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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
as Lake Forest (a)(b)
Orlando Lake First mortgage on approximately 17% of 01/31/98
Forest Joint 425 acres of residential land Gross
Venture in Orlando, Florida known as Receipts
Orlando Lake Forest (c)
(a) Effective July 1, 1994, these Mortgage Loans are paying interest at
the greater of 17% of Gross Receipts or 4.42% of the average
outstanding loan balance.
(b) These Mortgage Loans included a provision for Gross Receipts Interest
through June 30, 1994.
(c) This Mortgage Loan pays interest at the greater of 17% of Gross
Receipts or 6.46% of the average outstanding loan balance.
- 34 -
4. Mortgage Loans Receivable, net - Continued
------------------------------------------
Total Balance Interest
Senior Outstanding Commitment Receivable
Liens At Face Amount At Fees At
12/31/95 At 12/31/95 12/31/95(j) Received 12/31/95
-------- ----------- ------------ ---------- ----------
1) Earning
Loans:
Temporary
Mortgage Loan:
NTS/Virginia $ 1,063,873 $ 2,000,000 $ 1,053,953 $ 20,000 $ 10,443
Development
Company
Mortgage Loans:
NTS/Virginia 502,937 28,000,000 27,459,598 200,000 618,591
Development (d) (f)
Company
NTS/Lake Forest 562,873 28,000,000 25,935,985 250,000 313,171
II Residential (e) (g)
Corporation
Orlando Lake -- 13,000,000 5,633,787 -- 199,816
Forest Joint (h) (i)
Venture
----------- ----------- ----------- -----------
Total Earning
Loans $71,000,000 $60,083,323 $ 470,000 $ 1,142,021
=========== =========== =========== ===========
(d) Senior lien applies to approximately 37 acres securing the first
mortgage which are subordinated to an unaffiliated lender.
(e) Senior liens apply to approximately 180 acres securing the first
mortgage which are subordinated to unaffiliated lenders.
(f) NTS Guaranty Corporation guarantees up to $2 million of outstanding
debt exceeding $18 million.
(g) NTS Guaranty Corporation guarantees up to $2,416,500 of outstanding
debt exceeding $22 million.
(h) 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%.
(i) The carrying amount of this Mortgage Loan is net of an unaccreted
discount of approximately $1,275,879.
(j) The carrying amount of the mortgage loans receivable at December 31,
1995 is net of any unamortized commitment fees.
- 35 -
4. Mortgage Loans Receivable, net - Continued
------------------------------------------
Property Pledged Interest Maturity
Borrower as Collateral Rate Date
-------- ------------- ---- ----
2) Non-Earning Loans:
Temporary Mortgage
Loans:
Orlando Lake Pledge by both general partners Prime Demand
Forest Joint of their partnership interests + 2%
Venture in Orlando Lake Forest Joint (k)
Venture located in Orlando,
Florida; a pledge of 390 shares
of the Class A common stock in
NTS/Virginia Development Company;
NTS Guaranty Corporation
guarantees the loan
Mortgage Loan:
Orlando Lake First mortgage on approximately Prime Demand
Forest Joint 2 acres of residential land + 2%
Venture located in Orlando, Florida (k)
known as Orlando Lake Forest
Joint Venture
(k) The Orlando Lake Forest Joint Venture has entered into a forbearance
agreement with the Fund whereby, effective April 1, 1995, no interest
will be due on these loans through January 31, 1998.
- 36 -
4. Mortgage Loans Receivable, net - Continued
------------------------------------------
Total Balance Interest
Senior Outstanding Commitment Receivable
Liens At Face Amount At Fees At
12/31/95 At 12/31/95 12/31/95 Received 12/31/95
-------- ----------- ----------- ---------- ----------
2) Non-Earning
Loans:
Temporary
Mortgage Loan:
Orlando Lake $11,889,454 $ 7,818,000 $ 4,978,225 $ 150,000 $ --
Forest Joint (l) (m) (n) (P)
Venture
Mortgage Loans:
Orlando Lake -- 3,000,000 147,555 30,000 --
Forest Joint (o) (P)
Venture ---------- ---------- ---------- ------
Total Earning
Loans $10,818,000 $ 5,125,780 $ 180,000 $ --
========== ========== ========== ======
(l) Total senior liens include a $147,555 mortgage loan with the Fund and
a 59% interest in a senior lien totalling $11,741,899 with the Fund.
(m) NTS/Virginia Development Company (Fawn Lake) and NTS/Lake Forest II
Residential Corporation (Lake Forest) participate with the Fund
regarding this Temporary Mortgage Loan. The percentage ownership as
of December 31, 1995 is 14.862% and 16.103%, respectively.
(n) The Fund has established a $1,500,000 loan loss reserve as of December 31, 1995.
(o) The Fund has established a $53,397 loan loss reserve as of December 31, 1995.
(p) The Fund has discontinued accruing interest from the Temporary Mortgage Loan and the
Phase-In Mortgage Loan to the Orlando Lake Forest Joint Venture until
the interest payment is received. Approximately $1,827,000 of
interest remains due to the Fund on these loans but is not accrued in
the Fund's financial statements.
- 37 -
4. Mortgage Loans Receivable, net - Continued
------------------------------------------
Reconciliation of Mortgage Loans Receivable for the year ended:
---------------------------------------------------------------
Balance at December 31, 1992 $54,717,053
Additions:
Mortgage Loans $ 90,084
Temporary Mortgage Loans --
Amortization of loan fees 106,210 196,294
-----------
Reductions:
Mortgage Loans --
Temporary Mortgage Loans (2,283,652)
Mortgage Loan written-off --
Loan fees received (15,000) (2,298,652)
----------- -----------
Balance at December 31, 1993 $52,614,695
Additions:
Mortgage Loans $ --
Temporary Mortgage Loans --
Amortization of loan fees 117,930 117,930
-----------
Reductions:
Mortgage Loans (249,004)
Temporary Mortgage Loans (5,224)
Mortgage Loan written-off (241,145)
Loan fees received (15,000) (510,373)
----------- -----------
Balance at December 31, 1994 $52,222,252
Additions:
Mortgage Loans $14,060,254
Temporary Mortgage Loans --
Amortization of loan fees -- 14,060,254
-----------
Reductions:
Mortgage Loans --
Temporary Mortgage Loans (967,945)
Mortgage Loan written-off (85,458)
Loan fees received (20,000) (1,073,403)
----------- -----------
Balance at December 31, 1995 $65,209,103
==========
Reserves for Loan Losses:
Balance at December 31, 1992 $ 230,000
Additions charged to Expenses $ 1,500,000
Deduction for Mortgage Loan written-off -- 1,500,000
----------- ----------
Balance at December 31, 1993 $ 1,730,000
Additions charged to Expenses $ 150,000
Deduction for Mortgage Loan written-off (241,145) (91,145)
----------- -----------
Balance at December 31, 1994 $ 1,638,855
Additions charged to Expenses $ --
Deduction for Mortgage Loan written-off (85,458) (85,458)
----------- -----------
Balance at December 31, 1995 $ 1,553,397
==========
- 38 -
5. Reserves for Loan Losses
------------------------
Reserves for loan losses are based on management's evaluation of the
borrower's ability to meet its obligation as well as current and future
economic conditions. Reserves are based on estimates and ultimate losses
could differ materially from the amounts assumed in arriving at the
reserve for possible loan losses reported in the financial statements.
These estimates are reviewed periodically and, as adjustments become
necessary, they are reported in earnings in the period in which they
become known. On a regular basis, management reviews each mortgage loan
in the Fund's portfolio including an assessment of the recoverability of
the individual mortgage loans. As of December 31, 1995, the Fund has a
loan loss reserve regarding the $3,000,000 Phase-In Mortgage Loan to the
Orlando Lake Forest Joint Venture (with an outstanding balance of
$147,555 as of December 31, 1995) amounting to $53,397 and a loan loss
reserve regarding the Temporary Mortgage Loan to the Orlando Lake Forest
Joint Venture (with an outstanding balance of $4,978,225 as of December
31, 1995) amounting to $1,500,000.
6. Notes Payable
-------------
Notes payable consist of the following:
1995 1994
----------- -----------
Note payable to a bank in the amount
of $13,800,000 bearing interest at
the Prime Rate plus 1%, payable
monthly, due December 27, 1997,
secured by a collateral assignment
of the Fund's mortgages on Lake
Forest and Fawn Lake, guaranteed
by Mr. J. D. Nichols, Chairman of
the Board of the Fund's Sponsor $13,086,000 $ --
Note payable to a bank in the amount
of $2,000,000, bearing interest at the
Prime Rate plus 3/4%, payable quarterly
due November 30, 1996, secured by
approximately 187 acres of residential
land and improvements thereon 1,063,873 --
Note payable to a bank in the amount
of $2,800,000, bearing interest at
the Prime Rate plus 1%, payable
monthly, secured by a collateral
assignment of the Fund's mortgage
on Lake Forest, paid in full on
January 10, 1995 -- 1,936,522
---------- ----------
$14,149,873 $ 1,936,528
========== ==========
The Prime Rate was 8 1/2% at December 31, 1995 and 1994.
Based on the borrowing rates currently available to the Fund for bank
loans with similar terms and average maturities, the fair value of the
above debt instruments approximates the carrying value.
- 39 -
7. Gross Receipts and Supplemental Interest Income
-----------------------------------------------
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. 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, however, none was earned for the year ended
December 31, 1995.
In addition to regular interest and Gross Receipts Interest, borrowers
were required to pay Supplemental Interest. Supplemental Interest was
paid to the Fund through March 31, 1992, in order for the Fund to make
distributions to its Stockholders equal to a 12% per annum, noncompounded
return on their capital contribution. Supplemental Interest was credited
against 50% of the amounts later due as Gross Receipts Interest, thereby
reducing the amount of Gross Receipts Interest paid. Supplemental
Interest was classified as deferred revenue on the Fund's balance sheet
when received and was amortized into income equal to the amount credited
against Gross Receipts Interest thereby reflecting the full amount of
Gross Receipts Interest as income as earned on the accrual basis of
accounting. 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 (see Note 9). Supplemental Interest
of $160,185 which has been recognized in income for the year ended
December 31, 1993 represents the amount of Supplemental Interest paid in
prior years that was credited against 50% of the amount due as Gross
Receipts Interest for the period from certain Affiliated Borrowers. In
addition, on February 18, 1993 the Fund's Board of Directors changed the
interest rate to be charged on the Mortgage Loans to NTS/Virginia
Development Company and NTS/Lake Forest II Residential Corporation.
Effective January 1, 1993, for the first quarter of 1993, these loans
were charged interest at the Federal Funds Rate plus 3.7%. In
consideration for the interest rate change, NTS/Virginia Development
Company and NTS/Lake Forest II Residential Corporation 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 as Gross Receipts Income on the statement of 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.
