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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to _____________
Commission file number 0-18550
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NTS MORTGAGE INCOME FUND
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 61-1146077
- ----------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10172 Linn Station Road, Louisville, Kentucky 40223
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 426-4800
------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Shares of Common Stock
----------------------
(Title of Class)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of March 1, 1995, there were approximately 3,187,000 shares of common stock
outstanding. The aggregate sales price for shares sold was approximately
$63,690,000. There is no current market for these shares although it is possible
that one will develop.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Prospectus of the registrant dated March 31, 1989, as
supplemented by Supplements No. 1, No. 2, No. 3, No. 4, No. 5 and No. 6 dated
October 16, 1989, March 29, 1990, April 23, 1990, July 25, 1990, September 6,
1990, and August 23, 1991, respectively, (collective with the "Prospectus") and
filed pursuant to Rule 424 under the Securities Act of 1933, are incorporated by
reference into this Annual Report on Form 10-K.
Index to Exhibits is located on page 77.
TABLE OF CONTENTS
Pages
-----
PART I
Item 1 Business 3-7
Item 2 Properties 7
Item 3 Legal Proceedings 7-8
Item 4 Submission of Matters to a Vote of Security Holders 8
PART II
Item 5 Market for the Registrant's Shares and Related
Stockholder Matters 9-10
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-24
Item 8 Financial Statements and Supplementary Data 25-70
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 71
PART III
Item 10 Directors and Executive Officers of the Registrant 71-75
Item 11 Executive Compensation 75
Item 12 Security Ownership of Certain Beneficial Owners and
Management 75-76
Item 13 Certain Relationships and Related Transactions 76
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 77
Signatures 78
- 2 -
PART I
Item 1. Business
--------
NTS Mortgage Income Fund (the "Fund"), a Delaware corporation, was formed on
September 26, 1988. The Fund operates as a real estate investment trust (REIT)
under the Internal Revenue Code of 1986 (the "Code"), as amended. NTS
Corporation is the sponsor of the Fund (the "Sponsor") and its affiliate, NTS
Advisory Corporation, is the advisor to the Fund (the "Advisor"). The Fund
commenced an offering of Shares of Common Stock (Shares) on March 31, 1989.
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. The Fund extended the offering from March 31,
1990 to March 31, 1991. The Fund terminated the offering March 31, 1991, after
which time the Fund issued shares pursuant to its Dividend Reinvestment Plan.
During the second quarter of 1992, the Fund's Dividend Reinvestment Plan was
terminated. The Fund raised approximately $64 million from the sale of
approximately 3,187,000 shares including shares issued pursuant to the Fund's
Dividend Reinvestment Plan.
The Fund has used the proceeds of this offering primarily to make Residential
Land Development Loans to Affiliated Borrowers. It is anticipated that
substantially all of any future Mortgage Loans will be made to Affiliates of the
Sponsor. In addition, the Fund may make investments in real estate in amounts
not to exceed approximately 10% of funds available for investment. Mortgage
Loans are secured by a lien on the Borrower's real estate or by other REIT
qualifying security approved by the Board of Directors, including, without
limitation, by an interest in the Borrower or by a similar security interest.
Based upon current market conditions and foreseeable investment opportunities,
it is anticipated that no more than 25% of the Fund's proceeds will be invested
in Junior Mortgage Loans (excluding Temporary Mortgage Loans and "phase-in"
loans). In addition, NTS Guaranty Corporation, an Affiliate of the Sponsor, has
agreed to guarantee repayment of the principal of all Junior Mortgage Loans and
Temporary Mortgage Loans made to Affiliated Borrowers. Although the Fund has
reserved the right to make Real Estate Investments, it only intends to do so if
such an investment would be in the best interest of the Fund and assist it in
achieving its primary objectives. For example, the Fund may find it in its best
interest to make a Real Estate Investment which will generate non-cash
deductions from taxable income thereby allowing the Fund to make Mortgage Loans
providing for the accrual of deferred interest without causing difficulties in
meeting the distribution requirements of the Code.
Transactions entered into between the Fund and the Advisor and its Affiliates
are subject to an inherent conflict of interest. The Directors of the Fund and
the Advisor may face certain conflicts of interest in enforcing the rights of
the Fund against any Affiliated Borrower.
The Directors would consider the following factors in resolving certain inherent
conflicts of interest:
(1) When considering an advance of additional funds to an Affiliated
Borrower, factors such as projections for the development and operation of the
property, market value and market conditions generally and for the type of
property anticipated to be developed by the Affiliated Borrower, the credit
worthiness and equity interest of the Affiliated Borrower, the current value of
the property, the security and the availability of additional collateral.
- 3 -
Item 1. Business - Continued
--------------------
(2) In deciding whether to waive a default by an Affiliated Borrower,
foreclose on a Mortgage Loan or remedy a default on senior indebtedness, the
Directors will consider the nature of the default, its materiality, the
anticipated time and expense of pursuing the foreclosure as well as the cost of
waiving the default, the anticipated viability of the Affiliated Borrower and
the likelihood of the Affiliated Borrower remedying the default within a
reasonable time. When considering enforcing a due-on-sale clause, the Directors
will review the Fund's anticipated investments and the need for additional
funds, as well as market conditions, focusing on the specific intended use of
the property and the credit worthiness of the purchaser.
(3) In establishing the amount of the Interest Reserve to be funded, the
Directors will review the expected return on the reserve, the variability of the
interest rate on the Mortgage Loan, the outstanding indebtedness, the Affiliated
Borrower's anticipated cash flow, the operating history and the appraised value
and potential appreciation of the property.
(4) In determining whether to vary the terms of Mortgage Loans from the
anticipated terms specified in the Prospectus, the Directors will review
economic and market conditions and focus upon the locale of the property, the
availability of additional security to collateralize the loan and the equity
that the Affiliated Borrower has invested in the property.
(5) In considering whether to refinance a property, factors relating to the
value of the property compared to the Affiliated Borrower's total debt, the
terms of the proposed financing and the Affiliated Borrower's ability to service
the total debt, the Fund's participation in the potential appreciation of the
property, as well as other investment opportunities available to the Fund will
be considered. If the Affiliated Borrower seeks to refinance to prevent a
default and subsequent foreclosure, the Directors would consider the factors set
forth in (2) above.
In connection with the making of any Mortgage Loan to an Affiliated Borrower the
Independent Directors are required to obtain on opinion from an Independent
Advisor that the proposed Mortgage Loan is as fair and at least as favorable to
the Fund as a Mortgage Loan to a Non-Affiliated Borrower in similar
circumstances. The Independent Advisor's fees will generally be paid by the
Affiliated Borrower. An Independent Advisor may face certain conflicts of
interest in rendering its opinion due to the fact that its fees may be paid by
the Affiliated Borrower. However, the opinion of the Independent Advisor will be
requested by and rendered to the Fund.
Generally the Fund's Mortgage Loans will have maturities of between one and
seven years, subject to extension. The Fund's Mortgage Loans to Affiliated
Borrowers will generally provide for two-year extensions of the loan term at the
option of the Borrower upon the payment of an extension fee.
Affiliated Borrowers will generally pay Points upon the initial funding of a
Mortgage Loan equal to 1% of the maximum amount of the Mortgage Loan committed
to by the Fund.
Affiliated Borrowers will generally be required to pay Regular Interest on a
quarterly basis during the term of the Mortgage Loan. Affiliated Borrowers will
have the option to choose a fixed or floating interest rate on Mortgage Loans at
the time of initial funding. The floating rate is adjusted monthly based on the
average of the applicable rate during the previous month. Affiliated Borrowers
will generally be provided the option to convert from a fixed rate Mortgage Loan
to a floating rate Mortgage Loan, or a floating rate Mortgage Loan to a fixed
rate Mortgage Loan, once during the term of the Mortgage Loan and once during
the extension period.
- 4 -
Item 1. Business - Continued
--------------------
In the case of Residential or Commercial Land Development Loans and other loans
secured by properties not held for investment, the Fund will ordinarily receive
Gross Receipts Interest. Generally, Gross Receipts Interest will be an amount
equal to 5% of the Affiliated Borrower's Gross Receipts derived from the sale,
during the term of the Mortgage Loan, of all or a portion of the property which
serves as collateral of the Mortgage Loan, although this amount may be varied in
the discretion of the Board of Directors.
The Fund will obtain an MAI Appraisal prepared by an independent MAI appraiser
and a mortgagee's title insurance policy or commitment in connection with
obtaining each Mortgage Loan.
Generally, Residential or Commercial Land Development Loans will be repaid from
proceeds from the sale of parcels of the property, or from refinancing of the
property. Temporary Mortgage Loans are expected to be repaid from permanent
financing (including a Permanent Mortgage Loan from the Fund) or from the sale
or refinancing of the property.
Mortgage Loans to Affiliated Borrowers are generally non-recourse and have the
customary provision in the market for condemnation, events-of-default,
acceleration and other remedies.
The Fund's investments at December 31, 1995 were as follows:
A Mortgage Loan to NTS/Lake Forest II Residential Corporation, an Affiliated
Borrower, to fund the development of Lake Forest North, a specified
investment. The loan bears interest at an annualized rate equal to the
greater of 17% of Gross Receipts from the sale of residential lots or 4.42%
of the average outstanding loan balance and matures July 1, 1997. It is
secured by a first mortgage on approximately 556 acres of residential land
located in Louisville, Kentucky. The Fund has subordinated its first mortgage
on approximately 180 acres to unaffiliated lenders who provided construction
financing in the amount of $5,340,000 (with an outstanding balance of
$562,873 as of December 31, 1995) for the development of those acres. The
Fund's loan balance was $25,935,985 at December 31, 1995.
A Mortgage Loan to NTS/Virginia Development Company, an Affiliated Borrower,
to fund the development of Fawn Lake, a specified investment. The loan bears
interest at an annualized rate equal to the greater of 17% of Gross Receipts
from the sale of residential lots or 4.42% of the average outstanding loan
balance and matures July 1, 1997. It is secured by a first mortgage on
approximately 2,237 acres of residential land and improvements thereon
located in Fredericksburg, Virginia. The Fund has subordinated its first
mortgage on approximately 37 acres to an unaffiliated lender who provided
construction financing in the amount of $540,000 (with an outstanding balance
of $502,937 as of December 31, 1995) for the development of those acres. The
Fund's loan balance was $27,459,598 at December 31, 1995.
