UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the fiscal year ended December 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
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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 (Zip Code)
executive offices)
Registrant's telephone number,
including area code: (502) 426-4800
--------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Shares of Common Stock
- --------------------------------------------------------------------------------
(Title of Class)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of March 15, 2000 there were approximately 3,187,000 shares of common stock
outstanding. The aggregate sales price for shares sold was approximately
$63,690,000. There is no current market for these shares although it is possible
that one will develop.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Prospectus of the registrant dated March 31, 1989, as
supplemented by Supplements No. 1, No. 2, No. 3, No. 4, No. 5 and No. 6 dated
October 16, 1989, March 29, 1990, April 23, 1990, July 25, 1990, September 6,
1990, and August 23, 1991, respectively, (collective with the "Prospectus") and
filed pursuant to Rule 424 under the Securities Act of 1933, are incorporated by
reference into this Annual Report on Form 10-K.
Index to Exhibits is located on page 57
Total Pages: 58
<PAGE>
TABLE OF CONTENTS
Pages
PART I
Items 1 and 2. Business and Properties 3-5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a
Vote of Security Holders 5
PART II
Item 5. Market for the Registrant's Shares
and Related Stockholder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8-18
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 18
Item 8. Financial Statements and
Supplementary Data 19-49
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 50
PART III
Item 10. Directors and Executive Officers of
the Registrant 51-54
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial
Owners and Management 54
Item 13. Certain Relationships and Related
Transactions 55-56
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 57
Signatures 58
2
<PAGE>
PART I
Items 1. and 2. Business and Properties
-----------------------
Some of the statements included in Items 1. and 2., Business and Properties, or
elsewhere in this report, may be considered to be "forward-looking statements"
since such statements relate to matters which have not yet occurred. For
example, phrases such as "the Fund anticipates," "believes" or "expects"
indicate that it is possible that the event anticipated, believed or expected
may not occur. Should such event not occur, then the result which the Fund
expected also may not occur or occur in a different manner, which may be more or
less favorable to the Fund. The Fund does not undertake any obligations to
publicly release the result of any revisions to these forward-looking statements
that may be made to reflect any future events or circumstances.
Capitalized terms shall have the meaning ascribed them in the "Glossary" on
pages 75 to 81 of the Fund's Prospectus, which is filed herewith and
incorporated herein by reference.
NTS Mortgage Income Fund (the "Fund"), a Delaware corporation, was formed on
September 26, 1988. The Fund originally operated as a real estate investment
trust (REIT) under the Internal Revenue Code of 1986 (the "Code"), as amended
from inception through December 31, 1996. The acquisition of the capital stock
of NTS/Lake Forest II Residential Corporation and NTS/Virginia Development
Company, which is discussed below, caused the Fund to change its tax status to a
"C" corporation under the Code as of 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 operations of the Fund's wholly-owned subsidiaries (NTS Management). NTS
Advisory and NTS Management are Affiliates of and are under common control with
NTS Corporation.
The Fund's objectives as originally described in the Prospectus were to (i)
preserve and protect capital; (ii) distribute cash flow on a regular basis as it
was available; and (iii) increase the value of the Fund's Net Assets and the
Shares through receipt of Incentive Interest or Gross Receipts Interest and, to
a lesser extent, through the acquisition, operation and disposition of Real
Estate Investments. Incentive Interest is defined as the Fund's share in the
Increase in Value of a property securing a Mortgage Loan and was to be payable
in connection with Mortgage Loans secured by Real Estate not held for sale in
the ordinary course of business. Gross Receipts Interest is defined as 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 and was to be payable in connection with Mortgage Loans secured by Real
Estate held for sale in the ordinary course of business. It was not an objective
of the Fund to provide tax-sheltered income.
As previously reported, on February 12, 1997, the Fund entered into a letter of
intent (Letter of Intent) with NTS Corporation, the Sponsor of the Fund,
NTS/Lake Forest II Residential Corporation, a Kentucky corporation which then
was an Affiliate of and under common control with NTS Corporation (NTS/LFII),
NTS/Virginia Development Company, a Virginia corporation which then was an
Affiliate of and under control with NTS Corporation (NTS/VA) and NTS Development
Company, a Kentucky corporation and a wholly-owned subsidiary of NTS
Corporation. The Letter of Intent contemplated the restructuring of the Fund's
loans to NTS/LFII and NTS/VA, and the acquisition of control by the Fund of the
Lake Forest North project in Louisville, Kentucky, and the Fawn Lake project
near Fredericksburg, Virginia.
The Fund consummated the restructuring contemplated by the Letter of Intent by
acquiring all of the issued and outstanding common capital stock of NTS/LFII and
NTS/VA effective as of October 1, 1997, for a nominal purchase price. The
acquisition was closed pursuant to (i) an Agreement executed on December 30,
1997, and dated as of October 1, 1997, by and among the Fund, NTS/LFII and its
shareholders, NTS/VA and certain of its shareholders, NTS Corporation, the
3
<PAGE>
Items 1 and 2. Business and Properties - Continued
-----------------------------------
Advisor, and NTS Management, and (ii) an Agreement executed on December 30,
1997, and dated as of October 1, 1997, by and among the Fund, NTS/VA and certain
shareholders of NTS/VA and NTS Corporation.
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. As of December 31, 1999, approximately 740
of 1,172 total lots have been developed and approximately 432 of the total
projected lots to be developed have been sold.
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. NTS/Residential Properties, Inc. - Virginia, a Virginia
corporation and an Affiliate of the Sponsor of the Fund, will continue to act as
a broker and agent for NTS/VA for the sale of lots within the Fawn Lake project,
and as broker and agent for approved builders in the Fawn Lake project for the
sale of new homes. As of December 31, 1999, approximately 441 of 1,389 total
lots have been developed and approximately 948 of the total projected lots to be
developed have been sold.
The Fund purchased all of the issued and outstanding common capital stock of
NTS/LFII and NTS/VA for a nominal purchase price. Concurrent with this
transaction, the existing indebtedness of each of NTS/LFII and NTS/VA to the
Fund was converted to equity as of October 1, 1997, and the Fund released the
first mortgages in favor of the Fund on the Lake Forest North and Fawn Lake
projects.
The Fund, as the sole shareholder of NTS/LFII and NTS/VA, controls the ongoing
operations of the Lake Forest North and Fawn Lake projects. The ongoing
operation and management of the Lake Forest North and Fawn Lake projects is now
conducted by NTS Management under the terms of (i) a Property Management
Agreement executed on December 30, 1997, and dated as of October 1, 1997, by and
among the Fund, NTS/LFII and NTS Management for the Lake Forest North project,
and (ii) a Property Management Agreement executed on December 30, 1997, and
dated as of October 1, 1997, by and among the Fund, NTS/VA and NTS Management
for the Fawn Lake project (collectively, the Management Agreements). 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.
The terms of the restructuring and of the Management Agreements were negotiated
on behalf of the Fund by a committee of the Fund's Board of Directors (the
Special Committee) consisting only of the Independent Directors. The Special
Committee believes that the terms of the restructuring and of the Management
Agreements are as favorable to the Fund as could have been obtained from
unrelated third parties under the circumstances.
In August 1997, the Fund entered into an Amended and Restated Joint Venture
Agreement evidencing the Fund's admission as a partner in the Orlando Lake
Forest Joint Venture (the "Joint Venture") effective as of August 16, 1997. 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 NTS Corporation, the Fund's Sponsor. The Joint
Venture will continue to operate under its current legal name as the Orlando
Lake Forest Joint Venture.
The Joint Venture owns the Orlando Lake Forest project, a single-family
residential community located in Seminole County, Florida (near Orlando)
consisting of approximately 360 acres of residential land and improvements and
4
<PAGE>
Items 1 and 2. Business and Properties - Continued
-----------------------------------
approximately 20 acres of commercial land. The Joint Venture will continue to
own and develop the Orlando Lake Forest project.
The Fund contributed to the Joint Venture as a capital contribution its interest
in the principal and interest of the first mortgage loan on the Orlando Lake
Forest project, and obtained a 50% interest in the Joint Venture. The NTS
entities named above hold cumulatively the remaining 50% interest in the Joint
Venture.
The net income or net loss of the Joint Venture is allocated based on the
respective partner's percentage interest, as defined in the joint venture
agreement. As of December 31, 1999, 1998 and 1997, the Fund's percentage
interest was 50% and the Fund's share of the Joint Venture's net income (loss)
for the years ended December 31, 1999, 1998 and from August 16, 1997 (when the
Fund was admitted as a partner) through December 31, 1997 was $(405,183),
$(247,879) and $106,667, respectively.
There are currently five directors of the Fund, two of whom are affiliated with
the Advisor and three of whom are Independent Directors. The Directors are
responsible for the management and control of the affairs of the Fund. However,
in accordance with the Fund's Certificate of Incorporation and By-Laws, the
Directors have, in the Advisory Agreement and in certain management agreements
with NTS Management, delegated broad powers to the Advisor and NTS Management to
administer the day-to-day operations of the Fund and its subsidiaries. The
Advisor has delegated substantially all its duties to the Sponsor. All personnel
rendering services to the Fund are employees of companies affiliated with the
Sponsor. The Fund does not directly employ any persons other than the
Independent Directors, the Advisor and NTS Management. The business of the Fund
is not seasonal. The Fund is required to terminate its assets by December 31,
2008. Because the Fund's affiliates own real estate properties other than those
owned by the Fund that are or could be in competition with the Fund, potential
conflicts of interest exist.
Item 3. Legal Proceedings
-----------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Fund did not submit any matters to a vote of its security holders during the
year ended December 31, 1999.
5
<PAGE>
PART II
Item 5. Market for the Registrant's Shares and Related Stockholder Matters
------------------------------------------------------------------
The selling price of the Shares was $20 per Share. The Fund's Shares are freely
transferable but are not listed or included for quotation on a national
securities exchange. As of March 1, 2000, there were 3,460 record holders of the
Fund's Shares. No dividends were declared during 1999, 1998 or 1997.
The continued needs of the Fund and its subsidiaries (to which the Fund formerly
had outstanding Mortgage Loans) may significantly reduce the Fund's cash flows.
Therefore, the Fund's Board of Directors decided to terminate the Fund's
quarterly distribution for the foreseeable future effective as of the first
quarter of 1997.
6
<PAGE>
Item 6. Selected Financial Data
-----------------------
<TABLE>
Years ended December 31, 1999, 1998, 1997, 1996 and 1995. (1)
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Inventory $ 55,438,644 $ 53,264,438 $ 51,917,990 $ -- $ --
============ ============ ============ =========== ===========
Affiliated mortgage loans
receivable, net (3) $ -- $ -- $ -- $66,287,764 $63,655,706
============ ============ ============ =========== ===========
Total assets $ 65,094,003 $ 65,552,757 $ 64,184,368 $68,745,709 $65,511,633
============ ============ ============ =========== ===========
Total notes payable (6) $ 28,342,811 $ 28,850,539 $ 24,505,233 $18,801,517 $16,034,873
============ ============ ============ =========== ===========
Total revenues and other (4) $ 4,520,531 $ 2,628,950 $ 4,678,937 $ 3,304,995 $ 2,884,652
Total expenses (2) 5,369,847 4,098,561 18,385,887 2,454,686 2,026,318
------------ ------------ ------------ ----------- -----------
Net income (loss) $ (849,316) $ (1,469,611) $(13,706,950) $ 850,309 $ 858,334
============ ============ ============ =========== ===========
Weighted average number
of shares 3,187,333 3,187,333 3,187,333 3,187,333 3,187,333
============ ============ ============ =========== ===========
Net income per share of
common stock $ (.27) $ (.46) $ (4.30) $ .27 $ .27
============ ============ ============ =========== ===========
Taxable income (loss)
(prior to dividend paid
deduction) (5) $ (2,017,301) $ (1,488,574) $ (387,081) $ 631,114 $ 672,098
============ ============ ============ =========== ===========
Taxable income (loss)
(prior to dividend paid
deduction) per share of
common stock $ (.63) $ (.47) $ (.12) $ .20 $ .21
============ ============ ============ =========== ===========
Cash dividends declared $ -- $ -- $ -- $ 605,601 $ 643,841
============ ============ ============ =========== ===========
Cash dividends declared
per share of common stock $ -- $ -- $ -- $ .19 $ .20
============ ============ ============ =========== ===========
</TABLE>
(1) The above selected financial data should be read in conjunction with the
consolidated financial statements and related notes appearing in this Form
10-K report.
(2) Expenses for 1997 include a non-cash charge in the amount of $11,600,000.
This related to the Fund's acquisition of the stock of NTS/Lake Forest II
Residential Corporation (NTS/LFII) and NTS/Virginia Development Company
(NTS/VA). Also included in expenses is a non-cash charge of approximately
$3.7 million related to the Fund's investment in an unconsolidated
affiliate. (See Notes 3 and 4 to Consolidated Financial Statements).
(3) Represents the carrying amount of the mortgage loans, which is equal to
their face amount less unamortized commitment fees and unaccreted
discounts. The 1996 and 1995 balances are net of an allowance for loan
losses of $1,500,000 and $1,553,397, respectively.
(4) Total revenue and other income included the gross profit and lot sales and
other income items such as interest income and recovery of provision for
loan losses in certain years. Revenues for 1997 include approximately
$370,000 of gross profit from lot sales generated by NTS/LFII and NTS/VA
from October 1, 1997 (the date of acquisition) through December 31, 1997.
Prior to October 1, 1997, the Fund's primary source of revenues was
interest income earned on affiliated mortgage loans.
(5) See Note 11 of the Notes to Consolidated Financial Statements for an
explanation of differences between net income and taxable income.
(6) The balances presented as notes payable include notes payable to third
parties and notes payable to affiliates.
