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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-1
(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
NTS MORTGAGE INCOME FUND
(Exact name of registrant as specified in its charter)
Delaware 61-1146077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10172 Linn Station Road, Louisville, Kentucky 40223
(Address of principal 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]
.
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.
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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
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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
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Liquidity and Capital Resources - Continued
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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
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Liquidity and Capital Resources - Continued
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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.
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Liquidity and Capital Resources - Continued
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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.
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Liquidity and Capital Resources - Continued
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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
35 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
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Liquidity and Capital Resources - Continued
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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.
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Liquidity and Capital Resources - Continued
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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.
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<PAGE>
Liquidity and Capital Resources - Continued
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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.
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.
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.
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Liquidity and Capital Resources - Continued
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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
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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.
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.
- 9 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
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.
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
- 10 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
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
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.
- 11 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
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
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's revenues have decreased approximately 28% from 1993 to 1995 and
3% from 1994 to 1995. These declines are due to the conversion of the
Fund's Mortgage Loans to NTS/Virginia Development Company and NTS/Lake
Forest II Residential Corporation from fixed rate mortgage loans to cash
flow mortgage loans effective July 1, 1994. The decline from 1994 to 1995
was offset by the addition to the Fund's portfolio of a first mortgage loan
to the Orlando Lake Forest Joint Venture and the additional interest income
earned thereon.
The Fund's net income declined 44% from 1993 to 1995 and 52% from 1994 to
1995. The disproportionate declines in net income compared to the declines
in revenues is due to the fact that the sales volumes at the residential
projects and the corresponding interest income earned by the Fund have not
been sufficient to offset the increase in the Fund's cost of debt service.
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.
- 12 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
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.
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.
Any forward-looking statements included in Managemen's Discussion and
Analysis of Financial Condition and Results of Operations, or elsewhere in this
report, which reflect management's best judgement based on factors known,
involve risks and uncertainties. Actual results could differ materially from
those anticipated in any forward-looking statements as a result of a number of
factors, including but not limited to those discussed below. Any forward-
looking information provided by the Fund pursuant to the safe harbor
established by recent securities legislation should be evaluated in the
context of these factors.
- 13 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
- The Fund's principal activity is the investment in Mortgage Loans to
Affiliated Borrowers. Mortgage Loans are inherently subject to the risk
of default. If the Borrower defaults on a Mortgage Loan which is not
guaranteed, the Board of Directors may foreclose which could result in
considerable delays and expenses. A Borrower's ability to make payments
due under the Mortgage Loan and the amount the fund may realize upon
foreclosure are subject to risks generally associated with real estate
investments, many of which are beyond the control to the Fund, including
general or local economic conditions, competition, interest rates, real
estate tax rates, other operating expenses, the supply of and demand for
properties, zoning laws, other governmental rules and fiscal policies,
and acts of God.
- The Affiliated Borrowers are engaged in the development and sale of resi-
dential subdivision building lots, the pricing and sale of which are
subject to risks generally associated with real estate development and
applicable market forces beyond the control of the Affiliated Borrowers
and/or the Fund, including general or local economic conditions,
competition, interest rates, real estate tax rates, other operating
expenses, the supply of and demand for properties, zoning laws, other
governmental rules and fiscal policies, and acts of God.
- There is the potential for occurrences which could affect the Fund's
ability to reduce, or limit the increase in, its professional and
administrative expenses. Furthermore, the debt service regarding the
Fund's borrowings is variable based on current interest rates, any
flucuations in which are beyond the control of the Fund. These variances
could, for example, impact the Fund's projected cash and cash requirements
as well as projected returns.
- 14 -
<PAGE>
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
- 15 -
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
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.
</TABLE>
- 16 -
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993
<CAPTION>
1995 1994 1993
----------- ----------- -----------
Expenses:
<S> <C> <C> <C>
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.
</TABLE>
- 17 -
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
Common Common Additional Distributions
Stock Stock Paid-in- in Excess of
Shares Amount Capital Net Income Total
<S> <C> <C> <C> <C> <C>
Stockholders' 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.
</TABLE>
- 18 -
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
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.
</TABLE>
- 19 -
<PAGE>
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%
=========== ========== ==========
- 20 -
<PAGE>
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.
- 21 -
<PAGE>
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 Advisory Agreement
automatically renews for successive one year periods unless terminated
by the Fund's Independent Directors upon sixty days notice. The
Advisor has delegated substantially all of its duties to the Sponsor
(see Note 3). The Chairman of the Board of Directors of the Fund is
also the majority owner of NTS Corporation (the Fund's Sponsor),
NTS/Virginia Development Company an Affiliated Borrower, NTS/Lake
Forest II Residential Corporation, an Affiliated Borrower, and is a
majority owner of a partner in the Orlando Lake Forest Joint Venture,
an Affiliated Borrower.