- 40 -
7. Gross Receipts and Supplemental Interest Income - Continued
-----------------------------------------------------------
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.
8. Commitments and Contingencies
-----------------------------
The Fund has commitments to extend credit made in the normal course of
business that are not reflected in the financial statements. At December
31, 1995, the Fund had outstanding funding commitments under standby
letters of credit aggregating $985,664: Orlando Lake Forest Joint Venture
$517,813; NTS/Virginia Development Co. $467,851. These outstanding
funding commitments are part of the maximum funding amount of the
mortgage loans. Committed undisbursed loans were approximately $6,084,000
at December 31, 1995.
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.
9. Guaranties to the Fund
----------------------
NTS Guaranty Corporation (the "Guarantor"), an Affiliate of the Sponsor,
has agreed to provide the following guaranties to the Fund:
Cash Flow Guaranty
------------------
As defined in the Fund's Prospectus, the Cash Flow Guaranty ended on
March 31, 1992. It was anticipated that the 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, as defined in the Prospectus, at a combined rate sufficient to
allow the Fund to make distributions to the Stockholders at a rate equal
to a minimum 12% per annum, noncompounded return.
- 41 -
9. Guaranties to the Fund - Continued
----------------------------------
Cash Flow Guaranty - Continued
------------------------------
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,
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 amounts of Incentive 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.
Junior Mortgage Loan Guaranty
-----------------------------
The Guarantor guarantees the payment to the Fund, on a timely basis, of
the Principal (as defined in the Prospectus) of all Junior Mortgage Loans
and Temporary Mortgage Loans made by the Fund to Affiliated Borrowers.
The Guarantor's obligation is limited to the Principal balance
outstanding on the Junior Mortgage Loan or Temporary Mortgage Loan and
does not include the Interest Reserve, as defined in the Prospectus. This
guaranty will not apply to Junior Mortgage Loans or Temporary Mortgage
Loans made to Non-Affiliated Borrowers.
On October 19, 1992, the Fund notified the Orlando Lake Forest Joint
Venture (the "Joint Venture") that the Joint Venture is in payment
default regarding the Fund's Temporary Mortgage Loan to the Joint
Venture. This default gives the Fund the right to pursue the Guarantor
for its guaranty. 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 Borrowers. 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.
Purchase Price Guaranty
-----------------------
The Guarantor has guaranteed that investors of the Fund will receive,
over the life of the Fund, aggregate distributions from the Fund (from
all sources) in an amount at least equal to their Original Capital
Contributions, as defined in the Fund's Prospectus.
The liability of the Guarantor under the above guaranties is expressly
limited to its assets and its ability to draw upon a $10 million demand
note receivable from Mr. J.D. Nichols, Chairman of the Board of Directors
of the Sponsor. There can be no assurance that Mr. Nichols will, if
called upon, be able to honor his obligation to the Guarantor. The total
amounts guaranteed by the Guarantor are in excess of its net worth, and
there is no assurance that the Guarantor will be able to satisfy its
obligation under these guaranties. The Guarantor may in the future
provide guaranties for other Affiliates of the Fund.
- 42 -
10. Dividends Paid and Payable
--------------------------
Dividends declared for the periods ended December 31, 1993, 1994 and 1995
were as follows:
Average
Date Date of Date Outstanding Amount
Declared Record (1) Paid Shares Per Share Amount
-------- ---------- -------- ----------- --------- --------
02/18/93 01/31/93 02/26/93 3,187,333 $ .05 $ 161,974
02/18/93 02/28/93 03/29/93 3,187,333 .05 146,618
02/18/93 03/31/93 04/27/93 3,187,333 .05 162,556
02/18/93 04/30/93 05/28/93 3,187,333 .05 159,366
02/18/93 05/31/93 06/28/93 3,187,333 .05 159,336
02/18/93 06/30/93 07/28/93 3,187,333 .05 159,366
02/18/93 07/31/93 08/26/93 3,187,333 .07 223,144
02/18/93 08/31/93 09/30/93 3,187,333 .07 223,114
02/18/93 09/30/93 10/28/93 3,187,333 .07 223,114
02/18/93 10/31/93 11/29/93 3,187,333 .07 223,114
02/18/93 11/30/93 12/27/93 3,187,333 .07 223,114
02/18/93 12/31/93 01/26/94 3,187,333 .12 374,519
------- ---------
Total dividends declared in 1993 $ .77 $2,439,335
======= =========
01/28/94 01/31/94 02/28/94 3,187,333 $ .06 $ 191,240
01/28/94 02/28/94 03/28/94 3,187,333 .06 191,239
01/28/94 03/31/94 04/28/94 3,187,333 .06 191,240
01/28/94 04/20/94 05/28/94 3,187,333 .03 95,618
01/28/94 05/31/94 06/28/94 3,187,333 .03 95,619
01/28/94 06/30/94 07/28/94 3,187,333 .03 95,619
01/28/94 07/31/94 08/29/94 3,187,333 .03 95,619
01/28/94 08/31/94 09/29/94 3,187,333 .03 95,619
01/28/94 09/30/94 10/28/94 3,187,333 .03 95,620
01/28/94 10/31/94 11/29/94 3,187,333 .03 95,620
01/28/94 11/30/94 12/29/94 3,187,333 .03 95,620
01/28/94 12/31/94 01/27/95 3,187,333 .04 127,493
------- ---------
Total dividends declared in 1994 $ .46 $1,466,166
======= =========
03/09/95 01/31/95 02/27/95 3,187,333 $ .03 $ 95.620
03/09/95 02/28/95 03/28/95 3,187,333 .03 95,620
03/09/95 03/31/95 04/27/95 3,187,333 .03 95.620
03/09/95 04/30/95 05/26/95 3,187,333 .03 95,620
03/09/95 05/31/95 06/27/95 3,187,333 .01 31,873
03/09/95 06/30/95 07/27/95 3,187,333 .01 31,873
03/09/95 07/31/95 08/25/95 3,187,333 .01 31,873
03/09/95 08/31/95 09/26/95 3,187,333 .01 31,873
03/09/95 09/30/95 10/26/95 3,187,333 .01 31,873
03/09/95 10/31/95 11/29/95 3,187,333 .01 31,873
03/09/95 11/30/95 12/26/95 3,187,333 .01 31,873
03/09/95 12/31/95 01/26/96 3,187,333 .01 38,250
------- ---------
Total dividends declared in 1995 $ .20 $ 643,841
======= =========
It is the Fund's policy to distribute to its Stockholders an amount equal
to at least 95% of taxable income. A portion of the dividends paid during
a subsequent year may be allocable to taxable income earned in the prior
year. For 1993, 1994 and 1995, dividends to Stockholders represent
ordinary income.
(1) Cash dividends vary based upon the date of stockholder admittance.
- 43 -
11. Subsequent Events - Unaudited
-----------------------------
A) On March 12, 1996, the Fund's Board of Directors, including a
majority of the Independent Directors, took the following action:
* Fixed the number of directors on the Fund's Board of Directors
at five and elected Gerald B. Thomas as an Independent Director
and Richard L. Good as an Affiliated Director. Messrs. Thomas
and Good will serve as members of the Board of Directors until
the annual meeting and until they or their successors are duly
elected and qualified.
* Set May 1, 1996 as the record date for determination of
Stockholders entitled to notice of and vote at the annual
meeting to be held on June 27, 1996.
* Approved an increase in the loan commitment amount to
NTS/Virginia Development Company from $28,000,000 to
$30,000,000.
12. Unaudited Quarterly Financial Data
----------------------------------
Quarters Ended
--------------
1995 March 31 June 30 September 30 December 31 Total
---- ----------- ----------- ------------ ----------- ----------
Total revenues $ 640,705 $ 751,340 $ 741,441 $ 751,166 $2,884,652
Total expenses 418,094 520,429 522,330 555,465 2,016,318
---------- ---------- ---------- ---------- ----------
Income before
income taxes 222,611 230,911 219,111 195,701 868,334
Income tax expense 2,500 2,500 2,500 2,500 10,000
---------- ---------- ---------- ---------- ----------
Net income $ 220,111 $ 228,411 $ 216,611 $ 193,201 $ 858,334
========== ========== ========== ========== ==========
Net income per
share of common
stock $ .07 $ .07 $ .07 $ .06 $ .27
========== ========== ========== ========== ==========
1994 March 31 June 30 September 30 December 31 Total
---- ----------- ----------- ------------ ------------ ----------
Total revenues $ 916,883 $ 902,970 $ 615,566 $ 549,585 $2,985,004
Total expenses 256,355 412,773 256,658 252,047 1,177,833
---------- ---------- ---------- ---------- ----------
Income before
income taxes 660,528 490,197 358,908 297,538 1,807,171
Income tax expense 10,000 10,000 5,000 -- 25,000
---------- ---------- ---------- ---------- ----------
Net income $ 650,528 $ 480,197 $ 353,908 $ 297,538 $1,782,171
========== ========== ========== ========== ==========
Net income per
share of common
stock $ .20 $ .15 $ .11 $ .09 $ .56
========== ========== ========== ========== ==========
- 44 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders of NTS Guaranty Corporation:
We have audited the accompanying balance sheets of NTS Guaranty Corporation (a
Kentucky corporation) as of December 31, 1995 and 1994. These balance sheets are
the responsibility of NTS Guaranty Corporation's management. Our responsibility
is to express an opinion on these balance sheets based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheets are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheets. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of NTS Guaranty Corporation as of
December 31, 1995, and 1994, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
February 21, 1996
- 45 -
NTS GUARANTY CORPORATION
------------------------
(A KENTUCKY CORPORATION)
------------------------
BALANCE SHEETS
--------------
AS OF DECEMBER 31, 1995 AND 1994
--------------------------------
ASSETS
------
1995 1994
----------- ------------
Cash $ 100 $ 100
---------- -----------
$ 100 $ 100
========== ===========
STOCKHOLDER'S EQUITY
--------------------
Common stock, no par value;
100 shares issued and outstanding $ 10 $ 10
Additional paid-in capital 10,000,090 10,000,090
------------ ------------
10,000,100 10,000,100
Less non-interest bearing demand
note receivable from a majority
stockholder of NTS Corporation (10,000,000) (10,000,000)
------------ ------------
$ 100 $ 100
============ ============
NOTES TO BALANCE SHEETS
-----------------------
1. Significant Accounting Policies
-------------------------------
A. Organization
------------
NTS Guaranty Corporation (the "Guarantor"), a Kentucky corporation,
was formed in February 1987 and is an affiliate of NTS Corporation.
NTS Corporation is the Sponsor of the NTS Mortgage Income Fund (the
"Fund"). The balance sheets include only those assets and liabilities
which relate to the Guarantor. The Guarantor is authorized to issue
up to 2,000 shares of common stock with no par value. There are 100
shares issued and outstanding which were purchased by Mr. J. D.