A Temporary Mortgage Loan to NTS/Virginia Development Company, an Affiliated
Borrower, to fund the construction of the Fawn Lake Golf Course. The loan
bears interest at the Prime Rate plus 3/4%, payable quarterly, and matures
November 30, 1996. The loan is secured by a first mortgage on approximately
187 acres of residential land and improvements thereon. The principal balance
is guaranteed by NTS Guaranty Corporation. The Fund's loan balance was
$1,053,953 at December 31, 1995, which is net of unamortized deferred
commitment fees of $20,000.
- 5 -
Item 1. Business - Continued
--------------------
A Mortgage Loan to Orlando Lake Forest Joint Venture, an Affiliated Borrower,
to fund the development of Orlando Lake Forest, a specified investment. The
loan bears interest at an annualized rate equal to the greater of 17% of
Gross Receipts from the sale of residential lots or 6.46% of the average
outstanding loan balance and matures January 31, 1998. It is secured by a
participation interest in a first mortgage on approximately 425 acres of
residential land located in Orlando, Florida. An Affiliate of the Fund's
Sponsor participates with the Fund regarding this Mortgage Loan. As of
December 31, 1995, the Fund's ownership percentage was approximately 59% and
the Fund's share of the outstanding loan balance was $5,633,787, which is net
of an unaccreted discount of $1,275,879.
A Phase-In Mortgage Loan to Orlando Lake Forest Joint Venture, an Affiliated
Borrower, to develop Orlando Lake Forest Section II, a specified investment.
The loan bears interest at the Prime Rate plus 2%, payable quarterly, and is
a demand loan. The loan is secured by a first mortgage on approximately 2
acres of residential land located in Orlando Florida. Effective July 1, 1992,
the Fund discontinued accruing interest income on the Phase-In Mortgage Loan
and classified the loan as non-earning. The Fund has entered into a
forbearance agreement with the Joint Venture whereby, effective April 1,
1995, no interest will be due on this loan until January 31, 1998. In
addition, the Fund has reduced the amount due on the Phase-In Mortgage Loan
by $326,603 as an amount deemed uncollectible. The Fund has also established
a loan loss reserve of $53,397 as of December 31, 1995 regarding this loan.
The Fund's loan balance was $147,555 at December 31, 1995.
A Temporary Mortgage Loan to Orlando Lake Forest Joint Venture, an Affiliated
Borrower, the proceeds of which were used to partially fund the Orlando Lake
Forest Project, a specified investment. The loan bears interest at the Prime
Rate plus 2%, payable quarterly, and is a demand loan. It is secured by the
partnership interests of both general partners in the Orlando Lake Forest
Joint Venture and a pledge of 390 shares of the Class A common stock in
NTS/Virginia Development Company by J. D. Nichols, Chairman of the Board of
Directors of the Sponsor. The principal balance is guaranteed by NTS Guaranty
Corporation. Effective July 1, 1992, the Fund discontinued accruing interest
income on the Temporary Loan and classified the loan as non-earning. The Fund
has entered into a forbearance agreement with the Joint Venture whereby,
effective April 1, 1995, no interest will be due on this loan until January
31, 1998. In addition, the Fund has established a loan loss reserve of
$1,500,000 as of December 31, 1995 regarding this loan. In October 1993,
NTS/Virginia Development Company (Fawn Lake) and NTS/Lake Forest II
Residential Corporation (Lake Forest) entered into a participation agreement
with the Fund whereby they were each assigned an interest in the Fund's
Temporary Mortgage Loan with the Orlando Lake Forest Joint Venture in
consideration for reducing the amount of Supplemental Interest credit then
due to them by the Fund. As of December 31, 1995, the interest assigned to
Fawn Lake and Lake Forest was 14.862% and 16.103%, respectively. The Fund's
ownership percentage was 69.035% and the Fund's share of the loan balance was
$4,978,225 at December 31, 1995.
The Fund's objectives are to (i) preserve and protect capital; (ii) distribute
cash flow on a monthly basis; 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 the Fund's share
in the Increase in Value of a property securing a Mortgage Loan and shall be
payable in connection with Mortgage Loans secured by Real Estate not held for
sale in the ordinary course of business. Gross Receipts Interest is an amount
equal to a specified percentage of the
- 6 -
Item 1. Business - Continued
--------------------
Affiliated Borrower's Gross Receipts from the sale of the underlying Real Estate
received during the term of the Mortgage Loan and shall be payable in connection
with Mortgage Loans secured by Real Estate held for sale in the ordinary course
of business. It is not an objective of the Fund to provide tax-sheltered income.
There can be no assurance that these investment objectives will be attained.
The Fund has elected and is qualified to be treated as a real estate investment
trust under the Internal Revenue Code Sections 856-860 for the years ended
December 31, 1995, 1994 and 1993. The Fund intends to continue to qualify as a
REIT. The Fund is required to terminate and liquidate its assets by December 31,
2008, although the Fund expects to seek the Stockholders' approval to dissolve
the Fund by March 30, 2006 which is approximately 15 years after the Final
Closing Date.
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, delegated broad powers to the Advisor
to administer the day-to-day operations of the Fund. The Advisor has delegated
substantially all its duties to the Sponsor. All personnel rendering services to
the Fund are employees of the Sponsor or its affiliated companies. The Fund does
not directly employ any persons other than the Independent Directors and the
Advisor.
The business of the Fund is not seasonal and the Fund does no foreign or export
business.
Item 2. Properties
----------
The Fund makes loans which are secured or collateralized by an interest in real
property and does not now, nor contemplate in the immediate future, owning any
properties. See Item 1 of this Form 10-K and Note 4 of the Fund's Notes to
Financial Statements for information pertaining to the properties which
collateralize the Fund's mortgage loans.
Item 3. Legal Proceedings
-----------------
In August 1992, Jeno Paulucci & Silver Lakes I, Inc., individually and d/b/a PR
Partners (PR Partners) filed a complaint ("Original Complaint") against J. D.
Nichols, NTS Corporation, NTS/Florida Residential Properties, Inc., Orlando Lake
Forest, Inc. and Banc One Mortgage Corporation. The Original Complaint alleges,
inter alia, mismanagement of the Orlando Lake Forest project by Orlando Lake
Forest, Inc. as well as conspiracy among the defendants against PR Partners and
its principals. The Original Complaint requested unspecified damages and
declaratory and injunctive relief against the defendants. The Fund was not named
as a defendant in the Original Complaint. In July 1994, the plaintiffs filed an
amended complaint ("Amended Complaint") adding NTS/Residential Properties, Inc.
- - Florida, Lake Forest Realty, Inc. and the Fund as defendants, and have amended
the Complaint twice more in response to rulings by the trial judge requiring
clarification of certain claims asserted by the plaintiffs. The case is in the
early discovery phase, and certain of the defendants have answered the Complaint
and asserted counterclaims against the plaintiffs, including a claim that PR
Partners has breached its fiduciary duty. Lake Forest Realty, Inc., the Fund and
Banc One Mortgage Corporation have again moved to dismiss the Complaint, as
amended. Therefore, an outcome to this litigation cannot be predicted at
present. Mr. J. D. Nichols and the principals of the defendants have indicated
that the suit will be vigorously defended, and that counterclaims will be
vigorously prosecuted against the plaintiffs. Management believes that this
lawsuit will have no material effect on the Fund's operations or financial
condition.
- 7 -
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
quarter ended December 31, 1995.
- 8 -
PART II
Item 5. Market for the Registrant's Shares and Related Stockholder Matters
------------------------------------------------------------------
The selling price of the Shares was $20 per Share. The Fund's Shares are freely
transferable but are not listed or included for quotation on a national
securities exchange. As of March 1, 1996, there were 4,086 record holders of the
Fund's Shares. Cash dividends declared varied based upon the date of Stockholder
admittance. Dividends in 1995, 1994 and 1993 represent a return on invested
capital of 1.01%, 2.30% and 3.83%, respectively. The amount of dividends
declared was based on net taxable income earned per year.
Dividends per share for each of the three years ended December 31, 1995 were
declared as follows:
1995 1994 1993
---- ---- ----
January $.03 $.06 $.05
February .03 .06 .05
March .03 .06 .05
April .03 .03 .05
May .01 .03 .05
June .01 .03 .05
July .01 .03 .07
August .01 .03 .07
September .01 .03 .07
October .01 .03 .07
November .01 .03 .07
December .01 .04 .12
--- --- ---
$.20 $.46 $.77
=== === ===
The following table presents that portion of the Fund's dividends that represent
a return of capital under Generally Accepted Accounting Principals (GAAP) for
each of the three years ended December 31, 1995.
1995 1994 1993
---------- ---------- ----------
Net Income $ 858,334 $1,782,171 $1,530,596
Dividends Declared $ 643,841 $1,466,166 $2,439,335
Return of Capital
(GAAP Basis) $ -- $ -- $ 908,739
The Fund uses tax-reporting accounting in applying the REIT-qualifying test that
requires 95% of taxable income to be paid out in dividends.
- 9 -
Item 5. Market for the Registrant's Shares and Related Stockholder Matters
------------------------------------------------------------------
- Continued
-----------
The following table presents that portion of the Fund's dividends that represent
a return of capital under tax-reporting accounting.
1995 1994 1993
---------- ---------- -------
Net Taxable Income $ 672,098 $1,540,323 $2,553,129
Dividends Declared $ 643,841 $1,466,166 $2,439,335
Return of Capital
(GAAP Basis) $ -- $ -- $ --
See Note 1C to Notes to Financial Statements and the Results of Operations under
Management's Discussion for a detailed discussion of the differences between
GAAP net income and net taxable income.
The Fund intends to continue to distribute at least 95% of taxable income per
year in order to continue to qualify as a REIT in accordance with the Code.
The Fund established a Dividend Reinvestment Plan (the "Plan") to enable
Stockholders to elect to have their distributions from the Fund invested in
additional shares. The Plan also operated as a repurchase plan for Stockholders
who, under certain conditions, had been able to notify NTS Securities, Inc. of
their desire to sell their Shares to the Plan. The Plan began operations at the
time the first distribution was made to Stockholders (June 30, 1989). In the
second quarter of 1992, the Fund terminated the Plan. An analysis of the costs
and expenses to be incurred in order to comply with the regulatory review
associated with a dividend reinvestment plan was conducted. After consideration
of such expenses, the Fund determined that the best course of action was to
terminate the Plan. With the termination of the Plan, the Fund will no longer be
able to provide a means by which certain hardship cases could liquidate their
shares through the Fund. At some point in the future, the Fund may reexamine
these issues and determine to reinstate the Plan.
No shares were specifically reserved by the Fund for sale to the Plan.
