NTS MORTGAGE INCOME FUND

 

NTS MORTGAGE INCOME FUND

 

UNAUDITED FINANCIAL STATEMENTS

 

TABLE OF CONTENTS

 

CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION (LIQUIDATION BASIS) AS OF JUNE 30, 2011 AND DECEMBER 31, 2010 (UNAUDITED)	1
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION (LIQUIDATION BASIS) FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)	2
CONSOLIDATED STATEMENTS OF CASH FLOWS (LIQUIDATION BASIS) FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)	3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	4

 

 

NTS MORTGAGE INCOME FUND

Consolidated Statements of Net Assets in Liquidation

As of June 30, 2011 and December 31, 2010

Liquidation Basis

(Unaudited)

 

		June 30, 2011			December 31, 2010
ASSETS:
Real estate assets under development		$	9,685,775		$	9,331,365
Investment in unconsolidated affiliate		1,821,531			1,784,308
Total real estate and investments		11,507,306			11,115,673
Cash and equivalents		13,235			7,637
Cash and equivalents — restricted		310,696			644,472
Accounts receivable		30,285			31,175
Notes receivable		230,978			194,986
Other assets		92,676			198,248
Total assets		12,185,176			12,192,191
LIABILITIES AND NET ASSETS IN LIQUIDATION:
Mortgage payable		3,095,272			3,208,273
Notes payable due to affiliate		7,039,200			5,938,391
Accounts payable and accrued expenses		554,792			877,117
Accounts payable and accrued expenses due to affiliates		29,912			137,072
Other liabilities		97,246			86,246
Reserve for estimated costs during liquidation period		1,210,000			1,260,000
Total liabilities		12,026,422			11,507,099
COMMITMENTS AND CONTINGENCIES (NOTE 9)
NET ASSETS IN LIQUIDATION		$	158,754		$	685,092

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

1

 

NTS MORTGAGE INCOME FUND

Consolidated Statements of Changes in Net Assets in Liquidation

For the Six Months Ended June 30, 2011 and 2010

Liquidation Basis

 (Unaudited)

 

		For the Six Months Ended
		June 30, 2011			June 30, 2010
Net assets in liquidation — beginning of period		$	685,092		$	1,042,277
Operating activities of real estate assets under development		(774,545		)	(754,211		)
Adjustments of real estate and other assets to net realizable value, net of liabilities		248,207			459,445
Net assets in liquidation — end of period		$	158,754		$	747,511

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

 

2

 

NTS MORTGAGE INCOME FUND

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2011 and 2010

Liquidation Basis

(Unaudited)

 

		For the Six Months Ended
		2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Change in net assets in liquidation from:
Operating activities of real estate assets under development		$	(774,545	)	$	(754,211	)
Adjustments to reconcile to net cash used in operating activities:
Loss (income) from investment in unconsolidated affiliate		(735		)	157,974
Changes in assets and liabilities:
Cash and equivalents - restricted		333,776			677,716
Accounts receivable		133,065			(1,292		)
Notes receivable		4,971			4,778
Inventory		(274,586		)	(422,926		)
Accounts payable and accrued expenses		(322,291		)	130,806
Other liabilities		11,000			17,695
Other assets		106,795			82,260
Net cash used in operating activities		(782,550		)	(107,200		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contribution to unconsolidated affiliate		(92,500		)	(97,400		)
Net cash used in investing activities		(92,500		)	(97,400		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Accounts payable and accrued expenses due to affiliates		(107,160		)	(48,481		)
Proceeds from mortgage		—			511,284
Proceeds from notes payable due to affiliate		1,126,809			1,668,822
Payments on mortgage and notes payable		(113,001		)	(1,193,841		)
Payments on notes payable due to affiliate		(26,000		)	(820,000		)
Net cash provided by financing activities		880,648			117,784
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS		5,598			(86,816		)
CASH AND EQUIVALENTS, beginning of period		7,637			123,229
CASH AND EQUIVALENTS, end of period		$	13,235		$	36,413

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

3

 

NTS MORTGAGE INCOME FUND

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1 - Organization and Significant Accounting Policies

 

A) 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 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 (the “Sponsor”) is the sponsor of the Fund.  NTS Advisory Corporation (the “Advisor”) is the advisor to the Fund and NTS Residential Management Company and its successor under assignment, Residential Management Company, (“NTS Management”), are the managers of the Fund’s properties.  The Advisor and NTS Management are affiliates of and are under common control with NTS Corporation.  The terms “we,” “us” or “our,” as the context requires, may refer to the Fund or its interests in its properties and 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, the law of our state of incorporation, provides us with a three-year period after the filing of our dissolution to wind up our affairs and issue final distributions to stockholders. We filed for dissolution on December 31, 2008, thus initiating our liquidation.  See Note 1 B — Plan of Liquidation for additional information.

 

Final liquidating distributions will be made after payment of all of our debts and obligations, including approximately $7.0 million of notes payable and $30,000 of accounts payable and accrued expenses currently deferred and owed, by us, to affiliates of the Sponsor.  The amount available for distribution upon the completion of our liquidation, however, cannot be estimated with certainty given that final distributions will likely not be issued for several years.

