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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
---------------------------------------
OR
- ----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------- -------------
Commission file number 0-18550
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NTS MORTGAGE INCOME FUND
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 61-1146077
- -------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10172 Linn Station Road,
Louisville, Kentucky 40223
- -------------------------------- --------------------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number,
including area code: (502) 426-4800
--------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Shares of Common Stock
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of March 15, 2000 there were approximately 3,187,000 shares of common stock
outstanding. The aggregate sales price for shares sold was approximately
$63,690,000. There is no current market for these shares although it is possible
that one will develop.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Prospectus of the registrant dated March 31, 1989, as
supplemented by Supplements No. 1, No. 2, No. 3, No. 4, No. 5 and No. 6 dated
October 16, 1989, March 29, 1990, April 23, 1990, July 25, 1990, September 6,
1990, and August 23, 1991, respectively, (collective with the "Prospectus") and
filed pursuant to Rule 424 under the Securities Act of 1933, are incorporated by
reference into this Annual Report on Form 10-K.
Index to Exhibits is located on page 57
Total Pages: 58
TABLE OF CONTENTS
Pages
PART I
Items 1 and 2. Business and Properties 3-5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a
Vote of Security Holders 5
PART II
Item 5. Market for the Registrant's Shares
and Related Stockholder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8-18
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 18
Item 8. Financial Statements and
Supplementary Data 19-49
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 50
PART III
Item 10. Directors and Executive Officers of
the Registrant 51-54
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial
Owners and Management 54
Item 13. Certain Relationships and Related
Transactions 55-56
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 57
Signatures 58
2
PART I
Items 1. and 2. Business and Properties
-----------------------
Some of the statements included in Items 1. and 2., Business and Properties, or
elsewhere in this report, may be considered to be "forward-looking statements"
since such statements relate to matters which have not yet occurred. For
example, phrases such as "the Fund anticipates," "believes" or "expects"
indicate that it is possible that the event anticipated, believed or expected
may not occur. Should such event not occur, then the result which the Fund
expected also may not occur or occur in a different manner, which may be more or
less favorable to the Fund. The Fund does not undertake any obligations to
publicly release the result of any revisions to these forward-looking statements
that may be made to reflect any future events or circumstances.
Capitalized terms shall have the meaning ascribed them in the "Glossary" on
pages 75 to 81 of the Fund's Prospectus, which is filed herewith and
incorporated herein by reference.
NTS Mortgage Income Fund (the "Fund"), a Delaware corporation, was formed on
September 26, 1988. The Fund originally operated as a real estate investment
trust (REIT) under the Internal Revenue Code of 1986 (the "Code"), as amended
from inception through December 31, 1996. The acquisition of the capital stock
of NTS/Lake Forest II Residential Corporation and NTS/Virginia Development
Company, which is discussed below, caused the Fund to change its tax status to a
"C" corporation under the Code as of January 1, 1997. NTS Corporation is the
sponsor of the Fund (the "Sponsor"). NTS Advisory Corporation is the advisor to
the Fund (the "Advisor") and NTS Residential Management Company is the manager
of the operations of the Fund's wholly-owned subsidiaries (NTS Management). NTS
Advisory and NTS Management are Affiliates of and are under common control with
NTS Corporation.
The Fund's objectives as originally described in the Prospectus were to (i)
preserve and protect capital; (ii) distribute cash flow on a regular basis as it
was available; and (iii) increase the value of the Fund's Net Assets and the
Shares through receipt of Incentive Interest or Gross Receipts Interest and, to
a lesser extent, through the acquisition, operation and disposition of Real
Estate Investments. Incentive Interest is defined as the Fund's share in the
Increase in Value of a property securing a Mortgage Loan and was to be payable
in connection with Mortgage Loans secured by Real Estate not held for sale in
the ordinary course of business. Gross Receipts Interest is defined as an amount
equal to a specified percentage of the Affiliated Borrower's Gross Receipts from
the sale of the underlying Real Estate received during the term of the Mortgage
Loan and was to be payable in connection with Mortgage Loans secured by Real
Estate held for sale in the ordinary course of business. It was not an objective
of the Fund to provide tax-sheltered income.
As previously reported, on February 12, 1997, the Fund entered into a letter of
intent (Letter of Intent) with NTS Corporation, the Sponsor of the Fund,
NTS/Lake Forest II Residential Corporation, a Kentucky corporation which then
was an Affiliate of and under common control with NTS Corporation (NTS/LFII),
NTS/Virginia Development Company, a Virginia corporation which then was an
Affiliate of and under control with NTS Corporation (NTS/VA) and NTS Development
Company, a Kentucky corporation and a wholly-owned subsidiary of NTS
Corporation. The Letter of Intent contemplated the restructuring of the Fund's
loans to NTS/LFII and NTS/VA, and the acquisition of control by the Fund of the
Lake Forest North project in Louisville, Kentucky, and the Fawn Lake project
near Fredericksburg, Virginia.
The Fund consummated the restructuring contemplated by the Letter of Intent by
acquiring all of the issued and outstanding common capital stock of NTS/LFII and
NTS/VA effective as of October 1, 1997, for a nominal purchase price. The
acquisition was closed pursuant to (i) an Agreement executed on December 30,
1997, and dated as of October 1, 1997, by and among the Fund, NTS/LFII and its
shareholders, NTS/VA and certain of its shareholders, NTS Corporation, the
3
Items 1 and 2. Business and Properties - Continued
-----------------------------------
Advisor, and NTS Management, and (ii) an Agreement executed on December 30,
1997, and dated as of October 1, 1997, by and among the Fund, NTS/VA and certain
shareholders of NTS/VA and NTS Corporation.
NTS/LFII is the owner and developer of the Lake Forest North single-family
residential community located in Louisville, Kentucky, and will continue to own
and develop the Lake Forest North project to completion and orderly sale as a
wholly-owned subsidiary of the Fund. As of December 31, 1999, approximately 740
of 1,172 total lots have been developed and approximately 432 of the total
projected lots to be developed have been sold.
NTS/VA is the owner and developer of the Fawn Lake single-family residential
community located near Fredericksburg, Virginia, and will continue to own and
develop the Fawn Lake project to completion and orderly sale as a wholly-owned
subsidiary of the Fund. NTS/Residential Properties, Inc. - Virginia, a Virginia
corporation and an Affiliate of the Sponsor of the Fund, will continue to act as
a broker and agent for NTS/VA for the sale of lots within the Fawn Lake project,
and as broker and agent for approved builders in the Fawn Lake project for the
sale of new homes. As of December 31, 1999, approximately 441 of 1,389 total
lots have been developed and approximately 948 of the total projected lots to be
developed have been sold.
The Fund purchased all of the issued and outstanding common capital stock of
NTS/LFII and NTS/VA for a nominal purchase price. Concurrent with this
transaction, the existing indebtedness of each of NTS/LFII and NTS/VA to the
Fund was converted to equity as of October 1, 1997, and the Fund released the
first mortgages in favor of the Fund on the Lake Forest North and Fawn Lake
projects.
The Fund, as the sole shareholder of NTS/LFII and NTS/VA, controls the ongoing
operations of the Lake Forest North and Fawn Lake projects. The ongoing
operation and management of the Lake Forest North and Fawn Lake projects is now
conducted by NTS Management under the terms of (i) a Property Management
Agreement executed on December 30, 1997, and dated as of October 1, 1997, by and
among the Fund, NTS/LFII and NTS Management for the Lake Forest North project,
and (ii) a Property Management Agreement executed on December 30, 1997, and
dated as of October 1, 1997, by and among the Fund, NTS/VA and NTS Management
for the Fawn Lake project (collectively, the Management Agreements). The
Management Agreements have an initial term through December 31, 2003, subject to
extension under certain conditions, and are renewable for successive six (6)
year terms thereafter. Under the Management Agreements, NTS Management will be
reimbursed for costs incurred in the operation and management of the Lake Forest
North and Fawn Lake projects, and will accrue an incentive payment payable as
provided therein.
The terms of the restructuring and of the Management Agreements were negotiated
on behalf of the Fund by a committee of the Fund's Board of Directors (the
Special Committee) consisting only of the Independent Directors. The Special
Committee believes that the terms of the restructuring and of the Management
Agreements are as favorable to the Fund as could have been obtained from
unrelated third parties under the circumstances.
In August 1997, the Fund entered into an Amended and Restated Joint Venture
Agreement evidencing the Fund's admission as a partner in the Orlando Lake
Forest Joint Venture (the "Joint Venture") effective as of August 16, 1997. The
other partners in the Joint Venture are Orlando Lake Forest, Inc., Orlando
Capital Corporation and OLF II Corporation, all of whom are Affiliates of and
are under common control with NTS Corporation, the Fund's Sponsor. The Joint
Venture will continue to operate under its current legal name as the Orlando
Lake Forest Joint Venture.
The Joint Venture owns the Orlando Lake Forest project, a single-family
residential community located in Seminole County, Florida (near Orlando)
consisting of approximately 360 acres of residential land and improvements and
4
Items 1 and 2. Business and Properties - Continued
-----------------------------------
approximately 20 acres of commercial land. The Joint Venture will continue to
own and develop the Orlando Lake Forest project.
The Fund contributed to the Joint Venture as a capital contribution its interest
in the principal and interest of the first mortgage loan on the Orlando Lake
Forest project, and obtained a 50% interest in the Joint Venture. The NTS
entities named above hold cumulatively the remaining 50% interest in the Joint
Venture.
The net income or net loss of the Joint Venture is allocated based on the
respective partner's percentage interest, as defined in the joint venture
agreement. As of December 31, 1999, 1998 and 1997, the Fund's percentage
interest was 50% and the Fund's share of the Joint Venture's net income (loss)
for the years ended December 31, 1999, 1998 and from August 16, 1997 (when the
Fund was admitted as a partner) through December 31, 1997 was $(405,183),
$(247,879) and $106,667, respectively.
