<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to ________________
Commission file number 0-18550
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NTS MORTGAGE INCOME FUND
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(Exact name of registrant as specified in its charter)
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Delaware 61-1146077
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(State or other jurisdiction of (I.R.S. Employer
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incorporation or organization) Identification No.)
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10172 Linn Station Road, Louisville, Kentucky 40223
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 426-4800
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Shares of Common Stock
----------------------
(Title of Class)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [X]
As of March 1, 1997, there were approximately 3,187,000 shares of common stock
outstanding. The aggregate sales price for shares sold was approximately
$63,690,000. There is no current market for these shares although it is possible
that one will develop.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Prospectus of the registrant dated March 31, 1989, as
supplemented by Supplements No. 1, No. 2, No. 3, No. 4, No. 5 and No. 6
dated October 16, 1989, March 29, 1990, April 23, 1990, July 25, 1990,
September 6, 1990, and August 23, 1991, respectively, (collective with the
"Prospectus") and filed pursuant to Rule 424 under the Securities Act of
1933, are incorporated by reference into this Annual Report on Form 10-K.
Index to Exhibits is located on page 77.
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TABLE OF CONTENTS
Pages
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PART I
Item 1 Business 3-8
Item 2 Properties 8
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote of Security Holders 8
PART II
Item 5 Market for the Registrant's Shares and Related
Stockholder Matters 9-10
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-23
Item 8 Financial Statements and Supplementary Data 24-69
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 70
PART III
Item 10 Directors and Executive Officers of the Registrant 70-73
Item 11 Executive Compensation 74
Item 12 Security Ownership of Certain Beneficial Owners and
Management 74
Item 13 Certain Relationships and Related Transactions 74-75
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 76
Signatures 77
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<PAGE>
PART I
Item 1. Business
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Some of the statements included in Items 1 and 2, Business and Properties, or
elsewhere in this report, may be considered to be "forward-looking statements"
since such statements relate to matters which have not yet occurred. For
example, phrases such as "the Fund anticipates," "believes" or "expects"
indicate that it is possible that the event anticipated, believed or expected
may not occur. Should such event not occur, then the result which the Fund
expected also may not occur or occur in a different manner, which may be more or
less favorable to the Fund. The Fund does not undertake any obligations to
publicly release the result of any revisions to these forward-looking statements
that may be made to reflect any future events or circumstances.
Capitalized terms shall have the meaning ascribed them in the "Glossary" on
pages 75 to 81 of the Fund's Prospectus, which is filed herewith and
incorporated herein by reference.
The following narrative does not reflect the impact, if any, of the proposed
transactions discussed at the end of Item 1.
NTS Mortgage Income Fund (the "Fund"), a Delaware corporation, was formed on
September 26, 1988. The Fund operates as a real estate investment trust (REIT)
under the Internal Revenue Code of 1986 (the "Code"), as amended. NTS
Corporation is the sponsor of the Fund (the "Sponsor") and its affiliate, NTS
Advisory Corporation, is the advisor to the Fund (the "Advisor"). The Fund
commenced an offering of Shares of Common Stock (Shares) on March 31, 1989. The
Fund extended the offering from March 31, 1990 to March 31, 1991. The Fund
terminated the offering March 31, 1991, after which time the Fund issued shares
pursuant to its Dividend Reinvestment Plan. During the second quarter of 1992,
the Fund's Dividend Reinvestment Plan was terminated. The Fund raised
approximately $64 million from the sale of approximately 3,187,000 shares
including shares issued pursuant to the Fund's Dividend Reinvestment Plan.
The Fund's objectives as orignially described in the Prospectus are to (i)
preserve and protect capital; (ii) distribute cash flow on a regular basis as it
is available; and (iii) increase the value of the Fund's Net Assets and the
Shares through receipt of Incentive Interest or Gross Receipts Interest and, to
a lesser extent, through the acquisition, operation and disposition of Real
Estate Investments. Incentive Interest is the Fund's share in the Increase in
Value of a property securing a Mortgage Loan and shall be payable in connection
with Mortgage Loans secured by Real Estate not held for sale in the ordinary
course of business. Gross Receipts Interest is an amount equal to a specified
percentage of the Affiliated Borrower's Gross Receipts from the sale of the
underlying Real Estate received during the term of the Mortgage Loan and shall
be payable in connection with Mortgage Loans secured by Real Estate held for
sale in the ordinary course of business. It is not an objective of the Fund to
provide tax-sheltered income. There can be no assurance that these investment
objectives will be attained.
The Fund has elected and is qualified to be treated as a real estate investment
trust under the Internal Revenue Code Sections 856-860 for the years ended
December 31, 1996, 1995 and 1994. The Fund is required to terminate and
liquidate its assets by December 31, 2008.
There are currently five directors of the Fund, two of whom are affiliated with
the Advisor and three of whom are Independent Directors. The Directors are
responsible for the management and control of the affairs of the Fund.
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<PAGE>
Item 1. Business - Continued
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However, in accordance with the Fund's Certificate of Incorporation and By-Laws,
the Directors have, in the Advisory Agreement, delegated broad powers to the
Advisor to administer the day-to-day operations of the Fund. The Advisor has
delegated substantially all its duties to the Sponsor. All personnel rendering
services to the Fund are employees of the Sponsor or its affiliated companies.
The Fund does not directly employ any persons other than the Independent
Directors and the Advisor.
The business of the Fund is not seasonal and the Fund does no foreign or export
business.
The Fund has used the proceeds of this offering primarily to make Residential
Land Development Loans to Affiliated Borrowers. It is anticipated that
substantially all of any future Mortgage Loans will be made to Affiliates of the
Sponsor. In addition, the Fund may make investments in real estate in amounts
not to exceed approximately 10% of funds available for investment. Mortgage
Loans are secured by a lien on the Borrower's real estate or by other REIT
qualifying security approved by the Board of Directors, including, without
limitation, by an interest in the Borrower or by a similar security interest.
Based upon current market conditions and foreseeable investment opportunities,
it is anticipated that no more than 25% of the Fund's proceeds will be invested
in Junior Mortgage Loans (excluding Temporary Mortgage Loans and "phase-in"
loans). In addition, NTS Guaranty Corporation, an Affiliate of the Sponsor, has
agreed to guarantee repayment of the principal of all Junior Mortgage Loans and
Temporary Mortgage Loans made to Affiliated Borrowers. Although the Fund has
reserved the right to make Real Estate Investments, it only intends to do so if
such an investment would be in the best interest of the Fund and assist it in
achieving its primary objectives. For example, the Fund may find it in its best
interest to make a Real Estate Investment which will generate non-cash
deductions from taxable income thereby allowing the Fund to make Mortgage Loans
providing for the accrual of deferred interest without causing difficulties in
meeting the distribution requirements of the Code.
Transactions entered into between the Fund and the Advisor and its Affiliates
are subject to an inherent conflict of interest. The Directors of the Fund and
the Advisor may face certain conflicts of interest in enforcing the rights of
the Fund against any Affiliated Borrower.
The Directors would consider the following factors in resolving certain inherent
conflicts of interest:
(1) When considering an advance of additional funds to an Affiliated
Borrower, factors such as projections for the development and operation of the
property, market value and market conditions generally and for the type of
property anticipated to be developed by the Affiliated Borrower, the credit
worthiness and equity interest of the Affiliated Borrower, the current value of
the property, the security and the availability of additional collateral.
(2) In deciding whether to waive a default by an Affiliated Borrower,
foreclose on a Mortgage Loan or remedy a default on senior indebtedness, the
Directors will consider the nature of the default, its materiality, the
anticipated time and expense of pursuing the foreclosure as well as the cost of
waiving the default, the anticipated viability of the Affiliated Borrower and
the likelihood of the Affiliated Borrower remedying the default within a
reasonable time. When considering enforcing a due-on-sale clause, the Directors
will review the Fund's anticipated investments and the need for additional
funds, as well as market conditions, focusing on the specific intended use of
the property and the credit worthiness of the purchaser.
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<PAGE>
Item 1. Business - Continued
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(3) In establishing the amount of the Interest Reserve to be funded, the
Directors will review the expected return on the reserve, the variability of the
interest rate on the Mortgage Loan, the outstanding indebtedness, the Affiliated
Borrower's anticipated cash flow, the operating history and the appraised value
and potential appreciation of the property.