- 10 -
Item 6. Selected Financial Data
------------------------
Years ended December 31, 1995, 1994, 1993, 1992 and 1991.
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Mortgage Loans
Receivable net (2) $63,655,706 $50,583,397 $50,884,695 $54,487,053 $53,175,279
========== ========== ========== ========== ==========
Total Assets $65,511,633 $51,264,380 $51,635,523 $55,319,877 $54,054,635
========== ========== ========== ========== ==========
Total Revenues $ 2,884,652 $ 2,985,004 $ 4,025,301 $ 4,957,075 $ 5,818,075
Total Expenses 2,026,318 1,202,833 2,494,705 1,244,816 860,062
---------- ---------- ---------- ---------- ----------
Net Income $ 858,334 $ 1,782,171 $ 1,530,596 $ 3,712,259 $ 4,958,013
========== ========== ========== ========== ==========
Weighted Average Number
of Shares 3,187,333 3,187,333 3,187,333 3,179,039 3,060,124
========== ========== ========== ========== ==========
Net Income per Share of
Common Stock $ .27 $ .56 $ .48 $ 1.17 $ 1.62
========== ========== ========== ========== ==========
Taxable Income (prior to
dividend paid deduction)
(3) $ 672,098 $ 1,540,323 $ 2,553,129 $ 4,386,749 $ 7,364,401
========== ========== ========== ========== ==========
Taxable Income (prior to
dividend paid deduction)
per Share of Common
Stock $ .21 $ .48 $ .80 $ 1.38 $ 2.40
========== ========== ========== ========== ==========
Cash Dividends Declared
(4) $ 643,841 $ 1,466,166 $ 2,439,335 $ 4,295,678 $ 7,364,276
========== ========== ========== ========== ==========
Cash Dividends Declared
per Share of Common
Stock $ .20 $ .46 $ .77 $ 1.35 $ 2.40
========== ========== ========== ========== ==========
(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) Represents the carrying amount of the mortgage loans, which is equal to
their face amount less unamortized commitment fees and unaccreted
discounts. The 1995, 1994, 1993 and 1992 balances are net of an allowance
for loan losses of $1,553,397, $1,638,855, $1,730,000 and $230,000,
respectively.
(3) See Note 1C of the Notes to Financial Statements for an explanation of
differences between net income and taxable income.
(4) Cash dividends declared during 1995, 1994, 1993, 1992 and 1991 varied
based upon the date of Stockholder admittance.
- 11 -
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
The Fund commenced an offering to the public on March 31, 1989 and was
authorized to sell up to 2,500,000 shares of common stock at $20.00 per share
(subject to an increase to 5,000,000 shares at the option of the Fund).
Approximately 3,187,000 shares were sold representing approximately $64 million
in sales and approximately $9.5 million in selling expenses and other offering
costs. The net offering proceeds remaining, after payment of brokerage
commissions, organizational expenses and other costs, have been used to make
Mortgage Loans and Temporary Investments and such other investments as permitted
by the Fund's Prospectus.
Liquidity and Capital Resources
- -------------------------------
The Fund's objectives are to make investments which will: (i) preserve and
protect the Fund's capital, (ii) provide for monthly distributions to
Stockholders, and (iii) increase the value of the Fund's net assets and its
shares of common stock through receipt of Incentive Interest or Gross Receipts
Interest.
The Fund's primary investment strategy is to make investments in Mortgage Loans.
As of December 31, 1995 and 1994 the Fund had commitments outstanding for
Mortgage Loans aggregating $64,315,000 and $56,580,000 of which approximately
$59,177,000 and $45,202,000 had been funded, respectively. The balance of these
commitments will be drawn over a period of years in a series of advances as the
borrowers develop the projects. Also, the Fund has invested in Temporary
Investments totalling approximately $6,032,000 and $7,020,000 as of December 31,
1995 and 1994, respectively. Reference is made to Note 4 of the Notes to
Financial Statements for further information regarding the Fund's investments as
of December 31, 1995.
The Orlando Lake Forest Project (the "Orlando Project") is a single-family
residential community owned by the Orlando Lake Forest Joint Venture, an
Affiliated Borrower. Until August 30, 1995, the partners of the Joint Venture
were Orlando Lake Forest, Inc., an Affiliate of the Fund's Sponsor, and PR
Partners, an unaffiliated third party. On August 30, 1995, the interests of PR
Partners were acquired by NTS/Orlando Development Company, an Affiliate of the
Fund's Sponsor, due to the failure of PR Partners to make required capital
contributions to the Joint Venture. PR Partners is disputing the efficacy of
this transfer. The Orlando Project is encumbered by the following loans.
The Orlando Project is encumbered by a loan in the amount of $13,000,000
(with an outstanding balance of $11,741,899 as of December 31, 1995) from
the Fund and an Affiliate of the Fund's Sponsor. The loan is secured by a
second mortgage on Section II of the Project and a first mortgage on the
balance of the Project, approximately 425 acres of residential land and
improvements thereon located in Orlando, Florida. On February 17, 1995, an
agreement was reached with the bank which held the first mortgage on the
majority of the Orlando Project. As a result of negotiations between the
Fund and the unaffiliated bank, the bank sold its interest in the loan to
the Fund at a substantial discount. The Fund and the Affiliate of the
Fund's Sponsor, which holds the remaining interest in the first mortgage,
entered into a participation agreement (the Master Loan Participation
Agreement) whereby the Fund and the Affiliate will own a proportionate
share of the $13 million first mortgage. The initial ownership percentages
were 50% to the Fund and 50% to the Affiliate, however, the percentage
ownership will fluctuate as additional principal is advanced to the Orlando
Project by the Fund and as principal payments are received. Ownership
percentage is determined in accordance with the ratio of each participant's
share of
- 12 -
Liquidity and Capital Resources - Continued
- -------------------------------------------
the outstanding loan balance to the total outstanding loan balance. As of
December 31, 1995, the Fund's ownership percentage was approximately 59%.
Upon the Fund's purchase of an interest in the loan, it was converted to a
cash flow mortgage loan which bears interest at an annualized rate equal to
the greater of 17% of Gross Receipts or 6.46% of the average outstanding
loan balance and matures January 31, 1998. The Fund's share of the loan
balance was $5,633,787, as of December 31, 1995, which is net of an
unaccreted discount of $1,275,879.
The Orlando Project is encumbered by the Phase-In Mortgage Loan from the
Fund in the amount of $3,000,000 (with an outstanding balance of $147,555
as of December 31, 1995) to the Orlando Lake Forest Joint Venture for the
development of Section II of the Project (the "Phase-In Mortgage Loan").
The loan is secured by a first mortgage on approximately 2 acres of
residential land located in Orlando, Florida. The Phase-In Mortgage Loan is
classified as non-earning and is on a demand basis.
The Orlando Project is encumbered by a Temporary Mortgage Loan in the
amount of $7,818,000 (with an overall outstanding balance by the Orlando
Project of $7,211,145 as of December 31, 1995) to partially fund the
Orlando Lake Forest Project. The loan is secured by the partnership
interests of both general partners in the Orlando Lake Forest Joint Venture
and 390 shares of the Class A common stock of NTS/Virginia Development
Company (Fawn Lake). The Temporary Mortgage Loan is classified as
non-earning and is on a demand basis. The Principal balance outstanding of
the Temporary Mortgage Loan is guaranteed by NTS Guaranty Corporation
pursuant to the Fund's Junior Mortgage Loan Guaranty. In October 1993, Fawn
Lake and NTS/Lake Forest II Residential Corporation (Lake Forest) entered
into a participation agreement with the Fund (the Temporary Mortgage Loan
Participation Agreement) whereby they were each assigned an interest in the
Fund's Temporary Mortgage Loan with the Orlando Lake Forest Joint Venture
in consideration for reducing the amount of Supplemental Interest credit
then due to them by the Fund. As of December 31, 1995, the interest
assigned to Fawn Lake and Lake Forest was 14.862% and 16.103%,
respectively. The Fund's ownership percentage was 69.035% and the Fund's
share of the loan balance was $4,978,225 at December 31, 1995.
On October 19, 1992, the Fund notified the Orlando Lake Forest Joint
Venture (the "Joint Venture") that the Joint Venture is in default
regarding the Fund's Temporary Mortgage Loan and the Fund's $3,000,000
Phase-In Mortgage Loan (the "Promissory Notes") to the Joint Venture. The
defaults occurred when the Joint Venture failed to pay the Fund the
interest that was due on the Promissory Notes as of October 1, 1992. These
defaults give the Fund the right to accelerate the indebtedness and
foreclose the lien of the mortgage which secures the $3,000,000 Phase-In
Mortgage Loan and foreclose its security interest in the partnership
interests pledged against the Temporary Mortgage Loan. Also, the Fund has
the right to pursue the NTS Guaranty Corporation for its guaranty of the
Principal balance outstanding on the Temporary Mortgage Loan. The ability
of the Guarantor to honor its guaranty on the Temporary Mortgage Loan 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 Fund's Sponsor. Mr. Nichols has contingent liabilities
which exist in connection with debt on properties held by himself or his
affiliates. There can be no assurance that Mr. Nichols will, if called
upon, be able to honor his obligation to the Guarantor. The Fund's Board of
Directors continues to evaluate the collectability of the guaranty. The
Board is also concerned about the possible detrimental effects that the
collection proceedings may have on the Fund's other loans to other
Affiliated
- 13 -
Liquidity and Capital Resources - Continued
- -------------------------------------------
Borrowers. As a result, the Board has concluded that it is in the best
interest of the Fund and its Stockholders to pursue a work-out plan to both
preserve the assets of the Fund and support the viability of the projects
to which it has outstanding loans. On March 24, 1993, the first part of
this plan was implemented whereby the Fund received additional collateral
in the form of a pledge of 390 shares of the Class A common stock in
NTS/Virginia Development Company by J. D. Nichols to support the
collectability of the Temporary Mortgage Loan to the Orlando Lake Forest
Joint Venture.
The Fund discontinued the recognition of interest income from the
$3,000,000 Phase-In Mortgage Loan and the Temporary Mortgage Loan to the
Orlando Lake Forest Joint Venture beginning July 1, 1992, until the
principal and interest have been received. The Fund intends to pursue
collection of all amounts due. The Fund has entered into a forbearance
agreement with the Orlando Lake Forest Joint Venture whereby, effective
April 1, 1995, no interest will be due on these loans through January 31,
1998. The Fund will reevaluate the status of the Orlando Project at that
time to determine what, if any, additional courses of action to pursue and
whether to extend the forbearance of interest. As of December 31, 1995,
approximately $1,827,000 of interest remains due the Fund on these loans.
