<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
-----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from________________ to _________________________
Commission File Number 0-18550
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 (Zip Code)
offices)
Registrant's telephone number,
including area code: (502) 426-4800
Not Applicable
Former name, former address and former fiscal year,
if changed since last report
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, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
As of November 1, 1996 there were approximately 3,187,000 shares of common stock
outstanding.
<PAGE>
TABLE OF CONTENTS
Pages
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 1996 and
December 31, 1995 3
Statements of Income
For the three and nine months ended 4
September 30, 1996 and 1995
Statement of Stockholders' Equity
For the nine months ended September 30, 1996 5
Statements of Cash Flows
For the nine months ended 6
September 30, 1996 and 1995
Notes To Financial Statements 7-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 27
Item 3. Defaults upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
NTS MORTGAGE INCOME FUND
BALANCE SHEETS
<CAPTION>
As of As of
September 30, 1996 December 31, 1995*
------------------- -------------------
<S> <C> <C>
ASSETS
Affiliated mortgage loans receivable:
Earning loans $ 63,387,783 $ 60,083,323
Non-earning loans 4,293,727 5,125,780
------------------- -------------------
67,681,510 65,209,103
Less reserves for loan losses 1,553,397 1,553,397
------------------- -------------------
Net affiliated mortgage loans
receivable 66,128,113 63,655,706
Cash and equivalents 516,129 535,687
Interest receivable - affiliates 1,207,797 1,142,021
Other assets 227,301 178,219
------------------- -------------------
Total assets $ 68,079,340 $ 65,511,633
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 248,183 $ 179,307
Dividends payable 143,432 38,248
Notes payable - affiliates (Note 5) 3,763,617 1,885,000
Notes payable 14,457,232 14,149,873
Deferred revenues 413 3,127
------------------- -------------------
Total liabilities 18,612,877 16,255,555
------------------- -------------------
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 (4,700,121) (4,910,506)
------------------- -------------------
Total stockholders' equity 49,466,463 49,256,078
------------------- -------------------
Total liabilities and stockholders'
equity $ 68,079,340 $ 65,511,633
=================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
* Reference is made to the Fund's audited financial statements in the Form
10-K as filed with the Securities and Exchange Commission on April 1, 1996.
- 3 -
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------- --------------------------------------
1996 1995 1996 1995
------------------- ------------------ -------------------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
Interest income on affiliated
mortgage loans receivable $ 830,918 $ 731,037 $ 2,422,573 $ 2,105,742
Fee income on affiliated mortgage
loans and other financial services 5,389 5,166 19,623 10,044
Interest income on cash equivalents
and miscellaneous income 7,476 5,238 17,722 17,701
------------------- ------------------ -------------------- -----------------
843,783 741,441 2,459,918 2,133,487
------------------- ------------------ -------------------- -----------------
EXPENSES:
Advisory fee (Note 5) 136,351 132,670 408,426 396,472
Interest expense 337,155 332,719 1,005,004 893,772
Interest expense - affiliates 91,293 -- 176,141 --
Professional and administrative 55,488 37,426 149,414 112,619
Other taxes and licenses 6,975 6,515 20,665 18,990
Amortization expense 18,012 13,000 54,038 39,000
------------------- ------------------ -------------------- -----------------
645,274 522,330 1,813,688 1,460,853
------------------- ------------------ -------------------- -----------------
Income before income tax expense 198,509 219,111 646,230 672,634
Income tax expense (1,850) (2,500) (5,550) (7,500)
------------------- ------------------ -------------------- -----------------
Net income $ 196,659 $ 216,611 $ 640,680 $ 665,134
=================== ================== ==================== =================
Net income per share of common stock $ 0.06 $ 0.07 $ 0.20 $ 0.21
=================== ================== ==================== =================
Weighted average number of shares 3,187,333 3,187,333 3,187,333 3,187,333
=================== ================== ==================== =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 4 -
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<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, 1995 3,187,333 $ 3,187 $ 54,163,397 $ (4,910,506) $ 49,256,078
Net income -- -- -- 640,680 640,680
Dividends declared -- -- -- (430,295) (430,295)
----------------- ---------------- ----------------- ------------------ ----------------
Stockholders' equity
September 30, 1996 3,187,333 $ 3,187 $ 54,163,397 $ (4,700,121) $ 49,466,463
================= ================ ================= ================== =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 5 -
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<CAPTION>
1996 1995
---------------------- ----------------------
<S> <C> <C>
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES
Net income $ 640,680 $ 665,134
Adjustments to reconcile net income to net cash
provided by operating activities:
Accretion of discount on affiliated mortgage loans (110,783) (88,850)
receivable
Amortization expense 54,038 39,000
Changes in assets and liabilities:
Interest receivable - affiliates (65,776) (557,807)
Other assets (32,295) (7,000)
Accounts payable and accrued expenses 68,876 (18,266)
Deferred commitment fees (15,000) --
Deferred revenues (2,714) 1,709
---------------------- ----------------------
Net cash provided by operating activities 537,026 33,920
---------------------- ----------------------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES
Principal collections on affiliated mortgage loans $ 5,954,633 $ 5,972,911
receivable
Investment in affiliated mortgage loans receivable (8,301,257) (17,164,627)
---------------------- ----------------------
Net cash used for investing activities (2,346,624) (11,191,716)
---------------------- ----------------------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES
Proceeds from notes payable - affiliates $ 2,333,073 $ 750,000
Payments on notes payable - affiliates (454,456) --
Proceeds from notes payable 1,335,618 14,068,000
Payments on notes payable (1,028,259) (2,528,528)
Dividends paid (325,111) (637,467)
Other assets (70,825) (210,219)
---------------------- ----------------------
Net cash provided by financing activities 1,790,040 11,441,786
---------------------- ----------------------
Net increase (decrease) in cash and equivalents $ (19,558) $ 283,990
CASH AND EQUIVALENTS, beginning of period 535,687 308,155
---------------------- ----------------------
CASH AND EQUIVALENTS, end of period $ 516,129 $ 592,145
====================== ======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 6 -
<PAGE>
NTS MORTGAGE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
The financial statements and schedules included herein should be read in
conjunction with the Fund's 1995 Annual Report on Form 10-K. In the opinion of
the Fund's management, all adjustments (only consisting of normal recurring
accruals) necessary for a fair presentation have been made to the accompanying
financial statements for the nine months ended September 30, 1996 and 1995.
1. 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 for the nine months ended September 30,
1996 is as follows:
Net income (GAAP) $ 640,680
Accretion of note discount (110,783)
Federal income tax expense 3,750
Letters of credit income (2,715)
Loan commitment fee income (15,000)
------------------
Taxable income before dividends paid
deduction $ 515,932
==================
Dividends declared $ 430,295
==================
Distribution percentage 83%
==================
2. Reserves for Loan Losses
Reserves for loan losses are based on management's evaluation of the
borrower's ability to meet its obligation as well as current and future
economic conditions. Reserves are based on estimates and ultimate
losses could differ materially from the amounts assumed in arriving at
the reserve for possible loan losses reported in the financial
statements. These estimates are reviewed periodically and, as
adjustments become necessary, they are reported in earnings in the
period in which they become known. On a regular basis, management
reviews each mortgage loan in the Fund's portfolio including an
assessment of the recoverability of the individual mortgage loans. As
of September 30, 1996, 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 $100,712 as of September 30,
1996) 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 $4,193,015 as of September 30, 1996)
amounting to $1,500,000.
