<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
--------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------------ ------------------------
Commission File Number 0-18550
----------------------------------------------------------
NTS MORTGAGE INCOME FUND
- --------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
Delaware 61-1146077
- ------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10172 Linn Station Road
Louisville, Kentucky 40223
- ------------------------------- -------------------------------
(Address of principal executive (Zip Code)
offices)
(502) 426-4800
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
As of May 9, 2000 there were approximately 3,187,000 shares of common stock
outstanding.
<PAGE>
TABLE OF CONTENTS
-----------------
Pages
PART I
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999 3
Consolidated Statements of Operations
for the three months ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows
for the three months ended March 31, 2000 and 1999 5
Notes To Consolidated Financial Statements 6-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-21
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21
PART II
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
2
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
--------------------
<TABLE>
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<CAPTION>
As of As of
March 31, 2000 December 31, 1999 *
-------------- -------------------
(Unaudited)
ASSETS
- ------
<S> <C> <C>
Cash and equivalents $ 562,142 $ 619,022
Membership initiation fees and other
accounts receivable, net of allowance of
$74,000 and $75,000 1,338,320 1,406,376
Notes receivable 1,867,852 2,139,857
Inventory 56,146,133 55,438,644
Property and equipment, net of accumulated
depreciation of $526,454 and $478,962 568,806 505,219
Investment in unconsolidated affiliate 4,052,774 4,151,307
Other assets 825,393 833,578
------------ ------------
TOTAL ASSETS $ 65,361,420 $ 65,094,003
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Accounts payable and accrued expenses $ 2,228,721 $ 1,857,760
Accounts payable - affiliates 1,706,070 1,194,395
Mortgages and notes payable 28,282,809 28,342,811
Lot deposits 219,500 161,500
Deferred revenues 57,596 62,628
------------ ------------
TOTAL LIABILITIES 32,494,696 31,619,094
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 12)
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 (21,299,860) (20,691,675)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 32,866,724 33,474,909
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 65,361,420 $ 65,094,003
============ ============
</TABLE>
* Reference is made to the Fund's audited financial statements in the Form 10-K
as filed with the Securities and Exchange Commission on March 30, 2000.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<CAPTION>
Three Months Ended
March 31,
---------
(Unaudited)
2000 1999
---- ----
REVENUES:
- ---------
<S> <C> <C>
Lot sales, net of discounts $ 2,499,449 $ 2,444,785
Cost of sales 2,043,219 1,659,883
----------- -----------
Gross profit 456,230 784,902
----------- -----------
Interest and miscellaneous
income 95,063 73,671
----------- -----------
551,293 858,573
----------- -----------
EXPENSES:
- ---------
Selling, general and
administrative - affiliated 629,808 584,163
Selling, general and
administrative 352,909 464,318
Interest expense 52,633 115,952
Other taxes and licenses 12,016 5,050
Depreciation and amortization
expense 13,579 21,733
Loss from investment
in unconsolidated affiliate 98,533 78,956
----------- -----------
1,159,478 1,270,172
----------- -----------
Net loss before
federal income taxes (608,185) (411,599)
Federal income tax expense -- --
----------- -----------
Net loss $ (608,185) $ (411,599)
=========== ===========
Net loss per share of common stock $ (0.19) $ (0.13)
=========== ===========
Weighted average number of shares 3,187,333 3,187,333
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<CAPTION>
Three Months Ended
March 31,
---------
(Unaudited)
2000 1999
---- ----
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES
- ------------------------------------------------------
<S> <C> <C>
Net loss $ (608,185) $ (411,599)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization expense 78,727 67,815
Loss from investment in unconsolidated affiliate 98,533 78,956
Changes in assets and liabilities:
Membership initiation fees and other accounts
receivable 68,056 149,123
Notes receivable 272,005 263,503
Inventory (707,489) (283,154)
Accounts payable and accrued expenses 370,961 (580,244)
Accounts payable - affiliates 511,675 --
Lot deposits 58,000 (16,895)
Deferred revenues (5,032) (9,533)
Other assets (270) --
----------- -----------
Net cash provided by (used for) operating activities 136,981 (742,028)
----------- -----------
CASH FLOWS USED FOR INVESTING ACTIVITIES
- ----------------------------------------
Purchase of property and equipment (111,079) (37,174)
----------- -----------
Net cash used for investing activities (111,079) (37,174)
----------- -----------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES
- ------------------------------------------------------
Advances to/from affiliates -- (10,958)
Proceeds from mortgages and notes payable 2,500,048 2,996,142
Proceeds from notes payable - affiliated -- 362,140
Payments on mortgages and notes payable (2,560,050) (2,275,065)
Other assets (22,780) (19,119)
----------- -----------
Net cash provided by (used for) financing activities (82,782) 1,053,140
----------- -----------
Net increase (decrease) in cash and equivalents (56,880) 273,938
----------- -----------
CASH AND EQUIVALENTS, beginning of period 619,022 1,061,609
----------- -----------
CASH AND EQUIVALENTS, end of period $ 562,142 $ 1,335,547
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
<PAGE>
NTS MORTGAGE INCOME FUND
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
The unaudited financial statements and schedules included herein should be read
in conjunction with the Fund's 1999 Annual Report on Form 10-K, as filed with
the Securities and Exchange Commission on March 30, 2000. In the opinion of the
Fund's management, all adjustments (only consisting of normal recurring
accruals) necessary for a fair presentation have been made to the accompanying
financial statements for the three months ended March 31, 2000 and 1999.
1. Organization
------------
NTS Mortgage Income Fund (the "Fund"), a Delaware corporation, was formed
on September 26, 1988. The Fund operated as a Real Estate Investment Trust
("REIT") under the Internal Revenue Code of 1986 (the "Code"), as amended,
from its inception through December 31, 1996. The Fund began operating as a
"C" corporation under the Code for tax purposes effective January 1, 1997.
NTS Corporation is the sponsor of the Fund (the "Sponsor"). NTS Advisory
Corporation is the advisor to the Fund (the "Advisor"), and NTS Residential
Management Company is the manager of the Fund ("NTS Management"). The
Advisor and NTS Management are affiliates of and are under common control
with NTS Corporation.
The Fund's subsidiaries are NTS/Lake Forest II Residential Corporation
("NTS/LFII") and NTS/Virginia Development Company ("NTS/VA". These
subsidiaries were acquired effective October 1, 1997. The acquisitions were
accounted for under the purchase method of accounting. Prior to making the
acquisitions, the Fund had been the primary creditor of these entities.