7
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
The Fund commenced an offering to the public on March 31, 1989 and was
authorized to sell up to 2,500,000 shares of common stock at $20.00 per share
(subject to an increase to 5,000,000 shares at the option of the Fund).
Approximately 3,187,000 shares were sold representing approximately $64 million
in sales and approximately $9.5 million in selling expenses and other offering
costs. The net offering proceeds remaining, after payment of brokerage
commissions, organizational expenses and other costs were used to make Mortgage
Loans and Temporary Investments and such other investments as permitted by the
Fund's Prospectus.
Throughout 1997, the Fund's Board of Directors and NTS Corporation, the Fund's
Sponsor, were involved in a restructuring of the Fund's Mortgage Loan portfolio.
The Fund's Affiliated Borrowers had included NTS/Lake Forest II Residential
Corporation (NTS/LFII), NTS/Virginia Development Company (NTS/VA), and the
Orlando Lake Forest Joint Venture (OLFJV).
In August 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 marked 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.
Reference is made to Notes 3 and 4 of the Notes to Financial Statements for
further information regarding these investments and acquisitions.
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.
8
<PAGE>
Cautionary Statements - Continued
- ---------------------------------
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.
Liquidity and Capital Resources
- -------------------------------
Prior to October 1, 1997, 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 72% to 91% of Gross
Receipts from lot sales.
The continued cash needs of the Fund and its subsidiaries have significantly
reduced the Fund's cash flows. Therefore, the Fund's Board of Directors decided
to terminate the Fund's quarterly distribution for the foreseeable future
effective as of the first quarter of 1997.
As previously reported, on February 12, 1997, the Fund entered into a letter of
intent (Letter of Intent) with NTS Corporation, the Sponsor of the Fund,
NTS/LFII, NTS/VA and NTS Development Company, a Kentucky corporation and a
wholly-owned subsidiary of NTS Corporation. The Letter of Intent contemplated
the restructuring of the Fund's loans to NTS/LFII and NTS/VA, and the
acquisition of control by the Fund of the Lake Forest North project in
Louisville, Kentucky, and the Fawn Lake project near Fredericksburg, Virginia.
The Fund consummated the restructuring as described in the Letter of Intent by
acquiring all of the issued and outstanding common capital stock of NTS/LFII and
NTS/VA effective as of 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. The acquisition was closed pursuant to (i) an
Agreement executed on December 30, 1997, and dated as of October 1, 1997, by and
among the Fund, NTS/LFII and its shareholders, NTS/VA and certain of its
shareholders, NTS Corporation, NTS Advisory Corporation, a Kentucky corporation
and Advisor to the Fund (the Advisor) and NTS Residential Management Company, a
Kentucky corporation (NTS Management), and (ii) an Agreement executed on
December 30, 1997, and dated as of October 1, 1997, by and among the Fund,
NTS/VA and certain shareholders of NTS/VA and NTS Corporation. The Advisor and
NTS Management are Affiliates of and are under common control with NTS
Corporation.
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.
9
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
The Fund, as the sole shareholder of NTS/LFII and NTS/VA controls the ongoing
operations of the Lake Forest North and Fawn Lake projects. The ongoing
operation and management of the Lake Forest North and Fawn Lake projects is
conducted by NTS Management under the terms of (i) a Property Management
Agreement executed on December 30, 1997, and dated as of October 1, 1997, by and
among the Fund, NTS/LFII and NTS Management for the Lake Forest North project,
and (ii) a Property Management Agreement executed on December 30, 1997, and
dated as of October 1, 1997, by and among the Fund, NTS/VA and NTS Management
for the Fawn Lake project (collectively, the Management Agreements). 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.
Reimbursements of approximately $1,713,000, $1,439,000 and $527,000 were made to
NTS Management or an Affiliate during the years ended December 31, 1999, 1998
and the period from October 1, 1997 through December 31, 1997, respectively.
These expense reimbursements include 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 affiliates as well as various non-payroll related operating expenses.
Compensation costs are for those individuals rendering 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 project 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. These
reimbursements are included within Selling, General and Administrative -
Affiliated in the accompanying Consolidated Statements of Operations.
In addition to the expense reimbursement noted above, NTS Management is also
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
years ended December 31, 1999, 1998 and the period from October 1, 1997 through
December 31, 1997, were approximately $567,000, $496,000 and $106,000,
respectively. These amounts are classified as Selling, General and
Administrative - Affiliated in the accompanying Consolidated Statements of
Operations.
Reference is made to Note 9 of the Notes to Financial Statements for a breakdown
of these related party charges.
As presented in the accompanying consolidated balance sheet as of December 31,
1999, accounts payable - affiliates of $1,194,395 is owed to NTS Development
Company and NTS Residential Management Company for salary and overhead
reimbursements. NTS Development Company and NTS Residential Management Company
have agreed to defer amounts owed to them by the Fund as of December 31, 1999
and those amounts that will accrue during fiscal 2000 through the period ending
January 1, 2001, other than as permitted by cash flows of the Fund. There can be
no assurances that this level of support will continue past January 1, 2001.
The Management Agreements also call for NTS Management to potentially receive an
Incentive Payment, as defined in the Management Agreements, equal to 10% of the
Net Cash Flows of the projects. The Incentive Payment will not begin accruing
until after the cumulative cash flows of NTS/LFII, NTS VA and the Fund's share
of the cash flow of the Orlando Lake Forest Joint Venture would have been
sufficient to enable the Fund to have returned to the then existing shareholders
of the Fund an amount which, after adding thereto all other payments actually
remitted or distributed to such shareholders of the Fund, is at least equal to
the shareholders' Original Capital Contribution. As of December 31, 1999, the
10
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
Fund had raised approximately $63,690,000 and had paid distributions of
approximately $23,141,000. As of December 31, 1999, no amount had been accrued
as an Incentive Payment in the Fund's consolidated financial statements.
The terms of the restructuring and of the Management Agreements were negotiated
on behalf of the Fund by a committee of the Fund's Board of Directors (the
Special Committee) consisting only of the Independent Directors. The Special
Committee believes that the terms of the restructuring and of the Management
Agreements are at least as favorable to the Fund as could have been obtained
from unrelated third parties under the circumstances.
On December 30, 1997, NTS/VA closed on development financing for the Fawn Lake
project committed by an unaffiliated bank. The $10,700,000 revolving credit
facility is currently anticipated to provide funds for the continued development
and operations of the Fawn Lake project through December 1, 2002, the maturity
of the credit facility. Mr. J. D. Nichols, Chairman of the Board of the Fund's
Sponsor and of the Fund, has individually guaranteed the repayment of up to
$3,000,000 of the credit facility (See Financing Activity).
The credit facility bears interest at the Prime Rate + 1 1/2%, payable monthly,
and principal payments generally equal 91% of the Gross Receipts from the sale
of lots at the Fawn Lake project. In addition, the total outstanding principal
amount must be brought to within the following levels by the applicable date:
December 31, 1999 $10,700,000
December 31, 2000 $ 7,800,000
December 31, 2001 $ 5,900,000
December 1, 2002 $ 4,500,000
The loan balance was $9,777,485 as of December 31, 1999.
On January 6, 1998, NTS/LFII closed on a development loan of $8,000,000 for the
Lake Forest North project committed by an unaffiliated bank. On April 26, 1999,
this loan was increased to $9,500,000 to provide a one-time source for funding
development costs of the Fawn Lake project. The $9,500,000 revolving credit
facility is currently anticipated to provide funds for the continued development
and operations through December 31, 2002, the maturity of the credit facility,
and the repayment thereof has been guaranteed by the Fund. Mr. J. D. Nichols,
Chairman of the Board of the Fund's Sponsor and of the Fund, has individually
guaranteed the repayment of fifty percent (50%) of the credit facility.
The credit facility bears interest at the Prime Rate + 1%, payable monthly, and
principal payments generally equal 90% of the Gross Receipts from the sale of
lots at the Lake Forest North project. In addition, the principal amount
outstanding on the credit facility must be brought to within the following
levels by the applicable date:
December 31, 1999 $ 7,500,000
December 31, 2000 $ 4,500,000
December 31, 2001 $ 2,000,000
The net worth of NTS/LFII cannot be allowed to decrease by 20% or more
throughout the term of the agreement. The loan balance was $6,817,188 as of
December 31, 1999.
NTS/LFII is also encumbered by a mortgage loan in the amount of $4,000,000 (with
an outstanding balance of $2,870,000 as of December 31, 1999) from an
unaffiliated lender which is secured by a first mortgage on the Lake Forest
Country Club and golf course (approximately 176 acres of residential land and
improvements thereon). The note bears interest at the Prime Rate + 1/2%, payable
monthly, guaranteed by the Fund's sponsor. Principal payments totaling $300,000
are due twice a year, February through July and August through January. On
11
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
January 31, 2000, an amendment reduced the principal payment requirement for the
period August 1, 1999 through January 31, 2000 to $100,000. The primary source
of principal payments will be initiation fees received.
In August 1997, the Fund entered into an Amended and Restated Joint Venture
Agreement evidencing the Fund's admission as a partner in the Orlando Lake
Forest Joint Venture (the "Joint Venture") effective as of August 16, 1997. The
other partners in the Joint Venture are Orlando Lake Forest, Inc., Orlando
Capital Corporation and OLF II Corporation, all of who are Affiliates of and are
under common control with the Fund's Sponsor. The Joint Venture will continue to
operate under its current legal name as the Orlando Lake Forest Joint Venture.
The Joint Venture owns the Orlando Lake Forest project, a single-family
residential community located in Seminole County, Florida (near Orlando)
consisting of approximately 360 acres of residential land and improvements and
approximately 20 acres of commercial land. The Joint Venture will continue to
own and develop the Orlando Lake Forest project.
The Fund contributed to the Joint Venture as a capital contribution its interest
in the principal and interest of the first mortgage loan on the Orlando Lake
Forest project, and obtained a 50% interest in the Joint Venture. The NTS
entities named above hold cumulatively the remaining 50% interest in the Joint
Venture.
The net income or net loss of the Joint Venture is allocated based on the
respective partner's percentage interest, as defined in the joint venture
agreement. As of December 31, 1999 and 1998, the Fund's percentage interest was
50% and the Fund's investment balance in the Joint Venture was $4,151,307 and
$4,462,990, respectively. The Fund's share of the Joint Venture's net income
(loss) from the years ended December 31, 1999, 1998 and the period from October
1, 1997 through December 31, 1997 was $(405,183), $(247,879) and $106,667,
respectively.
Key elements of the Consolidated Statements of Cash Flows:
1999 1998 1997
---- ---- ----
Net cash provided by (used for)
operating activities $ 259,355 $(3,152,180) $ 459,795
Net cash provided by (used for)
investing activities $ (318,148) $ (446,334) $ 3,626,775
----------- ----------- -----------
Net cash flows from operating and
investing activities $ (58,793) $(3,598,514) $ 4,086,570
Net cash provided by (used for)
financing activities $ (383,794) $ 3,246,678 $(3,389,918)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents $ (442,587) $ (351,836) $ 696,652
=========== =========== ===========
Operating Activity
- ------------------
Cash provided by operating activities was approximately $259,000 for the year
ended December 31, 1999. The primary components of the cash provided for
operating activities were a net loss of approximately $849,000, an increase in
accounts payable to the affiliate of approximately $1,194,000, decrease in notes
receivable of approximately $1,164,000, offset by additions to inventory of
approximately $2,174,000.
Cash used for operating activities was approximately $3,152,000 for the year
ended December 31, 1998. The primary components of the use of cash for operating
activities were a net loss of approximately $1,470,000, a decrease in accounts
payable of approximately $949,000 and net additions to inventory of
approximately $1,346,000.
12
<PAGE>
Operating Activity - Continued
- ------------------------------
Cash provided by operations was approximately $460,000 for the year ended
December 31, 1997. The Fund received approximately $71,000 from cash revenues in
excess of cash expenses. The Fund received approximately $481,000 in interest
receivable payments from affiliates. NTS/LFII and NTS/VA used approximately
$790,000 of cash to increase inventory. NTS/LFII and NTS/VA provided
approximately $540,000 of cash from collection of initiation fees and other
receivables and notes receivable during the period October 1, 1997 through
December 31, 1997. In addition, accounts payables increased approximately
$159,000.
Investing Activity
- ------------------
Cash used for investing activities was approximately $318,000 for the year ended
December 31, 1999. The components of the use of cash were additional capital
contributions to an unconsolidated affiliate of approximately $94,000 and
capital additions, primarily at the Lake Forest North and Fawn Lake golf
operations of approximately $225,000.
Cash used for investing activities was approximately $446,000 for the year ended
December 31, 1998. The components of the use of cash for investing activities
were additional capital contribution to an unconsolidated affiliate of $186,000
and capital additions, primarily at the Lake Forest North and Fawn Lake golf
operations of approximately $261,000.
During the year ended December 31, 1997, the Fund received repayment on three
mortgage loans and two temporary investments in the aggregate principal amount
of approximately $9,299,000. Repayments on mortgage loans were generally equal
to approximately 83% of the Gross Receipts received on lot sales less closing
costs. The Funds made investments in three mortgage loans and one temporary
investment in the aggregate principal amount of approximately $5,700,000.
Financing Activity
- ------------------
Cash used for financing activities was approximately $384,000 for the year ended
December 31, 1999. The primary components of the cash used by financing
activities were net borrowings on notes payable of approximately $5,583,000
which included approximately $6,697,000 of borrowings to repay a note payable to
an affiliate and net payments of $1,114,000 relating to the development loans
for Lake Forest North and Fawn Lake projects.
Cash provided by financing activities was approximately $3,247,000 for the year
ended December 31, 1998. 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
$3,565,000, net borrowings on notes payable to affiliates of approximately
$781,000 which were used primarily to fund activities of the Fawn Lake project
and repayment of advances to affiliates of approximately $631,000 which were
initially used to fund development costs at the Fawn Lake project.
