196,829
Notes receivable 62,219 235,690
Inventory 3,996,374 (846,220)
Accounts payable and accrued expenses (251,402) (37,114)
Other liabilities 76,936 (9,582)
Other assets (114,806) (89,768)
----------------- -----------------
Net cash provided by (used in) operating activities 3,138,873 (2,148,035)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (140,820) (313,844)
----------------- -----------------
Net cash used in investing activities (140,820) (313,844)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Accounts payable - affiliates 851,602 973,044
Proceeds from mortgages and notes payable 5,340,165 7,288,632
Payments on mortgages and notes payable (9,215,628) (5,654,077)
----------------- -----------------
Net cash (used in) provided by financing activities (3,023,861) 2,607,599
----------------- -----------------
Net (decrease) increase in cash and equivalents (25,808) 145,720
----------------- -----------------
CASH AND EQUIVALENTS, beginning of period 889,675 813,009
----------------- -----------------
CASH AND EQUIVALENTS, end of period $ 863,867 $ 958,729
================= =================
The accompanying notes to consolidated financial statements are an integral part of these statements.
6
The unaudited consolidated financial statements included herein should be read in conjunction with NTS Mortgage Income Fund’s 2003 annual report on Form 10-K as filed with the Securities and Exchange Commission on April 9, 2004. In the opinion of the Fund’s management, all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation have been made to the accompanying consolidated financial statements for the three and six months ended June 30, 2004 and 2003. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period. As used in this quarterly report on Form 10-Q the terms “we,” “us” or “our,” as the context requires, may refer to the Fund or its interests in its properties and joint venture.
NTS Mortgage Income Fund (the “Fund”), a Delaware corporation, was formed on September 26, 1988. The Fund operated as a real estate investment trust (REIT) under the Internal Revenue Code of 1986 (the “Code”), as amended, from its inception through December 31, 1996. The Fund began operating as a “C” corporation under the Code for tax purposes effective January 1, 1997. NTS Corporation is the sponsor of the Fund (the “Sponsor”), NTS Advisory Corporation is the advisor to the Fund (the “Advisor”), and NTS Residential Management Company is the manager to the Fund (“NTS Management”). The Advisor and NTS Management are affiliates of and are under common control with NTS Corporation. As used in this Form 10-K the terms “we,” “us” or “our,” as the context requires, may refer to the Fund or its interests in properties and its joint venture.
Our wholly-owned subsidiaries include NTS/Lake Forest II Residential Corporation (“NTS/LFII”) and NTS/Virginia Development Company (“NTS/VA”).
We are a finite life entity. Our organizational documents require us to commence an orderly liquidation by December 31, 2008. Delaware law, our state of incorporation, provides us with a three-year period after the initiation of our liquidation to wind up our affairs and issue final distributions to shareholders.
NTS/LFII is in the process of developing approximately 1,109 residential lots of land located in Louisville, Kentucky into a single-family residential community (Lake Forest). Lake Forest has amenities consisting of a clubhouse, pools, tennis courts, recreation fields and several lakes.
NTS/VA is in the process of developing approximately 1,398 residential lots of land located in the Chancellor district of Spotsylvania County, Virginia, approximately 60 miles south of Washington D.C., into a single-family residential community (Fawn Lake) and has completed a country club with a championship golf course for the purpose of selling such residential lots and country club
7
memberships. Fawn Lake has amenities consisting of a 285 acre lake, clubhouse, pool, tennis courts and boat docks.
We also own a 50% interest in the Orlando Lake Forest Joint Venture (the “Joint Venture”). See Note 10 — Investment in Unconsolidated Affiliate for further information pertaining to the investment.
Our records are maintained on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles.
Our consolidated financial statements include the assets, liabilities, revenues and expenses of our wholly-owned subsidiaries (see Note 1). Investments of 50% or less in affiliated companies are accounted for under the equity method. All significant intercompany transactions and balances have been eliminated.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB 51.” The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities”) and how to determine when and which business enterprise (the “primary beneficiary”) should consolidate the variable interest entity. This new model for consolidation applies to an entity which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003.
In December 2003, the FASB issued FIN No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46-R”) to address certain FIN 46 implementation issues. The adoption of the provisions applicable to FIN 46 did not have any impact on our consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the June 30, 2003 consolidated statement of cash flow to conform to the presentation for 2004. These reclassifications had no effect on previously reported operating results.
8
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and equivalents include cash on hand and short-term, highly liquid investments with initial maturities of three months or less.
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 our notes receivable and debt instruments approximated their book value because a substantial portion of the underlying instruments are variable rate notes.
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 including the operating deficits of the Lake Forest Country Club, less amounts charged to cost of sales. Inventory 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 (net of country club initiation fees) 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 such estimates could change in the near term. Any changes in estimates are accounted for prospectively over the life of the project.