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 Residential Realty,
Inc., a Kentucky corporation and an Affiliate of NTS Corporation, the
Sponsor of the Fund, was formed on April 6, 1999 to act as a broker and
agent for NTS/LFII for the sale of lots within the Lake Forest North
project, and as broker and agent for the sale of new homes within the Lake
Forest North project.
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, will continue to act as a
broker and agent for NTS/VA for the sale of lots within the Fawn Lake
project, and as broker and agent for approved builders in the Fawn Lake
project for the sale of new homes.
The 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. The Joint Venture owns
the Orlando Lake Forest project, a single-family residential community
located in Seminole County, Florida (near Orlando). The Joint Venture will
continue to own and develop the Orlando Lake Forest project. Lake Forest
Realty, Inc., an Affiliate of and under common control with the Fund's
Sponsor, will continue to act as a broker and agent for the Joint Venture
for the sale of lots within the Orlando Lake Forest project.
6
<PAGE>
2. Basis of Accounting
-------------------
The Fund's records are maintained on the accrual basis of accounting in
accordance with Generally Accepted Accounting Principles (GAAP) in the
United States.
3. Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The consolidated financial statements of the Fund include the assets,
liabilities, revenues and expenses of its 100% owned subsidiaries. The
consolidated statements of operations include the results of acquired
businesses accounted for under the purchase method of accounting from the
date of acquisition. Investments of 50% or less in affiliated companies are
accounted for under the equity method. All significant intercompany
transactions have been eliminated.
4. 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.
5. Revenue Recognition
-------------------
The Fund and its subsidiaries recognize revenue and related costs from lot
sales using the accrual method in accordance with GAAP, 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.
6. 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 their relative
sales values. The use of the relative sales value method to record cost of
sales requires the use of estimates of sales values, development costs and
absorption periods over the life of the project. Given the long-term nature
of the projects and inherent economic volatility of residential real
estate, the use of estimates to determine sales values, development costs
and absorption periods, it is reasonably possible that such estimates could
change in the near term. Any changes in estimates are accounted for
prospectively over the life of the project.
Inventory consists of the following as of March 31, 2000:
NTS/LFII NTS/VA Consolidated
-------- ------ ------------
Land held for future
development, under
development and completed
lots $ 3,196,000 $ 24,118,000 $ 27,314,000
Country club (net of
membership initiation fees) 10,914,000 9,841,000 20,755,000
Amenities 2,289,000 5,788,000 8,077,000
------------ ------------ ------------
$ 16,399,000 $ 39,747,000 $ 56,146,000
============ ============ ============
7
<PAGE>
6. Inventory - Continued
---------------------
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
membership 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
============ ============ ============
NTS/LFII and NTS/VA capitalized in inventory approximately $720,000 of
interest and real estate taxes for the three months ended March 31, 2000.
Interest and real estate taxes incurred were approximately $785,000.
NTS/LFII and NTS/VA capitalized in inventory approximately $625,000 of
interest and real estate taxes for the three months ended March 31, 1999.
Interest and real estate taxes incurred were approximately $756,000.
Inventory for 2000, as reflected above, includes approximately $29,771,000
net of $9,016,000 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 1999, as reflected above includes approximately $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.
Pursuant to an agreement between NTS/LFII and the Lake Forest Country Club
regarding the cost to develop the Country Club, NTS/LFII is to receive all
initiation fees from membership sales for a period not to exceed 12 years
from the date of the agreement (ending 2003). The remaining cost to be
incurred for the current projected Country Club operating deficit for the
period covered by the agreement is approximately $1,870,000, which is
expected to be offset by member initiation fees. During the three months
ended March 31, 2000 approximately $192,000 of the Fawn Lake Country Club
deficit and $73,000 of the Lake Forest Country Club deficit was capitalized
as a cost of inventory.
7. Investment in Unconsolidated Affiliate
--------------------------------------
Effective as of August 16, 1997, the Fund became a partner in the Orlando
Lake Forest Joint Venture (the "Joint Venture"). The other partners in the
Joint Venture are Orlando Lake Forest, Inc., Orlando Capital Corporation
and OLF II Corporation, all of whom are Affiliates of and are under common
control with the Fund's Sponsor. The Joint Venture will continue to operate
under its current legal name as the Orlando Lake Forest Joint Venture.
The Joint Venture owns the Orlando Lake Forest project, a single-family
residential community located in Seminole County, Florida (near Orlando).
The Joint Venture will continue to own and develop the Orlando Lake Forest
project.
8
<PAGE>
7. Investment in Unconsolidated Affiliate - Continued
--------------------------------------------------
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 March 31, 2000, the Fund's percentage interest was 50%,
and the Fund's investment balance in the Joint Venture was approximately
$4,053,000 and $4,151,000 as of March 31, 2000 and December 31, 1999,
respectively. The Fund's share of the Joint Venture's net loss for the
three months ended March 31, 2000 and 1999 was approximately $99,000 and
$79,000, respectively.