As discussed above, the Fund and an Affiliate of the Fund's Sponsor now are
the first mortgage holders on the Orlando Project. As with the other
Residential Land Development Loans, the Fund will be providing the funds
needed by the Orlando Project to allow it to continue its development plan.
Principal and interest payments will be allocated proportionately between
the Fund and the Affiliate based upon their respective ownership
percentage.
In June of 1995, the Fund's Board of Directors approved a change to the
terms of the Master Loan Participation Agreement and the Temporary Mortgage
Loan Participation Agreement. Effective April 1, 1995, the Affiliate of the
Fund's Sponsor agreed that the Fund may retain all payments of principal
which the Affiliate would be entitled to receive on the $13 million
Mortgage Loan. The Fund is applying such sums as payment by the Orlando
Lake Forest Joint Venture of the Fund's share of the principal balance
outstanding on the Temporary Mortgage Loan. This will continue until such
time as the Fund's share of the outstanding principal of the Temporary
Mortgage Loan has been repaid in full.
The completion and marketing of the Orlando Project as planned should allow
the Orlando Lake Forest Joint Venture to repay both the first mortgage and
the outstanding principal balance of the Fund's Temporary Mortgage Loan.
The Fund has established a $1,500,000 loan loss reserve regarding the
Temporary Mortgage Loan. The amount of the reserve is based on the
requirements by GAAP that the mortgage loans be carried at the lower of the
carrying value of the asset or net realizable value. Given the likelihood
that it will be some time in the future before the Fund can collect the
principal balance outstanding, GAAP requires that this stream of payments
be discounted to determine the net realizable value at the balance sheet
date even though this loan is guaranteed by NTS Guaranty Corporation. This
calculation does not lessen the Fund's ability or expectation that the
entire principal balance outstanding will be collected in full.
- 14 -
Liquidity and Capital Resources - Continued
- -------------------------------------------
Also, the Fund has established a $53,397 loan loss reserve regarding the
$3,000,000 Phase-In Mortgage Loan to the Orlando Lake Forest Joint Venture.
The amount of the reserve is based on the Borrower's ability to meet its
obligation as well as current and future economic conditions. This reserve
is based on estimates and ultimate losses may vary. These estimates are
reviewed periodically and, as adjustments become necessary, they are
reported in earnings in the period in which they become known. Generally
Accepted Accounting Principles (GAAP) dictate that the Fund's mortgage
loans be carried at the lower of the carrying value of the asset or net
realizable value. The Fund has reduced the amount due on the Phase-In
Mortgage Loan by $326,603 as an amount deemed uncollectible. The loan is
non-recourse, thus, once the remaining lots in Section II of the Orlando
Project have been sold, the Fund has no further course of action to pursue
collection. Given current economic conditions and the uncertainty as to the
length of time required for the Fund to collect the principal due on the
$3,000,000 Phase-In Mortgage Loan, it is possible that an additional
reserve will be needed.
In August 1992, Jeno Paulucci & Silver Lakes I, Inc., individually and
d/b/a PR Partners (PR Partners) filed a complaint ("Original Complaint")
against J. D. Nichols, NTS Corporation, NTS/Florida Residential Properties,
Inc., Orlando Lake Forest, Inc. and Banc One Mortgage Corporation. The
Original Complaint alleges, inter alia, mismanagement of the Orlando Lake
Forest project by Orlando Lake Forest, Inc. as well as conspiracy among the
defendants against PR Partners and its principals. The Original Complaint
requested unspecified damages and declaratory and injunctive relief against
the defendants. The Fund was not named as a defendant in the Original
Complaint. In July 1994, the plaintiffs filed an amended complaint
("Amended Complaint") adding NTS/Residential Properties, Inc. - Florida,
Lake Forest Realty, Inc. and the Fund as defendants, and have amended the
Complaint twice more in response to rulings by the trial judge requiring
clarification of certain claims asserted by the plaintiffs. The case is in
the early discovery phase, and certain of the defendants have answered the
Complaint and asserted counterclaims against the plaintiffs, including a
claim that PR Partners has breached its fiduciary duty. Lake Forest Realty,
Inc., the Fund and Banc One Mortgage Corporation have again moved to
dismiss the Complaint, as amended. Therefore, an outcome to this litigation
cannot be predicted at present. Mr. J. D. Nichols and the principals of the
defendants have indicated that the suit will be vigorously defended, and
that counterclaims will be vigorously prosecuted against the plaintiffs.
Management believes that this lawsuit will have no material effect on the
Fund's operations or financial condition.
The Fawn Lake project is a single-family residential community owned by
NTS/Virginia Development Company, an Affiliated Borrower. Fawn Lake is
encumbered by the following notes:
A note payable in the amount of $540,000 (with an outstanding balance of
$502,937 as of December 31, 1995) from an unaffiliated lender which is
secured by a first mortgage on 24 residential lots (approximately 37 acres
of residential land and improvements thereon). The purpose of the loan is
to provide construction financing to develop approximately 44 lots of the
Fawn Lake project (20 of which have been sold and released from the
mortgage). The Fund's Board of Directors agreed to subordinate the Fund's
Mortgage Loan regarding the 44 lots until the unaffiliated lender note is
paid in full. The note bears interest at the Prime Rate plus 1%, payable
monthly, and matures September 15, 1996.
- 15 -
Liquidity and Capital Resources - Continued
- -------------------------------------------
A Mortgage Loan from the Fund in the amount of $28,000,000 (with an
outstanding balance of $27,459,598 as of December 31, 1995) to fund the
development of the Fawn Lake project, a specified investment. The loan is
secured by a first mortgage on approximately 2,237 acres of residential
land and improvements thereon located in Fredericksburg, Virginia. The Fund
has subordinated its first mortgage on approximately 37 acres regarding the
loan discussed above. The loan bears interest at an annualized rate equal
to the greater of 17% of Gross Receipts or 4.42% of the average outstanding
loan balance and matures July 1, 1997.
A Temporary Mortgage Loan from the Fund in the amount of $2,000,000 (with
an outstanding balance of $1,053,953 as of December 31, 1995) to fund the
construction of the Fawn Lake Golf Course. The loan bears interest at the
Prime Rate plus 3/4%, payable quarterly and matures November 30, 1996. The
loan is secured by a first mortgage on approximately 187 acres of
residential land and improvements thereon. The Principal balance
outstanding of the Temporary Mortgage Loan is guaranteed by NTS Guaranty
Corporation pursuant to the Fund's Junior Mortgage Loan Guaranty.
The Lake Forest project is a single-family residential community owned by
NTS/Lake Forest II Residential Corporation, an Affiliated Borrower. Lake Forest
is encumbered by the following notes:
A note payable with an unaffiliated lender in the amount of $875,000 (with
an outstanding balance of $123,913 as of December 31, 1995) which is
secured by a first mortgage on 11 residential lots (approximately 4 acres
of residential land and improvements thereon). The purpose of the loan is
to provide construction financing to develop 25 lots in the Lake Forest
project (14 of which have been sold and released from the mortgage). The
Fund has subordinated its Mortgage Loan regarding the 25 lots until the
unaffiliated lender note is paid in full. The note bears interest at the
Prime Rate plus 1%, payable monthly, and matures November 24, 1996.
A note payable with an unaffiliated bank in the amount of $4,465,000 (with
an outstanding balance of $438,960 as of December 31, 1995) which is
secured by a first mortgage on the Lake Forest Country Club golf course
(approximately 176 acres of residential land and improvements thereon). The
purpose of the loan is to provide construction financing to construct a
clubhouse building for the Country Club. The Fund has subordinated its
Mortgage Loan regarding the 176 acres until the unaffiliated bank note is
paid in full. The note bears interest at the Prime Rate plus 1%, payable
monthly, and matures July 31, 1999.
A Mortgage Loan from the Fund in the amount of $28,000,000 (with an
outstanding balance of $25,935,985 as of December 31, 1995) to fund the
development of the Lake Forest project, a specified investment. The loan
bears interest at an annualized rate equal to the greater of 17% of Gross
Receipts or 4.42% of the average outstanding loan balance and matures July
1, 1997. The loan is secured by a first mortgage on approximately 556 acres
of residential land and improvements thereon located in Louisville,
Kentucky of which approximately 180 acres have been subordinated regarding
the loans discussed above.
On October 11, 1994, following an extended review of operations of the
residential development borrowers, the Fund's Board of Directors agreed that it
was necessary to revise the structure of the Fund's Mortgage Loans to
- 16 -
Liquidity and Capital Resources - Continued
- -------------------------------------------
Fawn Lake and Lake Forest (the "Affiliated Borrowers") in order to protect the
capital of the Fund. After reviewing possible alternatives, it was determined
that it was necessary to change the structure of the loans to cash flow mortgage
loans which would relate the debt service to sales volumes, thereby allowing the
Affiliated Borrowers to develop the elements essential for successful completion
of the projects. It was judged by the Fund's Board of Directors to be the
approach most likely to effectively work out the current situation and protect
the Fund's capital. At the same time, the Board required that 1) the owners of
the Affiliated Borrowers receive no distributions from the projects until their
loan is fully repaid, 2) NTS Advisory Corporation will pay $100,000 annually
towards the expenses of the Fund beginning in 1995 until the maturity of the
loans, and 3) the Affiliated Borrowers will be required to pay to the Fund 100%
of the Gross Receipts from the sale of the underlying real estate (residential
lots) which secures the mortgage after paying closing costs. Effective July 1,
1994, the Affiliated Borrowers will pay interest at an annualized rate equal to
the greater of 15% (subsequently revised to 17%) of Gross Receipts or 4.42% of
the average outstanding loan balance. The Fund will no longer receive Regular
Interest, Gross Receipts Interest or other fees previously charged. Interest
will be due and payable monthly as lots are sold. Any shortfall to meet the
minimum rate of 4.42% will be due and payable December 31 of the calendar year.
On December 1, 1994, the Fund's Board of Directors approved an increase in the
loan commitment amount to Lake Forest from $25,000,000 to $28,000,000 and
approved an increase in the loan commitment amount to Fawn Lake from $20,000,000
to $28,000,000. The purpose of the increases was to enable the projects to
refinance certain obligations superior in priority to the Fund's Mortgage Loans
as well as to enable the projects to pay ongoing development costs. In addition,
the monthly interest rate was increased from 15% of Gross Receipts to 17% of
Gross Receipts from lot sales effective July 1, 1994. This will allow the
monthly interest payments to more closely approximate the minimum required
interest rate of 4.42% of the outstanding loan balance.