(4) In determining whether to vary the terms of Mortgage Loans from the
anticipated terms specified in the Prospectus, the Directors will review
economic and market conditions and focus upon the locale of the property, the
availability of additional security to collateralize the loan and the equity
that the Affiliated Borrower has invested in the property.
(5) In considering whether to refinance a property, factors relating to
the value of the property compared to the Affiliated Borrower's total debt, the
terms of the proposed financing and the Affiliated Borrower's ability to service
the total debt, the Fund's participation in the potential appreciation of the
property, as well as other investment opportunities available to the Fund will
be considered. If the Affiliated Borrower seeks to refinance to prevent a
default and subsequent foreclosure, the Directors would consider the factors set
forth in (2) above.
In connection with the making of any Mortgage Loan to an Affiliated Borrower the
Independent Directors are required to obtain on opinion from an Independent
Advisor that the proposed Mortgage Loan is as fair and at least as favorable to
the Fund as a Mortgage Loan to a Non-Affiliated Borrower in similar
circumstances. The Independent Advisor's fees will generally be paid by the
Affiliated Borrower. An Independent Advisor may face certain conflicts of
interest in rendering its opinion due to the fact that its fees may be paid by
the Affiliated Borrower. However, the opinion of the Independent Advisor will be
requested by and rendered to the Fund.
Generally the Fund's Mortgage Loans will have maturities of between one and
seven years, subject to extension. The Fund's Mortgage Loans to Affiliated
Borrowers will generally provide for two-year extensions of the loan term at the
option of the Borrower upon the payment of an extension fee.
Affiliated Borrowers will generally pay Points upon the initial funding of a
Mortgage Loan equal to 1% of the maximum amount of the Mortgage Loan committed
to by the Fund.
Affiliated Borrowers will generally be required to pay Regular Interest on a
quarterly basis during the term of the Mortgage Loan. Affiliated Borrowers will
have the option to choose a fixed or floating interest rate on Mortgage Loans at
the time of initial funding. The floating rate is adjusted monthly based on the
average of the applicable rate during the previous month. Affiliated Borrowers
will generally be provided the option to convert from a fixed rate Mortgage Loan
to a floating rate Mortgage Loan, or a floating rate Mortgage Loan to a fixed
rate Mortgage Loan, once during the term of the Mortgage Loan and once during
the extension period.
In the case of Residential or Commercial Land Development Loans and other loans
secured by properties not held for investment, the Fund will ordinarily receive
Gross Receipts Interest. Generally, Gross Receipts Interest will be an amount
equal to 5% of the Affiliated Borrower's Gross Receipts derived from the sale,
during the term of the Mortgage Loan, of all or a portion of the property which
serves as collateral of the Mortgage Loan, although this amount may be varied in
the discretion of the Board of Directors.
The Fund will obtain an MAI Appraisal prepared by an independent MAI appraiser
and a mortgagee's title insurance policy or commitment in connection with
obtaining each Mortgage Loan.
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<PAGE>
Item 1. Business - Continued
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Generally, Residential or Commercial Land Development Loans will be repaid from
proceeds from the sale of parcels of the property, or from refinancing of the
property. Temporary Mortgage Loans are expected to be repaid from permanent
financing (including a Permanent Mortgage Loan from the Fund) or from the sale
or refinancing of the property.
Mortgage Loans to Affiliated Borrowers are generally non-recourse and have the
customary provision in the market for condemnation, events-of-default,
acceleration and other remedies.
The Fund's investments at December 31, 1996 were as follows:
A Mortgage Loan to NTS/Lake Forest II Residential Corporation, an Affiliated
Borrower, to fund the development of Lake Forest North, a specified
investment. The loan bears interest at an annualized rate equal to the
greater of 17% of Gross Receipts from the sale of residential lots or 4.42%
of the average outstanding loan balance and matures July 1, 1997. It is
secured by a first mortgage on approximately 532 acres of residential land
located in Louisville, Kentucky. The Fund has subordinated its first mortgage
on approximately 180 acres to unaffiliated lenders who provided construction
financing in the amount of $5,840,000 (with an outstanding balance of
$4,166,187 as of December 31, 1996) for the development of those acres. The
Fund's loan balance was $25,857,472 at December 31, 1996.
A Mortgage Loan to NTS/Virginia Development Company, an Affiliated Borrower,
to fund the development of Fawn Lake, a specified investment. The loan bears
interest at an annualized rate equal to the greater of 17% of Gross Receipts
from the sale of residential lots or 4.42% of the average outstanding loan
balance and matures July 1, 1997. It is secured by a first mortgage on
approximately 2,207 acres of residential land and improvements thereon
located in Fredericksburg, Virginia. The Fund has subordinated its first
mortgage on approximately 22 acres to an unaffiliated lender who provided
construction financing in the amount of $325,000 (with an outstanding balance
of $243,393 as of December 31, 1996) for the development of those acres. The
Fund's loan balance was $28,966,245 at December 31, 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
bears interest at the Prime Rate plus 3/4%, payable monthly, and matures July
31, 1997. The loan is secured by a first mortgage on approximately 187 acres
of residential land and improvements thereon. The principal balance is
guaranteed by NTS Guaranty Corporation. The Fund's loan balance was
$1,998,850 at December 31, 1996.
A Mortgage Loan to Orlando Lake Forest Joint Venture, an Affiliated Borrower,
to fund the development of Orlando Lake Forest, a specified investment. The
loan bears interest at an annualized rate equal to the greater of 17% of
Gross Receipts from the sale of residential lots or 6.46% of the average
outstanding loan balance and matures January 31, 1998. It is secured by a
participation interest in a first mortgage on approximately 398 acres of
residential land located in Orlando, Florida. An Affiliate of the Fund's
Sponsor participates with the Fund regarding this Mortgage Loan. As of
December 31, 1996, the Fund's ownership percentage was approximately 63% and
the Fund's share of the outstanding loan balance was $7,126,366, which is net
of an unaccreted discount of $1,127,407.
A Temporary Mortgage Loan to Orlando Lake Forest Joint Venture, an Affiliated
Borrower, the proceeds of which were used to partially fund the Orlando Lake
Forest Project, a specified investment. The loan bears
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<PAGE>
Item 1. Business - Continued
---------------------
interest at the Prime Rate plus 2%, payable quarterly, and is a demand loan.
It is secured by the partnership interests of both general partners in the
Orlando Lake Forest Joint Venture and a pledge of 390 shares of the Class A
common stock in NTS/Virginia Development Company by J. D. Nichols, Chairman
of the Board of Directors of the Sponsor. The principal balance is guaranteed
by NTS Guaranty Corporation. Effective July 1, 1992, the Fund discontinued
accruing interest income on the Temporary Loan and classified the loan as
non-earning. The Fund has entered into a forbearance agreement with the Joint
Venture whereby, effective April 1, 1995, no interest will be due on this
loan until January 31, 1998. In addition, the Fund has established a loan
loss reserve of $1,500,000 as of December 31, 1996 regarding this loan. In
October 1993, NTS/Virginia Development Company (Fawn Lake) and NTS/Lake
Forest II Residential Corporation (Lake Forest) entered into a participation
agreement with the Fund whereby they were each assigned an interest in the
Fund's Temporary Mortgage Loan with the Orlando Lake Forest Joint Venture in
consideration for reducing the amount of Supplemental Interest credit then
due to them by the Fund. As of December 31, 1996, the interest assigned to
Fawn Lake and Lake Forest was 17.651% and 19.125%, respectively. The Fund's
ownership percentage was 63.224% and the Fund's share of the loan balance was
$3,838,831 at December 31, 1996.
On February 12, 1997, the Fund entered into a letter of intent (the Letter of
Intent) with NTS Corporation and its Affiliates, NTS Development Company, Fawn
Lake, and Lake Forest regarding the Fund's loans to Fawn Lake and Lake Forest.
The Letter of Intent provided for, among other things, a restructuring of the
Fund's loans to Fawn Lake and Lake Forest. The Letter of Intent contemplates
that ownership of the properties will be transferred to the Fund, which expects
to continue the development to completion of such properties and ultimately,
their orderly sale.
The parties to the Letter of Intent agreed to consider a general restructuring
of the relationship among the Fund, NTS Corporation and its various Affiliates.
The Fund has not yet determined the method by which it will acquire control of
the projects.
