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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 Number)
10172 Linn Station Road
Louisville, Kentucky 40223
- -------------------------------- ---------------------------
(Address of principal executive offices) (Zip Code)
(502) 426-4800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Share of Common Stock
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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.
[X] Yes [ ] 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 the 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, 2001 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 Supplement 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.
TABLE OF CONTENTS
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PART I
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Pages
-----
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
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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 19
Item 8. Financial Statements and Supplementary Data 20-52
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 53
PART III
--------
Item 10. Directors and Executive Officers of the Registrant 54-57
Item 11. Executive Compensation 57
Item 12. Security Ownership of Certain Beneficial
Owners and Management 57
Item 13. Certain Relationships and Related Transactions 58-59
PART IV
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Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 60
Signatures 61
2
PART I
------
Items 1. and 2. Business and Properties
-----------------------
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
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.
3
Items 1 and 2. Business and Properties - Continued
-----------------------------------
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, 2000, approximately 799
of 1,161 total lots have been developed and approximately 65% 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, 2000, approximately 558 of 1,398 total
lots have been developed and approximately 34% 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.
4
Items 1 and 2. Business and Properties - 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, 2000, 1999 and 1998, the Fund's percentage
interest was 50% and the Fund's share of the Joint Venture's net loss for the
years ended December 31, 2000, 1999 and 1998 was $3,017,862, $405,183 and
$247,879, 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.
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.
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
last quarter of the year ending December 31, 2000.
5
PART II
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Item 5. Market for 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, 2001, there were 3,317 record holders of the
Fund's Shares. No dividends were declared during 2000, 1999 or 1998.
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, 2000, 1999, 1998, 1997, and 1996.(1)
2000 1999 1998 1997 1996
---------------- ----------------- ---------------- ---------------- ----------------
Inventory $ 52,206,560 $ 55,438,644 $ 53,264,438 $ 51,917,990 $ -
============== =============== =============== ============== ===============
Affiliated mortgage loans
receivable, net (3) $ - $ - $ - $ - $ 66,287,764
============== =============== =============== ============== ===============
Total assets $ 57,780,576 $ 65,094,003 $ 65,552,757 $ 64,184,368 $ 68,745,709
============== =============== =============== ============== ===============
Total notes payable (6) $ 26,329,279 $ 28,342,811 $ 28,850,539 $ 24,505,233 $ 18,801,517
============== =============== =============== ============== ===============
Net revenues and other (4) $ 3,629,887 $ 4,520,531 $ 2,628,950 $ 4,678,937 $ 3,304,995
Total expenses (2) 12,758,834 5,369,847 4,098,561 18,385,887 2,454,686
-------------- --------------- --------------- -------------- ---------------
Net income (loss) before
extraordinary expense (9,128,947) (849,316) (1,469,611) (13,706,950) 850,309
-------------- --------------- --------------- -------------- ---------------
Extraordinary expense (7) 114,156 - - - -
-------------- --------------- --------------- -------------- ---------------
Net income (loss) $ (9,243,103) $ (849,316) $ (1,469,611) $ (13,706,950) $ 850,309
============== =============== =============== ============== ===============
Weighted average number of
shares 3,187,333 3,187,333 3,187,333 3,187,333 3,187,333
============== =============== =============== ============== ===============
Per share of common stock:
Income (loss) before
extraordinary expense $ (2.86) $ (0.27) $ (0.46) $ (4.30) $ 0.27
Extraordinary expense (0.04) - - - -
-------------- --------------- --------------- -------------- ---------------
Net income (loss) per share $ (2.90) $ (0.27) $ (0.46) $ (4.30) $ 0.27
============== =============== =============== ============== ===============
Taxable income (loss) (5) $ (3,311,279) $ (1,791,304) $ (1,488,574) $ (387,081) $ 631,114
============== =============== =============== ============== ===============
Taxable income (loss) per share $ (1.04) $ (.56) $ (.47) $ (.12) $ .20
============== =============== =============== ============== ===============
Cash dividends declared $ - $ - $ - $ - $ 605,601
============== =============== =============== ============== ===============
Cash dividends declared per
share of common stock $ - $ - $ - $ - $ .19
============== =============== =============== ============== ===============
(1) The above selected financial data should be read in conjunction with the
financial statements and related notes appearing elsewhere in this Form
10-K report.
(2) Expenses for 2000 included an asset impairment charge in the amount of $4.5
million related to a write down of inventory at NTS/LFII (see Note 6). Also
included in 2000 expenses is an asset impairment charge for inventory of
$2.6 million related to the Fund's investment in an unconsolidated
affiliate (see Note 3). Expenses for 1997 include an asset impairment
charge in the amount of $11.6 million. This related to the Fund's
acquisition of the stock of NTS/LFII and NTS/VA. Also included in the 1997
expenses is an asset impairment charge of approximately $3.7 million
related to the Fund's investment in an unconsolidated affiliate.
(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 balance is net of an allowance for loan losses of
$1,500,000.
(4) Total revenue and other income included the gross profit and 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 9 of 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 note payable to affiliates.
(7) Represents a write-off of unamortized loan costs of approximately $114,000.
7
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Management's Discussion and Analsysis of Financial condition and Results of
Operations ("MD&A") is structured in three major sections. The first section
provides information related to liquidity and capital resources. The second
section analyzes consolidated cash flows and financial conditions. The final
section analyzes results of operations on a consolidated basis. A discussion of
certain market risks also follows. MD&A should be read in conjunction with the
financial statements in Item 8 and the cautionary statements below.
Cautionary Statements
- ---------------------
Some of the statements included in this Items 1 and 2, Business and Properties,
and Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, may be considered "forward-looking statements" since such
statements relate to matters which have not yet occurred. For example, phrases
such as "the Fund anticipates," "believes" or "expects" indicate that it is
possible that the event anticipated, believed or expected may not occur. Should
such event not occur, then the result which the Fund expected also may not occur
or occur in a different manner, which may be more or less favorable to the Fund.