 

Our subsidiary, NTS/LFII, is the owner and developer of the Lake Forest North single-family residential community located in Louisville, Kentucky.  Our development activities at this location are substantially complete.

 

Our subsidiary, 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 or liquidation.  Fawn Lake has amenities consisting of a 285-acre lake, clubhouse, pool, tennis courts and boat docks, as well as Fawn Lake Country Club, a private country club with a championship golf course (the “Country Club”). As of June 30, 2011, approximately 975 of 1,398 total lots have been developed and approximately 68% of the total projected lots to be developed have been sold.

 

We also own a 50% interest in the Orlando Lake Forest Joint Venture (the “Joint Venture”).  See Note 3 - Investment in Unconsolidated Affiliate for further information pertaining to the investment. Our residential development activities at this location are substantially complete.

 

B)            Plan of Liquidation

 

On December 10, 2008, the Board of Directors (the “Board”) of the Fund adopted the Plan of Dissolution and Complete Liquidation of NTS Mortgage Income Fund (the “Plan”).  On December 31, 2008, we filed for a certificate of dissolution with the Secretary of State of the State of Delaware.  The plan contemplates the orderly completion of construction at our development properties and sale of each of the Fund’s remaining assets, the collection of all outstanding loans from third parties, the orderly discharge of all outstanding liabilities to third parties and, after the establishment of appropriate reserves through estimation or a claims process, the distribution of all remaining cash to stockholders.

 

4

 

At this time, we anticipate the liquidation process will exceed the three year statutory liquidation period due to the status of the Fawn Lake Development.  It does not appear likely that the Fund will completely dispose of this asset by the end of 2011. Under Delaware law the Fund may seek to extend its liquidation period by petitioning the Delaware Chancery Court.  Alternatively, the Plan provides that at that time or any time the Board of Directors of the Fund deems it advisable, all remaining assets and liabilities could be transferred into a liquidating trust.  The liquidating trust would continue in existence until all liabilities have been settled, all remaining assets have been sold, proceeds distributed, and the appropriate statutory periods have expired.

 

At June 30, 2011, the accompanying financial statements report the Fund’s net assets in liquidation aggregated $158,754, or $0.05 per share based upon 3,187,328 common shares outstanding.  This amount presents development projects at estimated net realizable value after giving effect to the discounting of estimated net proceeds therefrom.  All other assets are presented at estimated net realizable value on an undiscounted basis.  The amount also includes a reserve for future estimated general and administrative expenses and other costs during the liquidation.  Estimated net realizable value reflects economic changes and various other changed circumstances over recent months.  There can be no assurance that these estimated values will be realized.  Such amount should not be taken as an indication of the timing or amount of future distributions to be made by us.

 

The timing and amounts of interim liquidating distributions (if any) and final liquidating distributions will depend on the timing and amount of proceeds that we will receive upon the sale of the remaining assets and the extent to which reserves for current or future liabilities are required.  Accordingly, there can be no assurance that there will be any liquidating distributions prior to a final liquidating distribution.

 

C)            Basis of Accounting

 

On December 31, 2008, the date of dissolution, the Fund adopted the liquidation basis of accounting.  Under the liquidation basis of accounting, the Fund will report the value of its assets based on their net realized amounts and liabilities at their estimated settlement amounts.  The result of these calculations will be an estimated liquidation value for the Fund.  A Statement of Net Assets in Liquidation and a Statement of Changes in Net Assets in Liquidation are the principal financial statements presented under the liquidation basis of accounting.  The valuation of assets at their net realizable values and liabilities at their anticipated settlement amounts represent estimates, based on present facts and circumstances, of the net realizable values of assets and the costs associated with carrying out the Plan and dissolution based on the assumptions set forth below.  The actual values and costs associated with carrying out the Plan are expected to differ from the amounts shown herein because of the inherent uncertainty and will be greater than or less than the amounts recorded.  Such differences may be material.  In particular, the estimates of the Fund’s costs will vary with the length of time it operates.  In addition, the estimate of net assets in liquidation per share in the accompanying Statement of Net Assets in Liquidation, which except for projects under development, does not incorporate a present value discount.  Accordingly, it is not possible to predict the aggregate amount or timing of future distributions to stockholders and no assurance can be given that the amount of liquidating distributions to be received will equal or exceed the estimate of net assets in liquidation per share presented in the accompanying Statement of Net Assets in Liquidation.

 

D)            Valuation Assumptions and Net Assets in Liquidation

 

Under the liquidation basis of accounting, the carrying amounts of assets as of the date of dissolution, December 31, 2008, were adjusted to their estimated net realizable values and liabilities including the estimated costs associated with implementing the Plan were adjusted to estimated settlement amounts.  The following are the significant assumptions utilized by management in assessing the value of the assets and the expected settlement values of liabilities included in the Statement of Net Assets in Liquidation at June 30, 2011 and December 31, 2010.