Generally Accepted Accounting Principles require that transactions as
contemplated by the Letter of Intent be recorded at fair market value.
Management can not determine at this time whether or not such transactions, if
completed, will result in a loss. In addition, in connection with the ongoing
development of the projects, it is likely that the Fund will be required to
change its tax status from a Real Estate Investment Trust to a conventional
corporation.
The Fund, as owner of the Fawn Lake and Lake Forest projects, expects that it
will continue development of the projects and the orderly sale of lots, golf
course memberships and ancillary services through sell-out, as well as the sale
of the Fawn Lake Country Club, when appropriate. As owner, the Fund will be
responsible for continuing development, operations and marketing costs through
the remaining lives of the projects and it may be necessary for the Fund to
borrow additional funds to complete the development. While the Fund believes
that such funds will be more readily available if it owns the projects, it is
not certain that the Fund will be able to borrow the funds necessary to complete
the projects.
The Letter of Intent also contemplates that NTS Development Company, or another
subsidiary or affiliate of NTS Corporation (the "Manager"), will enter into a
management agreement ( the "Management Agreement") with the Fund pursuant to
which the Manager will, as authorized agent for the Fund, provide exclusive
management, development, marketing and sales efforts and personnel to the Fund,
and take all other actions necessary to manage the
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<PAGE>
Item 1. Business - Continued
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development of the projects to completion and the sale of lots, golf
memberships, ancillary services and the Fawn Lake Country Club. The terms of the
Management Agreement have not yet been finalized. The parties to the Letter of
Intent are presently negotiating the definitive agreements contemplated by the
Letter of Intent but have not yet agreed on final terms.
Item 2. Properties
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The Fund makes loans which are secured or collateralized by an interest in real
property. See Item 1 of this Form 10-K and Note 4 of the Fund's Notes to
Financial Statements for information pertaining to the properties which
collateralize the Fund's mortgage loans.
Item 3. Legal Proceedings
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In July 1994, the Fund was named as a defendant in a complaint originally filed
by Jeno Paulucci & Silver Lakes I, Inc. in August 1992 against NTS Corporation
(the Fund's Sponsor) and various Affiliates of the Fund's Sponsor. The terms of
the settlement agreement are confidential. However, as no monetary awards were
assessed against or are payable by the Fund under the agreement, it is not
anticipated that the settlement will have a material impact on the Fund's
financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
----------------------------------------------------
The Fund did not submit any matters to a vote of its security holders during the
quarter ended December 31, 1996.
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<PAGE>
PART II
Item 5. Market for the Registrant's Shares and Related Stockholder Matters
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The selling price of the Shares was $20 per Share. The Fund's Shares are freely
transferable but are not listed or included for quotation on a national
securities exchange. As of March 1, 1997, there were 4,021 record holders of the
Fund's Shares. Cash dividends declared varied based upon the date of Stockholder
admittance. Dividends in 1996, 1995 and 1994 represent a return on invested
capital of 0.95%, 1.01% and 2.30%, respectively. The amount of dividends
declared was based on net taxable income earned per year.
Dividends per share for the year ended December 31, 1996 were declared as
follows:
First Quarter $ .045
Second Quarter .045
Third Quarter .045
Fourth Quarter .055
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$ .190
====
Dividends per share for each of the two years in the period ended December 31,
1995 were declared as follows:
1995 1994
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January $.03 $.06
February .03 .06
March .03 .06
April .03 .03
May .01 .03
June .01 .03
July .01 .03
August .01 .03
September .01 .03
October .01 .03
November .01 .03
December .01 .04
--- ---
$.20 $.46
=== ===
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<PAGE>
Item 5.Market for the Registrant's Shares and Related Stockholder Matters -
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Continued
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The following table presents that portion of the Fund's dividends that represent
a return of capital under Generally Accepted Accounting Principals (GAAP) for
each of the three years in the period ended December 31, 1996.
1996 1995 1994
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Net Income $ 850,309 $ 858,334 $1,782,171
======== ========= =========
Dividends Declared $ 605,601 $ 643,841 $1,466,166
======== ========= =========
Return of Capital
(GAAP Basis) $ -- $ -- $ --
========= ========= =========
The Fund uses tax-reporting accounting in applying the REIT-qualifying test that
requires 95% of taxable income to be paid out in dividends.
The following table presents that portion of the Fund's dividends that represent
a return of capital under tax-reporting accounting.
1996 1995 1994
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Net Taxable Income $ 631,114 $ 672,098 $1,540,323
========= ========= ==========
Dividends Declared $ 605,601 $ 643,841 $1,466,166
========= ========= ==========
Return of Capital
(TAX Basis) $ -- $ -- $ --
========= ========= ==========
See Note 1C to Notes to Financial Statements and the Results of Operations under
Management's Discussion for a detailed discussion of the differences between
GAAP net income and net taxable income.
The continued needs of the projects to which the Fund has outstanding loans may
significantly reduce the Fund's cash flows. Therefore, the Fund's Board of
Directors has determined to terminate the Fund's quarterly distribution for the
foreseeable future effective as of the first quarter of 1997.
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<PAGE>
Item 6. Selected Financial Data
-----------------------
Years ended December 31, 1996, 1995, 1994, 1993 and 1992.
<TABLE>
1996 1995 1994 1993 1992
----------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Affiliated Mortgage Loans
Receivable, net (2) $66,287,764 $63,655,706 $50,583,397 $50,884,695 $54,487,053
=========== =========== =========== =========== ===========
Total Assets $68,745,709 $65,511,633 $51,264,380 $51,635,523 $55,319,877
=========== =========== =========== =========== ===========
Total Revenues $ 3,304,995 $ 2,884,652 $ 2,985,004 $ 4,025,301 $ 4,957,075
Total Expenses 2,454,686 2,026,318 1,202,833 2,494,705 1,244,816
----------- ----------- ----------- ----------- -----------
Net Income $ 850,309 $ 858,334 $ 1,782,171 $ 1,530,596 $ 3,712,259
=========== =========== =========== =========== ===========
Weighted Average Number
of Shares 3,187,333 3,187,333 3,187,333 3,187,333 3,179,039
=========== =========== =========== =========== ===========
Net Income per Share of
Common Stock $ .27 $ .27 $ .56 $ .48 $ 1.17
=========== =========== =========== =========== ===========
Taxable Income (prior to
dividend paid deduction)
(3) $ 631,114 $ 672,098 $ 1,540,323 $ 2,553,129 $ 4,386,749
=========== =========== =========== =========== ===========
Taxable Income (prior to
dividend paid deduction)
per Share of Common
Stock $ .20 $ .21 $ .48 $ .80 $ 1.38
=========== =========== =========== =========== ===========
Cash Dividends Declared
(4) $ 605,601 $ 643,841 $ 1,466,166 $ 2,439,335 $ 4,295,678
=========== =========== =========== =========== ===========
Cash Dividends Declared
per Share of Common
Stock $ .19 $ .20 $ .46 $ .77 $ 1.35
=========== =========== =========== =========== ===========
</TABLE>
(1) The above selected financial data should be read in conjunction with the
financial statements and related notes appearing elsewhere in this Form
10-K report.
(2) Represents the carrying amount of the mortgage loans, which is equal to
their face amount less unamortized commitment fees and unaccreted
discounts. The 1996, 1995, 1994, 1993, and 1992 balances are net of an
allowance for loan losses of $1,500,000, $1,553,397, $1,638,855,
$1,730,000 and $230,000, respectively.
(3) See Note 1C of the Notes to Financial Statements for an explanation of
differences between net income and taxable income.
(4) Cash dividends declared during 1996, 1995, 1994, 1993 and 1992 varied
based upon the date of Stockholder admittance.
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
The Fund commenced an offering to the public on March 31, 1989 and was
authorized to sell up to 2,500,000 shares of common stock at $20.00 per share
(subject to an increase to 5,000,000 shares at the option of the Fund).
Approximately 3,187,000 shares were sold representing approximately $64 million
in sales and approximately $9.5 million in selling expenses and other offering
costs. The net offering proceeds remaining, after payment of brokerage
commissions, organizational expenses and other costs, have been used to make
Mortgage Loans and Temporary Investments and such other investments as permitted
by the Fund's Prospectus.
Liquidity and Capital Resources
- -------------------------------
The Fund's primary investment strategy is to make investments in Mortgage Loans.
