<PAGE> 1
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 March 31, 1999
-------------------------------------------------
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 (IRS 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 April 1, 1999 there were approximately 3,187,000 shares of common stock
outstanding.
<PAGE> 2
TABLE OF CONTENTS
-----------------
Pages
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 3
Consolidated Statements of Operations
For the three months ended 4
March 31, 1999 and 1998
Consolidated Statements of Cash Flows
For the three months ended 5
March 31, 1999 and 1998
Notes To Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
1999 1998*
------------ ------------
ASSETS
<S> <C> <C>
Cash and equivalents $ 1,335,547 $ 1,061,609
Membership initiation fees and other
accounts receivable 1,735,349 1,884,472
Notes receivable 3,040,258 3,303,761
Inventory 53,547,592 53,264,438
Property and equipment, net of accumulated
depreciation of $228,305, and $187,059 497,849 501,921
Investment in unconsolidated affiliate 4,384,034 4,462,990
Advances to affiliates 41,296 30,338
Other assets 1,035,778 1,043,228
------------ ------------
Total assets 65,617,703 65,552,757
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses 1,511,386 2,091,630
Notes payable - affiliated 6,452,433 6,090,293
Notes payable 23,481,323 22,760,246
Lot deposits 114,500 131,395
Deferred revenues 145,435 154,968
------------ ------------
Total liabilities 31,705,077 31,228,532
------------ ------------
Commitments and contingencies (Note 10)
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 (20,253,958) (19,842,359)
------------ ------------
Total stockholders' equity 33,912,626 34,324,225
------------ ------------
Total liabilities and stockholders'
equity $ 65,617,703 $ 65,552,757
============ ============
</TABLE>
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 March 31, 1999.
3
<PAGE> 4
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
---- ----
<S> <C> <C>
REVENUES:
Lot sales, net of discounts $ 2,444,785 $ 1,132,248
Cost of sales 1,659,883 873,234
----------- -----------
Gross profit 784,902 259,014
Interest income on cash equivalents and
miscellaneous income 73,671 132,981
Recovery of provision for loan losses -- 382,096
----------- -----------
858,573 774,091
EXPENSES:
Selling, general and administrative-
affiliated 584,163 383,488
Selling, general and administrative 464,318 298,054
Interest expense 115,952 126,201
Interest expense - affiliated -- 63,511
Other taxes and licenses 5,050 7,601
Depreciation and amortization expense 21,733 36,247
Loss from investment in unconsolidated
affiliate 78,956 42,628
----------- -----------
1,270,172 957,730
----------- -----------
Net loss $ (411,599) $ (183,639)
=========== ===========
Net loss per share of common stock $ (0.13) $ (0.06)
=========== ===========
Weighted average number of shares 3,187,333 3,187,333
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS USED FOR OPERATING ACTIVITIES
Net loss $ (411,599) $ (183,639)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization expense 67,815 36,247
Loss from investment in unconsolidated affiliate 78,956 42,628
Changes in assets and liabilities:
Interest receivable - affiliated
Membership initiation fees and other receivables 149,123 150,923
Notes receivable 263,503 242,521
Inventory (283,154) (545,953)
Accounts payable and accrued expenses (580,244) (1,906,412)
Lot deposits (16,895) 10,000
Deferred revenues (9,533) 765
----------- -----------
Net cash used for operating activities (742,028) (2,152,920)
----------- -----------
CASH FLOWS USED FOR INVESTING ACTIVITIES
Purchase of property and equipment (37,174) (41,275)
----------- -----------
Net cash used for investing activities (37,174) (41,275)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Advances to affiliates (10,958) 563,669
Payments on advances from affiliates -- (126,136)
Proceeds from notes payable 2,996,142 9,878,673
Proceeds from notes payable - affiliated 362,140 --
Payments on notes payable (2,275,065) (5,811,638)
Payments on notes payable - affiliated -- (2,444,584)
Other assets (19,119) (193,741)
----------- -----------
Net cash provided by financing activities 1,053,140 1,866,243
----------- -----------
Net increase (decrease) in cash and equivalents 273,938 (327,952)
CASH AND EQUIVALENTS, beginning of period 1,061,609 1,413,445
----------- -----------
CASH AND EQUIVALENTS, end of period $ 1,335,547 $ 1,085,493
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
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 1998 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 months ended March 31, 1999 and 1998.