There are currently five directors of the Fund, two of whom are affiliated with
the Advisor and three of whom are Independent Directors. The Directors are
responsible for the management and control of the affairs of the Fund. However,
in accordance with the Fund's Certificate of Incorporation and By-Laws, the
Directors have, in the Advisory Agreement and in certain management agreements
with NTS Management, delegated broad powers to the Advisor and NTS Management to
administer the day-to-day operations of the Fund and its subsidiaries. The
Advisor has delegated substantially all its duties to the Sponsor. All personnel
rendering services to the Fund are employees of companies affiliated with the
Sponsor. The Fund does not directly employ any persons other than the
Independent Directors, the Advisor and NTS Management. The business of the Fund
is not seasonal. The Fund is required to terminate its assets by December 31,
2008. Because the Fund's affiliates own real estate properties other than those
owned by the Fund that are or could be in competition with the Fund, potential
conflicts of interest exist.
Item 3. Legal Proceedings
-----------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Fund did not submit any matters to a vote of its security holders during the
year ended December 31, 1999.
5
PART II
Item 5. Market for the Registrant's Shares and Related Stockholder Matters
------------------------------------------------------------------
The selling price of the Shares was $20 per Share. The Fund's Shares are freely
transferable but are not listed or included for quotation on a national
securities exchange. As of March 1, 2000, there were 3,460 record holders of the
Fund's Shares. No dividends were declared during 1999, 1998 or 1997.
The continued needs of the Fund and its subsidiaries (to which the Fund formerly
had outstanding Mortgage Loans) may significantly reduce the Fund's cash flows.
Therefore, the Fund's Board of Directors decided to terminate the Fund's
quarterly distribution for the foreseeable future effective as of the first
quarter of 1997.
6
Item 6. Selected Financial Data
-----------------------
Years ended December 31, 1999, 1998, 1997, 1996 and 1995. (1)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Inventory $ 55,438,644 $ 53,264,438 $ 51,917,990 $ -- $ --
============ ============ ============ =========== ===========
Affiliated mortgage loans
receivable, net (3) $ -- $ -- $ -- $66,287,764 $63,655,706
============ ============ ============ =========== ===========
Total assets $ 65,094,003 $ 65,552,757 $ 64,184,368 $68,745,709 $65,511,633
============ ============ ============ =========== ===========
Total notes payable (6) $ 28,342,811 $ 28,850,539 $ 24,505,233 $18,801,517 $16,034,873
============ ============ ============ =========== ===========
Total revenues and other (4) $ 4,520,531 $ 2,628,950 $ 4,678,937 $ 3,304,995 $ 2,884,652
Total expenses (2) 5,369,847 4,098,561 18,385,887 2,454,686 2,026,318
------------ ------------ ------------ ----------- -----------
Net income (loss) $ (849,316) $ (1,469,611) $(13,706,950) $ 850,309 $ 858,334
============ ============ ============ =========== ===========
Weighted average number
of shares 3,187,333 3,187,333 3,187,333 3,187,333 3,187,333
============ ============ ============ =========== ===========
Net income per share of
common stock $ (.27) $ (.46) $ (4.30) $ .27 $ .27
============ ============ ============ =========== ===========
Taxable income (loss)
(prior to dividend paid
deduction) (5) $ (2,017,301) $ (1,488,574) $ (387,081) $ 631,114 $ 672,098
============ ============ ============ =========== ===========
Taxable income (loss)
(prior to dividend paid
deduction) per share of
common stock $ (.63) $ (.47) $ (.12) $ .20 $ .21
============ ============ ============ =========== ===========
Cash dividends declared $ -- $ -- $ -- $ 605,601 $ 643,841
============ ============ ============ =========== ===========
Cash dividends declared
per share of common stock $ -- $ -- $ -- $ .19 $ .20
============ ============ ============ =========== ===========
(1) The above selected financial data should be read in conjunction with the
consolidated financial statements and related notes appearing in this Form
10-K report.
(2) Expenses for 1997 include a non-cash charge in the amount of $11,600,000.
This related to the Fund's acquisition of the stock of NTS/Lake Forest II
Residential Corporation (NTS/LFII) and NTS/Virginia Development Company
(NTS/VA). Also included in expenses is a non-cash charge of approximately
$3.7 million related to the Fund's investment in an unconsolidated
affiliate. (See Notes 3 and 4 to Consolidated Financial Statements).
(3) Represents the carrying amount of the mortgage loans, which is equal to
their face amount less unamortized commitment fees and unaccreted
discounts. The 1996 and 1995 balances are net of an allowance for loan
losses of $1,500,000 and $1,553,397, respectively.
(4) Total revenue and other income included the gross profit and lot sales and
other income items such as interest income and recovery of provision for
loan losses in certain years. Revenues for 1997 include approximately
$370,000 of gross profit from lot sales generated by NTS/LFII and NTS/VA
from October 1, 1997 (the date of acquisition) through December 31, 1997.
Prior to October 1, 1997, the Fund's primary source of revenues was
interest income earned on affiliated mortgage loans.
(5) See Note 11 of the Notes to Consolidated Financial Statements for an
explanation of differences between net income and taxable income.
(6) The balances presented as notes payable include notes payable to third
parties and notes payable to affiliates.
7
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
The Fund commenced an offering to the public on March 31, 1989 and was
authorized to sell up to 2,500,000 shares of common stock at $20.00 per share
(subject to an increase to 5,000,000 shares at the option of the Fund).
Approximately 3,187,000 shares were sold representing approximately $64 million
in sales and approximately $9.5 million in selling expenses and other offering
costs. The net offering proceeds remaining, after payment of brokerage
commissions, organizational expenses and other costs were used to make Mortgage
Loans and Temporary Investments and such other investments as permitted by the
Fund's Prospectus.
Throughout 1997, the Fund's Board of Directors and NTS Corporation, the Fund's
Sponsor, were involved in a restructuring of the Fund's Mortgage Loan portfolio.
The Fund's Affiliated Borrowers had included NTS/Lake Forest II Residential
Corporation (NTS/LFII), NTS/Virginia Development Company (NTS/VA), and the
Orlando Lake Forest Joint Venture (OLFJV).
In August 1997, the Fund entered into an Amended and Restated Joint Venture
Agreement evidencing the Fund's admission as a partner in OLFJV. The Fund
contributed its interest in the principal of the first mortgage loan on the
Orlando Lake Forest project and obtained a 50% interest in OLFJV.
In December 1997, the Fund acquired all the issued and outstanding common
capital stock of NTS/LFII and NTS/VA, effective October 1, 1997, for a nominal
purchase price. Concurrent with this transaction, the existing indebtedness of
NTS/LFII and NTS/VA to the Fund was converted to equity as of October 1, 1997.
This marked the beginning of the Fund's operations focusing solely on the
continuing development, operations, marketing and sale of single-family,
residential real estate. As a result, the Fund no longer operates as a Real
Estate Investment Trust.
Reference is made to Notes 3 and 4 of the Notes to Financial Statements for
further information regarding these investments and acquisitions.
Cautionary Statements
- ---------------------
Any forward-looking statements included in Management's Discussion and Analysis
of Financial Condition and Results of Operations, or elsewhere in this report,
which reflect management's best judgement based on factors known, involve risks
and uncertainties. Readers are cautioned not to place undue reliance on any
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Fund undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Actual results could differ materially from those anticipated
in any forward-looking statements as a result of a number of factors, including
but not limited to those discussed below. Any forward-looking information
provided by the Fund pursuant to the safe harbor established by recent
securities legislation should be evaluated in the context of these factors.
The Fund's subsidiaries, NTS/LFII and NTS/VA, and the Orlando Lake Forest Joint
Venture, in which the Fund has a 50% interest, are engaged in the development
and sale of residential subdivision building lots, the pricing and sale of which
are subject to risks generally associated with real estate development and
applicable market forces beyond the control of the Fund and/or its subsidiaries,
including general and local economic conditions, competition, interest rates,
real estate tax rates, other operating expenses, the supply of and demand for
properties, zoning laws, other governmental rules and fiscal policies, and acts
of God. All of the properties owned by NTS/LFII, NTS/VA and OLFJV are encumbered
by development loans from third party lenders which, given the nature of the
risks incumbent in real estate investment and development activities as stated
above, are inherently subject to default should the ability of NTS/LFII, NTS/VA,
OLFJV and/or the Fund to make principal and interest payments under such
development loans become impaired.
8
Cautionary Statements - Continued
- ---------------------------------
There is the potential for occurrences which could affect the Fund's ability to
reduce, or limit the increase in, its professional and administrative expenses.
Furthermore, the debt service regarding the Fund's borrowings is variable based
on current interest rates, any fluctuations in which are beyond the control of
the Fund. These variances could, for example, impact the Fund's projected cash
and cash requirements as well as projected returns.
Liquidity and Capital Resources
- -------------------------------
Prior to October 1, 1997, the Fund's primary source of liquidity had been from
the interest earned on the Mortgage Loans and on the Temporary Investments. The
Fund's current source of liquidity is primarily the ability of its subsidiaries
(to which the Fund formerly had outstanding Mortgage Loans) to draw upon their
respective development loans. Additional liquidity is provided by net proceeds
retained from residential lot closings by the properties owned by the Fund's
subsidiaries and OLFJV in which the Fund has a 50% interest. The various
development loans call for principal payments ranging from 72% to 91% of Gross
Receipts from lot sales.
The continued cash needs of the Fund and its subsidiaries have significantly
reduced the Fund's cash flows. Therefore, the Fund's Board of Directors decided
to terminate the Fund's quarterly distribution for the foreseeable future
effective as of the first quarter of 1997.
As previously reported, on February 12, 1997, the Fund entered into a letter of
intent (Letter of Intent) with NTS Corporation, the Sponsor of the Fund,
NTS/LFII, NTS/VA and NTS Development Company, a Kentucky corporation and a
wholly-owned subsidiary of NTS Corporation. The Letter of Intent contemplated
the restructuring of the Fund's loans to NTS/LFII and NTS/VA, and the
acquisition of control by the Fund of the Lake Forest North project in
Louisville, Kentucky, and the Fawn Lake project near Fredericksburg, Virginia.