Presented below are condensed balance sheets for the Joint Venture as of
March 31, 2000 and December 31, 1999, and statements of operations for the
three months ended March 31, 2000 and 1999:
March 31, December 31,
2000 1999
---- ----
Balance Sheets
--------------
Notes receivable $ 226,000 $ 296,000
Inventory 14,986,000 14,755,000
Other, net 305,000 266,000
------------ ------------
Total assets $ 15,517,000 $ 15,317,000
============ ============
Mortgages and notes payable 5,407,000 5,299,000
Other liabilities 2,004,000 1,715,000
Equity 8,106,000 8,303,000
------------ ------------
Total liabilities and equity $ 15,517,000 $ 15,317,000
============ ============
Three Months Ended
March 31,
---------
2000 1999
---- ----
Statements of Operations
------------------------
Lot sales, net of discounts $ 810,000 $ 917,000
Cost of sales (632,000) (715,000)
Other expenses, net (375,000) (360,000)
------------ -----------
Net loss $ (197,000) $ (158,000)
============ ===========
9
<PAGE>
8. Mortgages and Notes Payable
---------------------------
Mortgages and notes payable consist of the following:
March 31, December 31,
2000 1999
---- ----
Mortgage loan payable to a bank in
the amount of $10,700,000, bearing
interest at the Prime Rate + 1.5%,
due December 1, 2002, secured by
inventory of NTS/VA, generally
principal payments consist of
approximately 91% of the Gross
Receipts of lot sales, personally
guaranteed by Mr. J. D. Nichols,
Chairman of the Board of the Fund's
Sponsor, up to $3,000,000 and a $2
million letter of credit from a
third party lender with the
beneficiary being the bank. $ 10,503,169 $ 9,777,485
Note payable to a bank in the amount
of $9,500,000, bearing interest at
the Prime Rate + 1%, payable
monthly, due December 31, 2002,
secured by inventory of NTS/LFII,
generally principal payments consist
of approximately 90% of the Gross
Receipts of lot sales, guaranteed by
Mr. J. D. Nichols up to 50% of the
credit facility. The Note contains
certain covenants, which among other
things prohibits the net worth of
NTS/LFII from decreasing by 20% or
more throughout the term of the
agreement. 6,399,457 6,817,188
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 6,696,959
Mortgage loan payable to a bank in
the amount of $4,000,000, bearing
interest at the Prime Rate + .5%,
payable monthly, due July 31, 2002,
secured by the Lake Forest Country
Club and golf course, principal
reductions of $300,000 every three
months, guaranteed by NTS
Corporation, the Fund's Sponsor. 2,800,000 2,870,000
(Continued on next page)
10
<PAGE>
8. Mortgages and Notes Payable - Continued
---------------------------------------
March 31, December 31,
2000 1999
---- ----
Warehouse Line of Credit Agreements
with three banks bearing interest at
the Prime Rate + 1%, the Prime Rate
+ .75% and the Prime Rate + .5%, due
December 15, 2000, $112,428,
September 18, 2000, $564,609, and
February 28, 2000, $0, secured by
notes receivable, principal payments
consist of payments received from
notes receivable securing the
obligation. $ 677,037 $ 936,645
Bank note payable in the amount of
$1,174,800, bearing interest at a
rate of prime + .5%, secured by note
receivable, due in monthly
installments of $5,000 commencing
February 1, 1999 with any
outstanding principal and accrued
interest due and payable in full on
December 29, 2000. 1,058,616 1,119,800
Other 147,571 124,734
------------ ------------
$ 28,282,809 $ 28,342,811
============ ============
The Prime Rate was 9% and 8.5% at March 31, 2000 and December 31, 1999,
respectively.
The $112,428 Warehouse Line of Credit agreement is guaranteed by NTS
Corporation.
Principal balance requirements regarding the $10.7 and $9.5 million credit
facilities are as follows:
$10.7 Million Facility
December 31, 1999 $10,700,000
December 31, 2000 $ 7,800,000
December 31, 2001 $ 5,900,000
December 31, 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 June 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
11
<PAGE>
8. Mortgages and Notes Payable - Continued
---------------------------------------
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 personal
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 March
31, 2000 and those amounts accruing during 2000 other than as permitted by
cash flows (See Notes to Financial Statements "9. Related Party
Transactions"), 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.
9. Related Party Transactions
--------------------------
As of March 31, 2000, the Sponsor or an Affiliate owned 107,053 shares of
the Fund. The Fund has entered into, or had been subject to in prior
periods, the following agreements with various Affiliates of the Sponsor
regarding the ongoing operation of the Fund.
Property Management Agreements
The ongoing operation and management of the Lake Forest North and Fawn Lake
projects will be conducted by NTS Residential Management Company (NTS
Management) under the terms of (i) a Property Management Agreement executed
on December 30, 1997, and dated as of October 1, 1997, by and among the
Fund, NTS/LFII and NTS Management for the Lake Forest North project, and
(ii) a Property Management Agreement executed on December 30, 1997, and
dated as of October 1, 1997, by and among the Fund, NTS/VA and NTS
Management for the Fawn Lake project (collectively, the Management
Agreements). NTS Management is a wholly-owned subsidiary of NTS Development
Company. NTS Development Company is a wholly-owned subsidiary of the Fund's
Sponsor. The Management Agreements have an initial term through December
31, 2003, subject to extension under certain conditions, and are renewable
for successive six (6) year terms thereafter. Under the Management
Agreements, NTS Management will be reimbursed for costs incurred in the
operation and management of NTS/LFII and NTS/VA, will be entitled to an
Overhead Recovery, and will accrue an incentive payment payable all as
provided therein.
These expense reimbursements include direct and pro-rated costs incurred in
the management and operation of NTS/LFII and NTS/VA. Such costs include
compensation costs of management, accounting, professional, engineering and
development, marketing and office personnel employed by NTS Management
and/or certain of its affiliates as well as various non-payroll related
operating expenses. Compensation costs are for those individuals who
rendered services full time on and off site of the residential projects,
and with respect to the residential projects but who have multiple
residential projects responsibilities some of which may be affiliated
entities of NTS Management. For services provided by individuals not on
site or those with multiple residential project responsibilities, costs are
pro-rated by NTS Management
12
<PAGE>
9. Related Party Transactions - Continued
--------------------------------------
Property Management Agreements - Continued
------------------------------------------
and allocated to the appropriate residential project. As permitted by the
Property Management Agreements, the Fund was charged the following amounts
for the three and three months ended March 31, 2000 and 1999. These amounts
are reflected in Selling, General and Administrative - Affiliated on the
accompanying Statements of Operations:
Three Months Ended
March 31,
---------
2000 1999
---- ----
Personnel related costs:
------------------------
Finance and accounting $ 72,000 $ 38,000
Data processing 21,000 2,000
Human resources 10,000 11,000
Executive and administrative
services 35,000 75,000
Construction management 3,000 4,000
Sales and marketing 301,000 229,000
Legal 7,000 16,000
--------- ---------
Total personnel related costs 449,000 375,000
--------- ---------
Marketing 40,000 23,000
Rent 15,000 13,000
Other general and administrative 23,000 25,000
--------- ---------
Total expense reimbursements $ 527,000 $ 436,000
========= =========
Additionally, NTS Management is entitled to an Overhead Recovery, which is
a reimbursement for overhead expenses attributable to the employees and the
efforts of NTS Management under the Management Agreements, in an amount
equal to 3.75% of the projects' gross cash receipts, as defined in the
Management Agreements. Overhead Recovery for the three months ended March
31, 2000 and 1999 was approximately $103,000 and $149,000, respectively.
These amounts are classified with Selling, General and Administrative -
Affiliated in the accompanying Consolidated Statements of Operations.
The Management Agreements also provide the opportunity for NTS Management
to receive an Incentive Payment, as defined in the Management Agreements,
equal to 10% of the Net Cash Flows of the projects if certain financial
obligations are met. The Incentive Payment will not begin accruing until
after the cumulative cash flows of NTS/LFII, NTS/VA and the Fund's share of
the cash flow of the Orlando Lake Forest Joint Venture would have been
sufficient to enable the Fund to return to the shareholders of the Fund an
amount which, after adding thereto all other payments previously
distributed to such shareholders of the Fund, is at least equal to the
shareholders' Original Capital Contribution. As of March 31, 2000, the Fund
had raised approximately $63,690,000 and had paid distributions of
approximately $23,141,000. As of March 31, 2000, no amount had been accrued
as an Incentive Payment in the Fund's consolidated financial statements.