The results of operations for the interim periods are not necessarily an
indication of the results to be expected for the full 1999 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 of the
Fund (NTS Management). The Advisor and NTS Management are affiliates of
and are under common control with NTS Corporation.
The Fund's subsidiaries are NTS/Lake Forest II Residential Corporation
(NTS/LFII) and NTS/Virginia Development Company (NTS/VA). These
subsidiaries were acquired effective October 1, 1997. The acquisitions
were accounted for under the purchase method of accounting. Prior to
making the acquisitions, the Fund had been the primary creditor of these
entities.
The Fund purchased a 50% interest in the Orlando Lake Forest Joint
Venture effective August 16, 1997. Prior to becoming a Joint Venture
partner, the Fund had been the Joint Venture's primary creditor.
2. Use of Estimates in Preparation of Financial Statements
-------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principals 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.
3. Revenue Recognition
-------------------
The Fund and its subsidiaries recognize 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.
4. 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.
6
<PAGE> 7
Inventory consists of the following as of March 31, 1999:
<TABLE>
<CAPTION>
NTS/LFII NTS/VA Consolidated
-------- ------ ------------
<S> <C> <C> <C>
Land held for future
development, under
development and completed lots $ 5,270,000 $22,281,000 $27,551,000
Country club (net of
membership initiation fees) 10,227,000 7,769,000 17,996,000
Amenities 2,223,000 5,778,000 8,001,000
----------- ----------- -----------
$17,720,000 $35,828,000 $53,548,000
=========== =========== ===========
</TABLE>
Inventory consists of the following as of December 31, 1998:
<TABLE>
<CAPTION>
NTS/LFII NTS/VA Consolidated
-------- ------ ------------
<S> <C> <C> <C>
Land held for future
development, under development
and completed lots $ 5,855,000 $21,971,000 $27,826,000
Country club (net of membership initiation
fees) 10,225,000 8,099,000 18,324,000
Amenities 2,176,000 4,938,000 7,114,000
----------- ----------- -----------
$18,256,000 $35,008,000 $53,264,000
=========== =========== ===========
</TABLE>
NTS/LFII and NTS/VA capitalized in inventory approximately $625,000 of
interest and real estate taxes for the three months ended March 31, 1999.
Interest and real estate taxes incurred were approximately $756,000.
Inventory for 1999, as reflected above, includes approximately
$26,305,000, net of $8,309,000 of country club membership initiation
fees, of costs incurred to date for the development of the Fawn Lake
Country Club and the Lake Forest Country Club.
Inventory for 1998 as reflected above includes approximately $26,586,000,
net of $8,262,000 of country club membership initiation fees of costs
incurred to date for the development of the Fawn Lake Country Club and
the Lake Forest Country Club.
Pursuant to an agreement between NTS/LFII and the Lake Forest Country
Club regarding the cost to develop the Country Club, NTS/LFII is to
receive all initiation fees from membership sales for a period not to
exceed 12 years from the date of the agreement (ending 2003). The
remaining cost to be incurred for the current projected Country Club
operating deficit for the period covered by the agreement is
approximately $2,300,000 which is expected to be offset by member
initiation fees. During the first quarter of 1999 and for the year ended
December 31, 1998 the Country Club operating deficit was approximately
$108,000 and $279,000, respectively, and was capitalized in inventory.
5. Investment in Unconsolidated Affiliate
--------------------------------------
Effective as of August 16, 1997, the Fund became a partner in the Orlando
Lake Forest Joint Venture (the "Joint Venture"). The other partners in
the Joint Venture are Orlando Lake Forest, Inc., Orlando Capital
Corporation and OLF II Corporation, all of whom are Affiliates of and are
under common control with the Fund's Sponsor. The Joint Venture will
continue to operate under its current legal name as the Orlando Lake
Forest Joint Venture.
The Joint Venture owns the Orlando Lake Forest project, a single-family
residential community located in Seminole County, Florida (near Orlando).
The Joint Venture will continue to own and develop the Orlando Lake
Forest project.
The Fund contributed to the Joint Venture as a capital contribution its
interest in the principal and interest of the first mortgage loan on the
Orlando Lake Forest project, and obtained a 50% interest in the Joint
Venture. The NTS entities named above hold cumulatively the remaining 50%
interest in the Joint Venture.