9
Inventory consists of approximately the following as of June 30, 2004:
NTS/LFII NTS/VA Consolidated
--------------- ---------------- ---------------
Land held for future development,
under development and completed lots $ 1,908,000 $ 16,430,000 $ 18,338,000
Country club (net of $9,056,000
membership initiation fees) 1,985,000 -- 1,985,000
Amenities 475,000 10,021,000 10,496,000
--------------- ---------------- ---------------
$ 4,368,000 $ 26,451,000 $ 30,819,000
=============== ================ ===============
Items capitalized to inventory for the
six months ended June 30, 2004
Capitalized interest $ 2,000 $ 221,000 $ 223,000
=============== ================ ===============
Capitalized property taxes $ 6,000 $ 95,000 $ 101,000
=============== ================ ===============
Inventory consists of approximately the following as of December 31, 2003:
NTS/LFII NTS/VA Consolidated
--------------- ---------------- ---------------
Land held for future development,
under development and completed lots $ 1,841,000 $ 17,053,000 $ 18,894,000
Country club (net of $8,230,000
membership initiation fees) 3,455,000 -- 3,455,000
Amenities 674,000 11,682,000 12,356,000
--------------- ---------------- ---------------
$ 5,970,000 $ 28,735,000 $ 34,705,000
=============== ================ ===============
Items capitalized to inventory in 2003
Capitalized interest $ 70,000 $ 663,000 $ 733,000
=============== ================ ===============
Capitalized property taxes $ 12,000 $ 222,000 $ 234,000
=============== ================ ===============
Pursuant to the Membership Marketing Agreement, dated June 7, 2004, between NTS/LFII and the Lake Forest Country Club regarding the cost to develop the Country Club, NTS/LFII is to receive 50% of initiation fees from the initial issuance of the remaining initial memberships to the Country Club. We will no longer incur any marketing or selling expenses related to issuance of initial memberships. We are not responsible for any refund related to any issued memberships. On December 28, 2003, the Lake Forest Country Club ownership and operations were turned over to its members.
10
The following schedule provides an analysis of our approximate investment in property and equipment on June 30, 2004 and December 31, 2003:
As of As of
June 30, December 31,
2004 2003
------------------ ------------------
Land and buildings $ 3,309,000 $ 3,287,000
Equipment 1,191,000 1,072,000
------------------ ------------------
4,500,000 4,359,000
Less accumulated depreciation 1,257,000 1,140,000
------------------ ------------------
$ 3,243,000 $ 3,219,000
================== ==================
Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 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. There were no impairment losses during any of the periods presented.
Effective August 16, 1997, we 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) consisting of approximately 360 acres of residential land and improvements and approximately 20 acres of commercial land. The Joint Venture will continue to own and develop the Orlando Lake Forest project.
We contributed to the Joint Venture as a capital contribution our 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.
11
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, 2004 and December 31, 2003, our percentage interest was 50%, and our investment balance in the Joint Venture was approximately $2,189,000 and $1,918,000, respectively. Our share of the Joint Venture’s net income for the three and six months ended June 30, 2004, was approximately $190,000 and $270,000, respectively.
Presented below are approximate condensed balance sheets for the Joint Venture as of June 30, 2004 and December 31, 2003, and approximate condensed statements of operations for the three and six months ended June 30, 2004 and 2003:
June 30, December 31,
2004 2003
------------------ ------------------
(APPROXIMATELY)
Condensed Balance Sheets
Inventory $ 2,546,000 $ 2,804,000
Other, net 2,542,000 2,612,000
------------------ ------------------
Total assets $ 5,088,000 $ 5,416,000
================== ==================
Mortgages and notes payable -- 11,000
Other liabilities 710,000 1,568,000
Equity 4,378,000 3,837,000
------------------ ------------------
Total liabilities and equity $ 5,088,000 $ 5,416,000
================== ==================
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2004 2003 2004 2003
-------------- ------------- ------------- --------------
(APPROXIMATELY) (APPROXIMATELY)
Condensed Statements of Operations
Lot sales, net of discounts $ 2,583,000 $ 1,711,000 $ 4,285,000 $ 3,631,000
Cost of sales (1,817,000) (1,266,000) (2,999,000) (2,663,000)
Other expenses, net (385,000) (387,000) (745,000) (793,000)
-------------- ------------- ------------- --------------
Net income $ 381,000 $ 58,000 $ 541,000 $ 175,000
============== ============= ============= ==============
12
Mortgages and notes payable consist of the following:
June 30, December 31,
2004 2003
------------------ -----------------
Mortgage loan payable to a bank in the amount of $18,000,000,
bearing interest at the Prime Rate + 1.0%, payable monthly, due
December 31, 2007, secured by inventory of NTS/VA and
NTS/LFII, generally principal payments consist of approximately
91% of the Gross Receipts from lot sales, personally guaranteed
by Mr. J.D. Nichols, Chairman of the Board of the Fund's
Sponsor, for 50% of the outstanding loan balance. $ 230,520 $ 3,003,060
Note payable to a bank in the amount of $9,000,000, bearing
interest at 8.25%, payable monthly, due March 31, 2005, secured
by a Certificate of Deposit owned by NTS Financial Partnership,
an affiliate of the Fund. 5,627,562 6,696,959
Warehouse line of credit agreement with a bank, bearing interest
at the Prime Rate + .75% , due June 15, 2005, secured by notes
receivable, principal payments consist of payments received from
notes receivable securing the obligation 421,094 433,581
Other 146,885 167,924
------------------ -----------------
$ 6,426,061 $ 10,301,524
================== =================
We anticipate seeking renewals or refinancing the debts coming due within the next twelve months with our existing creditors, however, there can be no assurances that we will be successful in doing so. The Prime Rate was 4.25% on June 30, 2004 and 4.00% on December 31, 2003.
