UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-18550
NTS MORTGAGE INCOME FUND
(Exact name of registrant as specified in its charter)
Delaware 61-1146077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10172 Linn Station Road
Louisville, Kentucky 40223
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number,
including area code: (502) 426-4800
Not Applicable
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
As of August 1, 1998 there were approximately 3,187,000 shares of common
stock outstanding.
<PAGE>
TABLE OF CONTENTS
Pages
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 3
Consolidated Statements of Operations
For the three and six months ended 4
June 30, 1998 and 1997
Consolidated Statements of Cash Flows
For the six months ended 5
June 30, 1998 and 1997
Notes To Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NTS MORTGAGE INCOME FUND
CONSOLIDATED BALANCE SHEETS
As of As of
June 30, December 31,
1998 1997*
----------- -----------
ASSETS
Cash and equivalents $ 660,701 $ 1,413,445
Membership initiation fees and other
accounts receivable 1,959,225 1,625,489
Notes receivable 3,209,946 3,573,162
Inventory 52,236,681 51,917,990
Property and equipment, net of accumulated
depreciation of $138,143 and $45,788 568,298 452,913
(1997)
Investment in unconsolidated affiliate
(Note 6) 4,367,625 4,525,369
Other assets 848,079 676,000
------------ ------------
Total assets $ 63,850,555 $ 64,184,368
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,372,325 $ 3,040,468
Advances from affiliates (Note 8) 134,600 600,542
Notes payable - affiliates (Note 8) 4,178,908 5,309,492
Notes and mortgage loans payable 22,764,318 19,195,741
Lot deposits 107,491 97,500
Deferred revenues 164,973 146,789
------------ ------------
Total liabilities 28,722,615 28,390,532
------------ ------------
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock, $0.001 par value,
6,000,000 shares authorized;
3,187,333 shares issued and
outstanding $ 3,187 $ 3,187
Additional paid-in-capital 54,163,397 54,163,397
Accumulated deficit (19,038,644) (18,372,748)
------------ ------------
Total stockholders' equity 35,127,940 35,793,836
------------ ------------
Total liabilities and stockholders'
equity $ 63,850,555 $ 64,184,368
============ ============
The accompanying notes are an integral part of these financial statements.
* Reference is made to the Fund's audited financial statements in the Form 10-K
as filed with the Securities and Exchange Commission on April 15, 1998.
- 3 -
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
REVENUES:
<S> <C> <C> <C> <C>
Lot sales, net of discounts $ 2,006,441 $ -- $ 3,138,689 $ --
Cost of sales 1,479,280 -- 2,352,514 --
----------- ----------- ----------- -----------
Gross profit 527,161 -- 786,175 --
Interest income on affiliated
mortgage loans receivable -- 842,493 -- 1,649,230
Fee income on affiliated
mortgage loans and other
financial services -- 4,030 -- 7,709
Recovery of provision for loan
losses -- -- 382,096 --
Interest income on cash
equivalents and miscellaneous
income 88,000 10,560 220,981 17,327
----------- ----------- ----------- ----------
615,161 857,083 1,389,252 1,674,266
----------- ----------- ----------- -----------
EXPENSES:
Advisory fee (Note 8) -- 144,080 -- 287,430
Selling and general 141,435 -- 390,370 --
Selling and general -
affiliates (Note 8) 475,180 -- 771,854 --
Overhead reimbursements
(Note 8) 122,147 -- 195,148 --
Interest expense 85,637 328,895 211,838 650,504
Interest expense - affiliates
(Note 8) 61,019 84,066 124,530 175,751
Professional and administrative 42,895 62,500 92,014 125,000
Professional and administrative
- affiliates (Note 8) 11,077 -- 24,890 --
Other taxes and licenses 4,614 6,515 12,215 13,115
Depreciation and amortization
expense 38,298 17,285 74,545 34,570
Loss from investment in
unconsolidated affiliate 115,116 -- 157,744 --
----------- ----------- ----------- -----------
1,097,418 643,341 2,055,148 1,286,370
----------- ----------- ----------- -----------
Income (loss) before income tax
expense (482,257) 213,742 (665,896) 387,896
Income tax expense -- (1,850) -- (3,700)
----------- ----------- ----------- -----------
Net income (loss) $ (482,257) $ 211,892 $ (665,896) $ 384,196
=========== =========== =========== ===========
Net income (loss) per share of
common stock $ (0.15) $ 0.07 $ (0.21) $ 0.12
=========== =========== =========== ===========
Weighted average number of
shares 3,187,333 3,187,333 3,187,333 3,187,333
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 4 -
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Six Months Ended
June 30,
1998 1997
------------ ------------
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ (665,896) $ 384,196
Adjustments to reconcile net income (loss) to net
cash provided by (used for)operating activities:
Accretion of discount on affiliated mortgage loans
receivable -- (76,545)
Depreciation and amortization expense 74,545 34,570
Loss from investment in unconsolidated affiliate 157,744 --
Changes in assets and liabilities:
Interest receivable - affiliates -- 888,047
Membership initiation fees and other receivables (333,736) --
Notes receivable 363,216 --
Inventory (318,691) --
Other assets (10,928) 11,320
Accounts payable and accrued expenses (1,668,143) (39,837)
Lot deposits 9,991 --
Deferred revenues 18,184 449
------------ ------------
Net cash provided by (used for)operating activities (2,373,714) 1,202,200
------------ ------------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES
Principal collections on affiliated mortgage loans
receivable $ -- $ 4,430,033
Investment in affiliated mortgage loans receivable -- (4,456,970)
Property and equipment (140,652) --
------------ ------------
Net cash used for investing activities (140,652) (26,937)
------------ ------------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES
Advances from affiliates $ 563,669 $ --
Payments on advances from affiliates (1,029,611) --
Proceeds from notes payable - affiliates 1,314,000 860,957
Payments on notes payable - affiliates (2,444,584) (1,362,466)
Proceeds from notes payable 11,794,473 491,799
Payments on notes payable (8,225,896) (1,192,500)
Dividends paid -- (175,305)
Other assets (210,429) 36,882
------------ -----------
Net cash provided by (used for)financing activities 1,761,622 (1,340,633)
------------ ------------
Net increase (decrease) in cash and equivalents $ (752,744) $ (165,370)
CASH AND EQUIVALENTS, beginning of period 1,413,445 716,793
------------ ------------
CASH AND EQUIVALENTS, end of period $ 660,701 $ 551,423
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 5 -
<PAGE>
NTS MORTGAGE INCOME FUND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The financial statements and schedules included herein should be read in
conjunction with the Fund's 1997 Annual Report on Form 10-K. In the opinion of
the Fund's management, all adjustments (only consisting of normal recurring
accruals) necessary for a fair presentation have been made to the accompanying
financial statements for the three and six months ended June 30, 1998 and 1997.
The results of operations for the interim periods are not necessarily an
indication of the results to be expected for the full 1998 fiscal year.
1. Organization
- -- ------------
NTS Mortgage Income Fund (the "Fund"), a Delaware corporation, was formed
on September 26, 1988. The Fund operated as a real estate investment
trust (REIT) under the Internal Revenue Code of 1986 (the "Code"), as
amended, from its inception through December 31, 1996. The Fund began
operating as a "C" corporation under the Code for tax purposes effective
January 1, 1997. NTS Corporation is the sponsor of the Fund (the
"Sponsor"). NTS Advisory Corporation is the advisor to the Fund (the
"Advisor"), and NTS Residential Management Company is the manager to the
Fund ("NTS Management"). The Advisor and NTS Management are affiliates of
and are under common control with NTS Corporation.
The Fund acquired a 50% interest in the Orlando Lake Forest Joint Venture
effective August 16, 1997 in exchange for indebtedness owed to the Fund.
Prior to becoming a joint venture partner, the Fund had been the Joint
Venture's primary creditor.
The Fund's subsidiaries are NTS/Lake Forest II Residential Corporation
(NTS/LFII) and NTS/Virginia Development Company (NTS/VA). These
subsidiaries were acquired effective October 1, 1997. The acquisitions
were accounted for under the purchase method of accounting. Prior to
making the acquisitions, the Fund had been the primary creditor of these
entities.
The following unaudited pro forma information for the Fund for the
periods shown below gives effect to the NTS/LFII and NTS/VA acquisitions
as if they had occurred as of the beginning of 1997.