13
<PAGE>
9. Related Party Transactions - Continued
--------------------------------------
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 three months ended March 31, 1999, the interest expense
to affiliate totaling approximately $120,000 was capitalized in inventory.
As presented in the accompanying consolidated balance sheet as of March 31,
2000 and December 31, 1999, accounts payable - affiliates of $1,706,070 and
$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 March 31, 2000 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.
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 carry forwards using
enacted tax rates in effect for the year in which the differences are
expected to reverse. The principal tax carry forwards and temporary
differences giving rise to the Fund's deferred taxes consist of tax net
operating loss carry forwards, valuation allowances and differences in
inventory basis for book and tax.
A valuation allowance is provided when the probability that the deferred
tax asset to be realized does not meet the criteria established by the
Financial Accounting Standards Board. The Fund has determined, based on a
history of operating losses by its subsidiaries and its expectations for
the future, that it is more likely than not that the net deferred tax
assets at March 31, 2000 and December 31, 1999, will not be realized.
As of December 31, 1999, the Fund had a federal net operating loss carry
forward of approximately $3,853,000 expiring during 2012, 2013, and 2014.
11. Financial Instruments
---------------------
The book values of cash and cash equivalents, trade receivables and trade
payables are considered to be representative of their respective fair
values because of the immediate or short-term maturity of these financial
instruments. The fair value of the Fund's notes receivable and debt
instruments approximated the book value because a substantial portion of
the underlying instruments are variable rate notes.
12. Commitments and Contingencies
-----------------------------
The Fund, as an owner of real estate, is subject to various environmental
laws of federal and local governments. Compliance by the Fund with existing
laws has not had a material adverse effect on the Fund's financial
condition and results of operations. However, the Fund cannot predict the
impact of new or changed laws or regulations on its current properties or
on properties that it may acquire in the future.
14
<PAGE>
12. Commitments and Contingencies - Continued
-----------------------------------------
The Fund does not believe there is any litigation threatened against the
Fund other than routine litigation arising out of the ordinary course of
business, some of which is expected to be covered by insurance, none of
which is expected to have a material adverse effect on the consolidated
financial statements of the Fund.
NTS/LFII and NTS/VA have various letters of credit outstanding to
governmental agencies and utility companies totaling approximately
$2,633,000 as of March 31, 2000 and December 31, 1999. 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 homeowner's association
amenities at NTS/LFII 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
homeowner's association amenities. No costs are estimated to be incurred
during the years 2000, 2001 and 2002.
It is estimated that the country club and homeowners' association amenities
at NTS/VA 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.
13. 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 March 31, 2000, 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.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
The NTS Mortgage Income Fund (the "Fund") commenced an offering to the public on
March 31, 1989 and was authorized to sell up to 2,500,000 shares of common stock
at $20.00 per share (subject to an increase to 5,000,000 shares at the option of
the Fund). Approximately 3,187,000 shares were sold representing approximately
$64 million in sales and approximately $9.5 million in selling expenses and
other offering costs. The net offering proceeds remaining, after payment of
brokerage commissions, organizational expenses and other costs, were used to
make Mortgage Loans and Temporary Investments and such other investments as
permitted by the Fund's Prospectus. Capitalized terms shall have the meaning
ascribed in the "Glossary" on pages 75 to 81 of the Fund's Prospectus, which is
filed herewith and incorporated by reference.
In 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 Fund contributed its interest in the first mortgage
loan on the Orlando Lake Forest project and obtained a 50% interest in the Joint
Venture.
In December 1997, the Fund acquired all the issued and outstanding common
capital stock of NTS/LFII and NTS/VA, effective October 1, 1997, for a nominal
purchase price. Concurrent with this transaction, the existing indebtedness of
NTS/LFII and NTS/VA to the Fund was converted to equity as of October 1, 1997.
This marks the beginning of the Fund's operations focusing solely on the
continuing development, operations, marketing and sale of single-family,
residential real estate. As a result, the Fund no longer operates as a Real
Estate Investment Trust effective January 1, 1997.
Cautionary Statements
- ---------------------
Some of the statements included in this Item 2 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.
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,
16
<PAGE>
Cautionary Statements - Continued
- ---------------------------------
zoning laws, other governmental rules and fiscal policies, and acts of God. All
of the properties owned by NTS/LFII, NTS/VA and the Joint Venture are encumbered
by development loans from third party lenders which, given the nature of the
risks incumbent in real estate investment and development activities as stated
above, are inherently subject to default should the ability of NTS/LFII, NTS/VA,
Joint Venture and/or the Fund to make principal and interest payments under such
development loans become impaired.
There is the potential for occurrences which could affect the Fund's ability to
control 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
- -------------------------------
The Fund's current source of liquidity is primarily the ability of its
subsidiaries (to which the Fund formerly had outstanding Mortgage Loans) to draw
upon their respective development loans. Additional liquidity is provided by net
proceeds retained from residential lot closings by the properties owned by the
Fund's subsidiaries and Joint Venture in which the Fund has a 50% interest. The
various development loans call for principal payments ranging from 72% to 91% of
Gross Receipts from lot sales.
Consolidated Cash Flows and Financial Condition
- -----------------------------------------------
2000 1999
---- ----
Operating activities $ 136,981 $ (742,028)
Investing activities (111,079) (37,174)
Financing activities (82,782) 1,053,140
----------- -----------
Net (decrease) increase in
cash and equivalents $ (56,880) $ 273,938
=========== ===========
Operating Activity
- ------------------
Cash provided by operating activities was approximately $137,000 for the three
months ended March 31, 2000. The primary components of the cash provided by
operating activities were a net loss of approximately $608,000, an increase to
accounts payable to affiliates of approximately $512,000, an increase in
accounts payable of approximately $371,000, and a decrease in notes receivable
of approximately $272,000, offset by additions to inventory of approximately
$707,000.
Cash used for operating activities was approximately $742,000 for the three
months ended March 31, 1999. The primary components of the use of cash for
operating activities were a net loss of approximately $412,000, a decrease in
accounts payable and accrued expenses of approximately $580,000, net additions
to inventory of approximately $283,000, partially offset by collections of notes
receivable of approximately $264,000.