Cash used for financing activities was approximately $3,390,000 for the year
ended December 31, 1997. During the year ended December 31, 1997, the Fund and
its subsidiaries borrowed approximately $8,516,000 from their various lenders.
The Fund and its subsidiaries repaid approximately $2,380,000 of their
borrowings from lot proceeds generated by NTS/LFII, NTS/VA and OLFJV. In
addition, approximately $9,425,000 of borrowings were repaid using proceeds from
the NTS/VA and OLFJV development loans. The Fund and its subsidiaries also
borrowed approximately $2,436,000 from affiliates of the Fund's sponsor. They
repaid approximately $1,651,000 of these borrowings primarily from loan
repayments made by OLFJV during the period from January 1, 1997 through August
15, 1997.
13
<PAGE>
Financing Activity - Continued
- ------------------------------
NTS Guaranty Corporation (the "Guarantor"), an Affiliate of the Sponsor, has
guaranteed that investors of the Fund will receive, over the life of the Fund,
aggregate distributions from the Fund (from all sources) in an amount at least
equal to their Original Capital Contributions, as defined in the Fund's
Prospectus. As of December 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.
The NTS/VA lender has agreed to allow NTS/VA to maintain a maximum outstanding
development loan balance of $10.7 million through April 30, 2000, without
considering the obligation in default due to non-compliance with the maximum
funding levels called for in the original loan agreement management's
projections indicate that the present development plans will require a funding
level which will result in an outstanding debt balance as of December 31, 2000
of approximately $12.2 million. Management's projection for NTS/VA indicates the
development will reach the maximum funding level allowed by the current
development loan of $10.7 million during 2000 and in fact require additional
funding to achieve its 2000 development plan, which includes projected sales of
$7.05 million. In the event short term capital needs dictate the need for cash
to reduce the outstanding obligation relative to the NTS/VA development loan,
the loan is secured by a approximately $2 million letter of credit issued by a
third party lender with the NTS/VA lender stated as the beneficiary, and a $3
million guarantee by Mr. J.D. Nichols, both of which could provide the necessary
capital to help ensure compliance with the maximum funding levels set forth in
the original development loan.
Based upon present facts and circumstances, including ongoing discussions with
the NTS/VA lender management's present plans will consider the following: 1)
defer the payment of amounts owed to Affiliates as of December 31, 1999 and
those amounts accruing during 2000 other than as permitted by cash flows (See
Note 9) 2) continuing discussions with the NTS/VA lender to combine both the
NTS/VA and NTS/LFII debt at the current NTS/VA lender securing overall favorable
terms, rates and fees and 3) obtaining additional funding from the NTS/LFII
lender thereby allowing NTS/VA to utilize such funds for development purposes.
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 NTS/VA. However, if management is
unsuccessful in the effort, considerations will be given to slowing individual
budgeted development projects at NTS/VA budgeted for year 2000.
Results of Operations
- ---------------------
Comparability
- -------------
On an overall basis, the Fund experienced a loss of approximately $(849,000),
$(1,470,000) and $(13,707,000), or $(.27), $(.46) and $(4.30) per share of
common stock for the years ended December 31, 1999, 1998 and 1997, respectively.
In the context of the restructuring and acquisitions which occurred during the
fourth quarter of 1997, comparisons of results of operations are complex. The
fourth quarter 1997 charge relating to the acquisition of NTS/LFII and NTS/VA
and the adjustment of the carrying value of the Fund's investment in OLFJV also
represent significant items which complicated year-to-year comparisons.
14
<PAGE>
Results of Operations - Continued
- ---------------------------------
Revenues
- --------
Revenue for the year ended December 31, 1999, includes $14.3 million in lot
sales consisting of approximately $9.3 million and $5.0 million from the Lake
Forest North and Fawn Lake projects, respectively. Cost of sales of
approximately $10.0 million resulted in a gross profit margin of approximately
30%. During this period 165 lots were sold for an average selling price of
$86,400.
The average selling price per lot was higher in 1999 compared to 1998 primarily
attributable to the sale of an entire lot section to a single builder in the
Fawn Lake project during 1998. These lots sold for a lower average price of
approximately $54,100 since they were smaller lots for the construction of patio
homes.
Revenue for the year ended December 31, 1998, includes $8.1 million in lot sales
consisting of approximately $5.9 million and $2.2 million from the Lake Forest
North and Fawn Lake projects, respectively. Cost of sales of approximately $6.2
million resulted in a gross profit margin of approximately 23%. During this
period 136 lots were sold for an average selling price of $59,272. The decrease
in the average sales price compared to the period October 1, 1997 through
December 31, 1997 is primarily attributable to the sale of an entire lot section
to a single home builder in the Fawn Lake project during 1998.
During the year ended December 31, 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.
Revenue for the year ended December 31, 1997, includes $1.6 million of lot sales
consisting of approximately $1.4 million and $200,000 from the Lake Forest North
and Fawn Lake projects, respectively, for the period from October 1, 1997 (when
the Fund acquired the stock of these entities) to December 31, 1997. Cost of
sales was $1.2 million resulting in a gross profit of approximately 23%. During
this period 21 lots were sold for an average selling price of $76,202.
During the nine months ended September 30, 1997, the Fund's primary revenue
source was interest income earned on affiliated mortgage loans. The average
interest rate earned by the Fund for the nine months ended September 30, 1997,
was approximately 5.5% on the average loan balance of approximately $63,600,000.
Interest income on cash equivalents and miscellaneous income includes interest
income earned from short-term investments made by the Fund with cash reserves
for each of the three years in the period ended December 31, 1999, as well as
interest earnings on notes receivable for the fiscal years ended December 31,
1999, 1998 and for the period from October 1, 1997 through December 31, 1997.
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 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
15
<PAGE>
Results of Operations - Continued
- ---------------------------------
Expenses - Continued
- --------------------
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.
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 $1,713,000, $1,439,000, and
$527,000 were made to NTS Management or an Affiliate during the years ended
December 31, 1999, 1998 and the period from October 1, 1997 through December 31,
1997, respectively, for actual personnel, marketing and administrative costs as
they relate to NTS/LFII, NTS/VA and the Fund.
Reimbursements of Expense Recovery increased approximately $274,000 in 1999
compared to 1998. This increase is primarily due to higher sales commissions of
approximately $332,000 in 1999 compared to 1998, which was a result of an
increase in lot sales.
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.
Selling, general and administrative expenses also include directors' fees,
legal, outside accounting, other investor related cost, repairs and maintenance
cost.
For the years ended December 31, 1999, 1998, and the period from October 1, 1997
through December 31, 1997, the amounts incurred for selling, general and
administrative expenses were approximately $2,353,000, $1,437,000, and $275,000,
respectively. The increase in 1999 compared to 1998 is primarily attributable to
an increase in advertising and marketing costs of approximately $724,000.
Additional marketing promotions, new brochures, enhanced newspaper inserts, and
a home show exhibit generated sales traffic through the NTS/LFII community, and
as a result of these efforts, lot sales increased for the year ended 1999
compared to 1998. The increase in 1998 as compared to 1997 is attributable to
NTS/VA incurring marketing costs directly in 1998 which were included in
selling, general and administrative costs and in 1997 these costs were
classified as Expense Recovery since they were incurred by NTS Management
initially and reimbursed by NTS/VA.
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 years ended December 31, 1999, 1998 and the period from
October 1, 1997
16
<PAGE>
Results of Operations - Continued
- ---------------------------------
Expenses - Continued
- --------------------
through December 31, 1997, Overhead Recovery incurred was approximately
$567,000, $496,000 and $106,000, respectively.
The increase in overhead recovery for the year end December 31, 1999 compared to
1998 and the period from October 1, 1997 through December 31, 1997 was due to an
increase in sales.
Increases and decreases in interest expense generally correspond directly to
increases and decreases in the outstanding balances of the Fund's borrowings and
its subsidiaries borrowings as well as in the capitalization percentage. For the
years ended December 31, 1999, and 1998 approximately $2,652,000 and $2,350,000,
was capitalized in inventory and approximately $261,000 and $364,000,
respectively, was expensed.
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.
No benefit for income taxes was provided during 1999, 1998 or 1997 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. See Note 10 to the Fund's Consolidated Financial
Statements for a discussion of the components of the deferred tax asset.
The Fund had a net book loss of approximately $13,707,000 for the year ended
December 31, 1997, which includes a non-cash charge of approximately $11,600,000
related to the acquisition of NTS/LFII and NTS/VA and an adjustment to the
carrying value of the Fund's investment in the OLFJV of approximately
$3,707,000.
Accounting Principles generally accepted in the Unites States required that the
acquisitions of NTS/LFII and NTS/VA be recorded at fair market value on the day
of acquisition. The application of these principles resulted in a non-cash
charge of approximately $11,600,000 during the fourth quarter of 1997. In
addition, the Fund's investment in an unconsolidated affiliate should be
recorded at the lower of cost or fair market value. A non-cash charge of
approximately $3.7 million was recorded in the third quarter of 1997 related to
this investment. All estimates used in these evaluations represented
management's best estimates based on the facts present at the date of such
evaluations.
Year 2000
- ---------
During 1999, all divisions of NTS Corporation, including the Fund, reviewed the
effort necessary to prepare NTS' information systems (IT) and non-information
technology with embedded technology (ET) for the Year 2000. The information
technology solutions were addressed separately 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 development during the decade of the
1990's. NTS' property management staff surveyed vendors to evaluate embedded
technology in our alarm systems, HVAC controls, telephone systems and other
computer associated facilities. Some equipment was replaced, while others had
circuitry upgrades.
In 1999, the PILOT software system, purchased in the early 1990's, was replaced
by a Windows based network system both for NTS' headquarters functions and other
locations. The real estate accounting system developed, sold, and supported by
the Yardi Company of Santa Barbara, California replaced PILOT. The Yardi system
is fully implemented and operational as of December 31, 1999. There have been no
Year 2000 related problems with either system.
The costs of these advances in NTS' systems technology are not all attributable
to the Year 2000 issue since NTS had already identified the need to move to a
network based system regardless of the Year 2000. The Fund's share of the costs
involved were approximately $98,000 during 1999 and 1998. These costs include
primarily the purchase, lease and maintenance of hardware and software.
17
<PAGE>
Year 2000 - Continued
- ---------------------
At the date of this filing the Fund did not experience any significant operating
issues relative to the Year 2000 issue. Despite diligent preparation,
unanticipated third-party failures, inability of our tenants to pay rent when
due, more general public infrastructure failures or failure of our remediation
efforts as planned could have a material adverse impact on our results of
operations, financial conditions and/or cash flows in 2000 and beyond.
Item 7A. 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 8 of the Fund's financial
statements under Item 8 of this Form 10-K. At December 31, 1999, a hypothetical
100 basis point increase in interest rates would result in an approximately
$226,000 increase in interest expense. During the year ended December 31, 1999,
the majority of interest expense incurred was capitalized in inventory.
18
<PAGE>
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders of the NTS Mortgage Income Fund:
We have audited the accompanying consolidated balance sheets of the NTS Mortgage
Income Fund and subsidiaries (the Fund) (a Delaware corporation) as of December
31, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Fund as of
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
March 29, 2000
19
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
<CAPTION>
1999 1998
---- ----
ASSETS
- ------
<S> <C> <C>
Cash and equivalents $ 619,022 $ 1,061,609
Membership initiation fees and other
accounts receivable, net of allowance
of $75,000 and $132,406 1,406,376 1,884,472
Notes receivable 2,139,857 3,303,761
Inventory 55,438,644 53,264,438
Property and equipment, net of
accumulated depreciation of $478,962
and $257,612 505,219 501,921
Investment in unconsolidated affiliate 4,151,307 4,462,990
Advances to affiliates -- 30,338
Other assets 833,578 1,043,228
------------ ------------
Total assets 65,094,003 65,552,757
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Accounts payable and accrued expenses 1,857,760 2,091,630
Accounts payable - affiliates 1,194,395 --
Notes payable - affiliates -- 6,090,293
Notes payable 28,342,811 22,760,246
Lot deposits 161,500 131,395
Deferred revenues 62,628 154,968
------------ ------------
Total liabilities 31,619,094 31,228,532
------------ ------------
Commitments and contingencies (Note 13)
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 (20,691,675) (19,842,359)
------------ ------------
Total stockholders' equity 33,474,909 34,324,225
------------ ------------
Total liabilities and stockholders'
equity $ 65,094,003 $ 65,552,757
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
----------------------------------------------------
<CAPTION>
1999 1998 1997
---- ---- ----
Revenues:
- ---------
<S> <C> <C> <C>
Lot sales, net of discounts $ 14,256,114 $ 8,061,027 $ 1,600,237
Cost of sales 10,026,656 6,167,853 1,230,168
------------ ------------ ------------
Gross profit 4,229,458 1,893,174 370,069
Interest income on cash
equivalents and
miscellaneous income 291,073 353,680 183,144
Recovery of provision for
loan losses -- 382,096 1,500,000
Interest income on
affiliated mortgage loans
receivable -- -- 2,617,126
Fee income on affiliated
mortgage loan and other
finanicial services -- -- 8,598
------------ ------------ ------------
4,520,531 2,628,950 4,678,937
------------ ------------ ------------
Expenses:
- ---------
Selling, general and
administrative - affiliated 2,280,064 1,934,784 633,044
Selling, general and
administrative 2,352,831 1,437,413 274,977
Interest expense 260,899 364,173 1,304,157
Interest expense - affiliated -- -- 358,262
Other taxes and licenses 30,443 28,116 23,060
Depreciation and amortization
expense 40,427 86,196 172,877
Loss from investment in
unconsolidated affiliate 405,183 247,879 3,600,560
Advisory fee -- -- 418,950
Other charges -- -- 11,600,000
------------ ------------ ------------
5,369,847 4,098,561 18,385,887
------------ ------------ ------------
Net loss before income tax
expense (849,316) (1,469,611) (13,706,950)
Federal income tax expense -- -- --
------------ ------------ ------------
Net loss $ (849,316) $ (1,469,611) $(13,706,950)
============ ============ ============
Net loss per share of
common stock $ (.27) $ (.46) $ (4.30)
============ ============ ============
Weighted average number of
shares 3,187,333 3,187,333 3,187,333
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (1)
---------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
-----------------------------------------------------
<CAPTION>
Common Additional
Common Stock Stock Paid-in- Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Stockholders'
equity
December 31, 1996 3,187,333 $ 3,187 $54,163,397 $ (4,665,798) $49,500,786
Net loss -- -- -- (13,706,950) (13,706,950)
--------- -------- ----------- ----------- -----------
Stockholders'
equity
December 31, 1997 3,187,333 3,187 54,163,397 (18,372,748) 35,793,836
Net loss -- -- -- (1,469,611) (1,469,611)
--------- -------- ----------- ----------- -----------
Stockholders'
equity
December 31, 1998 3,187,333 3,187 54,163,397 (19,842,359) 34,324,225
--------- -------- ----------- ----------- -----------
Net loss -- -- -- (849,316) (849,316)
--------- -------- ----------- ----------- -----------
Stockholders'
equity
December 31, 1999 3,187,333 $ 3,187 $54,163,397 $(20,691,675) $33,474,909
========= ======== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(1) For the periods presented, there are no elements of other comprehensive
income as defined by the Financial Accounting Standards Board, Statement of
Financial Accounting Standards, No. 130 Reporting Comprehensive Income.