Six Months Ended
June 30,
1998 1997
------------- -------------
Lot sales $ 3,138,689 $ 3,536,926
Cost of sales (2,352,514) (2,538,476)
Other income (expenses), net (1,452,071) (2,093,121)
------------- -------------
Net loss $ (665,896) $ (1,094,671)
============= =============
Net loss per share of common stock $ (0.21) $ (0.34)
============= =============
Weighted average number of shares 3,187,333 3,187,333
============= =============
- 6 -
<PAGE>
1. Organization - Continued
- -- ------------------------
The unaudited pro forma information assumes the acquisitions occurred
January 1, 1997 and, accordingly, includes adjustments for interest
income on affiliated mortgages loans receivable, interest expense,
certain administrative costs and income taxes. The unaudited pro forma
financial data is presented for information purposes only and is not
necessarily indicative of the results of operations that actually would
have been achieved had the acquisition of NTS/LFII and NTS/VA been
consummated at the beginning of the periods presented.
2. 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.
3. 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.
4. Revenue Recognition and Reserves for Loan Losses
- -- ------------------------------------------------
The Fund recognizes revenue and related costs from lot sales using the
accrual method in accordance with generally accepted accounting
principles, which is when payment has been received and title, possession
and other attributes of ownership have been transferred to the buyer, and
the Fund and its subsidiaries are not obligated to perform significant
activities after the sale. The Fund and its subsidiaries generally
require a minimum down payment of at least 10% of the sales price of the
lot.
Interest income from mortgage loans and notes receivable was reported as
earned on the accrual basis of accounting. If the Fund had any reason to
doubt the collectability of any principal or interest amounts due
pursuant to the terms of the mortgage loans or notes, appropriate
reserves would have been established for any principal and accrued
interest amounts deemed unrealizable. Statements of Financial Accounting
Standards Nos. 114 and 118 require that impaired loans be measured based
on the present value of expected future cash flows discounted at each
loan's effective interest rate, at each loan's observable market price or
at the fair value of the collateral if the loan is collateral dependent.
5. Inventory
- -- ---------
Inventory is stated at the lower of cost or net realizable value.
Inventory includes all direct costs of land, land development, and
amenities, including interest, real estate taxes, and certain other costs
incurred during the development period, less amounts charged to cost of
sales. Inventory costs are allocated to individual lots sold using the
relative sales values. The use of the relative sales value method to
record cost of sales requires the use of estimates of sales values,
development costs and absorption periods over the life of the project.
Given the long-term nature of the projects and inherent economic
volatility of residential real estate, it is reasonably possible that
such estimates could change in the near term. Any changes in estimates
would be accounted for prospectively over the life of the project.
- 7 -
<PAGE>
5. Inventory - Continued
- -- ---------------------
Inventory consists of the following:
June 30, December 31,
1998 1997
---------- ----------
Land held for future
development, under
development and
completed lots $28,641,592 $28,661,525
Country club (net of
membership initiation
fees) 17,413,538 17,480,011
Amenities 6,181,551 5,776,454
---------- ----------
$52,236,681 $51,917,990
========== ==========
NTS/LFII and NTS/VA capitalized in inventory approximately $1,000,000 of
interest and real estate taxes for the six months ended June 30, 1998.
Interest and real estate taxes incurred was approximately $1,277,000.
Inventory for 1998 as reflected above includes $25,437,122, net of
$8,023,584 of country club membership initiation fees, of costs incurred
to date for the development of the Fawn Lake Country Club and the Lake
Forest Country Club. During the six months ended June 30, 1998,
approximately $336,000 of the Fawn Lake Country Club deficit and
approximately $187,000 of the Lake Forest Country Club deficit was
capitalized as a cost of inventory.
Pursuant to an agreement between NTS/LFII and the Lake Forest Country
Club regarding the cost to develop the Country Club, NTS/LFII is to
receive all initiation fees from membership sales for a period not to
exceed 12 years from the date of the agreement (ending 2003). The
remaining cost to be incurred for the current projected Country Club
operating deficit for the period covered by the agreement is
approximately $2,330,000 which is expected to be offset by member
initiation fees.
6. Investment in Unconsolidated Affiliate
- -- --------------------------------------
Effective as of August 16, 1997 the Fund became a partner in the Orlando
Lake Forest Joint Venture (OLFJV). The other partners in OLFJV are
Orlando Lake Forest, Inc., Orlando Capital Corporation and OLF II
Corporation, all of whom are Affiliates of and are under common control
with the Fund's Sponsor. OLFJV will continue to operate under its current
legal name as the Orlando Lake Forest Joint Venture.
OLFJV owns the Orlando Lake Forest project, a single-family residential
community located in Seminole County, Florida (near Orlando). OLFJV will
continue to own and develop the Orlando Lake Forest project.
The Fund contributed to the OLFJV as a capital contribution its interest
in the principal and interest of the first mortgage loan on the Orlando
Lake Forest project, and obtained a 50% interest in the Joint Venture.
The NTS entities named above hold cumulatively the remaining 50% interest
in OLFJV.
The net income or net loss of the OLFJV is allocated based on the
respective partner's percentage interest, as defined in the joint venture
agreement. As of June 30, 1998, the Fund's percentage interest was 50%,
and the Fund's investment balance in OLFJV was $4,367,625. The Fund's
share of OLFJV's net loss for the three and six months ended June 30,
1998 was $115,116 and $157,744, respectively.
- 8 -
<PAGE>
7. Notes and Mortgage Loans Payable
- -- --------------------------------
Notes and mortgage loans payable consist of the following:
June 30, December 31,
1998 1997
---------- ----------
Note payable to a bank in the amount of
$13,800,000, bearing interest at the Prime
Rate + 1%, payable monthly,
due December 27, 1997, secured by a collateral
assignment of the Fund's mortgages on Lake Forest
and Fawn Lake, paid
in full on January 7, 1998 $ -- $ 3,607,283
Mortgage loan payable to a bank in the
amount of $10,700,000, bearing interest at
the Prime Rate + 1 1/2%, due December 1,
2002, secured by inventory of NTS/VA,
generally principal payments consist of
approximately 91% of the Gross Receipts of
lot sales, guaranteed by Mr. J. D. Nichols,
Chairman of the Board of the Fund's
Sponsor, up to $3,000,000 10,345,473 8,005,034
Mortgage loan payable to a bank in the
amount of $8,000,000, bearing interest at
the Prime Rate + 1%, due October 31, 2003,
secured by inventory of NTS/LFII, generally
principal payments consist of approximately
90% of the Gross Receipts of lot sales,
guaranteed by Mr. J. D. Nichols up to 50%
of the credit facility 5,629,189 --
Mortgage loan payable to a bank in the
amount of $4,000,000, bearing interest at
the Prime Rate + 1/2%, payable monthly, due
July 31, 2002, secured by the Lake Forest
Country Club and golf course, annual
principal reductions of $300,000 every six
months are guaranteed by NTS Corporation,
the Fund's Sponsor 3,540,000 3,950,000
Warehouse Line of Credit Agreements with
three banks bearing interest at the Prime
Rate + 1%, the Prime Rate + 3/4% and the
Prime Rate + 1/2%, due December 15, 1998
($585,148),September 30, 1998 ($2,034,489)
and February 28, 1999 ($491,375), secured
by notes receivable, principal payments
consist of payments received from notes
receivable securing the obligation 3,111,012 3,495,299
Equipment loan in the amount of $50,180,
bearing interest at a rate of 2.9%, due May
1, 2001, secured by equipment for use at
the Lake Forest Country Club 48,844 --
(Continued next page)
- 9 -
<PAGE>
7. Notes and Mortgage Loans Payable
- -- --------------------------------
June 30, December 31,
1998 1997
---------- --------
Equipment loan in the amount of $27,736,
bearing interest at a rate of 5.94%,
due April 1, 2000, secured by equipment
purchased for use at the Lake Forest
Country Club $ 17,488 $ 21,970
Equipment loan in the amount of $165,276,
bearing interest at the rate of 8.75%, due
January 14, 1999, secured by golf course
maintenance equipment 30,790 60,123
Equipment loan in the amount of $42,435,
bearing interest at the rate of 10.5%, due
October 15, 1999, secured by golf course
maintenance equipment 18,484 24,778
Equipment loan in the amount of $34,555,
bearing interest at the rate of 10.5%, due
October 15, 1999, secured by golf course
maintenance equipment 14,689 20,063
Equipment loan in the amount of $19,194,
bearing interest at the rate of 10.5%, due
October 15, 1999, secured by golf course
maintenance equipment 8,349 11,191
---------- ----------
$ 22,764,318 $ 19,195,741
========== ==========
The Prime Rate was 8 1/2% at June 30, 1998 and December 31, 1997.