On July 21, 1995, the Fund's Temporary Mortgage Loan to the NTS/Mall Limited
Partnership was paid in full.
May 16, 1989 was the Initial Closing Date of the Fund. During the period
beginning with the 90th day following May 16, 1989 (August 14, 1989) and ending
March 31, 1992, (the Cash Flow Guaranty period), it was anticipated that
Mortgage Loans would be structured to provide for the payment by Affiliated
Borrowers of Points, Regular Interest and either Incentive Interest or Gross
Receipts Interest, which would be sufficient to allow the Fund to make
distributions to the Stockholders, on a monthly basis, at a rate equal to a
minimum of 12% per annum, noncompounded return. In order to achieve such
distributions, Affiliated Borrowers were required to pay Supplemental Interest
which was an amount in excess of Points, Regular Interest, Incentive Interest
and Gross Receipts Interest (i.e. an amount based on a percentage of an
Affiliated Borrower's Gross Receipts from the sale of underlying Real Estate
received during the term of the Mortgage Loan), other cash balances available
for distribution at the discretion of the Board of Directors of the Fund, and
all other cash receipts of the Fund net of all cash expenditures of the Fund.
Payments of Supplemental Interest were credited against 50% of the amount of
Incentive Interest or Gross Receipts Interest which the Fund received from
Affiliated Borrowers in later years. The Fund received $4,731,000 in
Supplemental Interest from Affiliated Borrowers during the Cash Flow Guaranty
period. None of this amount was advanced by the Guarantor.
- 17 -
Liquidity and Capital Resources - Continued
- -------------------------------------------
For tax purposes, Supplemental Interest is recognized as income when received.
Taxable income is used in computing dividends to be paid. Thus, for liquidity
purposes, the year the Supplemental Interest is received is the year it is paid
to Stockholders as dividends. The Cash Flow Guaranty period ended on March 31,
1992. The Fund has not and it is not anticipated that the Fund will receive into
taxable income, or make distributions of, Supplemental Interest beyond this
date.
In the second quarter of 1992, the Fund terminated the purchase of shares of
stock through its Dividend Reinvestment Plan. An analysis of the costs and
expenses to be incurred in order to comply with the regulatory review associated
with a dividend reinvestment plan was conducted. After consideration of such
expenses, the Fund determined that the best course of action was to terminate
the Plan. With the termination of the Plan, the Fund is no longer able to
provide a means by which certain hardship cases can liquidate their shares
through the Fund. At some point in the future, the Fund may re-examine these
issues and determine to reinstate the Plan.
On January 24, 1992, the Fund entered into a loan agreement with an unaffiliated
bank providing for a credit facility of up to $2.8 million secured by a
collateral assignment of the Fund's mortgage to Lake Forest. On August 3, 1993,
the credit limit was raised to $4 million. The loan was paid in full on January
10, 1995.
On January 10, 1995, the Fund entered into a loan agreement with an unaffiliated
bank proving for a credit facility of up to $13.8 million secured by a
collateral assignment of the Fund's mortgages to Lake Forest and Fawn Lake. The
purpose of the loan is to refinance the Fund's existing credit facility,
increase the Fund's investment portfolio and provide additional operating
capital for the Fund. The loan bears interest at the Prime Rate plus 1%, payable
monthly and matures December 27, 1997. The Fund made principal payments on the
loan equal to $12,000 per lot from lot sales at Lake Forest and $1,000 per lot
from lot sales at Fawn Lake during 1995. The Fund will make principal payments
on the loan equal to $13,500 per lot from lot sales at Lake Forest and $1,000
per lot from lot sales at Fawn Lake during 1996. The loan is guaranteed by Mr.
J. D. Nichols, Chairman of the Board of the Fund's Sponsor.
On September 29, 1995, the Fund entered into a loan agreement with an
unaffiliated bank for $268,000 secured by the guarantee of Mr. J. D. Nichols.
The purpose of the loan was to provide interim funding to complete the
construction of the Fawn Lake Country Club golf course six months earlier than
previously scheduled. The loan was paid in full on November 13, 1995.
In the fourth quarter of 1995, the Fund entered into a loan agreement with an
unaffiliated bank for $2,000,000 secured by a collateral assignment of the
Fund's mortgage to Fawn Lake regarding approximately 187 acres of residential
land and improvements known as the Fawn Lake Golf Course. The purpose of the
loan is to fund the remaining construction of the Fawn Lake Golf Course. The
loan bears interest at the Prime Rate plus 3/4%, payable quarterly and matures
November 30, 1996.
In the third quarter of 1995, the Fund borrowed $750,000 from an Affiliate of
the Fund's Sponsor. The advance is in the form of an unsecured non-interest
bearing note payable and matures April 15, 1996. The advance was made to meet
the development plans of the projects to which the Fund has outstanding loans.
- 18 -
Liquidity and Capital Resources - Continued
- -------------------------------------------
In the fourth quarter of 1995, the Fund borrowed an additional $1,135,000 from
Affiliates of the Fund's Sponsor. The advances bear interest at various rates
averaging approximately 5.75% and mature April 15, 1996.
These advances are unsecured.
The Fund intends to maintain a working capital reserve equal to 1% of the gross
proceeds received. The Fund may alter the percentage of such reserves if deemed
necessary. As of December 31, 1995, the Fund had cash and equivalents of
approximately $536,000.
The primary source of future liquidity is expected to be from the interest
earned on the Mortgage Loans and on the Temporary Investments. The ability of
the Fund to receive interest on the Mortgage Loans depends primarily on the
level of residential lot closings achieved by the properties which collateralize
the loans. The interest received will be used to make cash distributions to
Stockholders and to pay operating expenses. In addition, the Fund is continuing
to focus on cash management and is pursuing financing sources to provide
sufficient resources to fund the needs of the projects to which it has
outstanding loans.
Distributions will equal at least 95% of taxable income so that the Fund will
continue to qualify as a real estate investment trust. For the next twelve
months, it is anticipated that returns on Stockholders' original capital
contributions will approximate 1% per annum. The Fund's cash and cash
equivalents are expected to be sufficient to meet its anticipated needs for
liquidity and capital resources.
Results of Operations
- ---------------------
Net income using generally accepted accounting principles (GAAP) was $858,334,
$1,782,171 and $1,530,596 and using tax-reporting accounting (TRA) was $672,098,
$1,540,323 and $2,553,129 for the years ended December 31, 1995, 1994 and 1993,
respectively. The difference between GAAP income and TRA income was due
primarily to the treatment of loan discount accretion, loan commitment fee
income, letters of credit income, Supplemental Interest income and provision for
loan losses. GAAP requires that discounts on mortgage loan receivables be
recognized as an adjustment to yield over the estimated life of the loan; for
tax purposes the discount is recognized as income when the proceeds are
received. GAAP requires that loan commitment fee income be recognized as income
over the term of the related loans; for tax purposes the fees are recognized as
income when received. GAAP requires that income received from letters of credit
be recognized on a straight-line basis over the term of the letter of credit
(typically one year); for tax purposes, this income is recognized as income when
received. For GAAP purposes, Gross Receipts Interest is reported as earned on
the accrual basis of accounting; for tax purposes 50% of the amount of Gross
Receipts Interest earned is credited against Supplemental Interest Income paid
in prior years. For GAAP purposes, a provision for loan losses is recognized
when the net realizable value of the asset is less than the carrying value of
the asset; for tax purposes, a provision for loan losses is allowed when the
debt becomes worthless within the taxable year. TRA income is used in applying
the REIT-qualifying test that requires 95% of taxable income to be paid out in
dividends. (See Note 1C to Notes to Financial Statements).
Cash provided by operations was $59,772, $1,503,393 and $3,085,947 during the
years ended December 31, 1995, 1994 and 1993, respectively. The Fund declared
dividends of $643,841 (1995), $1,466,166 (1994) and $2,439,335 (1993). Total
dividends declared provided Stockholders with an annualized return of 1.01%,
2.30% and 3.83% for the years ended December 31, 1995, 1994 and 1993,
respectively.
- 19 -
Results of Operations - Continued
- ---------------------------------
On October 11, 1994, the Fund's Board of Directors approved a change in the
structure of the Fund's Mortgage Loans to NTS/Virginia Development Company and
NTS/Lake Forest II Residential Corporation (the "Affiliated Borrowers") from
fixed rate mortgage loans to cash flow mortgage loans. Effective July 1, 1994,
these Affiliated Borrowers will pay interest at an annualized rate equal to the
greater of 15% (subsequently revised to 17%) of Gross Receipts from the sale of
the underlying real estate (residential lots) which secures the mortgage or
4.42% of the average outstanding loan balance. Interest will be due and payable
monthly as lots are sold. Any shortfall to meet the minimum rate of 4.42% will
be due and payable December 31 of the calendar year. The Fund will no longer
receive Regular Interest, Gross Receipts Interest or other fees previously
charged. In February 1995, the Fund purchased a 50% interest in a $13 million
first mortgage loan to the Orlando Lake Forest Joint Venture. The loan bears
interest at the greater of 17% of Gross Receipts or 6.46% of the average
outstanding loan balance. The increase in interest income on mortgage loans
receivable for the year ended December 31, 1995 over the comparable period in
1994 is due to an increase in the average outstanding balances of the earning
loans. The average interest rate earned by the Fund for the year ended December
31, 1995 was approximately 4.6% of the average outstanding loan balances.
The decrease in interest income on mortgage loans receivable for the year ended
December 31, 1994 over the comparable period in 1993 is due to a decrease in the
average rate earned by the Fund. The rate decreased from approximately 7% (1993)
to 6% (1994) of the average outstanding loan balances. On February 18, 1993, the
Fund's Board of Directors approved a change in the interest rate to be charged
on the Fund's Mortgage Loans to NTS/Virginia Development Company and NTS/Lake
Forest II Residential Corporation from the Prime Rate plus 2% to the Federal
Funds Rate plus 3.7% effective January 1, 1993. In addition, on March 23, 1993,
NTS/Virginia Development Company exercised its option (as provided in the
existing loan agreement) to convert from a floating rate Mortgage Loan to a
fixed rate Mortgage Loan. The fixed interest rate, as defined in the mortgage
note and in the Fund's Prospectus, is equal to 300 basis points in excess of the
applicable treasury rate. The fixed interest rate was 7.64%. Also on March 23,
1993, NTS/Lake Forest II Residential Corporation exercised its option (as
provided in the existing loan agreement) to convert from a floating rate
Mortgage Loan to a fixed rate Mortgage Loan. The fixed interest rate, as defined
in the mortgage note and in the Fund's Prospectus, is equal to 300 basis points
in excess of the applicable treasury rate. The fixed interest rate was 6.74%.