- 7 -
<PAGE>
<TABLE>
3. Affiliated Mortgage Loans Receivable, net
The following tables outline the Fund's mortgage loan portfolio at
September 30, 1996. 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
Loan:
<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 2,215 acres of residential land Gross
and improvements thereon Receipts
located in Fredericksburg, (a)
Virginia, known as Fawn Lake
NTS/Lake Forest First mortgage on approximately 17% of 07/01/97
II Residential 540 acres of residential land Gross
Corporation in Louisville, Kentucky, known Receipts
as Lake Forest (a)
Orlando Lake First mortgage on approximately 17% of 01/31/98
Forest Joint 408 acres of residential land Gross
Venture in Orlando, Florida known as Receipts
Orlando Lake Forest (b)
<FN>
(a) These Mortgage Loans are paying interest at the greater of 17% of Gross
Receipts or 4.42% of the average outstanding loan balance.
(b) This Mortgage Loan pays interest at the greater of 17% of Gross
Receipts or 6.46% of the average outstanding loan balance.
</FN>
</TABLE>
- 8 -
<PAGE>
<TABLE>
3. Affiliated Mortgage Loans Receivable, net - Continued
<CAPTION>
Total Balance Interest
Senior Outstanding Commitment Receivable
Liens At Face Amount At Fees At
Borrower 09/30/96 At 09/30/96 09/30/96(c) Received 09/30/96
1) Earning
Loans:
Temporary
Mortgage Loan:
<S> <C> <C> <C> <C> <C>
NTS/Virginia $1,994,232 $ 2,000,000 $ 1,989,231 $ 20,000 $ 30,412
Development
Company
Mortgage Loans:
NTS/Virginia 162,195 30,000,000 28,673,138 200,000 556,719
Development (d) (f)
Company
NTS/Lake Forest 3,590,424 28,000,000 25,647,343 250,000 498,699
II Residential (e) (g)
Corporation
Orlando Lake -- 14,000,000 7,078,071 -- 121,967
Forest Joint (h) (i)
Venture
----------- ----------- --------- ----------
Total Earning
Loans $74,000,000 $63,387,783 $ 470,000 $1,207,797
=========== =========== ========= ==========
<FN>
(c) The carrying amount of the mortgage loans receivable at September 30,
1996 is net of any unamortized commitment fees.
(d) Senior lien applies to approximately 31 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 September 30, 1996, the Fund's
ownership percentage was approximately 63%.
(i) The carrying amount of this Affiliated Mortgage Loan is net of an
unaccreted discount of approximately $1,165,096.
</FN>
</TABLE>
- 9 -
<PAGE>
<TABLE>
3. Affiliated Mortgage Loans Receivable, net - Continued
<CAPTION>
Property Pledged Interest Maturity
Borrower as Collateral Rate Date
2) Non-Earning Loans:
Temporary Mortgage
Loan:
<S> <C> <C> <C>
Orlando Lake Pledge by both general partners Prime Demand
Forest Joint of their partnership interests + 2%
Venture in Orlando Lake Forest Joint (j)
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 1 acre of residential land + 2%
Venture located in Orlando, Florida (j)
known as Orlando Lake Forest
Joint Venture
<FN>
(j)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.
</FN>
</TABLE>
- 10 -
<PAGE>
<TABLE>
3. Affiliated Mortgage Loans Receivable, net - Continued
<CAPTION>
Total Balance Interest
Senior Outstanding Commitment Receivable
Liens At Face Amount At Fees At
Borrower 09/30/96 At 09/30/96 09/30/96 Received 09/30/96
<S> <C> <C> <C> <C> <C>
2) Non-Earning
Loans:
Temporary
Mortgage Loan:
Orlando Lake $13,176,111 $ 7,818,000 $ 4,193,015 $ 150,000 $ --
Forest Joint (k) (l) (m) (o)
Venture
Mortgage Loan:
Orlando Lake -- 3,000,000 100,712 30,000 --
Forest Joint (n) (o)
Venture
----------- ----------- --------- -----
Total Non-
Earning Loans $10,818,000 $ 4,293,727 $ 180,000 $ --
=========== =========== ========= ===
<FN>
(k) Total senior liens include a $100,712 mortgage loan with the Fund and
a senior lien totalling $13,075,399 in which the Fund owns a 63%
interest.
(l) NTS/Virginia Development Company (Fawn Lake) and NTS/Lake Forest II
Residential Corporation (Lake Forest) participate with the Fund
regarding this Temporary Mortgage Loan. Their percentage ownership as
of September 30, 1996 is 16.678 and 18.071%, respectively.
(m) The Fund's financial statements reflect a $1,500,000 loan loss
reserve regarding this loan as of September 30, 1996. No change was
made to the reserve during the nine months ended September 30, 1996.
(n) The Fund's financial statements reflect a $53,397 loan loss reserve
regarding this loan as of September 30, 1996. No change was made to
the reserve during the nine months ended September 30, 1996.
(o) 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.
</FN>
</TABLE>
- 11 -
<PAGE>
4. Notes Payable
Notes payable consist of the following:
September 30, December 31,
1996 1995
--------------- ---------------
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 $12,463,000 $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, known as the Fawn Lake
Golf Course 1,994,232 1,063,873
---------- ----------
$14,457,232 $14,149,873
========== ==========
The Prime Rate was 8 1/4% and 8 1/2% at September 30, 1996 and December
31, 1995, respectively.
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.
5. Related Party Transactions
As of September 30, 1996, the Sponsor (NTS Corporation) or an Affiliate
owned approximately 96,468 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 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 $75,000 for each of the nine months ended September 30, 1996 and
1995. The net Advisory Fee for the nine months ended September 30, 1996
and 1995 was $408,426 and $396,472, respectively.
The Fund has received advances from Affiliates of the Fund's Sponsor net
of repayments totalling $3,763,617 as of September 30, 1996. The advances
bear interest at the Prime Rate and mature as follows: $2,446,000 on March
31, 1999 and $1,317,617 is due on demand. Interest expense to the
Affiliates was $176,141 for the nine months ended September 30, 1996. No
interest was charged by the Affiliates for the nine months ended September
30, 1995.
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
- 12 -
<PAGE>
5. Related Party Transactions - Continued
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 September 30, 1996, the outstanding
balance on the first mortgage was $13,075,399, and the Fund's ownership
percentage was approximately 63%.
In 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
percentage ownership as of September 30, 1996 was 16.678%
to Fawn Lake and 18.071% to Lake Forest.
6. Guaranties to the Fund
NTS Guaranty Corporation (the Guarantor), an Affiliate of the Fund's
Sponsor, has agreed to provide the following guaranties to the Fund:
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 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 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. In addition, Mr.
Nichols' ability to make any payments to the Guarantor pursuant to the $10
million demand note may be affected by additional liabilities and
obligations that he has or may incur. There are no
- 13 -
<PAGE>
6. Guaranties to the Fund - Continued
limitations on Mr. Nichols' ability to incur liabilities or obligations in
the future. 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.
7. 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 September
30, 1996, the Fund had outstanding funding commitments under standby
letters of credit or surety bonds aggregating $571,597: Orlando Lake
Forest Joint Venture $91,921; NTS/Virginia Development Co. $479,676. These
outstanding funding commitments are part of the maximum funding amount of
the mortgage loans. Committed undisbursed loans were approximately $4.6
million at September 30, 1996.
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 alleged, 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 further 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. Given the procedural posture of the case, and that
discovery is continuing, 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.
8. Supplemental Financial Information
NTS Guaranty Corporation has provided material guaranties to the Fund. The
following presents condensed financial information for NTS Guaranty
Corporation.