The $585,148 and $491,375 Warehouse Line of Credit agreements are
guaranteed by NTS Corporation.
8. Related Party Transactions
- -- --------------------------
As of June 30, 1998, the Sponsor or an Affiliate owned 97,955 shares of
the Fund. The Fund has entered into, or had been subject to in prior
periods, the following agreements with various Affiliates of the Sponsor
regarding the ongoing operation of the Fund.
Advisory Agreement
------------------
During 1997, pursuant to the Advisory Agreement, the Fund paid the
Advisor (NTS Advisory Corporation) a Management Expense Allowance
(Advisory Fee) relating to services performed for the Fund in an amount
equal to 1% of the Fund's Net Assets, per annum, which amount was
increased annually by an amount corresponding to the percentage increase
in the Consumer Price Index. The Advisory Fee was $144,080 and $287,430
for the three and six months ended June 30, 1997, respectively. Effective
October 1, 1997, the Fund no longer incurs an Advisory Fee but is
responsible for the actual general and administrative costs pursuant to
certain property management agreements discussed below.
Property Management Agreements
------------------------------
The ongoing operation and management of the Lake Forest North and Fawn
Lake projects will be conducted by NTS Residential Management Company
(NTS Management) under the terms of two Property Management Agreements.
NTS Management is a wholly-owned subsidiary of NTS Development Company.
NTS Development Company is a wholly-owned subsidiary of the Fund's
Sponsor. The Management Agreements have an initial term through December
31, 2003, subject to extension under certain conditions, and are
renewable for successive six (6) year terms thereafter. Under the
Management Agreements,
- 10 -
<PAGE>
8. Related Party Transactions - Continued
- -- --------------------------------------
Property Management Agreements - Continued
------------------------------------------
NTS Management will be reimbursed for costs incurred in the operation and
management of the Lake Forest North and Fawn Lake projects, and will
accrue an incentive payment payable as provided therein.
Pursuant to the Management Agreements, reimbursements of approximately
$475,000 and $772,000 were made to NTS Management or an Affiliate during
the three months and six months ended June 30, 1998, respectively, for
actual personnel, marketing and administrative costs as they relate to
NTS/LFII and NTS/VA. These reimbursements are reflected as Selling and
General Affiliates in the accompanying Consolidated Statements of
Operations. In addition, reimbursements of approximately $11,000 and
$25,000 were made to an Affiliate of the Fund's Sponsor during the three
months and six months ended June 30, 1998, respectively, for the actual
personnel and administration costs as they relate to the Fund.
Additionally, NTS Management is entitled to an Overhead Recovery, which
is a reimbursement for overhead expenses attributable to the employees
and the efforts of NTS Management under the Management Agreements, in an
amount equal to 3.75% of the projects' gross cash receipts, as defined in
the Management Agreements. Approximately $122,000 and $195,000 was
incurred as an Overhead Recovery during the three months and six months
ended June 30, 1998, respectively. This amount is classified as Overhead
Reimbursements in the accompanying Consolidated Statements of Operations.
The Management Agreements also call for NTS Management to receive an
Incentive Payment, as defined in the Management Agreements, equal to 10%
of the Net Cash Flows of the projects. The Incentive Payment will not
begin accruing until after the cumulative cash flows of NTS/LFII, NTS/VA
and the Fund's share of the cash flow of the Orlando Lake Forest Joint
Venture would have been sufficient to enable the Fund to return to the
then existing shareholders of the Fund an amount which, after adding
thereto all other payments actually remitted or distributed to such
shareholders of the Fund, is at least equal to the shareholders' Original
Capital Contribution, as defined in the Fund's Prospectus. As of June 30,
1998, the Fund had raised approximately $63,690,000 and had paid
distributions of approximately $23,141,000. As of June 30, 1998, no
amount had been accrued as an Incentive Payment in the Fund's
consolidated financial statements.
Advances and Notes Payable Affiliates
-------------------------------------
NTS/VA had received advances from Affiliates of the Fund's Sponsor, net
of repayments, totaling $600,542 as of December 31, 1997. Interest on the
advances had accrued at the Prime Rate. The advances were repaid to the
Affiliates in the second quarter of 1998. Interest incurred payable to
the Affiliates was $10,512 and $21,273 for the three and six months ended
June 30, 1998, respectively.
The Fund has received non-interest bearing advances from an
unconsolidated Affiliate of $134,600 as of June 30, 1998. The Fund has
received advances from Affiliates of the Fund's Sponsor, net of
repayments, totaling $4,178,908 and $5,309,492 as of June 30, 1998 and
December 31, 1997, respectively. As of June 30, 1998, the advances bear
interest at approximately the Prime Rate and mature May 1, 2006. Interest
expense to the Affiliates was $61,019 and $84,066 for the three months
ended June 30, 1998 and 1997, and $124,530 and $175,751 for the six
months ended June 30, 1998 and 1997, respectively.
9. Income Taxes
- -- ------------
The Fund adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109), effective January 1, 1997. SFAS
109 requires recognition of deferred tax assets and liabilities for the
expected future tax consequence of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
assets
- 11 -
<PAGE>
9. Income Taxes - Continued
- -- ------------------------
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, 1998 and December 31, 1997, will not be realized.
As of December 31, 1997, the Fund has a federal net operating loss
carryforward of approximately $387,000 expiring in 2012.
10. Financial Instruments
- --- ---------------------
The book values of cash and cash equivalents, trade receivables and trade
payables are considered to be representative of their respective fair
values because of the immediate or short-term maturity of these financial
instruments. The fair value of the Fund's debt instruments approximated
the book value because a substantial portion of the underlying
instruments are variable rate notes which re-price frequently.
11. Commitments and Contingencies
- --- -----------------------------
NTS/LFII and NTS/VA have various letters of credit outstanding to
governmental agencies and utility companies totaling approximately
$2,978,500. The primary purpose of these documents is to ensure that the
work at the developments is completed in accordance with the construction
plans as approved by the appropriate governmental agency or utility
company.
It is estimated that development of the remaining homeowners association
amenities at the Lake Forest North project will be substantially complete
by May 2000. Based on engineering studies and projections, NTS/LFII will
incur additional costs, excluding interest, of approximately $500,000
during 2000 to complete the homeowners association amenities.
It is estimated that the country club and homeowners association
amenities at the Fawn Lake project will be substantially completed by
December 2002. Based on engineering studies and projections, NTS/VA will
incur additional costs, excluding interest, of approximately $3,465,000
to complete the country club and homeowners association amenities for the
project. These costs are estimated to be incurred as follows: $150,000
for 1998, $1,485,000 for 1999, $1,430,000 for 2000, zero for 2001 and
$400,000 for 2002.
12. Guaranties to the Fund
- --- ----------------------
NTS Guaranty Corporation (the "Guarantor"), an Affiliate of the Sponsor,
has guaranteed that investors of the Fund will receive, over the life of
the Fund, aggregate distributions from the Fund (from all sources) in an
amount at least equal to their Original Capital Contributions. As of June
30, 1998, 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.
- 12 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The NTS Mortgage Income Fund (the "Fund")commenced an offering to the public on
March 31, 1989 and was authorized to sell up to 2,500,000 shares of common stock
at $20.00 per share (subject to an increase to 5,000,000 shares at the option of
the Fund). Approximately 3,187,000 shares were sold representing approximately
$64 million in sales and approximately $9.5 million in selling expenses and
other offering costs. The net offering proceeds remaining, after payment of
brokerage commissions, organizational expenses and other costs, were used to
make Mortgage Loans and Temporary Investments and such other investments as
permitted by the Fund's Prospectus. Capitalized terms shall have the meaning
ascribed in the "Glossary" on pages 75 to 81 of the Fund's Prospectus, which is
filed herewith and incorporated by reference.
In September 1997, the Fund entered into an Amended and Restated Joint Venture
Agreement evidencing the Fund's admission as a partner in OLFJV. The Fund
contributed its interest in the principal of the first mortgage loan on the
Orlando Lake Forest project and obtained a 50% interest in OLFJV.
In December 1997, the Fund acquired all the issued and outstanding common
capital stock of NTS/LFII and NTS/VA, effective October 1, 1997, for a nominal
purchase price. Concurrent with this transaction, the existing indebtedness of
NTS/LFII and NTS/VA to the Fund was converted to equity as of October 1, 1997.