As of December 31, 1996 and 1995 the Fund had commitments outstanding for
Mortgage Loans aggregating $67,168,000 and $64,315,000 of which approximately
$61,950,000 and $59,177,000 had been funded, respectively. The balance of these
commitments will be drawn over a period of years in a series of advances as the
borrowers develop the projects. Also, the Fund has invested in Temporary
Investments totalling approximately $5,838,000 and $6,032,000 as of December 31,
1996 and 1995, respectively. Reference is made to Note 4 of the Notes to
Financial Statements for further information regarding the Fund's investments as
of December 31, 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 Sponsor, and PR
Partners, an unaffiliated third party. On August 30, 1995, the interests of PR
Partners were acquired by NTS/Orlando Development Company, an Affiliate of the
Fund's Sponsor, due to the failure of PR Partners to make required capital
contributions to the Joint Venture. 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 $13,086,004 as of December 31, 1996) from
the Fund and an Affiliate of the Fund's Sponsor. The loan is secured by a
first mortgage on the Project, approximately 398 acres of residential land
and improvements thereon located in Orlando, Florida. On February 17, 1995,
an agreement was reached with the bank which held the first mortgage on the
majority of the Orlando Project. As a result of negotiations between the
Fund and the unaffiliated bank, the bank sold its interest in the loan to
the Fund at a substantial discount. The Fund and the Affiliate of the
Fund's Sponsor, which holds the remaining interest in the first mortgage,
entered into a participation agreement (the Master Loan Participation
Agreement) whereby the Fund and the Affiliate will own a proportionate
share of the first mortgage. The initial ownership percentages were 50% to
the Fund and 50% to the Affiliate, however, the percentage ownership will
fluctuate as additional principal is advanced to the Orlando Project by the
Fund and as principal payments are received. Ownership percentage is
determined in accordance with the ratio of each participant's share of the
outstanding loan balance to the total outstanding loan balance. The Fund's
ownership percentage was approximately 63% as of December 31, 1996. Upon
the Fund's purchase of an interest in the loan, it was
- 12 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
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 $7,126,366, as of December 31, 1996,
which is net of an unaccreted discount of $1,127,407.
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 $6,071,752 as of December 31, 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 December 31, 1996, the interest
assigned to Fawn Lake and Lake Forest was 17.651% and 19.125%,
respectively. The Fund's ownership percentage was 63.224% and the Fund's
share of the loan balance was $3,838,831 at December 31, 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 to the Joint Venture. The
defaults occurred when the Joint Venture failed to pay the Fund the
interest that was due on the Temporary Mortgage Loan as of October 1, 1992.
The default gives the Fund the right to accelerate the indebtedness 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 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 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
- 13 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
Forest Joint Venture whereby, effective April 1, 1995, no interest will be due
on this loan through January 31, 1998. The Fund will reevaluate the status of
the Orlando Project at that time to determine what, if any, additional courses
of action to pursue and whether to extend the forbearance of interest. As of
December 31, 1996, approximately $1,553,000 of interest remains due the Fund on
this loan.
As discussed above, the Fund and an Affiliate of the Fund's Sponsor now are the
first mortgage holders on the Orlando Project. As with the other Residential
Land Development Loans, the Fund will be providing the funds needed by the
Orlando Project to allow it to continue its development plan. Principal and
interest payments will be allocated proportionately between the Fund and the
Affiliate based upon their respective ownership percentage.
In June of 1995, the Fund's Board of Directors approved a change to the terms of
the Master Loan Participation Agreement and the Temporary Mortgage Loan
Participation Agreement. Effective April 1, 1995, the Affiliate of the Fund's
Sponsor agreed that the Fund may retain all payments of principal which the
Affiliate would be entitled to receive on the first Mortgage Loan. The Fund is
applying such sums as payment by the Orlando Lake Forest Joint Venture of the
Fund's share of the principal balance outstanding on the Temporary Mortgage
Loan. This will continue until such time as the Fund's share of the outstanding
principal of the Temporary Mortgage Loan has been repaid in full. The Fund has
received $1,139,394 and $541,899 for the years ended December 31, 1996 and 1995,
respectively, 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 fair 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 the stream of estimated future cash flows be discounted to
determine the fair 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.
The Orlando Project had been encumbered by a Phase-In Mortgage Loan from the
Fund to the Orlando Lake Forest Joint Venture for the development of Section II
of the Orlando Project. In October 1996, the last lot in Section II of the
Orlando Project was sold and the proceeds therefrom were transferred to the
Fund. These proceeds were applied to the outstanding balance of the Fund's
$3,000,000 Phase-In Mortgage Loan to the Orlando Lake Forest Joint Venture. The
loan was non-recourse, thus, the remaining $53,397 still due the Fund after the
application of the lot proceeds was written off as an amount deemed
uncollectible. The Fund has no further course of action to pursue collection.
In July 1994, the Fund was named as a defendant in a complaint originally filed
by Jeno Paulucci & Silver Lakes I, Inc. in August 1992 against NTS Corporation
(the Fund's Sponsor) and various Affiliates of the Fund's Sponsor. The terms of
the settlement agreement are confidential. However, as no monetary awards were
assessed against or are payable by the Fund under the agreement, it is not
anticipated that the settlement will have a material impact on the Fund's
financial position or results of operations.
- 14 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
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 $325,000 (with an outstanding balance of $
243,393 as of December 31, 1996) from an unaffiliated lender which is
secured by a first mortgage on 14 residential lots (approximately 22 acres
of residential land and improvements thereon). The purpose of the loan was
to provide construction financing to develop approximately 44 lots of the
Fawn Lake project (30 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, 1997.
A Mortgage Loan from the Fund in the amount of $30,000,000 (with an
outstanding balance of $28,966,245 as of December 31, 1996) to fund the
development of the Fawn Lake project, a specified investment. The loan is
secured by a first mortgage on approximately 2,207 acres of residential
land and improvements thereon located in Fredericksburg, Virginia. The Fund
has subordinated its first mortgage on approximately 22 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 $2,500,000 (with
an outstanding balance of $1,998,850 as of December 31, 1996) to fund the
construction of the Fawn Lake Golf Course. The loan bears interest at the
Prime Rate plus 3/4%, payable monthly, and matures July 31, 1997. The loan
is secured by a first mortgage on approximately 187 acres of residential
land and improvements thereon. The Principal balance outstanding of the
Temporary Mortgage Loan is guaranteed by NTS Guaranty Corporation pursuant
to the Fund's Junior Mortgage Loan Guaranty.
The Lake Forest project is a single-family residential community owned by
NTS/Lake Forest II Residential Corporation, an Affiliated Borrower. Lake
Forest is encumbered by the following notes:
A note payable with an unaffiliated lender in the amount of $875,000 (with
an outstanding balance of $258,060 as of December 31, 1996) which is
secured by a first mortgage on 10 residential lots (approximately 3 acres
of residential land and improvements thereon). The purpose of the loan was
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 matured November 24, 1996, an
extension is being negotiated.
A note payable with an unaffiliated bank in the amount of $4,965,000 (with
an outstanding balance of $3,908,127 as of December 31, 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 was to provide construction financing to construct the
clubhouse building for the Country Club. The Fund has subordinated its
Mortgage Loan regarding the 176 acres until the unaffiliated bank note is
paid in full. The note bears interest at the Prime Rate plus 1%, payable
monthly, and matures July 31, 1999.
- 15 -
<PAGE>
Liquidity and Capital Resources - Continued
- --------------------------------------------
A Mortgage Loan from the Fund in the amount of $28,000,000 (with an
outstanding balance of $25,857,472 as of December 31, 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 532 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
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 21, 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 February 12, 1997, the Fund entered into a letter of intent (the Letter of
Intent) with NTS Corporation and its Affiliates, NTS Development Company,
- 16 -
<PAGE>
Liquidity and Capital Resources - Continued
- --------------------------------------------
Fawn Lake and Lake Forest, regarding the Fund's loans to Fawn Lake and Lake
Forest. The Letter of Intent provides for a restructuring of the Fund's loans to
Fawn Lake and Lake Forest. The Letter of Intent contemplates that the ownership
of the properties will be transferred to the Fund, which plans to continue the
development to completion of such properties and, ultimately, their orderly
sale.
The parties to the Letter of Intent agreed to consider a general restructuring
of the relationships among the Fund, NTS Corporation and its various Affiliates.