The Fund consummated the restructuring as described in the Letter of Intent by
acquiring all of the issued and outstanding common capital stock of NTS/LFII and
NTS/VA effective as of October 1, 1997, for a nominal purchase price. Concurrent
with this transaction, the existing indebtedness of NTS/LFII and NTS/VA to the
Fund was converted to equity. The acquisition was closed pursuant to (i) an
Agreement executed on December 30, 1997, and dated as of October 1, 1997, by and
among the Fund, NTS/LFII and its shareholders, NTS/VA and certain of its
shareholders, NTS Corporation, NTS Advisory Corporation, a Kentucky corporation
and Advisor to the Fund (the Advisor) and NTS Residential Management Company, a
Kentucky corporation (NTS Management), and (ii) an Agreement executed on
December 30, 1997, and dated as of October 1, 1997, by and among the Fund,
NTS/VA and certain shareholders of NTS/VA and NTS Corporation. The Advisor and
NTS Management are Affiliates of and are under common control with NTS
Corporation.
NTS/LFII is the owner and developer of the Lake Forest North single-family
residential community located in Louisville, Kentucky, and will continue to own
and develop the Lake Forest North project to completion and orderly sale as a
wholly-owned subsidiary of the Fund.
NTS/VA is the owner and developer of the Fawn Lake single-family residential
community located near Fredericksburg, Virginia, and will continue to own and
develop the Fawn Lake project to completion and orderly sale as a wholly-owned
subsidiary of the Fund. Fawn Lake Realty, Inc. a division of NTS/Residential
Properties, Inc.- Virginia, a Virginia corporation and an Affiliate of NTS
Corporation, the Sponsor of the Fund, will continue to act as a broker and agent
for NTS/VA for the sale of lots within the Fawn Lake project, and as broker and
agent for approved builders in the Fawn Lake project for the sale of new homes.
9
Liquidity and Capital Resources - Continued
- -------------------------------------------
The Fund, as the sole shareholder of NTS/LFII and NTS/VA controls the ongoing
operations of the Lake Forest North and Fawn Lake projects. The ongoing
operation and management of the Lake Forest North and Fawn Lake projects is
conducted by NTS Management under the terms of (i) a Property Management
Agreement executed on December 30, 1997, and dated as of October 1, 1997, by and
among the Fund, NTS/LFII and NTS Management for the Lake Forest North project,
and (ii) a Property Management Agreement executed on December 30, 1997, and
dated as of October 1, 1997, by and among the Fund, NTS/VA and NTS Management
for the Fawn Lake project (collectively, the Management Agreements). The
Management Agreements have an initial term through December 31, 2003, subject to
extension under certain conditions, and are renewable for successive six (6)
year terms thereafter. Under the Management Agreements, NTS Management will be
reimbursed for costs incurred in the operation and management of the Lake Forest
North and Fawn Lake projects, will be entitled to an Overhead Recovery, and will
accrue an incentive payment payable all as provided therein.
Reimbursements of approximately $1,713,000, $1,439,000 and $527,000 were made to
NTS Management or an Affiliate during the years ended December 31, 1999, 1998
and the period from October 1, 1997 through December 31, 1997, respectively.
These expense reimbursements include direct and pro-rated costs incurred in the
management and operation of NTS/LF II and NTS/VA. Such costs include
compensation costs of management, accounting, professional, engineering and
development, marketing and office personnel employed by NTS Management and/or
certain affiliates as well as various non-payroll related operating expenses.
Compensation costs are for those individuals rendering services full time and on
site at the residential projects, with respect to the residential projects but
who are not on site and with respect to the residential projects but who have
multiple residential project responsibilities some of which may be affiliated
entities of NTS Management. For services provided by individuals not on site or
those with multiple residential project responsibilities, costs are pro-rated by
NTS Management and allocated to the appropriate residential project. These
reimbursements are included within Selling, General and Administrative -
Affiliated in the accompanying Consolidated Statements of Operations.
In addition to the expense reimbursement noted above, NTS Management is also
entitled to an Overhead Recovery, which is a reimbursement for overhead expenses
attributable to the employees and the efforts of NTS Management under the
Management Agreements, in an amount equal to 3.75% of the projects' gross cash
receipts, as defined in the Management Agreements. Overhead recovery for the
years ended December 31, 1999, 1998 and the period from October 1, 1997 through
December 31, 1997, were approximately $567,000, $496,000 and $106,000,
respectively. These amounts are classified as Selling, General and
Administrative - Affiliated in the accompanying Consolidated Statements of
Operations.
Reference is made to Note 9 of the Notes to Financial Statements for a breakdown
of these related party charges.
As presented in the accompanying consolidated balance sheet as of December 31,
1999, accounts payable - affiliates of $1,194,395 is owed to NTS Development
Company and NTS Residential Management Company for salary and overhead
reimbursements. NTS Development Company and NTS Residential Management Company
have agreed to defer amounts owed to them by the Fund as of December 31, 1999
and those amounts that will accrue during fiscal 2000 through the period ending
January 1, 2001, other than as permitted by cash flows of the Fund. There can be
no assurances that this level of support will continue past January 1, 2001.
The Management Agreements also call for NTS Management to potentially receive an
Incentive Payment, as defined in the Management Agreements, equal to 10% of the
Net Cash Flows of the projects. The Incentive Payment will not begin accruing
until after the cumulative cash flows of NTS/LFII, NTS VA and the Fund's share
of the cash flow of the Orlando Lake Forest Joint Venture would have been
sufficient to enable the Fund to have returned to the then existing shareholders
of the Fund an amount which, after adding thereto all other payments actually
remitted or distributed to such shareholders of the Fund, is at least equal to
the shareholders' Original Capital Contribution. As of December 31, 1999, the
10
Liquidity and Capital Resources - Continued
- -------------------------------------------
Fund had raised approximately $63,690,000 and had paid distributions of
approximately $23,141,000. As of December 31, 1999, no amount had been accrued
as an Incentive Payment in the Fund's consolidated financial statements.
The terms of the restructuring and of the Management Agreements were negotiated
on behalf of the Fund by a committee of the Fund's Board of Directors (the
Special Committee) consisting only of the Independent Directors. The Special
Committee believes that the terms of the restructuring and of the Management
Agreements are at least as favorable to the Fund as could have been obtained
from unrelated third parties under the circumstances.
On December 30, 1997, NTS/VA closed on development financing for the Fawn Lake
project committed by an unaffiliated bank. The $10,700,000 revolving credit
facility is currently anticipated to provide funds for the continued development
and operations of the Fawn Lake project through December 1, 2002, the maturity
of the credit facility. Mr. J. D. Nichols, Chairman of the Board of the Fund's
Sponsor and of the Fund, has individually guaranteed the repayment of up to
$3,000,000 of the credit facility (See Financing Activity).
The credit facility bears interest at the Prime Rate + 1 1/2%, payable monthly,
and principal payments generally equal 91% of the Gross Receipts from the sale
of lots at the Fawn Lake project. In addition, the total outstanding principal
amount must be brought to within the following levels by the applicable date:
December 31, 1999 $10,700,000
December 31, 2000 $ 7,800,000
December 31, 2001 $ 5,900,000
December 1, 2002 $ 4,500,000
The loan balance was $9,777,485 as of December 31, 1999.
On January 6, 1998, NTS/LFII closed on a development loan of $8,000,000 for the
Lake Forest North project committed by an unaffiliated bank. On April 26, 1999,
this loan was increased to $9,500,000 to provide a one-time source for funding
development costs of the Fawn Lake project. The $9,500,000 revolving credit
facility is currently anticipated to provide funds for the continued development
and operations through December 31, 2002, the maturity of the credit facility,
and the repayment thereof has been guaranteed by the Fund. Mr. J. D. Nichols,
Chairman of the Board of the Fund's Sponsor and of the Fund, has individually
guaranteed the repayment of fifty percent (50%) of the credit facility.
The credit facility bears interest at the Prime Rate + 1%, payable monthly, and
principal payments generally equal 90% of the Gross Receipts from the sale of
lots at the Lake Forest North project. In addition, the principal amount
outstanding on the credit facility must be brought to within the following
levels by the applicable date:
December 31, 1999 $ 7,500,000
December 31, 2000 $ 4,500,000
December 31, 2001 $ 2,000,000
The net worth of NTS/LFII cannot be allowed to decrease by 20% or more
throughout the term of the agreement. The loan balance was $6,817,188 as of
December 31, 1999.
NTS/LFII is also encumbered by a mortgage loan in the amount of $4,000,000 (with
an outstanding balance of $2,870,000 as of December 31, 1999) from an
unaffiliated lender which is secured by a first mortgage on the Lake Forest
Country Club and golf course (approximately 176 acres of residential land and
improvements thereon). The note bears interest at the Prime Rate + 1/2%, payable
monthly, guaranteed by the Fund's sponsor. Principal payments totaling $300,000
are due twice a year, February through July and August through January. On
11
Liquidity and Capital Resources - Continued
- -------------------------------------------
January 31, 2000, an amendment reduced the principal payment requirement for the
period August 1, 1999 through January 31, 2000 to $100,000. The primary source
of principal payments will be initiation fees received.
In August 1997, the Fund entered into an Amended and Restated Joint Venture
Agreement evidencing the Fund's admission as a partner in the Orlando Lake
Forest Joint Venture (the "Joint Venture") effective as of August 16, 1997. The
other partners in the Joint Venture are Orlando Lake Forest, Inc., Orlando
Capital Corporation and OLF II Corporation, all of who are Affiliates of and are
under common control with the Fund's Sponsor. The Joint Venture will continue to
operate under its current legal name as the Orlando Lake Forest Joint Venture.
The Joint Venture owns the Orlando Lake Forest project, a single-family
residential community located in Seminole County, Florida (near Orlando)
consisting of approximately 360 acres of residential land and improvements and
approximately 20 acres of commercial land. The Joint Venture will continue to
own and develop the Orlando Lake Forest project.