September 30, December 31,
1996 1995
-------------------- --------------------
Cash $ 100 $ 100
==================== ====================
Common stock and paid-in-capital $ 10,000,100 $ 10,000,100
Note receivable from stockholder (10,000,000) (10,000,000)
-------------------- --------------------
Equity $ 100 $ 100
==================== ====================
- 14 -
<PAGE>
8. Supplemental Financial Information - Continued
The Fund has invested in various temporary investments and mortgage loans
(see Note 3). The following presents condensed financial information with
respect to Affiliated Borrowers whose loan balance as of September 30,
1996 represents a substantial concentration of the Fund's assets.
NTS/Lake Forest II Residential Corporation
September 30, December 31,
1996 1995
---------------- --------------
Balance Sheets
Notes receivable $ 827,675 $ 1,677,064
Inventory 28,886,275 25,783,989
Other, net 2,971,367 4,508,888
---------------- --------------
Total assets $ 32,685,317 $ 31,969,941
================ ==============
Notes payable $ 30,608,031 $ 28,628,987
Other liabilities,net 1,561,283 2,589,235
Equity 516,003 751,719
---------------- --------------
Total liabilities and
equity $ 32,685,317 $ 31,969,941
================ ==============
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
--------- ------------ ----------- ----------
Statements of Operations
Lot sales $ 866,811 $ 966,039 $2,259,257 $ 3,201,208
Cost of sales (654,006) (702,632) (1,677,647) (2,338,150)
Provision of loan
losses -- -- -- (465,932)
Other income
(expense), net (305,623) (170,919) (817,326) (779,743)
----------- ----------- ------------ ----------
Net income (loss) $ (92,818) $ 92,488 $ (235,716) $ (382,617)
=========== =========== ============ =========
NTS/Virginia Development
Company
September 30, December 31,
1996 1995
---------------- ---------------
Balance Sheets
Notes receivable $ 4,189,494 $ 5,215,716
Inventory 32,188,770 30,812,235
Other, net 1,417,979 1,493,363
---------------- ---------------
Total assets $ 37,796,243 $ 37,521,314
================ ===============
Notes payable $ 34,975,579 $ 34,369,132
Other liabilities, net 2,045,010 2,175,663
Equity 775,654 976,519
---------------- ---------------
Total liabilities
and equity $ 37,796,243 $ 37,521,314
================ ================
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------------ ------------ ------------ ----------
Statements of Operations
Lot sales $ 1,207,039 $ 1,205,841 $ 2,461,754 $2,344,899
Cost of sales (760,853) (741,805) (1,547,967) (1,462,680)
Provision for loan
losses -- -- -- (406,739)
Other income
(expense), net (400,325) (269,843) (1,114,652) (595,042)
------------ ------------ -------------- -----------
$ Net income (loss) $ 45,861 $ 194,193 $ (200,865) $ (119,562)
============ ============ ============== ===========
- 15 -
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
------------------------------------------------------------------------
of Operations
-------------
The NTS Mortgage Income Fund (the "Fund") was formed September 26, 1988 to
operate as a real estate investment trust (REIT) under the Internal Revenue Code
of 1986, as amended. 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. Capitalized terms shall have the meaning ascribed in
the "Glossary" on pages 75 to 81 of the Fund's Prospectus, which is filed
herewith and incorporated by reference.
Liquidity and Capital Resources
- -------------------------------
The Fund's objectives are to make investments which will: (i) preserve and
protect the Fund's capital, (ii) provide for 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 September 30, 1996, the Fund had commitments outstanding for Mortgage
Loans aggregating $67,300,000 of which approximately $61,500,000 had been
funded. 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 $6,200,000 as of
September 30, 1996. Reference is made to Note 3 of the Notes to Financial
Statements for further information regarding the Fund's investments as of
September 30, 1996.
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 Advisor, and PR
Partners, an unaffiliated third party. On August 30, 1995, the interests of PR
Partners in the Joint Venture were acquired by NTS/Orlando Development Company,
an affiliate of the Fund's Advisor, due to the failure of PR Partners to make
required capital contributions to the Joint Venture. PR Partners continues to
dispute 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 $14,000,000
(with an outstanding balance of $13,075,399 as of September 30, 1996) 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 408 acres of residential land and
improvements thereon located in Orlando, Florida. On February 17, 1995, an
agreement was reached with the bank which had previously held a partial
interest in 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 will be determined in
accordance withthe ratio of each participant's share of the outstanding
loan balance to the total outstanding
- 16 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
loan balance. As of September 30, 1996, the Fund's ownership percentage was
approximately 63%. 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 $7,078,071, as of September 30, 1996,
which is net of an unaccreted discount of $1,165,096.
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 $100,712
as of September 30, 1996) 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 1 acre 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 $6,425,935 as of September 30, 1996) 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 September 30, 1996, the interest
assigned to Fawn Lake and Lake Forest was 16.678% and 18.071%,
respectively. The Fund's ownership percentage was 65.251% and the Fund's
share of the loan balance was $4,193,015 at September 30, 1996.
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 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
- 17 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
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 September 30, 1996,
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 September 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. As of September 30, 1996,
the Fund has received $1,327,109 which was applied to the principal balance
outstanding on the Temporary Mortgage Loan via this agreement.
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.
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,
- 18 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
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 alleged, 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 further 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. Given the
procedural posture of the case, and that discovery is continuing, 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
$162,195 as of September 30, 1996) from an unaffiliated lender which is
secured by a first mortgage on 20 residential lots (approximately 31 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 (24 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. An extension is being negotiated.
A Mortgage Loan from the Fund in the amount of $30,000,000 (with an
outstanding balance of $28,673,138 as of September 30, 1996) to fund the
development of the Fawn Lake project, a specified investment. The loan is
secured by a first mortgage on approximately 2,215 acres of residential
land and improvements thereon located in Fredericksburg, Virginia. The Fund
has subordinated its first mortgage on approximately 31 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 $1,989,231 as of September 30, 1996) 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
Fund's Board of Directors has not taken a position or made plans concerning
this loan maturity date.
- 19 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
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 $58,058 as of September 30, 1996) which is
secured by a first mortgage on 10 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 (15 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 $4,965,000 (with
an outstanding balance of $3,532,366 as of September 30, 1996) 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 January 1, 2000.
A Mortgage Loan from the Fund in the amount of $28,000,000 (with an
outstanding balance of $25,647,343 as of September 30, 1996) 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 547 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 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
- 20 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
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 March 12, 1996, 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. The purpose
of the increase is to pay ongoing development costs.
On September 27, 1996, the Fund's Board of Directors approved an increase in the
loan commitment amount to Orlando Lake Forest from $13,000,000 to $14,000,000.
The purpose of the increase is to pay ongoing development costs.
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 was to refinance the Fund's then 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 is making 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. The loan balance was
$12,463,000 at September 30, 1996.
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. The Fund is currently negotiating with the bank regarding a
two year extension of this loan. The loan balance was $1,994,232 at September
30, 1996.