This marks the beginning of the Fund's operations focusing solely on the
continuing development, operations, marketing and sale of single-family,
residential real estate. As a result, the Fund no longer operates as a Real
Estate Investment Trust effective January 1, 1997.
Liquidity and Capital Resources
- -------------------------------
The Fund's primary source of liquidity had been from the interest earned on the
Mortgage Loans and on the Temporary Investments. The Fund's current source of
liquidity is primarily the ability of its subsidiaries (to which the Fund
formerly had outstanding Mortgage Loans)to draw upon their respective
development loans. Additional liquidity is provided by net proceeds retained
from residential lot closings by the properties owned by the Fund's subsidiaries
and OLFJV in which the Fund has a 50% interest. The various development loans
call for principal payments ranging from 67% to 91% of Gross Receipts from lot
sales.
NTS/LFII is the owner and developer of the Lake Forest North single-family
residential community located in Louisville, Kentucky, and will continue to own
and develop the Lake Forest North project to completion and orderly sale as a
wholly-owned subsidiary of the Fund.
NTS/VA is the owner and developer of the Fawn Lake single-family residential
community located near Fredericksburg, Virginia, and will continue to own and
develop the Fawn Lake project to completion and orderly sale as a wholly-owned
subsidiary of the Fund. Fawn Lake Realty, Inc. a division of NTS/Residential
Properties, Inc.- Virginia, a Virginia corporation and an Affiliate of NTS
Corporation, the Sponsor of the Fund, will continue to act as a broker and agent
for NTS/VA for the sale of lots within the Fawn Lake project, and as broker and
agent for approved builders in the Fawn Lake project for the sale of new homes.
The Joint Venture owns the Orlando Lake Forest project, a single-family
residential community located in Seminole County, Florida (near Orlando). The
Joint Venture will continue to own and develop the Orlando Lake Forest project.
NTS Realty Company of Florida, an Affiliate of and under common control with the
Fund's Sponsor, will continue to act as a broker and agent for OLFJV for the
sale of lots within the Orlando Lake Forest project.
- 13 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
Operating Activity
- ------------------
During the six months ended June 30, 1998, cash used by operations was
$2,373,314. The Fund used $444,535 for cash expenses in excess of cash revenues.
NTS/LFII and NTS/VA used $318,691 of cash to increase inventory. NTS/LFII and
NTS/VA provided $29,480 of cash from the collection of initiation fees and other
receivables and notes receivable. In addition, payables decreased $1,668,143
while lot deposits and deferred revenues increased $28,175.
Cash provided by operations was $1,202,200 for the six months ended June 30,
1997. This amount includes net income as reported coupled with a decrease in
interest receivable from affiliates.
Investing Activity
- ------------------
During the six months ended June 30, 1998, the Fund was involved in minimal
investing activity.
During the six months ended June 30, 1997, the Fund received repayment on three
mortgage loans and two temporary investments in the aggregate principal amount
of $4,430,033. Repayments on mortgage loans were generally equal to
approximately 83% of the Gross Receipts received on lot sales less closing
costs. The Fund made investments in three mortgage loans and one temporary
investment in the aggregate principal amount of $4,456,970.
Financing Activity
- ------------------
During the six months ended June 30, 1998, the Fund and its subsidiaries
borrowed $11,794,473 from their various lenders. The Fund and its subsidiaries
repaid $4,618,613 of their borrowings from lot proceeds generated by NTS/LFII
and NTS/VA. In addition, $3,607,283 of borrowings were repaid using proceeds
from the NTS/LFII development loan. The Fund and its subsidiaries received
$1,877,669 in advances from affiliates and repaid $3,474,195 of notes and
advances from affiliates. The affiliated borrowings were repaid primarily using
proceeds from the NTS/LFII development loan. The Fund paid $210,429 for loan
costs and other assets during the six months ended June 30, 1998.
During the six months ended June 30, 1997, the Fund borrowed $491,799 on its
credit facilities. The Fund repaid $1,192,500 of its borrowings using proceeds
from loan repayments made by NTS/Lake Forest II Residential Corporation and
NTS/Virginia Development Company. The Fund borrowed $860,957 from an Affiliate
of the Fund's Sponsor. The Fund repaid $1,362,466 of its borrowings from
Affiliates using proceeds from loan repayments made by NTS/Lake Forest II
Residential Corporation, Orlando Lake Forest Joint Venture and NTS/Virginia
Development Company. The Fund paid dividends of $175,305 during the six months
ended June 30, 1997.
The Fund's cash and cash equivalents with amounts available from its development
loans and notes payable to Affiliates and amounts generated from future
operations are expected to be sufficient to meet the Fund's anticipated needs
for liquidity and capital resources.
Results of Operations
- ---------------------
Comparability
- -------------
On an overall basis, the Fund lost $665,896 or $0.21 per share of common stock
for the six months ended June 30, 1998 and $482,257 or $0.15 per share of common
stock for the three months ended June 30, 1998. The historical financial
statements are impacted by the Fund's lack of history as a real estate
development company, therefore, management believes that the Fund's results of
operations for the three and six months ended June 30, 1998, are not comparable
with prior years and a discussion comparing these periods is not included.
- 14 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
Revenues
- --------
Revenue for the three months ended June 30, 1998, includes $2 million of lot
sales from NTS/LFII and NTS/VA. Cost of sales was $1,480,000 resulting in a
gross profit of approximately 26%.
During the three and six months ended June 30, 1997, the Fund's primary revenue
source was interest income earned on affiliated mortgage loans. The average
outstanding balance of the earning loans was approximately $65,000,000 and the
average rate of interest earned by the Fund was approximately 5%.
The Fund had previously written-off a portion of the Phase-In Mortgage Loan to
OLFJV regarding Section 2 of that project. During the first quarter of 1998, the
Fund collected $382,096 of principal payments related to this loan.
Expenses
- --------
During 1997, the operating expenses of the Fund included a Management Expense
Allowance (Advisory Fee) of 1% of the Fund's Net Assets, per annum, which was
increased annually by an amount corresponding to the percentage increase in the
Consumer Price Index. Pursuant to the Advisory Agreement, the Advisory Fee was
paid to the Advisor (NTS Advisory Corporation) or its affiliate. The Advisory
Fee for the three and six months ended June 30, 1997 was $144,080 and $287,430,
respectively. Effective October 1, 1997, the Fund will no longer incur an
Advisory Fee but will be responsible for the actual general and administrative
costs pursuant to certain property management agreements discussed below.
The ongoing operation and management of the Lake Forest North and Fawn Lake
projects will be conducted by NTS Management under the terms of two Property
Management Agreements executed on December 30, 1997, and dated as of October 1,
1997. NTS Management is a wholly-owned subsidiary of NTS Development Company.
NTS Development Company is a wholly-owned subsidiary of the Fund's Sponsor. The
Management Agreements have an initial term through December 31, 2003, subject to
extension under certain conditions, and are renewable for successive six (6)
year terms thereafter. Under the Management Agreements, NTS Management will be
reimbursed for costs incurred in the operation and management of the Lake Forest
North and Fawn Lake projects, and will accrue an incentive payment payable as
provided therein.
Reimbursements of approximately $486,000 and $800,000 were made to NTS
Management or an Affiliate for the three and six months ended June 30, 1998,
respectively, for actual personnel, marketing and administrative costs as they
relate to NTS/LFII, NTS/VA and the Fund.
Additionally, NTS Management is entitled to an Overhead Recovery, which is a
reimbursement for overhead expenses attributable to the employees and the
efforts of NTS Management under the Management Agreements, in an amount equal to
3.75% of the projects' gross cash receipts, as defined in the Management
Agreements. Approximately $122,000 and $195,000 was incurred as an Overhead
Recovery for the three and six months ended June 30, 1998, respectively.
Increases and decreases in interest expense generally correspond directly to
increases and decreases in the outstanding balances of the Fund's borrowings as
well as a factor of the ratio of interest expensed to the total interest
incurred. The average interest rate paid by the Fund for the three and six
months ended June 30, 1998 and 1997 was approximately 9%. Interest incurred by
the Fund was approximately $655,000 and $413,000 for the three months ended June
30, 1998 and 1997, and $1,302,000 and $826,000 for the six months ended June 30,
1998 and 1997, respectively.