The net income or net loss of the Joint Venture is allocated based on the
respective partner's percentage interest, as defined in the Joint Venture
7
<PAGE> 8
agreement. As of March 31, 1999, the Fund's percentage interest was 50%,
and the Fund's investment balance in the Joint Venture was $4,384,034 and
$4,462,990 as of March 31, 1999 and December 31, 1998, respectively. The
Fund's share of the Joint Venture's net loss for the three months ended
March 31, 1999 was $78,956.
The following presents condensed financial information for the Joint
Venture as of March 31, 1999 and for the year ended December 31, 1998:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- --------------
Balance Sheet
-------------
<S> <C> <C>
Notes receivable $ 526,206 $ 550,272
Inventory 14,220,394 14,461,364
Other, net 566,079 512,976
----------- -----------
Total assets $15,312,679 $15,524,612
=========== ===========
Notes payable $ 5,356,851 $ 5,323,241
Other liabilities 1,187,758 1,275,389
Equity 8,768,070 8,925,982
----------- -----------
Total liabilities and equity $15,312,679 $15,524,612
=========== ===========
March 31, 1999 March 31, 1998
-------------- --------------
Statement of Operations
-----------------------
Lot sales $ 916,785 $ 397,000
Cost of sales (714,932) (286,241)
Other income (expenses), net (359,765) (196,015)
----------- -----------
Net loss $ (157,912) $ (85,256)
=========== ===========
</TABLE>
8
<PAGE> 9
6. Notes and Mortgage Loans Payable
--------------------------------
Notes and mortgage loans payable consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
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 and a $2 million letter of credit from a third party lender
with the beneficiary being the bank. $ 10,612,734 $ 9,581,963
Note payable to a bank in the amount of $8,000,000, bearing interest at
the Prime Rate + 1%, payable monthly, 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. The Note contains certain
covenants which among other things require the net worth of NTS/LFII not
be allowed to decrease by 20% or more throughout the term of the agreement. 6,153,803 6,113,434
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, principal
reductions of $300,000 every six months, guaranteed by NTS Corporation,
the Fund's Sponsor. 3,200,000 3,250,000
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, 1999, ($511,363), September 30, 1999 ($1,141,230), and
February 28, 2000 ($487,906), secured by notes receivable, principal
payments consist of payments received from notes receivable securing the
obligation. 2,140,499 2,404,585
Bank note payable in the amount of $1,174,800, bearing interest at a rate
of prime +.5%, secured by note receivable, due in monthly installments of
$5,000 commencing February 1, 1999 with any outstanding principal and
accrued interest due and payable in full on December 29, 2000. 1,159,800 1,174,800
Mortgage loan payable to a bank in the amount of $150,000, bearing
interest at the Prime Rate +1%, payable monthly, due August 4, 1999
secured by land, guaranteed by NTS Corporation, the Fund's Sponsor. 150,000 150,000
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. 35,302 40,755
</TABLE>
9
<PAGE> 10
6. Notes and Mortgage Loans Payable
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
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. $ 10,511 $ 12,871
Bank note payable in the amount of $165,276, bearing interest at the rate
of 8.75%, due January 14, 1999, secured by golf course maintenance
equipment. -- 5,358
Bank note payable the amount of $42,435, bearing interest at the rate of
10.5%, due October 15, 1999, secured by golf course maintenance
equipment. 8,405 11,853
Bank note payable in the amount of $34,555, bearing interest at the rate
of 10.5%, due October 15, 1999, secured by golf course maintenance
equipment. 6,460 9,265
Bank note payable in the amount of $19,194, bearing interest at the rate
of 10.5%, due October 15, 1999, secured by golf course maintenance
equipment. 3,809 5,362
----------- -----------
$ 23,481,323 $ 22,760,246
=========== ===========
</TABLE>
The Prime Rate was 7 3/4% at March 31, 1999 and 8 1/2% at December 31,
1998.
The $511,363 and $487,906 Warehouse Line of Credit agreements are
guaranteed by NTS Corporation.