Nichols, Chairman of the Board of Directors of the Sponsor and the
Fund. In addition, Mr. Nichols has given the Guarantor a non-interest
bearing demand note receivable for $10,000,000, the receipt of which
is included in additional paid-in capital. Expenses (consisting
mostly of state taxes and professional fees) of the Guarantor
totalling approximately $45 for each of the years ended December 31,
1995 and 1994 were paid by an affiliate of the Sponsor and therefore
no income statement is presented. These expenses will not be
reimbursed to the affiliate.
2. Commitments
-----------
The Guarantor has made commitments to the Fund as follows:
A. Junior Mortgage Loan Guaranty
-----------------------------
The Guarantor guarantees the payment to the Fund, on a timely basis,
of the Principal (as defined in the Fund's Prospectus) of all Junior
Mortgage and Temporary Mortgage Loans made by the Fund to Affiliated
- 46 -
2. Commitments - Continued
-----------------------
A. Junior Mortgage Loan Guaranty - Continued
-----------------------------------------
Borrowers. The Guarantor's obligation is limited to the Principal
balance outstanding on the Junior Mortgage Loan or Temporary Mortgage
Loan and does not include the Interest Reserve as defined in the
Fund's Prospectus. This guaranty will not apply to Junior Mortgage
Loans or Temporary Mortgage Loans made to Non-Affiliated
Borrowers.
As of December 31, 1995, the Principal balance outstanding on Junior
Mortgage Loans and Temporary Mortgage Loans guaranteed by the
Guarantor was $8,285,098.
The Temporary Mortgage Loan to the Orlando Lake Forest Joint Venture
(with an overall outstanding balance of $7,211,145 as of December 31,
1995) is in default. The Fund's Board of Directors has not called
upon the guaranty at this time. Based on current facts, management
believes that the Fund will continue to pursue a work-out plan
regarding the default.
B. Purchase Price Guaranty
-----------------------
The Guarantor has guaranteed that Investors of the Fund will receive,
over the life of the Fund, aggregate distributions from the Fund
(from all sources) in an amount at least equal to their Original
Capital Contributions, as defined in the Fund's Prospectus. As of
December 31, 1995, the Fund has raised approximately $63,690,000 and
has paid distributions of approximately $22,535,000.
C. Mortgage Loan Guaranties
------------------------
The Guarantor has guaranteed the payment, up to $2,000,000, of the
outstanding principal amount of the Mortgage Loan to NTS/Virginia
Development Company which exceeds $18,000,000. The Guarantor has
guaranteed the payment, up to $2,416,500, of the outstanding
principal amount of the Mortgage Loan to NTS/Lake Forest II
Residential Corporation which exceeds $22,000,000. As of December 31,
1995, the outstanding principal balances of the NTS/Virginia
Development Company Mortgage Loan and the NTS/Lake Forest II
Residential Corporation Mortgage Loan were $27,459,598 and
$25,935,985, respectively.
The liability of the Guarantor under the above guaranties and obligations is
expressly limited to its assets and its ability to draw upon a $10 million
demand note receivable from Mr. J. D. Nichols. Mr. Nichols has contingent
liabilities which have arisen in connection with the acquisition of properties
by himself or his affiliates. There can be no assurance that Mr. Nichols will,
if called upon, be able to honor his obligation to the Guarantor. The total
amounts guaranteed by the Guarantor are in excess of its net worth, and there is
no assurance that the Guarantor will be able to satisfy its obligation under
these commitments. The Guarantor may in the future provide guarantees to other
Affiliates of the Fund.
- 47 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders of NTS/Lake Forest II Residential Corporation:
We have audited the accompanying balance sheets of NTS/Lake Forest II
Residential Corporation (a Kentucky 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 Company'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 NTS/Lake Forest II Residential
Corporation, 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
- 48 -
NTS/LAKE FOREST II RESIDENTIAL CORPORATION
------------------------------------------
BALANCE SHEETS
--------------
AS OF DECEMBER 31, 1995 AND 1994
--------------------------------
1995 1994
------------ ------------
ASSETS
- ------
Cash $ 201,928 $ 79,006
Accounts receivable 1,724,974 1,220,703
Notes receivable 1,677,064 2,054,725
Notes receivable - affiliate
Earning loan 1,734,518 1,675,076
Non-earning loan, net of a loan loss
reserve of $765,932 (1995) and $300,000
(1994) 395,275 861,207
Inventory 25,783,989 26,445,755
Property & equipment, net of accumulated
depreciation of $265,384 (1995) and
$196,172 (1994) 176,453 241,888
Deferred marketing costs, net of
amortization of $154,558 (1994) -- 38,640
Loan costs, net of amortization of $456,983
(1995) and $433,069 (1994) 66,896 14,862
Performance bonds 208,844 156,500
----------- -----------
Total assets $31,969,941 $32,788,362
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
- --------------------------------
Accounts payable and accrued expenses
including retainage of $39,939 (1995)
and $34,877 (1994) $ 832,165 $ 1,163,658
Advances from an affiliate 1,669,346 1,613,650
Notes and mortgage loans payable (Note 6) 28,628,987 28,537,902
Lot deposits 10,500 57,524
Deferred revenue 77,224 64,856
----------- -----------
Total liabilities 31,218,222 31,437,590
----------- -----------
Stockholders' equity:
Common stock, no par value, 2,000 shares
authorized, 100 shares issued and
outstanding 1,000 1,000
Retained earnings 750,719 1,349,772
----------- -----------
Total stockholders' equity 751,719 1,350,772
----------- -----------
Total liabilities and stockholders'
equity $31,969,941 $32,788,362
=========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
- 49 -
NTS/LAKE FOREST II RESIDENTIAL CORPORATION
------------------------------------------
STATEMENTS OF INCOME
--------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
1995 1994 1993
------------ ------------ ------------
Revenues:
Lot sales, net of discounts $ 4,329,717 $ 4,110,735 $ 5,380,689
Interest and other income 460,944 397,950 241,560
Interest income - affiliate 116,371 109,112 100,471
----------- ----------- -----------
4,907,032 4,617,797 5,722,720
Cost of sales 3,161,765 2,735,786 2,886,001
----------- ----------- -----------
Gross profit 1,745,267 1,882,011 2,836,719
Expenses:
Cost Reimbursement (Note 7) 835,033 -- --
Marketing and development fee (Note 7) -- 382,789 1,110,004
General and administrative 283,690 278,753 269,311
Interest 691,813 681,046 599,908
Gross receipts interest (Note 7) 5,355 61,555 210,135
Depreciation and amortization 62,497 129,034 106,735
Provision for loan losses 465,932 -- 300,000
----------- ----------- -----------
2,344,320 1,533,177 2,596,093
----------- ----------- -----------
Net income (loss) $ (599,053) $ 348,834 $ 240,626
=========== =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
- 50 -
NTS/LAKE FOREST II RESIDENTIAL CORPORATION
------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
Common Retained
Stock Earnings Total
------------ ------------ ------------
Balances at December 31, 1992 $ 1,000 $ 760,312 $ 761,312
Net income -- 240,626 240,626
----------- ----------- -----------
Balances at December 31, 1993 1,000 1,000,938 1,001,938
Net income -- 348,834 348,834
----------- ----------- -----------
Balances at December 31, 1994 1,000 1,349,772 1,350,772
Net loss -- (599,053) (599,053)
----------- ----------- -----------
Balances at December 31, 1995 $ 1,000 $ 750,719 $ 751,719
=========== =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
- 51 -
NTS/LAKE FOREST II RESIDENTIAL CORPORATION
------------------------------------------
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 (loss) $ (599,053) $ 348,834 $ 240,626
Adjustments to reconcile net income to net
cash from (used for) operating activities:
Depreciation and amortization 62,497 129,034 106,735
Provision for loan losses 465,932 -- 300,000
Accrued interest on performance bonds (1,343) -- --
Changes in assets and liabilities:
Accounts receivable (504,271) (405,101) (314,313)
Notes receivable 377,661 672,917 (1,836,033)
Inventory 731,035 (1,205,288) (873,110)
Supplemental interest -- -- 241,170
Performance bonds (51,000) (105,500) --
Accounts payable and accrued expenses (331,493) 231,112 67,323
Lot deposits (47,024) (26,740) 42,424
Deferred revenue 12,367 43,440 21,416
----------- ----------- -----------
Net cash from (used for) operating activities 115,308 (317,292) (2,003,762)
----------- ----------- -----------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES
Property and equipment (3,777) (76,450) (102,963)
Notes receivable - affiliate (59,442) (108,013) (107,504)
----------- ----------- -----------
Net cash used for investing activities (63,219) (184,463) (210,467)
----------- ----------- -----------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES
Proceeds from mortgage loans 5,055,933 4,474,634 4,480,464
Repayments on mortgage loans (4,670,797) (3,099,776) (3,982,958)
Proceeds from notes payable -- 39,124 150,802
Repayments on notes payable (129,563) (137,553) (82,445)
Net borrowings (repayments) under warehouse
line of credit agreements (164,488) (594,288) 1,040,433
Loan costs (75,948) (33,288) (16,893)
Advances (to) from an affiliate 55,696 (157,646) 641,617
----------- ----------- -----------
Net cash from financing activities 70,833 491,207 2,231,020
----------- ----------- -----------
Net increase (decrease) in cash 122,922 (10,548) 16,791
CASH, beginning of period 79,006 89,554 72,763
----------- ----------- -----------
CASH, end of period $ 201,928 $ 79,006 $ 89,554
=========== =========== ===========
Cash paid during period for:
Interest, net of amounts capitalized $ 569,266 $ 688,217 $ 659,832
Noncash investing activities:
Investment in note receivable - affiliate by
entering into a participation agreement $ -- $ -- $ 1,162,306
Noncash financing activities:
Principal reduction on mortgage loan by
offsetting supplemental interest $ -- $ -- $ 750,000
The accompanying notes to financial statements are an integral part of these
statements.
- 52 -
NTS/LAKE FOREST II RESIDENTIAL CORPORATION
------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. Significant Accounting Policies
-------------------------------
A) Organization
------------
NTS/Lake Forest II Residential Corporation (Lake Forest) was
organized on July 6, 1988 as a Kentucky corporation. Lake Forest is
in the process of developing approximately 726 acres of land located
in Louisville, Kentucky into a single-family residential community
and a country club with a championship golf course for the purpose of
selling such residential lots and country club memberships. Lake
Forest will have amenities consisting of a clubhouse, pools, tennis
courts, recreation fields and several lakes.