Investing Activity
- ------------------
During the three months ended March 31, 2000 and 1999, approximately $111,000
and $37,000 was used to purchase property and equipment.
17
<PAGE>
Consolidated Cash Flows and Financial Condition - Continued
- -----------------------------------------------------------
Financing Activity
- ------------------
Cash used for financing activities was approximately $83,000 for the three
months ended March 31, 2000. The primary components of the cash used in
financing activities were net payments on mortgages and notes payable relating
to the development loans for NTS/LFII and NTS/VA of approximately $60,000, and
payments for other assets of approximately $23,000.
Cash provided by financing activities was approximately $1,053,000 for the three
months ended March 31, 1999. The primary components of the cash provided by
financing activities were net borrowings on mortgages and notes payable relating
to the development loans for NTS/LFII and NTS/VA of approximately $721,000,
which were used primarily to fund activities of NTS/VA, and proceeds on notes
payable to affiliates of approximately $362,000 which were used primarily to
fund activities of NTS/VA.
The NTS/VA lender has agreed to allow NTS/VA to maintain a maximum outstanding
development loan balance of $10.7 million through June 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 personal 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 March 31, 2000 and those
amounts accruing during 2000 other than as permitted by cash flows (See Notes to
Financial Statements "9. Related Party Transactions"), 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
- ---------------------
Revenues
- --------
On an overall basis, the Fund experienced a loss of approximately $(608,000) and
$(412,000), or $(0.19) and $(0.13), respectively.
Revenue for the three months ended March 31, 2000, includes approximately
$2,499,000 in lot sales consisting of approximately $1,915,000 and $584,000 from
NTS/LFII and NTS/VA, respectively. During this period 24 lots were sold for an
average selling price of approximately $104,000.
18
<PAGE>
Results of Operations - Continued
- ---------------------------------
Revenues - Continued
- --------------------
Revenue for the three months ended March 31, 1999, includes approximately
$2,445,000 in lot sales consisting of approximately $1,730,000 and $715,000 from
NTS/LFII and NTS/VA, respectively, for an average selling price of approximately
$98,000. During this period 25 lots were sold for an average selling price of
approximately $98,000.
Cost of sales for the three months ended March 31, 2000 and 1999 were
approximately $2,043,000 and $1,660,000, respectively. The gross profit margins
for the three months ended March 31, 2000 and 1999, were approximately 18% and
32%, respectively. The decrease in gross profit margin is a function of a change
in the estimates of sales values, development costs and absorption periods over
the life of the project. The estimates have changed 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.
Interest income on cash equivalents and miscellaneous income includes interest
income earned from short-term investments made by the Fund with cash reserves
for the three months ended March 31, 2000 and 1999.
Expenses
- --------
The ongoing operation and management of NTS/LFII and NTS/VA 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 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 $527,000 and $436,000 were
made to NTS Management or an Affiliate during the three months ended March 31,
2000 and 1999, respectively, for actual personnel, marketing and administrative
costs as they relate to NTS/LFII, NTS/VA and the Fund.
19
<PAGE>
Results of Operations - Continued
- ---------------------------------
Expenses - Continued
- --------------------
Reimbursements for Expense Recovery increased approximately $91,000 for the
three months ended March 31, 2000, compared to the same period in 1999. The
increase is primarily a result of an increase in sales and marketing efforts at
NTS/VA, partially offset by a decrease in the executive and administrative costs
at NTS/LFII and 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 three months ended March 31, 2000 and 1999, Overhead
Recovery incurred was approximately $103,000 and $149,000, respectively.
Selling, general and administrative expenses include directors' fees, legal,
outside accounting, other investor related cost, repairs and maintenance cost.
Selling, general and administrative expenses also include those costs incurred
directly by NTS/VA for marketing related activities.
For the three months ended March 31, 2000 and 1999, the amounts incurred for
selling, general and administrative expenses were approximately $353,000 and
$464,000, respectively.
Increases and decreases in interest expense generally correspond directly to
increases and decreases in the outstanding balances of the Fund's borrowings and
its subsidiaries borrowings as well as in the capitalization percentage. For the
three months ended March 31, 2000 and 1999, approximately $681,000 and $586,000,
was capitalized in inventory and approximately $53,000 and $116,000,
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 the three months ended March 31,
2000 and 1999, 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.
Provisions for Write-down to Net Realizable Value
- -------------------------------------------------
The Fund periodically reviews the value of land and inventories and determines
whether any write-downs need to be recorded to reflect declines in value. The
Fund did not record any write-downs during the three months ended March 31, 2000
and 1999. The estimated net realizable value of real estate inventories
represents management's estimate based on present plans and intentions, selling
prices in the ordinary course of business and anticipated economic and market
conditions. Accordingly, the realization of the value of the Fund's real estate
inventories is dependent upon future events and conditions that may cause actual
results to differ from amounts presently estimated.
20
<PAGE>
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.
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 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Our primary market risk exposure with regard to financial instruments is changes
in interest rates. The Fund's debt instruments bear interest at both variable
and fixed rates as further discussed in Note 6 of the Fund's financial
statements. At March 31, 2000, a hypothetical 100 basis point increase in
interest rates would result in an approximately $70,000 increase in interest
expense. During the three months ended March 31, 2000, the majority of interest
expense incurred was capitalized in inventory.
21
<PAGE>
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit Number Description
--------------------------
27 Financial Data Schedule
99 Additional Exhibits - Pages from the Fund's Prospectus,
which have been specifically incorporated by, reference
and copies of which are attached hereto which includes
pages 75 to 81.
(b) Reports on Form 8-K
None.
22
<PAGE>
SIGNATURES
----------
Pursuant to the requirements the Securities Exchange Act of 1934, NTS Mortgage
Income Fund has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NTS Mortgage Income Fund
-----------------------------------
(Registrant)
/s/ Brian F. Lavin
-----------------------------------
Brian F. Lavin
President and Director of the
Mortgage Income Fund
Date: May 12, 2000
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF MARCH 31, 2000 AND FROM THE STATEMENT OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 562,142
<SECURITIES> 0
<RECEIVABLES> 3,206,172
<ALLOWANCES> 74,000
<INVENTORY> 56,146,133
<CURRENT-ASSETS> 0<F1>
<PP&E> 568,806
<DEPRECIATION> 47,492
<TOTAL-ASSETS> 65,361,420
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 28,282,809
0
0
<COMMON> 3,187
<OTHER-SE> 32,863,537
<TOTAL-LIABILITY-AND-EQUITY> 65,361,420
<SALES> 2,499,449
<TOTAL-REVENUES> 2,594,512
<CGS> 2,043,219
<TOTAL-COSTS> 982,717
<OTHER-EXPENSES> 12,016
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,633
<INCOME-PRETAX> (608,185)
<INCOME-TAX> 0
<INCOME-CONTINUING> (608,185)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (608,185)
<EPS-BASIC> (0.19)
<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.