Principal balance requirements regarding the $10.7 and $8 million credit
facilities:
<TABLE>
<CAPTION>
$10.7 Million Facility
----------------------
<S> <C>
December 31, 1999 $9,300,000
December 31, 2000 $7,800,000
December 31, 2001 $5,900,000
December 1, 2002 $4,500,000
<CAPTION>
$8 Million Facility
-------------------
<S> <C>
January 1, 1999 $7,800,000
January 1, 2000 $7,200,000
January 1, 2001 $7,000,000
July 1, 2001 $6,100,000
January 1, 2002 $5,500,000
July 1, 2002 $4,900,000
January 1, 2003 $4,000,000
July 1, 2003 $2,400,000
</TABLE>
Management's projection for Fawn Lake indicates the development will
reach the maximum funding level allowed by the current development loan
of $10.7 million during 1999 and in fact require additional funding to
achieve its 1999 development plan which includes projected sales of $6.5
million. The current development loan is secured by the inventory of the
Fawn Lake Project, an approximately $2 million letter of credit issued by
a third party lender with the Fawn Lake lender stated as the beneficiary,
and a $3 million guarantee by Mr. J.D. Nichols. Management's projections
indicate the outstanding debt balance as of December 31, 1999 will be
approximately $12.1 million. Management's present plans and actions
include (1) approaching the Fawn Lake lender and requesting that the loan
agreement be modified to allow the outstanding balance to remain at the
loan maximum of
10
<PAGE> 11
$10.7 Million as opposed to the contractual required maximum of $9.3
million as of December 31, 1999, (2) obtaining additional funding from
the Lake Forest North lender thereby allowing Fawn Lake to utilize such
funds for development purposes, and (3) borrowing additional funds from
an affiliate via the loan agreement between the affiliate and the
Mortgage Income Fund. Although management believes that it will be
successful in such negotiations, there can be no assurances that these
third party lenders will approve of management's plans and intentions for
Fawn Lake. However, if management is unsuccessful in that effort,
consideration will be given to implementing an alternative development
plan.
7. Related Party Transactions
--------------------------
As of March 31, 1999, the Sponsor or an Affiliate owned 105,955 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.
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 (i) a Property Management Agreement
executed on December 30, 1997, and dated as of October 1, 1997, by and
among the Fund, NTS/LFII and NTS Management for the Lake Forest North
project, and (ii) a Property Management Agreement executed on December
30, 1997, and dated as of October 1, 1997, by and among the Fund, NTS/VA
and NTS Management for the Fawn Lake project (collectively, the
Management Agreements). NTS Management is a wholly-owned subsidiary of
NTS Development Company. NTS Development Company is a wholly-owned
subsidiary of the Fund's Sponsor. The Management Agreements have an
initial term through December 31, 2003, subject to extension under
certain conditions, and are renewable for successive six (6) year terms
thereafter. Under the Management Agreements, NTS Management will be
reimbursed for costs incurred in the operation and management of the Lake
Forest North and Fawn Lake projects, will be entitled to an Overhead
Recovery, and will accrue an incentive payment payable all as provided
therein.
These expense reimbursements included direct and pro-rated costs incurred
in the management and operation of NTS/LF II and NTS/VA. Such costs
include compensation costs of management, accounting, professional,
engineering and development, marketing and office personnel employed by
NTS management and/or certain of its affiliates as well as various non
payroll related operating expenses. Compensation costs are for those
individuals who rendered services full time and on site at the
residential projects, with respect to the residential projects but who
are not on site and with respect to the residential projects but who have
multiple residential projects responsibilities some of which may be
affiliated entities of NTS Management. For services provided by
individuals not on site or those with multiple residential project
responsibilities, costs are pro-rated by NTS Management and allocated to
the appropriate residential project. As permitted by the Property
Management Agreements, the Fund was charged the following amounts for the
three months ended March 31, 1999 and 1998. These amounts are reflected
in Selling, General and Administrative - Affiliated on the accompanying
Statement of Operations:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Personnel Related Costs:
Finance and Accounting $ 38,145 $ 30,301
Data Processing 1,811 1,606
Human Resources 10,517 6,531
Executive and Administrative Services 75,242 76,203
Construction Management 4,065 3,829
Sales and Marketing 229,143 129,619
Legal 16,200 9,000
Marketing 22,571 36,902
Rent 12,911 8,288
Other General and Administrative 24,900 8,207
-------- --------
Total Expense Reimbursements $435,505 $310,486
======== ========
</TABLE>
11
<PAGE> 12
Additionally, NTS Management is entitled to an Overhead Recovery, which
is a reimbursement for overhead expenses attributable to the employees
and the efforts of NTS Management under the Management Agreements, in an
amount equal to 3.75% of the projects' gross cash receipts, as defined in
the Management Agreements. Overhead recovery for the three months ended
March 31, 1999 and 1998 was $149,000 and $73,000, respectively. These
amounts are classified with Selling, General and Administrative -
Affiliated in the accompanying Statements of Operations.