The Fund has a loan agreement with a financial institution for a combined principal sum of up to $18,000,000. The loan is secured by the NTS/LFII and NTS/VA projects, 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. 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. On May 16, 2003, the loan was amended to remove the requirement that 50% of the Joint Venture’s net sales proceeds be applied against the outstanding balance and to include the payment to the lender of 90% of the gross initiation fees from Country Club memberships sold. The loan is a reducing revolver and the maximum amount outstanding at the end of each year shall be as follows:
December 31, 2004 $ 9,500,000
December 31, 2005 $ 9,000,000
December 31, 2006 $ 5,500,000
December 31, 2007 $ 1,000,000
13
We recognize revenue and related costs from lot sales using the accrual method in accordance with U.S. generally accepted accounting principles, which is when payment has been received and title, possession and other attributes of ownership have been transferred to the buyer, and we are not obligated to perform significant activities after the sale. We generally require a minimum down payment of at least 10% of the sales price of the lot. The country club recognizes operating revenue as services are performed.
As of June 30, 2004, the Sponsor or an affiliate owned approximately 377,000 shares of the Fund. The Fund has entered into 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”). NTS Development is a wholly-owned subsidiary of the Fund’s Sponsor. The Management Agreements have been renewed through December 31, 2008. 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.
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 and on site at 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 project responsibilities, costs are pro-rated by NTS Management and allocated to the appropriate residential project. As permitted by the property management agreements, we were charged the following amounts for the three and six months ended June 30, 2004 and 2003. These amounts are reflected in selling, general and administrative — affiliates on the accompanying consolidated statements of operations in accordance with the Management Agreements.
14
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------- ------------- -------------- -------------
Personnel related costs:
Financing and accounting $ 70,000 $ 73,000 $ 136,000 $ 143,000
Data processing 7,000 12,000 15,000 27,000
Human resources 13,000 12,000 27,000 25,000
Executive and administrative services 39,000 43,000 69,000 82,000
Construction management -- 9,000 -- 48,000
Sales and marketing 257,000 189,000 480,000 391,000
Legal 14,000 21,000 28,000 48,000
------------- ------------- -------------- -------------
Total personnel related costs 400,000 359,000 755,000 764,000
------------- ------------- -------------- -------------
Marketing -- 7,000 -- 44,000
Rent 5,000 13,000 10,000 28,000
Other general and administrative -- 8,000 -- 23,000
------------- ------------- -------------- -------------
Total expense reimbursements $ 405,000 $ 387,000 $ 765,000 $ 859,000
============= ============= ============== =============
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, 2004, was approximately $219,000 and $337,000, respectively. Overhead recovery for the three and six months ended June 30, 2003, was approximately $76,000 and $156,000, respectively. These amounts are classified with selling, general and administrative-affiliates in the accompanying consolidated statements of operations.
There were also expense reimbursements of approximately $534,000 and $651,000 accrued to NTS Management or an affiliate during the six months ended June 30, 2004 and 2003, respectively, for Fawn Lake Country Club. Such costs include compensation costs of management, golf course maintenance, golf professional, kitchen personnel, and accounting as well as various non-payroll related operating expenses. In addition, there were overhead recovery fees of approximately $28,000 and $25,000 accrued to NTS Management for overhead recovery fees at Fawn Lake Country Club for the six months ended June 30, 2004 and 2003.
The Management Agreements also call for NTS Management to potentially receive an incentive payment, as defined in the Management Agreements, equal to 10% of the net cash flows of the projects. The incentive payment will not begin accruing until after the cumulative cash flows of NTS/LFII, NTS VA and the Fund’s share of the cash flow of the Joint Venture would have been sufficient to enable us to have returned to the then existing shareholders of the Fund an amount which, after adding thereto all other payments actually remitted or distributed to such shareholders of the Fund, is at least equal to the shareholders’ original capital contribution. As of June 30, 2004,
15
we had raised approximately $63,690,000 and had paid distributions of approximately $23,141,000. As of June 30, 2004, no amount had been accrued as an incentive payment in our consolidated financial statements.
Advances and Notes Payable Affiliates
As of June 30, 2004, we owed approximately $11,376,000 to affiliates for fees and reimbursements, including $10,311,000 owed to NTS Development and NTS Management for salary and overhead reimbursements included in accounts payable and accrued expenses — affiliates.