The Fund has not yet determined the method by which it will acquire control of
the projects.
Generally Accepted Accounting Principles require that transactions as
contemplated by the Letter of Intent be recorded at fair market value.
Management can not determine at this time whether or not such transactions, if
completed, will result in a loss. In addition, in connection with the ongoing
development of the projects, it is likely that the Fund will be required to
change its tax status from a Real Estate Investment Trust to a conventional
corporation.
The Fund, as owner of the Fawn Lake and Lake Forest projects, expects to
continue development of the projects and the orderly sale of lots, golf course
memberships and ancillary services through sell-out, as well as the sale of the
Fawn Lake Country Club, when appropriate. As owner, the Fund will be responsible
for continuing development, operations and marketing costs through the remaining
lives of the projects and it may be necessary for the Fund to borrow additional
funds to complete the development. While the Fund believes that such funds will
be more readily available if it owns the projects, it is not certain that the
Fund will be able to borrow the funds necessary to complete the projects.
The Letter of Intent contemplates that NTS Development Company, or another
subsidiary or affiliate of NTS Corporation (the "Manager"), will enter into a
management agreement ( the "Management Agreement") with the Fund pursuant to
which the Manager will, as authorized agent for the Fund, provide exclusive
management, development, marketing and sales efforts and personnel to the Fund,
and take all other actions necessary to manage the development of the projects
to completion and the sale of lots, golf memberships, ancillary services and the
Fawn Lake Country Club. The terms of the Management Agreement have not yet been
finalized. The parties to the Letter of Intent are presently negotiating the
definitive agreements contemplated by the Letter of Intent but have not yet
agreed on final terms.
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 providing for a credit facility of up to $13.8 million secured by a
collateral assignment of the Fund's mortgages to Lake Forest and Fawn Lake. The
purpose of the loan is to refinance the Fund's existing credit facility,
increase the Fund's investment portfolio and provide additional operating
capital for the Fund. The loan bears interest at the Prime Rate plus 1%, payable
monthly and matures December 27, 1997. The Fund made principal payments on the
loan equal to $12,000 per lot from lot sales at Lake Forest and $1,000 per lot
from lot sales at Fawn Lake during 1995 and $13,500 per lot from lot sales at
Lake Forest and $1,000 per lot from lot sales at Fawn Lake during 1996. The Fund
will make principal payments on the loan equal to $27,500 per lot from lot sales
at Lake Forest and $1,000 per lot from lot sales at Fawn Lake during 1997. The
loan is guaranteed by Mr. J. D. Nichols, Chairman of the Board of the Fund's
Sponsor.
- 17 -
<PAGE>
Liquidity and Capital Resources - Continued
- -------------------------------------------
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 monthly. In February
1997, the loan balance was increased to $2,500,000 and the maturity date was
extended to July 31, 1997.
The Fund has received advances from Affiliates of the Fund's Sponsor, net of
repayments, totalling $4,524,667 and $1,885,000 as of December 31, 1996 and
1995, respectively. The advances had been at various rates averaging
approximately 5.75% when they 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 $2,320,000 of the borrowings is March
31, 1999 and $2,204,667 is due on demand. In February 1997, the maturity date on
$1,054,667 of the borrowings due on demand was extended to May 1, 1999. 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 31, 1998; and $7,500 per lot from April 1, 1998 through March 31, 1999.
Additional principal payments will be made to the Affiliates as cash flow
permits. Interest paid to the Affiliates was $258,191 and $82,050 for the years
ended December 31, 1996 and 1995, respectively. No interest was due to
Affiliates in 1994. The advances were made to meet the development plans of the
projects to which the Fund has outstanding loans.
During the year ended December 31, 1996, the Fund received repayment on four
mortgage loans and two temporary investments in the aggregate principal amount
of $8,099,364. The repayments on mortgage loans were generally equal to
approximately 83% of the Gross Receipts received on lot sales less closing
costs. The Fund made investments in three mortgage loans and one temporary
investment in the aggregate principal amount of $10,562,950.
During the year ended December 31, 1995, the Fund received repayment on four
mortgage loans and two temporary investments in the aggregate principal amount
of $8,219,874. The repayments on mortgage loans were generally equal to
approximately 83% of the Gross Receipts received on lot sales less closing
costs. The Fund made investments in three mortgage loans and one temporary
investment in the aggregate principal amount of $21,187,154.
During the year ended December 31, 1994, the Fund received repayment on three
mortgage loans and one temporary investment in the aggregate principal amount of
$4,310,554. The repayments of mortgage loans through June 30, 1994 were based on
Scheduled Principal Payments of (i) 80% of the Gross Receipts received on sales
of lots to builders and (ii) 70% of the Gross Receipts received on sales of lots
to individuals. Effective July 1, 1994, repayments on mortgage loans were
generally equal to approximately 83% of the Gross Receipts received on lot sales
less closing costs. The Fund made investments in two mortgage loans in the
aggregate principal amount of $4,056,326.
During the year ended December 31, 1996, the Fund borrowed $1,201,999 from its
various lenders. The Fund repaid $1,075,022 of its borrowings primarily from
loan repayments made by NTS/Lake Forest II Residential Corporation. In addition,
the Fund borrowed $4,077,457 from an Affiliate of the Fund's Sponsor. The Fund
repaid $1,437,790 of these affiliated borrowings primarily from loan repayments
make by the Orlando Lake Forest Joint Venture.
- 18 -
<PAGE>
Liquidity and Capital Resources - Continued
- --------------------------------------------
During the year ended December 31, 1995, the Fund borrowed $15,186,873 from its
various lenders. The Fund repaid $1,991,528 of its borrowings using proceeds
from a $13.8 million credit facility and repaid $268,000 of its borrowings using
proceeds from a $2,000,000 mortgage loan. The remaining $714,000 reduction in
debt came primarily from loan repayments made by NTS/Lake Forest II Residential
Corporation. The Fund also borrowed $1,885,000 from Affiliates of the Fund's
Sponsor.
During the year ended December 31, 1994, the Fund borrowed $554,691 on its
credit facility. The Fund repaid $1,006,151 of its borrowings using proceeds
from loan payments made by NTS/Lake Forest II Residential Corporation.
The Fund intends to maintain a working capital reserve equal to 1% of the gross
proceeds received. The Fund may alter the percentage of such reserves if deemed
necessary. As of December 31, 1996, the Fund had cash and equivalents of
approximately $716,000.
The Fund's primary source of liquidity has been from the interest earned on the
Mortgage Loans on the Temporary Investments. It is expected that this will
continue to be a primary source of future liquidity until the consumation of the
transactions contemplated in the Letter of Intent, as discussed on page 17, if
such transactions are completed. The ability of the Fund to receive interest on
the Mortgage Loans depends on the level of residential lot closings achieved by
the properties which collateralize the loans. 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. The Fund's Sponsor is also working with several lenders
including the Fund's existing creditors, to refinance the Fund's debt which will
mature within the next twelve months. While management can provide no assurance
that these negotiations will be successful, it is their belief that, based upon
discussions with the various lenders, such financing will be accomplished prior
to the respective maturity dates.
The continued cash needs of the projects to which the Fund has outstanding loans
may significantly reduce the Fund's cash flows. Therefore, the Fund's Board of
Directors has determined to terminate the Fund's quarterly distribution for the
foreseeable future effective as of the first quarter of 1997. However, 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 $850,309,
$858,334 and $1,782,171 and using tax-reporting accounting (TRA) was $631,114,
$672,098 and $1,540,323 for the years ended December 31, 1996, 1995 and 1994,
respectively. The difference between GAAP income and TRA income was due
primarily to the treatment of loan discount accretion, loan commitment fee
income, letters of credit income, Supplemental Interest income and provision for
loan losses. GAAP requires that discounts on mortgage loan receivables be
recognized as an adjustment to yield over the estimated life of the loan; for
tax purposes the discount is recognized as income when the proceeds are
received. GAAP requires that loan commitment fee income be recognized as income
over the term of the related loans; for tax purposes the fees are recognized as
income when received. GAAP requires that income received from letters of credit
be recognized on a straight-line basis over the term of the letter of credit
(typically one year); for tax purposes, this income is recognized as income when
received. For GAAP purposes, Gross Receipts Interest is reported as earned on
the accrual basis of accounting; for tax purposes 50% of the amount of Gross
Receipts Interest earned is credited against Supplemental Interest Income paid
in prior years.