The Management Agreements also provides the opportunity for NTS
Management to receive an Incentive Payment, as defined in the
Management Agreements, equal to 10% of the Net Cash Flows of the
projects if certain financial obligations are met. The Incentive
Payment will not begin accruing until after the cumulative cash flows of
NTS/LFII, NTS/VA and the Fund's share of the cash flow of the Orlando
Lake Forest Joint Venture would have been sufficient to enable the Fund
to return to the shareholders of the Fund an amount which, after adding
thereto all other payments previously distributed to such shareholders
of the Fund, is at least equal to the shareholders' Original Capital
Contribution. As of March 31, 1999, the Fund had raised approximately
$63,690,000 and had paid distributions of approximately $23,141,000. As
of March 31, 1999, no amount had been accrued as an Incentive Payment
in the Fund's consolidated financial statements.
Advances and Notes Payable Affiliates
-------------------------------------
The Fund has received advances from Affiliates of the Fund's Sponsor, net
of repayments, totaling approximately $6,452,000 and $6,090,000 as of
March 31, 1999 and December 31, 1998 respectively. As of March 31, 1999,
the advances bear interest at approximately the Prime Rate and mature on
May 31, 2006. The Affiliate has represented that it will not demand
repayment on any amounts owed during 1999, unless cash flows are adequate
to allow such repayment. For the three months ended March 31, 1999, the
interest expense to affiliate totaling approximately $120,000 was
capitalized in inventory. For the three months ended March 31, 1998,
interest of approximately $64,000 was expensed.
8. Income Taxes
------------
The Fund adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109), effective January 1, 1997. SFAS
109 requires recognition of deferred tax assets and liabilities for the
expected future tax consequence of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
Fund's book and tax bases of assets and liabilities and tax
carry-forwards using enacted tax rates in effect for the year in which
the differences are expected to reverse. The principal 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 March 31, 1999 and December 31, 1998, will not be realized.
As of December 31, 1998, the Fund has a federal net operating loss
carryforward of approximately $687,000 expiring during 2012 and 2013.
9. 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.
12
<PAGE> 13
10. Commitments and Contingencies
-----------------------------
NTS/LFII and NTS/VA have various letters of credit outstanding to
governmental agencies and utility companies totaling approximately
$2,277,000 as of March 31, 1999 and December 31, 1998. 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 2001. Based on engineering studies and projections, NTS/LFII will
incur additional costs, excluding interest, of approximately $500,000
during 2001 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 2004. Based on engineering studies and projections, NTS/VA will
incur additional costs, excluding interest, of approximately $3,165,000
to complete the country club and homeowners association amenities for the
project. These costs are estimated to be incurred as follows: $1,500,000
for 1999, $75,000 for 2002, $440,000 for 2003, and $1,150,000 for 2004.
11. 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
March 31, 1999, 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.
13
<PAGE> 14
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 August 1997, the Fund entered into an Amended and Restated Joint Venture
Agreement evidencing the Fund's admission as a partner in the Joint Venture. The
Fund contributed its interest in the first mortgage loan on the Orlando Lake
Forest project and obtained a 50% interest in the Joint Venture.
In December 1997, the Fund acquired all the issued and outstanding common
capital stock of NTS/LFII and NTS/VA, effective October 1, 1997, for a nominal
purchase price. Concurrent with this transaction, the existing indebtedness of
NTS/LFII and NTS/VA to the Fund was converted to equity as of October 1, 1997.
This marks the beginning of the Fund's operations focusing solely on the
continuing development, operations, marketing and sale of single-family,
residential real estate. As a result, the Fund no longer operates as a Real
Estate Investment Trust effective January 1, 1997.