 

Real estate assets under development are primarily reflected at net realizable value which is based upon our estimates for developing and selling out the respective NTS/VA project in the orderly course of business.  Sales prices are based upon contracts signed to date, estimated sales prices for the unsold lots and undeveloped land, appraisals and analysis provided by independent third parties.  Costs and expenses are based upon our estimates for the remaining life of the project and an orderly liquidation.  We have assumed that existing financing will remain in place during the respective projects’ planned development and sell out.

 

5

 

Cash, deposits and escrow accounts are presented at face value.  The remaining assets that we have determined to have a cash value are stated at estimated net realizable value which is the expected selling price or contractual payment to be received, less applicable direct costs or expenses, if any.  The assets that have been valued on this basis include receivables and an investment in unconsolidated affiliate.

 

Mortgage, notes payable, accounts payable, accrued expenses and other liabilities are stated at settlement amounts.

 

E)            Reserve for Estimated Costs During the Liquidation Period

 

Under the liquidation basis of accounting, we are required to estimate and accrue the costs associated with implementing and completing the Plan.  These amounts can vary significantly due to, among other things, the timing and realized proceeds from lot sales, the costs of retaining personnel and others to oversee the liquidation, including the cost of insurance, the timing and amounts associated with discharging known and contingent liabilities and the costs associated with cessation of our operations including an estimate of costs subsequent to that date (which would include reserve contingencies for the appropriate statutory periods).  As a result, we have accrued the projected costs, including overhead and specific liquidation costs of salaries, professional fees, and other miscellaneous wind-down costs, expected to be incurred during the estimated liquidation period required to complete the liquidation of our remaining assets.  These projections could change materially based on the timing of lot sales and development activity.   These accruals will be adjusted from time to time as projections and assumptions change or as a result of a claims process.

 

The following is a summary of the changes in our Reserve for Estimated Costs at June 30, 2011:

 

		(Unaudited)
		For the Six Months Ended June 30, 2011
		Balance at December 31, 2010			Adjustments and Payments, net			Balance at June 30, 2011
Payroll, benefits, and retention costs		$	450,000		$	25,000		$	425,000
Professional fees		425,000			25,000			400,000
Other general and administrative costs		385,000			—			385,000
		$	1,260,000		$	50,000		$	1,210,000

 

F)            Principles of Consolidation and Basis of Presentation

 

Our consolidated financial statements include the assets, liabilities, revenues and expenses of our wholly-owned subsidiaries.  Investments of 50% or less in affiliated companies are accounted for under the equity method.  All significant intercompany transactions and balances have been eliminated.

 

G)            Use of Estimates in the Preparation of Consolidated Financial Statements and Consideration of Subsequent Events

 

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.

 

We considered subsequent events through October 14, 2011, the date of issuance of this report.  Actual results could differ from those estimates.

 

H)           Revenue Recognition

 

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.

 

6

 

I)                Advertising

 

We expense advertising costs as incurred, which are classified with the operating activities of real estate assets under development in the accompanying consolidated statements of changes in net assets for the six months ended June 30, 2011 and 2010.  Advertising expense was approximately $10,000 and $33,000 during the six months ended June 30, 2011 and 2010.

 

J)               Environmental Remediation and Compliance

 

Environmental liabilities for remediation costs are accrued based on estimates of known environmental remediation exposures.  Liabilities are recognized when they are probable and can be reasonably estimated.  Environmental compliance costs are expensed as incurred.  We are not aware of any environmental remediation or compliance liabilities that presently require accrual of a loss contingency.

 

K)            Statements of Cash Flows

 

For purposes of reporting cash flows, cash and equivalents include cash on hand and short-term, highly liquid investments with an original maturity of three months or less when purchased that are readily convertible to cash.

 

Cash payments for interest, net of amounts capitalized, totaled approximately $180,000 and $109,000 during the six months ended June 30, 2011 and 2010, respectively.

 

L)             Segment Reporting

 

Our reportable operating segments include only one segment which is the development and sale of single-family residential lots.

 

M)         Fair Value of Financial Instruments

 

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820 Fair Value Measurements and Disclosures (“FASB ASC Topic 820”) requires companies to determine fair value based on the price that would be received to sell the asset or paid to transfer the liability to a market participant.  FASB ASC Topic 820 emphasizes that fair value is a market-based measurement, not an entity specific measurement.

 

FASB ASC Topic 820 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:

 

Level Input:		Input Definition:
Level 1		Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level 2		Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date.
Level 3		Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

 

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

7

 

The following table summarizes fair value measurements by level at June 30, 2011 and December 31, 2010 for assets and liabilities measured at fair value on a recurring basis:

 

		(Unaudited)
		Fair Value Measurements as of June 30, 2011 Using
Description		Level 1			Level 2			Level 3			Total
Assets:
Cash and equivalents		$	13,235		$	—		$	—		$	13,235
Cash and equivalents - restricted		310,696			—			—			310,696
Accounts and notes receivable		—			261,263			—			261,263
Real estate assets under development		—			—			9,685,775			9,685,775
Investment in unconsolidated affiliate		—			—			1,821,531			1,821,531
Total		$	323,931		$	261,263		$	11,507,306		$	12,092,5