- 15 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
Expenses - Continued
- --------------------
Professional and administrative expenses include primarily directors' fees,
legal, outside accounting and investor processing fees, printing costs for
financial reports and salaries. Selling and general expenses for the three and
six months ended June 30, 1998 include advertising, salaries, office supplies,
rent and other general expenses related to the operation of NTS/LFII and NTS/VA.
Selling and general expenses are zero for the three months and six months ended
June 30, 1997 as the Fund did not own NTS/LFII and NTS/VA during these periods.
Depreciation expense relates to equipment used for development activity which is
being depreciated over five years. Amortization expense relates primarily to
loan costs which are being amortized over the life of the related loan.
No benefit for income taxes was provided during 1998 as the Fund has recorded a
valuation allowance equal to the amount of the benefit. The Fund has determined
that it is more likely than not that the net deferred tax asset will not be
realized.
Income tax expense is the Fund's estimated liability for Federal, state, and
local income taxes due on the amount of earnings which are in excess of
dividends for the three and six months ended June 30, 1997.
Net Income (Loss)
- -----------------
The Fund's gross revenues for the six months ended June 30, 1998 increased
approximately 98% from 1997 to 1998 (exclusive of an $382,000 recovery on
provision for loan losses). This increase is due to the transition from a
mortgage REIT that generated its revenues from interest earned on mortgage loans
to a real estate development company that generates its revenues primarily from
the sale of single-family residential lots. The net loss for the three months
ended June 30, 1998 of $482,257 represents a decline from the net income of
$213,742 generated for the three months ended June 30, 1997. The net loss for
the six months ended June 30, 1998 of $665,896 represents a decline from the net
income of $384,196 generated for the six months ended June 30, 1997. In the
context of the restructuring of the operations of the Fund from a REIT to a real
estate development company, management believes that the results of operations
for 1998 are not comparable to the prior year.
Provisions for Write-down to Net Realizable Value
- -------------------------------------------------
The Fund periodically reviews the value of land and inventories and determines
whether any write-downs need to be recorded to reflect declines in value. The
Fund did not record any write-downs during the three and six month periods ended
June 30, 1998. The estimated net realizable value of real estate inventories
represents management's estimate based on present plans and intentions, selling
prices in the ordinary course of business and anticipated economic and market
conditions. Accordingly, the realization of the value of the Fund's real estate
inventories is dependent upon future events and conditions that may cause actual
results to differ from amounts presently estimated.
Year 2000
- ---------
The Fund has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 Issue and is
developing an implementation plan to resolve the issue. The Year 2000 Issue, a
worldwide problem, is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Fund's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations. The Fund presently believes that, with modifications
to existing software and conversions to new software, the Year 2000 Issue will
not pose significant operational problems for the Fund's computer systems. The
Fund
- 16 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
Year 2000 - Continued
- ---------------------
continues to evaluate appropriate courses of corrective action, including
replacement of certain systems whose associated costs would be recorded as
assets and amortized. The Fund does not expect the costs associated with the
resolution of the Year 2000 Issue to have a material effect on its financial
position or results of operations. The associated costs will be funded by cash
flow from operations or cash reserves. The amounts expensed in the three and six
months ended June 30, 1998 and 1997 were immaterial.
Cautionary Statements
- ---------------------
Any forward-looking statements included in Management's Discussion and Analysis
of Financial Condition and Results of Operations, or elsewhere in this report,
which reflect management's best judgement based on factors known, involve risks
and uncertainties. Readers are cautioned not to place undue reliance on any
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Fund undertakes no obligation to publicly revise these forward-
looking statements to reflect events or circumstances that arise after the date
hereof. Actual results could differ materially from those anticipated in any
forward-looking statements as a result of a number of factors, including but not
limited to those discussed below. Any forward-looking information provided by
the Fund pursuant to the safe harbor established by recent securities
legislation should be evaluated in the context of these factors.
The Fund's subsidiaries, NTS/LFII and NTS/VA, and the Orlando Lake Forest Joint
Venture, in which the Fund has a 50% interest, are engaged in the development
and sale of residential subdivision building lots, the pricing and sale of which
are subject to risks generally associated with real estate development and
applicable market forces beyond the control of the Fund and/or its subsidiaries,
including general and local economic conditions, competition, interest rates,
real estate tax rates, other operating expenses, the supply of and demand for
properties, zoning laws, other governmental rules and fiscal policies, and acts
of God. All of the properties owned by NTS/LFII, NTS/VA and OLFJV are encumbered
by development loans from third party lenders which, given the nature of the
risks incumbent in real estate investment and development activities as stated
above, are inherently subject to default should the ability of NTS/LFII, NTS/VA,
OLFJV and/or the Fund to make principal and interest payments under such
development loans become impaired.
There is the potential for occurrences which could affect the Fund's ability to
reduce, or limit the increase in, its professional and administrative expenses.
Furthermore, the debt service regarding the Fund's borrowings is variable based
on current interest rates, any fluctuations in which are beyond the control of
the Fund. These variances could, for example, impact the Fund's projected cash
and cash requirements as well as projected returns.
- 17 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description
27 Financial Data Schedule
99 Additional Exhibits - Pages from the
Fund's Prospectus which have been
specifically incorporated by
reference and copies of which are
attached hereto which includes pages
75 to 81.
(b) Reports on Form 8-K
None.
- 18 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, NTS Mortgage Income Fund has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NTS Mortgage Income Fund
(Registrant)
/s/ Richard L. Good
Richard L. Good
President
/s/ Lynda J. Wilbourn
Treasurer
Principal Accounting Officer
Date: August 13, 1998
- 19 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1998 AND FROM THE STATEMENT OF OPERATIONS FOR THE SIX
MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 660701
<SECURITIES> 0
<RECEIVABLES> 3209946
<ALLOWANCES> 0
<INVENTORY> 52236681
<CURRENT-ASSETS> 0<F1>
<PP&E> 568298
<DEPRECIATION> 138143
<TOTAL-ASSETS> 63850555
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 26943226
0
0
<COMMON> 3187
<OTHER-SE> 35124753
<TOTAL-LIABILITY-AND-EQUITY> 63850555
<SALES> 3138689
<TOTAL-REVENUES> 3741766
<CGS> 2352514
<TOTAL-COSTS> 1162224
<OTHER-EXPENSES> 195148
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 336368
<INCOME-PRETAX> (665896)
<INCOME-TAX> 0
<INCOME-CONTINUING> (665896)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (665896)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> 0
<FN>
<F1>THE COMPANY HAS AN UNCLASSIFIED BALANCE SHEET; THEREFORE, THE VALUE IS $0.
</FN>
</TABLE>
EXHIBIT NO. 99 - ADDITIONAL EXHIBITS
Included is this Exhibit Number 99 is the Glossary of Terms from pages 75 to 81
of NTS Mortgage Investment Fund's Prospectus dated March 31, 1989. The text of
these pages has been duplicated in type style and font compatible with the other
portions of the Fund's Form 10-Q Quarterly Report and suitable for electronic
filing with the Securities and Exchange Commission. As a result, although
Exhibit 99 contains all of the words contained in the Glossary section of the
Prospectus, the total text of each page of this Exhibit does not exactly
correspond to the total text of the page of the Prospectus from which it is
taken.
GLOSSARY
"Accountable Due Diligence Expense Allowance" shall mean an amount equal to 1/2%
of the Gross Proceeds payable to the Selling Agent as reimbursement for its
accountable expenses incurred in connection with bona fide due diligence
activities.
"Acquisition Expenses" shall mean expenses related to the Fund's selection of
and investment in, Mortgage Loans and Real Estate Investments (whether or not
made), including but not limited to legal fees and expenses, travel and
communication expenses, costs of appraisals, accounting fees and expenses, title
insurance and miscellaneous other expenses.
"Acquisition Fees" shall mean the total of all fees and commissions, however
designated, paid by any party in connection with the making or investing in
Mortgage Loans or Real Estate Investments.
"Adjusted Contribution" shall mean the Original Capital Contribution paid by the
original purchaser of a Share, reduced by the total cash distributed with
respect to such Share from Capital Proceeds.
"Advisor" shall mean NTS Advisory Corporation, a Delaware Corporation which will
serve as the initial investment advisor and administrator of the Fund, or any
successor Advisor selected by the Directors, or any person or entity to which
the Advisor subcontracts substantially all of its administrative functions.
"Advisory Agreement" shall mean the agreement between the Fund and the Advisor,
pursuant to which the Advisor will act as the investment advisor and
administrator of the Fund.