B) Revenue Recognition
-------------------
Lake Forest recognizes revenue and related costs from lot sales using
the accrual method in accordance with generally accepted accounting
principles, which is when payment has been received and title,
possession and other attributes of ownership have been transferred to
the buyer, and Lake Forest is not obligated to perform significant
activities after the sale. Lake Forest generally requires a minimum
down payment of at least 10% of the sales price of the lot.
C) Reserves for Loan Losses
------------------------
Interest income is reported as earned on the accrual basis of
accounting. If Lake Forest has any reason to doubt the collectability
of any principal and interest amounts due pursuant to the terms of
the notes and accounts receivable, appropriate reserves would be
established for any principal and accrued interest amounts deemed
unrealizable. Notes and accounts receivable in the accompanying
balance sheets are presented at the lower of net carrying value or
net realizable value. The amounts Lake Forest will ultimately realize
could differ from the amounts assumed in arriving at the reserve for
loan losses reported in the financial statements.
D) Inventory
---------
Inventory is stated at the lower of cost or net realizable value.
Inventory includes all direct costs of land, land development, and
amenities, including interest, real estate taxes, and certain other
costs incurred during the development period, less amounts charged to
cost of sales. Inventory costs are allocated to individual lots sold
using the relative sales values. The use of the relative sales value
method to record cost of sales requires the use of estimates of sales
values, development costs and absorption periods over the life of the
project. Given the long-term nature of the project and inherent
economic volatility of residential real estate, it is reasonably
possible that such estimates could change in the near term. Any
changes in estimates would be accounted for prospectively over the
life of the project.
E) Loan Costs
----------
Certain costs associated with obtaining debt financing have been
capitalized. Loan costs are being amortized over the life of the debt
to which the loan costs relate.
- 53 -
1. Significant Accounting Policies - Continued
-------------------------------------------
F) Tax Status
----------
Lake Forest has elected, for income tax purposes, to include its
income with that of its stockholders, an S-Corporation election.
Accordingly, no provision for income taxes is included in the
accompanying financial statements.
G) Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
H) New Accounting Pronouncement
----------------------------
In March 1995, the Financial Accounting Standard Board issued
Statement No. 121 (the "Statement") on accounting for the impairment
of long-lived assets, certain identifiable intangibles, and goodwill
related to assets to be held and used. The Statement also establishes
accounting standards for long-lived assets and certain identifiable
intangibles to be disposed of. The Corporation is required to adopt
the Statement no later than January 1, 1996, although earlier
implementation is permitted. The Statement is required to be applied
prospectively for assets to be held and used. The initial application
of the Statement to assets held for disposal is required to be
reported as the cumulative effect of a change in accounting
principle.
The Corporation plans to adopt the Statement on January 1, 1996.
Based on a preliminary review, the Corporation does not anticipate
that any material adjustments will be required.
2. Accounts Receivable
-------------------
Included in accounts receivable are Lake Forest Country Club (the
"Country Club") membership initiation fees receivable totalling
$1,529,148 and $1,072,724 as of December 31, 1995 and 1994, respectively.
The receivable is net of a discount recorded to allow for the present
value of the receivables considering the estimated timing of collections.
3. Notes Receivable
----------------
Notes receivable are secured by a first mortgage on lots sold to
individuals. The notes bear interest at the prevailing market rates at
the time the lots were sold. The majority of the notes are due between
five to seven years, monthly payments are based on a 30-year amortization
and the balance is due at the maturity date. As of December 31, 1995,
notes totalling $1,641,590 are pledged as security for notes payable to
banks under certain Warehouse Line of Credit Agreements. There are also
$35,475 of notes held by Lake Forest that are not pledged. Approximately
$530,885, $496,053, $259,310, $74,440 and $278,946 of the notes
receivable balance as of December 31, 1995 are due for the years ended
December 1996 through 2000, respectively, with $37,431 due thereafter.
- 54 -
4. Inventory
---------
Inventory consists of the following as of December 31:
1995 1994
----------- -----------
Land held for future development,
under development and completed
lots $11,674,237 $12,636,945
Country club (net of membership
initiation fees) 7,683,416 9,667,448
Amenities 6,426,336 4,141,362
---------- ----------
$25,783,989 $26,445,755
========== ==========
Lake Forest capitalized in inventory approximately $1,123,366 and
$1,039,000 of interest and real estate taxes in 1995 and 1994,
respectively. Interest and real estate taxes incurred were approximately
$1,514,674 and $2,015,000 for the years ended December 31, 1995 and 1994,
respectively.
Inventory as reflected above includes $11,586,739, net of $3,938,700 of
Country Club membership initiation fees, of costs incurred to date for
the development of the Country Club. Pursuant to an agreement between the
Country Club and Lake Forest regarding the cost to develop the Country
Club, Lake Forest is to receive all initiation fees from membership sales
for a period not to exceed 12 years (ending 2003). The remaining
development costs to be incurred for the completion of the clubhouse
facilities are currently estimated to be approximately $5,730,000 which
includes the effect of the current projected Country Club operating
deficit for the period covered by the agreement.
5. Supplemental Interest
---------------------
Lake Forest has a mortgage loan with the NTS Mortgage Income Fund (the
"Fund"). Per the terms of the mortgage loan, Lake Forest was required to
pay Supplemental Interest in addition to its regular interest and Gross
Receipts Interest. Supplemental Interest was capitalized when paid and
was amortized into expense equal to the amount credited against Gross
Receipts Interest thereby reflecting the full amount of Gross Receipts
Interest as expense. Supplemental Interest was paid to the Fund through
March 31, 1992 in order for the Fund to make distributions to its
stockholders equal to a 12% per annum, noncompounded return on their
capital contribution. Supplemental Interest was credited against 50% of
the amounts later due as Gross Receipts Interest, thereby reducing the
amount of Gross Receipts Interest paid in future periods. Supplemental
Interest of $75,915, which has been recognized in income for the year
ended December 31, 1993, represents the amount of Supplemental Interest
paid in prior years that was credited against 50% of the amount due as
Gross Receipts Interest for the current year.
On February 18, 1993, the Fund's Board of Directors approved a change in
the interest rate to be charged on the mortgage loan to Lake Forest.
Effective January 1, 1993, for the first quarter of 1993, the loan was
charged interest at the Federal Funds Rate plus 3.7% In consideration for
the interest rate change, Lake Forest agreed to reduce the amount of
future Gross Receipts Interest credit to be received by $121,875.
- 55 -
5. Supplemental Interest - Continued
---------------------------------
On October 14, 1993, the Fund's Board of Directors accepted a proposal
whereby Lake Forest would begin paying Gross Receipts Interest in an
amount equal to 5% of the net sales price of residential lot sales in
consideration for a credit of the balance of Supplemental Interest due
from the Fund. The amount of Supplemental Interest credit due from the
Fund as of October 14, 1993 was $1,912,306.
The adjustment of the Supplemental Interest credit was as follows:
In connection with the Fund's Supplemental Interest credit
obligation, the Fund credited Lake Forest for $750,000 representing a
reduction in the project's mortgage loan.
In connection with the Fund's Supplemental Interest credit
obligation, the Fund credited Lake Forest for the Supplemental
Interest credit balance by assigning Lake Forest an interest in the
Fund's Temporary Mortgage Loan with the Orlando Lake Forest Joint
Venture. The interest assigned to Lake Forest was $1,162,306.
6. Notes and Mortgage Loans Payable
--------------------------------
Notes and mortgage loans payable consist of the following as of December
31:
1995 1994
----------- ------------
Mortgage loan payable to the Fund
in the amount of $28,000,000 bearing
interest equal to the greater of 17%
of Gross Receipts or 4.42% of the
outstanding loan balance, due July 1,
1997, secured by inventory and a
subordinated first mortgage on 180
acres of land, advances are made as
needed for project costs, generally
principal payments consist of
approximately 83% of the Gross
Receipts of lot sales $25,935,987 $24,723,037
Warehouse Line of Credit Agreements
with three banks bearing interest at
the Prime Rate + 1%, the Prime Rate +
3/4% and the Prime Rate + 1/2%, due
November 30, 1996 ($438,716),
September 30, 1996 ($776,405) and
April 30, 1996 ($893,128), secured by
notes receivable, principal payments
consist of payments received from
notes receivable securing the
obligation 2,108,249 2,272,738
Mortgage loan payable in the amount
of $4,465,000, bearing interest at
the Prime Rate + 1%, due July 31,
1999, secured by the Lake Forest
Country Club golf course, 10 acres of
land upon which the clubhouse will be
constructed and inventory, advances
are made as needed for project cost,
principal payments consist 100% of
the Club's net memberships prior to
closing and 95% of the Club's net
memberships after closing 438,960 --
(continued next page)
- 56 -
6. Notes and Mortgage Loans Payable - Continued
--------------------------------------------
1995 1994
----------- -----------
Mortgage loan payable in the amount
of $875,000, bearing interest at the
Prime Rate + 1%, due November 24,
1996, secured by inventory, advances
are made as needed for project costs,
principal payments consist of 85% of
gross proceeds of lot sales to
builders and 75% of the gross
proceeds of the lot sales to
individuals $ 123,913 $ 771,160
Equipment loan in the amount of
$38,961, bearing interest of 10.5%,
due October 1, 1997, secured by
equipment purchased for use at the
Country Club 21,878 32,697
Mortgage loan payable in the amount
of $2,055,000, bearing interest at
the Prime Rate + 1%, due January 14,
1996, secured by inventory, advances
are made as needed for project costs,
principal payments consist of 85% of
gross proceeds of lot sales to
builders and 75% of the gross
proceeds of the lot sales to
individuals -- 572,847
Equipment loan in the amount of
$261,498 bearing interest at the
Prime Rate + 1 3/8%, due November 16,
1995, secured by equipment purchased
for use at the Country Club -- 100,725
Mortgage loan payable in the amount
of $850,000, bearing interest at the
Prime Rate + 1%, due February 5,
1995, secured by inventory, advances
are made as needed for project costs,
principal payments consist of 85% of
the gross proceeds of lot sales to
builders and 75% of the gross
proceeds of the lot sales to
individuals -- 36,678
Unsecured promissory note in the
amount of $43,520, non-interest
bearing, due January 1, 1996 -- 18,020
Unsecured note payable in the amount
of $10,000, bearing interest at the
Prime Rate + 1%, due December 31,
1994 -- 10,000
---------- ----------
$28,628,987 $28,537,902
========== ==========
The Prime Rate was 8 1/2% at December 31, 1995 and 1994.
There is currently no readily determinable market value for the
$28,000,000 mortgage loan payable to the Fund given its unique and
affiliated nature. Based on the borrowing rates currently available to
Lake Forest for bank loans with similar terms and average
- 57 -
6. Notes and Mortgage Loans Payable - Continued
--------------------------------------------
maturities, the fair value of all other debt instruments approximates the
carrying value for these debt instruments.