The Fund contributed to the Joint Venture as a capital contribution its interest
in the principal and interest of the first mortgage loan on the Orlando Lake
Forest project, and obtained a 50% interest in the Joint Venture. The NTS
entities named above hold cumulatively the remaining 50% interest in the Joint
Venture.
The net income or net loss of the Joint Venture is allocated based on the
respective partner's percentage interest, as defined in the joint venture
agreement. As of December 31, 1999 and 1998, the Fund's percentage interest was
50% and the Fund's investment balance in the Joint Venture was $4,151,307 and
$4,462,990, respectively. The Fund's share of the Joint Venture's net income
(loss) from the years ended December 31, 1999, 1998 and the period from October
1, 1997 through December 31, 1997 was $(405,183), $(247,879) and $106,667,
respectively.
Key elements of the Consolidated Statements of Cash Flows:
1999 1998 1997
---- ---- ----
Net cash provided by (used for)
operating activities $ 259,355 $(3,152,180) $ 459,795
Net cash provided by (used for)
investing activities $ (318,148) $ (446,334) $ 3,626,775
----------- ----------- -----------
Net cash flows from operating and
investing activities $ (58,793) $(3,598,514) $ 4,086,570
Net cash provided by (used for)
financing activities $ (383,794) $ 3,246,678 $(3,389,918)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents $ (442,587) $ (351,836) $ 696,652
=========== =========== ===========
Operating Activity
- ------------------
Cash provided by operating activities was approximately $259,000 for the year
ended December 31, 1999. The primary components of the cash provided for
operating activities were a net loss of approximately $849,000, an increase in
accounts payable to the affiliate of approximately $1,194,000, decrease in notes
receivable of approximately $1,164,000, offset by additions to inventory of
approximately $2,174,000.
Cash used for operating activities was approximately $3,152,000 for the year
ended December 31, 1998. The primary components of the use of cash for operating
activities were a net loss of approximately $1,470,000, a decrease in accounts
payable of approximately $949,000 and net additions to inventory of
approximately $1,346,000.
12
Operating Activity - Continued
- ------------------------------
Cash provided by operations was approximately $460,000 for the year ended
December 31, 1997. The Fund received approximately $71,000 from cash revenues in
excess of cash expenses. The Fund received approximately $481,000 in interest
receivable payments from affiliates. NTS/LFII and NTS/VA used approximately
$790,000 of cash to increase inventory. NTS/LFII and NTS/VA provided
approximately $540,000 of cash from collection of initiation fees and other
receivables and notes receivable during the period October 1, 1997 through
December 31, 1997. In addition, accounts payables increased approximately
$159,000.
Investing Activity
- ------------------
Cash used for investing activities was approximately $318,000 for the year ended
December 31, 1999. The components of the use of cash were additional capital
contributions to an unconsolidated affiliate of approximately $94,000 and
capital additions, primarily at the Lake Forest North and Fawn Lake golf
operations of approximately $225,000.
Cash used for investing activities was approximately $446,000 for the year ended
December 31, 1998. The components of the use of cash for investing activities
were additional capital contribution to an unconsolidated affiliate of $186,000
and capital additions, primarily at the Lake Forest North and Fawn Lake golf
operations of approximately $261,000.
During the year ended December 31, 1997, the Fund received repayment on three
mortgage loans and two temporary investments in the aggregate principal amount
of approximately $9,299,000. Repayments on mortgage loans were generally equal
to approximately 83% of the Gross Receipts received on lot sales less closing
costs. The Funds made investments in three mortgage loans and one temporary
investment in the aggregate principal amount of approximately $5,700,000.
Financing Activity
- ------------------
Cash used for financing activities was approximately $384,000 for the year ended
December 31, 1999. The primary components of the cash used by financing
activities were net borrowings on notes payable of approximately $5,583,000
which included approximately $6,697,000 of borrowings to repay a note payable to
an affiliate and net payments of $1,114,000 relating to the development loans
for Lake Forest North and Fawn Lake projects.
Cash provided by financing activities was approximately $3,247,000 for the year
ended December 31, 1998. The primary components of the cash provided by
financing activities were net borrowings on notes payable relating to the
development loans for Lake Forest North and Fawn Lake projects of approximately
$3,565,000, net borrowings on notes payable to affiliates of approximately
$781,000 which were used primarily to fund activities of the Fawn Lake project
and repayment of advances to affiliates of approximately $631,000 which were
initially used to fund development costs at the Fawn Lake project.
Cash used for financing activities was approximately $3,390,000 for the year
ended December 31, 1997. During the year ended December 31, 1997, the Fund and
its subsidiaries borrowed approximately $8,516,000 from their various lenders.
The Fund and its subsidiaries repaid approximately $2,380,000 of their
borrowings from lot proceeds generated by NTS/LFII, NTS/VA and OLFJV. In
addition, approximately $9,425,000 of borrowings were repaid using proceeds from
the NTS/VA and OLFJV development loans. The Fund and its subsidiaries also
borrowed approximately $2,436,000 from affiliates of the Fund's sponsor. They
repaid approximately $1,651,000 of these borrowings primarily from loan
repayments made by OLFJV during the period from January 1, 1997 through August
15, 1997.
13
Financing Activity - Continued
- ------------------------------
NTS Guaranty Corporation (the "Guarantor"), an Affiliate of the Sponsor, has
guaranteed that investors of the Fund will receive, over the life of the Fund,
aggregate distributions from the Fund (from all sources) in an amount at least
equal to their Original Capital Contributions, as defined in the Fund's
Prospectus. As of December 31, 1999, the Fund has raised approximately
$63,690,000 and has paid distributions of $23,141,000.
The liability of the Guarantor under the above guaranties is expressly limited
to its assets and its ability to draw upon a $10 million demand note receivable
from Mr. J.D. Nichols, Chairman of the Board of Directors of the Sponsor. There
can be no assurance that Mr. Nichols will, if called upon, be able to honor his
obligation to the Guarantor. The total amounts guaranteed by the Guarantor are
in excess of its net worth, and there is no assurance that the Guarantor will be
able to satisfy its obligation under these guaranties. The Guarantor may in the
future provide guaranties for other Affiliates of the Fund.
The NTS/VA lender has agreed to allow NTS/VA to maintain a maximum outstanding
development loan balance of $10.7 million through April 30, 2000, without
considering the obligation in default due to non-compliance with the maximum
funding levels called for in the original loan agreement management's
projections indicate that the present development plans will require a funding
level which will result in an outstanding debt balance as of December 31, 2000
of approximately $12.2 million. Management's projection for NTS/VA indicates the
development will reach the maximum funding level allowed by the current
development loan of $10.7 million during 2000 and in fact require additional
funding to achieve its 2000 development plan, which includes projected sales of
$7.05 million. In the event short term capital needs dictate the need for cash
to reduce the outstanding obligation relative to the NTS/VA development loan,
the loan is secured by a approximately $2 million letter of credit issued by a
third party lender with the NTS/VA lender stated as the beneficiary, and a $3
million guarantee by Mr. J.D. Nichols, both of which could provide the necessary
capital to help ensure compliance with the maximum funding levels set forth in
the original development loan.
Based upon present facts and circumstances, including ongoing discussions with
the NTS/VA lender management's present plans will consider the following: 1)
defer the payment of amounts owed to Affiliates as of December 31, 1999 and
those amounts accruing during 2000 other than as permitted by cash flows (See
Note 9) 2) continuing discussions with the NTS/VA lender to combine both the
NTS/VA and NTS/LFII debt at the current NTS/VA lender securing overall favorable
terms, rates and fees and 3) obtaining additional funding from the NTS/LFII
lender thereby allowing NTS/VA to utilize such funds for development purposes.
Although management believes that it will be successful in such negotiations,
there can be no assurances that these third party lenders will approve of
management's plans and intentions for NTS/VA. However, if management is
unsuccessful in the effort, considerations will be given to slowing individual
budgeted development projects at NTS/VA budgeted for year 2000.
Results of Operations
- ---------------------
Comparability
- -------------
On an overall basis, the Fund experienced a loss of approximately $(849,000),
$(1,470,000) and $(13,707,000), or $(.27), $(.46) and $(4.30) per share of
common stock for the years ended December 31, 1999, 1998 and 1997, respectively.
In the context of the restructuring and acquisitions which occurred during the
fourth quarter of 1997, comparisons of results of operations are complex. The
fourth quarter 1997 charge relating to the acquisition of NTS/LFII and NTS/VA
and the adjustment of the carrying value of the Fund's investment in OLFJV also
represent significant items which complicated year-to-year comparisons.
14
Results of Operations - Continued
- ---------------------------------
Revenues
- --------
Revenue for the year ended December 31, 1999, includes $14.3 million in lot
sales consisting of approximately $9.3 million and $5.0 million from the Lake
Forest North and Fawn Lake projects, respectively. Cost of sales of
approximately $10.0 million resulted in a gross profit margin of approximately
30%. During this period 165 lots were sold for an average selling price of
$86,400.
The average selling price per lot was higher in 1999 compared to 1998 primarily
attributable to the sale of an entire lot section to a single builder in the
Fawn Lake project during 1998. These lots sold for a lower average price of
approximately $54,100 since they were smaller lots for the construction of patio
homes.
Revenue for the year ended December 31, 1998, includes $8.1 million in lot sales
consisting of approximately $5.9 million and $2.2 million from the Lake Forest
North and Fawn Lake projects, respectively. Cost of sales of approximately $6.2
million resulted in a gross profit margin of approximately 23%. During this
period 136 lots were sold for an average selling price of $59,272. The decrease
in the average sales price compared to the period October 1, 1997 through
December 31, 1997 is primarily attributable to the sale of an entire lot section
to a single home builder in the Fawn Lake project during 1998.
During the year ended December 31, 1998, the Fund realized approximately
$382,000 of proceeds from a loan previously made to the Orlando Lake Forest
project during the time the Fund operated as a REIT. This loan was written off
by the Fund prior to its investment in the Orlando Lake Forest Joint Venture.