The Fund has received advances from Affiliates of the Fund's Sponsor net of
repayments totalling $3,763,617 as of September 30, 1996. The advances had been
at various rates averaging approximately 5.75% and matured April 15, 1996. On
April 15, 1996, the interest rate on all borrowings from Affiliates of the
Fund's Sponsor increased to the Prime Rate. The maturity date on $2,536,000 of
borrowings from Affiliates was extended to March 31, 1999. The maturity date on
$250,000 of borrowings from Affiliates was extended to December 31, 1996 and the
note was paid in full on September 25, 1996. All other advances are due on
demand. In addition, the Fund is making principal payments on the advances equal
to $3,000 per lot from lot sales at Fawn Lake, Lake Forest and the Orlando
Project from April 15, 1996 through March 31, 1997; $5,000 per lot from April 1,
1997 through March 1, 1998; and $7,500 per lot from April 1, 1998 through March
31, 1999. Interest paid to the Affiliates was $176,141 for the nine months ended
September 30, 1996. No interest was paid to the Affiliates for the nine months
ended September 30, 1995. The advances were made to meet the development plans
of the projects to which the Fund has outstanding loans.
During the nine months ended September 30, 1996, the Fund received repayment on
four mortgage loans and two temporary investments in the aggregate principal
amount of $5,954,633. Repayments on mortgage loans are 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 $8,301,257.
- 21 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
During the nine months ended September 30, 1995, the Fund received repayment on
four mortgage loans and two temporary investments in the aggregate principal
amount of $5,972,911. The Fund made investments in three mortgage loans in the
aggregate principal amount of $17,164,627.
During the nine months ended September 30, 1996, the Fund borrowed $1,335,618 on
its credit facilities. The Fund repaid $1,028,259 of its borrowings using
proceeds from loan repayments made by NTS/Lake Forest II Residential Corporation
and NTS/Virginia Development Company.
During the nine months ended September 30, 1996, the Fund borrowed $2,333,073
from an Affiliate of the Fund's Sponsor. The Fund repaid $454,4546 of its
borrowings from Affiliates using proceeds from loan repayments made by NTS/Lake
Forest II Residential Corporation, Orlando Lake Forest Joint Venture and
NTS/Virginia Development Company.
During the nine months ended September 30, 1995, the Fund borrowed $14,068,000
on its credit facilities. The Fund repaid $1,991,528 of its borrowings using
proceeds from the new $13.8 million credit facility. The remaining $537,000
reduction in debt came primarily from loan repayments made by NTS/Lake Forest II
Residential Corporation. The Fund also borrowed $750,000 from an Affiliate of
the Fund's Sponsor.
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 September 30, 1996, the Fund had cash and equivalents of
approximately $500,000.
The primary source of future liquidity is expected to be from the interest
earned on the Mortgage Loans and on the Temporary Investments. The ability of
the Fund to receive interest on the Mortgage Loans depends primarily on the
level of residential lot closings achieved by the properties which collateralize
the loans. The interest received will be used to make cash distributions to
Stockholders and to pay operating expenses. In addition, the Fund is continuing
to focus on cash management and is pursuing financing sources to provide
sufficient resources to fund the needs of the projects to which it has
outstanding loans.
Distributions will equal at least 95% of taxable income so that the Fund will
continue to qualify as a real estate investment trust. For the next twelve
months, it is anticipated that returns on Stockholders' original capital
contributions will approximate 1% per annum. The Fund's cash and cash
equivalents are expected to be sufficient to meet its anticipated needs for
liquidity and capital resources.
Results of Operations
- ---------------------
Net income using generally accepted accounting principles (GAAP) was $196,659
and $216,611 and using tax-reporting accounting (TRA) was $155,314 and $185,313
for the three months ended September 30, 1996 and 1995, respectively. Net income
for the nine months ended September 30, 1996 and 1995 using GAAP was $640,680
and $665,134 and using TRA was $515,932 and $581,527, 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
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 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, a provision for loan losses is recognized when the
- 22 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
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 1 to Notes to Financial Statements).
Cash provided by operations was $537,026 and $33,920 and dividends declared were
$430,295 and $446,227 for the nine months ended September 30, 1996 and 1995,
respectively. Total dividends declared provided Stockholders with an annualized
return of 0.90% and 1.13% for the nine months ended September 30, 1996 and 1995,
respectively.
During 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 bearing interest at 7.64% and 6.74%, respectively, to cash flow
mortgage loans. Effective July 1, 1994, these Affiliated Borrowers began paying
interest at an annualized rate equal to the greater of 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 three and nine months ended September 30, 1996 over the
comparable period in 1995 is due primarily to an increase in the average
outstanding balances of the earning loans. The average outstanding balances of
the earning loans increased from approximately $57,362,000 to $63,613,000 for
the three months ended and from $56,500,000 to $62,040,000 for the nine months
ended September 30, 1995 and 1996, respectively. The average rate of interest
earned by the Fund remained at approximately 5% between periods.
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.
Approximately $1,827,000 of interest remains due on these loans but is 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 were 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 other financial services
is the amount of commitment fees and letter of credit fees being amortized for
the period. Fee income is comparable between periods.
In addition to Regular 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
- 23 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
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 either the three or nine
months ended September 30, 1996 or 1995.
In the case of Residential or Commercial Land Development Loans and other loans
secured by properties not held for investment, the Fund will ordinarily receive
Gross Receipts Interest in lieu of receiving Incentive Interest. Gross Receipts
Interest will generally be payable in connection with Mortgage Loans secured by
properties which the Affiliated Borrower intends to develop for sale to
customers in the ordinary course of business as compared with properties
purchased or constructed and held for investment or for use in a trade or
business. Gross Receipts Interest is intended to enable the Fund to share in the
Gross Receipts which the Affiliated Borrower realizes from the sale of property
which it has acquired, developed, marketed and sold with the assistance of a
Mortgage Loan from the Fund. No Gross Receipts Interest has been included in
revenues for either the three or nine months ended September 30, 1996 or 1995 as
none of the Fund's Mortgage Loans currently provide for Gross Receipts Interest.
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 either
the three or nine months ended September 30, 1996 or 1995 as operating expenses
did not exceed the limit.
Operating expenses of the Fund include a Management Expense Allowance (Advisory
Fee) of 1% of the Fund's Net Assets, per annum, which may be increased annually
by an amount corresponding to the percentage increase in the Consumer Price
Index. The Advisory Fee is paid to the Advisor (NTS Advisory Corporation) or its
affiliate. Effective July 1, 1994, the Fund's Mortgage Loans to Fawn Lake and
Lake Forest were converted to cash flow mortgage loans. As part of the
consideration for this restructuring, the Fund's Board of Directors required,
among other things, that beginning in 1995, NTS Advisory Corporation pay
$100,000 annually towards the expenses of the Fund until the maturity of the
Mortgage Loans. As such, the Advisory Fee has been reduced $75,000 for each of
the nine months ended September 30, 1996 and 1995. The net Advisory Fee for the
nine months ended September 30, 1996 and 1995 was $408,426 and $396,472,
respectively. Increases and decreases in the Advisory Fee generally correspond
directly to increases and decreases in the Fund's Net Assets.
Increases and decreases in interest expense generally correspond directly to
increases and decreases in the outstanding balances of the Fund's borrowings.
The average interest rate paid by the Fund for the nine months ended September
30, 1996 and 1995 was 8.9% and 9.9%, respectively.
Professional and administrative expenses include primarily directors' fees,
legal, outside accounting and investor processing fees, and printing costs for
financial reports. The increases in expenses for the three and nine month
periods are due to the fees associated with the addition of an Independent
Director and increased professional fees related to the on-going lawsuit
discussed in Part II, Item 1 of this Form 10-Q.
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.
- 24 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
While the Fund's revenues for the nine month period have increased approximately
15% from 1995 to 1996, net income has decreased approximately 4%. The decrease
in net income is due primarily to the fact that the sales volumes at the
residential projects and the corresponding interest income have not been
sufficient to offset the increase in the Fund's cost of debt service.