22
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
-----------------------------------------------------
<CAPTION>
1999 1998 1997
---- ---- ----
CASH FLOWS PROVIDED BY (USED FOR) OPERATING
- -------------------------------------------
ACTIVITIES
- ----------
<S> <C> <C> <C>
Net loss $ (849,316) $ (1,469,611) $(13,706,950)
Adjustments to reconcile net loss
to net cash provided by (used for)
operating activities:
Depreciation and amortization expense 337,404 312,346 172,877
Loss from investment in unconsolidated
affiliate 405,183 247,879 3,600,560
Accretion of discount on affiliated mortgage
loans receivable -- -- (95,932)
Recovery of provision for loan losses -- -- (1,500,000)
Other non-cash charges -- -- 11,600,000
Changes in assets and liabilities: (1)
Interest receivable - affiliates -- -- 480,778
Membership initiation fees and other
accounts receivable 478,096 (258,983) 123,364
Notes receivable 1,163,904 269,401 416,352
Inventory (2,174,206) (1,346,448) (789,991)
Accounts payable - affiliates 1,194,395 -- --
Accounts payable and accrued expenses (233,870) (948,838) 158,721
Lot deposits 30,105 33,895 (14,000)
Deferred revenues (92,340) 8,179 14,016
------------ ------------ ------------
Net cash provided by (used for) operating
activities 259,355 (3,152,180) 459,795
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING
- -------------------------------------------
Capital contribution to unconsolidated
affiliate (93,500) (185,500) --
Purchase of property and equipment (224,648) (260,834) 27,555
Principal collections on affiliated mortgage
loan receivable -- -- 9,299,287
Investment in affiliated mortgage loans
loan receivable -- -- (5,700,037)
Purchase of stock of acquired subsidiaries -- -- (30)
------------ ------------ ------------
Net cash provided by (used for) investing
activities (318,148) (446,334) 3,626,775
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING
- -------------------------------------------
ACTIVITIES
- ----------
Advances to/from affiliates 30,338 (630,880) (519,797)
Proceeds from notes payable 20,489,549 17,798,287 8,515,946
Proceeds from notes payable - affiliates 606,666 3,225,385 2,436,291
Payments on notes payable (14,906,985) (14,233,781) (11,805,279)
Payments on notes payable - affiliates (6,696,959) (2,444,584) (1,651,466)
Other assets 93,597 (467,749) (190,308)
Dividends paid -- -- (175,305)
------------ ------------ ------------
Net cash provided by (used for) financing
activities (383,794) 3,246,678 (3,389,918)
------------ ------------ ------------
Net increase (decrease) in cash and
equivalents (442,587) (351,836) 696,652
CASH AND EQUIVALENTS, beginning of period 1,061,609 1,413,445 716,793
------------ ------------ ------------
CASH AND EQUIVALENTS, end of period $ 619,022 $ 1,061,609 $ 1,413,445
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(1) Net of the effects of acquisitions in 1997, where applicable. See Note 11
for information on non-cash investing and financing activities.
23
<PAGE>
NTS MORTGAGE INCOME FUND
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Summary of Significant Accounting Policies
------------------------------------------
A) Organization
------------
NTS Mortgage Income Fund (the "Fund"), a Delaware corporation, was
formed on September 26, 1988. The Fund operated as a real estate
investment trust (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's subsidiaries include 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. See Note 3, "Acquisitions", for further information
pertaining to the acquisitions. Prior to making the acquisitions, the
Fund had been the primary creditor of these entities.
NTS/LFII is in the process of developing approximately 1,172
residential lots of land located in Louisville, Kentucky into a
single-family residential community and a country club with a
championship golf course for the purpose of selling such residential
lots and country club memberships. As of December 31, 1999,
approximately 740 of the 1,172 residential lots have been developed
and approximately 59% of the total projected lots to be developed
have been sold. In addition, Lake Forest has amenities consisting of
a clubhouse, pools, tennis courts, recreation fields and several
lakes.
NTS/VA is in the process of developing approximately 1,389
residential lots located in the Chancellor district of Spotsylvania
County, Virginia, approximately 60 miles south of Washington D.C.,
into a single-family residential community and a country club with a
championship golf course for the purpose of selling such residential
lots and country club memberships. As of December 31, 1999,
approximately 441 of the 1,389 total lots have been developed and
approximately 29% of the total projected lots to be developed have
been sold. Included on the property is a 285-acre lake. In addition,
Fawn Lake has amenities consisting of a clubhouse, pool, tennis
courts and boat docks.
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. See
Note 4, "Investment in Unconsolidated Affiliate", for further
information pertaining to the investment.
B) Basis of Accounting
-------------------
The Fund's records are maintained on the accrual basis of accounting
in accordance with accounting principles generally accepted in the
United States (GAAP).
24
<PAGE>
1. Summary of Significant Accounting Policies - Continued
------------------------------------------------------
C) Principals 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.
D) Use of Estimates in Preparation of Consolidated Financial Statements
--------------------------------------------------------------------
The preparation of financial statements in conformity with GAAP in
the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
E) Revenue Recognition and Reserves for Loan Losses
------------------------------------------------
The Fund recognizes revenue and related costs from lot sales using
the accrual method in accordance with accounting principles generally
accepted in the United States, 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. Impaired loans are
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.
F) 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, the use of
estimates to determine sales values, development costs and absorption
periods 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 are accounted for prospectively
over the life of the project.
25
<PAGE>
1. Summary of Significant Accounting Policies - Continued
------------------------------------------------------
G) Long-Lived Assets
-----------------
Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, specifies circumstances in which certain
long-lived assets must be reviewed for impairment. If such review
indicates that the carrying amount of an asset exceeds the sum of its
expected future cash flows, the asset's carrying value must be
written down to fair market value.
H) Advertising
-----------
The Fund expenses advertising-type costs as incurred. Advertising
expense was approximately $1,523,000, $718,000 and $100,000 during
the years ended December 31, 1999, 1998 and 1997, respectively.
I) Environmental Remediation and Compliance
----------------------------------------
Environmental liabilities for remediation costs are accrued based on
estimates of known environmental remediation exposures. Liabilities
are recognized when they can be reasonably estimated. Environmental
compliance costs are expensed as incurred.
J) Per Share Information
---------------------
The Financial Accounting Standards Board recently issued Standard No.
128, Earnings Per Share (SFAS 128). The Statement simplifies the
standards for computing earnings per share (EPS) and replaces the
presentation of primary and fully diluted EPS with a presentation of
basic and diluted EPS. SFAS 128 is effective for consolidated
financial statements for periods ending after December 15, 1997. For
all periods presented, the Fund did not have common stock
equivalents, therefore, the adoption of SFAS 128 did not have any
impact on the Fund's consolidated financial statements.
K) Statement of Cash Flows
-----------------------
For purposes of reporting cash flows, cash and equivalents include
cash on hand and short-term, highly liquid investments with an
original maturity of three (3) months or less that are readily
convertible to cash.
L) Segment Reporting
-----------------
The Fund adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, during the fourth quarter of
1998. SFAS No. 131 established standards for reporting information
about operating segments in annual financial statements and requires
selected information about operating segments in interim financial
reports issued to shareholders. Operating segments are defined as
components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how
to allocate resources and in assessing performance. The standard also
allows entities to aggregate operating segments into a single segment
if the segments are similar in each of the six criteria set forth in
SFAS No. 131. The Fund's chief operating decision-maker is the
President of the Fund.
The Fund's reportable operating segments include only one segment
that is the development and sale of single-family residential lots.
26
<PAGE>
1. Summary of Significant Accounting Policies - Continued
------------------------------------------------------
M) Reclassifications
-----------------
Certain reclassification have been made to the December 31, 1998 and
1997 financial statements to conform with December 31, 1999
classifications. The classifications had no effect on previously
reported results of operations.
2. Affiliations
------------
The Fund operates under the direction of its Board of Directors who have
retained NTS Management to be the sole and exclusive agent of the Fund
for day-to-day control and management of the business of the Fund's
subsidiaries including (a) the continued operation of NTS/LFII and
NTS/VA, (b) the operations of the Lake Forest Country Club and the Fawn
Lake Country Club, (c) the operations of the Lake Forest Community
Association and the Fawn Lake Community Association and (d) the provision
and/or sale of ancillary goods and services as selected by NTS Management
with respect to any of the foregoing. The Management Agreements have an
initial term through and including December 31, 2003, and automatically
renew for successive six year terms unless terminated by the Fund, its
subsidiaries, or NTS Management upon six months written notice. See Note
9 for further discussion of the Management Agreements. NTS Management is
an Affiliate of and under common control with NTS Corporation, the Fund's
Sponsor. The Chairman of the Board of Directors of the Fund is also the
majority shareholder of NTS Corporation and is a majority shareholder of
the managing general partner in the Orlando Lake Forest Joint Venture of
which the Fund is a 50% joint venture partner. NTS Advisory and NTS
Management are Affiliates of and are under common control with NTS
Corporation.
3. Acquisitions
------------
The Fund acquired all of the issued and outstanding common stock of
NTS/LFII and NTS/VA effective October 1, 1997, for a nominal purchase
price. Concurrent with this transaction, the existing indebtedness of
each of NTS/LFII and NTS/VA to the Fund was converted to equity.
The transaction has been accounted for using the purchase method of
accounting. The purchase price (approximately $14.5 million for NTS/LFII
and approximately $28.7 million for NTS/VA) was allocated to the assets
and liabilities of NTS/LFII and NTS/VA based on their estimated fair
market value. The acquisition of NTS/LFII included inventory of
approximately $19 million, debt of approximately $5 million and other net
assets and liabilities of approximately $500,000. The acquisition of
NTS/VA included inventory of approximately $32 million, debt of
approximately $5.5 million and other net assets and liabilities of
approximately $2.2 million. The results of operations for NTS/LFII and
NTS/VA from the date of acquisition (October 1, 1997) are included in the
consolidated financial statements of the Fund.
Accounting Principles generally accepted in the United States require
that these acquisitions be recorded at fair market value. The application
of these principles resulted in a non-cash charge of approximately
$11,600,000 during the fourth quarter of 1997 related to these
transactions. All estimates used in these evaluations represented
management's best estimates based on the facts present at the date of the
evaluations.
4. Investment in Unconsolidated Affiliate
--------------------------------------
In September 1997, the Fund entered into an Amended and Restated Joint
Venture Agreement evidencing the Fund's admission as a partner in the
Orlando Lake Forest Joint Venture (the "Joint Venture") effective as of
August 16, 1997. 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.
27
<PAGE>
4. Investment in Unconsolidated Affiliate - Continued
--------------------------------------------------
The Joint Venture owns the Orlando Lake Forest project, a single-family
residential community located in Seminole County, Florida (near Orlando)
consisting of approximately 360 acres of residential land and
improvements and approximately 20 acres of commercial land. The Joint
Venture will continue to own and develop the Orlando Lake Forest project.
The Fund contributed to the Joint Venture as a capital contribution its
interest in the principal and interest of the first mortgage loan on the
Orlando Lake Forest project, and obtained a 50% interest in the Joint
Venture. The NTS entities named above hold cumulatively the remaining 50%
interest in the Joint Venture.
The net income or net loss of the Joint Venture is allocated based on the
respective partner's percentage interest, as defined in the joint venture
agreement. As of December 31, 1999 and 1998, the Fund's percentage
interest was 50%, and the Fund's investment balance in the Joint Venture
was $4,151,307 and $4,462,990 as of December 31, 1999 and 1998,
respectively. The Fund's share of the Joint Venture's net income (loss)
for the years ended December 31, 1999, 1998 and from August 16, 1997
through December 31, 1997, was $(405,183), $(247,879) and $106,667,
respectively.
Accounting Principles generally accepted in the United States require
that such investments be recorded at the lower of carrying value or fair
market value. The application of these principles resulted in a non-cash
charge of approximately $3.7 million in the third quarter of 1997. All
estimates used in this evaluation represent management's best estimates
based on the facts present at the date of such evaluations.
During the year ended 1999, the Fund and the other joint venture partners
contributed as a capital contribution $187,000 to the joint venture, the
Fund's portion being $93,500.