The Fund had previously established a $1,500,000 loan loss reserve regarding a
Temporary Mortgage Loan to the Orlando Lake Forest Joint Venture. During the
third quarter 1997, the Fund received 100% of the amount due on this loan and
determined the loan loss reserve was no longer needed.
Revenue for the year ended December 31, 1997, includes $1.6 million of lot sales
consisting of approximately $1.4 million and $200,000 from the Lake Forest North
and Fawn Lake projects, respectively, for the period from October 1, 1997 (when
the Fund acquired the stock of these entities) to December 31, 1997. Cost of
sales was $1.2 million resulting in a gross profit of approximately 23%. During
this period 21 lots were sold for an average selling price of $76,202.
During the nine months ended September 30, 1997, the Fund's primary revenue
source was interest income earned on affiliated mortgage loans. The average
interest rate earned by the Fund for the nine months ended September 30, 1997,
was approximately 5.5% on the average loan balance of approximately $63,600,000.
Interest income on cash equivalents and miscellaneous income includes interest
income earned from short-term investments made by the Fund with cash reserves
for each of the three years in the period ended December 31, 1999, as well as
interest earnings on notes receivable for the fiscal years ended December 31,
1999, 1998 and for the period from October 1, 1997 through December 31, 1997.
Expenses
- --------
The ongoing operation and management of the Lake Forest North and Fawn Lake
projects will be conducted by NTS Residential Management (NTS Management) under
the terms of (i) a Property Management Agreement executed on December 30, 1997,
and dated as of October 1, 1997, by and among the Fund, NTS/LFII and NTS
Management for the Lake Forest North project, and (ii) a Property Management
Agreement executed on December 30, 1997, and dated as of October 1, 1997, by and
among the Fund, NTS/VA and NTS Management for the Fawn Lake project
(collectively, the Management Agreements). NTS Management is a wholly-owned
subsidiary of NTS Development Company. NTS Development Company is a wholly-owned
subsidiary of the Fund's Sponsor. The Management Agreements have an initial term
through December 31, 2003, subject to extension under certain conditions, and
are
15
Results of Operations - Continued
- ---------------------------------
Expenses - Continued
- --------------------
renewable for successive six (6) year terms thereafter. Under the Management
Agreements, NTS Management will be reimbursed for costs incurred in the
operation and management of the Lake Forest North and Fawn Lake projects, will
be entitled to an Overhead Recovery, and will accrue an incentive payment
payable all as provided therein.
The expenses related to the Property Management agreement are presented as
selling, general and administrative - Affiliated on the accompanying
consolidated statements of operations. As defined in the Management Agreements,
the expenses are classified in two ways, Expense Recovery and Overhead Recovery.
The expense recovery includes direct and pro-rated costs incurred in the
management and operation of NTS/LF II and NTS/VA. Such costs include
compensation costs of management, accounting, professional, engineering and
development, marketing and office personnel employed by NTS management and/or
certain of its affiliates as well as various non-payroll related operating
expenses. Compensation costs are for those individuals who rendered services
full time and on site at the residential projects, with respect to the
residential projects but who are not on site and with respect to the residential
projects but who have multiple residential projects responsibilities some of
which may be affiliated entities of NTS Management. For services provided by
individuals not on site or those with multiple residential project
responsibilities, costs are pro-rated by NTS Management and allocated to the
appropriate residential project.
Reimbursements for Expense Recovery of approximately $1,713,000, $1,439,000, and
$527,000 were made to NTS Management or an Affiliate during the years ended
December 31, 1999, 1998 and the period from October 1, 1997 through December 31,
1997, respectively, for actual personnel, marketing and administrative costs as
they relate to NTS/LFII, NTS/VA and the Fund.
Reimbursements of Expense Recovery increased approximately $274,000 in 1999
compared to 1998. This increase is primarily due to higher sales commissions of
approximately $332,000 in 1999 compared to 1998, which was a result of an
increase in lot sales.
During 1998, the Fund elected to forego the Expense Recovery portion of the
Management Agreements relative to NTS/VA. NTS/VA pays expenses directly as
incurred rather than allowing NTS Management to pay expenses initially and then
make reimbursement to NTS Management. Therefore selling, general and
administrative expenses include those costs incurred directly by NTS/VA for
marketing related activities.
Selling, general and administrative expenses also include directors' fees,
legal, outside accounting, other investor related cost, repairs and maintenance
cost.
For the years ended December 31, 1999, 1998, and the period from October 1, 1997
through December 31, 1997, the amounts incurred for selling, general and
administrative expenses were approximately $2,353,000, $1,437,000, and $275,000,
respectively. The increase in 1999 compared to 1998 is primarily attributable to
an increase in advertising and marketing costs of approximately $724,000.
Additional marketing promotions, new brochures, enhanced newspaper inserts, and
a home show exhibit generated sales traffic through the NTS/LFII community, and
as a result of these efforts, lot sales increased for the year ended 1999
compared to 1998. The increase in 1998 as compared to 1997 is attributable to
NTS/VA incurring marketing costs directly in 1998 which were included in
selling, general and administrative costs and in 1997 these costs were
classified as Expense Recovery since they were incurred by NTS Management
initially and reimbursed by NTS/VA.
Additionally, NTS Management is entitled to an Overhead Recovery, which is a
reimbursement for overhead expenses attributable to the employees and the
efforts of NTS Management under the Management Agreements, in an amount equal to
3.75% of the projects' gross cash receipts, as defined in the Management
Agreements. For the years ended December 31, 1999, 1998 and the period from
October 1, 1997
16
Results of Operations - Continued
- ---------------------------------
Expenses - Continued
- --------------------
through December 31, 1997, Overhead Recovery incurred was approximately
$567,000, $496,000 and $106,000, respectively.
The increase in overhead recovery for the year end December 31, 1999 compared to
1998 and the period from October 1, 1997 through December 31, 1997 was due to an
increase in sales.
Increases and decreases in interest expense generally correspond directly to
increases and decreases in the outstanding balances of the Fund's borrowings and
its subsidiaries borrowings as well as in the capitalization percentage. For the
years ended December 31, 1999, and 1998 approximately $2,652,000 and $2,350,000,
was capitalized in inventory and approximately $261,000 and $364,000,
respectively, was expensed.
Depreciation expense relates to equipment used for development activity which is
being depreciated over five to seven years. Amortization expense relates
primarily to loan costs which are being amortized over the life of the related
loan.
No benefit for income taxes was provided during 1999, 1998 or 1997 as the Fund
has recorded a valuation allowance equal to the amount of the recorded benefit.
The Fund has determined that it is more likely than not that the net deferred
tax asset will not be realized. See Note 10 to the Fund's Consolidated Financial
Statements for a discussion of the components of the deferred tax asset.
The Fund had a net book loss of approximately $13,707,000 for the year ended
December 31, 1997, which includes a non-cash charge of approximately $11,600,000
related to the acquisition of NTS/LFII and NTS/VA and an adjustment to the
carrying value of the Fund's investment in the OLFJV of approximately
$3,707,000.
Accounting Principles generally accepted in the Unites States required that the
acquisitions of NTS/LFII and NTS/VA be recorded at fair market value on the day
of acquisition. The application of these principles resulted in a non-cash
charge of approximately $11,600,000 during the fourth quarter of 1997. In
addition, the Fund's investment in an unconsolidated affiliate should be
recorded at the lower of cost or fair market value. A non-cash charge of
approximately $3.7 million was recorded in the third quarter of 1997 related to
this investment. All estimates used in these evaluations represented
management's best estimates based on the facts present at the date of such
evaluations.
Year 2000
- ---------
During 1999, all divisions of NTS Corporation, including the Fund, reviewed the
effort necessary to prepare NTS' information systems (IT) and non-information
technology with embedded technology (ET) for the Year 2000. The information
technology solutions were addressed separately for the Year 2000 since the Fund
saw the need to move to more advanced management and accounting systems made
available by new technology and software development during the decade of the
1990's. NTS' property management staff surveyed vendors to evaluate embedded
technology in our alarm systems, HVAC controls, telephone systems and other
computer associated facilities. Some equipment was replaced, while others had
circuitry upgrades.
In 1999, the PILOT software system, purchased in the early 1990's, was replaced
by a Windows based network system both for NTS' headquarters functions and other
locations. The real estate accounting system developed, sold, and supported by
the Yardi Company of Santa Barbara, California replaced PILOT. The Yardi system
is fully implemented and operational as of December 31, 1999. There have been no
Year 2000 related problems with either system.
The costs of these advances in NTS' systems technology are not all attributable
to the Year 2000 issue since NTS had already identified the need to move to a
network based system regardless of the Year 2000. The Fund's share of the costs
involved were approximately $98,000 during 1999 and 1998. These costs include
primarily the purchase, lease and maintenance of hardware and software.
17
Year 2000 - Continued
- ---------------------
At the date of this filing the Fund did not experience any significant operating
issues relative to the Year 2000 issue. Despite diligent preparation,
unanticipated third-party failures, inability of our tenants to pay rent when
due, more general public infrastructure failures or failure of our remediation
efforts as planned could have a material adverse impact on our results of
operations, financial conditions and/or cash flows in 2000 and beyond.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Our primary market risk exposure with regard to financial instruments is changes
in interest rates. The Fund's debt instruments bear interest at both variable
and fixed rates as further discussed in Note 8 of the Fund's financial
statements under Item 8 of this Form 10-K. At December 31, 1999, a hypothetical
100 basis point increase in interest rates would result in an approximately
$226,000 increase in interest expense. During the year ended December 31, 1999,
the majority of interest expense incurred was capitalized in inventory.