The Fund has invested in Mortgage Loans totalling approximately $61,500,000 and
$58,300,000 as of September 30, 1996 and 1995, respectively. Also, the Fund has
invested in Temporary Investments totalling approximately $6,182,000 and
$6,000,000 as of September 30, 1996 and 1995, respectively. The balance of funds
were invested in short-term cash equivalents.
The Fund's investments at September 30, 1996 were as follows:
A Mortgage Loan to NTS/Lake Forest II Residential Corporation, an
Affiliated Borrower, to fund the development of Lake Forest, a specified
investment. The loan balance was $25,647,343 at September 30, 1996.
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 $28,673,138 at September 30, 1996.
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 $1,989,231 at September 30, 1996, which is net of
unamortized deferred commitment fees of $5,000.
A Mortgage Loan to Orlando Lake Forest Joint Venture, an Affiliated
Borrower, to fund the Orlando Lake Forest Loan, a specified investment. The
loan balance was $7,078,071 at September 30, 1996, net of an unaccreted
discount of $1,165,096.
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 September 30, 1996 regarding this loan. The
loan balance was $4,193,015 at September 30, 1996.
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 September 30, 1996 regarding this loan. The loan balance was
$100,712 at September 30, 1996.
The Fund's investment of $25,647,343 in NTS/Lake Forest II Residential
Corporation represents approximately 38% of the Fund's portfolio and the Fund's
commitment of $28,000,000 represents approximately 41% of the Fund's portfolio.
The Fund's investment of $28,673,138 in NTS/Virginia Development Company
represents approximately 42% of the Fund's portfolio and the Fund's commitment
of $30,000,000 represents approximately 44% 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 their 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. 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
- 25 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
time to determine what, if any, additional courses of action to pursue, and
whether to extend the forbearance of interest.
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.
- 26 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In August 1992, Jeno Paulucci & Silver Lakes I, Inc., individually
and d/b/a PR Partners (PR Partners) filed a complaint ("Original
Complaint") against J. D. Nichols, NTS Corporation, NTS/Florida
Residential Properties, Inc., Orlando Lake Forest, Inc. and Banc
One Mortgage Corporation. The Original Complaint alleged, 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
further 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. Given the procedural posture of the
case, and that discovery is continuing, 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.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description
27 Financial Data Schedule
99 Additional Exhibits - Pages from the
Fund's Prospectus which have been
specifically incorporated by
reference and copies of which are
attached hereto which includes pages
75 to 81.
(b) Reports on Form 8-K
None
- 27 -
<PAGE>
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
- 28 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF SEPTEMBER 30, 1996 ABD FROM THE STATEMENT OF INCOME FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 516129
<SECURITIES> 0
<RECEIVABLES> 67681510
<ALLOWANCES> 1553397
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 68079340
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 18220849
0
0
<COMMON> 3187
<OTHER-SE> 49466463
<TOTAL-LIABILITY-AND-EQUITY> 68079340
<SALES> 0
<TOTAL-REVENUES> 2459918
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 408426
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1181145
<INCOME-PRETAX> 646230
<INCOME-TAX> 5550
<INCOME-CONTINUING> 640680
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 640680
<EPS-PRIMARY> .20
<EPS-DILUTED> 0
<FN>
<F1>The Company has an unclassified balance sheet; therefore, the value is $0.
</FN>
</TABLE>
EXHIBIT NO. 99 - ADDITIONAL EXHIBITS
Included is this Exhibit Number 99 is the Glossary of Terms from pages 75 to 81
of NTS Mortgage Investment Fund's Prospectus dated March 31, 1989. The text of
these pages has been duplicated in type style and font compatible with the other
portions of the Fund's Form 10-Q Quarterly Report and suitable for electronic
filing with the Securities and Exchange Commission. As a result, although
Exhibit 99 contains all of the words contained in the Glossary section of the
Prospectus, the total text of each page of this Exhibit does not exactly
correspond to the total text of the page of the Prospectus from which it is
taken.
GLOSSARY
"Accountable Due Diligence Expense Allowance" shall mean an amount equal to 1/2%
of the Gross Proceeds payable to the Selling Agent as reimbursement for its
accountable expenses incurred in connection with bona fide due diligence
activities.
"Acquisition Expenses" shall mean expenses related to the Fund's selection of
and investment in, Mortgage Loans and Real Estate Investments (whether or not
made), including but not limited to legal fees and expenses, travel and
communication expenses, costs of appraisals, accounting fees and expenses, title
insurance and miscellaneous other expenses.
"Acquisition Fees" shall mean the total of all fees and commissions, however
designated, paid by any party in connection with the making or investing in
Mortgage Loans or Real Estate Investments.
"Adjusted Contribution" shall mean the Original Capital Contribution paid by the
original purchaser of a Share, reduced by the total cash distributed with
respect to such Share from Capital Proceeds.
"Advisor" shall mean NTS Advisory Corporation, a Delaware Corporation which will
serve as the initial investment advisor and administrator of the Fund, or any
successor Advisor selected by the Directors, or any person or entity to which
the Advisor subcontracts substantially all of its administrative functions.
"Advisory Agreement" shall mean the agreement between the Fund and the Advisor,
pursuant to which the Advisor will act as the investment advisor and
administrator of the Fund.
Affiliate" shall mean (i) any person directly or indirectly controlling,
controlled by or under common control with another person, (ii) any person
owning or controlling 10% or more of the outstanding voting securities or
beneficial interests of such other person, (iii) any officer, director, trustee
or general partner of such person or (iv) if such other person is an officer,
director, trustee or partner of another entity, then the entity for which that
person acts in any such capacity.
- 75 -
<PAGE>
"Affiliated Borrower" shall mean Affiliates of NTS which obtain a Mortgage Loan
from the Fund.
"Affiliated Directors" shall mean those Directors who are not Independent
Directors.
"Appraised Value" of a Real Estate Investment or the Real Estate securing a
Mortgage Loan shall mean the value of the subject Real Estate at a specified
point in time as determined by an MAI Appraisal acceptable to the Directors.
"As-Built Appraised Value of the Property" shall mean (i) for Development Loans,
Residential Land Development Loans and Commercial Land Development Loans, the
land portion of the appraised value of the mortgaged property, and (ii) for
Construction Loans, the appraised value of the mortgaged property (as determined
by MAI Appraisal), in each case including improvements to be made by the
Borrower, taking into account the Borrower's planned construction and
development of the property.
"Average Invested Assets" shall mean for any period, the average Total Assets of
the Fund invested, directly or indirectly, in Mortgage Loans and Real Estate
Investments, before reserves for bad debts or other similar non-cash reserves,
computed by taking the average of such values at the end of each month during
such period.
"Below Market Interest Obligation" shall mean any note, agreement, contract or
other obligation pursuant to which a purchaser agrees to make periodic payments
in respect of the Real Estate purchased, which provides for the payment of
interest in respect of the amount due at a rate which is lower than an interest
rate 400 basis points below the then applicable Prime Rate.
"Board of Directors" shall mean all of the Directors having been duly elected or
otherwise properly in office pursuant to the Organizational Documents.
"Borrower" shall mean any person, including an Affiliated Borrower, which
obtains a Mortgage Loan from the Fund.
"Bylaws" shall mean the Bylaws of the Fund, as they may be amended from time to
time.