During the year ended 1998, the Fund and the other joint venture partners
contributed as a capital contribution $371,000 to the joint venture, the
Fund's portion being $185,500.
5. Member Initiation Fees and Other Accounts Receivable
----------------------------------------------------
Fawn Lake Country Club and Lake Forest Country Club membership initiation
fees receivable totaled approximately $911,000 and $1,370,000 as of
December 31, 1999 and 1998. The receivable is net of a discount of
$75,000 and $132,406,respectively recorded to allow for the present value
of the membership initiation fee receivables considering the estimated
timing of collections.
6. Notes Receivable
----------------
Notes receivable are secured by a first mortgage on lots sold to
individuals. The notes bear interest at the prevailing market rates at
the time the lots were sold. The majority of the notes are due between
five and seven years, monthly payments are based on a 30-year
amortization and the balance is due at the maturity date. Notes totaling
approximately $2,015,000 and $3,179,000 are pledged as security for notes
payable to banks under certain Warehouse Line of Credit Agreements and
other debt agreements as of December 31, 1999 and 1998, respectively.
There are also $125,000 of notes held by NTS/VA that are not pledged as
of 1999 and 1998. Approximately $956,000, $101,000 and $179,000 of the
notes receivable balance as of December 31, 1999 are due during the years
ended December 2000 through 2002, respectively. Approximately $787,000 of
the notes receivable balance relates to the sale of 24 lots to one
builder in fiscal 1998 at NTS/VA. The $787,000 note bearing interest at
the Prime Rate plus 1%, is due in monthly installments commencing June
29, 2001, with any outstanding principal and interest payable in full on
December 29, 2003.
28
<PAGE>
7. Inventory
---------
Inventory consists of the following as of December 31, 1999:
NTS/LFII NTS/VA Consolidated
-------- ------ ------------
Land held for future
development, under
development and completed lots $ 3,772,000 $23,517,000 $27,289,000
Country club (net of
member initiation fees) 10,847,000 9,431,000 20,278,000
Amenities 2,296,000 5,576,000 7,872,000
----------- ----------- -----------
$16,915,000 $38,524,000 $55,439,000
=========== =========== ===========
Inventory consists of the following as of December 31, 1998:
NTS/LFII NTS/VA Consolidated
-------- ------ ------------
Land held for future
development, under
development and completed lots $ 5,855,000 $21,971,000 $27,826,000
Country club (net of
Member 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
=========== =========== ===========
NTS/LFII and NTS/VA capitalized in inventory approximately $2,786,000 and
$2,064,000 of interest and real estate taxes during 1999 and 1998,
respectively. Interest and real estate taxes incurred was approximately
$3,113,000 and $2,296,000 as of December 31, 1999 and 1998, respectively.
Inventory for 1999, includes $29,444,000 net of $9,166,000 of country club
membership initiation fees, of costs incurred to date for the development
of the Fawn Lake Country Club and the Lake Forest Country Club.
Inventory for 1998, includes $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 the initial issuance of memberships to the Country
Club. The remaining cost to be incurred for the current projected Country
Club operating deficit for the period covered by the agreement is
approximately $1,870,000 which is expected to be offset by member
initiation fees. During 1999 and 1998 the Lake Forest Country Club
operating deficit was approximately $459,000 and $279,000, respectively,
and was capitalized as a cost of inventory.
During 1999 and 1998, the Fawn Lake Country Club deficit was $1,019,000 and
$469,000, respectively, and was capitalized as a cost of inventory.
8. Notes and Mortgage Loans Payable
--------------------------------
Notes and mortgage loans payable consist of the following:
1999 1998
--------------- --------------
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 up to $3,000,000 and
a $2 million letter of credit from a
third party lender with the
beneficiary being the bank. $9,777,485 $9,581,963
(Continued on next page)
29
<PAGE>
8. Notes and Mortgage Loans Payable - Continued
--------------------------------------------
1999 1998
--------------- --------------
Note payable to a bank in the amount
of $9,500,000, 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 from lot sales,guaranteed by
Mr.JD 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. $ 6,817,188 $ 6,113,434
Bank note payable to a bank in the
amount of $9,000,000, bearing
interest at 8.25%, payable monthly,
due November 1, 2004, secured by a
Certificate of Deposit owned by NTS
Financial Partnership,an affiliate of
the Fund. 6,696,959 --
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 payable every
six months, guaranteed by NTS
Corporation, the Fund's Sponsor. 2,870,000 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 15,2000 $(113,789),September
18, 2000 $(676,534) and February 28,
2000 $(146,322), secured by notes
receivable (see Note 6), principal
payments consist of payments received
from notes receivable securing the
obligation. 936,645 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 (see Note 6), due in
monthly installments of $5,000, with
any outstanding principal and accrued
interest due and payable in full on
December 29, 2000. 1,119,800 1,174,800
Other 124,734 235,464
----------- -----------
$28,342,811 $22,760,246
=========== ===========
The Prime Rate was 8 1/2% and 7 3/4% at December 31, 1999 and 1998,
respectively.
The $113,789 and $146,322 Warehouse Line of Credit agreements are guaranteed
by NTS Corporation.
30
<PAGE>
8. Notes and Mortgage Loans Payable - Continued
--------------------------------------------
The minimum scheduled principal payments on debt outstanding at December
31, 1999 are as follows:
2000 $ 7,068,625
2001 5,007,227
2002 9,570,000
2003 --
2004 6,696,959
Thereafter --
------------
$ 28,342,811 (1)
============
(1) The minimum scheduled principal payments regarding the $10.7
and $9.5 million credit facilities are reflected in the table
such that the outstanding principal amount is brought to
within the following levels by the applicable date.
$10.7 Million Facility
----------------------
December 31, 1999 $10,700,000
December 31, 2000 $ 7,800,000
December 31, 2001 $ 5,900,000
December 1, 2002 $ 4,500,000
$9.5 Million Facility
---------------------
December 31, 1999 $7,500,000
December 31, 2000 $4,500,000
December 31, 2001 $2,000,000
The NTS/VA lender has agreed to allow NTS/VA to maintain a maximum
outstanding development loan balance of $10.7 million through April 30,
2000, without considering the obligation in default due to
non-compliance with the maximum funding levels called for in the
original loan agreement. Management's projections indicate that the
present development plans will require a funding level which will
result in an outstanding debt balance as of December 31, 2000 of
approximately $12.2 million. Management's projection for NTS/VA
indicates the development will reach the maximum funding level allowed
by the current development loan of $10.7 million during 2000 and in
fact require additional funding to achieve its 2000 development plan,
which includes projected sales of $7.05 million. In the event short
term capital needs dictate the need for cash to reduce the outstanding
obligation relative to the NTS/VA development loan, the loan is secured
by a approximately $2 million letter of credit issued by a third party
lender with the NTS/VA lender stated as the beneficiary, and a $3
million guarantee by Mr. J.D. Nichols, both of which could provide the
necessary capital to help ensure compliance with the maximum funding
levels set forth in the original development loan.
Based upon present facts and circumstances, including ongoing
discussions with the NTS/VA lender management's present plans will
consider the following: 1) defer the payment of amounts owed to
Affiliates as of December 31, 1999 and those amounts accruing during
2000 other than as permitted by cash flows (See Note 9) 2) continuing
discussions with the NTS/VA lender to combine both the NTS/VA and
NTS/LFII debt at the current NTS/VA lender securing overall favorable
terms, rates and fees and 3) obtaining additional funding from the
NTS/LFII lender thereby allowing NTS/VA to utilize such funds for
development purposes. 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 NTS/VA. However, if management is unsuccessful in the effort,
considerations will be given to slowing individual budgeted development
projects at NTS/VA budgeted for year 2000.
31
<PAGE>
9. Related Party Transactions
--------------------------
As of December 31, 1999, the Sponsor or an Affiliate owned 105,955 shares
of the Fund. The Fund thereby allowing Fawn Lake to utilize such funds
for development purposes entered into the following agreements with
various Affiliates of the Sponsor regarding the ongoing operation of the
Fund.
Advisory Agreement
------------------
Pursuant to the Advisory Agreement, the Fund paid the Advisor (NTS
Advisory Corporation) a Management Expense Allowance from inception of
the Fund through September 30, 1997 (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.
For the year ended December 31, 1997, $418,950 had been incurred as an
Advisory Fee. Effective October 1, 1997, the Fund no longer incurred an
Advisory Fee but is now 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 (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
32
<PAGE>
9. Related Party Transactions - Continued
--------------------------------------
Property Management Agreements - Continued
------------------------------------------
for the year ended December 31, 1999 and 1998. These amounts are
reflected in Selling, General and Administrative - Affiliated on the
accompanying Consolidated Statement of Operations:
1999 1998
--------- ---------
Personnel Related Costs:
Finance and Accounting $ 131,000 $ 172,000
Data Processing 31,000 6,000
Human Resources 34,000 35,000
Executive and Administrative 196,000 186,000
Construction Management 15,000 39,000
Sales and Marketing 1,045,000 713,000
Legal 37,000 72,000
Marketing 126,000 125,000
Rent 39,000 34,000
Other General and Administrative 59,000 57,000
---------- ----------
Total Expense Reimbursements $ 1,713,000 $ 1,439,000
========== ==========
Additionally, NTS Management is entitled to an Overhead Recovery, which
is a reimbursement for overhead expenses attributable to the employees
and the efforts of NTS Management under the Management Agreements, in an
amount equal to 3.75% of the projects' gross cash receipts, as defined in
the Management Agreements. Overhead recovery for the years ended December
31, 1999, 1998 and for the period October 1, 1997 through December 31,
1997, was approximately $567,000, $496,000 and $106,000, respectively.
These amounts are classified with Selling, General and Administrative -
Affiliated 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 of December 31, 1999, the Fund had raised
approximately $63,690,000 and had paid distributions of approximately
$23,141,000. As of December 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 $6,090,293 as of December 31, 1998. On November
6, 1999, the Fund repaid these advances from the Affiliate by obtaining a
loan in the amount of $9,000,000, and used approximately $6,697,000 of
the loan to pay the entire principal balance and accrued interest due to
the Affiliate. For the year ended December 31, 1999 and 1998, the
interest expense to affiliate totaling $375,572 and $341,213 was
capitalized in inventory.
As presented in the accompanying consolidated balance sheet as of
December 31, 1999, accounts payable - affiliates of $1,194,395 is owed to
NTS Development Company and NTS Residential Management Company for salary
and overhead reimbursements. NTS Development Company and NTS Residential
Management Company have agreed to defer amounts owed to them by the Fund
as of December 31, 1999 and those amounts that will accrue during fiscal
2000 through the period ending January 1, 2001, other than as permitted
by cash flows of the Fund. There can be no assurances that this level of
support will continue past January 1, 2001.
33
<PAGE>
10. 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 carryforwards
using enacted tax rates in effect for the year in which the differences
are expected to reverse. The principal tax carryforwards and temporary
differences giving rise to the Fund's deferred taxes consist of tax net
operating loss carryforwards, valuation allowances and differences in
inventory basis for book and tax.
The Fund's deferred tax assets and liabilities as of December 31, are as
follows:
1999 1998
------------- -------------
Deferred tax assets
-------------------
Net operating loss carryforwards $ 1,310,000 $ 687,000
Inventory 2,069,000 2,972,000
Deferred revenue 207,000 157,000
------------- -------------
Net deferred tax assets 3,586,000 3,816,000
Valuation allowance (3,586,000) (3,816,000)
------------- -------------
$ -- $ --
============= =============
A valuation allowance is provided when the probability that the deferred
tax asset to be realized does not meet the criteria established by the
Financial Accounting Standards Board. The Fund has determined, based on
its history of operating losses by its subsidiaries and its expectations
for the future, that it is more likely than not that the net deferred tax
assets at December 31, 1999 and 1998, will not be realized.
As of December 31, 1999, the Fund has a federal net operating loss
carryforward of approximately $3,853,000 expiring during 2012, 2013 and
2014.
A reconciliation of the statutory to the effective rate of the Fund for
the year ended December 31, is as follows:
1999 1998
---------- ----------
Tax benefit using statutory rate $ 289,000 $ 500,000
Valuation allowance (231,000) (486,000)
Other (58,000) (14,000)
---------- ----------
Income tax expense $ -- $ --
========== ==========
11. Supplemental Cash Flow Information
----------------------------------
a) Cash payments for interest, net of amounts capitalized and cash
payments for income taxes, net of refunds are as follows:
1999 1998 1997
---------- ---------- ----------
Interest $ 296,120 $ 244,295 $1,767,786
Federal income taxes $ -- $ -- $ 5,320
34
<PAGE>
11. Supplemental Cash Flow Information - Continued
----------------------------------------------
b) Supplemental Non-Cash Investing and Financing Activity:
In 1997, the Fund made an investment in an unconsolidated affiliate
by contributing the principal amount outstanding on mortgage loans
receivable of approximately $8,125,000. (See Notes 4 and 10).
In 1997, the Fund acquired all of the outstanding common stock of
NTS/LFII and NTS/VA for a nominal purchase price. Concurrent with
this transaction, the existing indebtedness of each of NTS/LFII and
NTS/VA to the Fund totaling approximately $53,659,000 was converted
to equity (See Notes 3 and 10).
12. Financial Instruments
---------------------
The book values of cash and equivalents, trade receivables and trade
payables are considered to be representative of their respective fair
values because of the immediate or short-term maturity of these financial
instruments. The fair value of the Fund's notes receivable and debt
instruments approximated the book value because a substantial portion of
the underlying instruments are variable rate notes.
13. Commitments and Contingencies
-----------------------------
NTS/LFII and NTS/VA have various letters of credit outstanding to
governmental agencies and utility companies totaling approximately
$2,633,000 and $2,277,000 as of December 31, 1999 and 1998, respectively.