Liquidity and Capital Resources
- -------------------------------
Prior to the acquisition of a 50% interest in the Joint Venture, 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 Joint Venture 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 the Joint Venture
for the sale of lots within the Orlando Lake Forest project.
Operating Activity
- ------------------
Cash used for operating activities was approximately $742,000 for the three
months ended March 31, 1999. The primary components of the use of cash for
operating activities were a net loss of approximately $412,000, a decrease in
accounts payable and accrued expenses of approximately $580,000, net additions
to inventory of approximately $283,000, partially offset by collections of notes
receivable of approximately $264,000.
14
<PAGE> 15
Cash used for operating activities was approximately $2,153,000 for the three
months ended March 31, 1998. The primary components of the use of cash for
operating activities were a decrease in accounts payable and accrued expenses of
approximately $1,906,000, net additions to inventory of approximately $546,000,
partially offset by collections of notes receivable of approximately $243,000.
Investing Activity
- ------------------
During the three months ended March 31, 1999 and 1998, approximately $37,000 and
$41,000 was used to purchase property and equipment.
Financing Activity
- ------------------
Cash provided by financing activities was approximately $1,053,000 for the three
months ended March 31, 1999. The primary components of the cash provided by
financing activities were net borrowings on notes payable relating to the
development loans for Lake Forest North and Fawn Lake projects of approximately
$721,000, which were used primarily to fund activities of the Fawn Lake project,
and proceeds on notes payable to affiliates of approximately $362,000 which were
used primarily to fund activities of the Fawn Lake project.
Cash provided by financing activities was approximately $1,866,000 for the three
months ended March 31, 1998. The primary components of the cash provided by
financing activities were net borrowings on notes payable related to the
development loans for Lake Forest North and Fawn Lake projects of approximately
$4,067,000 and payments on notes payable to affiliates of approximately
$2,445,000. In addition, the Fund received net borrowings of approximately
$438,000 from Affiliates of the Fund's Sponsor.
Results of Operations
- ---------------------
Revenues
- --------
First quarter consolidated revenues increased 116% to $2.4 million in 1999 from
$1.1 million in 1998. This increase was a result of additional lot sales and
higher average lot selling price in the first quarter of 1999 compared to the
same period in 1998. During the first quarter of 1999, 25 lots were sold for an
average selling price of $97,791 compared to 15 lots sold in 1998 for an average
selling price of $75,483. First quarter cost of sales increased to $1.7 million
in 1999 compared to approximately $873,000 in 1998, resulting in a gross profit
margin of 32% and 23% for 1999 and 1998, respectively.
During the first quarter of 1998, the Fund realized approximately $382,000 of
proceeds from a loan previously made to the Orlando Lake Forest project during
the time the Fund operated as a REIT. This loan was written off by the Fund
prior to its investment in the Orlando Lake Forest Joint Venture. The Fund had
previously established a $1,500,000 loan loss reserve regarding a Temporary
Mortgage Loan to the Orlando Lake Forest Joint Venture. During the third quarter
1997, the Fund received 100% of the amount due on this loan and determined the
loan loss reserve was no longer needed.
Interest income on cash equivalents and miscellaneous income includes interest
income earned from short-term investments made by the Fund with cash reserves
for the three months ended March 31, 1999 and 1998.
Expenses
- --------
The ongoing operation and management of the Lake Forest North and Fawn Lake
projects will be conducted by NTS Residential Management (NTS Management) under
the terms of (i) a Property Management Agreement executed on December 30, 1997,
and dated as of October 1, 1997, by and among the Fund, NTS/LFII and NTS
Management for the Lake Forest North project, and (ii) a Property Management
Agreement executed December 30, 1997, and dated as of October 1, 1997, by and
among the Fund, NTS/VA and NTS Management for the Fawn Lake project
(collectively, the Management Agreements). NTS Management is a wholly-owned
subsidiary of NTS Development Company. NTS Development Company is a wholly-owned
subsidiary of the Fund's Sponsor. The Management Agreements have an initial term
through December 31, 2003, subject to extension under certain conditions, and
are renewable for successive six (6) year terms thereafter. Under the Management
Agreements, NTS Management will be reimbursed for costs incurred in the
operation and management of the Lake Forest North and Fawn Lake projects, will
be entitled to an Overhead Recovery, and will accrue an incentive payment
payable all as provided therein.