Affiliate" shall mean (i) any person directly or indirectly controlling,
controlled by or under common control with another person, (ii) any person
owning or controlling 10% or more of the outstanding voting securities or
beneficial interests of such other person, (iii) any officer, director, trustee
or general partner of such person or (iv) if such other person is an officer,
director, trustee or partner of another entity, then the entity for which that
person acts in any such capacity.
- 75 -
<PAGE>
"Affiliated Borrower" shall mean Affiliates of NTS which obtain a Mortgage Loan
from the Fund.
"Affiliated Directors" shall mean those Directors who are not Independent
Directors.
"Appraised Value" of a Real Estate Investment or the Real Estate securing a
Mortgage Loan shall mean the value of the subject Real Estate at a specified
point in time as determined by an MAI Appraisal acceptable to the Directors.
"As-Built Appraised Value of the Property" shall mean (i) for Development Loans,
Residential Land Development Loans and Commercial Land Development Loans, the
land portion of the appraised value of the mortgaged property, and (ii) for
Construction Loans, the appraised value of the mortgaged property (as determined
by MAI Appraisal), in each case including improvements to be made by the
Borrower, taking into account the Borrower's planned construction and
development of the property.
"Average Invested Assets" shall mean for any period, the average Total Assets of
the Fund invested, directly or indirectly, in Mortgage Loans and Real Estate
Investments, before reserves for bad debts or other similar non-cash reserves,
computed by taking the average of such values at the end of each month during
such period.
"Below Market Interest Obligation" shall mean any note, agreement, contract or
other obligation pursuant to which a purchaser agrees to make periodic payments
in respect of the Real Estate purchased, which provides for the payment of
interest in respect of the amount due at a rate which is lower than an interest
rate 400 basis points below the then applicable Prime Rate.
"Board of Directors" shall mean all of the Directors having been duly elected or
otherwise properly in office pursuant to the Organizational Documents.
"Borrower" shall mean any person, including an Affiliated Borrower, which
obtains a Mortgage Loan from the Fund.
"Bylaws" shall mean the Bylaws of the Fund, as they may be amended from time to
time.
"Capital Proceeds" shall mean the net cash realized from the repayment,
retirement, refinancing, sale or other disposition of the Fund's Real Estate
Investments and Mortgage Loan investments, including payments of Principal,
Interest Reserve, Gross Receipts Interest and Incentive Interest, but excluding
Points and Regular Interest, after reduction for the following: (i) payment of
all expenses related to the transaction; (ii) payment of all debts and
obligations of the Fund arising from or otherwise related to the transaction,
including fees to the Advisor or its Affiliates; and (iii) any amount set aside
by the Advisor for working capital reserves; provided, however, that proceeds
from a disposition of a Fund investment shall not be deemed to be "Capital
Proceeds" to the extent such proceeds are reinvested by the Fund and not
distributed to Stockholders.
- 76 -
<PAGE>
"Cash Flow Guaranty" shall mean the obligation of the Guarantor to provide
investors, directly or indirectly, a minimum return (from all sources) equal to
an annual 12% cumulative, non-compounded, return on their Original Capital
Contributions during the Cash Flow Guaranty Period.
"Cash Flow Guaranty Period" shall mean the period beginning with the 90th day
following the Initial Closing and ending upon the later of two years thereafter
or one year following the Offering Termination Date.
"Certificate of Incorporation" shall mean the certificate of incorporation filed
by the Fund in Delaware, as it may be amended from time to time.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or
corresponding provisions of any successor legislation.
"Commercial Land Development Loan" shall mean a Mortgage Loan, secured by
unimproved or partially improved real property subject to a development plan,
obtained by a Borrower for the purpose of acquiring, carrying and improving the
parcel through pre-development and in certain instances development activities,
including, without limitation, the construction of infrastructure and other
improvements necessary to prepare the parcel for the construction of commercial
or industrial developments, including zoning, planning and construction of
amenity packages, and landscaping, for resale (or in limited cases, lease) in
the ordinary course of business of the Borrower or an Affiliate.
"Construction Loan" shall mean a Mortgage Loan obtained by a Borrower for the
purpose of constructing improvements on real property.
"Dealer Property" shall mean property held primarily for sale to customers in
the ordinary course of one's trade or business.
"Dealers" shall mean the Participating Dealers and the Selling Agent.
"Deficiency Dividend" shall mean a distribution of the Fund within the meaning
of Section 859(d) of the Code.
"Delaware Corporation Statute" shall mean the General Corporation Law of the
State of Delaware, as it may be amended from time to time.
"Development Loan" shall mean a Mortgage Loan obtained by a Borrower for the
purpose of acquiring, carrying and engaging in pre-development and development
activities with respect to real property prior to the construction of
improvements thereon, which activities shall include, without limitation,
engineering, zoning, planning and construction of common area and amenities
including the construction of clubhouses, pools, etc., but shall exclude
Residential and Commercial Land Development Loans.
"Directors" shall mean, as of any particular time, Directors holding office
under the Certificate of Incorporation and Bylaws at such time, whether they are
the Directors named therein or additional or successor Directors appointed by
the initial Board of Directors or duly elected by the Stockholders.
- 77 -
<PAGE>
"Dividend Reinvestment Plan" or "Plan" shall mean the plan pursuant to which
Stockholders may direct that cash distributions otherwise payable to them from
the Fund with respect to Shares owned by them be delivered instead to the
Reinvestment Agent, who is directed, pursuant to the terms of the plan, to
acquire additional Shares with such cash.
"Escrow Agent" shall mean Liberty National Bank & Trust Company of Louisville,
Kentucky, or any other entity selected by the Directors to serve as escrow agent
for the Fund.
"Escrow Guaranty" shall mean the Guarantor's obligation to advance to the Fund,
directly or indirectly, the amount necessary to supplement the interest
generated by subscription proceeds so as to provide subscribers with an 8%
annual, non-compounded return on their subscriptions, calculated from the date
the subscriber's proceeds were deposited in the escrow account through the 89th
day following the Initial Closing Date (or if the Minimum Number of Shares is
not sold, through the date on which the proceeds are released from the escrow
account).
"Federal Funds Rate" shall mean the average of the prior month's rate at which
reserves are traded among commercial banks for overnight use in amounts of one
million dollars or more, as published in the Federal Reserve Statistical Release
H.15(519), or, in the event that such a release does not exist, "Federal Funds
Rate" shall mean that announced in the Wall Street Journal, or its successor, as
it shall change from time to time.
"First Mortgage Loans" shall refer to Mortgage Loans which have as security a
first mortgage or first priority lien on the collateral property.
"Foreclosure Property" shall mean real property (including interests in real
property), and any personal property incident thereto, which is acquired by the
Fund as the result of a bid in foreclosure, or by agreement or legal process,
following a default (or where a default was imminent) on a lease of the property
or on an indebtedness secured by such property.
"Foreign Investor" shall mean a nonresident alien, a foreign corporation or an
entity consisting of such persons.
"Fund" shall mean NTS Mortgage Income Fund, a Delaware corporation, or any
successor thereto.
"Funds Available for Investment" shall mean the Gross Proceeds to be Raised in
this Offering ($100,000,000) plus an amount equal to the aggregate borrowings
which the Fund is authorized to make (300% of Net Assets).
"Gross Proceeds" shall mean the aggregate Original Capital Contributions of
all Stockholders.
"Gross Proceeds to be Raised" shall mean $100,000,000.
- 78 -
<PAGE>
"Gross Receipts" shall mean, with regard to (i) any Real Estate serving as
collateral for a Mortgage Loan the record title to which has been conveyed to
the purchaser, the total fair market value of the consideration, inclusive of
the face amount of the notes or other payment obligations received by an
Affiliated Borrower from the sale of such Real Estate, without reduction for any
costs or expenses incurred in connection with the sale, development or
improvement of the Real Estate, real estate commissions or other closing
expenses, but net of amounts to be repaid or credits allowed to the purchaser
such as builder discounts or rebates, landscaping allowances or similar expenses
as well as any sale or transfer tax imposed on the transaction, provided,
however, that Gross Receipts shall not include the face amount of any Below
Market Interest Obligation, and (ii) any Real Estate serving as collateral for a
Mortgage Loan which the Borrower has agreed to sell to a purchaser but as to
which the record title has not been conveyed to the purchaser or which has been
conveyed to the purchaser in exchange for a Below Market Interest Obligation,
the amount of cash received by the Affiliated Borrower as and when received.