The Fund does not undertake any obligations to publicly release the result of
any revisions to these forward-looking statements that may be made to reflect
any future events or circumstances.
Any forward-looking statements included in Management's Discussion and Analysis
of Financial Condition and Results of Operations, or elsewhere in this report,
which reflect management's best judgement based on factors known, involve risks
and uncertainties. Readers are cautioned not to place undue reliance on any
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Fund undertakes no obligation to publicly revise these
forward-looking statements 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 Joint Venture, in which
the Fund has a 50% interest, are engaged in the development and sale of
residential subdivision lots, the pricing and sale of which are subject to risks
generally associated with real estate development and applicable market forces
beyond the control of the Fund and/or its subsidiaries, including general and
local economic conditions, competition, interest rates, real estate tax rates,
other operating expenses, the supply of and demand for properties, zoning laws,
other governmental rules and fiscal policies, and acts of God. All of the
properties owned by NTS/LFII, NTS/VA and the Joint Venture are encumbered by
development loans from third party lenders which, given the nature of the risks
incumbent in real estate investment and development activities as stated above,
are inherently subject to default should the ability of NTS/LFII, NTS/VA, the
Joint Venture and/or the Fund to make principal and interest payments under such
development loans become impaired.
There is the potential for occurrences which could affect the Fund's ability to
control its professional and administrative expenses. Furthermore, the debt
service regarding the Fund's borrowings is variable based on current interest
rates, any fluctuations in which are beyond the control of the Fund. These
variances could, for example, impact the Fund's projected cash and cash
requirements as well as projected returns.
8
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 on the sale of 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 $2,043,000, $1,713,000 and $1,439,000 were
accrued to NTS Management or an affiliate during the years ended December 31,
2000, 1999 and 1998, 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 -
affiliates 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, 2000, 1999 and 1998, were approximately $561,000,
$567,000 and $496,000, respectively. These amounts are classified as selling,
general and administrative - affiliates in the accompanying consolidated
statements of operations.
Reference is made to Note 8 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,
2000, accounts payable - affiliates of $3,809,658 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, 2000
and those amounts that will accrue during fiscal 2001 through the period
10
Liquidity and Capital Resources - Continued
- -------------------------------------------
ending March 31, 2002, other than as permitted by cash flows of the Fund. There
can be no assurances that this level of support will continue past March 31,
2002.
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 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, 2000, the Fund had raised
approximately $63,690,000 and had paid distributions of approximately
$23,141,000. As of December 31, 2000, 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 October 31, 2000, NTS/VA and NTS/LFII entered into a loan agreement with a
financial institution for a combined principal sum of up to $18,000,000 and used
approximately $5,930,000 and $10,494,000 to pay the entire principal balance of
the NTS/LFII and NTS/VA loans, respectively. The new loan is secured by the
NTS/LFII and NTS/VA projects, a $2 million letter of credit issued by a third
party lender with the NTS/VA and NTS/LFII lender stated as the beneficiary, a
guarantee by the Fund for the full $18,000,000, and a personal guarantee by J.D.
Nichols for 50% of the outstanding loan balance. Additionally, the Joint Venture
will be required to apply 50% of the net sales proceeds against the outstanding
loan balance from the lot sales in the Joint Venture's project once its present
loan is paid in full. The lender requires contracts on lots with gross proceeds
exceeding 80% of a section's development costs before advancing funds for a
newly developed section at NTS/VA. The loan is a reducing revolver and the
maximum amount outstanding at the end of each year shall be as follows:
December 31, 2000 $ 18,000,000
December 31, 2001 $ 16,500,000
December 31, 2002 $ 11,000,000
December 31, 2003 $ 7,000,000
December 31, 2004 $ 4,000,000
The Fund's projections indicate that it will meet the minimum principal payment
requirement at December 31, 2001.
NTS/LFII is also encumbered by a mortgage loan in the amount of $4,000,000 (with
an outstanding balance of $2,490,000 as of December 31, 2000) 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 + .5%, payable
monthly, guaranteed by the Fund's sponsor. Principal payments totaling $300,000
are due
11
Liquidity and Capital Resources - Continued
- -------------------------------------------
twice a year, February through July and August through January. On January 31,
2000, an amendment reduced the principal payment requirement for the period
August 1, 1999 through January 31, 2000 to $100,000. The primarily 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, 2000 and 1999, the Fund's percentage interest was
50%, and the Fund's investment balance in the Joint Venture was $1,329,427 and
$4,151,307, respectively. The Fund's share of the Joint Venture's net loss for
the years ended December 31, 2000, 1999 and 1998, was $3,017,862, $405,183 and
$247,879, respectively.
Key Elements of the Consolidated Statements of Cash Flows:
2000 1999 1998
--------------------- --------------------- -------------------
Net cash provided by (used for) operating
activities $ 2,464,424 $ 259,355 $ (3,152,180)
Net cash used for investing activities (522,977) (318,148) (446,334)
------------------- ------------- --------------
Net cash flows from operating and investing
activities 1,941,447 (58,793) (3,598,514)
Net cash provided by (used for) financing
activities (1,990,004) (383,794) 3,246,678
------------------- ------------- --------------
Net decrease in cash and cash equivalents $ (48,557) $ (442,587) $ (351,836)
=================== ============= ==============
12
Operating Activity
- ------------------
Cash provided by operating activities was approximately $2,464,000 for the year
ended December 31, 2000. The primary components of the cash provided for
operating activities were the continued deferral of accounts payable to
affiliates of approximately $2,615,000 which is owed to NTS Development Company
and NTS Residential Management Company for salary and overhead reimbursements.