Effective July 1, 1992, the Fund discontinued accruing interest income from the
$3,000,000 Phase-In Mortgage Loan and the Temporary Mortgage Loan to the Orlando
Lake Forest Joint Venture until the principal and interest have been received.
As of December 31, 1995 and 1994, approximately $1,827,000 and $1,659,000,
respectively, of interest was due on these loans but not accrued in the Fund's
financial statements. The Fund has entered into a forbearance agreement with the
Orlando Lake Forest Joint Venture whereby, effective April 1, 1995, no interest
will be due on these loans through January 31, 1998. The Fund will reevaluate
the status of the Orlando Project at that time to determine what, if any,
additional courses of action to pursue, and whether to extend the forbearance of
interest.
Commitment fees paid at loan closings are amortized over the life of the loan
using the interest method. Letter of credit fees are amortized over the term of
the letter of credit. Fee income on mortgage loans and financial services is the
amount of commitment fees and letter of credit fees being amortized for the
period. The increase in fee income for the year ended December 31, 1994 over the
year ended December 31, 1993 is due to recognizing in income all remaining
unamortized fees for Fawn Lake and Lake Forest as a result of the loan
restructuring discussed above. There was no commitment fee income recognized in
1995.
- 20 -
Results of Operations - Continued
- ---------------------------------
Gross Receipts Interest represents 5% of the Affiliated Borrowers' Gross
Receipts from the sale of the underlying real estate (residential lots) during
the period. Supplemental Interest is an amount in excess of Points, Regular
Interest, and either Gross Receipts Interest or Incentive Interest that certain
Affiliated Borrowers paid to the Fund. Payments of Supplemental Interest were
credited against 50% of the amount of Gross Receipts Interest or Incentive
Interest which the Fund received from Affiliated Borrowers in later years. The
Fund earned Gross Receipts Interest of $129,338 for the year ended December 31,
1994 and $627,784 (which includes $160,185 of amortized Supplemental Interest)
for the year ended December 31, 1993. These amounts were generated from the
Fund's Mortgage Loans to NTS/Virginia Development Company, NTS/Lake Forest II
Residential Corporation and the Phase-In Mortgage Loan to the Orlando Lake
Forest Joint Venture. Effective July 1, 1994, the only loan which provides for
Gross Receipts Interest is the Phase-In Mortgage Loan to the Orlando Lake Forest
Joint Venture.
Prior to July 1, 1994, increases and decreases in Gross Receipts and
Supplemental Interest income between years were directly related to increases
and decreases in the level of residential lot closings achieved by the
properties which collateralize the loans. In addition, in consideration for the
January 1, 1993 interest rate change from the Prime Rate plus 2% to the Federal
Funds rate plus 3.7% discussed above, Fawn Lake and Lake Forest agreed to reduce
the amount of future Gross Receipts Interest credit to be received by $97,500
and $121,875, respectively. This total amount of $219,375 has been recognized in
income for the year ended December 31, 1993.
On October 14, 1993, the Fund's Board of Directors accepted a proposal whereby
the residential projects securing the Fund's Mortgage Loans would agree to begin
paying Gross Receipts Interest in an amount equal to 5% of the net sales price
of residential lots sales in consideration for a credit of the balance of
Supplemental Interest credit due from the Fund. The amount of Supplemental
Interest credit due from the Fund as of October 14, 1993 was $3,777,637. The
adjustment of the Supplemental Interest credit was as follows:
In connection with the Fund's Supplemental Interest credit obligation, the
Fund credited Fawn Lake and Lake Forest for $750,000, each, representing a
reduction in each project's Mortgage Loan.
In connection with the Fund's Supplemental Interest credit obligation, the
Fund credited Orlando Lake Forest Joint Venture for $42,604 representing a
reduction in the Fund's Temporary Mortgage Loan with the Orlando Lake
Forest Joint Venture.
In connection with the Fund's Supplemental Interest credit obligation, the
Fund credited Fawn Lake and Lake Forest for the Supplemental Interest
credit balance by assigning Fawn Lake and Lake Forest an interest in the
Fund's Temporary Mortgage Loan with the Orlando Lake Forest Joint Venture.
The interest assigned to Fawn Lake and Lake Forest was $1,072,727 and
$1,162,306, respectively.
In addition to Points, Regular Interest and Supplemental Interest, the Fund may
receive Incentive Interest in connection with Mortgage Loans made to Affiliated
Borrowers secured by properties not held for sale in the ordinary course of the
Affiliated Borrower's business; except that in certain cases the Fund may forego
Incentive Interest in order to maintain compliance with REIT qualification
requirements and may instead either seek additional Points or Regular Interest
or will seek to obtain Gross Receipts Interest. The Fund does not anticipate
receiving Incentive Interest and Gross Receipts Interest on the same Mortgage
Loan. The amount of Incentive Interest which
- 21 -
Results of Operations - Continued
- ---------------------------------
the Fund will receive from Affiliated Borrowers will be equal to a specified
percentage of the "Increase in Value" of the underlying property securing the
Mortgage Loan, which Increase in Value occurred during the period beginning from
the date that the Mortgage Loan was funded and ending upon the repayment of the
Mortgage Loan at maturity or upon the Sale or Refinancing of the underlying
property excluding a sale or transfer to an Affiliate, so long as the Fund
retains an interest in the property subsequent to the sale or transfer. No
Incentive Interest has been included in revenues for any of the three years
ended December 31, 1995.
The Fund's by-laws provide that annual operating expenses of the Fund may not
exceed in any year the greater of (i) 2% of the Funds average invested assets
during such year or (ii) 25% of the Fund's taxable income during such year. The
Advisor must reimburse the Fund within 60 days after the end of the year the
amount by which the aggregate annual Operating Expenses paid or incurred by the
Fund exceed the foregoing limitations, unless the Board of Directors approves
expenses in excess of such limitations. No reimbursement was required for any of
the three years ended December 31, 1995 as operating expenses did not exceed the
limit.
Operating expenses of the Fund include a Management Expense Allowance (Advisory
Fee) of 1% of the Fund's Net Assets, per annum, which may be increased annually
by an amount corresponding to the percentage increase in the Consumer Price
Index. The Advisory Fee is paid to the Advisor (NTS Advisory Corporation) or its
affiliate. Effective July 1, 1994, the Fund's Mortgage Loans to Fawn Lake and
Lake Forest were converted to cash flow mortgage loans. As part of the
consideration for this restructuring, the Fund's Board of Directors required,
among other things, that beginning in 1995, NTS Advisory Corporation pay
$100,000 annually towards the expenses of the Fund until the maturity of the
Mortgage Loans. As such, the Advisory Fee has been reduced $100,000 for the year
ended December 31, 1995. The Advisory Fee for the years ended December 31, 1995,
1994 and 1993 was $528,973, $614,100 and $593,500, respectively. Increases and
decreases in the Advisory Fee generally correspond directly to increases and
decreases in the Fund's Net Assets.
Professional and administrative expenses include primarily directors' fees,
legal, outside accounting and investor processing fees, and printing costs for
financial reports. Expenses are comparable between years.
Income tax expense is the Fund's estimated liability for Federal, state, and
local income taxes due on the amount of earnings which are in excess of
dividends for the period.
The planned principal operations (investments in Mortgage Loans) commenced
during the latter part of September 1989. Therefore, administrative expenses
incurred from inception (September 1988) through September 30, 1989 have been
capitalized as start-up costs and were amortized over five years.
The Fund has established a $1,500,000 loan loss reserve regarding the Temporary
Mortgage Loan to the Orlando Lake Forest Joint Venture and a $53,397 loan loss
reserve regarding the $3,000,000 Phase-In Mortgage Loan to the Orlando Lake
Forest Joint Venture. The amount of the reserve was determined by comparing the
mortgage note receivable balance with the discounted value of estimated future
cash flows as well as considering current and future economic conditions. This
reserve is based on estimates and ultimate losses may vary. These estimates are
reviewed periodically and, as adjustments become necessary, they are reported in
earnings in the period in which they become known. In addition, the Fund has
reduced the
- 22 -
Results of Operations - Continued
- ---------------------------------
carrying amount due on the Phase-In Mortgage Loan by $326,603 as an amount
deemed uncollectible. The loan is non-recourse, thus, once the remaining lots in
Section II of the Orlando Project have been sold, the Fund has no further course
of action to pursue collection.
The Fund has invested in Mortgage Loans totaling approximately $59,177,000 and
$45,202,000 as of December 31, 1995 and 1994, respectively. Also, the Fund has
invested in Temporary Investments totaling approximately $6,032,000 and
$7,020,000 as of December 31, 1995 and 1994, respectively. The balance of funds
were invested in short-term cash equivalents. The Temporary Investments were
funded as an alternative to other short-term investments in order to obtain
higher interest rates.
The Fund's investments at December 31, 1995 were as follows:
A Mortgage Loan to NTS/Lake Forest II Residential Corporation, an
Affiliated Borrower, to fund the development of Lake Forest North, a
specified investment. The loan balance was $25,935,985 at December 31,
1995.
A Mortgage Loan to NTS/Virginia Development Company, an Affiliated
Borrower, to fund the development of Fawn Lake, a specified investment. The
loan balance was $27,459,598 at December 31, 1995.
A Temporary Mortgage Loan to NTS/Virginia Development Company, an
Affiliated Borrower, to fund the construction of the Fawn Lake Golf Course.
The loan balance was $1,053,953 at December 31, 1995, which is net of
unamortized deferred commitment fees of $20,000.
A Mortgage Loan to Orlando Lake Forest Joint Venture, an Affiliated
Borrower, to fund the development of Orlando Lake Forest, a specified
investment. The loan balance was $5,633,787 at December 31, 1995, which is
net of an unaccreted discount of $1,275,879.
A Temporary Mortgage Loan to Orlando Lake Forest Joint Venture, an
Affiliated Borrower, to partially fund the Orlando Lake Forest Loan, a
specified investment. Effective July 1, 1992, the Fund discontinued
accruing interest income on the Temporary Mortgage Loan and classified the
loan as non-earning. In addition, the Fund has established a loan loss
reserve of $1,500,000 as of December 31, 1995 regarding this loan. The loan
balance was $4,978,225 at December 31, 1995.