18
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders of the NTS Mortgage Income Fund:
We have audited the accompanying consolidated balance sheets of the NTS Mortgage
Income Fund and subsidiaries (the Fund) (a Delaware corporation) as of December
31, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Fund as of
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
March 29, 2000
19
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
1999 1998
---- ----
ASSETS
- ------
Cash and equivalents $ 619,022 $ 1,061,609
Membership initiation fees and other
accounts receivable, net of allowance
of $75,000 and $132,406 1,406,376 1,884,472
Notes receivable 2,139,857 3,303,761
Inventory 55,438,644 53,264,438
Property and equipment, net of
accumulated depreciation of $478,962
and $257,612 505,219 501,921
Investment in unconsolidated affiliate 4,151,307 4,462,990
Advances to affiliates -- 30,338
Other assets 833,578 1,043,228
------------ ------------
Total assets 65,094,003 65,552,757
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Accounts payable and accrued expenses 1,857,760 2,091,630
Accounts payable - affiliates 1,194,395 --
Notes payable - affiliates -- 6,090,293
Notes payable 28,342,811 22,760,246
Lot deposits 161,500 131,395
Deferred revenues 62,628 154,968
------------ ------------
Total liabilities 31,619,094 31,228,532
------------ ------------
Commitments and contingencies (Note 13)
Stockholders' equity:
Common stock, $0.001 par value,
6,000,000 shares authorized;
3,187,333 shares issued and
outstanding 3,187 3,187
Additional paid-in-capital 54,163,397 54,163,397
Accumulated deficit (20,691,675) (19,842,359)
------------ ------------
Total stockholders' equity 33,474,909 34,324,225
------------ ------------
Total liabilities and stockholders'
equity $ 65,094,003 $ 65,552,757
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
20
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
----------------------------------------------------
1999 1998 1997
---- ---- ----
Revenues:
- ---------
Lot sales, net of discounts $ 14,256,114 $ 8,061,027 $ 1,600,237
Cost of sales 10,026,656 6,167,853 1,230,168
------------ ------------ ------------
Gross profit 4,229,458 1,893,174 370,069
Interest income on cash
equivalents and
miscellaneous income 291,073 353,680 183,144
Recovery of provision for
loan losses -- 382,096 1,500,000
Interest income on
affiliated mortgage loans
receivable -- -- 2,617,126
Fee income on affiliated
mortgage loan and other
finanicial services -- -- 8,598
------------ ------------ ------------
4,520,531 2,628,950 4,678,937
------------ ------------ ------------
Expenses:
- ---------
Selling, general and
administrative - affiliated 2,280,064 1,934,784 633,044
Selling, general and
administrative 2,352,831 1,437,413 274,977
Interest expense 260,899 364,173 1,304,157
Interest expense - affiliated -- -- 358,262
Other taxes and licenses 30,443 28,116 23,060
Depreciation and amortization
expense 40,427 86,196 172,877
Loss from investment in
unconsolidated affiliate 405,183 247,879 3,600,560
Advisory fee -- -- 418,950
Other charges -- -- 11,600,000
------------ ------------ ------------
5,369,847 4,098,561 18,385,887
------------ ------------ ------------
Net loss before income tax
expense (849,316) (1,469,611) (13,706,950)
Federal income tax expense -- -- --
------------ ------------ ------------
Net loss $ (849,316) $ (1,469,611) $(13,706,950)
============ ============ ============
Net loss per share of
common stock $ (.27) $ (.46) $ (4.30)
============ ============ ============
Weighted average number of
shares 3,187,333 3,187,333 3,187,333
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
21
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (1)
---------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
-----------------------------------------------------
Common Additional
Common Stock Stock Paid-in- Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
Stockholders'
equity
December 31, 1996 3,187,333 $ 3,187 $54,163,397 $ (4,665,798) $49,500,786
Net loss -- -- -- (13,706,950) (13,706,950)
--------- -------- ----------- ----------- -----------
Stockholders'
equity
December 31, 1997 3,187,333 3,187 54,163,397 (18,372,748) 35,793,836
Net loss -- -- -- (1,469,611) (1,469,611)
--------- -------- ----------- ----------- -----------
Stockholders'
equity
December 31, 1998 3,187,333 3,187 54,163,397 (19,842,359) 34,324,225
--------- -------- ----------- ----------- -----------
Net loss -- -- -- (849,316) (849,316)
--------- -------- ----------- ----------- -----------
Stockholders'
equity
December 31, 1999 3,187,333 $ 3,187 $54,163,397 $(20,691,675) $33,474,909
========= ======== =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
(1) For the periods presented, there are no elements of other comprehensive
income as defined by the Financial Accounting Standards Board, Statement of
Financial Accounting Standards, No. 130 Reporting Comprehensive Income.
22
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
-----------------------------------------------------
1999 1998 1997
---- ---- ----
CASH FLOWS PROVIDED BY (USED FOR) OPERATING
- -------------------------------------------
ACTIVITIES
- ----------
Net loss $ (849,316) $ (1,469,611) $(13,706,950)
Adjustments to reconcile net loss
to net cash provided by (used for)
operating activities:
Depreciation and amortization expense 337,404 312,346 172,877
Loss from investment in unconsolidated
affiliate 405,183 247,879 3,600,560
Accretion of discount on affiliated mortgage
loans receivable -- -- (95,932)
Recovery of provision for loan losses -- -- (1,500,000)
Other non-cash charges -- -- 11,600,000
Changes in assets and liabilities: (1)
Interest receivable - affiliates -- -- 480,778
Membership initiation fees and other
accounts receivable 478,096 (258,983) 123,364
Notes receivable 1,163,904 269,401 416,352
Inventory (2,174,206) (1,346,448) (789,991)
Accounts payable - affiliates 1,194,395 -- --
Accounts payable and accrued expenses (233,870) (948,838) 158,721
Lot deposits 30,105 33,895 (14,000)
Deferred revenues (92,340) 8,179 14,016
------------ ------------ ------------
Net cash provided by (used for) operating
activities 259,355 (3,152,180) 459,795
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING
- -------------------------------------------
Capital contribution to unconsolidated
affiliate (93,500) (185,500) --
Purchase of property and equipment (224,648) (260,834) 27,555
Principal collections on affiliated mortgage
loan receivable -- -- 9,299,287
Investment in affiliated mortgage loans
loan receivable -- -- (5,700,037)
Purchase of stock of acquired subsidiaries -- -- (30)
------------ ------------ ------------
Net cash provided by (used for) investing
activities (318,148) (446,334) 3,626,775
------------ ------------ ------------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING
- -------------------------------------------
ACTIVITIES
- ----------
Advances to/from affiliates 30,338 (630,880) (519,797)
Proceeds from notes payable 20,489,549 17,798,287 8,515,946
Proceeds from notes payable - affiliates 606,666 3,225,385 2,436,291
Payments on notes payable (14,906,985) (14,233,781) (11,805,279)
Payments on notes payable - affiliates (6,696,959) (2,444,584) (1,651,466)
Other assets 93,597 (467,749) (190,308)
Dividends paid -- -- (175,305)
------------ ------------ ------------
Net cash provided by (used for) financing
activities (383,794) 3,246,678 (3,389,918)
------------ ------------ ------------
Net increase (decrease) in cash and
equivalents (442,587) (351,836) 696,652
CASH AND EQUIVALENTS, beginning of period 1,061,609 1,413,445 716,793
------------ ------------ ------------
CASH AND EQUIVALENTS, end of period $ 619,022 $ 1,061,609 $ 1,413,445
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
(1) Net of the effects of acquisitions in 1997, where applicable. See Note 11
for information on non-cash investing and financing activities.
23
NTS MORTGAGE INCOME FUND
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Summary of Significant Accounting Policies
------------------------------------------
A) Organization
------------
NTS Mortgage Income Fund (the "Fund"), a Delaware corporation, was
formed on September 26, 1988. The Fund operated as a real estate
investment trust (REIT) under the Internal Revenue Code of 1986 (the
"Code"), as amended, from its inception through December 31, 1996.
The Fund began operating as a "C" corporation under the Code for tax
purposes effective January 1, 1997. NTS Corporation is the sponsor of
the Fund (the "Sponsor"). NTS Advisory Corporation is the advisor to
the Fund (the "Advisor"), and NTS Residential Management Company is
the manager to the Fund ("NTS Management"). The Advisor and NTS
Management are affiliates of and are under common control with NTS
Corporation.
The Fund's subsidiaries include NTS/Lake Forest II Residential
Corporation (NTS/LFII) and NTS/Virginia Development Company (NTS/VA).
These subsidiaries were acquired effective October 1, 1997. The
acquisitions were accounted for under the purchase method of
accounting. See Note 3, "Acquisitions", for further information
pertaining to the acquisitions. Prior to making the acquisitions, the
Fund had been the primary creditor of these entities.
NTS/LFII is in the process of developing approximately 1,172
residential lots of land located in Louisville, Kentucky into a
single-family residential community and a country club with a
championship golf course for the purpose of selling such residential
lots and country club memberships. As of December 31, 1999,
approximately 740 of the 1,172 residential lots have been developed
and approximately 59% of the total projected lots to be developed
have been sold. In addition, Lake Forest has amenities consisting of
a clubhouse, pools, tennis courts, recreation fields and several
lakes.
NTS/VA is in the process of developing approximately 1,389
residential lots located in the Chancellor district of Spotsylvania
County, Virginia, approximately 60 miles south of Washington D.C.,
into a single-family residential community and a country club with a
championship golf course for the purpose of selling such residential
lots and country club memberships. As of December 31, 1999,
approximately 441 of the 1,389 total lots have been developed and
approximately 29% of the total projected lots to be developed have
been sold. Included on the property is a 285-acre lake. In addition,
Fawn Lake has amenities consisting of a clubhouse, pool, tennis
courts and boat docks.
The Fund purchased a 50% interest in the Orlando Lake Forest Joint
Venture effective August 16, 1997. Prior to becoming a joint venture
partner, the Fund had been the Joint Venture's primary creditor. See
Note 4, "Investment in Unconsolidated Affiliate", for further
information pertaining to the investment.
B) Basis of Accounting
-------------------
The Fund's records are maintained on the accrual basis of accounting
in accordance with accounting principles generally accepted in the
United States (GAAP).