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"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.
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"Dividend Reinvestment Plan" or "Plan" shall mean the plan pursuant to which
Stockholders may direct that cash distributions otherwise payable to them from
the Fund with respect to Shares owned by them be delivered instead to the
Reinvestment Agent, who is directed, pursuant to the terms of the plan, to
acquire additional Shares with such cash.
"Escrow Agent" shall mean Liberty National Bank & Trust Company of Louisville,
Kentucky, or any other entity selected by the Directors to serve as escrow agent
for the Fund.
"Escrow Guaranty" shall mean the Guarantor's obligation to advance to the Fund,
directly or indirectly, the amount necessary to supplement the interest
generated by subscription proceeds so as to provide subscribers with an 8%
annual, non-compounded return on their subscriptions, calculated from the date
the subscriber's proceeds were deposited in the escrow account through the 89th
day following the Initial Closing Date (or if the Minimum Number of Shares is
not sold, through the date on which the proceeds are released from the escrow
account).
"Federal Funds Rate" shall mean the average of the prior month's rate at which
reserves are traded among commercial banks for overnight use in amounts of one
million dollars or more, as published in the Federal Reserve Statistical Release
H.15(519), or, in the event that such a release does not exist, "Federal Funds
Rate" shall mean that announced in the Wall Street Journal, or its successor, as
it shall change from time to time.
"First Mortgage Loans" shall refer to Mortgage Loans which have as security a
first mortgage or first priority lien on the collateral property.
"Foreclosure Property" shall mean real property (including interests in real
property), and any personal property incident thereto, which is acquired by the
Fund as the result of a bid in foreclosure, or by agreement or legal process,
following a default (or where a default was imminent) on a lease of the property
or on an indebtedness secured by such property.
"Foreign Investor" shall mean a nonresident alien, a foreign corporation or an
entity consisting of such persons.
"Fund" shall mean NTS Mortgage Income Fund, a Delaware corporation, or any
successor thereto.
"Funds Available for Investment" shall mean the Gross Proceeds to be Raised in
this Offering ($100,000,000) plus an amount equal to the aggregate borrowings
which the Fund is authorized to make (300% of Net Assets).
"Gross Proceeds" shall mean the aggregate Original Capital Contributions of
all Stockholders.
"Gross Proceeds to be Raised" shall mean $100,000,000.
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"Gross Receipts" shall mean, with regard to (i) any Real Estate serving as
collateral for a Mortgage Loan the record title to which has been conveyed to
the purchaser, the total fair market value of the consideration, inclusive of
the face amount of the notes or other payment obligations received by an
Affiliated Borrower from the sale of such Real Estate, without reduction for any
costs or expenses incurred in connection with the sale, development or
improvement of the Real Estate, real estate commissions or other closing
expenses, but net of amounts to be repaid or credits allowed to the purchaser
such as builder discounts or rebates, landscaping allowances or similar expenses
as well as any sale or transfer tax imposed on the transaction, provided,
however, that Gross Receipts shall not include the face amount of any Below
Market Interest Obligation, and (ii) any Real Estate serving as collateral for a
Mortgage Loan which the Borrower has agreed to sell to a purchaser but as to
which the record title has not been conveyed to the purchaser or which has been
conveyed to the purchaser in exchange for a Below Market Interest Obligation,
the amount of cash received by the Affiliated Borrower as and when received.
"Gross Receipts Interest" shall mean, with respect to a Mortgage Loan secured by
Real Estate held for sale in the ordinary course of business, an amount equal to
a specified percentage of the Affiliated Borrower's Gross Receipts from the sale
of the underlying Real Estate received during the term of the Mortgage loan.
"Guarantor" shall mean NTS Guaranty Corporation, a Delaware corporation or any
successor thereto.
"Incentive Interest" shall mean the Fund's share in the Increase in Value of a
property securing a Mortgage Loan and shall be payable in connection with
Mortgage Loans secured by Real Estate not held for sale in the ordinary course
of business.
"Incentive Interest Agent" shall mean the independent party authorized to
receive Incentive Interest payments from Borrowers and pay to the Fund the
amount of such payments to which it is entitled, with the remainder of such
payments to be returned to the Borrowers.
"Increase in Value" shall mean the difference between the Appraised Value of a
property at the time of funding a Mortgage Loan and the Appraised Value of such
property (or the fair market value of the consideration received in the case of
a sale) upon the earlier of the maturity of the Mortgage Loan or the sale or
refinancing of the collateral property, net of the actual cost incurred in
connection with the improvement of the collateral property since the date of the
funding of the Mortgage Loan. For purposes of this definition, the phrase
"actual cost incurred" shall refer to all costs paid by the Borrower to
Affiliated and Non-Affiliated parties in connection with the acquisition,
holding, ownership, or development or improvement of the property, including
without limitation, costs of acquiring and financing the property.
"Increased Maximum Number of Shares" shall mean 5,000,000 Shares in this public
offering.
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"Independent Advisor" shall mean Laventhol and Horwath or any alternative person
selected by the Independent Directors to provide an opinion concerning the
fairness of the terms of proposed Mortgage Loans to Affiliated Borrowers and
acquisitions of Real Estate Investments from Affiliates.
"Independent Directors" shall mean the Directors who: (i) are not Affiliated,
directly or indirectly, with the Advisor, whether by ownership of, ownership
interest in, employment by, any business or professional relationship with, or
service as an officer or director of, the Advisor or its Affiliates; (ii) do not
serve as a director or trustee for more than two other REITs organized by the
Advisor or its Affiliates; and (iii) perform no other services for the Fund,
except as Directors. An indirect relationship shall include circumstances in
which the immediate family of a Director has one of the foregoing relationships
with the Advisor or the Fund.
"Initial Closing Date" shall mean the date on which the first closing for Shares
sold pursuant to the Prospectus occurs.
"Initial Fund Investments" shall mean those investments which the Fund has
specified as of the date of this Prospectus being the Fawn Lake Loan, Orlando
Lake Forest Loan, the Louisville Lake Forest North Loan and the Blankenbaker
Crossings Loan.
"Interest Reserve" shall mean the amount loaned or committed to be loaned to a
Borrower to Fund the Borrower's projected future payments of Regular Interest to
the Fund and upon which Regular Interest shall be charged once disbursed.