In addition, there was an increase in accounts payable of $1,338,000, which was
primarily for the development of NTS/LFII and NTS/VA projects, offset by
additions to inventory of approximately $949,000.
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 $1,877,000.
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 $1,120,000.
Investing Activity
- ------------------
Cash used for investing activities was approximately $523,000 for the year ended
December 31, 2000. The components of the use of cash for investing activities
were additional capital contribution to an unconsolidated affiliate of $196,000
and capital additions, primarily at the NTS/LFII and NTS/VA golf operations of
approximately $327,000.
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 NTS/LFII and NTS/VA 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 NTS/LFII and NTS/VA golf operations of
approximately $261,000.
Financing Activity
- ------------------
Cash used for financing activities was approximately $1,990,000 for the year
ended December 31, 2000. The components of the use of cash provided by financing
activities were net payments on notes payable relating to the development loans
for NTS/LFII and NTS/VA projects of approximately $2,432,000 partially offset by
net borrowings on notes payable to affiliate of approximately $546,000 which
were used primarily to fund activities of the NTS/VA project.
13
Financing Activity - Continued
- ------------------------------
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 NTS/LFII and NTS/VA 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 NTS/LFII and NTS/VA projects of approximately $3,565,000,
net borrowings on notes payable to affiliate of approximately $781,000 which
were used primarily to fund activities of the NTS/VA project and repayment of
advances to affiliates of approximately $631,000 which were initially used to
fund development costs at the NTS/VA project.
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, 2000, the Fund has raised approximately
$63,690,000 and has paid distributions of $23,141,000.
The liability of the Guarantor under the above guaranty 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.
Results of Operations
- ---------------------
Revenues
- --------
The following is an analysis of material changes in results of operations for
the periods ending December 21, 2000, 1999 and 1998. Items that did not have a
material impact on operations for the periods listed have been excluded from
this discussion.
Revenue for the year ended December 31, 2000, includes approximately $13,793,000
in lot sales consisting of approximately $7,292,000 and $6,501,000 from NTS/LFII
and NTS/VA, respectively. During this period 137 lots were sold for an average
selling price of approximately $101,000. Additionally, revenue for the year
ended December 31, 2000, includes approximately $149,000 recognized as revenue
from an installment sale at NTS/VA.
Revenue for the year ended December 31, 1999, includes approximately $14,256,000
in lot sales consisting of approximately $9,250,000 and $5,006,000 from NTS/LFII
and NTS/VA, respectively. During this period 165 lots were sold for an average
selling price of approximately $86,400.
14
Revenues - Continued
- --------------------
Management feels that the higher average selling price of lots closed for the
year ended December 31, 2000 compared to 1999, is a result of a dominant market
position at NTS/LFII in the Louisville, Kentucky market along with the
developing and selling more premium golf course property at NTS/LFII.
Revenue for the year ended December 31, 1998, includes approximately $8,061,000
in lot sales consisting of approximately $5,892,000 and $2,169,000 from NTS/LFII
and NTS/VA, respectively. During this period 136 lots were sold for an average
selling price of approximately $59,000.
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 $54,000 since they were smaller lots for the construction of patio
homes.
Cost of sales for the year ended December 31, 2000, 1999 and 1998 were
approximately $10,600,000, $10,027,000 and $6,168,000, respectively.
Presented below are the gross profit margins for the years ended December 31,
2000, 1999 and 1998:
2000 1999 1998
---------------- ------------------ ----------------
NTS/LFII 18% 24% 24%
NTS/VA 30% 40% 23%
Combined gross profit margins 24% 30% 23%
The difference in the cost of sales percentage of NTS/LFII compared to NTS/VA
and the difference in the lot sales mix will create a proportionate change in
the combined gross profit margin throughout a given year. The decrease in gross
profit margin is a function of a change in the estimates of sales values,
development costs and absorption periods over the life of the project. The
estimates are performed at the end of each fiscal year and the resulting cost of
sales percentages are applied prospectively. Management assesses the basis for
these annual projections at the end of each quarter and if changes in facts and
circumstances warrant interim adjustments are made to the cost of sales
percentages prospectively. In comparing the gross margin percentages for the
year ended December 31, 2000, 1999, and 1998, respectively, Management's
estimates have changed relative to the ultimate sales values, development costs
and absorption periods, and inherent economic volatility of residential real
estate they now believe will be realized during the duration of the projects.
Management feels that the decrease in the gross profit margin for 2000 compared
to 1999 will more likely than not be a permanent decrease.
During the year ended December 31, 1998, the Fund realized approximately
$382,000 of proceeds from a loan previously made to the Joint Venture project
during the time the Fund operated as a REIT. This loan was written off by the
Fund prior to its investment in the Joint Venture. The Fund had previously
established a $1,500,000 loan loss reserve regarding a temporary mortgage loan
to the 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.
15
Revenues - Continued
- --------------------
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, 2000, as well as
interest earnings on notes receivable for the fiscal years ended December 31,
2000, 1999 and 1998.
Expenses
- --------
The expenses presented as selling, general and administrative - affiliates on
the accompanying consolidated statements of operations 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/LFII
and NTS/VA. Such costs include compensation costs of management, accounting,
professional, engineering and development, marketing and office personnel
employed by NTS management and/or certain of its affiliates as well as various
non-payroll related operating expenses. Compensation costs are for those
individuals who rendered services full time 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 $2,043,000, $1,713,000 and
$1,439,000 were made to NTS Management or an affiliate during the years ended
December 31, 2000, 1999 and 1998, respectively, for actual personnel, marketing
and administrative costs as they relate to NTS/LFII, NTS/VA and the Fund.