A Phase-In Mortgage Loan to Orlando Lake Forest Joint Venture, an
Affiliated Borrower, to develop Orlando Lake Forest Section II, a specified
investment. Effective July 1, 1992, the Fund discontinued accruing interest
income on the Phase-In Mortgage Loan and classified the loan as
non-earning. In addition, the Fund has established a loan loss reserve of
$53,397 as of December 31, 1995 regarding this loan. The loan balance was
$147,555 at December 31, 1995.
The Fund's investment of $25,935,985 in NTS/Lake Forest II Residential
Corporation represents approximately 40% of the Fund's portfolio and the Fund's
commitment of $28,000,000 represents approximately 43% of the Fund's portfolio.
The Fund's investment of $27,459,598 in NTS/Virginia Development Company
represents approximately 42% of the Fund's portfolio and the Fund's commitment
of $28,000,000 represents approximately 43% of the Fund's portfolio. Both loans
are current in their interest payments to the Fund.
- 23 -
Results of Operations - Continued
- ---------------------------------
In addition, the Fund's Mortgage Loan to the Orlando Lake Forest Joint Venture
and the Temporary Mortgage Loan to NTS/Virginia Development Company are current
in interest payments to the Fund. The Fund's Phase-In Mortgage Loan and
Temporary Mortgage Loan to the Orlando Lake Forest Joint Venture are not current
in their interest payments to the Fund. Approximately $1,827,000 of interest
remains due on these loans but is not accrued in the Fund's financial
statements.
During the year ended December 31, 1995, the Fund received repayment on four
mortgage loans and two temporary investments in the aggregate principal amount
of $8,219,874. The repayments on mortgage loans were generally equal to
approximately 83% of the Gross Receipts received on lot sales less closing
costs. The Fund made investments in three mortgage loans and one temporary
investment in the aggregate principal amount of $21,187,154.
During the year ended December 31, 1994, the Fund received repayment on three
mortgage loans and one temporary investment in the aggregate principal amount of
$4,310,554. The repayments of mortgage loans through June 30, 1994 were based on
Scheduled Principal Payments of (i) 80% of the Gross Receipts received on sales
of lots to builders and (ii) 70% of the Gross Receipts received on sales of lots
to individuals. Effective July 1, 1994, repayments on mortgage loans were
generally equal to approximately 83% of the Gross Receipts received on lot sales
less closing costs. The Fund made investments in two mortgage loans in the
aggregate principal amount of $4,056,326.
During the year ended December 31, 1993, the Fund received repayment on three
mortgage loans and one temporary investment in the aggregate principal amount of
$7,145,622. The Fund made investments in two mortgage loans in the aggregate
principal amount of $8,729,692.
During the year ended December 31, 1995, the Fund borrowed $15,186,873 from its
various lenders. The Fund repaid $1,991,528 of its borrowings using proceeds
from a $13.8 million credit facility and repaid $268,000 of its borrowings using
proceeds from a $2,000,000 mortgage loan. The remaining $714,000 reduction in
debt came primarily from loan repayments made by NTS/Lake Forest II Residential
Corporation. The Fund also borrowed $1,885,000 from Affiliates of the Fund's
Sponsor.
During the year ended December 31, 1994, the Fund borrowed $554,691 on its
credit facility. The Fund repaid $1,006,151 of its borrowings using proceeds
from loan payments made by NTS/Lake Forest II Residential Corporation.
During the year ended December 31, 1993, the Fund borrowed $2,653,977 on its
credit facility. The Fund repaid $1,358,052 of these borrowings using proceeds
from loan repayments made by NTS/Lake Forest II Residential Corporation.
- 24 -
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders of the NTS Mortgage Income Fund:
We have audited the accompanying balance sheets of the NTS Mortgage Income Fund
(a Delaware corporation) as of December 31, 1995 and 1994, and the related
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the NTS Mortgage Income Fund as
of December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
February 21, 1996
- 25 -
NTS MORTGAGE INCOME FUND
------------------------
BALANCE SHEETS
--------------
AS OF DECEMBER 31, 1995 AND 1994
--------------------------------
1995 1994
------------- -------------
ASSETS
Mortgage loans receivable:
Earning loans $ 60,083,323 $ 46,123,406
Non-earning 5,125,780 6,098,846
------------ ------------
65,209,103 52,222,252
Less reserves for loan losses 1,553,397 1,638,855
------------ ------------
Net mortgage loans receivable 63,655,706 50,583,397
Cash and equivalents 535,687 308,155
Interest receivable 1,142,021 372,828
Other assets 178,219 --
------------ ------------
Total assets $ 65,511,633 $ 51,264,380
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 179,307 $ 154,615
Dividends payable 38,248 127,493
Notes payable - affiliates (Note 3) 1,885,000 --
Notes payable 14,149,873 1,936,528
Deferred revenues 3,127 4,159
------------ ------------
Total liabilities 16,255,555 2,222,795
------------ ------------
Commitments and contingencies
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
Distributions in excess of net income (4,910,506) (5,124,999)
------------ ------------
Total stockholders' equity 49,256,078 49,041,585
------------ ------------
Total liabilities and stockholders'
equity $ 65,511,633 $ 51,264,380
============ ============
The accompanying notes are an integral part of these financial statements.
- 26 -
NTS MORTGAGE INCOME FUND
------------------------
STATEMENTS OF INCOME
--------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993
----------------------------------------------------
1995 1994 1993
------------ ------------ ------------
Revenues:
Interest income on mortgage loans
receivable $ 2,849,807 $ 2,716,804 $ 3,248,160
Fee income on mortgage loans and other
financial services 12,924 130,791 118,955
Gross receipts and supplemental interest
income -- 129,338 627,784
Interest income on cash equivalents
and miscellaneous income 21,921 8,071 30,402
----------- ----------- -----------
2,884,652 2,985,004 4,025,301
----------- ---------- ----------
Expenses:
Advisory fee (Note 3) $ 528,973 $ 614,100 $ 593,500
Professional and administrative 162,427 174,900 208,501
Interest expense 1,247,128 182,486 91,733
Other taxes and licenses 25,790 20,705 22,013
Amortization expense 52,000 35,642 34,958
Provision for loan losses -- 150,000 1,500,000
----------- ----------- -----------
2,016,318 1,177,833 2,450,705
----------- ----------- -----------
Income before income tax expense 868,334 1,807,171 1,574,596
Income tax expense 10,000 25,000 44,000
----------- ----------- -----------
Net income $ 858,334 $ 1,782,171 $ 1,530,596
=========== =========== ===========
Net income per share of common stock $ .27 $ .56 $ .48
=========== =========== ===========
Weighted average number of shares 3,187,333 3,187,333 3,187,333
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
- 27 -
NTS MORTGAGE INCOME FUND
------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
Common Common Additional Distributions
Stock Stock Paid-in- in Excess of
Shares Amount Capital Net Income Total
------ ------ ---------- ------------- -------------
Stockholder's equity
December 31, 1992 3,187,333 $ 3,187 $ 54,163,397 $ (4,532,265) $ 49,634,319
Net income -- -- 1,530,596 1,530,596
Dividends declared -- -- (2,439,335) (2,439,335)
---------- ------- ------------ ------------ ------------
Stockholders' equity
December 31, 1993 3,187,333 $ 3,187 $ 54,163,397 $ (5,441,004) $ 48,725,580
Net income -- -- 1,782,171 1,782,171
Dividends declared -- -- (1,466,166) (1,466,166)
---------- ------- ------------ ------------ ------------
Stockholders' equity
December 31, 1994 3,187,333 $ 3,187 $ 54,163,397 $ (5,124,999) $ 49,041,585
Net income -- -- 858,334 858,334
Dividends declared -- -- (643,841) (643,841)
---------- ------- ------------ ------------ ------------
Stockholders' equity
December 31, 1995 3,187,333 $ 3,187 $ 54,163,397 $ (4,910,506) $ 49,256,078
========== ======= ============ ============ ============
The accompanying notes are an integral part of these financial statements.
- 28 -
NTS MORTGAGE INCOME FUND
------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
1995 1994 1993
------------- ------------- -------------
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES
Net income $ 858,334 $ 1,782,171 $ 1,530,596
Adjustments to reconcile net income to
net cash provided by operating activities:
Accretion of discount on mortgage loans
receivable (125,029) -- --
Amortization expense 52,000 35,642 34,958
Provision for loan losses -- 150,000 1,500,000
Changes in assets and liabilities:
Interest receivable (769,193) (372,828) 502,723
Accounts payable and accrued expenses 24,692 14,443 (5,001)
Deferred commitment fees 20,000 (102,930) (91,210)
Deferred revenues (1,032) (3,105) (386,119)
------------ ------------ ------------
Net cash provided by operating activities 59,772 1,503,393 3,085,947
------------ ------------ ------------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES
Principal collections on mortgage loans
receivable $ 8,219,874 $ 4,310,554 $ 7,145,622
Investment in mortgage loans receivable (21,187,154) (4,056,326) (8,729,692)
------------ ------------ ------------
Net cash from (used for) investing
activities (12,967,280) 254,228 (1,584,070)
------------ ------------ ------------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES
Proceeds from notes payable $ 15,186,873 $ 554,691 $ 2,653,977
Proceeds from notes payable - affiliates 1,885,000 -- --
Payments on notes payable (2,973,528) (1,006,151) (1,358,052)
Other assets (230,219) -- (22,178)
Dividends paid (733,086) (1,713,192) (2,342,117)
------------ ------------ ------------
Net cash used for financing activities 13,135,040 (2,164,652) (1,068,370)
------------ ------------ ------------
Net increase (decrease) in cash and
equivalents $ 227,532 $ (407,031) $ 433,507
CASH AND EQUIVALENTS, beginning of period 308,155 715,186 281,679
------------ ------------ ------------
CASH AND EQUIVALENTS, end of period $ 535,687 $ 308,155 $ 715,186
============ ============ ============
Cash paid during the period for:
Interest, net of amounts capitalized $ 1,130,832 $ 180,235 $ 85,271
Income taxes $ 700 $ 36,082 $ 49,492
Noncash investing activities:
Principal reductions on mortgage loan
receivable by offsetting deferred revenues $ -- $ -- $ 1,542,604
Principal reductions on mortgage loan
receivables by entering into a participation
agreement $ -- $ -- $ 2,235,033
The accompanying notes are an integral part of these financial statements.