NTS Development and NTS Management have agreed to defer, until March 31, 2005, amounts owed to them by us as of December 31, 2003 and those amounts accruing from January 1, 2004 through March 31, 2005, other than as permitted by our cash flows. There can be no assurances that NTS Development and NTS Management will continue to defer amounts due them past March 31, 2005.
During April 2001, the Fawn Lake Country Club was substantially completed. As a result of the Fund’s intention to sell the Club as a single asset, SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects” requires that the Club’s operations no longer be capitalized to inventory costs upon substantial completion. Instead, the Club’s results of operations have been included in the Fund’s statement of operations.
Presented below are the approximate condensed statements of operations for the Fawn Lake Country Club for the six months ended June 30, 2004 and 2003:
Six Months Ended
June 30,
--------------------------------------
2004 2003
------------------ ------------------
(APPROXIMATELY)
Condensed Statements of Operations
Revenues
Operating revenue $ 752,000 $ 677,000
------------------ ------------------
Total revenues 752,000 677,000
Expenses
Cost of goods sold 161,000 131,000
Selling, general and administrative - affiliates 562,000 676,000
Selling, general and administrative 379,000 344,000
Depreciation 57,000 32,000
------------------ ------------------
Total expenses 1,159,000 1,183,000
--------------------------------------
Net loss $ (407,000)$ (506,000)
================== ==================
16
We recognize 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 our 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 its history of operating losses and its expectations for the future, that it is more likely than not that the net deferred tax assets on June 30, 2004 and December 31, 2003, will not be realized and have provided a valuation allowance for the net deferred tax assets. We have a federal net operating loss carryforward of approximately $23,800,000 expiring during various years beginning in 2012 and ending in 2023.
We, as an owner of real estate, are subject to various environmental laws of federal, state and local governments. Compliance by us with existing laws has not had a material adverse effect on our financial condition and results of operations. However, we cannot predict the impact of new or changed laws or regulations on our current properties or on properties that it may acquire in the future.
We do not believe there is any litigation threatened against us other than routine litigation arising out of the ordinary course of business, some of which is expected to be covered by insurance and none of which is expected to have a material adverse effect on our consolidated financial statements. We believe we have adequate insurance.
NTS/LFII and NTS/VA have various certificates of deposit and bonds outstanding to governmental agencies and utility companies totaling approximately $1,140,000 and $5,502,000 as of June 30, 2004. 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 the homeowners’ association amenities at the Fawn Lake project will be substantially completed by December 2009. Based on engineering studies and projections, NTS/VA will incur additional costs, excluding interest, of approximately $2,130,000 to complete the homeowners’ association amenities for the project. These costs are estimated to be incurred as follows: $966,000 for 2004, $450,000 for 2005, $514,000 for 2006, $75,000 for 2007, $75,000 for 2008, and $50,000 for 2009.
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NTS/Lake Forest II Residential Corporation entered into an agreement with Lake Forest Country Club, Inc. in February, 1992 which governed the transfer of control, conveyance of assets and management of the Lake Forest Country Club, Inc. to its members. The Club was transferred to the members on December 28, 2003.
NTS/Lake Forest II Residential Corporation had a contingent liability of approximately $197,000 for the balance of the notes and leases transferred to the Lake Forest Country Club, Inc. on December 28, 2003.
NTS Guaranty Corporation (the “Guarantor”), an affiliate of the Sponsor, has guaranteed that, at the time that we are liquidated and dissolved, the total distributions we have made to shareholders from all sources during our existence is at least equal to the original capital contributions attributable to our then outstanding shares. As of June 30, 2004, the original capital contributions attributable to our outstanding shares were $63,690,000, and we had paid distributions of approximately $23,141,000.
The liability of the Guarantor under the guaranty is expressly limited to its assets. The Guarantor’s sole asset presently consists of 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 or that the Guarantor will be able to satisfy its obligation under the guaranty. The Guarantor may in the future guarantee obligations of other third parties including guaranties of obligations owed by our affiliates to other entities.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements in Item 1 and the cautionary statements below.
The accompanying consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles. Application of these accounting principles requires us to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates. In preparing these financial statements, we have made our best estimates and judgements of the amounts and disclosures included in the financial statements, giving due regard to materiality.
Revenue Recognition
Revenues are recorded when the sales of lots are completed and ownership has transferred to the customer. Unfunded settlements are deposits in transit on lots for which the sale was completed. We do not engage in arrangements where we have ongoing relationships with our customers that require us to repurchase our lots or provide for a right of return.
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 including the operating deficits of the Lake Forest Country Club, less amounts charged to cost of sales. Inventory 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 (net of country club initiation fees) 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 such estimates could change in the near term. Any changes in estimates are accounted for prospectively over the life of the project.
Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 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. There were no impairment losses during any of the periods presented.