"Investable Proceeds" shall mean the Gross Proceeds less Organization and
Offering Expenses, plus an amount equal to the outstanding borrowings of the
Fund, exclusive of borrowings made in connection with Real Estate Investments.
"IRA" shall mean an Individual Retirement Account established pursuant to
Section 408 of the Code or any successor provision.
"Junior Mortgage Loan" shall refer to any Mortgage Loan which is subordinate to
another mortgage or deed of trust secured by the collateral real property and
shall exclude Temporary Mortgage Loans and loans which are outstanding and being
"phased-in" pending full funding of a First Mortgage Loan.
"Junior Mortgage Loan Guaranty" shall mean the Guarantor's obligation to pay the
Fund the Principal amount of any Junior or Temporary Mortgage Loan on which the
Affiliated Borrower has defaulted.
"Land Acquisition Loans" shall mean a Mortgage Loan obtained by a Borrower for
the purpose of acquiring Unimproved Real Property.
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"Loan" shall mean a Mortgage Loan or Temporary Mortgage Loan made by the Fund.
"MAI Appraisal" shall mean an appraisal made by a member in good standing of the
American Institute of Real Estate Appraisers.
"Majority Vote" shall mean the vote or consent in person or by proxy of
Stockholders owning more than 50% of the outstanding Shares.
"Management Expense Allowance" shall mean a non-accountable expense allowance
relating to services performed for the Fund (but excluding amounts paid by the
Advisor on behalf of the Fund to third parties) in an amount equal to 1% of the
Fund's Net Assets, per annum, payable quarterly to the Advisor which may be
increased annually by an amount corresponding to the percentage increase in the
Consumer Price Index for all urban consumers- Louisville or a comparable
consumer price index, which increase will in no event cause the Fund's Operating
Expenses to exceed the limitation imposed by the Bylaws.
"Maximum Number of Shares" shall mean 2,500,000 Shares in this public offering.
"Minimum Number of Shares" shall mean 75,000 Shares to at least 100 independent
investors in this public offering.
"Mortgage Loans" shall mean Residential Land Development Loans, Commercial Land
Development Loans, Permanent Mortgage Loans, Construction Loans, Development
Loans and Land Acquisition Loans evidenced by notes, debentures, bonds and other
evidences of indebtedness or obligations (other than Temporary Mortgage Loans
made by the Fund) which are secured or collateralized by: (i) interests in real
property; (ii) other beneficial interests essentially equivalent to a mortgage
on real property; or (iii) interests in partnerships, joint ventures, or other
entities which own real property.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"NASDAQ" shall mean the nationwide automated quotations system operated by
the NASD.
"Net Assets" shall mean the Total Assets (other than intangibles) at cost before
deducting depreciation or other non-cash reserves, less total liabilities,
calculated quarterly according to generally accepted accounting principles on a
basis consistently applied.
"Net Income" for any period shall mean total revenues applicable to such period
as determined for federal income tax purposes, less the expenses applicable to
such period, other than additions to reserves for bad debts or other similar
non-cash reserves. In connection with the calculation of any incentive type fee,
Net Income, for purposes of calculating Operating Expenses, shall not include
the gain from the sale of the Fund's assets.
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"Non-Accountable Expense Allowance" shall mean an amount equal to 1% of the
Gross Proceeds payable to the Selling Agent as reimbursement for its
non-accountable sales and other expenses incurred in connection with the offer
and sale of Shares.
"Non-Affiliate" shall mean persons who are not Affiliates.
"NTS" shall mean NTS Corporation, a Delaware corporation which is the Sponsor
for the Fund.
"Offering Termination Date" shall mean the date on which the last closing for
Shares sold pursuant to the Prospectus occurs which shall occur either one year
from the date of this Prospectus subject to increase for up to an additional
year in the discretion of the Board of Directors and subject to compliance with
applicable state and federal laws.
"Operating Expenses" shall mean all operating, general and administrative
expenses of the Fund as determined under generally accepted accounting
principles, including but not limited to rent, utilities, capital equipment,
salaries, fringe benefits, travel expenses, the Management Expense Allowance,
expenses paid by third parties to the Advisor and its Affiliates based upon its
relationship with the Fund (e.g. loan administration, servicing, engineering and
inspection expenses) and other administrative items, but excluding the expenses
of raising capital, interest payments, taxes, non-cash expenditures (e.g.
depreciation, amortization, bad debt reserve), the Subordinated Advisory Fee and
the costs related directly to a specific Mortgage Loan or Real Estate Investment
by the Fund, such as expenses for originating, acquiring, servicing or disposing
of said specific Real Estate Investment or a Mortgage Loan.
"Organization and Offering Expenses" shall mean those expenses payable by the
Fund in connection with the formation, qualification and registration of the
Fund and in marketing, distributing and processing Shares, including any Sales
Commissions, Non-Accountable Expense Allowance, Accountable Due Diligence
Expense Allowance, and any other expenses actually incurred and directly related
to the registration, offering and sale of Shares, including such expenses as:
(a) fees and expenses paid to attorneys in connection with the offering; (b)
registration fees, filing fees and taxes; (c) the costs of qualifying, printing,
amending, supplementing, mailing and distributing the Fund's Registration
Statement and Prospectus, including telephone and telegraphic costs; (d) the
costs of qualifying, printing, amending, supplementing, mailing and distributing
sales materials used in connection with the issuance of Shares, including
telephone and telegraphic costs; (e) remuneration of officers and employees of
the Advisor and its Affiliates while directly engaged in marketing,
distributing, processing and establishing records of Shares and establishing
records and paying Sales Commissions; and (f) accounting and legal fees and
expenses incurred in connection therewith to the Advisor or its Affiliates.
"Organizational Documents" shall mean the Fund's Certificate of Incorporation
and By-Laws, as they may be amended from time to time.
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"Original Capital Contribution" shall mean the amount of $20.00 for each Share,
which amount shall be attributed to such Share in the hands of subsequent
holders thereof.
"Participating Dealers" shall mean members in good standing of the National
Association of Securities Dealers, Inc., ("NASD") engaged by the Selling Agent
to offer and sell Shares on a "best efforts" basis, as well as certain selected
foreign broker dealers, who are not eligible for membership in the NASD, who
agree to abide by the provisions of Section 25 of the NASD Rules of Fair
Practice.