"Gross Receipts Interest" shall mean, with respect to a Mortgage Loan secured by
Real Estate held for sale in the ordinary course of business, an amount equal to
a specified percentage of the Affiliated Borrower's Gross Receipts from the sale
of the underlying Real Estate received during the term of the Mortgage loan.
"Guarantor" shall mean NTS Guaranty Corporation, a Delaware corporation or any
successor thereto.
"Incentive Interest" shall mean the Fund's share in the Increase in Value of a
property securing a Mortgage Loan and shall be payable in connection with
Mortgage Loans secured by Real Estate not held for sale in the ordinary course
of business.
"Incentive Interest Agent" shall mean the independent party authorized to
receive Incentive Interest payments from Borrowers and pay to the Fund the
amount of such payments to which it is entitled, with the remainder of such
payments to be returned to the Borrowers.
"Increase in Value" shall mean the difference between the Appraised Value of a
property at the time of funding a Mortgage Loan and the Appraised Value of such
property (or the fair market value of the consideration received in the case of
a sale) upon the earlier of the maturity of the Mortgage Loan or the sale or
refinancing of the collateral property, net of the actual cost incurred in
connection with the improvement of the collateral property since the date of the
funding of the Mortgage Loan. For purposes of this definition, the phrase
"actual cost incurred" shall refer to all costs paid by the Borrower to
Affiliated and Non-Affiliated parties in connection with the acquisition,
holding, ownership, or development or improvement of the property, including
without limitation, costs of acquiring and financing the property.
"Increased Maximum Number of Shares" shall mean 5,000,000 Shares in this public
offering.
- 79 -
<PAGE>
"Independent Advisor" shall mean Laventhol and Horwath or any alternative person
selected by the Independent Directors to provide an opinion concerning the
fairness of the terms of proposed Mortgage Loans to Affiliated Borrowers and
acquisitions of Real Estate Investments from Affiliates.
"Independent Directors" shall mean the Directors who: (i) are not Affiliated,
directly or indirectly, with the Advisor, whether by ownership of, ownership
interest in, employment by, any business or professional relationship with, or
service as an officer or director of, the Advisor or its Affiliates; (ii) do not
serve as a director or trustee for more than two other REITs organized by the
Advisor or its Affiliates; and (iii) perform no other services for the Fund,
except as Directors. An indirect relationship shall include circumstances in
which the immediate family of a Director has one of the foregoing relationships
with the Advisor or the Fund.
"Initial Closing Date" shall mean the date on which the first closing for Shares
sold pursuant to the Prospectus occurs.
"Initial Fund Investments" shall mean those investments which the Fund has
specified as of the date of this Prospectus being the Fawn Lake Loan, Orlando
Lake Forest Loan, the Louisville Lake Forest North Loan and the Blankenbaker
Crossings Loan.
"Interest Reserve" shall mean the amount loaned or committed to be loaned to a
Borrower to Fund the Borrower's projected future payments of Regular Interest to
the Fund and upon which Regular Interest shall be charged once disbursed.
"Investable Proceeds" shall mean the Gross Proceeds less Organization and
Offering Expenses, plus an amount equal to the outstanding borrowings of the
Fund, exclusive of borrowings made in connection with Real Estate Investments.
"IRA" shall mean an Individual Retirement Account established pursuant to
Section 408 of the Code or any successor provision.
"Junior Mortgage Loan" shall refer to any Mortgage Loan which is subordinate to
another mortgage or deed of trust secured by the collateral real property and
shall exclude Temporary Mortgage Loans and loans which are outstanding and being
"phased-in" pending full funding of a First Mortgage Loan.
"Junior Mortgage Loan Guaranty" shall mean the Guarantor's obligation to pay the
Fund the Principal amount of any Junior or Temporary Mortgage Loan on which the
Affiliated Borrower has defaulted.
"Land Acquisition Loans" shall mean a Mortgage Loan obtained by a Borrower for
the purpose of acquiring Unimproved Real Property.
- 80 -
<PAGE>
"Loan" shall mean a Mortgage Loan or Temporary Mortgage Loan made by the Fund.
"MAI Appraisal" shall mean an appraisal made by a member in good standing of the
American Institute of Real Estate Appraisers.
"Majority Vote" shall mean the vote or consent in person or by proxy of
Stockholders owning more than 50% of the outstanding Shares.
"Management Expense Allowance" shall mean a non-accountable expense allowance
relating to services performed for the Fund (but excluding amounts paid by the
Advisor on behalf of the Fund to third parties) in an amount equal to 1% of the
Fund's Net Assets, per annum, payable quarterly to the Advisor which may be
increased annually by an amount corresponding to the percentage increase in the
Consumer Price Index for all urban consumers- Louisville or a comparable
consumer price index, which increase will in no event cause the Fund's Operating
Expenses to exceed the limitation imposed by the Bylaws.
"Maximum Number of Shares" shall mean 2,500,000 Shares in this public offering.
"Minimum Number of Shares" shall mean 75,000 Shares to at least 100 independent
investors in this public offering.
"Mortgage Loans" shall mean Residential Land Development Loans, Commercial Land
Development Loans, Permanent Mortgage Loans, Construction Loans, Development
Loans and Land Acquisition Loans evidenced by notes, debentures, bonds and other
evidences of indebtedness or obligations (other than Temporary Mortgage Loans
made by the Fund) which are secured or collateralized by: (i) interests in real
property; (ii) other beneficial interests essentially equivalent to a mortgage
on real property; or (iii) interests in partnerships, joint ventures, or other
entities which own real property.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"NASDAQ" shall mean the nationwide automated quotations system operated by
the NASD.
"Net Assets" shall mean the Total Assets (other than intangibles) at cost before
deducting depreciation or other non-cash reserves, less total liabilities,
calculated quarterly according to generally accepted accounting principles on a
basis consistently applied.
"Net Income" for any period shall mean total revenues applicable to such period
as determined for federal income tax purposes, less the expenses applicable to
such period, other than additions to reserves for bad debts or other similar
non-cash reserves. In connection with the calculation of any incentive type fee,
Net Income, for purposes of calculating Operating Expenses, shall not include
the gain from the sale of the Fund's assets.
- 81 -
<PAGE>
"Non-Accountable Expense Allowance" shall mean an amount equal to 1% of the
Gross Proceeds payable to the Selling Agent as reimbursement for its
non-accountable sales and other expenses incurred in connection with the offer
and sale of Shares.
"Non-Affiliate" shall mean persons who are not Affiliates.
"NTS" shall mean NTS Corporation, a Delaware corporation which is the Sponsor
for the Fund.
"Offering Termination Date" shall mean the date on which the last closing for
Shares sold pursuant to the Prospectus occurs which shall occur either one year
from the date of this Prospectus subject to increase for up to an additional
year in the discretion of the Board of Directors and subject to compliance with
applicable state and federal laws.
"Operating Expenses" shall mean all operating, general and administrative
expenses of the Fund as determined under generally accepted accounting
principles, including but not limited to rent, utilities, capital equipment,
salaries, fringe benefits, travel expenses, the Management Expense Allowance,
expenses paid by third parties to the Advisor and its Affiliates based upon its
relationship with the Fund (e.g. loan administration, servicing, engineering and
inspection expenses) and other administrative items, but excluding the expenses
of raising capital, interest payments, taxes, non-cash expenditures (e.g.
depreciation, amortization, bad debt reserve), the Subordinated Advisory Fee and
the costs related directly to a specific Mortgage Loan or Real Estate Investment
by the Fund, such as expenses for originating, acquiring, servicing or disposing
of said specific Real Estate Investment or a Mortgage Loan.
"Organization and Offering Expenses" shall mean those expenses payable by the
Fund in connection with the formation, qualification and registration of the
Fund and in marketing, distributing and processing Shares, including any Sales
Commissions, Non-Accountable Expense Allowance, Accountable Due Diligence
Expense Allowance, and any other expenses actually incurred and directly related
to the registration, offering and sale of Shares, including such expenses as:
(a) fees and expenses paid to attorneys in connection with the offering; (b)
registration fees, filing fees and taxes; (c) the costs of qualifying, printing,
amending, supplementing, mailing and distributing the Fund's Registration
Statement and Prospectus, including telephone and telegraphic costs; (d) the
costs of qualifying, printing, amending, supplementing, mailing and distributing
sales materials used in connection with the issuance of Shares, including
telephone and telegraphic costs; (e) remuneration of officers and employees of
the Advisor and its Affiliates while directly engaged in marketing,
distributing, processing and establishing records of Shares and establishing
records and paying Sales Commissions; and (f) accounting and legal fees and
expenses incurred in connection therewith to the Advisor or its Affiliates.