7. Related Party Transactions
--------------------------
Development and marketing activities, which include accounting, are
managed by NTS Residential Properties, Inc. - Kentucky (Residential), an
affiliate of Lake Forest. Residential received 25% of the gross proceeds
of lot sales to individuals and 15% of the gross proceeds of lot sales to
builders as a fee for its service. The fee amounted to $382,789 and
$1,110,004 for the years ended December 31, 1994 and 1993, respectively.
Subsequent to June 30, 1994, the fee was no longer charged by
Residential.
Lake Forest incurred expenditures with various affiliates for loan,
acquisition, preliminary planning, start-up, and construction overhead
costs. The amounts charged were approximately $459,000, $112,500 and
$142,500 for each of the three years ended December 31, 1995. In
addition, for 1995, pursuant to an agreement effective July 1, 1994,
reimbursements were made to Residential for actual personnel, marketing
and administrative costs as it relates to Lake Forest of approximately
$835,000. These reimbursements are reflected as Cost Reimbursements in
the accompanying Statement of Income.
In addition to the Supplemental Interest and the mortgage loan with the
Fund, Lake Forest had the following transactions with the Fund:
1995 1994 1993
---------- ---------- ----------
Regular interest - capitalized $ 916,922 $ 859,745 $1,433,311
Regular interest - expensed $ 299,067 $ 325,578 $ 238,405
Gross receipts interest $ -- $ 52,124 $ 210,135
Letters of credit fees $ -- $ 3,295 $ 6,665
Lake Forest has made advances in 1993 and 1992 to an affiliate in
connection with the expansion of the sewage treatment plant servicing the
project which is owned and operated by the affiliate. The advances are
due December 27, 1996 and bear interest at 6.74%. The amount outstanding,
including interest, at December 31, 1995 and 1994 was $1,734,518 and
$1,675,076, respectively. Interest income earned on the advances was
$116,371, $109,112 and $100,471 for the years ended December 31, 1995,
1994 and 1993, respectively.
Lake Forest has received advances from an affiliate totalling $1,669,346,
and $1,613,650 as of December 31, 1995 and 1994, respectively. The
advances bear interest at a rate approximating the Prime Rate. Interest
paid to the affiliate for the years ended December 31, 1995, 1994 and
1993 totalled $146,976, $131,940 and $115,898, respectively. The advances
will be repaid to the affiliate as cash flow permits.
On October 14, 1993, Lake Forest entered into a participation agreement
with the Fund whereby Lake Forest was assigned an interest in the Fund's
Temporary Mortgage Loan with the Orlando Lake Forest Joint
- 58 -
7. Related Party Transactions - Continued
--------------------------------------
Venture (the "Joint Venture"). 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 Lake Forest. The loan
is secured by the partnership interests of both general partners in the
Joint Venture and 390 shares of the Class A common stock of NTS/Virginia
Development Company. The principal balance outstanding is guaranteed by
NTS Guaranty Corporation. The loan is on a demand basis and is in default
due to the failure of the Joint Venture to pay the interest due on the
loan. A forbearance agreement was entered into by the Joint Venture and
lenders, including Lake Forest, whereby effective April 1, 1995, no
interest will be due on the loan through January 31, 1998. As of December
31, 1995, approximately $136,455 of interest was due Lake Forest on this
note but is not accrued in Lake Forest's financial statements. Lake
Forest's share of the loan balance was $395,275 at December 31, 1995,
which is net of a loan loss reserve of $765,932. Reserves for loan losses
are based on management's evaluation of the borrower's ability to meet
its obligation as well as current and future economic conditions.
Reserves are 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.
8. Commitments and Contingencies
-----------------------------
It is estimated that development of the remaining Country Club and
homeowners association amenities will be substantially completed by
December 31, 1999. Based on engineering studies and projections, Lake
Forest will incur additional costs, excluding interest, of approximately
$4,446,000 to complete the Country Club and homeowners association
amenities. These costs are estimated to be incurred as follows;
$4,026,000 for 1996, $-0- for 1997, $280,000 for 1998 and $140,000 for
1999.
Lake Forest has various letters of credit outstanding to governmental
agencies and utility companies totalling approximately $332,000.
- 59 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders of NTS/Virginia Development Company:
We have audited the accompanying balance sheets of NTS/Virginia Development
Company (a Virginia corporation) as of December 31, 1995 and 1994, and the
related statements of operations, 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 Company'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 NTS/Virginia Development
Company 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
- 60 -
NTS/VIRGINIA DEVELOPMENT COMPANY
--------------------------------
BALANCE SHEETS
--------------
AS OF DECEMBER 31, 1995 AND 1994
--------------------------------
1995 1994
------------ ------------
ASSETS
Cash $ 48,466 $ 7,625
Accounts receivable 670,861 552,653
Notes receivable 5,215,716 5,437,417
Non-earning note receivable - affiliate, net
of loan loss reserve of $706,739 (1995) and
$300,000 (1994) 364,974 771,713
Inventory 30,812,235 25,467,805
Property and equipment, net of accumulated
depreciation of $78,664 (1995) and $19,833
(1994) 231,227 79,334
Deferred marketing costs, net of amortization
of $69,484 (1995) and $46,323 (1994) 46,323 69,484
Loan costs, net of amortization of
$589,131 (1995) and $472,576 (1994) 115,289 155,026
Performance bonds and prepaid assets 16,224 11,316
----------- -----------
Total assets $37,521,314 $32,552,373
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses,
including retainage of $90,303 (1995)
and $17,070 (1994) $ 1,384,131 $ 606,059
Advances from an affiliate 729,531 1,791,165
Notes and mortgage loans payable (Note 6) 34,369,132 28,450,059
Lot deposits 62,000 67,000
----------- -----------
Total liabilities 36,544,794 30,914,283
----------- -----------
Stockholders' equity:
Class A common stock, no par value, 70,000
shares authorized, 910 shares issued and
outstanding 910 910
Class B common stock, no par value, 30,000
shares authorized, 90 shares issued and
outstanding 90 90
Retained earnings 975,519 1,637,090
----------- -----------
Total stockholders' equity 976,519 1,638,090
----------- -----------
Total liabilities and stockholders' equity $37,521,314 $32,552,373
=========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
- 61 -
NTS/VIRGINIA DEVELOPMENT COMPANY
--------------------------------
STATEMENTS OF OPERATIONS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
1995 1994 1993
------------ ------------ ------------
Revenues:
Lot sales, net of discounts $ 3,073,548 $ 3,508,281 $ 4,325,632
Interest and other income 516,898 485,903 553,340
----------- ----------- -----------
3,590,446 3,994,184 4,878,972
Cost of sales 1,923,221 2,097,208 2,404,933
----------- ----------- -----------
Gross profit 1,667,225 1,896,976 2,474,039
Expenses:
Cost reimbursements (Note 7) 984,435 -- --
Marketing and development fee (Note 7) -- 505,950 1,025,204
General and administrative 132,359 100,469 292,304
Interest 592,786 611,128 747,137
Gross receipts interest (Note 7) 13,932 85,881 191,042
Depreciation and amortization 198,546 187,949 207,516
Provision for loan losses 406,739 -- 300,000
----------- ----------- -----------
2,328,796 1,491,377 2,763,203
----------- ----------- -----------
Net income (loss) $ (661,571) $ 405,599 $ (289,164)
=========== =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
- 62 -
NTS/VIRGINIA DEVELOPMENT COMPANY
--------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
Common Retained
Stock Earnings Total
------------ ------------ ------------
Balances at December 31, 1992 $ 1,000 $ 1,520,655 $ 1,521,655
Net loss -- (289,164) (289,164)
----------- ----------- -----------
Balances at December 31, 1993 1,000 1,231,491 1,232,491
Net income -- 405,599 405,599
----------- ----------- -----------
Balances at December 31, 1994 1,000 1,637,090 1,638,090
Net loss -- (661,571) (661,571)
----------- ----------- -----------
Balances at December 31, 1995 $ 1,000 $ 975,519 $ 976,519
=========== =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
- 63 -
NTS/VIRGINIA DEVELOPMENT COMPANY
--------------------------------
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 (loss) $ (661,571) $ 405,599 $ (289,164)
Adjustments to reconcile net income (loss) to
net cash from (used for) operating
activities:
Depreciation and amortization 198,546 187,949 207,516
Provision for loan losses 406,739 -- 300,000
Accrued interest on Performance Bonds (333) -- --
Changes in assets and liabilities:
Accounts receivable (118,208) (91,339) (458,754)
Notes receivable 221,701 269,523 594,308
Inventory (5,344,430) (1,732,505) (2,164,519)
Supplemental interest -- -- 182,347
Performance bonds -- 45,065 21,602
Prepaid assets (4,574) -- --
Accounts payable and accrued expenses 778,072 (375,434) (50,259)
Lot deposits (5,000) (13,000) 40,000
------------ ------------ ------------
Net cash from (used for) operating
activities (4,529,058) (1,304,142) (1,616,923)
------------ ------------ ------------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES
Additions to property and equipment (210,724) (99,167) --
------------ ------------ ------------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES
Proceeds from mortgage loans 12,022,452 2,691,653 8,888,738
Repayments on mortgage loans (6,122,937) (3,030,471) (6,912,638)
Proceeds from notes payable 320,280 79,545 --
Repayments on notes payable (179,947) (5,935) --
Net (repayments) borrowings under warehouse
line of credit agreements (120,773) (117,278) (317,560)
Loan costs (76,818) (5,304) (59,866)
Advances (to) from an affiliate (1,061,634) 1,791,165 --
------------ ------------ ------------
Net cash from (used for) financing
activities 4,780,623 1,403,375 1,598,674
------------ ------------ ------------
Net increase (decrease) in cash 40,841 66 (18,249)
CASH, beginning of period 7,625 7,559 25,808
------------ ------------ ------------
CASH, end of period $ 48,466 $ 7,625 $ 7,559
============ ============ ============
Cash paid during period for:
Interest, net of amounts capitalized $ 147,867 $ 611,128 $ 747,150
Noncash investing activities:
Investment in note receivable - affiliate by
entering into a participation agreement $ -- $ -- $ 1,072,727
Noncash financing activities:
Principal reduction on mortgage loan by
offsetting supplemental interest $ -- $ -- $ 750,000
The accompanying notes to financial statements are an integral part of these
statements.
- 64 -
NTS/VIRGINIA DEVELOPMENT COMPANY
--------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. Significant Accounting Policies
--------------------------------------
A) Organization
------------
NTS/Virginia Development Company (Fawn Lake) was organized on
December 8, 1987 as a Virginia corporation. Fawn Lake is in the
process of developing approximately 2,825 acres of land located in
the Chancellor district of Spotsylvania County, Virginia,
approximately 60 miles south of Washington D.C., into a single-family
residential community and a country club with a championship golf
course for the purpose of selling such residential lots and country
club memberships. Included on the property is a 285 acre lake. Fawn
Lake will have amenities consisting of a clubhouse, pool, tennis
courts and boat docks.