Reimbursements for expense recovery increased approximately $330,000 in 2000
compared to 1999. This increase is due to the cost of additional finance and
accounting staff of approximately $131,000 at NTS/LFII and NTS/VA, since in 1999
NTS/LFII and NTS/VA were not fully staffed. The increase is also a result of an
increase of approximately $65,000 in data processing efforts associated with
replacing the current management software system for NTS/LFII and NTS/VA. These
efforts will continue through the year ending December 31, 2001. In addition,
there was an increase in sales and marketing efforts at NTS/LFII of
approximately $56,000, and an increase in sales salaries and commissions paid to
sales agents employed by NTS/LFII and NTS/VA of approximately $95,000.
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.
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 and 1998, the amounts incurred for
selling, general and administrative expenses were approximately $2,353,000 and
$1,437,000, respectively. The increase in 1999 compared to 1998 is primarily
attributable to an increase in advertising and marketing costs
16
Expenses - Continued
- --------------------
of approximately $724,000. Additional marketing promotions, new brochures, and
enhanced newspaper inserts at NTS/VA, and a home show exhibit at NTS/LFII
generated sales traffic through the NTS/VA and NTS/LFII communities, and as a
result of these efforts, lot sales increased for the year ended 1999 compared to
1998.
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, 2000, 1999 and 1998 overhead
recovery incurred was approximately $561,000, $567,000 and $496,000,
respectively.
The increase in overhead recovery for the year end December 31, 1999 compared to
1998 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, 2000 and 1999 approximately $2,749,000 and $2,652,000,
was capitalized in inventory and approximately $149,000 and $261,000,
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.
Pursuant to the guidance set forth in SFAS No. 121, the Fund recorded an
impairment charge in the fourth quarter ended December 31, 2000, reducing the
carrying value of inventory related to the NTS/LFII project. This determination
was based upon management's most recent assessment of NTS/LFII's projection
through completion of the development. The NTS/LFII projection indicated the
carrying amount of the long-lived assets exceeded the expected undiscounted net
cash flows to be received through the completion of the NTS/LFII project. The
circumstances involved in this determination related to the increase in expected
development costs to complete the NTS/LFII project.
The impairment charge was determined by management of the Fund utilizing a
discounted cash flows model. The impairment resulted in a charge of $4,500,000
presented in the accompanying financial statements within the statements of
operations line item described as "Asset Impairment Charge."
Generally Accepted Accounting Principles ("GAAP") requires that investments in
unconsolidated affiliates be recorded at the lower of carrying value or fair
market value. The application of these principles resulted in an asset
impairment charge of $5.2 million for OLFJV, the Fund's portion being $2.6
million. This charge is included in the loss from investment in unconsolidated
affiliate on the accompanying consolidated statements of operations. All
estimates used in this evaluation represent management's best estimates based on
the facts present at the date of such evaluations.
17
Expenses - Continued
- --------------------
The loan agreement permits the lender to reconsider funding of draws under
certain conditions, including among others, that neither NTS/VA, NTS/LFII, nor
the Fund experience a material adverse change in financial condition or
creditworthiness as defined in the agreement. As a result of the asset
impairment charges recognized in relation to the NTS/LFII and the Joint Venture
inventories during the fourth quarter ended December 31, 2000, the Fund was
technically in violation of this provision as of December 31, 2000. The Fund
received a letter dated April 2, 2001, from the lender waiving this provision of
the agreement with respect to this violation, but reserves the right to exercise
this provision for furure years.
No benefit for income taxes was provided during 2000, 1999 or 1998 as the Fund
has recorded a valuation allowance equal to the amount of the recorded benefit.
The Fund has determined that it is more likely than not that the net deferred
tax asset will not be realized. See Note 9 to the Fund's Consolidated Financial
Statements for a discussion of the components of the deferred tax asset.
During the year ended December 31, 2000 there was a write off of unamortized
loan costs remaining on the previous NTS/LFII loan for approximately $114,000
which is shown as an extraordinary expense on the accompanying consolidated
statements of operations. This loan was paid off in full on October 31, 2000
from borrowings on a new loan with a different lending institution. The
remaining unamortized loan costs on the previous NTS/VA loan was deferred and
amortized over the term of the new loan arrangement since the new loan was with
the same lending institution.
18
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 7 of the Fund's financial
statements under Item 8 of this Form 10-K. At December 31, 2000, a hypothetical
100 basis point increase in interest rates would result in an approximately
$270,000 increase in interest expense. During the year ended December 31, 2000,
the majority of interest expense incurred was capitalized in inventory.
19
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders of 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, 2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. 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, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
March 21, 2001
(Except with respect to the matter discussed in Note 14,
as to which the date is April 2, 2001)
20
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF DECEMBER 31, 2000 AND 1999
--------------------------------
2000 1999
------------------------ -----------------------
ASSETS
- ------
Cash and equivalents $ 570,465 $ 619,022
Membership initiation fees and other accounts
receivable, net of allowance of approximately $88,000 1,312,448 1,406,376
and $75,000
Notes receivable 1,213,191 2,139,857
Inventory 52,206,560 55,438,644
Property and equipment, net of accumulated
depreciation of approximately $745,000 and $479,000 566,008 505,219
Investment in unconsolidated affiliate 1,329,427 4,151,307
Advances to affiliates 20,252 -
Other assets 562,225 833,578
---------------------- ---------------------
TOTAL ASSETS $ 57,780,576 $ 65,094,003
====================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Accounts payable and accrued expenses $ 3,195,691 $ 1,857,760
Accounts payable - affiliates 3,809,658 1,194,395
Notes payable - affiliates 418,657 -
Mortgages and notes payable 25,910,622 28,342,811
Lot deposits 185,257 161,500
Deferred revenues 28,885 62,628
---------------------- ---------------------
TOTAL LIABILITIES 33,548,770 31,619,094
---------------------- ---------------------
COMMITMENTS AND CONTINGENCIES (Note 11)
Stockholders' equity:
Common stock, $0.001 par value, 6,000,000 shares
authorized; 3,187,333 shares issued and outstanding 3,187 3,187
Additional paid-in-capital 54,163,397 54,163,397
Accumulated deficit (29,934,778) (20,691,675)
---------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY 24,231,806 33,474,909
---------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 57,780,576 $ 65,094,003
====================== =====================
The accompanying notes are an integral part of these consolidated financial
statements.