"Organizational Documents" shall mean the Fund's Certificate of Incorporation
and By-Laws, as they may be amended from time to time.
- 82 -
<PAGE>
"Original Capital Contribution" shall mean the amount of $20.00 for each Share,
which amount shall be attributed to such Share in the hands of subsequent
holders thereof.
"Participating Dealers" shall mean members in good standing of the National
Association of Securities Dealers, Inc., ("NASD") engaged by the Selling Agent
to offer and sell Shares on a "best efforts" basis, as well as certain selected
foreign broker dealers, who are not eligible for membership in the NASD, who
agree to abide by the provisions of Section 25 of the NASD Rules of Fair
Practice.
"Permanent Mortgage Loans" shall mean notes, bonds and other evidences of
indebtedness or obligations (other than temporary investments made by the Fund)
which are secured or collateralized by interests in (i) income producing real
property, (ii) other beneficial interest essentially equivalent to a mortgage on
income producing real property or (iii) partnerships, joint ventures or other
entities which own income producing real property. Such Mortgage Loans may be
Junior or First Mortgage Loans and will generally have terms of between three
and five years, subject to extension for up to two two-year periods.
"Points" shall mean the fee payable to the Fund at the time funds are advanced
under a Mortgage Loan.
"Prime Rate" shall mean the rate of interest as published in the Federal Reserve
Statistical Release H.15(519), as it shall change from time to time. In the
event that such a release does not exist, "Prime Rate" shall mean the prime
lending rate as published in the Wall Street Journal, or its successor.
"Principal" shall mean the funds loaned to a Borrower, excluding the amount of
the Interest Reserve.
"Prohibited Transaction" shall mean the sale of Dealer Property other than both
Foreclosure Property and certain Dealer Property held by the Fund for at least
four years.
"Prospectus" shall mean the final prospectus of the Fund with respect to the
offer and sale of Shares filed with the Securities and Exchange Commission as
part of the Fund's Registration Statement on Form S-11, as amended.
"Qualified Plans" shall mean qualified pension, profit-sharing and other
employee retirement benefit plans (including Keogh [HR 10] plans) and trusts,
bank commingled trust funds for such plans and individual retirement accounts.
"Real Estate" shall mean all real properties or any interest therein acquired
directly or indirectly by the Fund, including real properties acting as
collateral for Mortgage Loans.
- 83 -
<PAGE>
"Real Estate Investments" shall mean direct or indirect equity investments by
the Fund in all forms in Real Estate, and shall exclude investments in Mortgage
Loans as well as any investments in Mortgage Loans characterized as equity
investments for financial accounting purposes.
"Regular Interest" shall mean the rate of interest payable periodically on a
Mortgage Loan, as determined by the Board of Directors at the beginning of each
Mortgage Loan or any extension thereof.
"Regular Interest Rate" shall mean the rate of interest payable periodically on
a Mortgage Loan and shall be equal to (i) 500 basis points and 300 basis points
in excess of the rate on a treasury obligation having a maturity substantially
similar to that of the Mortgage Loan for fixed rate Junior and First Mortgage
Loans, respectively, and 400 basis points and 200 basis points in excess of the
Prime Rate, or 570 basis points and 370 basis points in excess of the Federal
Funds Rate, for variable rate Junior and First Mortgage Loans, respectively.
"Reinvestment Agent" shall mean NTS Depositary Corporation, Louisville,
Kentucky, or its successor as agent for the dividend reinvestment plan.
"REIT" and "real estate investment trust" shall mean a real estate investment
trust as defined in Sections 856 to 860 of the Code.
"REIT Qualifying Investment" shall mean an investment in assets described in
Section 856(c)(5) of the Code, or any successor provision.
"REIT Taxable Income" shall mean the taxable income as computed for a
corporation which is not a REIT: (i) without the deductions allowed by Code
Sections 241 through 247, 249 and 250 (relating generally to the deduction for
dividends received); (ii) excluding amounts equal to (a) the net income from
foreclosure property and (b) the net income derived from prohibited
transactions; and (iii) deducting amounts equal to (a) any net loss derived from
prohibited transactions, (b) the tax imposed by Code Section 857(b)(5) upon a
failure to meet the 95% and/or 75% gross income tests and (c) the dividends
paid, computed without regard to the amount of the net income from foreclosure
property which is excluded from REIT Taxable Income.
"Residential Land Development Loan" shall mean a Mortgage Loan obtained by a
Borrower for the purpose of acquiring, carrying, improving, through pre-
development, development and sale, the underlying real estate, including,
without limitation, engineering, zoning, planning and construction of common
areas and amenity packages, necessary to prepare the parcel and its individual
sites for the construction of homes (and in limited circumstances minor portions
for commercial purposes) and the sale of such sites in the ordinary course of
business of the Borrower or an Affiliate.
"Sales Commissions" shall mean an amount equal to 8% of the Gross Proceeds from
the sale of each Share, subject to certain discounts, payable to the Dealers who
sell such Shares.
"Selling Agent" shall mean NTS Securities, Inc.
- 84 -
<PAGE>
"Shares" shall mean the Fund's shares of common stock with a par value of
$0.001.
"Sponsor" shall mean NTS Corporation, a Kentucky corporation, or any person
directly or indirectly instrumental in organizing, wholly or in part, the Fund
or any person who will manage or participate in the management of the Fund, and
any Affiliate of any such person, but excluding (i) a person whose only
relationship with the Fund is that of an independent property manager and whose
only compensation is as such, and (iii) wholly independent third parties such as
attorneys, accountants and underwriters whose only compensation is for
professional services.
"Stockholders" shall mean as of any particular time the registered holders of
outstanding Shares at such time.
"Subordinated Advisory Fee" shall mean the fee payable to the Advisor or its
Affiliates for services in connection with the liquidation of the Fund's
investments, equal to 5% of the Capital Proceeds remaining after distributions
to Stockholders from all sources in an amount equal to 100% of their Original
Capital Contribution plus a 15% per annum cumulative, non-compounded return on
their Adjusted Contributions to the extent not already paid, beginning on the
Offering Termination Date.
"Supplemental Interest" shall mean the amount, if any, in excess of Regular
Interest, Points, Incentive and Gross Receipts Interest, other cash balances
available for distribution in the discretion of the Board of Directors, and all
other cash receipts of the Fund net of all cash expenditures of the Fund, that
Affiliated Borrowers shall pay the Fund to enable it to make quarterly
distributions to Stockholders equal to an annual 12% cumulative, non-compounded
return on their Original Capital Contributions during the Cash Flow Guaranty
Period.
"Temporary Investments" shall refer to those investments made by the Fund
pending the receipt of sufficient Investable Proceeds to fund the Initial Fund
Investments, or reinvestment in later Fund loans.
"Temporary Mortgage Loan" shall refer to any temporary mortgage loan investment
made by the Fund to an Affiliated Borrower pending investment or reinvestment in
a Mortgage Loan if such Temporary Mortgage Loan (i) matures within one year of
making the loan subject to any extension in the discretion of the Board of
Directors (ii) is anticipated to generate yields higher than other temporary
investments, (iii) is approved by a majority of the Independent Directors, and
(iv) constitutes a REIT qualifying investment.
"Tax-Exempt Entities" shall mean Qualified Plans and other entities exempt from
federal income taxation, such as endowment funds and foundations and charitable,
religious, scientific or educational organizations.
"Total Assets" shall mean the book value of all assets of the Fund, determined
in accordance with generally accepted accounting principles.
- 85 -
<PAGE>
"Transfer Agent" shall mean an independent national agent selected by the
Directors or any entity designated at some later date.
"Treasury Rate" shall mean the rate of interest paid on United States Treasury
investments, as published in the Federal Reserve statistical Release H.15(519),
as it shall change from time to time, having a maturity substantially similar to
that of the Mortgage Loan; in the event that such a release is not published,
any other nationally-recognized publication. If there is more than one such
treasury investment, then the rate of that investment priced closest to par
shall be used; provided, however, that this definition may be modified with the
approval of a majority of the Directors, including a majority of the Independent
Directors.
"Unimproved Real Estate" shall mean property which has each of the following
three characteristics: (i) it was not acquired for the purpose of producing
rental or other operating income; (ii) there is no development or construction
in process on such land, and (iii) there is no development or construction
planned in good faith to commence on such land within one year.
- 86 -
<PAGE>