B) Revenue Recognition
-------------------
Fawn Lake recognizes revenue and related costs from lot sales using
the accrual method in accordance with generally accepted accounting
principles, which is when payment has been received and title,
possession and other attributes of ownership have been transferred to
the buyer, and Fawn Lake is not obligated to perform significant
activities after the sale. Fawn Lake generally requires a minimum
down payment of at least 10% of the sales price of the lot.
C) Reserves for Loan Losses
------------------------
Interest income from notes receivable is reported as earned on the
accrual basis of accounting. If Fawn Lake has any reason to doubt the
collectability of any principal and interest amounts due pursuant to
the terms of the notes and accounts receivable, appropriate reserves
would be established for any principal and accrued interest amounts
deemed unrealizable. Notes and accounts receivable in the
accompanying balance sheets are presented at the lower of net
carrying value or net realizable value. The amounts Fawn Lake will
ultimately realize could differ from the amounts assumed in arriving
at the reserve for loan losses reported in the financial statements.
D) Inventory
---------
Inventory is stated at the lower of cost or net realizable value.
Inventory includes all direct costs of land, land development, and
amenities, including interest, real estate taxes, and certain other
costs incurred during the development period, less amounts charged to
cost of sales. Inventory costs are allocated to individual lots sold
using the relative sales values. The use of the relative sales value
method to record cost of sales requires the use of estimates of sales
values, development costs and absorption periods over the life of the
project. Given the long-term nature of the project and inherent
economic volatility of residential real estate, it is reasonably
possible that such estimates could change in the near term. Any
changes in estimates would be accounted for prospectively over the
life of the project.
E) Loan Costs
----------
Certain costs associated with obtaining debt financing have been
capitalized. Loan costs are being amortized over the life of the debt
to which the loan costs relate.
- 65 -
1. Significant Accounting Policies - Continued
-------------------------------------------
F) Tax Status
----------
Fawn Lake has elected, for income tax purposes, to include its income
with that of its stockholders, an S-Corporation election.
Accordingly, no provision for income taxes is included in the
accompanying financial statements.
G) Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
H) New Accounting Pronouncement
----------------------------
In March 1995, the Financial Accounting Standard Board issued
Statement No. 121 (the "Statement") on accounting for the impairment
of long-lived assets, certain identifiable intangibles, and goodwill
related to assets to be held and used. The Statement also establishes
accounting standards for long-lived assets and certain identifiable
intangibles to be disposed of. The Corporation is required to adopt
the Statement no later than January 1, 1996, although earlier
implementation is permitted. The Statement is required to be applied
prospectively for assets to be held and used. The initial application
of the Statement to assets held for disposal is required to be
reported as the cumulative effect of a change in accounting
principle.
The Corporation plans to adopt the Statement on January 1, 1996.
Based on a preliminary review, the Corporation does not anticipate
that any material adjustments will be required.
2. Accounts Receivable
-------------------
Included in accounts receivable are Fawn Lake Country Club membership
initiation fees receivable totalling $662,673 and $550,154 as of December
31, 1995 and 1994, respectively. The receivable is net of a discount
recorded to allow for the present value of the receivables considering
the estimated timing of collections.
3. Notes Receivable
----------------
Notes receivable are secured by a first mortgage on lots sold to
individuals. The notes bear interest at the prevailing market rates at
the time the lots were sold. The majority of the notes are due between
five to seven years, monthly payments are based on a 30-year amortization
and the balance is due at the maturity date. As of December 31, 1995,
notes totalling $5,215,716 are pledged as security for notes payable to
banks under certain Warehouse Line of Credit Agreements. Approximately
$189,483, $1,213,482, $2,088,142, $1,050,944 and $466,438 of the notes
receivable balance as of December 31, 1995 are due for the years ended
December 1996 through 2000, respectively, with $207,227 due thereafter.
- 66 -
4. Inventory
---------
Inventory consists of the following as of December 31:
1995 1994
----------- -----------
Land held for future development,
under development and completed
lots $20,714,958 $18,467,827
Country club (net of membership
initiation fees) 5,207,703 2,213,524
Amenities 4,889,574 4,786,454
---------- ----------
$30,812,235 $25,467,805
========== ==========
Fawn Lake capitalized in inventory approximately $1,216,410 and
$1,349,000 of interest and real estate taxes in 1995 and 1994,
respectively. Interest and real estate taxes incurred was approximately
$1,336,285 and $1,996,000 as of December 31, 1995 and 1994, respectively.
Inventory as reflected above includes $6,242,722, net of $1,044,590 of
country club membership initiation fees, of costs incurred to date for
the development of Fawn Lake Country Club.
5. Supplemental Interest
---------------------
Fawn Lake has a mortgage loan with the NTS Mortgage Income Fund (the
Fund). Per the terms of the mortgage loan, Fawn Lake was required to pay
Supplemental Interest in addition to its regular interest and Gross
Receipts Interest. Supplemental Interest was capitalized when paid and
was amortized into expense equal to the amount credited against Gross
Receipts Interest thereby reflecting the full amount of Gross Receipts
Interest as expense. Supplemental Interest was paid to the Fund through
March 31, 1992 in order for the Fund to make distributions to its
stockholders equal to a 12% per annum, noncompounded return on their
capital contribution. Supplemental Interest was credited against 50% of
the amounts later due as Gross Receipts Interest, thereby, reducing the
amount of Gross Receipts Interest paid in future periods. Supplemental
Interest paid to the Fund was $416,500 for the year ended December 31,
1992. Supplemental Interest of $81,342, which has been recognized in
income for the year ended December 31, 1993, represents the amount of
Supplemental Interest paid in prior years that was credited against 50%
of the amount due as Gross Receipts Interest for the current year.
On February 18, 1993, the Fund's Board of Directors approved a change in
the interest rate to be charged on the mortgage loan to Fawn Lake.
Effective January 1, 1993, for the first quarter of 1993, the loan was
charged interest at the Federal Funds Rate plus 3.7%. In consideration
for the interest rate change, Fawn Lake agreed to reduce the amount of
future Gross Receipts Interest credit to be received by $97,500.
On October 14, 1993, the Fund's Board of Directors accepted a proposal
whereby Fawn Lake would begin paying Gross Receipts Interest in an amount
equal to 5% of the net sales price of residential lots sales in
- 67 -
5. Supplemental Interest - Continued
---------------------------------
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 $1,822,727. 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 for $750,000, representing a reduction in
the project's mortgage loan.
In connection with the Fund's Supplemental Interest credit obligation,
the Fund credited Fawn Lake for the Supplemental Interest credit
balance by assigning Fawn Lake an interest in the Fund's Temporary
Mortgage Loan with the Orlando Lake Forest Joint Venture. The interest
assigned to Fawn Lake was $1,072,727.
6. Notes and Mortgage Loans Payable
--------------------------------
Notes and mortgage loans payable consist of the following as of December
31:
1995 1994
----------- -----------
Mortgage loan payable to the Fund in
the amount of $28,000,000, bearing
interest equal to the greater of 17% of
Gross Receipts or 4.42% of the
outstanding loan balance, due July 1,
1997, secured by inventory and a
subordinated first mortgage on 37 acres
of land, generally principal payments
consist of approximately 83% of the
Gross Receipts of lot sales $27,459,598 $19,900,369
Mortgage payable to the Fund in the
amount of $2,000,000, bearing interest
at the rate of Prime + 3/4%, due
November 30, 1996, secured by the Fawn
Lake Golf Course 1,073,953 --
Warehouse Line of Credit Agreements
with two banks bearing interest at the
Prime Rate + 1/2% and Prime Rate +
3/4%, due November 30, 1996
($1,033,758) and September 30, 1996
($4,084,944), secured by notes
receivable, principal payments consist
of payments received from notes
receivable securing the obligation 5,118,702 5,239,476
Mortgage loan payable in the amount of
$540,000 with total disbursements not
to exceed $675,000 bearing interest at
the Prime Rate + 1% and gross receipts
interest of 2% of the gross proceeds
from lot sales, due September 15, 1996,
secured by a first mortgage on 24 lots
in Fawn Lake, principal payments
consist of 85% of the gross proceeds of
lot sales to builders and 75% of the
gross proceeds of lot sales to
individuals 502,936 336,607
(continued next page)
- 68 -
1995 1994
------------ ------------
Bank note payable in the amount of
$165,276, bearing interest at the rate
of 8.75%, due January 14, 1999, secured
by golf course maintenance equipment $ 165,276 $ --
Bank note payable in the amount of
$79,545 bearing interest at the rate of
7.99%, due October 1, 1997, secured by
golf course maintenance equipment 48,667 73,611
Mortgage loan payable in the amount of
$2,900,000, bearing interest at the
Prime Rate + 21/2%, secured by 1,557
acres of land with principal payments
of $50,000 per month commencing on
September 15, 1994. The mortgage loan
was paid in full January 1995. -- 2,800,000
Note payable to International Paper
Realty Corporation in the amount of
$300,000, bearing 0% interest and
secured by a first mortgage on 3
residential lots in Fawn Lake. The
loan is to be paid in 18 equal
installments starting January 15, 1994
with final payment due June 15, 1995 -- 99,996
---------- ----------
$34,369,132 $28,450,059
========== ==========
The Prime Rate was 8 1/2% at December 31, 1995 and 1994.
There is currently no readily determinable market value for the
$28,000,000 loan payable to the Fund given its unique and affiliated
nature. Based on the borrowing rates currently available to Fawn Lake for
bank loans with similar terms and average maturities, the fair value of
all other debt instruments approximates the carrying value for these debt
instruments.
7. Related Party Transactions
--------------------------
Development and marketing activities, which include accounting, are
managed by NTS Residential Properties, Inc. - Virginia (Residential), an
affiliate of Fawn Lake. Residential received 25% of the gross proceeds of
lot sales to individuals and 15% of the gross proceeds of lot sales to
builders as a fee for its service. The fee amounted to $505,950 and
$1,025,204 for the years ended December 31, 1994 and 1993, respectively.
Subsequent to June 30, 1994, the fee is no longer being charged by
Residential.
Fawn Lake incurred expenditures with various affiliates for loan,
acquisition, preliminary planning, start-up and construction overhead
costs. The amounts charged were approximately $206,000, $811,900 and
$116,400 and for each of the three years ended December 31, 1995. In
addition, for 1995, pursuant to an agreement effective July 1, 1994,
reimbursements were made to Residential for actual personnel, marketing
and administrative costs as it relates to Fawn Lake of approximately
$984,000. These reimbursements are reflected as Cost Reimbursements in
the accompanying Statement of Income.