- 19 -
<PAGE>
Results of Operations - Continued
- ---------------------------------
For GAAP purposes, a provision for loan losses is recognized when the fair value
of the asset is less than the carrying value of the asset; for tax purposes, a
provision for loan losses is allowed when the debt becomes worthless within the
taxable year. TRA income is used in applying the REIT-qualifying test that
requires 95% of taxable income to be paid out in dividends. (See Note 1C to
Notes to Financial Statements).
Cash provided by operations was $392,077, $59,772 and $1,503,393 during the
years ended December 31, 1996, 1995 and 1994, respectively. The Fund declared
dividends of $605,601 (1996), $643,841 (1995) and $1,466,166 (1994). Total
dividends declared provided Stockholders with an annualized return of 0.95%,
1.01% and 2.30% for the years ended December 31, 1996, 1995 and 1994,
respectively.
On October 11, 1994, the Fund's Board of Directors approved a change in the
structure of the Fund's Mortgage Loans to NTS/Virginia Development Company and
NTS/Lake Forest II Residential Corporation (the "Affiliated Borrowers") from
fixed rate mortgage loans to cash flow mortgage loans. Effective July 1, 1994,
these Affiliated Borrowers will pay interest at an annualized rate equal to the
greater of 15% (subsequently revised to 17%) of Gross Receipts from the sale of
the underlying real estate (residential lots) which secures the mortgage or
4.42% of the average outstanding loan balance. Interest will be due and payable
monthly as lots are sold. Any shortfall to meet the minimum rate of 4.42% will
be due and payable December 31 of the calendar year. The Fund will no longer
receive Regular Interest, Gross Receipts Interest or other fees previously
charged. In February 1995, the Fund purchased a 50% interest in a $13 million
first mortgage loan to the Orlando Lake Forest Joint Venture. The loan bears
interest at the greater of 17% of Gross Receipts or 6.46% of the average
outstanding loan balance. The increases in interest income on mortgage loans
receivable between years are due to an increase in the average outstanding
balances of the earning loans. The average outstanding balances of the earning
loans increased from $46,299,000 (1994) to $57,668,000 (1995) to $62,878,000
(1996). The average interest rate earned by the Fund for the years ended
December 31, 1996, 1995 and 1994 was approximately 5.1%, 4.9% and 5.9%,
respectively, of the average outstanding loan balances.
Effective July 1, 1992, the Fund discontinued accruing interest income from the
Temporary Mortgage Loan to the Orlando Lake Forest Joint Venture until the
principal and interest have been received. As of December 31, 1996 and 1995,
approximately $1,553,000 of interest was due on this loan but not accrued in the
Fund's financial statements. The Fund has entered into a forbearance agreement
with the Orlando Lake Forest Joint Venture whereby, effective April 1, 1995, no
interest will be due on the loan through January 31, 1998. The Fund will
reevaluate the status of the Orlando Project at that time to determine what, if
any, additional courses of action to pursue, and whether to extend the
forbearance of interest.
Commitment fees paid at loan closings are amortized over the life of the loan
using the interest method. Letter of credit fees are amortized over the term of
the letter of credit. Fee income on mortgage loans and financial services is the
amount of commitment fees and letter of credit fees being amortized for the
period. There was no commitment fee income recognized in 1995.
Gross Receipts Interest represents 5% of the Affiliated Borrowers' Gross
Receipts from the sale of the underlying real estate (residential lots) during
the period. Supplemental Interest is an amount in excess of Points, Regular
Interest, and either Gross Receipts Interest or Incentive Interest that certain
Affiliated Borrowers paid to the Fund. Payments of Supplemental Interest were
credited against 50% of the amount of Gross Receipts Interest or Incentive
Interest which the Fund received from
- 20 -
<PAGE>
Results of Operations - Continued
- ----------------------------------
Affiliated Borrowers in later years. The Fund earned Gross Receipts Interest of
$129,338 for the year ended December 31, 1994. These amounts were generated from
the Fund's Mortgage Loans to NTS/Virginia Development Company, NTS/Lake Forest
II Residential Corporation and the Phase-In Mortgage Loan to the Orlando Lake
Forest Joint Venture. Effective July 1, 1994, none of the Fund's Mortgage Loans
provide for Gross Receipts Interest.
In addition to Points, Regular Interest and Supplemental Interest, the Fund may
receive Incentive Interest in connection with Mortgage Loans made to Affiliated
Borrowers secured by properties not held for sale in the ordinary course of the
Affiliated Borrower's business; except that in certain cases the Fund may forego
Incentive Interest in order to maintain compliance with REIT qualification
requirements and may instead either seek additional Points or Regular Interest
or will seek to obtain Gross Receipts Interest. The Fund does not anticipate
receiving Incentive Interest and Gross Receipts Interest on the same Mortgage
Loan. The amount of Incentive Interest which the Fund will receive from
Affiliated Borrowers will be equal to a specified percentage of the "Increase in
Value" of the underlying property securing the Mortgage Loan, which Increase in
Value occurred during the period beginning from the date that the Mortgage Loan
was funded and ending upon the repayment of the Mortgage Loan at maturity or
upon the Sale or Refinancing of the underlying property excluding a sale or
transfer to an Affiliate, so long as the Fund retains an interest in the
property subsequent to the sale or transfer. No Incentive Interest has been
included in revenues for any of the three years ended December 31, 1996.
The Fund's by-laws provide that annual operating expenses of the Fund may not
exceed in any year the greater of (i) 2% of the Funds average invested assets
during such year or (ii) 25% of the Fund's taxable income during such year. The
Advisor must reimburse the Fund within 60 days after the end of the year the
amount by which the aggregate annual Operating Expenses paid or incurred by the
Fund exceed the foregoing limitations, unless the Board of Directors approves
expenses in excess of such limitations. No reimbursement was required for any of
the three years ended December 31, 1996 as operating expenses did not exceed the
limit.
Operating expenses of the Fund include a Management Expense Allowance (Advisory
Fee) of 1% of the Fund's Net Assets, per annum, which may be increased annually
by an amount corresponding to the percentage increase in the Consumer Price
Index. The Advisory Fee is paid to the Advisor (NTS Advisory Corporation) or its
affiliate. Effective July 1, 1994, the Fund's Mortgage Loans to Fawn Lake and
Lake Forest were converted to cash flow mortgage loans. As part of the
consideration for this restructuring, the Fund's Board of Directors required,
among other things, that beginning in 1995, NTS Advisory Corporation pay
$100,000 annually towards the expenses of the Fund until the maturity of the
Mortgage Loans. As such, the Advisory Fee has been reduced $100,000 for each of
the years ended December 31, 1995 and 1996. The Advisory Fee for the years ended
December 31, 1996, 1995 and 1994 was $544,776, $528,973 and $614,100,
respectively. Increases and decreases in the Advisory Fee generally correspond
directly to increases and decreases in the Fund's Net Assets.
Increase and decreases in interest expense generally correspond directly to
increase and decreases in the outstanding balances of the Fund's borrowings. The
average interest rate paid by the Fund for the years ended December 31, 1996,
1995 and 1994 was 8.9%, 9.7% and 8.2%, respectively.
Professional and administrative expenses include primarily directors' fees,
legal, outside accounting and investor processing fees, and printing costs for
financial reports. The increase in expenses for the year ended December 31, 1996
is due to the fees associated with the addition of an Independent Director and
increased professional fees related to the lawsuit discussed in Part 1, Item 3
of this Form 10-K.
- 21 -
<PAGE>
Results of Operations - Continued
- ----------------------------------
Income tax expense is the Fund's estimated liability for Federal, state, and
local income taxes due on the amount of earnings which are in excess of
dividends for the period.
The Fund's net income declined 52% from 1994 to 1996 and 19% from 1995 to 1996.
The disproportionate declines in net income compared to the increases in
revenues is due to the fact that the sales volumes at the residential projects
and the corresponding interest income earned by the Fund have not been
sufficient to offset the increase in the Fund's cost of debt service.
The Fund has invested in Mortgage Loans totaling approximately $67,168,000 and
$59,177,000 as of December 31, 1996 and 1995, respectively. Also, the Fund has
invested in Temporary Investments totaling approximately $5,837,681 and
$6,032,000 as of December 31, 1996 and 1995, respectively. The balance of funds
were invested in short-term cash equivalents. The Temporary Investments were
funded as an alternative to other short-term investments in order to obtain
higher interest rates.