3. Related Party Transactions
As of December 31, 1995, the Sponsor 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
- 22 -
<PAGE>
Related Party Transactions- Continued
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
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).
- 23 -
<PAGE>
<TABLE>
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.
<CAPTION>
Property Pledged Interest Maturity
Borrower as Collateral Rate Date
--------- -------------------- --------- ---------
1) Earning Loans:
Temporary Mortgage
Loans:
<S> <C> <C> <C>
NTS/Virginia First mortgage on approximately Prime 11/30/96
Development Company 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.
</TABLE>
- 24 -
<PAGE>
<TABLE>
4. Mortgage Loans Receivable, net - Continued
<CAPTION>
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
----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
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.
</TABLE>
- 25 -
<PAGE>
<TABLE>
4. Mortgage Loans Receivable, net - Continued
<CAPTION>
Property Pledged Interest Maturity
Borrower as Collateral Rate Date
-------- ------------- ---- ----
<S> <C> <C> <C>
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.
</TABLE>
- 26 -
<PAGE>
<TABLE>
4. Mortgage Loans Receivable, net - Continued
<CAPTION>
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
-------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1) Earning
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.
</TABLE>
- 27 -
<PAGE>
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
============
- 28 -
<PAGE>
5. Reserves for Loan Losses
Reserves for loan losses are based on management's evaluation of the
borrower's ability to meet its obligation 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. 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.
Certain of the Fund's mortgage loans are guaranteed by NTS Guaranty
Corporation, an Affiliate of the Fund's Sponsor (see Note 6). The Fund
has not considered this guarantee when determining future cash flows
and the loan loss reserve.
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.
- 29 -
<PAGE>
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.
- 30 -
<PAGE>
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.
- 31 -
<PAGE>
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.
- 32 -
<PAGE>
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.
- 33 -
<PAGE>
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
========= ========= ========= ========= =========
- 34 -
<PAGE>
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
- 35 -
<PAGE>
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
- 36 -
<PAGE>
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.
- 37 -
<PAGE>
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
- 38 -
<PAGE>
<TABLE>
NTS/LAKE FOREST II RESIDENTIAL CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
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.
</TABLE>
- 39 -
<PAGE>
<TABLE>
NTS/LAKE FOREST II RESIDENTIAL CORPORATION
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
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.
</TABLE>
- 40 -
<PAGE>
<TABLE>
NTS/LAKE FOREST II RESIDENTIAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
Common Retained
Stock Earnings Total
----------- ----------- -----------
<S> <C> <C> <C>
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.
</TABLE>
- 41 -
<PAGE>
<TABLE>
NTS/LAKE FOREST II RESIDENTIAL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
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.
</TABLE>
- 42 -
<PAGE>
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
an Affiliate under common control with NTS Corporation, the Sponsor
of the NTS Mortgage Income Fund. The NTS Mortgage Income Fund is
the primary creditor of Lake Forest. 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.
- 43 -
<PAGE>
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.
- 44 -
<PAGE>
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.
- 45 -
<PAGE>
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)
- 46 -
<PAGE>
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
- 47 -
<PAGE>
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),
of NTS Corporation. These entities are a wholly -owned subsidiary of
NTS Development Company. NTS Development Company is a wholly-owned
subsidiary under common control with 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
- 48 -
<PAGE>
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.
- 49 -
<PAGE>
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
- 50 -
<PAGE>
<TABLE>
NTS/VIRGINIA DEVELOPMENT COMPANY
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
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.
</TABLE>
- 51 -
<PAGE>
<TABLE>
NTS/VIRGINIA DEVELOPMENT COMPANY
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
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.
</TABLE>
- 52 -
<PAGE>
<TABLE>
NTS/VIRGINIA DEVELOPMENT COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
Common Retained
Stock Earnings Total
---------- ----------- -----------
<S> <C> <C> <C>
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.
</TABLE>
- 53 -
<PAGE>
<TABLE>
NTS/VIRGINIA DEVELOPMENT COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
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.
</TABLE>
- 54 -
<PAGE>
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 an
Affiliate under common control with NTS Corporation, the Sponsor of
the NTS Mortgage Income Fund. The NTS Mortgage Income Fund is the
primary creditor of Fawn Lake. 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.
- 55 -
<PAGE>
1. Significant Accounting Policies - Continued
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.
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.
- 56 -
<PAGE>
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
- 57 -
<PAGE>
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)
- 58 -
<PAGE>
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 + 2 1/2%, 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),a
wholly-owned subsidiary of NTS Development Company. NTS Development
Company is a wholly-owned subsidiary of NTS Corporation. These entities
are under common control with 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.
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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.
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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
(Registrant)
/s/ John W. Hampton
John W. Hampton
Secretary/Treasurer (principal
accounting and chief financial
officer)
Date: November 13, 1996
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