21
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
-----------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
REVENUES
- --------
Lot sales, net of discounts $ 13,941,968 $ 14,256,114 $ 8,061,027
Cost of sales 10,600,444 10,026,656 6,167,853
--------------- ---------------- ---------------
Gross profit 3,341,524 4,229,458 1,893,174
Interest income on cash equivalents and
miscellaneous income 288,363 291,073 353,680
Recovery of provision for loan losses - - 382,096
--------------- ---------------- ---------------
NET REVENUES 3,629,887 4,520,531 2,628,950
--------------- ---------------- ---------------
EXPENSES
- --------
Selling, general and administrative - affiliates 2,604,470 2,280,064 1,934,784
Selling, general and administrative 2,332,664 2,352,831 1,437,413
Interest expense 148,925 260,899 364,173
Other taxes and licenses 93,902 30,443 28,116
Depreciation and amortization expense 61,011 40,427 86,196
Loss from investment in unconsolidated affiliate 3,017,862 405,183 247,879
Asset impairment charge (Note 6) 4,500,000 - -
--------------- ---------------- ---------------
TOTAL EXPENSES 12,758,834 5,369,847 4,098,561
--------------- ---------------- ---------------
Net loss before federal income tax and (9,128,947) (849,316) (1,469,611)
extraordinary expense
Federal income tax expense - - -
--------------- ---------------- --------------
Net loss before extraordinary expense (9,128,947) (849,316) (1,469,611)
--------------- ---------------- ---------------
Extraordinary expense (Note 7) 114,156 - -
--------------- ---------------- ---------------
Net loss $ (9,243,103) $ (849,316) $ (1,469,611)
=============== ================ ===============
Per share of common stock:
Net loss before extraordinary expense $ (2.86) $ (.27) $ (.46)
Extraordinary expense (0.04) - -
--------------- ---------------- ---------------
Net loss per share $ (2.90) $ (.27) $ (.46)
=============== ================ ===============
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.
22
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (1)
---------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
-----------------------------------------------------
Common Common Stock Additional Paid- Accumulated
Stock Shares Amount in-Capital Deficit Total
--------------- ---------------- ----------------- ----------------- ------------------
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
Net loss - - - (9,243,103) (9,243,103)
------------- --------------- ------------- ------------- -------------
Stockholders' equity
December 31, 2000 3,187,333 $ 3,187 $ 54,163,397 $ (29,934,778) $ 24,231,806
============= =============== ============= ============= =============
(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 Statement No. 130, "Reporting Comprehensive
Income."
The accompanying notes are an integral part of these consolidated financial
statements.
23
NTS MORTGAGE INCOME FUND
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
-----------------------------------------------------
2000 1999 1998
------------------ ------------------- ------------------
CASH FLOWS PROVIDED BY (USED FOR)
- ---------------------------------
OPERATING ACTIVITIES
- --------------------
Net loss $ (9,243,103) $ (849,316) $ (1,469,611)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization expense 61,011 40,427 86,196
Loss from investment in unconsolidated affiliate 3,017,862 405,183 247,879
Asset impairment charge 4,500,000 - -
Extraordinary charge 114,156 - -
Changes in assets and liabilities:
Membership initiation fees and other accounts
receivable 93,928 478,096 (258,983)
Notes receivable 926,666 1,163,904 269,401
Inventory (949,304) (1,877,229) (1,120,298)
Accounts payable - affiliates 2,615,263 1,194,395 -
Accounts payable and accrued expenses 1,337,931 (233,870) (948,838)
Lot deposits 23,757 30,105 33,895
Deferred revenues (33,743) (92,340) 8,179
------------- ------------- --------------
Net cash provided by (used for) operating activities 2,464,424 259,355 (3,152,180)
CASH FLOWS USED FOR INVESTING
- -----------------------------
ACTIVITIES
- ----------
Capital contribution to unconsolidated affiliate (195,982) (93,500) (185,500)
Purchase of property and equipment (326,995) (224,648) (260,834)
------------- ------------- --------------
Net cash used for investing activities (522,977) (318,148) (446,334)
------------- ------------- --------------
CASH FLOWS PROVIDED BY (USED FOR)
- ---------------------------------
FINANCING ACTIVITIES
- --------------------
Advances to affiliate (20,252) 30,338 (630,880)
Proceeds from mortgages and notes payable 11,929,435 20,489,549 17,798,287
Proceeds from notes payable - affiliates 545,657 606,666 3,225,385
Payments on mortgages and notes payable (14,361,624) (14,906,985) (14,233,781)
Payments on notes payable - affiliates (127,000) (6,696,959) (2,444,584)
Other assets 43,780 93,597 (467,749)
------------- ------------- --------------
Net cash provided by (used in) financing activities (1,990,004) (383,794) 3,246,678
------------- ------------- --------------
Net decrease in cash and equivalents (48,557) (442,587) (351,836)
CASH AND EQUIVALENTS, beginning of period 619,022 1,061,609 1,413,445
------------- ------------- --------------
CASH AND EQUIVALENTS, end of period $ 570,465 $ 619,022 $ 1,061,609
============= ============= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
24
NTS MORTGAGE INCOME FUND
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------
1. 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. Prior to making the acquisitions, the Fund had been the primary
creditor of these entities.