- 29 -
NTS MORTGAGE INCOME FUND
------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. Summary of Significant Accounting Policies
-------------------------------------------
A) Organization
------------
NTS Mortgage Income Fund (the "Fund"), a Delaware corporation, was
formed on September 26, 1988. The Fund operates as a real estate
investment trust (REIT) under the Internal Revenue Code of 1986 (the
"Code"), as amended. NTS Corporation is the sponsor of the Fund (the
"Sponsor") and its affiliate, NTS Advisory Corporation, is the
advisor to the Fund (the "Advisor").
The Fund intends to make residential and commercial land development
loans, land acquisition loans, development loans, construction and
permanent mortgage loans to Affiliated Borrowers consisting
principally of first, and to a lesser extent, junior mortgage loans
and to make Equity Investments in real estate in amounts not to
exceed approximately 10% of its Funds Available for Investment as
defined in the Fund's offering prospectus (the "Prospectus"). Equity
Investments are only anticipated to be made if necessary to assist
the Fund to satisfy applicable requirements of the Code. Each
mortgage loan will be secured by a lien on the property, by an
interest in the borrower or by a similar security interest.
The Fund is required to terminate and liquidate its assets by
December 31, 2008, although the Fund expects to seek the
Stockholders' approval to dissolve the Fund by March 30, 2006 which
is approximately 15 years after the Final Closing Date.
B) Basis of Accounting
-------------------
The Fund's records are maintained on the accrual basis of accounting
in accordance with generally accepted accounting principles (GAAP).
C) Income Taxes
------------
The Fund has elected and is qualified to be treated as a REIT under
Internal Revenue Code Sections 856-860. In order to qualify, the Fund
is required to distribute at least 95% of its taxable income to
Stockholders and meet certain other requirements. The Fund intends to
continue to qualify as a REIT for Federal income tax purposes. A
reconciliation of net income for financial statement purposes versus
that for income tax reporting at December 31 is as follows:
1995 1994 1993
------------ ------------ ------------
Net income (GAAP) $ 858,334 $ 1,782,171 $ 1,530,596
Accretion of note discount (125,029) -- --
Loan commitment fee income 20,000 (102,930) (91,210)
Letters of credit income (1,032) (3,105) 6,438
Supplemental interest
income (1,717) (64,668) (424,819)
Federal income tax expense 7,000 20,000 32,124
Provision for loan losses (85,458) (91,145) 1,500,000
----------- ----------- -----------
Taxable income before
dividends paid deduction $ 672,098 $ 1,540,323 $ 2,553,129
=========== =========== ===========
Dividends declared $ 643,841 $ 1,466,166 $ 2,439,335
=========== =========== ===========
Distribution percentage 96% 95% 96%
=========== =========== ===========
- 30 -
1. Summary of Significant Accounting Policies - Continued
-------------------------------------------------------
D) Organizational and Start-up Costs
---------------------------------
Organizational costs are expenses incurred in the creation of the
Fund such as legal and accounting fees and were amortized over a
five-year period beginning on the Initial Closing Date. Start-up
costs are administration expenses which were capitalized until the
Fund made its first Mortgage Loan on September 29, 1989 and were
amortized over a five-year period.
E) Offering Costs
--------------
Offering costs consist primarily of selling commissions and other
costs associated with the offering of the Shares. Offering costs are
shown as a reduction of stockholders' equity. Pursuant to the Fund's
Prospectus, the offering and organizational costs incurred by the
Fund were equal to 15% of the gross proceeds.
F) Use of Estimates in Preparation of Financial Statements
-------------------------------------------------------
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
G) Revenue Recognition and Reserves for Loan Losses
------------------------------------------------
Interest income from mortgage loans is reported as earned on the
accrual basis of accounting. If the Fund has any reason to doubt the
collectability of any principal or interest amounts due pursuant to
the terms of the mortgage loans appropriate reserves would be
established for any principal and accrued interest amounts deemed
unrealizable (see Note 5). Statements of Financial Accounting
Standards Nos. 114 and 118 require that impaired loans be measured
based on the present value of expected future cash flows discounted
at each loan's effective interest rate, at each loan's observable
market price or at the fair value of the collateral if the loan is
collateral dependent.
Commitment fees paid at loan closing are amortized over the life of
the loan using the interest method. Letter of credit income is
amortized over the term of the letter of credit using the
straight-line method. Gross Receipts Interest is recognized with
respect to a mortgage loan secured by real estate held for sale in
the ordinary course of the borrower's business. Gross Receipts
Interest is an amount equal to 5% of the borrower's Gross Receipts,
as defined in the Fund's Prospectus, from the sale of the underlying
real estate during the term of the mortgage loan. Gross Receipts
Interest is reported as earned on the accrual basis of accounting.
H) Statement of Cash Flows
-----------------------
For purposes of reporting cash flows, cash and equivalents include
cash on hand and short-term, highly liquid investments with an
original maturity of three (3) months or less that are readily
convertible to cash.
- 31 -
1. Summary of Significant Accounting Policies - Continued
------------------------------------------------------
I) Operating Expense Limitations
-----------------------------
The annual Operating Expenses of the Fund, based upon guidelines
promulgated by the North American Securities Administrators
Association, Inc., are prohibited from exceeding in any fiscal year
the greater of (i) 2% of the Fund's Average Invested Assets during
such fiscal year or (ii) 25% of the Fund's Net Income during such
fiscal year. In the event the Fund's annual Operating Expenses exceed
this limitation, the Advisor must reimburse the Fund within 60 days
after the end of the fiscal year, the amount by which the aggregate
annual Operating Expenses paid or incurred by the Fund exceed the
foregoing limitations. The Fund did not exceed this limitation for
the years ended December 31, 1995, 1994 and 1993.
Operating Expenses are defined as operating, general and
administrative expenses of the Fund as determined under generally
accepted accounting principles, including but not limited to rent,
utilities, capital equipment, salaries, fringe benefits, travel
expenses, the Management Expense Allowance, expenses paid by third
parties to the Advisor and its Affiliates based upon its relationship
with the Fund (e.g. loan administration, servicing, engineering and
inspection expenses) and other administrative items, but excluding
the expenses of raising capital, interest payments, taxes, non-cash
expenditures (e.g., depreciation, amortization, bad debt reserves),
the Subordinated Advisory Fee, and the costs related directly to a
specific Mortgage Loan investment or Real Estate Investment by the
Fund, such as expenses for originating, acquiring, servicing or
disposing of said specific Mortgage Loan or Real Estate Investment.
2. Affiliations
------------
The Fund operates under the direction of its Board of Directors who have
retained the Advisor to manage the Fund's operations and to make
recommendations concerning investments. The Advisor has delegated
substantially all of its duties to the Sponsor (see Note 3).
3. Related Party Transactions
--------------------------
As of December 31, 1995, the Sponsor (NTS Corporation) or an Affiliate
owned 58,918 shares of the Fund.
Pursuant to the Advisory Agreement, the Fund will pay the Advisor (NTS
Advisory Corporation) a Management Expense Allowance (Advisory Fee)
relating to services performed for the Fund in an amount equal to 1% of
the Fund's Net Assets, per annum, which amount may be increased annually
by an amount corresponding to the percentage increase in the Consumer
Price Index. Effective July 1, 1994, the Fund's Mortgage Loans to Fawn
Lake and Lake Forest were converted to cash flow mortgage loans. As part
of the consideration for this restructuring, the Fund's Board of
Directors required, among other things, that beginning in 1995, NTS
Advisory Corporation pay $100,000 annually towards the expenses of the
Fund until the maturity of the Mortgage Loans. As such, the Advisory Fee
has been reduced $100,000 for the year ended December 31, 1995. For the
years ended December 31, 1995, 1994 and 1993, $528,973, $614,100 and
$593,500, respectively, has been incurred as an Advisory Fee.
On February 17, 1995, the Fund purchased from an unaffiliated bank an
interest in a $13 million first mortgage (with an outstanding balance of
$9,664,465 as of February 17, 1995) to the Orlando Lake Forest Joint
Venture. An Affiliate of the Sponsor owns the remaining interest via
- 32 -
3. Related Party Transactions - Continued
--------------------------------------
a participation agreement. The initial ownership percentages were 50% to
the Fund and 50% to the Affiliate, however, the percentage ownership will
fluctuate as additional principal is advanced to the Joint Venture by the
Fund. Ownership percentages will be determined in accordance with the
ratio of each participant's share of the outstanding loan balance to the
total outstanding loan balance. As of December 31, 1995, the outstanding
balance on the first mortgage was $11,741,899, and the Fund's ownership
percentage was approximately 59%.
During the third quarter of 1995, the Fund borrowed $750,000 from an
Affiliate of the Fund's Sponsor. The advance is in the form of an
unsecured non-interest bearing note payable and matures April 15, 1996.
The advance was made to meet the development plans of the projects to
which the Fund has outstanding loans.
During the fourth quarter of 1995, the Fund borrowed an additional
$1,135,000 from Affiliates of the Fund's Sponsor in a series of advances.
The advances bear interest at various rates averaging approximately 5.75%
and mature April 15, 1996. Interest paid to the Affiliates was $13,023
for the year ended December 31, 1995. These advances are unsecured.
On October 14, 1993, Fawn Lake and Lake Forest entered into a
participation agreement with the Fund whereby they were each assigned an
interest in the Fund's Temporary Mortgage Loan with the Orlando Lake
Forest Joint Venture. The respective assignment of interest was
$1,072,727 to Fawn Lake and $1,162,306 to Lake Forest. The consideration
given the Fund for the acquisition of an interest in the note was a
reduction in the amount of the Supplemental Interest credit due by the
Fund to Fawn Lake and Lake Forest (see Note 7).
- 33 -
4. Mortgage Loans Receivable, net
------------------------------
The following tables outline the Fund's mortgage loan portfolio at December
31, 1995. There is currently no readily determinable market value for the
portfolio given its unique and affiliated nature.
Property Pledged Interest Maturity
Borrower as Collateral Rate Date
-------- ---------------- -------- ---------
1) Earning Loans:
Temporary Mortgage
Loans:
NTS/Virginia First mortgage on approximately Prime 11/30/96
Development Compan 187 acres of residential land + 3/4%
and improvements thereon located
in Fredericksburg, Virginia,
known as the Fawn Lake Golf
Course; NTS Guaranty Corporation
guarantees the loan
Mortgage Loans:
NTS/Virginia First mortgage on approximately 17% of 07/01/97
Development Company 2,237 acres of residential land Gross
and improvements thereon Receipts
located in Fredericksburg, (a)(b)
Virginia, known as Fawn Lake
NTS/Lake Forest First mortgage on approximately 17% of 07/01/97
II Residential 556 acres of residential land Gross
Corporation in Louisville, Kentucky, known Receipts