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During April 2001, the Fawn Lake Country Club was substantially completed. As a result of our intention to sell the Club as a single asset, Statement of Financial Accounting Standards (“SFAS”) No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects,” requires that the Club be reported separately from inventory on our balance sheets within property and equipment. The assets’ estimated fair market value was determined to be approximately $3,000,000 and is included in property and equipment on the June 30, 2004 and December 31, 2003, balance sheets as an asset held for use pursuant to SFAS No. 144 and is being depreciated according to our normal depreciation policy.
Cost of Sales
We calculate our costs of sales using a percentage based on estimates of total sales and project costs, principally acquisition and development costs. We estimate cost of sales percentages at the end of each fiscal year, and the resulting cost of sales percentages are applied prospectively. Total estimates are based on an analysis of actual costs incurred to date and the estimated costs of completion. Adjustments to estimated total project sales and development costs for the project affect the cost of goods sold percentage. 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. Costs of sales for a specific period also include direct selling costs, such as those relating to sales concessions, incurred during the period. These costs are not included in the estimated cost of sales percentage.
Income Tax
No benefit for income taxes was provided during 2004 or 2003 as we have recorded a valuation allowance equal to the amount of the recorded benefit. We have determined that it is more likely than not that the net deferred tax asset will not be realized based upon the guidance in SFAS No. 109. See Note 15 to our Consolidated Financial Statements.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB 51.” The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities”) and how to determine when and which business enterprise (the “primary beneficiary”) should consolidate the variable interest entity. This new model for consolidation applies to an entity which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003.
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In December 2003, the FASB issued FIN No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46-R”) to address certain FIN 46 implementation issues. The adoption of the provisions applicable to FIN 46 did not have any impact on our consolidated financial statements.
The following tables include our selected summarized operating data for the three and six months ended June 30, 2004 and 2003. This data is presented to provide assistance in identifying trends in our operating results and other factors affecting our business. This data should be read in conjunction with our financial statements, including the notes thereto, in Part I, Item 1 of this report.
Three Months Ended June 30, 2004
-----------------------------------------------------------------------
MIF NTS/LFII NTS/VA Total
-----------------------------------------------------------------------
Lot sales, net of discounts $ -- $ 1,324,000 $ 4,442,000 $ 5,766,000
Cost of sales -- (1,166,000) (3,533,000) (4,699,000)
Country Club income -- -- 443,000 443,000
Interest and miscellaneous income 2,000 -- 6,000 8,000
Operating expenses (141,000) (233,000) (698,000) (1,072,000)
Country Club expenses -- -- (675,000) (675,000)
Depreciation and amortization -- -- (29,000) (29,000)
Income from investment in
unconsolidated affiliate 190,000 -- -- 190,000
Net income (loss) 51,000 (75,000) (44,000) (68,000)
Three Months Ended June 30, 2003
-----------------------------------------------------------------------
MIF NTS/LFII NTS/VA Total
-----------------------------------------------------------------------
Lot sales, net of discounts $ -- $ 944,000 $ 918,000 $ 1,862,000
Cost of sales -- (824,000) (770,000) (1,594,000)
Country Club income -- -- 420,000 420,000
Interest and miscellaneous income -- -- 16,000 16,000
Operating expenses (129,000) (252,000) (527,000) (908,000)
Country Club expenses -- -- (651,000) (651,000)
Interest expense -- -- (18,000) (18,000)
Depreciation and amortization -- -- (39,000) (39,000)
Income from investment in
unconsolidated affiliate 29,000 -- -- 29,000
Net loss (100,000) (132,000) (651,000) (883,000)
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Six Months Ended June 30, 2004
-----------------------------------------------------------------------
MIF NTS/LFII NTS/VA Total
-----------------------------------------------------------------------
Lot sales, net of discounts $ -- $ 2,124,000 $ 6,678,000 $ 8,802,000
Cost of sales -- (1,871,000) (5,326,000) (7,197,000)
Country Club income -- -- 752,000 752,000
Interest and miscellaneous income 3,000 1,000 44,000 48,000
Operating expenses (228,000) (410,000) (1,332,000) (1,970,000)
Country Club expenses -- -- (1,160,000) (1,160,000)
Depreciation and amortization -- (1,000) (59,000) (60,000)
Income from investment in
unconsolidated affiliate 270,000 -- -- 270,000
Net income (loss) 45,000 (157,000) (403,000) (515,000)
Six Months Ended June 30, 2003
-----------------------------------------------------------------------
MIF NTS/LFII NTS/VA Total
-----------------------------------------------------------------------
Lot sales, net of discounts $ -- $ 1,562,000 $ 2,198,000 $ 3,760,000
Cost of sales -- (1,358,000) (1,733,000) (3,091,000)
Country Club income -- -- 677,000 677,000
Interest and miscellaneous income -- 8,000 67,000 75,000
Operating expenses (232,000) (554,000) (1,026,000) (1,812,000)
Country Club expenses -- -- (1,183,000) (1,183,000)
Interest expense -- -- (25,000) (25,000)
Depreciation and amortization -- (1,000) (77,000) (78,000)
Income from investment in
unconsolidated affiliate 88,000 -- -- 88,000
Net loss (144,000) (343,000) (1,102,000) (1,589,000)
The following discussion relating to changes in our results of operations includes only material line items within our Statements of Operations and line items for which there was a material change between the three and six months ending June 30, 2004 and 2003.