"Permanent Mortgage Loans" shall mean notes, bonds and other evidences of
indebtedness or obligations (other than temporary investments made by the Fund)
which are secured or collateralized by interests in (i) income producing real
property, (ii) other beneficial interest essentially equivalent to a mortgage on
income producing real property or (iii) partnerships, joint ventures or other
entities which own income producing real property. Such Mortgage Loans may be
Junior or First Mortgage Loans and will generally have terms of between three
and five years, subject to extension for up to two two-year periods.
"Points" shall mean the fee payable to the Fund at the time funds are advanced
under a Mortgage Loan.
"Prime Rate" shall mean the rate of interest as published in the Federal Reserve
Statistical Release H.15(519), as it shall change from time to time. In the
event that such a release does not exist, "Prime Rate" shall mean the prime
lending rate as published in the Wall Street Journal, or its successor.
"Principal" shall mean the funds loaned to a Borrower, excluding the amount of
the Interest Reserve.
"Prohibited Transaction" shall mean the sale of Dealer Property other than both
Foreclosure Property and certain Dealer Property held by the Fund for at least
four years.
"Prospectus" shall mean the final prospectus of the Fund with respect to the
offer and sale of Shares filed with the Securities and Exchange Commission as
part of the Fund's Registration Statement on Form S-11, as amended.
"Qualified Plans" shall mean qualified pension, profit-sharing and other
employee retirement benefit plans (including Keogh [HR 10] plans) and trusts,
bank commingled trust funds for such plans and individual retirement accounts.
"Real Estate" shall mean all real properties or any interest therein acquired
directly or indirectly by the Fund, including real properties acting as
collateral for Mortgage Loans.
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"Real Estate Investments" shall mean direct or indirect equity investments by
the Fund in all forms in Real Estate, and shall exclude investments in Mortgage
Loans as well as any investments in Mortgage Loans characterized as equity
investments for financial accounting purposes.
"Regular Interest" shall mean the rate of interest payable periodically on a
Mortgage Loan, as determined by the Board of Directors at the beginning of each
Mortgage Loan or any extension thereof.
"Regular Interest Rate" shall mean the rate of interest payable periodically on
a Mortgage Loan and shall be equal to (i) 500 basis points and 300 basis points
in excess of the rate on a treasury obligation having a maturity substantially
similar to that of the Mortgage Loan for fixed rate Junior and First Mortgage
Loans, respectively, and 400 basis points and 200 basis points in excess of the
Prime Rate, or 570 basis points and 370 basis points in excess of the Federal
Funds Rate, for variable rate Junior and First Mortgage Loans, respectively.
"Reinvestment Agent" shall mean NTS Depositary Corporation, Louisville,
Kentucky, or its successor as agent for the dividend reinvestment plan.
"REIT" and "real estate investment trust" shall mean a real estate investment
trust as defined in Sections 856 to 860 of the Code.
"REIT Qualifying Investment" shall mean an investment in assets described in
Section 856(c)(5) of the Code, or any successor provision.
"REIT Taxable Income" shall mean the taxable income as computed for a
corporation which is not a REIT: (i) without the deductions allowed by Code
Sections 241 through 247, 249 and 250 (relating generally to the deduction for
dividends received); (ii) excluding amounts equal to (a) the net income from
foreclosure property and (b) the net income derived from prohibited
transactions; and (iii) deducting amounts equal to (a) any net loss derived from
prohibited transactions, (b) the tax imposed by Code Section 857(b)(5) upon a
failure to meet the 95% and/or 75% gross income tests and (c) the dividends
paid, computed without regard to the amount of the net income from foreclosure
property which is excluded from REIT Taxable Income.
"Residential Land Development Loan" shall mean a Mortgage Loan obtained by a
Borrower for the purpose of acquiring, carrying, improving, through pre-
development, development and sale, the underlying real estate, including,
without limitation, engineering, zoning, planning and construction of common
areas and amenity packages, necessary to prepare the parcel and its individual
sites for the construction of homes (and in limited circumstances minor portions
for commercial purposes) and the sale of such sites in the ordinary course of
business of the Borrower or an Affiliate.
"Sales Commissions" shall mean an amount equal to 8% of the Gross Proceeds from
the sale of each Share, subject to certain discounts, payable to the Dealers who
sell such Shares.
"Selling Agent" shall mean NTS Securities, Inc.
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"Shares" shall mean the Fund's shares of common stock with a par value of
$0.001.
"Sponsor" shall mean NTS Corporation, a Kentucky corporation, or any person
directly or indirectly instrumental in organizing, wholly or in part, the Fund
or any person who will manage or participate in the management of the Fund, and
any Affiliate of any such person, but excluding (i) a person whose only
relationship with the Fund is that of an independent property manager and whose
only compensation is as such, and (iii) wholly independent third parties such as
attorneys, accountants and underwriters whose only compensation is for
professional services.
"Stockholders" shall mean as of any particular time the registered holders of
outstanding Shares at such time.
"Subordinated Advisory Fee" shall mean the fee payable to the Advisor or its
Affiliates for services in connection with the liquidation of the Fund's
investments, equal to 5% of the Capital Proceeds remaining after distributions
to Stockholders from all sources in an amount equal to 100% of their Original
Capital Contribution plus a 15% per annum cumulative, non-compounded return on
their Adjusted Contributions to the extent not already paid, beginning on the
Offering Termination Date.
"Supplemental Interest" shall mean the amount, if any, in excess of Regular
Interest, Points, Incentive and Gross Receipts Interest, other cash balances
available for distribution in the discretion of the Board of Directors, and all
other cash receipts of the Fund net of all cash expenditures of the Fund, that
Affiliated Borrowers shall pay the Fund to enable it to make quarterly
distributions to Stockholders equal to an annual 12% cumulative, non-compounded
return on their Original Capital Contributions during the Cash Flow Guaranty
Period.
"Temporary Investments" shall refer to those investments made by the Fund
pending the receipt of sufficient Investable Proceeds to fund the Initial Fund
Investments, or reinvestment in later Fund loans.
"Temporary Mortgage Loan" shall refer to any temporary mortgage loan investment
made by the Fund to an Affiliated Borrower pending investment or reinvestment in
a Mortgage Loan if such Temporary Mortgage Loan (i) matures within one year of
making the loan subject to any extension in the discretion of the Board of
Directors (ii) is anticipated to generate yields higher than other temporary
investments, (iii) is approved by a majority of the Independent Directors, and
(iv) constitutes a REIT qualifying investment.
"Tax-Exempt Entities" shall mean Qualified Plans and other entities exempt from
federal income taxation, such as endowment funds and foundations and charitable,
religious, scientific or educational organizations.
"Total Assets" shall mean the book value of all assets of the Fund, determined
in accordance with generally accepted accounting principles.
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"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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