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 2003. Based on engineering studies and projections, NTS/LFII will
incur additional costs, excluding interest, of approximately $300,000
during 2003 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 2008. Based on engineering studies and projections, NTS/VA will
incur additional costs, excluding interest, of approximately $9,622,000
to complete the country club and homeowners' association amenities for
the project. These costs are estimated to be incurred as follows:
$2,202,000 for 2000, $630,000 for 2001, $750,000 for 2002, $2,190,000 for
2003, $2,640,000 for 2004, $290,000 for 2005, $660,000 for 2006, $140,000
for 2007, and $120,000 for 2008.
In July 1994, the Fund was named as a defendant in a complaint originally
filed by Jeno Paulucci & Silver Lakes I, Inc. in August 1992 against the
Fund's Sponsor and various Affiliates of the Fund's Sponsor. The suit was
settled in the first quarter of 1997. The terms of the settlement
agreement are confidential; however, the settlement did not have a
material impact on the Fund's financial position or results of
operations.
14. Guaranties to the Fund
----------------------
NTS Guaranty Corporation (the "Guarantor"), an Affiliate of the Sponsor,
has guaranteed that investors of the Fund will receive, over the life of
the Fund, aggregate distributions from the Fund (from all sources) in an
amount at least equal to their Original Capital Contributions, as defined
in the Fund's Prospectus. As of December 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.
35
<PAGE>
15. Subsequent Event
----------------
On November 15, 1999, Lake Forest Fairways, LLC ("Fairways"), a limited
liability company, was formed between NTS Development Company and Fairway
Development, LLC (an unaffiliated third party) to purchase and develop
26.2 acres of land of the Lake Forest North development. Upon final
approval of the appropriate governmental agencies on the rezoning of the
property and the transfer of title of the property, Fairways will pay
NTS/LFII $30,000 per acre as a partial payment for the property. Fairways
will also pay NTS/LFII at each closing of the sale of the first 100 home
units, as an additional component of the purchase price for the property,
the sum of $14,500 per home unit sold. The final approval of the rezoning
must be obtained by December 31, 2000 to avoid dissolution and
termination of Fairways.
16. Unaudited Quarterly Financial Data
----------------------------------
<TABLE>
1999 March 31 June 30 September 30 December 31 Total
---- -------- ------- ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
Total revenues $ 858,573 $ 730,107 $ 1,421,433 $ 1,510,418 $ 4,520,531
Total expenses 1,270,172 1,233,740 1,153,649 1,712,286 5,369,847
----------- ----------- ----------- ----------- -----------
Income (loss)
before income
taxes (411,599) (503,633) 267,784 (201,868) (849,316)
Income tax
expense -- -- -- -- --
Net income
(loss) $ (411,599) $ (503,633) $ 267,784 $ (201,868) $ (849,316)
=========== =========== =========== =========== ===========
Net income (loss)
per share of
common stock $ (.13) $ (.16) $ .08 $ (.06) $ (.27)
=========== =========== =========== =========== ===========
1998 March 31 June 30 September 30 December 31 Total
---- -------- ------- ------------ ----------- -----
Total revenues $ 774,091 (1) $ 615,161 $ 515,855 $ 723,843 $ 2,628,950
Total expenses 957,730 1,097,418 1,026,038 1,017,375 4,098,561
Income (loss)
before income
taxes (183,639) (482,257) (510,183) (293,532) (1,469,611)
Income tax
expense -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income
(loss) $ (183,639) $ (482,257) $ (510,183) $ (293,532) (1,469,611)
=========== =========== =========== =========== ===========
Net income (loss)
per share of
common stock $ (.06) $ (.15) $ (.16) $ (.09) $ (.46)
=========== =========== =========== =========== ===========
</TABLE>
(1) Includes approximately $382,000 for recovery of loan previously written
off.
36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Orlando Lake Forest Joint Venture:
We have audited the accompanying balance sheet of Orlando Lake Forest Joint
Venture (a Florida general partnership) as of December 31, 1999, and the related
statements of income, partners' equity and cash flows for the year then ended.
These financial statements are the responsibility of Orlando Lake Forest Joint
Venture's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Orlando Lake Forest Joint
Venture as of December 31, 1999, and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
March 29, 2000
37
<PAGE>
<TABLE>
ORLANDO LAKE FOREST JOINT VENTURE
---------------------------------
BALANCE SHEETS
--------------
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
<CAPTION>
1999 1998
---- ----
ASSETS (unaudited)
- ------
<S> <C> <C>
Cash and equivalents $ 80,687 $ 326,245
Account receivable 3,219 20,742
Notes receivable 296,149 550,272
Inventory 14,755,257 14,461,364
Property and equipment, net of
accumulated depreciation of $40,274
and $22,919 38,491 33,387
Other assets 142,981 132,602
------------ ------------
Total assets 15,316,784 15,524,612
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Accounts payable and accrued expenses 604,387 491,594
Accounts payable - affiliates 514,543 6,379
Notes payable 5,299,158 5,323,241
Lot deposits 94,450 60,550
Deferred revenues 31,630 31,866
Other liabilities 470,000 685,000
------------ ------------
Total liabilities 7,014,168 6,598,630
------------ ------------
Commitments and contingencies (Note 7)
Partners' equity:
Capital contributions 23,044,090 22,857,090
Additional paid-in-capital 18,007 18,007
Accumulated deficit (14,759,481) (13,949,115)
------------ ------------
Total partners' equity 8,302,616 8,925,982
------------ ------------
Total liabilities and partners'
equity $ 15,316,784 $ 15,524,612
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
<TABLE>
ORLANDO LAKE FOREST JOINT VENTURE
---------------------------------
STATEMENTS OF OPERATIONS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND FROM
----------------------------------------------------
AUGUST 16, 1997 THROUGH DECEMBER 31, 1997
-----------------------------------------
<CAPTION>
August 16,
1997 through
December 31,
1999 1998 1997
---- ---- ----
(unaudited) (unaudited)
Revenues:
- ---------
<S> <C> <C> <C>
Lot sales, net of discounts $ 3,437,035 $ 2,624,548 $ 1,678,079
Cost of sales 2,550,607 1,742,032 1,150,338
------------ ------------ ------------
Gross profit 886,428 882,516 527,741
Interest and other income 37,950 108,743 64,705
Gain on sale of land -- -- 149,875
------------ ------------ ------------
924,378 991,259 742,321
------------ ------------ ------------
Expenses:
- --------
Selling, general and
administrative - affiliated 741,428 638,150 218,346
Selling, general and
administrative 903,259 706,611 230,593
Interest expense 72,702 85,162 56,283
Depreciation and amortization
expense 17,355 57,092 23,763
Other charges -- -- 12,000,000
------------ ------------ ------------
1,734,744 1,487,015 12,528,985
------------ ------------ ------------
Net loss $ (810,366) $ (495,756) $(11,786,664)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
<TABLE>
ORLANDO LAKE FOREST JOINT VENTURE
---------------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND
-----------------------------------------------
FROM AUGUST 16, 1997 THROUGH DECEMBER 31, 1997
----------------------------------------------
<CAPTION>
August 16,
1997 through
December 31,
1999 1998 1997
---- ---- ----
CASH FLOWS PROVIDED BY (USED FOR) OPERATING (unaudited) (unaudited)
- -------------------------------------------
ACTIVITIES
- ----------
<S> <C> <C> <C>
Net loss $ (810,366) $ (495,756) $(11,786,664)
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation and amortization expense 50,252 57,092 23,763
Changes in assets and liabilities:
Membership initiation fees and other
accounts receivable 17,523 (16,515) 541
Notes receivable 254,123 97,176 419,610
Inventory (293,893) (1,084,650) 13,511,903
Other assets 8,054 88,889 (97,101)
Accounts payable - affiliates 508,164 (302,677) (216,045)
Accounts payable 112,793 183,488 (2,797,128)
Lot deposits 33,900 42,050 1,000
Other liabilities (215,236) (763,134) (632,500)
------------ ------------ ------------
Net cash used for operating activities (334,686) (2,194,037) (1,572,621)
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING
- -------------------------------------------
ACTIVITIES
- ----------
Capital contribution 187,000 371,000 16,633,845
Purchase of property and equipment (22,459) (26,710) --
------------ ------------ ------------
Net cash provided by investing activities 164,541 344,290 16,633,845
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING
- -------------------------------------------
ACTIVITIES
- ----------
Proceeds from notes payable 2,542,675 2,665,328 4,714,517
Payments on notes payable (2,566,758) (2,135,101) (18,015,599)
Loan costs (51,330) (15,825) (145,826)
------------ ------------ ------------
Net cash provided by (used for) financing
activities (75,413) 514,402 (13,446,908)
------------ ------------ ------------
Net increase (decrease) in cash and
activities (245,558) (1,335,345) 1,614,316
CASH AND EQUIVALENTS, beginning of period 326,245 1,661,590 47,274
------------ ------------ ------------
CASH AND EQUIVALENTS, end of period $ 80,687 $ 326,245 $ 1,661,590
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
<TABLE>
ORLANDO LAKE FOREST JOINT VENTURE
---------------------------------
STATEMENTS OF PARTNERS' EQUITY
------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND
-----------------------------------------------
FROM AUGUST 16, 1997 THROUGH DECEMBER 31, 1997
----------------------------------------------
<CAPTION>
Additional
Capital Paid-in- Accumulated
Contribution Capital Deficit Total
------------ ------- ------- -----
<S> <C> <C> <C> <C>
Partners'
equity
August 16, 1997 $ 5,852,246 $ 18,007 $ (1,666,695) $ 4,203,558
(unaudited)
Net loss -- -- (11,786,664) (11,786,664)
Capital
contribution 16,633,844 -- -- 16,633,844
---------- --------- ---------- ----------
Partners'
equity
December 31, 1997 22,486,090 18,007 (13,453,359) 9,050,738
(unaudited)
Net loss -- -- (495,756) (495,756)
Capital
contribution 371,000 -- -- 371,000
---------- --------- ---------- ----------
Partners'
equity
December 31, 1998 22,857,090 18,007 (13,949,115) 8,925,982
(unaudited)
Net loss -- -- (810,366) (810,366)
Capital
contribution 187,000 -- -- 187,000
---------- --------- ---------- ----------
Partners'
equity
December 31, 1999 $23,044,090 $ 18,007 $(14,759,481) $8,302,616
=========== ========= =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
ORLANDO LAKE FOREST JOINT VENTURE
---------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. Summary of Significant Accounting Policies
------------------------------------------
A) Organization
------------
Orlando Lake Forest Joint Venture ("OLFJV") was organized on March
16, 1987 as a Florida general partnership. In August 1997, NTS
Mortgage Income Fund (the "Fund") entered into an Amended and
Restated Joint Venture Agreement evidencing the Fund's admission as a
partner in OLFJV effective August 16, 1997. The other partners in
OLFJV are Orlando Lake Forest, Inc., Orlando Capital Corporations and
OLF II Corporation, all of whom are Affiliates of and are under
common control with NTS Corporation, the Fund's sponsor.
OLFJV owns the Orlando Lake Forest project, a single-family
residential community located in Seminole County, Florida (near
Orlando) consisting of approximately 360 acres of residential land
and improvements and approximately 20 acres of commercial land. OLFJV
will continue to own and develop the Orlando Lake Forest project.
The Fund contributed to 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
OLFJV. The NTS entities named above hold cumulatively the remaining
50% interest in OLFJV.
The net income or net loss of OLFJV is allocated based on the
respective partner's percentage interest, as defined in the joint
venture agreement. As of December 31, 1999 and 1998, the Fund's
percentage interest was 50%, and the Fund's investment balance in
OLFJV was $4,151,307 and $4,462,990 as of December 31, 1999 and 1998,
respectively. The Fund's share of OLFJV's net income (loss) for the
years ended December 31, 1999, 1998 and from August 16, 1997 through
December 31, 1997, was $(405,183), $(247,879) and $106,667,
respectively.
Accounting Principles generally accepted in the United States require
that such investments be recorded at the lower of carrying value or
fair market value. The application of these principles resulted in a
non-cash charge of $12.0 million in the third quarter of 1997. All
estimates used in this evaluation represent management's best
estimates based on the facts present at the date of such evaluations.
B) Basis of Accounting
-------------------
The Fund's records are maintained on the accrual basis of accounting
in accordance with accounting principles generally accepted in the
United States (GAAP).
C) 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.
D) Revenue Recognition and Reserves for Loan Losses
------------------------------------------------
OLFJV 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 OLFJV and its subsidiaries are not obligated to
perform significant activities after the sale. The OLFJV and its
subsidiaries generally require a minimum down payment of at least 10%
of the sales price of the lot.
42
<PAGE>
1. Summary of Significant Accounting Policies - Continued
------------------------------------------------------
E) 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, the use of
estimates to determine sales values, development costs, absorption
periods and the 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.
F) Long-Lived Assets
-----------------
Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, specifies circumstances in which certain
long-lived assets must be reviewed for impairment. If such review
indicates that the carrying amount of an asset exceeds the sum of its
expected future cash flows, the asset's carrying value must be
written down to fair market value.
G) Advertising
-----------
OLFJV expenses advertising-type costs as incurred. Advertising
expense was approximately $444,000, $392,000, and $58,000 during the
years ended December 31, 1999, 1998 and for the period August 16,
1997 through December 31, 1997, respectively.
H) Environmental Remediation and Compliance
----------------------------------------
Environmental liabilities for remediation costs are accrued based on
estimates of known environmental remediation exposures. Liabilities
are recognized when they can be reasonably estimated. Environmental
compliance costs are expensed as incurred.
I) Statement of Cash Flows
-----------------------
For purposes of reporting cash flows, cash and equivalents include
cash on hand and short-term, highly liquid investments with an
original maturity of three (3) months or less that are readily
convertible to cash.