"Capital Proceeds" shall mean the net cash realized from the repayment,
retirement, refinancing, sale or other disposition of the Fund's Real Estate
Investments and Mortgage Loan investments, including payments of Principal,
Interest Reserve, Gross Receipts Interest and Incentive Interest, but excluding
Points and Regular Interest, after reduction for the following: (i) payment of
all expenses related to the transaction; (ii) payment of all debts and
obligations of the Fund arising from or otherwise related to the transaction,
including fees to the Advisor or its Affiliates; and (iii) any amount set aside
by the Advisor for working capital reserves; provided, however, that proceeds
from a disposition of a Fund investment shall not be deemed to be "Capital
Proceeds" to the extent such proceeds are reinvested by the Fund and not
distributed to Stockholders.
- 76 -
<PAGE>
"Cash Flow Guaranty" shall mean the obligation of the Guarantor to provide
investors, directly or indirectly, a minimum return (from all sources) equal to
an annual 12% cumulative, non-compounded, return on their Original Capital
Contributions during the Cash Flow Guaranty Period.
"Cash Flow Guaranty Period" shall mean the period beginning with the 90th day
following the Initial Closing and ending upon the later of two years thereafter
or one year following the Offering Termination Date.
"Certificate of Incorporation" shall mean the certificate of incorporation filed
by the Fund in Delaware, as it may be amended from time to time.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or
corresponding provisions of any successor legislation.
"Commercial Land Development Loan" shall mean a Mortgage Loan, secured by
unimproved or partially improved real property subject to a development plan,
obtained by a Borrower for the purpose of acquiring, carrying and improving the
parcel through pre-development and in certain instances development activities,
including, without limitation, the construction of infrastructure and other
improvements necessary to prepare the parcel for the construction of commercial
or industrial developments, including zoning, planning and construction of
amenity packages, and landscaping, for resale (or in limited cases, lease) in
the ordinary course of business of the Borrower or an Affiliate.
"Construction Loan" shall mean a Mortgage Loan obtained by a Borrower for the
purpose of constructing improvements on real property.
"Dealer Property" shall mean property held primarily for sale to customers in
the ordinary course of one's trade or business.
"Dealers" shall mean the Participating Dealers and the Selling Agent.
"Deficiency Dividend" shall mean a distribution of the Fund within the meaning
of Section 859(d) of the Code.
"Delaware Corporation Statute" shall mean the General Corporation Law of the
State of Delaware, as it may be amended from time to time.
"Development Loan" shall mean a Mortgage Loan obtained by a Borrower for the
purpose of acquiring, carrying and engaging in pre-development and development
activities with respect to real property prior to the construction of
improvements thereon, which activities shall include, without limitation,
engineering, zoning, planning and construction of common area and amenities
including the construction of clubhouses, pools, etc., but shall exclude
Residential and Commercial Land Development Loans.
"Directors" shall mean, as of any particular time, Directors holding office
under the Certificate of Incorporation and Bylaws at such time, whether they are
the Directors named therein or additional or successor Directors appointed by
the initial Board of Directors or duly elected by the Stockholders.
- 77 -
<PAGE>
"Dividend Reinvestment Plan" or "Plan" shall mean the plan pursuant to which
Stockholders may direct that cash distributions otherwise payable to them from
the Fund with respect to Shares owned by them be delivered instead to the
Reinvestment Agent, who is directed, pursuant to the terms of the plan, to
acquire additional Shares with such cash.
"Escrow Agent" shall mean Liberty National Bank & Trust Company of Louisville,
Kentucky, or any other entity selected by the Directors to serve as escrow agent
for the Fund.
"Escrow Guaranty" shall mean the Guarantor's obligation to advance to the Fund,
directly or indirectly, the amount necessary to supplement the interest
generated by subscription proceeds so as to provide subscribers with an 8%
annual, non-compounded return on their subscriptions, calculated from the date
the subscriber's proceeds were deposited in the escrow account through the 89th
day following the Initial Closing Date (or if the Minimum Number of Shares is
not sold, through the date on which the proceeds are released from the escrow
account).
"Federal Funds Rate" shall mean the average of the prior month's rate at which
reserves are traded among commercial banks for overnight use in amounts of one
million dollars or more, as published in the Federal Reserve Statistical Release
H.15(519), or, in the event that such a release does not exist, "Federal Funds
Rate" shall mean that announced in the Wall Street Journal, or its successor, as
it shall change from time to time.
"First Mortgage Loans" shall refer to Mortgage Loans which have as security a
first mortgage or first priority lien on the collateral property.
"Foreclosure Property" shall mean real property (including interests in real
property), and any personal property incident thereto, which is acquired by the
Fund as the result of a bid in foreclosure, or by agreement or legal process,
following a default (or where a default was imminent) on a lease of the property
or on an indebtedness secured by such property.
"Foreign Investor" shall mean a nonresident alien, a foreign corporation or an
entity consisting of such persons.
"Fund" shall mean NTS Mortgage Income Fund, a Delaware corporation, or any
successor thereto.
"Funds Available for Investment" shall mean the Gross Proceeds to be Raised in
this Offering ($100,000,000) plus an amount equal to the aggregate borrowings
which the Fund is authorized to make (300% of Net Assets).
"Gross Proceeds" shall mean the aggregate Original Capital Contributions of
all Stockholders.
"Gross Proceeds to be Raised" shall mean $100,000,000.
- 78 -
<PAGE>
"Gross Receipts" shall mean, with regard to (i) any Real Estate serving as
collateral for a Mortgage Loan the record title to which has been conveyed to
the purchaser, the total fair market value of the consideration, inclusive of
the face amount of the notes or other payment obligations received by an
Affiliated Borrower from the sale of such Real Estate, without reduction for any
costs or expenses incurred in connection with the sale, development or
improvement of the Real Estate, real estate commissions or other closing
expenses, but net of amounts to be repaid or credits allowed to the purchaser
such as builder discounts or rebates, landscaping allowances or similar expenses
as well as any sale or transfer tax imposed on the transaction, provided,
however, that Gross Receipts shall not include the face amount of any Below
Market Interest Obligation, and (ii) any Real Estate serving as collateral for a
Mortgage Loan which the Borrower has agreed to sell to a purchaser but as to
which the record title has not been conveyed to the purchaser or which has been
conveyed to the purchaser in exchange for a Below Market Interest Obligation,
the amount of cash received by the Affiliated Borrower as and when received.
"Gross Receipts Interest" shall mean, with respect to a Mortgage Loan secured by
Real Estate held for sale in the ordinary course of business, an amount equal to
a specified percentage of the Affiliated Borrower's Gross Receipts from the sale
of the underlying Real Estate received during the term of the Mortgage loan.
"Guarantor" shall mean NTS Guaranty Corporation, a Delaware corporation or any
successor thereto.
"Incentive Interest" shall mean the Fund's share in the Increase in Value of a
property securing a Mortgage Loan and shall be payable in connection with
Mortgage Loans secured by Real Estate not held for sale in the ordinary course
of business.
"Incentive Interest Agent" shall mean the independent party authorized to
receive Incentive Interest payments from Borrowers and pay to the Fund the
amount of such payments to which it is entitled, with the remainder of such
payments to be returned to the Borrowers.
"Increase in Value" shall mean the difference between the Appraised Value of a
property at the time of funding a Mortgage Loan and the Appraised Value of such
property (or the fair market value of the consideration received in the case of
a sale) upon the earlier of the maturity of the Mortgage Loan or the sale or
refinancing of the collateral property, net of the actual cost incurred in
connection with the improvement of the collateral property since the date of the
funding of the Mortgage Loan. For purposes of this definition, the phrase
"actual cost incurred" shall refer to all costs paid by the Borrower to
Affiliated and Non-Affiliated parties in connection with the acquisition,
holding, ownership, or development or improvement of the property, including
without limitation, costs of acquiring and financing the property.