Revenues
Revenue from lot sales increased to $5,766,000 in the three months ended June 30, 2004, from $1,862,000 in the comparable period in 2003. The increase of $3,904,000, or 210%, was the result of our selling 37 lots in the three months ending June 30, 2004, as compared with 16 lots in the comparable period in 2003. Additionally there was an increase in the average sales price, to $156,000 in the three months ended June 30, 2004 from $116,000 in the comparable period in 2003.
Revenue from lot sales increased to $8,802,000 in the six months ended June 30, 2004, from $3,760,000 in the comparable period in 2003. The increase of $5,042,000, or 134%, was the result of our selling 59 lots in the six months ending June 30, 2004, as compared with the 31 in the comparable period in 2003. Additionally there was an increase in the average sales price, to $149,000 in the six months ended June 30, 2004 from $121,000 in the comparable period in 2003.
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Cost of Sales
The increase in cost of sales to $4,699,000 in the three months ended June 30, 2004, from $1,594,000 in the comparable period in 2003. The increase of $3,105,000, or 195%, was due to the sale of more lots in 2004.
The increase in cost of sales to $7,197,000 in the six months ended June 30, 2004, from $3,091,000 in the comparable period in 2003. The increase of $4,106,000, or 133%, was due to the sale of more lots is 2004.
Presented below are the gross profit margins for the three and six months ended June 30, 2004 and 2003:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2004 2003 2004 2003
--------------- ---------------- --------------- ----------------
NTS/LFII 12% 13% 12% 13%
NTS/VA 20% 16% 20% 21%
Combined gross profit margins 18% 14% 18% 18%
The decline in gross margin percentages for the six months ended June 30, 2004 as compared with the comparable period in 2003 is due to revised estimates of the ultimate sales values, development costs and absorption periods for both NTS/LFII and NTS/VA. As a result of the inherent economic volatility of residential real estate, we cannot be certain that the current estimated gross profit percentages will not be revised in the future.
We periodically review the value of land and inventories and determine whether any impairment charges are needed to reflect declines in value. We did not record any impairment charges during the periods ended June 30, 2004 and 2003. The estimated net realizable value of real estate inventories represents our 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 our real estate inventories is dependent on future events and conditions that may cause actual results to differ from amounts presently estimated.
Beginning with April 1, 2001, the income and expenses of the Fawn Lake Country Club have been included in our statement of operations. This was the result of the substantial completion of the Club and the intention to sell the Club as a single asset.
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Presented below is the condensed statement of operations for the Fawn Lake Country Club for the six months ended June 30, 2004 and 2003:
Six Months Ended
June 30,
-----------------------------
2004 2003
-------------- -------------
Revenues
Operating revenue $ 752,000 $ 677,000
-------------- -------------
Total revenues 752,000 677,000
Expenses
Cost of goods sold 161,000 131,000
Selling, general and administrative - affiliates 562,000 676,000
Selling, general and administrative 379,000 344,000
Depreciation 57,000 32,000
-------------- -------------
Total expenses 1,159,000 1,183,000
-------------- -------------
Net loss $ (407,000)$ (506,000)
============== =============
Expenses
Selling, general and administrative – affiliates expenses were approximately $624,000 and $463,000, respectively for the three months ended June 30, 2004 and 2003. The increase of $161,000, or 35%, was primarily a result of an increase in the overhead recovery fee on cash receipts of approximately $143,000. The increase in the overhead recovery fee is a direct result of the cash receipts from increased lot sales, as compared to the same period in 2003.
Selling, general and administrative — affiliates expenses were approximately $1,102,000 and $1,015,000, respectively for the six months ended June 30, 2004 and 2003. The increase of $87,000, or 9%, was primarily a result of an increase in the recovery fee on cash receipts of approximately $182,000. The increase in the overhead recovery fee is a direct result of the cash receipts from increased lot sales, as compared to the same period in 2003.
Selling and administrative expenses – affiliates are for actual personnel, marketing and administrative costs as they relate to us, NTS/LFII and NTS/VA which were accrued to NTS Residential Management Company (“NTS Management”). In addition, NTS Management is entitled to an overhead recovery, which is a reimbursement for overhead expenses attributable to the employees and the efforts of the 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.
Selling, general and administrative expenses were approximately $415,000 and $443,000, respectively for the three months ended June 30, 2004 and 2003. The decrease of $28,000, or 6%, was primarily a result of a decrease in advertising and marketing for the three months ended June 30, 2004, compared to the same period in 2003.
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Selling, general and administrative expenses were approximately $830,000 and $770,000, respectively for the six months ended June 30, 2004 and 2003. The increase of $60,000, or 8%, was primarily a result of an increase in legal fees and advertising and marketing for the six months ended June 30, 2004, compared to the same period in 2003.