NTS/LFII is in the process of developing approximately 1,161
residential lots of land located in Louisville, Kentucky into a
single-family residential community (Lake Forest) and operates a
country club with a championship golf course for the purpose of selling
such residential lots and country club memberships. As of December 31,
2000, approximately 799 of the 1,161 residential lots have been
developed and approximately 65% 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 1,398 residential
lots of land located in the Chancellor district of Spotsylvania County,
Virginia, approximately 60 miles south of Washington D.C., into a
single-family residential community (Fawn Lake) 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, 2000,
approximately 558 of the 1,398 total lots have been developed and
approximately 34% 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 (the "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 3 - Investment in Unconsolidated Affiliate
for further information pertaining to the investment.
25
B) Basis of Accounting
-------------------
The Fund's records are maintained on the accrual basis of accounting in
accordance with Generally Accepted Accounting Principles ("GAAP") in
the United States.
C) Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The consolidated financial statements of the Fund include the assets,
liabilities, revenues and expenses of its 100% owned subsidiaries. The
consolidated statements of operations include the results of acquired
businesses accounted for under the purchase method of accounting from
the date of acquisition. Investments of 50% or less in affiliated
companies are accounted for under the equity method. All significant
intercompany transactions have been eliminated.
D) Use of Estimates in the Preparation of Consolidated Financial
-------------------------------------------------------------
Statements
----------
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the 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
-------------------
The Fund and its subsidiaries recognize revenue and related costs from
lot sales using the accrual method in accordance with GAAP, which is
when payment has been received and title, possession and other
attributes of ownership have been transferred to the buyer, and the
Fund and its subsidiaries are not obligated to perform significant
activities after the sale. The Fund and its subsidiaries generally
require a minimum down payment of at least 10% of the sales price of
the lot.
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, 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.
26
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 may be written
down to fair market value. Application of this standard during the year
ended December 31, 2000, resulted in an impairment loss of $4,500,000
for the NTS/LFII project. See Note 6 - Inventory for further
information pertaining to this impairment charge.
H) Advertising
-----------
The Fund expenses advertising costs as incurred. Advertising expense
was approximately $1,535,000, $1,523,000 and $718,000 during the years
ended December 31, 2000, 1999 and 1998, 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 are probable and can be reasonably estimated.
Environmental compliance costs are expensed as incurred. No such
liabilities existed as of December 31, 2000 and 1999.
J) Statements 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.
Cash payments for interest, net of amounts capitalized and cash
payments for income taxes, net of refunds are as follows:
2000 1999 1998
--------------------- -------------------- --------------------
Interest $ 152,679 $ 296,120 $ 244,295
Federal income taxes $ - $ - $ -
K) Segment Reporting
-----------------
The Fund's reportable operating segments include only one segment which
is the development and sale of single-family residential lots.
L) Reclassifications
-----------------
Certain reclassifications have been made to the 1999 and 1998 financial
statements to be in conformity with the 2000 presentation.
27
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 8 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. Investment in Unconsolidated Affiliate
--------------------------------------
Effective August 16, 1997, the Fund became a partner in the Joint Venture.
The other partners in the Joint Venture are Orlando Lake Forest, Inc.,
Orlando Capital Corporation and OLF II Corporation, all of whom are
affiliates of and are under common control with the Fund's Sponsor. The
Joint Venture will continue to operate under its current legal name as the
Orlando Lake Forest Joint Venture.
The Joint Venture owns the Orlando Lake Forest project, a single-family
residential community located in Seminole County, Florida (near Orlando).
The Joint Venture will continue to own and develop the Orlando Lake Forest
project.
The Fund contributed to the Joint Venture as a capital contribution its
interest in the principal and interest of the first mortgage loan on the
Orlando Lake Forest project, and obtained a 50% interest in the Joint
Venture. The NTS entities named above hold cumulatively the remaining 50%
interest in the Joint Venture.
The net income or net loss of the Joint Venture is allocated based on the
respective partner's percentage interest, as defined in the joint venture
agreement. As of December 31, 2000 and 1999, the Fund's percentage interest
was 50%, and the Fund's investment balance in the Joint Venture was
$1,329,427 and $4,151,307, respectively. The Fund's share of the Joint
Venture's net loss for the years ended December 31, 2000, 1999 and 1998,
was $3,017,862, $405,183 and $247,879, respectively.
GAAP requires that such investments be recorded at the lower of carrying
value or fair market value. The application of these principles resulted in
an asset impairment charge of $5.2 million in the fourth quarter of 2000,
the Fund's portion being $2.6 million. All estimates used in this
evaluation represent management's best estimates based on the facts present
at the date of such evaluations.
28
3. Investment in Unconsolidated Affiliate - Continued
--------------------------------------------------
During the year ended 2000, the Fund and the other joint venture partners
contributed as a capital contribution $391,964 to the joint venture, the
Fund's portion being $195,982.
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.
Presented below are approximate condensed balance sheets for the Joint
Venture as of December 31, 2000 and December 31, 1999, and approximate
statements of operations for the three years ended December 31, 2000, 1999
and 1998:
December 31, 2000 December 31, 1999
------------------------------ ------------------------------
Balance Sheets
- --------------
Notes receivable $ 84,000 $ 296,000
Inventory 8,805,000 14,755,000
Other, net 242,000 266,000
----------------------------- -----------------------------
Total assets $ 9,131,000 $ 15,317,000
============================= =============================
Mortgages and notes payable 4,401,000 5,299,000
Other liabilities 2,071,000 1,715,000
Equity 2,659,000 8,303,000
----------------------------- -----------------------------
Total liabilities and equity $ 9,131,000 $ 15,317,000
============================= =============================
Year Ended December 31,
--------------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- -----------------------
Statements of Operations
- ------------------------
Lot sales, net of discounts $ 3,804,000 $ 3,437,000 $ 2,625,000
Cost of sales (2,925,000) (2,551,000) (1,742,000)
Other expenses, net (6,915,000) (1,696,000) (1,379,000)
-------------- ----------------- ------------------
Net loss $ (6,036,000) $ (810,000) $ (496,000)
============== ================= ==================
4. Member Initiation Fees and Other Accounts Receivable
----------------------------------------------------
Fawn Lake Country Club and Lake Forest Country Club membership initiation
fees receivable totaled approximately $766,000 and $911,000 as of December
31, 2000 and 1999. The receivable is net of a discount of $66,000 and
$75,000, respectively, recorded to allow for the present value of the
membership initiation fee receivables considering the estimated timing of
collections.