"Increased Maximum Number of Shares" shall mean 5,000,000 Shares in this public
offering.
- 79 -
<PAGE>
"Independent Advisor" shall mean Laventhol and Horwath or any alternative person
selected by the Independent Directors to provide an opinion concerning the
fairness of the terms of proposed Mortgage Loans to Affiliated Borrowers and
acquisitions of Real Estate Investments from Affiliates.
"Independent Directors" shall mean the Directors who: (i) are not Affiliated,
directly or indirectly, with the Advisor, whether by ownership of, ownership
interest in, employment by, any business or professional relationship with, or
service as an officer or director of, the Advisor or its Affiliates; (ii) do not
serve as a director or trustee for more than two other REITs organized by the
Advisor or its Affiliates; and (iii) perform no other services for the Fund,
except as Directors. An indirect relationship shall include circumstances in
which the immediate family of a Director has one of the foregoing relationships
with the Advisor or the Fund.
"Initial Closing Date" shall mean the date on which the first closing for Shares
sold pursuant to the Prospectus occurs.
"Initial Fund Investments" shall mean those investments which the Fund has
specified as of the date of this Prospectus being the Fawn Lake Loan, Orlando
Lake Forest Loan, the Louisville Lake Forest North Loan and the Blankenbaker
Crossings Loan.
"Interest Reserve" shall mean the amount loaned or committed to be loaned to a
Borrower to Fund the Borrower's projected future payments of Regular Interest to
the Fund and upon which Regular Interest shall be charged once disbursed.
"Investable Proceeds" shall mean the Gross Proceeds less Organization and
Offering Expenses, plus an amount equal to the outstanding borrowings of the
Fund, exclusive of borrowings made in connection with Real Estate Investments.
"IRA" shall mean an Individual Retirement Account established pursuant to
Section 408 of the Code or any successor provision.
"Junior Mortgage Loan" shall refer to any Mortgage Loan which is subordinate to
another mortgage or deed of trust secured by the collateral real property and
shall exclude Temporary Mortgage Loans and loans which are outstanding and being
"phased-in" pending full funding of a First Mortgage Loan.
"Junior Mortgage Loan Guaranty" shall mean the Guarantor's obligation to pay the
Fund the Principal amount of any Junior or Temporary Mortgage Loan on which the
Affiliated Borrower has defaulted.
"Land Acquisition Loans" shall mean a Mortgage Loan obtained by a Borrower for
the purpose of acquiring Unimproved Real Property.
- 80 -
<PAGE>
"Loan" shall mean a Mortgage Loan or Temporary Mortgage Loan made by the Fund.
"MAI Appraisal" shall mean an appraisal made by a member in good standing of the
American Institute of Real Estate Appraisers.
"Majority Vote" shall mean the vote or consent in person or by proxy of
Stockholders owning more than 50% of the outstanding Shares.
"Management Expense Allowance" shall mean a non-accountable expense allowance
relating to services performed for the Fund (but excluding amounts paid by the
Advisor on behalf of the Fund to third parties) in an amount equal to 1% of the
Fund's Net Assets, per annum, payable quarterly to the Advisor which may be
increased annually by an amount corresponding to the percentage increase in the
Consumer Price Index for all urban consumers- Louisville or a comparable
consumer price index, which increase will in no event cause the Fund's Operating
Expenses to exceed the limitation imposed by the Bylaws.
"Maximum Number of Shares" shall mean 2,500,000 Shares in this public offering.
"Minimum Number of Shares" shall mean 75,000 Shares to at least 100 independent
investors in this public offering.
"Mortgage Loans" shall mean Residential Land Development Loans, Commercial Land
Development Loans, Permanent Mortgage Loans, Construction Loans, Development
Loans and Land Acquisition Loans evidenced by notes, debentures, bonds and other
evidences of indebtedness or obligations (other than Temporary Mortgage Loans
made by the Fund) which are secured or collateralized by: (i) interests in real
property; (ii) other beneficial interests essentially equivalent to a mortgage
on real property; or (iii) interests in partnerships, joint ventures, or other
entities which own real property.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"NASDAQ" shall mean the nationwide automated quotations system operated by
the NASD.
"Net Assets" shall mean the Total Assets (other than intangibles) at cost before
deducting depreciation or other non-cash reserves, less total liabilities,
calculated quarterly according to generally accepted accounting principles on a
basis consistently applied.
"Net Income" for any period shall mean total revenues applicable to such period
as determined for federal income tax purposes, less the expenses applicable to
such period, other than additions to reserves for bad debts or other similar
non-cash reserves. In connection with the calculation of any incentive type fee,
Net Income, for purposes of calculating Operating Expenses, shall not include
the gain from the sale of the Fund's assets.
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"Non-Accountable Expense Allowance" shall mean an amount equal to 1% of the
Gross Proceeds payable to the Selling Agent as reimbursement for its
non-accountable sales and other expenses incurred in connection with the offer
and sale of Shares.
"Non-Affiliate" shall mean persons who are not Affiliates.
"NTS" shall mean NTS Corporation, a Delaware corporation which is the Sponsor
for the Fund.
"Offering Termination Date" shall mean the date on which the last closing for
Shares sold pursuant to the Prospectus occurs which shall occur either one year
from the date of this Prospectus subject to increase for up to an additional
year in the discretion of the Board of Directors and subject to compliance with
applicable state and federal laws.
"Operating Expenses" shall mean all 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 reserve), the Subordinated Advisory Fee and
the costs related directly to a specific Mortgage Loan or Real Estate Investment
by the Fund, such as expenses for originating, acquiring, servicing or disposing
of said specific Real Estate Investment or a Mortgage Loan.
"Organization and Offering Expenses" shall mean those expenses payable by the
Fund in connection with the formation, qualification and registration of the
Fund and in marketing, distributing and processing Shares, including any Sales
Commissions, Non-Accountable Expense Allowance, Accountable Due Diligence
Expense Allowance, and any other expenses actually incurred and directly related
to the registration, offering and sale of Shares, including such expenses as:
(a) fees and expenses paid to attorneys in connection with the offering; (b)
registration fees, filing fees and taxes; (c) the costs of qualifying, printing,
amending, supplementing, mailing and distributing the Fund's Registration
Statement and Prospectus, including telephone and telegraphic costs; (d) the
costs of qualifying, printing, amending, supplementing, mailing and distributing
sales materials used in connection with the issuance of Shares, including
telephone and telegraphic costs; (e) remuneration of officers and employees of
the Advisor and its Affiliates while directly engaged in marketing,
distributing, processing and establishing records of Shares and establishing
records and paying Sales Commissions; and (f) accounting and legal fees and
expenses incurred in connection therewith to the Advisor or its Affiliates.
"Organizational Documents" shall mean the Fund's Certificate of Incorporation
and By-Laws, as they may be amended from time to time.
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"Original Capital Contribution" shall mean the amount of $20.00 for each Share,
which amount shall be attributed to such Share in the hands of subsequent
holders thereof.
"Participating Dealers" shall mean members in good standing of the National
Association of Securities Dealers, Inc., ("NASD") engaged by the Selling Agent
to offer and sell Shares on a "best efforts" basis, as well as certain selected
foreign broker dealers, who are not eligible for membership in the NASD, who
agree to abide by the provisions of Section 25 of the NASD Rules of Fair
Practice.