J) Tax Status
----------
OLFJV has received a ruling from the Internal Revenue Service stating
that the Partnership is classified as a general partnership for
federal income tax purposes. As such, OLFJV makes no provision for
income taxes. The taxable income or loss is passed through to the
holders of the partnership interests for inclusion on their
individual income tax returns.
2. Notes Receivable
----------------
Notes receivable are secured by a first mortgage on lots sold to
individuals. The notes bear interest at the prevailing market rates at
the time the lots were sold. The majority of the notes are due between
five and seven years, monthly payments are based on a 30-year
amortization and the balance is due at the maturity date. As of December
31, 1999, notes totaling $183,656, are pledged as security for notes
payable to a bank under a Warehouse Line of Credit Agreement. There are
also approximately $112,000 of notes held by OLFJV that are not pledged.
43
<PAGE>
3. Inventory
---------
Inventory consists of the following as of December 31:
1999 1998
---- ----
Land held for future
development, under
development and completed lots $ 6,053,000 $ 5,756,000
Amenities 8,702,000 8,705,000
---------- ----------
$14,755,000 $14,461,000
========== ==========
OLFJV capitalized in inventory $494,000 and $445,000 of interest and real
estate taxes during 1999 and 1998, respectively. Interest and real estate
taxes incurred were $680,000 and $608,000 for the years ended December
31, 1999 and 1998, respectively.
4. Notes and Mortgage Loans Payable
--------------------------------
Notes and mortgage loans payable consist of the following:
1999 1998
---- ----
Mortgage loan payable to a bank
in the amount of $5,500,000, bearing
interest at the Prime Rate + 1/2%,
due on demand with 180 days written
notice,secured by inventory of OLFJV
and a $300,570 letter of credit,
generally principal payments consist
of approximately 41% of the Gross
Receipts of lot sales. $2,630,779 $2,227,662
Mortgage loan payable to a bank in
the amount of $3,100,000, bearing
interest at the Prime Rate + 1/2%,
due September 30, 2002, secured by
inventory of OLFJV and a $300,570
letter of credit,generally principal
payments consist of approximately
31% of the Gross Receipts of lot
sales. 1,891,043 2,297,873
Mortgage loan payable to a bank in
the amount of $500,000, bearing
interest at the Prime Rate, due
December 3, 2000, guaranteed by Mr.
J.D. Nichols, NTS Corporation and
NTS Mortgage Income Fund. 499,677 500,000
Note payable to a bank in the
amount of $84,500, bearing interest
at the Prime Rate + 1%, due July 18,
2000, secured by inventory of OLFJV,
guaranteed by Mr.J.D.Nichols and NTS
Development Company. 84,500 --
Warehouse Line of Credit Agreements
with a bank, bearing interest at the
Prime Rate + 1%, secured by notes
receivable, principal payments
consist of payments received from
notes receivable securing the
obligation, due December 15, 2000. 183,656 287,244
Other 9,503 10,462
---------- ----------
$ 5,299,158 $ 5,323,241
========== ==========
The Prime Rate was 8 1/2% and 7 3/4% at December 31, 1999 and 1998,
respectively.
44
<PAGE>
4. Notes and Mortgage Loans Payable - Continued
--------------------------------------------
The minimum scheduled principal payments on debt outstanding at December
31, 1999 are as follows:
2000 $ 3,834,158
2001 635,000
2002 830,000
---- ------------
$ 5,299,158
============
Per the mortgage loan agreement, the $5.5 million facility is due on
demand within 180 days of written notice. OLFJV understands that the bank
has the legal right to demand this facility at any time. However, OLFJV
is in compliance with the repayment hurdle and the bank has indicated
that no demand of the facility appears imminent.
5. Supplemental Cash Flow Information
----------------------------------
Cash payments for interest, net of amounts capitalized and cash payments
for income taxes, net of refunds are as follows:
August 16, 1997
through
1999 1998 December 31, 1997
---- ---- -----------------
Interest $ 42,820 $ 64,456 $ 8,202
6. Financial Instruments
---------------------
The book values of cash and 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 OLFJV's notes receivable and debt
instruments approximated the book value because a substantial portion of
the underlying instruments are variable rate notes.
7. Commitments and Contingencies
-----------------------------
OLFJV entered into an agreement with Morrison Homes of Florida, Inc.
("Morrison") effective March 1999 for the sale of approximately 43
residential lots with options for additional lot sales up to a total of
approximately 94 lots at a market price agreed to by OLFJV and Morrison.
The first six lots closed on December 15, 1999. OLFJV recognizes revenue
related to this agreement as each lot is sold.
OLFJV entered into an agreement with Brentwood Custom Homes, Inc.
("Brentwood") effective December 1999 for the sale of approximately 22
residential lots. The first three lots closed in December 1999. OLFJV
recognizes revenue related to this agreement as each lot is sold.
OLFJV has various letters of credit outstanding to governmental agencies
and utility companies totaling approximately $35,000.
45
<PAGE>
8. Related Party Transactions
--------------------------
A) Selling, General and Administrative - Affiliates
------------------------------------------------
The expenses presented as selling, general and administrative -
affiliates are classified in two ways, expense recovery and overhead
recovery. The expense recovery includes compensation costs of
management, accounting, professional, development marketing and office
personnel employed by NTS Management as well as various non-payroll
related operating expenses.
Reimbursements for expense recovery of approximately $619,000,
$532,000 and $162,000 were made to NTS Management or an affiliate
during the years ended December 31, 1999, 1998 and the period from
August 16, 1997 through December 31, 1997, respectively, for
compensation costs and various non-payroll related operating expenses.
These amounts are reflected in selling, general and administrative -
affiliates on the accompanying statement of operations:
1999 1998
---- ----
Personnel related costs:
Finance and accounting $ 72,000 $ 61,000
Executive and administrative 76,000 73,000
Construction management 9,000 13,000
Sales and marketing 462,000 384,000
-------- --------
Total expense reimbursements $619,000 $531,000
======== ========
Additionally, OLFJV incurs an overhead recovery, which is a
reimbursement to NTS Management for overhead expenses attributable to
the employees and the efforts of NTS Management, in an amount equal to
3.75% of the project's gross cash receipts. For the years ended
December 31, 1999, 1998 and the period from August 16, 1997 through
December 31, 1997, overhead recovery incurred was approximately
$122,000, $107,000 and $56,000, respectively.
B) Accounts Payable - Affiliates
-----------------------------
As presented in the accompanying balance sheet as of December 31,
1999, accounts payable - affiliates of $514,543 is owed to NTS
Development Company and NTS Residential Management Company for salary
and overhead reimbursements. NTS Development Company and NTS
Residential Management Company have agreed to defer amounts owed to
them by the Fund as of December 31, 1999 and those amounts that will
accrue during fiscal 2000 through the period ending January 1, 2001,
other than as permitted by cash flows of the Fund. There can be no
assurances that this level of support will continue past January 1,
2001.
46
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholder of NTS Guaranty Corporation:
We have audited the accompanying balance sheets of NTS Guaranty Corporation (a
Kentucky corporation) as of December 31, 1999 and 1998. These balance sheets are
the responsibility of NTS Guaranty Corporation's management. Our responsibility
is to express an opinion on these balance sheets based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the balance sheets are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheets. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of NTS Guaranty Corporation as of
December 31, 1999 and 1998, in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
March 29, 2000
47
<PAGE>
NTS GUARANTY CORPORATION
------------------------
BALANCE SHEETS
--------------
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
ASSETS
------
1999 1998
---- ----
Cash $100 $100
---- ----
$100 $100
==== ====
STOCKHOLDER'S EQUITY
--------------------
Common stock, no par value; 100 shares
issued and outstanding $ 10 $ 10
Additional paid-in capital 10,000,090 10,000,090
----------- -----------
10,000,100 10,000,100
Less non-interest bearing demand note
receivable from a majority stockholder
of NTS Corporation (10,000,000) (10,000,000)
----------- -----------
$ 100 $ 100
=========== ===========
NOTES TO BALANCE SHEETS
-----------------------
1. Significant Accounting Policies
-------------------------------
A. Organization
------------
NTS Guaranty Corporation (the "Guarantor"), a Kentucky corporation,
was formed in February 1987 and is an affiliate of NTS Corporation.
NTS Corporation is the Sponsor of the NTS Mortgage Income Fund (the
"Fund"). The balance sheets include only those assets and liabilities
which relate to the Guarantor. The Guarantor is authorized to issue
up to 2,000 shares of common stock with no par value. There are 100
shares issued and outstanding which were purchased by Mr. J. D.
Nichols, Chairman of the Board of Directors of the Sponsor and of the
Fund. In addition, Mr. Nichols has given the Guarantor a non-interest
bearing demand note receivable for $10,000,000, the receipt of which
is included in additional paid-in capital. Expenses (consisting
mostly of state taxes and licenses) of the Guarantor totaling
approximately $15 for each of the years ended December 31, 1999 and
1998, were paid by an affiliate of the Sponsor and therefore no
income statement is presented. These expenses will not be reimbursed
to the affiliate.
B. Use of Estimates in Preparation of Financial Statements
-------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
48
<PAGE>
2. Commitments
-----------
The Guarantor has guaranteed that Investors of the Fund will receive,
over the life of the Fund, aggregate distributions from the Fund (from
all sources) in an amount at least equal to their Original Capital
Contributions, as defined in the Fund's Prospectus. As of December 31,
1999, the Fund has raised approximately $63,690,000 and has paid
distributions of approximately $23,141,000.
The liability of the Guarantor under the above guaranty is expressly
limited to its assets and its ability to draw upon a $10 million demand
note receivable from Mr. J. D. Nichols. Mr. Nichols has contingent
liabilities which have arisen in connection with the acquisition of
properties by himself or his affiliates. 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 commitments. The Guarantor may in
the future provide guaranties to other Affiliates of the Fund.
49
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
-----------------------------------------------------------------------
Financial Disclosure
--------------------
There have been no changes in accountants or reported disagreements on any
matter of accounting principles, practices or financial statement disclosure.
50
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The directors and principal officers of the Fund are as follows:
Name Office With the Fund
---- --------------------
J. D. Nichols Chairman of the Board of Directors
Robert M. Day Director*
Gerald B. Thomas Director*
Gerald B. Brenzel Director*
Brian F. Lavin President and Director
- --------------------------------------------------------------------------------
* Messr. Day, Thomas and Brenzel are the Independent Directors of the Fund.
Neither of them are employees, partners, officers or directors of the Sponsor or
any of its Affiliates.
J. D. Nichols (age 58) is Chairman of the Board and Chief Executive Officer of
- -------------
NTS Corporation and its various Affiliates and is a member and Chairman of the
Board of Directors of the NTS Mortgage Income Fund. He is a graduate of the
University of Louisville School of Law. His undergraduate studies were at the
University of Kentucky, where he concentrated in Accounting, Marketing and
Business Administration. Mr. Nichols entered the real estate construction and
development business in 1965 and has been involved in the development and
construction of over 6,500 acres of land and over 6,500,000 square feet of
office, residential, commercial and industrial space in numerous states
throughout the eastern half of the United States. He is a member of both the
Louisville and National Homebuilders Associations, and has served as Vice
President and Director of the Louisville and National Apartment Associations.
Mr. Nichols is also lifetime member of the President's Society of Bellarmine
College, Louisville, Kentucky and a past member of the Board of Overseers and
Board of Trustee of the University of Louisville, the Governors Council for
Education Technology and the Board of Directors of the Louisville Chamber of
Commerce. Mr. Nichols is currently a member of the Board of Directors of the
Regional Airport Authority of Louisville and Jefferson County and is a member of
the Board of Directors of the Greater Louisville Economic Development
Partnership.
Robert M. Day (age 46) has been Managing Director of Lambert, Smith & Hampton
- -------------
and its predecessor companies, Atlanta, Georgia, a commercial and industrial
real estate brokerage firm since 1985. Mr. Day received a Bachelor of Business
Administration degree from Georgia State University and holds an MAI designation
from the Appraisal Institute. Mr. Day is a member of the Atlanta Board of
Realtors, the Urban Land Institute and is on the operating committee of the
Atlanta Chapter of Young Life.
Gerald B. Thomas (age 61) has 25 years experience in Commercial Real Estate
- -----------------
lending. Formerly a Senior Vice President with Mid-American Bank of Louisville,
Mr. Thomas joined Citizens Bank of Kentucky in February 1996 as Vice President,
with responsibility of developing real estate portfolios for four Kentucky
affiliate banks of CNB Bancshares, Inc., Evansville, Indiana. Mr. Thomas has
attended Eastern Kentucky University, National School of Real Estate Finance
(Ohio State University) and National Institute of Real Estate Appraisers
(University of Louisville). He is a board member of Big Brothers/Big Sisters,
Louisville and Co-chairman of the Programs, Planning and Evaluation Committee.
51
<PAGE>
Item 10. Directors and Executive Officers of the Registrant - Continued
--------------------------------------------------------------
Gerald B. Brenzel (age 68) has over forty years experience in the securities
- -----------------
industry, most recently as First Vice President of Morgan, Keegan & Company in
Louisville, Kentucky. Prior to that, Mr. Brenzel was founder and CEO of
Commonwealth Investment Group, Inc., an investment money managers and regional
brokerage firm in Louisville. From 1964 to 1988, Mr. Brenzel was regional Vice
President and Branch Manager of Stifel, Nicolaus & Company, and was a member of
the Board of that firm, was also an allied member of the New York Stock Exchange
(1964 thru 1988). A former Governor of the National Association of Securities
Dealers, Mr. Brenzel attended the University of Louisville for three years and
also served three years in the U.S. Air Force during the Korean War.