- 69 -
7. Related Party Transactions - Continued
--------------------------------------
In addition to the Supplemental Interest and the mortgage loans with the
Fund, Fawn Lake had the following additional transactions with the Fund:
1995 1994
----------- -----------
Regular interest - capitalized $ 1,074,591 $ 961,161
Regular interest - expensed $ 82,261 $ 225,745
Gross receipts interest $ -- $ 71,350
Letters of credit fees $ 4,679 $ 6,201
Fawn Lake has received non-interest bearing advances from an affiliate
totalling $729,531 as of December 31, 1995. The advances were used to
fund development costs and will be repaid to the affiliate as cash flow
permits.
On October 14, 1993, Fawn Lake entered into a participation agreement
with the Fund whereby Fawn Lake was assigned an interest in the Fund's
Temporary Mortgage Loan with the Orlando Lake Forest Joint Venture (the
"Joint Venture"). 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. The loan is secured by the
partnership interests of both general partners of the Joint Venture and
390 shares of the Class A common stock of Fawn Lake. The principal
balance outstanding is guaranteed by NTS Guaranty Corporation. The loan
is on a demand basis and is in default due to the failure of the Joint
Venture to pay the interest due on the loan. A forbearance agreement was
entered into by the Joint Venture and lenders, including Fawn Lake,
whereby effective April 1, 1995, no interest will be due on this loan
through January 31, 1998. As of December 31, 1995, approximately $125,938
of interest was due Fawn Lake on this note but is not accrued in Fawn
Lake's financial statements. Fawn Lake's share of the loan balance was
$364,974 at December 31, 1995, which is net of a loan loss reserve of
$706,739. Reserves for loan losses are based on management's evaluation
of the borrower's ability to meet its obligation as well as current and
future economic conditions. Reserves are 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.
8. Commitments and Contingencies
-----------------------------
It is estimated that the golf course and amenities will be substantially
completed by December 31, 1999. Based on engineering studies and
projections, Fawn Lake will incur additional costs, excluding interest,
of approximately $6,130,000 to complete the golf course and amenities for
the project. These costs are estimated to be incurred as follows:
$2,130,000 for 1996, $-0- for 1997, $1,600,000 for 1998 and $2,400,000
for 1999.
Fawn Lake has letters of credit outstanding to governmental agencies
totalling approximately $467,851 at December 31, 1995.
9. Subsequent Event - Unaudited
----------------------------
Subsequent to December 31, 1995, the Fund's Board of Directors approved
an increase in the loan commitment amount to Fawn Lake from $28,000,000
to $30,000,000.
- 70 -
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
There have been no changes in accountants or reported disagreements on any
matter of accounting principles, practices or financial statement disclosure.
Part III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The directors and principal officers of the Fund are as follows:
Name Office With the Fund
---- --------------------
J. D. Nichols Chairman of the Board of Directors
Robert M. Day Director*
Gerald B. Thomas Director*
F. Everett Warren, J.D. Director*
Richard L. Good President and Director
John W. Hampton Secretary and Treasurer
* Messrs. Day, Thomas and Warren are the Independent Directors of the Fund.
Neither of them are employees, partners, officers or directors of the
Sponsor or any of its Affiliates.
J. D. Nichols (age 54)is Chairman of the Board and Chief Executive Officer of
NTS Corporation and its various Affiliates and is a member and Chairman of the
Board of Directors of the NTS Mortgage Income Fund. He is a graduate of the
University of Louisville School of Law. His undergraduate studies were at the
University of Kentucky, where he concentrated in Accounting, Marketing and
Business Administration. Mr. Nichols entered the real estate construction and
development business in 1965 and has been involved in the development and
construction of over 6,500 acres of land and over 6,500,000 square feet of
office, residential, commercial and industrial space in numerous states
throughout the eastern half of the United States. He is a member of both the
Louisville and National Homebuilders Associations, and has served as Vice
President and Director of the Louisville and National Apartment Associations.
Mr. Nichols is also lifetime member of the President's Society of Bellarmine
College, Louisville, Kentucky and a past member of the Board of Overseers and
Board of Trustee of the University of Louisville, the Governors Council for
Education Technology and the Board of Directors of the Louisville Chamber of
Commerce. Mr. Nichols is currently is a member of the Board of Directors of the
Regional Airport Authority of Louisville and Jefferson County and is a member of
the Board of Directors of the Greater Louisville Economic Development
Partnership.
Robert M. Day (age 43) has been Managing Director of Lambert, Smith & Hampton
and its predecessor companies, Atlanta, Georgia, a commercial and industrial
real estate brokerage firm since 1985. Mr. Day received a Bachelor of Business
Administration degree from Georgia State University and holds an MAI designation
from the Appraisal Institute. Mr. Day is a member of the Atlanta Board of
Realtors, the Urban Land Institute and is on the operating committee of the
Atlanta Chapter of Young Life.
Gerald B. Thomas (age 57) has 24 years experience in Commercial Real Estate
lending. Formerly a Senior Vice President with Mid-American Bank of Louisville,
Mr. Thomas joined Citizens Bank of Kentucky in February 1996 as Vice President,
with responsibility of developing real estate portfolios for four Kentucky
affiliate banks of CNB Bancshares, Inc., Evansville, Indiana. Mr. Thomas has
attended Eastern Kentucky University, National School of Real Estate Finance
(Ohio State University) and National Institute of Real Estate Appraisers
(University of Louisville). He is a board member of Big Brothers/Big Sisters,
Louisville and Co-chairman of the Programs, Planning and Evaluation Committee.
- 71 -
Item 10. Directors and Executive Officers of the Registrant - Continued
--------------------------------------------------------------
F. Everett Warren, J.D. (age 72) retired in 1985 from Citizens Fidelity Mortgage
Company, Louisville, Kentucky, a division of Citizens Fidelity Bank Corporation
and Pittsburgh National Corporation. From 1972 to 1985, Mr. Warren served as
Chairman, President and Chief Executive Officer of Citizens Fidelity Mortgage
Company. Mr. Warren attended both the University of Kentucky and University of
Louisville and received a Bachelor of Law degree and a Juris Doctorate degree.
He serves on the Board of Directors of Louisville Mortgage Bankers Association,
National Mortgage Bankers Association, United Cerebral Palsy and Louisville Deaf
Oral School. Mr. Warren is a member of both the Kentucky and Louisville Bar
Associations.
Richard L. Good (age 56) is President and Chief Operating Officer of NTS
Corporation, and Chairman of the Board of NTS Securities, Inc. As such, Mr. Good
oversees all operations of NTS Corporation and its various subsidiaries and is
responsible for residential developments, commercial properties, property
management, securities, finance and corporate administration. From 1981 to 1984,
Mr. Good was Executive Vice President of Jacques-Miller, Inc., a real estate
syndication, property management and financial planning firm, and was
responsible for corporate systems, marketing and planning. Prior to 1981, Mr.
Good held sales, marketing and management positions, including sixteen years
with IBM Corporation, where he served as Branch Manager of the Data Processing
Division in Nashville. Mr. Good attended Stanford University and Case Western
Reserve University and holds a Bachelor of Science degree in Management Science
from Case. He is a registered securities principal and member of the
International Association for Financial Planning and the Real Estate Securities
and Syndication Institute and is past President of the Hurstbourne Corridor
Business Association in Louisville. In addition, he has served on the Board of
Directors of Junior Achievement, the Boy Scouts and Christ Church United
Methodist and is a member of the Leadership Louisville Class of 1990.
John W. Hampton (age 46) is Senior Vice President of NTS Corporation with
responsibility for all accounting operations. Before joining NTS in March 1991,
Mr. Hampton was Vice President - Finance and Chief Financial Officer of the
Sturgeon-Thornton-Marrett Development Company in Louisville, Kentucky for nine
years. Prior to that he was with Alexander Grant & Company CPA's. Mr. Hampton is
a Certified Public Accountant and a graduate of the University of Louisville
with a Bachelor of Science degree in Commerce. He is a member of the American
Institute of CPA's and the Kentucky Society of CPA's.
The Directors are not required to devote all of their time to the Fund, they are
only required to devote such of their time to the affairs of the Fund as their
duties require, and will meet quarterly or more frequently if necessary. It is
not expected that the Directors will be required to devote substantial portions
of their time to discharge their duties as Directors. For a description of
provisions concerning indemnification, see "Fiduciary Responsibility" on page 14
of the Fund's Prospectus, which description is filed herewith and incorporated
herein by reference.
The Directors, although not precluded from engaging in activities similar to the
Fund's, are required to disclose any interest held directly or indirectly by
them, or an Affiliate in an investment presented to the Fund. Furthermore,
Affiliated Directors must offer the Fund the right to engage in an investment
opportunity, which is within the Fund's objectives and policies, prior to
entering into such transaction themselves. The Fund will not pay a commission to
an Affiliate of any Director for presenting or disposing of the Fund's
investments.
- 72 -
Item 10. Directors and Executive Officers of the Registrant - Continued
--------------------------------------------------------------
The Fund will initially pay to each Independent Director a fee of $1,000 per
month (which amount may be increased or decreased in the discretion of the
Directors) and will reimburse such persons and Affiliated Directors for travel
expenses and other out-of-pocket disbursements incurred in connection with
attending any meetings. Affiliated Directors will not receive any compensation
from the Fund for their services as Directors or Officers of the Fund.
The Directors have retained NTS Advisory Corporation (the Advisor) to manage the
Fund's day-to-day affairs, and recommend investments suitable for the Fund. The
Advisor has delegated substantially all of its duties to NTS Corporation (NTS),
an affiliate of the Advisor. NTS has substantial experience in all phases of
real estate activities, including acquisition, financing, property management
and disposition.
The following persons are the executive officers and key employees of NTS and/or
an affiliate and will provide services to the Advisor and the Fund:
Name Office
---- ------
J. D. Nichols Chairman and Chief Executive Officer
Richard L. Good President and Chief Operating Officer
B. J. DeVries President, NTS Residential Properties, Inc.
Coleman C. Kicklighter President, NTS/Residential Properties, Inc. -
Virginia
Margaret O. Templeton President, NTS/Residential Properties, Inc. -
Florida
David G. Williams President, NTS Securities, Inc.
H. L. Heiner Executive Vice President, NTS Development Company
John W. Hampton, CPA Senior Vice President, NTS Corporation
Gary D. Adams Senior Vice President, NTS Development Company
Gregory A. Compton Senior Vice President, NTS Corporation
Sally A. Judah Senior Vice President, NTS Corporation
The following provides additional information regarding the above-mentioned
persons. Information regarding Messrs. Nichols, Good and Hampton is provided in
the section entitled "Directors and Officers of the Fund."