"Permanent Mortgage Loans" shall mean notes, bonds and other evidences of
indebtedness or obligations (other than temporary investments made by the Fund)
which are secured or collateralized by interests in (i) income producing real
property, (ii) other beneficial interest essentially equivalent to a mortgage on
income producing real property or (iii) partnerships, joint ventures or other
entities which own income producing real property. Such Mortgage Loans may be
Junior or First Mortgage Loans and will generally have terms of between three
and five years, subject to extension for up to two two-year periods.
"Points" shall mean the fee payable to the Fund at the time funds are advanced
under a Mortgage Loan.
"Prime Rate" shall mean the rate of interest as published in the Federal Reserve
Statistical Release H.15(519), as it shall change from time to time. In the
event that such a release does not exist, "Prime Rate" shall mean the prime
lending rate as published in the Wall Street Journal, or its successor.
"Principal" shall mean the funds loaned to a Borrower, excluding the amount of
the Interest Reserve.
"Prohibited Transaction" shall mean the sale of Dealer Property other than both
Foreclosure Property and certain Dealer Property held by the Fund for at least
four years.
"Prospectus" shall mean the final prospectus of the Fund with respect to the
offer and sale of Shares filed with the Securities and Exchange Commission as
part of the Fund's Registration Statement on Form S-11, as amended.
"Qualified Plans" shall mean qualified pension, profit-sharing and other
employee retirement benefit plans (including Keogh [HR 10] plans) and trusts,
bank commingled trust funds for such plans and individual retirement accounts.
"Real Estate" shall mean all real properties or any interest therein acquired
directly or indirectly by the Fund, including real properties acting as
collateral for Mortgage Loans.
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"Real Estate Investments" shall mean direct or indirect equity investments by
the Fund in all forms in Real Estate, and shall exclude investments in Mortgage
Loans as well as any investments in Mortgage Loans characterized as equity
investments for financial accounting purposes.
"Regular Interest" shall mean the rate of interest payable periodically on a
Mortgage Loan, as determined by the Board of Directors at the beginning of each
Mortgage Loan or any extension thereof.
"Regular Interest Rate" shall mean the rate of interest payable periodically on
a Mortgage Loan and shall be equal to (i) 500 basis points and 300 basis points
in excess of the rate on a treasury obligation having a maturity substantially
similar to that of the Mortgage Loan for fixed rate Junior and First Mortgage
Loans, respectively, and 400 basis points and 200 basis points in excess of the
Prime Rate, or 570 basis points and 370 basis points in excess of the Federal
Funds Rate, for variable rate Junior and First Mortgage Loans, respectively.
"Reinvestment Agent" shall mean NTS Depositary Corporation, Louisville,
Kentucky, or its successor as agent for the dividend reinvestment plan.
"REIT" and "real estate investment trust" shall mean a real estate investment
trust as defined in Sections 856 to 860 of the Code.
"REIT Qualifying Investment" shall mean an investment in assets described in
Section 856(c)(5) of the Code, or any successor provision.
"REIT Taxable Income" shall mean the taxable income as computed for a
corporation which is not a REIT: (i) without the deductions allowed by Code
Sections 241 through 247, 249 and 250 (relating generally to the deduction for
dividends received); (ii) excluding amounts equal to (a) the net income from
foreclosure property and (b) the net income derived from prohibited
transactions; and (iii) deducting amounts equal to (a) any net loss derived from
prohibited transactions, (b) the tax imposed by Code Section 857(b)(5) upon a
failure to meet the 95% and/or 75% gross income tests and (c) the dividends
paid, computed without regard to the amount of the net income from foreclosure
property which is excluded from REIT Taxable Income.
"Residential Land Development Loan" shall mean a Mortgage Loan obtained by a
Borrower for the purpose of acquiring, carrying, improving, through pre-
development, development and sale, the underlying real estate, including,
without limitation, engineering, zoning, planning and construction of common
areas and amenity packages, necessary to prepare the parcel and its individual
sites for the construction of homes (and in limited circumstances minor portions
for commercial purposes) and the sale of such sites in the ordinary course of
business of the Borrower or an Affiliate.
"Sales Commissions" shall mean an amount equal to 8% of the Gross Proceeds from
the sale of each Share, subject to certain discounts, payable to the Dealers who
sell such Shares.
"Selling Agent" shall mean NTS Securities, Inc.
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"Shares" shall mean the Fund's shares of common stock with a par value of
$0.001.
"Sponsor" shall mean NTS Corporation, a Kentucky corporation, or any person
directly or indirectly instrumental in organizing, wholly or in part, the Fund
or any person who will manage or participate in the management of the Fund, and
any Affiliate of any such person, but excluding (i) a person whose only
relationship with the Fund is that of an independent property manager and whose
only compensation is as such, and (iii) wholly independent third parties such as
attorneys, accountants and underwriters whose only compensation is for
professional services.
"Stockholders" shall mean as of any particular time the registered holders of
outstanding Shares at such time.
"Subordinated Advisory Fee" shall mean the fee payable to the Advisor or its
Affiliates for services in connection with the liquidation of the Fund's
investments, equal to 5% of the Capital Proceeds remaining after distributions
to Stockholders from all sources in an amount equal to 100% of their Original
Capital Contribution plus a 15% per annum cumulative, non-compounded return on
their Adjusted Contributions to the extent not already paid, beginning on the
Offering Termination Date.
"Supplemental Interest" shall mean the amount, if any, in excess of Regular
Interest, Points, Incentive and Gross Receipts Interest, other cash balances
available for distribution in the discretion of the Board of Directors, and all
other cash receipts of the Fund net of all cash expenditures of the Fund, that
Affiliated Borrowers shall pay the Fund to enable it to make quarterly
distributions to Stockholders equal to an annual 12% cumulative, non-compounded
return on their Original Capital Contributions during the Cash Flow Guaranty
Period.
"Temporary Investments" shall refer to those investments made by the Fund
pending the receipt of sufficient Investable Proceeds to fund the Initial Fund
Investments, or reinvestment in later Fund loans.
"Temporary Mortgage Loan" shall refer to any temporary mortgage loan investment
made by the Fund to an Affiliated Borrower pending investment or reinvestment in
a Mortgage Loan if such Temporary Mortgage Loan (i) matures within one year of
making the loan subject to any extension in the discretion of the Board of
Directors (ii) is anticipated to generate yields higher than other temporary
investments, (iii) is approved by a majority of the Independent Directors, and
(iv) constitutes a REIT qualifying investment.
"Tax-Exempt Entities" shall mean Qualified Plans and other entities exempt from
federal income taxation, such as endowment funds and foundations and charitable,
religious, scientific or educational organizations.
"Total Assets" shall mean the book value of all assets of the Fund, determined
in accordance with generally accepted accounting principles.
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"Transfer Agent" shall mean an independent national agent selected by the
Directors or any entity designated at some later date.
"Treasury Rate" shall mean the rate of interest paid on United States Treasury
investments, as published in the Federal Reserve statistical Release H.15(519),
as it shall change from time to time, having a maturity substantially similar to
that of the Mortgage Loan; in the event that such a release is not published,
any other nationally-recognized publication. If there is more than one such
treasury investment, then the rate of that investment priced closest to par
shall be used; provided, however, that this definition may be modified with the
approval of a majority of the Directors, including a majority of the Independent
Directors.
"Unimproved Real Estate" shall mean property which has each of the following
three characteristics: (i) it was not acquired for the purpose of producing
rental or other operating income; (ii) there is no development or construction
in process on such land, and (iii) there is no development or construction
planned in good faith to commence on such land within one year.
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