The Fund's investments at December 31, 1996 were as follows:
A Mortgage Loan to NTS/Lake Forest II Residential Corporation, an
Affiliated Borrower, to fund the development of Lake Forest North, a
specified investment. The loan balance was $25,857,472 at December 31,
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 $28,966,245 at December 31, 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 $1,998,850 at December 31, 1996.
A Mortgage Loan to Orlando Lake Forest Joint Venture, an Affiliated
Borrower, to fund the development of Orlando Lake Forest, a specified
investment. The loan balance was $7,126,366 at December 31, 1996, which is
net of an unaccreted discount of $1,127,407.
A Temporary Mortgage Loan to Orlando Lake Forest Joint Venture, an
Affiliated Borrower, to partially fund the Orlando Lake Forest Loan, a
specified investment. Effective July 1, 1992, the Fund discontinued
accruing interest income on the Temporary Mortgage Loan and classified the
loan as non-earning. In addition, the Fund has established a loan loss
reserve of $1,500,000 as of December 31, 1996 regarding this loan. The loan
balance was $3,838,831 at December 31, 1996.
The Fund's investment of $25,857,472 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 $28,966,245 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 interest payments to the Fund. The Fund's Temporary Mortgage Loan to the
Orlando Lake Forest Joint Venture is not current in interest payments to the
Fund. Approximately $1,553,000 of interest remains due on this loan but is not
accrued in the Fund's financial statements.
- 22 -
<PAGE>
Results of Operations - Continued
- ----------------------------------
Any forward-looking statements included in Management's Discussion and Analysis
of Financial Condition and Results of Operations, or elsewhere in this report,
which reflect management's best judgement based on factors known, involve risks
and uncertainties. Readers are cautioned not to place undue reliance on any
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Fund undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Actual results could differ materially from those anticipated
in any forward-looking statements as a result of a number of factors, including
but not limited to those discussed below. Any forward-looking information
provided by the Fund pursuant to the safe harbor established by recent
securities legislation should be evaluated in the context of these factors.
- - The Fund's principal activity is the investment in Mortgage Loans to
Affiliated Borrowers. Mortgage Loans are inherently subject to the risk of
default. If the Borrower defaults on a Mortgage Loan which is not guaranteed,
the Board of Directors may foreclose which could result in considerable delays
and expenses. A Borrower's ability to make payments due under the Mortgage Loan
and the amount the Fund may realize upon foreclosure are subject to risks
generally associated with real estate investments, many of which are beyond the
control to the Fund, including general or local economic conditions,
competition, interest rates, real state tax rates, other operating expenses, the
supply of and demand for properties, zoning laws, other governmental rules and
fiscal policies, and acts of God.
- - The Affiliated Borrowers are engaged in the development and sale of
residential subdivision building lots, the pricing of which are subject to risks
generally associated with real estate development and applicable market forces
beyond the control of the Affiliated Borrowers and/or the Fund, including
economic conditions, competition, interest rates, real estate tax rates, other
operating expenses, the supply of and demand for properties, zoning laws, other
governmental rules and fiscal policies, and acts of God.
- - There is the potential for occurrences which could affect the Fund's ability
to reduce, or limit the increase in, its professional and administrative
expenses. Furthermore, the debt service regarding the Fund's borrowings is
variable based on current interest rates, any fluctuations in which are beyond
the control of the fund. These variances could, for example, impact the Fund's
projected cash and cash requirements as well as projected returns.
- 23 -
<PAGE>
Item 8. Financial Statements and Supplementary Data
--------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of the NTS Mortgage Income Fund:
We have audited the accompanying balance sheets of the NTS Mortgage Income Fund
(a Delaware corporation) as of December 31, 1996 and 1995, and the related
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the NTS Mortgage Income Fund as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
March 24, 1997
- 24 -
<PAGE>
<TABLE>
<CAPTION>
NTS MORTGAGE INCOME FUND
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Affiliated mortgage loans receivable:
Earning loans $ 63,948,933 $ 60,083,323
Non-earning 3,838,831 5,125,780
------------ ------------
67,787,764 65,209,103
Less reserves for loan losses 1,500,000 1,553,397
------------ ------------
Net affiliated mortgage loans
receivable 66,287,764 63,655,706
Cash and equivalents 716,793 535,687
Interest receivable - affiliates 1,589,498 1,142,021
Other assets 151,654 178,219
------------ ------------
Total assets $ 68,745,709 $ 65,511,633
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 267,800 $ 179,307
Dividends payable 175,305 38,248
Notes payable - affiliates (Note 3) 4,524,667 1,885,000
Notes payable 14,276,850 14,149,873
Deferred revenues 301 3,127
------------ ------------
Total liabilities 19,244,923 16,255,555
------------ ------------
Commitments and contingencies (Note 8)
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 (4,665,798) (4,910,506)
------------ ------------
Total stockholders' equity 49,500,786 49,256,078
------------ ------------
Total liabilities and stockholders'
equity $ 68,745,709 $ 65,511,633
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 25 -
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
------------------------
STATEMENTS OF INCOME
--------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
----------------------------------------------------
<CAPTION>
1996 1995 1994
------------ ------------ ---------
Revenues:
<S> <C> <C> <C>
Interest income on affiliated mortgage
loans receivable $3,256,148 $2,849,807 $2,716,804
Fee income on affiliated mortgage loans
and other financial services 24,873 12,924 130,791
Gross receipts and supplemental interest
income - affiliates -- -- 129,338
Interest income on cash equivalents
and miscellaneous income 23,974 21,921 8,071
---------- ---------- ----------
3,304,995 2,884,652 2,985,004
---------- ---------- ----------
Expenses:
Advisory fee (Note 3) $ 544,776 $ 528,973 $ 614,100
Professional and administrative 201,688 162,427 174,900
Interest expense 1,343,241 1,165,078 182,486
Interest expense - affiliates 258,191 82,050 --
Other taxes and licenses 27,340 25,790 20,705
Amortization expense 72,050 52,000 35,642
Provision for loan losses -- -- 150,000
---------- ---------- ----------
2,447,286 2,016,318 1,177,833
---------- ---------- ----------
Income before income tax expense 857,709 868,334 1,807,171
Income tax expense 7,400 10,000 25,000
---------- ---------- ----------
Net income $ 850,309 $ 858,334 $1,782,171
========== ========== ==========
Net income per share of common stock $ .27 $ .27 $ .56
========== ========== ==========
Weighted average number of shares 3,187,333 3,187,333 3,187,333
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 26 -
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<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, 1993 3,187,333 $ 3,187 $ 54,163,397 $ (5,441,004) $ 48,725,580
Net income -- -- 1,782,171 1,782,171
Dividends declared -- -- (1,466,166) (1,466,166)
------------ ------------ ------------ ------------ ------------
Stockholders' equity
December 31, 1994 3,187,333 $ 3,187 $ 54,163,397 $ (5,124,999) $ 49,041,585
Net income -- -- 858,334 858,334
Dividends declared -- -- (643,841) (643,841)
------------ ------------ ------------ ------------ ------------
Stockholders' equity
December 31, 1995 3,187,333 $ 3,187 $ 54,163,397 $ (4,910,506) $ 49,256,078
Net income -- -- 850,309 850,309
Dividends declared -- -- (605,601) (605,601)
------------ ------------ ------------ ------------ ------------
Stockholders' equity
December 31, 1996 3,187,333 $ 3,187 $ 54,163,397 $ (4,665,798) $ 49,500,786
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 27-
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
----------------------------------------------------
<CAPTION>
1996 1995 1994
------------ ------------ -----------
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 850,309 $ 858,334 $ 1,782,171
Adjustments to reconcile net income to
net cash provided by operating activities:
Accretion of discount on affiliated mortgage
loans receivable (148,472) (125,029) --
Amortization expense 72,050 52,000 35,642
Provision for loan losses -- -- 150,000
Changes in assets and liabilities:
Interest receivable - affiliates (447,477) (769,193) (372,828)
Accounts payable and accrued expenses 88,493 24,692 14,443
Deferred commitment fees (20,000) 20,000 (102,930)
Deferred revenues (2,826) (1,032) (3,105)
------------ ------------ ------------
Net cash provided by operating activities 392,077 59,772 1,503,393
------------ ------------ ------------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES
Principal collections on affiliated mortgage $ 8,099,364 $ 8,219,874 $ 4,310,554
loans receivable
Investment in affiliated mortgage loans
receivable (10,562,950) (21,187,154) (4,056,326)
------------ ------------ ------------
Net cash provided by (used for) investing
activities (2,463,586) (12,967,280) 254,228
------------ ------------ ------------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES
Proceeds from notes payable $ 1,201,999 $ 15,186,873 $ 554,691
Proceeds from notes payable - affiliates 4,077,457 1,885,000 --
Payments on notes payable (1,075,022) (2,973,528) (1,006,151)
Payments on notes payable - affiliates (1,437,790) -- --
Other assets (45,485) (230,219) --
Dividends paid (468,544) (733,086) (1,713,192)
------------ ------------ ------------
Net cash provided by (used for) financing
activities 2,252,615 13,135,040 (2,164,652)
------------ ------------ ------------
Net increase (decrease) in cash and
equivalents $ 181,106 $ 227,532 $ (407,031)
CASH AND EQUIVALENTS, beginning of period 535,687 308,155 715,186
------------ ------------ ------------
CASH AND EQUIVALENTS, end of period $ 716,793 $ 535,687 $ 308,155
============ ============ ============
Cash paid during the period for:
Interest $ 1,510,384 $ 1,130,832 $ 180,235
Income taxes $ -- $ 700 $ 36,082
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 28-
<PAGE>
NTS MORTGAGE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
------------------------------------------
A) Organization
------------
NTS Mortgage Income Fund (the "Fund"), a Delaware corporation, was
formed on September 26, 1988. The Fund operates as a real estate
investment trust (REIT) under the Internal Revenue Code of 1986 (the
"Code"), as amended. NTS Corporation is the sponsor of the Fund (the
"Sponsor") and its affiliate, NTS Advisory Corporation, is the
advisor to the Fund (the "Advisor").