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 for marketing related activities.
Increases and decreases in interest expense generally correspond directly to increases and decreases in the outstanding balances of our borrowings and our subsidiaries borrowings as well as in the capitalization percentage. For the six months ended June 30, 2004 and 2003, approximately $223,000 and $349,000, respectively, was capitalized in inventory and approximately $0 and $25,000, respectively, was expensed. The decrease in total interest is primarily due to the decrease in outstanding balances of loans.
No benefit or provision for income taxes was provided during the three and six months ended June 30, 2004 and 2003, as we have recorded a valuation allowance equal to the amount of the recorded benefit. We have determined that it is more likely than not that the net deferred tax asset will not be realized.
The primary sources of our liquidity are the ability of us and our subsidiaries, NTS/LFII and NTS/VA, to continue to defer payment of amounts owed to NTS Development Company and NTS Residential Management Company, to draw upon our development loan and the net proceeds retained from sales of residential lots and homes owned by our subsidiaries and the Joint Venture. Under the development loan we are required to make principal payments equal to 91% of gross receipts from lot sales in the Fawn Lake development owned by NTS/VA and the Lake Forest development owned by NTS/LFII. The development loan also requires that 90% of proceeds from the sale of the country club memberships be applied to the outstanding development loan balance.
Under the terms of our development loan, we may draw up to $12,000,000 on our $18,000,000 loan. As of June 30, 2004, the loan balance was approximately $231,000. If the balance on the loan exceeds $9,500,000 as of December 31, 2004, the lender would be entitled, pursuant to provisions of the development loan, to take possession of the unsold lots and all other security pledged for this loan. Failure to generate sufficient proceeds from lot sales or the lack of further availability under the development loan may have a material adverse effect on our liquidity and capital resources.
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The following table summarizes our sources/uses of cash flow for the six months ended June 30, 2004 and 2003, respectively:
Six Months Ended
June 30,
---------------------------------------
2004 2003
------------------ ------------------
Operating activities $ 3,138,873 $ (2,148,035)
Investing activities (140,820) (313,844)
Financing activities (3,023,861) 2,607,599
------------------ ------------------
Net (decrease) increase in cash and equivalents $ (25,808)$ 145,720
================== ==================
Cash provided by operating activities was approximately $3,139,000 for the six months ended June 30, 2004. The primary components of the cash provided by operating activities were a decrease in inventory of approximately $3,996,000, an increase in investment of unconsolidated affiliate of approximately $270,000 and a net loss of approximately $515,000. The decrease in inventory is due to the liquidation of inventory by lot sales.
Cash used in operating activities was approximately $2,148,000 for the six months ended June 30, 2003. The primary components of the cash used in operating activities were a net loss of approximately $1,589,000 and an increase in inventory of approximately $846,000, which were partially offset by a decrease in initiation fees receivable of approximately $197,000, and notes receivable of approximately $236,000. The decrease in initiation fees receivable is due to the continued cash collections from members on financing plans.
Cash used for investing activities was approximately $141,000 for the six months ended June 30, 2004. The component of the use of cash for investing activities was capital additions primarily at NTS/VA golf operations.
Cash used for investing activities was approximately $314,000 for the six months ended June 30, 2003. The component of the use of cash for investing activities was capital additions, primarily at NTS/VA golf operations.
Cash used for financing activities was approximately $3,024,000 for the six months ended June 30, 2004. The primary component of the cash used in financing activities is net payments related to the development loans for NTS/LFII and NTS/VA projects of approximately $3,875,000 which was partially offset by the continued deferral of accounts payable to affiliates of approximately $852,000 which is owed to NTS Development Company and NTS Residential Management Company for salary and overhead reimbursements.
Cash provided by financing activities was approximately $2,608,000 for the six months ended June 30, 2003. The components of the cash provided by financing activities were the continued deferral of accounts payable to affiliates of approximately $973,000 which is owed to NTS Development Company and NTS Residential Management Company for salary and overhead reimbursements,
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along with additional net proceeds on notes payable relating to the development loans for NTS/LFII and NTS/VA projects of approximately $1,635,000.
We intend to satisfy our future liquidity needs through cash provided by operations, cash reserves, additional borrowings secured by our properties and deferrals of amounts owed to NTS Development and NTS Management. There can be no assurance that funds from operations, reserves or borrowings will be available, or that NTS Development and NTS Management will continue to defer amounts due them past March 31, 2005. If these sources of liquidity are not available our Advisor will manage the demand on liquidity according to our best interest.
Dissolution and Liquidation
We are a finite life entity. Our organizational documents require us to commence an orderly liquidation by December 31, 2008. Delaware law, our state of incorporation, provides us with a three-year period after the initiation of our liquidation to wind up our affairs and issue final distributions to shareholders. We anticipate initiating our liquidation on or before December 31, 2008.