24
1. Summary of Significant Accounting Policies - Continued
------------------------------------------------------
C) Principals of Consolidation and Basis of Presentation
-----------------------------------------------------
The consolidated financial statements of the Fund include the assets,
liabilities, revenues and expenses of its 100% owned subsidiaries.
The consolidated statements of operations include the results of
acquired businesses accounted for under the purchase method of
accounting from the date of acquisition. Investments of 50% or less
in affiliated companies are accounted for under the equity method.
All significant intercompany transactions have been eliminated.
D) Use of Estimates in Preparation of Consolidated Financial Statements
--------------------------------------------------------------------
The preparation of financial statements in conformity with GAAP in
the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
E) Revenue Recognition and Reserves for Loan Losses
------------------------------------------------
The Fund recognizes revenue and related costs from lot sales using
the accrual method in accordance with accounting principles generally
accepted in the United States, which is when payment has been
received and title, possession and other attributes of ownership have
been transferred to the buyer, and the Fund and its subsidiaries are
not obligated to perform significant activities after the sale. The
Fund and its subsidiaries generally require a minimum down payment of
at least 10% of the sales price of the lot.
Interest income from mortgage loans and notes receivable was reported
as earned on the accrual basis of accounting. If the Fund had any
reason to doubt the collectability of any principal or interest
amounts due pursuant to the terms of the mortgage loans or notes,
appropriate reserves would have been established for any principal
and accrued interest amounts deemed unrealizable. Impaired loans are
measured based on the present value of expected future cash flows
discounted at each loan's effective interest rate, at each loan's
observable market price or at the fair value of the collateral if the
loan is collateral dependent.
F) Inventory
---------
Inventory is stated at the lower of cost or net realizable value.
Inventory includes all direct costs of land, land development, and
amenities, including interest, real estate taxes, and certain other
costs incurred during the development period, less amounts charged to
cost of sales. Inventory costs are allocated to individual lots sold
using the relative sales values. The use of the relative sales value
method to record cost of sales requires the use of estimates of sales
values, development costs and absorption periods over the life of the
project. Given the long-term nature of the projects, the use of
estimates to determine sales values, development costs and absorption
periods and inherent economic volatility of residential real estate,
it is reasonably possible that such estimates could change in the
near term. Any changes in estimates are accounted for prospectively
over the life of the project.
25
1. Summary of Significant Accounting Policies - Continued
------------------------------------------------------
G) Long-Lived Assets
-----------------
Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, specifies circumstances in which certain
long-lived assets must be reviewed for impairment. If such review
indicates that the carrying amount of an asset exceeds the sum of its
expected future cash flows, the asset's carrying value must be
written down to fair market value.
H) Advertising
-----------
The Fund expenses advertising-type costs as incurred. Advertising
expense was approximately $1,523,000, $718,000 and $100,000 during
the years ended December 31, 1999, 1998 and 1997, respectively.
I) Environmental Remediation and Compliance
----------------------------------------
Environmental liabilities for remediation costs are accrued based on
estimates of known environmental remediation exposures. Liabilities
are recognized when they can be reasonably estimated. Environmental
compliance costs are expensed as incurred.
J) Per Share Information
---------------------
The Financial Accounting Standards Board recently issued Standard No.
128, Earnings Per Share (SFAS 128). The Statement simplifies the
standards for computing earnings per share (EPS) and replaces the
presentation of primary and fully diluted EPS with a presentation of
basic and diluted EPS. SFAS 128 is effective for consolidated
financial statements for periods ending after December 15, 1997. For
all periods presented, the Fund did not have common stock
equivalents, therefore, the adoption of SFAS 128 did not have any
impact on the Fund's consolidated financial statements.
K) Statement of Cash Flows
-----------------------
For purposes of reporting cash flows, cash and equivalents include
cash on hand and short-term, highly liquid investments with an
original maturity of three (3) months or less that are readily
convertible to cash.
L) Segment Reporting
-----------------
The Fund adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, during the fourth quarter of
1998. SFAS No. 131 established standards for reporting information
about operating segments in annual financial statements and requires
selected information about operating segments in interim financial
reports issued to shareholders. Operating segments are defined as
components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how
to allocate resources and in assessing performance. The standard also
allows entities to aggregate operating segments into a single segment
if the segments are similar in each of the six criteria set forth in
SFAS No. 131. The Fund's chief operating decision-maker is the
President of the Fund.
The Fund's reportable operating segments include only one segment
that is the development and sale of single-family residential lots.
26
1. Summary of Significant Accounting Policies - Continued
------------------------------------------------------
M) Reclassifications
-----------------
Certain reclassification have been made to the December 31, 1998 and
1997 financial statements to conform with December 31, 1999
classifications. The classifications had no effect on previously
reported results of operations.
2. Affiliations
------------
The Fund operates under the direction of its Board of Directors who have
retained NTS Management to be the sole and exclusive agent of the Fund
for day-to-day control and management of the business of the Fund's
subsidiaries including (a) the continued operation of NTS/LFII and
NTS/VA, (b) the operations of the Lake Forest Country Club and the Fawn
Lake Country Club, (c) the operations of the Lake Forest Community
Association and the Fawn Lake Community Association and (d) the provision
and/or sale of ancillary goods and services as selected by NTS Management
with respect to any of the foregoing. The Management Agreements have an
initial term through and including December 31, 2003, and automatically
renew for successive six year terms unless terminated by the Fund, its
subsidiaries, or NTS Management upon six months written notice. See Note
9 for further discussion of the Management Agreements. NTS Management is
an Affiliate of and under common control with NTS Corporation, the Fund's
Sponsor. The Chairman of the Board of Directors of the Fund is also the
majority shareholder of NTS Corporation and is a majority shareholder of
the managing general partner in the Orlando Lake Forest Joint Venture of
which the Fund is a 50% joint venture partner. NTS Advisory and NTS
Management are Affiliates of and are under common control with NTS
Corporation.
3. Acquisitions
------------
The Fund acquired all of the issued and outstanding common stock of
NTS/LFII and NTS/VA effective October 1, 1997, for a nominal purchase
price. Concurrent with this transaction, the existing indebtedness of
each of NTS/LFII and NTS/VA to the Fund was converted to equity.
The transaction has been accounted for using the purchase method of
accounting. The purchase price (approximately $14.5 million for NTS/LFII
and approximately $28.7 million for NTS/VA) was allocated to the assets
and liabilities of NTS/LFII and NTS/VA based on their estimated fair
market value. The acquisition of NTS/LFII included inventory of
approximately $19 million, debt of approximately $5 million and other net
assets and liabilities of approximately $500,000. The acquisition of
NTS/VA included inventory of approximately $32 million, debt of
approximately $5.5 million and other net assets and liabilities of
approximately $2.2 million. The results of operations for NTS/LFII and
NTS/VA from the date of acquisition (October 1, 1997) are included in the
consolidated financial statements of the Fund.
Accounting Principles generally accepted in the United States require
that these acquisitions be recorded at fair market value. The application
of these principles resulted in a non-cash charge of approximately
$11,600,000 during the fourth quarter of 1997 related to these
transactions. All estimates used in these evaluations represented
management's best estimates based on the facts present at the date of the
evaluations.
4. Investment in Unconsolidated Affiliate
--------------------------------------
In September 1997, the Fund entered into an Amended and Restated Joint
Venture Agreement evidencing the Fund's admission as a partner in the
Orlando Lake Forest Joint Venture (the "Joint Venture") effective as of
August 16, 1997. The other partners in the Joint Venture are Orlando Lake
Forest, Inc., Orlando Capital Corporation and OLF II Corporation, all of
whom are Affiliates of and are under common control with the Fund's
Sponsor. The Joint Venture will continue to operate under its current
legal name as the Orlando Lake Forest Joint Venture.
27
4. Investment in Unconsolidated Affiliate - Continued
--------------------------------------------------
The Joint Venture owns the Orlando Lake Forest project, a single-family
residential community located in Seminole County, Florida (near Orlando)
consisting of approximately 360 acres of residential land and
improvements and approximately 20 acres of commercial land. The Joint
Venture will continue to own and develop the Orlando Lake Forest project.
The Fund contributed to the Joint Venture as a capital contribution its
interest in the principal and interest of the first mortgage loan on the
Orlando Lake Forest project, and obtained a 50% interest in the Joint
Venture. The NTS entities named above hold cumulatively the remaining 50%
interest in the Joint Venture.
The net income or net loss of the Joint Venture is allocated based on the
respective partner's percentage interest, as defined in the joint venture
agreement. As of December 31, 1999 and 1998, the Fund's percentage
interest was 50%, and the Fund's investment balance in the Joint Venture
was $4,151,307 and $4,462,990 as of December 31, 1999 and 1998,
respectively. The Fund's share of the Joint Venture's net income (loss)
for the years ended December 31, 1999, 1998 and from August 16, 1997
through December 31, 1997, was $(405,183), $(247,879) and $106,667,
respectively.
Accounting Principles generally accepted in the United States require
that such investments be recorded at the lower of carrying value or fair
market value. The application of these principles resulted in a non-cash
charge of approximately $3.7 million in the third quarter of 1997. All
estimates used in this evaluation represent management's best estimates
based on the facts present at the date of such evaluations.
During the year ended 1999, the Fund and the other joint venture partners
contributed as a capital contribution $187,000 to the joint venture, the
Fund's portion being $93,500.
During the year ended 1998, the Fund and the other joint venture partners
contributed as a capital contribution $371,000 to the joint venture, the
Fund's portion being $185,500.
5. Member Initiation Fees and Other Accounts Receivable
----------------------------------------------------
Fawn Lake Country Club and Lake Forest Country Club membership initiation
fees receivable totaled approximately $911,000 and $1,370,000 as of
December 31, 1999 and 1998. The receivable is net of a discount of
$75,000 and $132,406,respectively recorded to allow for the present value
of the membership initiation fee receivables considering the estimated
timing of collections.