15
<PAGE> 16
The expenses related to the Property Management agreement are presented as
selling, general and administrative affiliated on the accompanying consolidated
statements of operations. As defined in the Management Agreements, the expenses
are classified in two ways, Expense Recovery and Overhead Recovery. The expense
recovery includes direct and pro-rated costs incurred in the management and
operation of NTS/LF II and NTS/VA. Such costs include compensation costs of
management, accounting, professional, engineering and development, marketing and
office personnel employed by NTS management and/or certain of its affiliates as
well as various non payroll related operating expenses. Compensation costs are
for those individuals who rendered services full time and on site at the
residential projects, with respect to the residential projects but who are not
on site and with respect to the residential projects but who have multiple
residential projects responsibilities some of which may be affiliated entities
of NTS Management. For services provided by individuals not on site or those
with multiple residential project responsibilities, costs are pro-rated by NTS
Management and allocated to the appropriate residential project.
Reimbursements for Expense Recovery of approximately $435,000 and $310,000 were
made to NTS Management or an Affiliate during the three months ended March 31,
1999 and 1998, respectively, for actual personnel, marketing and administrative
costs as they relate to NTS/LFII, NTS/VA and the Fund.
During 1998, the Fund elected to forego the Expense Recovery portion of the
Management Agreements relative to NTS/VA. NTS/VA pays expenses directly as
incurred rather than allowing NTS Management to pay expenses initially and then
make reimbursement to NTS Management. Therefore selling, general and
administrative expenses include those costs incurred directly by NTS/VA for
marketing related activities.
Additionally, NTS Management is entitled to an Overhead Recovery, which is a
reimbursement for overhead expenses attributable to the employees and the
efforts of NTS Management under the Management Agreements, in an amount equal to
3.75% of the projects' gross cash receipts, as defined in the Management
Agreements.
For the three months ended March 31, 1999 and 1998, Overhead Recovery incurred
was approximately $149,000 and $73,000, respectively.
Increases and decreases in interest expense generally correspond directly to
increases and decreases in the outstanding balances of the Fund's borrowings and
its subsidiaries borrowings as well as changes in the capitalization percentage.
For the three months ended March 31, 1999 approximately $586,000 was capitalized
in inventory and approximately $116,000 was expensed. For the three months ended
March 31, 1998, approximately $454,000 was capitalized in inventory and
approximately $190,000 was expensed.
Selling, general and administrative expenses also include directors' fees,
legal, outside accounting, other investor related cost. For the three months
ended March 31, 1999 and 1998, the amount incurred was approximately $464,000
and $298,000 respectively. The increase in 1999 compared to 1998 is primarily
due to additional selling and marketing cost.
Depreciation expense relates to equipment used for development activity, which
is being depreciated over five to seven years. Amortization expense relates
primarily to loan costs, which are being amortized over the life of the related
loan. For the three months ended March 31, 1999 loan cost amortization expense
was capitalized in inventory.
No benefit for income taxes was provided during the three months ended March 31,
1999 or 1998 as the Fund has recorded a valuation allowance equal to the amount
of the recorded benefit. The Fund has determined that it is more likely than not
that the net deferred tax asset will not be realized.
Net Loss
- --------
The Fund's net loss for the three months ended March 31, 1999 of $412,000
represents a decline from the net loss of $184,000 for the three months ended
March 31, 1998. This decline is primarily a result of $382,000 recovery on
provision for loan losses which occurred in the first quarter of 1998, partially
offset by a higher gross profit margin in 1999.
16
<PAGE> 17
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 months ended March 31, 1999
and 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
- ---------
NTS Management and its affiliates are reviewing the effort necessary to prepare
our information systems (IT) and non-information technology with embedded
technology (ET) for the Year 2000. The information technology solutions have
been addressed separate for the Year 2000 since the Fund saw the need to move to
more advanced management and accounting systems made available by new technology
and software developments during the decade of the 1990s.
The PILOT software system, purchased in the early 1990s, needs to be replaced by
a windows based network system both for headquarters functions and other
locations. The real estate accounting system developed, sold and supported by
the Yardi Company of Santa Barbara, California has been selected to supercede
PILOT. The Yardi system has been tested and is compatible with Year 2000 and
beyond. This system is being implemented and should be fully operational by the
end of third quarter of 1999.