B. J. DeVries (age 35) is President of NTS Residential Properties, Inc. in
Kentucky with responsibility for single-family residential development,
marketing and operations. Mr. DeVries' experience with NTS includes the
positions of Residential Sales Representative, Builder Sales Representative,
Residential Sales Manager and Vice President - Sales and Marketing. Prior to
joining NTS in June 1992, Mr. DeVries served eight years as a United States
Marine Corps officer. Mr. DeVries was a pilot with additional management
experience in operations, maintenance and logistics. Mr. DeVries received his
Bachelor of Arts degree from Centre College.
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Item 10. Directors and Executive Officers of the Registrant - Continued
--------------------------------------------------------------
Coleman C. Kicklighter (age 49) is President of NTS/Residential Properties, Inc.
- - Virginia with responsibility for single-family residential development,
marketing and operations in the state of Virginia. Prior to joining NTS in
September 1995 Mr. Kicklighter had been Vice President and General Manager of
Alaqua in Orlando, Florida from May 1994 to September 1995 where he was
responsible for directing the development of a 1,300 acre golf course community.
His background includes over 15 years of experience in up-scale master planned
residential and resort club community projects including Project Director of
Royal Westmoreland in Barbados and Managing Director - Business Services for
Sno-Engineering. Mr. Kicklighter received his Bachelor of Arts degree from the
University of South Florida.
Margaret O. Templeton (age 46) is President of NTS/Residential Properties, Inc.
- - Florida with responsibility for single family residential development,
marketing and operations in the state of Florida. Prior to joining NTS in
November 1994, Ms. Templeton was President of Templeton Development Corporation,
a real estate development firm in Tampa, Florida from 1992 to November 1994. She
has extensive experience in marketing, construction and land development
including seven years (1985 to 1992) as Vice President of Tampa Palms and
Gulfstream Land and Development Company, whose holdings included 30,000 acres in
Florida, Georgia and Virginia. Ms. Templeton received a Bachelor of Arts degree
from the University of Florida. Ms. Templeton is a member and Director of the
National Association of Homebuilders, Florida Homebuilders Association as well
as Director and Vice President of the Builders Association of Greater Tampa and
Orlando. Ms. Templeton is also a member of the Florida Board of Realtors and the
Urban Land Institute.
David G. Williams (age 61) is President of NTS Securities, Inc. and serves as
the General Securities Principal with responsibilities for managing NTS's
securities operations. Mr. Williams is also Senior Vice President of NTS
Corporation and is responsible for Management Information Systems and Corporate
Administration of NTS Corporation and NTS Development Company. Prior to joining
NTS in March 1989, Mr. Williams served as President of Systemedics, Inc., a
physicians claim processing company in Princeton, New Jersey. Mr. Williams has a
Bachelor of Science degree from Tufts University, Medford, Massachusetts and
attended graduate school at Harvard University.
H. L. Heiner (age 44) is Executive Vice President of NTS Development Company
with responsibility for development, leasing and property management activities
for commercial and retail properties. Mr. Heiner attended Purdue University and
received his Master's degree in Engineering, magna cum laude, from the
University of Louisville. From 1974 until joining NTS in 1985, Mr. Heiner was a
consultant responsible for the successful planning of development projects in
South Carolina, Florida, Kentucky and Indiana, many of which were planned for
NTS. During this period, Mr. Heiner held the position of Vice President and
partner of Sabak, Wilson, Heiner & Lingo, Inc., a development planning and
consulting firm in Louisville. Mr. Heiner is registered as a professional
engineer in several states.
Gary D. Adams (age 50) is Senior Vice President of NTS Development Company with
responsibility for single-family residential development, multi-family
operations and commercial properties in the state of Florida. Since joining the
NTS organization in May 1977, Mr. Adams has been involved in the development,
construction and management of numerous apartment, office, industrial and
commercial developments in the southeastern portion of the United States. Mr.
Adams received his undergraduate degree in Engineering from the University of
Cincinnati, and he holds a Master of Business Administration from Xavier
University. He is a member of the Building Owners and Managers Association and
is a licensed general contractor in the State of Florida.
- 74 -
Item 10. Directors and Executive Officers of the Registrant - Continued
--------------------------------------------------------------
Gregory A. Compton (age 35) is Senior Vice President, Secretary and General
Counsel of NTS Corporation. Prior to joining NTS in March 1992, Mr. Compton was
a senior associate in the Real Estate and Finance Department of Greenebaum, Doll
& McDonald for seven years, where he was responsible for many of NTS's corporate
real estate transactions. He is a member of the Board of Directors of and is
General Counsel for Goodwill Industries of Kentucky. He received a B.B.A. in
Finance from the University of Kentucky and a J. D. from the University of
Cincinnati College of Law.
Sally A. Judah (age 37) is Senior Vice President of NTS Corporation with
responsibility for multi-family property management of NTS's apartment
communities in Kentucky and Indiana and the Human Resources area of Corporate
Administration of NTS Development Company. From July 1991 to 1994, Ms. Judah was
Vice President of NTS Corporation with responsibility for Corporate Marketing,
Human Resources and the Graphics Division. From June of 1987 when she joined NTS
until July 1991, Ms. Judah was responsible for leasing activities for commercial
properties in Louisville, Kentucky. Ms. Judah is a member of the Louisville
Board of Realtors and is a Certified Commercial Investment Member (CCIM)
Candidate and is a member of the national and Kentucky CCIM chapters. Ms. Judah
is also a member of the Louisville Apartment Association and is a member of the
Leadership Louisville Class of 1993. Ms. Judah holds a Bachelor of Arts degree
from the University of Kentucky.
Item 11. Executive Compensation
----------------------
(a, b, c & d) The Fund will pay each Independent Director a fee of $12,000 per
year and will reimburse such persons and Affiliated Directors for travel
expenses and other out-of-pocket disbursements incurred in connection with
attending any meetings of the Board of Directors. During the years ended
December 31, 1995, 1994 and 1993, the Fund paid directors fees of $24,000,
$24,000 and $24,000, respectively, representing annual compensation. The
Affiliated Directors will not receive any compensation from the Fund for their
services to the Fund. The present officers of the Fund receive compensation from
the Advisor or its affiliates which indirectly relates to services to the Fund
(see Item 13).
The Fund is entitled to engage in various transactions involving the Advisor and
its affiliates, as described under captions "Compensation Table" at pages 9 and
10 of the Prospectus and "Conflicts of Interest" on pages 11 to 14 of the
Prospectus, which descriptions are filed herewith and incorporated herein by
reference. Reference is made to Note 3 to Notes to the Fund's Financial
Statements filed with this report for various transactions with affiliates.
(e) There are no compensatory plans or arrangements resulting from resignation
or retirement of the Directors and executive officers which require payments to
be received from the Fund.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
(a) As of the date hereof, no person owns of record or is known by the Fund to
own beneficially more than five percent (5%) of the outstanding shares of common
stock of the Fund.
- 75 -
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
(b) The following table sets forth the ownership of shares owned directly or
indirectly by the Directors and principal officers of the Fund as of the date
hereof:
Amount of Percent
Name of Beneficial of
Title of Class Beneficial Owner Ownership Interest
-------------- ---------------- ---------- --------
Shares of Common J. D. Nichols 85,792 * 2.7%
Stock, $0.001 Shares
Par Shares
* These shares are owned of record by NTS Corporation or an Affiliate of which
Mr. Nichols directly or beneficially holds voting and investment authority.
(c) There are no known arrangements which may at a subsequent date result in
change in control of the Fund.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
Pursuant to the Advisory Agreement, the Fund will pay the Advisor a Management
Expense Allowance 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. For the years ended December 31, 1995, 1994 and 1993, $528,973,
$614,100 and $593,500, respectively, has been incurred as a Management Expense
Allowance.
Neither the Certificate of Incorporation, By-Laws nor the Advisory Agreement
restricts the Affiliated Directors, the Advisor or its affiliates from engaging
in other business activities which may give rise to conflicts of interest with
the Fund. One of the three Directors is an Affiliated Director. This individual
holds a position with the Advisor and is affiliated with other related entities,
including partnerships that borrow money from the Fund. In such cases, this
individual will have fiduciary obligations to such other entities which may
conflict with his fiduciary obligations to the Fund. Transactions between the
Fund and any affiliates will be subject to potential conflicts of interest. With
respect to the conflicts of interest described herein, the Advisor and its
affiliates will endeavor to balance the interests of the Fund with the interests
of the Advisor and its affiliates in making any determinations.
- 76 -
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
1. Financial statements
The financial statements for the NTS Mortgage Income Fund, NTS Guaranty
Corporation, NTS/Lake Forest II Residential Corporation and NTS/Virginia
Development Company together with the reports of Arthur Andersen LLP
dated February 21, 1996.
2. Financial statement schedules
All schedules have been omitted because they are not applicable, are not
required, or because the required information is included in the
financial statements or notes thereto.
3. Exhibits
The following exhibits are incorporated by reference from the Fund's
Registration Statement on Form S-11, referencing the exhibit number used
in such Registration Statement.
Exhibit Number Description
-------------- -----------
3 (a)(2) Restated Certificate of Incorporation
3 (b) By-Laws
10 (c) Form of Advisory Agreement
10 (b) Form of Guaranty Agreement
The following are additional exhibits filed with the Form 10-K Report.
Exhibit Number Description
-------------- -----------
99 Additional Exhibits - Pages from the Fund's
prospectus which have been specifically
incorporated by reference and copies of
which are attached hereto which include
pages 9 to 14 and pages 75 to 81.
4. Reports on Form 8-K.
None.
- 77 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities exchange
Act of 1934, NTS Mortgage Income Fund has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NTS MORTGAGE INCOME FUND
/s/ Richard L. Good Date: March 12, 1996
- -----------------------------------------
Richard L. Good
President of the NTS Mortgage Income Fund
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
registrant in their capacities and on the date indicated.
/s/ J. D. Nichols Date: March 12, 1996
- -----------------------------------------
J. D. Nichols
Chairman of the Board of Directors
of the NTS Mortgage Income Fund
/s/ F. Everett Warren J.D. Date: March 12, 1996
- -----------------------------------------
F. Everett Warren J.D.
Director of the NTS Mortgage Income Fund
/s/ Robert M. Day Date: March 12, 1996
- -----------------------------------------
Robert M. Day
Director of the NTS Mortgage Income Fund
/s/ Gerald B. Thomas Date: March 12, 1996
- -----------------------------------------
Gerald B. Thomas
Director of the NTS Mortgage Income Fund
/s/ Richard L. Good Date: March 12, 1996
- -----------------------------------------
Richard L. Good
President and Director of the
NTS Mortgage Income Fund
/s/ John W. Hampton Date: March 12, 1996
- -----------------------------------------
John W. Hampton
Secretary and Treasurer (principal
financial and chief accounting officer)
- 78 -