5. 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
$1,123,000 and $2,015,000 are pledged as security for notes payable to
banks under certain Warehouse Line of
29
5. Notes Receivable - Continued
----------------------------
Credit Agreements and other debt agreements as of December 31, 2000 and
1999, respectively. There are also $90,000 and $125,000 of notes held by
NTS/VA that are not pledged as of 2000 and 1999, respectively.
Approximately $311,000, $118,000, $4,000, $4,000, and $129,000 of the notes
receivable balance, as of December 31, 2000, are due during the years ended
December 31, 2001 through 2005, respectively. Approximately $557,000 of the
notes receivable balance relates to the sale of 24 lots to one builder in
fiscal 1998 at NTS/VA. The $557,000 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.
6. Inventory
---------
Inventory consists of approximately the following as of December 31, 2000:
NTS/LFII NTS/VA Consolidated
----------------------- --------------------- --------------------
Land held for future development,
under development and completed lots $ 672,000 $ 23,023,000 $ 23,695,000
Country club (net of membership
initiation fees) 7,720,000 11,066,000 18,786,000
Amenities 1,663,000 8,063,000 9,726,000
-------------------- --------------- ---------------
$ 10,055,000 $ 42,152,000 $ 52,207,000
==================== =============== ===============
Inventory consists of approximately the following as of December 31, 1999:
NTS/LFII NTS/VA Consolidated
----------------------- --------------------- --------------------
Land held for future development,
under development and completed lots $ 3,772,000 $ 23,517,000 $ 27,289,000
Country club (net of membership
initiation fees) 10,847,000 9,431,000 20,278,000
Amenities 2,296,000 5,576,000 7,872,000
----------------- ----------------- ----------------
$ 16,915,000 $ 38,524,000 $ 55,439,000
================= ================= ================
NTS/LFII and NTS/VA capitalized in inventory approximately $2,890,000 and
$2,786,000 of interest and real estate taxes during 2000 and 1999,
respectively. Interest and real estate taxes incurred was approximately
$3,081,000 and $3,113,000 for the years ended December 31, 2000 and 1999,
respectively.
Inventory for 2000, includes approximately $28,413,000, net of
approximately $9,627,000 of country club membership initiation fees, of
costs incurred to date for the development of the Fawn Lake Country Club
and the Lake Forest Country Club.
Inventory for 1999, includes approximately $29,444,000 net of approximately
$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.
30
6. Inventory - Continued
---------------------
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 $720,000, which is expected to be offset by member initiation
fees. During 2000 and 1999 the Lake Forest Country Club operating deficit
was approximately $492,000 and $459,000, respectively, and was capitalized
as a cost of inventory.
During 2000 and 1999, the Fawn Lake Country Club deficit was approximately
$882,000 and $1,019,000, respectively, and was capitalized as a cost of
inventory.
Pursuant to the guidance set forth in SFAS No. 121, the Fund recorded an
impairment charge in the fourth quarter ended December 31, 2000, reducing
the carrying value of inventory related to the NTS/LFII project. This
determination was based upon management's most recent assessment of
NTS/LFII's projection through completion of the development. The NTS/LFII
projection indicated the carrying amount of the long-lived assets exceeded
the expected undiscounted net cash flows to be received through the
completion of the NTS/LFII project. The circumstances involved in this
determination related to the increase in expected development costs to
complete the NTS/LFII project.
The impairment charge was determined by management of the Fund utilizing a
discounted cash flows model. The impairment resulted in a charge of
$4,500,000 presented in the accompanying financial statements within the
statements of operations line item described as "Asset Impairment Charge."
7. Notes and Mortgage Loans Payable
--------------------------------
Notes and mortgage loans payable consist of the following:
2000 1999
------------------ -------------------
Note payable to a bank in the amount of $18,000,000, bearing interest at the
Prime Rate + 1.0%, payable monthly, due October 31, 2005, secured by inventory
of NTS/VA and NTS/LFII, generally principal payments consist of approximately
91% of the Gross Receipts from lot sales, personally guaranteed by Mr. J. D.