NTS Guaranty Corporation (the “Guarantor”), an affiliate of the Sponsor, has guaranteed that, at the time that we complete our liquidation and dissolve, the total distributions we have made to shareholders from all sources during our existence will be at least equal to the original capital contributions attributable to our then outstanding shares. As of December 31, 2003, the original capital contributions attributable to our outstanding shares were $63,690,000, and we had paid distributions of approximately $23,141,000.
In connection with our ongoing review of the status of our properties and progress to liquidation, we have undertaken a preliminary analysis as to the approximate total distributions which we anticipate making to our shareholders through dissolution. As final liquidating distributions are not likely for 5-7 years, these estimates may change significantly prior to dissolution.
The final liquidating distributions will be made after payment of all of our debts and obligations, including $11,376,000 currently deferred and owed to Affiliates of the Sponsor by us, our portion of the $16,207 (as of June 30, 2004 our portion is approximately $8,000) currently deferred and owed to Affiliates of the Sponsor by the Orlando Lake Forest Joint Venture, and the release of collateral provided by Affiliates of the Sponsor securing our loan from Provident Bank in the amount of $5,627,562. Based upon the preliminary analysis referred to above, we currently do not anticipate that the ultimate proceeds from future asset sales and final liquidation will be sufficient to return to shareholders an amount equal to original capital contributions attributable to then outstanding shares. Thus, we anticipate the guaranty provided by NTS Guaranty to be called upon in order to return original capital contributions attributable to the then outstanding shares.
The liability of the Guarantor under the guaranty is expressly limited to its assets. The Guarantor’s sole asset consists of 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,
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be able to honor his obligation to the Guarantor or that the Guarantor will be able to satisfy its obligation under the guaranty. The Guarantor may in the future guarantee obligations of other third parties, including guaranties of obligations owed by our affiliates to other entities. Based on the preliminary analysis referred to above and the $10,000,000 to be provided for by the Guarantor, the remaining amount projected to be distributed to shareholders appears to be sufficient to meet the return of capital guaranty to shareholders. The amount available for distribution to our shareholders, however, cannot be estimated with any certainty given that final distributions are not likely for 5-7 years. This estimate may change significantly prior to dissolution.
Our website address is www.ntsdevelopment.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act are available and may be accessed free of charge through the “About NTS” section of our website as soon as reasonably practicable after we electronically file this material with, or furnish it to, the SEC. Our website and the information contained therein or connected thereto are not incorporated into this Quarterly Report on Form 10-Q.
Our primary market risk exposure with regard to financial instruments stems from changes in interest rates. The Fund’s debt instruments bear interest at both variable and fixed rates as discussed in Note 11 of the Fund’s financial statements. For the three months ended June 30, 2004, a hypothetical 100 basis point increase in interest rates would result in an approximate $41,000 increase in interest expense and an approximate $54,000 decrease in the fair value of debt for the three months then ended. During the six months ended June 30, 2004, the majority of interest expense incurred was capitalized in inventory.
The President of the NTS Mortgage Income Fund and the Chief Financial Officer of NTS Development Company * (the equivalent of the Chief Financial Officer of the Company) have evaluated our disclosure controls and procedures as of June 30, 2004. Based on that evaluation, the President of the NTS Mortgage Income Fund and the Chief Financial Officer of NTS Development Company concluded that our disclosure controls and procedures were effective as of June 30, 2004. There were no material changes in our internal controls over financial reporting during the six months ended June 30, 2004.
* NTS Development Company provides services to the Company under property management agreements as described in Part I — Note 13 Related Party Transactions.
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Items 1 through 5 are omitted because these items are inapplicable or the answers to the items are negative.
a) The following exhibits are incorporated by reference from the Fund's Registration Statement on
Form S-11, referencing the exhibit number used in such Registration Statement.
| Exhibit No. | Description | |
| 3 (a) (2) | Restated Certificate of Incorporation | |
| 3 (b) | By-Laws | |
| 10 (c) | Form of Advisory Agreement | |
| 10 (b) | Form of Guaranty Agreement |
b) The following exhibits are incorporated by reference from the Fund's Form 8-K dated January 14, 1998.
| Exhibit No. | Description | |
| 10 | Material contracts - The agreements whereby the Fund acquired all of the issued | |
| and outstanding common capital stock of NTS/LFII and NTS/VA, and the | ||
| Property Management Agreements between the Fund and NTS Management. |
c) The following exhibits can be found on our website www.ntsdevelopment.com.
| Exhibit No. | Description | |
| 14 | Code of Ethics |
d) The following are additional exhibits filed with this Form 10-Q Report.
| Exhibit No. | Description | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. | |
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| 32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
We filed a Form 8-K on May 17, 2004, to inform shareholders of a mini-tender offer by CMG Partners, LLC to purchase their shares in NTS Mortgage Income Fund for $2.00 per share in cash. We also informed the shareholders that we recommended a rejection of the offer and provided reasons for our recommendation.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NTS Mortgage Income Fund | |||
| /s/ Brian F. Lavin |
| Brian F. Lavin |
| President of NTS Mortgage Income Fund |
| Date: August 16, 2004 |
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