6. Notes Receivable
----------------
Notes receivable are secured by a first mortgage on lots sold to
individuals. The notes bear interest at the prevailing market rates at
the time the lots were sold. The majority of the notes are due between
five and seven years, monthly payments are based on a 30-year
amortization and the balance is due at the maturity date. Notes totaling
approximately $2,015,000 and $3,179,000 are pledged as security for notes
payable to banks under certain Warehouse Line of Credit Agreements and
other debt agreements as of December 31, 1999 and 1998, respectively.
There are also $125,000 of notes held by NTS/VA that are not pledged as
of 1999 and 1998. Approximately $956,000, $101,000 and $179,000 of the
notes receivable balance as of December 31, 1999 are due during the years
ended December 2000 through 2002, respectively. Approximately $787,000 of
the notes receivable balance relates to the sale of 24 lots to one
builder in fiscal 1998 at NTS/VA. The $787,000 note bearing interest at
the Prime Rate plus 1%, is due in monthly installments commencing June
29, 2001, with any outstanding principal and interest payable in full on
December 29, 2003.
28
7. Inventory
---------
Inventory consists of the following as of December 31, 1999:
NTS/LFII NTS/VA Consolidated
-------- ------ ------------
Land held for future
development, under
development and completed lots $ 3,772,000 $23,517,000 $27,289,000
Country club (net of
member initiation fees) 10,847,000 9,431,000 20,278,000
Amenities 2,296,000 5,576,000 7,872,000
----------- ----------- -----------
$16,915,000 $38,524,000 $55,439,000
=========== =========== ===========
Inventory consists of the following as of December 31, 1998:
NTS/LFII NTS/VA Consolidated
-------- ------ ------------
Land held for future
development, under
development and completed lots $ 5,855,000 $21,971,000 $27,826,000
Country club (net of
Member initiation fees 10,225,000 8,099,000 18,324,000
Amenities 2,176,000 4,938,000 7,114,000
----------- ----------- -----------
$18,256,000 $35,008,000 $53,264,000
=========== =========== ===========
NTS/LFII and NTS/VA capitalized in inventory approximately $2,786,000 and
$2,064,000 of interest and real estate taxes during 1999 and 1998,
respectively. Interest and real estate taxes incurred was approximately
$3,113,000 and $2,296,000 as of December 31, 1999 and 1998, respectively.
Inventory for 1999, includes $29,444,000 net of $9,166,000 of country club
membership initiation fees, of costs incurred to date for the development
of the Fawn Lake Country Club and the Lake Forest Country Club.
Inventory for 1998, includes $26,586,000, net of $8,262,000 of country club
membership initiation fees, of costs incurred to date for the development
of the Fawn Lake Country Club and the Lake Forest Country Club.
Pursuant to an agreement between NTS/LFII and the Lake Forest Country Club
regarding the cost to develop the Country Club, NTS/LFII is to receive all
initiation fees from the initial issuance of memberships to the Country
Club. The remaining cost to be incurred for the current projected Country
Club operating deficit for the period covered by the agreement is
approximately $1,870,000 which is expected to be offset by member
initiation fees. During 1999 and 1998 the Lake Forest Country Club
operating deficit was approximately $459,000 and $279,000, respectively,
and was capitalized as a cost of inventory.
During 1999 and 1998, the Fawn Lake Country Club deficit was $1,019,000 and
$469,000, respectively, and was capitalized as a cost of inventory.
8. Notes and Mortgage Loans Payable
--------------------------------
Notes and mortgage loans payable consist of the following:
1999 1998
--------------- --------------
Mortgage loan payable to a bank in
the amount of $10,700,000, bearing
interest at the Prime Rate + 1 1/2%,
due December 1, 2002, secured by
inventory of NTS/VA, generally
principal payments consist of
approximately 91% of the Gross
Receipts of lot sales, guaranteed by
Mr.J.D. Nichols up to $3,000,000 and
a $2 million letter of credit from a
third party lender with the
beneficiary being the bank. $9,777,485 $9,581,963
(Continued on next page)
29
8. Notes and Mortgage Loans Payable - Continued
--------------------------------------------
1999 1998
--------------- --------------
Note payable to a bank in the amount
of $9,500,000, bearing interest at
the Prime Rate + 1%,payable monthly,
due October 31, 2003, secured by
inventory of NTS/LFII, generally
principal payments consist of
approximately 90% of the Gross
Receipts from lot sales,guaranteed by
Mr.JD Nichols up to 50% of the credit
facility. The Note contains certain
covenants which among other things
require the net worth of NTS/LFII not
be allowed to decrease by 20% or more
throughout the term of the agreement. $ 6,817,188 $ 6,113,434
Bank note payable to a bank in the
amount of $9,000,000, bearing
interest at 8.25%, payable monthly,
due November 1, 2004, secured by a
Certificate of Deposit owned by NTS
Financial Partnership,an affiliate of
the Fund. 6,696,959 --
Mortgage loan payable to a bank in
the amount of $4,000,000, bearing
interest at the Prime Rate + 1/2%,
payable monthly, due July 31, 2002,
secured by the Lake Forest Country
Club and golf course, principal
reductions of $300,000 payable every
six months, guaranteed by NTS
Corporation, the Fund's Sponsor. 2,870,000 3,250,000
Warehouse Line of Credit Agreements
with three banks, bearing interest at
the Prime Rate + 1%, the Prime Rate +
3/4% and the Prime Rate + 1/2%, due
December 15,2000 $(113,789),September
18, 2000 $(676,534) and February 28,
2000 $(146,322), secured by notes
receivable (see Note 6), principal
payments consist of payments received
from notes receivable securing the
obligation. 936,645 2,404,585
Bank note payable in the amount of
$1,174,800, bearing interest at a
rate of prime + .5%, secured by note
receivable (see Note 6), due in
monthly installments of $5,000, with
any outstanding principal and accrued
interest due and payable in full on
December 29, 2000. 1,119,800 1,174,800
Other 124,734 235,464
----------- -----------
$28,342,811 $22,760,246
=========== ===========
The Prime Rate was 8 1/2% and 7 3/4% at December 31, 1999 and 1998,
respectively.
The $113,789 and $146,322 Warehouse Line of Credit agreements are guaranteed
by NTS Corporation.
30
8. Notes and Mortgage Loans Payable - Continued
--------------------------------------------
The minimum scheduled principal payments on debt outstanding at December
31, 1999 are as follows:
2000 $ 7,068,625
2001 5,007,227
2002 9,570,000
2003 --
2004 6,696,959
Thereafter --
------------
$ 28,342,811 (1)
============
(1) The minimum scheduled principal payments regarding the $10.7
and $9.5 million credit facilities are reflected in the table
such that the outstanding principal amount is brought to
within the following levels by the applicable date.
$10.7 Million Facility
----------------------
December 31, 1999 $10,700,000
December 31, 2000 $ 7,800,000
December 31, 2001 $ 5,900,000
December 1, 2002 $ 4,500,000
$9.5 Million Facility
---------------------
December 31, 1999 $7,500,000
December 31, 2000 $4,500,000
December 31, 2001 $2,000,000
The NTS/VA lender has agreed to allow NTS/VA to maintain a maximum
outstanding development loan balance of $10.7 million through April 30,
2000, without considering the obligation in default due to
non-compliance with the maximum funding levels called for in the
original loan agreement. Management's projections indicate that the
present development plans will require a funding level which will
result in an outstanding debt balance as of December 31, 2000 of
approximately $12.2 million. Management's projection for NTS/VA
indicates the development will reach the maximum funding level allowed
by the current development loan of $10.7 million during 2000 and in
fact require additional funding to achieve its 2000 development plan,
which includes projected sales of $7.05 million. In the event short
term capital needs dictate the need for cash to reduce the outstanding
obligation relative to the NTS/VA development loan, the loan is secured
by a approximately $2 million letter of credit issued by a third party
lender with the NTS/VA lender stated as the beneficiary, and a $3
million guarantee by Mr. J.D. Nichols, both of which could provide the
necessary capital to help ensure compliance with the maximum funding
levels set forth in the original development loan.
Based upon present facts and circumstances, including ongoing
discussions with the NTS/VA lender management's present plans will
consider the following: 1) defer the payment of amounts owed to
Affiliates as of December 31, 1999 and those amounts accruing during
2000 other than as permitted by cash flows (See Note 9) 2) continuing
discussions with the NTS/VA lender to combine both the NTS/VA and
NTS/LFII debt at the current NTS/VA lender securing overall favorable
terms, rates and fees and 3) obtaining additional funding from the
NTS/LFII lender thereby allowing NTS/VA to utilize such funds for
development purposes. Although management believes that it will be
successful in such negotiations, there can be no assurances that these
third party lenders will approve of management's plans and intentions
for NTS/VA. However, if management is unsuccessful in the effort,
considerations will be given to slowing individual budgeted development
projects at NTS/VA budgeted for year 2000.
31
9. Related Party Transactions
--------------------------
As of December 31, 1999, the Sponsor or an Affiliate owned 105,955 shares
of the Fund. The Fund thereby allowing Fawn Lake to utilize such funds
for development purposes entered into the following agreements with
various Affiliates of the Sponsor regarding the ongoing operation of the
Fund.
Advisory Agreement
------------------
Pursuant to the Advisory Agreement, the Fund paid the Advisor (NTS
Advisory Corporation) a Management Expense Allowance from inception of
the Fund through September 30, 1997 (Advisory Fee) relating to services
performed for the Fund in an amount equal to 1% of the Fund's Net Assets,
per annum, which amount was increased annually by an amount corresponding
to the percentage increase in the Consumer Price Index.
For the year ended December 31, 1997, $418,950 had been incurred as an
Advisory Fee. Effective October 1, 1997, the Fund no longer incurred an
Advisory Fee but is now responsible for the actual general and
administrative costs pursuant to certain property management agreements
discussed below.
Property Management Agreements
------------------------------
The ongoing operation and management of the Lake Forest North and Fawn
Lake projects will be conducted by NTS Residential Management Company
(NTS Management) under the terms of (i) a Property Management Agreement
executed on December 30, 1997, and dated as of October 1, 1997, by and
among the Fund, NTS/LFII and NTS Management for the Lak