Nichols, Chairman of the Board of the Fund's Sponsor, for 50% of the outstanding
loan balance and a $2 million letter of credit from a third party lender with
the beneficiary being the bank. $ 15,630,107 $ -
Mortgage loan payable to a bank in the amount of $10,700,000, bearing interest
at the Prime Rate + 1.5 %, due December 1, 2002 secured by inventory of NTS/VA,
generally principal payments consist of approximately 91% of the Gross Receipts
of lot sales, 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
(Continued on next page)
31
7. Notes and Mortgage Loans Payable - Continued
--------------------------------------------
2000 1999
------------------ -------------------
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. J. D. Nichols up to 50% of the credit
facility. $ - $ 6,817,188
Note payable to a bank in the amount of $9,000,000, bearing interest at 8.25%,
payable monthly, due November 1, 2004, secured by a Certificate of Deposit owned
by NTS Financial Partnership, an affiliate of the Fund. 6,696,959 6,696,959
Mortgage loan payable to a bank in the amount of $4,000,000, bearing interest at
the Prime Rate + .5%, payable monthly, due July 31, 2002, secured by the Lake
Forest Country Club and golf course, principal reductions of $300,000 payable
every six months, guaranteed by NTS Corporation, the Fund's Sponsor. 2,490,000 2,870,000
Warehouse Line of Credit Agreements with three banks, bearing interest at the
Prime Rate + 1%, the Prime Rate + .75% and the Prime Rate + .5%, due December
15, 2001 $(108,535) September 18, 2001 $(115,336) and February 28, 2000 $(0),
secured by notes receivable (see Note 5), principal payments consist of payments
received from notes receivable securing the obligation. 223,871 936,645
Bank note payable in the amount of $1,174,800, bearing interest at the Prime
Rate + .5%, secured by note receivable (see Note 5), due in monthly installments
of $5,000, with any outstanding principal and accrued interest due and payable
in full on December 29, 2001. 680,925 1,119,800
Other 188,760 124,734
--------------- -------------
$ 25,910,622 $ 28,342,811
=============== =============
The Prime Rate was 9.5% and 8.5% at December 31, 2000 and 1999,
respectively.
The $108,535 warehouse line of credit agreement is guaranteed by NTS
Corporation.
The minimum scheduled principal payments on debt outstanding at December
31, 2000 are as follows:
2001 $ 1,576,929
2002 5,299,476
2003 5,329,242
2004 9,704,975
2005 4,000,000
Thereafter -
-----------------
$ 25,910,622
=================
32
7. Notes and Mortgage Loans Payable - Continued
--------------------------------------------
On October 31, 2000, NTS/VA and NTS/LFII entered into a loan agreement with
a financial institution for a combined principal sum of up to $18,000,000
and used approximately $5,930,000 and $10,494,000 to pay the entire
principal balance of the NTS/LFII and NTS/VA loans, respectively. The new
loan is secured by the NTS/LFII and NTS/VA projects, a $2 million letter of
credit issued by a third party lender with the NTS/VA and NTS/LFII lender
stated as the beneficiary, a guarantee by the Fund for the full
$18,000,000, and a personal guarantee by J.D. Nichols for 50% of the
outstanding loan balance. Additionally, the Joint Venture will be required
to apply 50% of the net sales proceeds against the outstanding loan balance
from the lot sales in the Joint Venture's project once its present loan is
paid in full. The lender requires contracts on lots with gross proceeds
exceeding 80% of a section's development costs before advancing funds for a
newly developed section at NTS/VA. The loan is a reducing revolver and the
maximum amount outstanding at the end of each year shall be as follows:
December 31, 2000 $ 18,000,000
December 31, 2001 $ 16,500,000
December 31, 2002 $ 11,000,000
December 31, 2003 $ 7,000,000
December 31, 2004 $ 4,000,000
The Fund's projections indicate that it will meet the minimum principal
payment requirement at December 31, 2001.
During the year ended December 31, 2000 there was a write off of
unamortized loan costs remaining on the previous NTS/LFII loan for
approximately $114,000 which is shown as an extraordinary expense on the
accompanying consolidated statements of operations. The tax effect of this
amount was not provided given the Fund's current net operating loss
carryforward position. This loan was paid off in full on October 31, 2000
from borrowings on a new loan with a different lending institution. The
remaining unamortized loan costs on the previous NTS/VA loan was deferred
and amortized over the term of the new loan arrangement since the new loan
was with the same lending institution.
8. Related Party Transactions
--------------------------
As of December 31, 2000, the Sponsor or an affiliate owned 112,500 shares
of the Fund. The Fund thereby allowed Fawn Lake to utilize such funds for
development purposes and entered into the following agreements with various
affiliates of the Sponsor regarding the ongoing operation of the Fund.
Property Management Agreements
------------------------------
The ongoing operation and management of the Lake Forest North and Fawn Lake
projects will be conducted by NTS Residential Management Company ("NTS
Management") under the terms of (i) a property management agreement
executed on December 30, 1997, and dated as of October 1, 1997, by and
among the Fund, NTS/LFII and NTS Management for the Lake Forest North
project, and (ii) a property management agreement executed on December 30,
1997, and
33
8. Related Party Transactions - Continued
--------------------------------------
Property Management Agreements - Continued
------------------------------------------
dated as of October 1, 1997, by and among the Fund, NTS/VA and NTS
Management for the Fawn Lake project(collectively, the "Management
Agreements"). NTS Management is a wholly-owned subsidiary of NTS
Development Company. NTS Development Company is a wholly-owned subsidiary
of the Fund's Sponsor. The Management Agreements have an initial term
through December 31, 2003, subject to extension under certain conditions,
and are renewable for successive six (6) year terms thereafter. Under the
Management Agreements, NTS Management will be reimbursed for costs incurred
in the operation and management of the Lake Forest North and Fawn Lake
projects, will be entitled to an overhead recovery, and will accrue an
incentive payment payable all as provided therein.
These expense reimbursements include direct and pro-rated costs incurred in
the management and operation of NTS/LFII and NTS/VA. Such costs include
compensation costs of management, accounting, professional, engineering and
development, marketing and office personnel employed by NTS management
and/or certain of its affiliates as well as various non- payroll related
operating expenses. Compensation costs are for those individuals who
rendered services full time and on site at the residential projects and
with respect to the residential projects, but who have multiple residential
projects responsibilities some of which may be affiliated entities of NTS
Management. For services provided by individuals not on site, or those with
multiple residential project responsibilities, costs are pro-rated by NTS
Management and allocated to the appropriate residential project. As
permitted by the property management agreements, the Fund was charged the
following amounts for the year ended December 31, 2000, 1999 and 1998.
These amounts are reflected in selling, general and administrative -
affiliates on the accompanying consolidated statements of operations.