Brian F. Lavin (age 46), President of NTS Corporation and NTS Development
- ---------------
Company joined the Manager in June 1997. From November 1994 through June 1997,
Mr. Lavin served as President of the Residential Division of Paragon Group,
Inc., and as a Vice President of Paragon's Midwest Division prior to November
1994. In this capacity, he directed the development, marketing, leasing and
management operations for the firms expanding portfolios. Mr. Lavin attended the
University of Missouri where he received his Bachelor's Degree in Business
Administration. He has served as a Director of the Louisville Apartment
Association. He is a licensed Kentucky Real Estate Broker and Certified Property
Manager. Mr. Lavin is a member of the Institute of Real Estate Management, and
council member of the Urban Land Institute. He currently serves on the
University of Louisville Board of Overseers and is on the Board of Directors of
the National Multi-Housing Council and the Louisville Science Center.
The Directors are not required to devote all of their time to the Fund, they are
only required to devote such of their time to the affairs of the Fund as their
duties require, and will meet quarterly or more frequently if necessary. It is
not expected that the Directors will be required to devote substantial portions
of their time to discharge their duties as Directors. For a description of
provisions concerning indemnification, see "Fiduciary Responsibility" on page 14
of the Fund's Prospectus, which description is filed herewith and incorporated
herein by reference.
The Directors, although not precluded from engaging in activities similar to the
Fund's, are required to disclose any interest held directly or indirectly by
them, or an Affiliate in an investment presented to the Fund. Furthermore,
Affiliated Directors must offer the Fund the right to engage in an investment
opportunity, which is within the Fund's objectives and policies, prior to
entering into such transaction themselves. The Fund will not pay a commission to
an Affiliate of any Director for presenting or disposing of the Fund's
investments.
The Fund will initially pay to each Independent Director a fee of $1,000 per
month (which amount may be increased or decreased at the discretion of the
Directors) and will reimburse such persons and Affiliated Directors for travel
expenses and other out-of-pocket disbursements incurred in connection with
attending any meetings. Affiliated Directors will not receive any compensation
from the Fund for their services as Directors or Officers of the Fund.
The Directors have retained NTS Advisory Corporation (the Advisor) to manage the
Fund's day-to-day affairs, and recommend investments suitable for the Fund. The
Advisor has delegated substantially all of its duties to NTS Corporation (NTS),
an affiliate of the Advisor. NTS has substantial experience in all phases of
real estate activities, including acquisition, financing, property management
and disposition.
52
<PAGE>
Item 10. Directors and Executive Officers of the Registrant - Continued
--------------------------------------------------------------
The following persons are the executive officers and key employees of NTS and/or
an affiliate and will provide services to the Advisor and the Fund:
Name Office
---- ------
J. D. Nichols Chairman and Chief Executive Officer
Michael H. Hannon Executive Vice President, NTS Development Company
Brian F. Lavin President, NTS Development Company
Margaret O. Templeton President, NTS/Residential Properties, Inc.- Florida
Gary D. Adams Senior Vice President, NTS Development Company
Sally A. Judah Senior Vice President, NTS Corporation
The following provides additional information regarding the above-mentioned
persons. Information regarding Messrs. Nichols and Lavin is provided in the
section entitled "Directors and Officers of the Fund."
Michael H. Hannon (age 56) serves as Executive Vice President of NTS Development
- -----------------
Company and President of NTS Residential Properties, Inc. Virginia where he
oversees the development, land acquisitions, marketing, operations, and general
management. Immediately prior to joining NTS, Mr. Hannon was employed by Hines
Interest Limited Partners as general manager for the Hines Rocky Mountain Region
from 1995 to February 1998. In addition to his responsibilities in The Rocky
Mountain Region, Mr. Hannon was responsible for Hines national residential
acquisition evaluations. Prior to 1995, Mr. Hannon served as Division President
for Arvida's South Atlantic Division, which included eleven residential
communities, including two Arnold Palmer Designed Golf Courses. Mr. Hannon
attended Grand View Junior College in Des Moines, Iowa and Parsons College in
Fairfield, Iowa. He is an active Member of the Urban Land Institute, National
Association of Home Builders and a licensed real estate broker in Colorado and
Florida. Mr. Hannon is a decorated Viet Nam Veteran, serving with the 1st
Infantry Division in Dian, South Viet Nam during 1965-1966.
Margaret O. Templeton (age 50) is President of NTS/Residential Properties, Inc.
- ---------------------
- - Florida with responsibility for single-family residential development,
marketing and operations in the state of Florida. Prior to joining NTS in
November 1994, Ms. Templeton was President of Templeton Development Corporation,
a real estate development firm in Tampa, Florida from 1992 to November 1994. She
has extensive experience in marketing, construction and land development
including seven years (1985 to 1992) as Vice President of Tampa Palms and
Gulfstream Land and Development Company, whose holdings included 30,000 acres in
Florida, Georgia and Virginia. Ms. Templeton received a Bachelor of Arts degree
from the University of Florida. Ms. Templeton is a member and Director of the
National Association of Homebuilders, Florida Homebuilders Association as well
as Director and Vice President of the Builders Association of Greater Tampa and
Orlando. Ms. Templeton is also a member of the Florida Board of Realtors and the
Urban Land Institute.
Gary D. Adams (age 54) is Senior Vice President of NTS Development Company with
- -------------
responsibility for multi-family operations and commercial properties in the
state of Florida. Since joining the NTS organization in May 1977, Mr. Adams has
been involved in the development, construction and management of numerous
apartment, office, industrial and commercial developments in the southeastern
portion of the United States. Mr. Adams received his undergraduate degree in
Engineering from the University of Cincinnati, and he holds a Master of Business
Administration from Xavier University. He is a member of the Building Owners and
Managers Association and is a licensed general contractor in the State of
Florida.
53
<PAGE>
Item 10. Directors and Executive Officers of the Registrant - Continued
--------------------------------------------------------------
Sally A. Judah (age 41) is Senior Vice President of NTS Corporation with
- ---------------
responsibility for multi-family property management of NTS's apartment
communities in Kentucky and Indiana. From July 1991 to 1994, Ms. Judah was Vice
President of NTS Corporation with responsibility for Corporate Marketing, Human
Resources and the Graphics Division. From June of 1987 when she joined NTS until
July 1991, Ms. Judah was responsible for leasing activities for commercial
properties in Louisville, Kentucky. Ms. Judah is a member of the Louisville
Board of Realtors and is a Certified Commercial Investment Member (CCIM)
Candidate and is a member of the national and Kentucky CCIM chapters. Ms. Judah
is also a member of the Louisville Apartment Association and is a member of the
Leadership Louisville Class of 1993. Ms. Judah holds a Bachelor of Arts degree
from the University of Kentucky.
Item 11. Executive Compensation
----------------------
(a, b, c & d) The Fund will pay each Independent Director a fee of $12,000 per
year and will reimburse such persons and Affiliated Directors for travel
expenses and other out-of-pocket disbursements incurred in connection with
attending any meetings of the Board of Directors. During the years ended
December 31, 1999, 1998 and 1997, the Fund paid directors fees of $36,000 each
year, representing annual compensation. The Affiliated Directors will not
receive any compensation from the Fund for their services to the Fund. The
present officers of the Fund receive compensation from the Advisor or its
affiliates which indirectly relates to services to the Fund (see Item 13).
The Fund is entitled to engage in various transactions involving the Advisor and
its affiliates, as described under captions "Compensation Table" at pages 9 and
10 of the Prospectus and "Conflicts of Interest" on pages 11 to 14 of the
Prospectus, which descriptions are filed herewith and incorporated herein by
reference. Reference is made to Note 9 of the Notes to the Fund's Consolidated
Financial Statements filed with this report for various transactions with
affiliates.
(e) There are no compensatory plans or arrangements resulting from resignation
or retirement of the Directors and executive officers which require payments to
be received from the Fund.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
(a) As of the date hereof, no person owns of record or is known by the Fund to
own beneficially more than five percent (5%) of the outstanding shares of common
stock of the Fund.
(b) The following table sets forth the ownership of shares owned directly or
indirectly by the Directors and principal officers of the Fund as of the date
hereof:
Amount of Percent
Name of Beneficial Of
Title of Class Beneficial Owner Ownership Interest
-------------- ---------------- --------- --------
Shares of Common J. D. Nichols 96,468 * 3.0%
Stock, $0.001 Shares
Per Share
* These shares are owned of record by NTS Corporation or an Affiliate of which
Mr. Nichols directly or beneficially holds voting and investment authority.
(c) There are no known arrangements which may at a subsequent date result in
change in control of the Fund.
54
<PAGE>
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
As of December 31, 1999, the Sponsor or an Affiliate owned 105,955 shares of the
Fund. The Fund thereby allowing Fawn Lake to utilize such funds for development
purposes entered into the following agreements with various Affiliates of the
Sponsor regarding the ongoing operation of the Fund.
Advisory Agreement
- ------------------
Pursuant to the Advisory Agreement, the Fund paid the Advisor (NTS Advisory
Corporation) a Management Expense Allowance from inception of the Fund through
September 30, 1997 (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.
For the years ended December 31, 1997, $418,950 had been incurred as an Advisory
Fee. Effective October 1, 1997, the Fund no longer incurred an Advisory Fee but
is now 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 (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 years ended
December 31, 1999 and 1998.
55
<PAGE>
Item 13. Certain Relationships and Related Transactions - Continued
----------------------------------------------------------
Property Management Agreements - Continued
- ------------------------------------------
These amounts are reflected in Selling, General and Administrative - Affiliated
on the accompanying Statement of Operations:
1999 1998
---- ----
Personnel Related Costs:
Finance and Accounting $ 131,000 $ 172,000
Data Processing 31,000 6,000
Human Resources 34,000 35,000
Executive and Administrative Services 196,000 186,000
Construction Management 15,000 39,000
Sales and Marketing 1,045,000 713,000
Legal 37,000 72,000
Marketing 126,000 125,000
Rent 39,000 34,000
Other General and Administrative 59,000 57,000
---------- ----------
Total Expense Reimbursements $1,713,000 $1,439,000
========== ==========
Additionally, NTS Management is entitled to an Overhead Recovery, which is a
reimbursement for overhead expenses attributable to the employees and the
efforts of NTS Management under the Management Agreements, in an amount equal to
3.75% of the projects' gross cash receipts, as defined in the Management
Agreements. Overhead recovery for the years ended December 31, 1999, 1998 and
for the period October 1, 1997 through December 31, 1997, was approximately
$567,000, $496,000 and $106,000, respectively. These amounts are classified with
Selling, General and Administrative - Affiliated in the accompanying 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 of December 31, 1999, the Fund
had raised approximately $63,690,000 and had paid distributions of approximately
$23,141,000. As of December 31, 1999, no amount had been accrued as an Incentive
Payment in the Fund's consolidated financial statements.
56
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
1. Financial statements
The financial statements for the NTS Mortgage Income Fund, Orlando Lake
Forest Joint Venture and NTS Guaranty Corporation together with the
reports of Arthur Andersen LLP dated March 29, 2000.
2. Financial statement schedules
All schedules have been omitted because they are not applicable, are not
required, or because the required information is included in the
financial statements or notes thereto.
3. Exhibits
a) The following exhibits are incorporated by reference from the
Fund's Registration Statement on Form S-11, referencing the
exhibit number used in such Registration Statement.
Exhibit Number Description
-------------- -----------
3 (a)(2) Restated Certificate of Incorporation
3 (b) By-Laws
10 (c) Form of Advisory Agreement
10 (b) Form of Guaranty Agreement
b) The following exhibits are incorporated by reference from the Fund's
Form 8-K dated January 14, 1998.
Exhibit Number Description
-------------- -----------
10 Material contracts - The agreements whereby
the Fund acquired all of the issued and
outstanding common capital stock of NTS/LFII
and NTS/VA, and the Property Management
Agreements between the Fund and NTS
Management.
c) The following are additional exhibits filed with the Form 10-K Report.
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
include pages 9 to 14 and pages 75 to 81.
4. Reports on Form 8-K.
None.
57
<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
/s/ Brian F. Lavin Date: March 30, 2000
- -----------------------------------------
President and Director of the
NTS Mortgage Income Fund
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
registrant in their capacities and on the date indicated.
/s/ J. D. Nichols Date: March 30, 2000
- -----------------------------------------
J. D. Nichols
Chairman of the Board of Directors
of the NTS Mortgage Income Fund
/s/ Gerald B. Brenzel Date: March 30, 2000
- -----------------------------------------
Gerald B. Brenzel
Director of the NTS Mortgage Income Fund
/s/ Robert M. Day Date: March 30, 2000
- -----------------------------------------
Robert M. Day
Director of the NTS Mortgage Income Fund
/s/ Gerald B. Thomas Date: March 30, 2000
- -----------------------------------------
Gerald B. Thomas
Director of the NTS Mortgage Income Fund
/s/ Gregory A. Wells Date: March 30, 2000
- -----------------------------------------
Senior Vice President and
Chief Financial Officer of
NTS Capital Corporation
58
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the balance
sheet as of December 31, 1999 and from the statement of operations for the year
ended December 31, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 619,022
<SECURITIES> 0
<RECEIVABLES> 2,139,857
<ALLOWANCES> 0
<INVENTORY> 55,438,644
<CURRENT-ASSETS> 0<F1>
<PP&E> 505,219
<DEPRECIATION> 478,962
<TOTAL-ASSETS> 65,094,003
<CURRENT-LIABILITIES> 0
<BONDS> 28,342,811
0
0
<COMMON> 3,187
<OTHER-SE> 33,471,722
<TOTAL-LIABILITY-AND-EQUITY> 65,094,003
<SALES> 14,256,114
<TOTAL-REVENUES> 14,547,187
<CGS> 10,026,656
<TOTAL-COSTS> 5,369,847
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 260,899
<INCOME-PRETAX> (849,316)
<INCOME-TAX> 0
<INCOME-CONTINUING> (849,316)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (849,316)
<EPS-BASIC> (0.27)
<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.
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"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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