The few remaining systems not addressed by these conversions are being modified
by our in-house staff of programmers. The Hewlett Packard 3000 system, used for
PILOT and custom applications, was purchased in 1997 and will be part of our new
network. It will be retained as long as necessary to assure smooth operations
and has been upgraded to meet Year 2000 requirements.
All risks identified with information technology are believed to be addressed by
these plans.
The cost of these advances in our systems technology is not all attributable to
the Year 2000 issue since the need to move to a network based system had been
determined regardless of the Year 2000. The portion of the cost attributed to
the Mortgage Income Fund was approximately $42,000 for 1998 and is projected to
be approximately $63,000 during 1999 for hardware and software costs.
NTS management staff has been surveying our vendors to evaluate embedded
technology in our alarm systems, HVAC controls, telephone systems and other
computer associated facilities. In a few cases, equipment is being replaced. In
some cases circuitry is being upgraded. The cost involved is still being
evaluated. There are no known significant risks that are currently without
solutions. Management anticipates that applications involving ET will be Year
2000 compliant by the third quarter of 1999.
We are also currently addressing the Year 2000 readiness of third parties whose
business interruption could have a material negative impact on our business. All
significant vendors have indicated that they will be compliant by the end of
1999. Such assurances are being evaluated and documented.
Management has determined that at our current state of readiness, the need does
not presently exist for a contingency plan. We will continue to evaluate the
need for such a plan.
Despite diligent preparation, unanticipated third-party failures, more general
public infrastructure failures or failure to successfully conclude our
remediation efforts as planned could have a material adverse impact on our
results of operations, financial conditions and/or cash flows in 1999 and
beyond.
17
<PAGE> 18
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
Our primary market risk exposure with regard to financial instruments is changes
in interest rates. The Fund's debt instruments bear interest at both variable
and fixed rates as further discussed in Note 6 of the Fund's financial
statements. At March 31, 1999, a hypothetical 100 basis point increase in
interest rates would result in an approximately $58,000 increase in interest
expense. During the three months ended March 31, 1999, the majority of interest
expense incurred was capitalized in inventory.
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 the Joint Venture
are encumbered by development loans from third party lenders which, given the
nature of the risks incumbent in real estate investment and development
activities as stated above, are inherently subject to default should the ability
of NTS/LFII, NTS/VA, Joint Venture and/or the Fund to make principal and
interest payments under such development loans become impaired.
There is the potential for occurrences which could affect the Fund's ability to
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.
18
<PAGE> 19
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.
19
<PAGE> 20
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 and Director of the NTS Mortgage
Income Fund (acting as Chief Financial Officer)
Date: May 17, 1999
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> NTS MORTGAGE INCOME FUND
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF MARCH 31, 1999 AND FROM THE STATEMENT OF OPERATIONS FOR
QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000841942
<NAME> NTS MORTGAGE INCOME FUND
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,335,547
<SECURITIES> 0
<RECEIVABLES> 3,040,258
<ALLOWANCES> 0
<INVENTORY> 53,547,592
<CURRENT-ASSETS> 0<F1>
<PP&E> 497,849
<DEPRECIATION> 228,305
<TOTAL-ASSETS> 65,617,703
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 29,933,756
0
0
<COMMON> 3,187
<OTHER-SE> 33,909,439
<TOTAL-LIABILITY-AND-EQUITY> 65,617,703
<SALES> 2,444,785
<TOTAL-REVENUES> 2,518,456
<CGS> 1,659,883
<TOTAL-COSTS> 1,048,481
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115,952
<INCOME-PRETAX> (411,599)
<INCOME-TAX> 0
<INCOME-CONTINUING> (411,599)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (411,599)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> 0
<FN>
<F1>THE COMPANY HAS AN UNCLASSIFIED BALANCE SHEET; THEREFORE, THE VALUE IS $0
</FN>
</TABLE>
<PAGE> 1
Glossary
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> 2
"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> 3
"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> 4
"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.
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"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.
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"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.
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"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.
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<PAGE> 8
"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.
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"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.
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"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.
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"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.
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<PAGE> 12
"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.
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