The Fund has made permanent mortgage loans to Affiliated Borrowers
consisting principally of first, and to a lesser extent, junior
mortgage loans. Each mortgage loan is secured by a lien on the
property, by an interest in the borrower or by a similar security
interest.
The Fund is required to terminate and liquidate its assets by
December 31, 2008.
These financial statements do not reflect the impact, if any, of the
proposed transactions discussed in Note 12.
B) Basis of Accounting
-------------------
The Fund's records are maintained on the accrual basis of accounting
in accordance with generally accepted accounting principles (GAAP).
C) Income Taxes
------------
The Fund has elected and is qualified to be treated as a REIT under
Internal Revenue Code Sections 856-860. In order to qualify, the Fund
is required to distribute at least 95% of its taxable income to
Stockholders and meet certain other requirements. The Fund intends to
continue to qualify as a REIT for Federal income tax purposes. A
reconciliation of net income for financial statement purposes versus
that for income tax reporting at December 31 is as follows:
1996 1995 1994
----------- ----------- ----------
Net income (GAAP) $ 850,309 $ 858,334 $ 1,782,171
Accretion of note discount (148,472) (125,029) --
Loan commitment fee income (20,000) 20,000 (102,930)
Letters of credit income (2,326) (1,032) (3,105)
Supplemental interest
income -- (1,717) (64,668)
Federal income tax expense 5,000 7,000 20,000
Provision for loan losses (53,397) (85,458) (91,145)
----------- ----------- -----------
Taxable income before
dividends paid deduction $ 631,114 $ 672,098 $ 1,540,323
=========== =========== ===========
Dividends declared $ 605,601 $ 643,841 $ 1,466,166
=========== =========== ===========
Distribution percentage 96% 96% 95%
=========== =========== ============
- 29 -
<PAGE>
1. Summary of Significant Accounting Policies - Continued
------------------------------------------------------
D) Use of Estimates in Preparation of Financial Statements
-------------------------------------------------------
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
E) Revenue Recognition and Reserves for Loan Losses
------------------------------------------------
Interest income from mortgage loans is reported as earned on the
accrual basis of accounting. If the Fund has any reason to doubt the
collectability of any principal or interest amounts due pursuant to
the terms of the mortgage loans appropriate reserves would be
established for any principal and accrued interest amounts deemed
unrealizable (see Note 5). Statements of Financial Accounting
Standards Nos. 114 and 118 require that impaired loans be measured
based on the present value of expected future cash flows discounted
at each loan's effective interest rate, at each loan's observable
market price or at the fair value of the collateral if the loan is
collateral dependent.
Commitment fees paid at loan closing are amortized over the life of
the loan using the interest method. Letter of credit income is
amortized over the term of the letter of credit using the
straight-line method. Gross Receipts Interest is recognized with
respect to a mortgage loan secured by real estate held for sale in
the ordinary course of the borrower's business. Gross Receipts
Interest is an amount equal to 5% of the borrower's Gross Receipts,
as defined in the Fund's Prospectus, from the sale of the underlying
real estate during the term of the mortgage loan. Gross Receipts
Interest is reported as earned on the accrual basis of accounting.
F) Statement of Cash Flows
-----------------------
For purposes of reporting cash flows, cash and equivalents include
cash on hand and short-term, highly liquid investments with an
original maturity of three (3) months or less that are readily
convertible to cash.
G) Operating Expense Limitations
-----------------------------
The annual Operating Expenses of the Fund, based upon guidelines
promulgated by the North American Securities Administrators
Association, Inc., are prohibited from exceeding in any fiscal year
the greater of (i) 2% of the Fund's Average Invested Assets during
such fiscal year or (ii) 25% of the Fund's Net Income during such
fiscal year. In the event the Fund's annual Operating Expenses exceed
this limitation, the Advisor must reimburse the Fund within 60 days
after the end of the fiscal year, the amount by which the aggregate
annual Operating Expenses paid or incurred by the Fund exceed the
foregoing limitations. The Fund did not exceed this limitation for
the years ended December 31, 1996, 1995 and 1994.
Operating Expenses are defined as operating, general and
administrative expenses of the Fund as determined under generally
accepted accounting principles, including but not limited to rent,
utilities, capital equipment, salaries, fringe benefits, travel
expenses, the Management Expense Allowance, expenses paid by third
- 30 -
<PAGE>
1. Summary of Significant Accounting Policies - Continued
------------------------------------------------------
G) Operatings Expense Limitations - Continued
------------------------------------------
parties to the Advisor and its Affiliates based upon its relationship
with the Fund (e.g. loan administration, servicing, engineering and
inspection expenses) and other administrative items, but excluding
the expenses of raising capital, interest payments, taxes, non-cash
expenditures (e.g., depreciation, amortization, bad debt reserves),
the Subordinated Advisory Fee, and the costs related directly to a
specific Mortgage Loan investment or Real Estate Investment by the
Fund, such as expenses for originating, acquiring, servicing or
disposing of said specific Mortgage Loan or Real Estate Investment.
2. Affiliations
-------------
The Fund operates under the direction of its Board of Directors who have
retained the Advisor to manage the Fund's operations and to make
recommendations concerning investments. The Advisory Agreement
automatically renews for successive one year periods unless terminated by
the Fund's Independent Directors upon sixty days notice. The Advisor has
delegated substantially all of its duties to the Sponsor (see Note 3).
The Chairman of the Board of Directors of the Fund is also the majority
shareholder of NTS Corporation (the Fund's Sponsor), NTS/Virginia
Development Company, an Affiliated Borrower, NTS/Lake Forest II
Residential Corporation, an Affiliated Borrower, and is a majority
shareholder of the managing general partner in the Orlando Lake Forest
Joint Venture, an Affiliated Borrower.
3. Related Party Transactions
--------------------------
In addition to the Affiliated Mortgage Loans discussed in Note 4 to the
Fund's Financial Statements, the Fund had the following related party
transactions.
As of December 31, 1996, the Sponsor or an Affiliate owned 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 amount may be increased annually
by an amount corresponding to the percentage increase in the Consumer
Price Index. Effective July 1, 1994, the Fund's Mortgage Loans to Fawn
Lake and Lake Forest were converted to cash flow mortgage loans. As part
of the consideration for this restructuring, the Fund's Board of
Directors required, among other things, that beginning in 1995, NTS
Advisory Corporation pay $100,000 annually towards the expenses of the
Fund until the maturity of the Mortgage Loans. As such, the Advisory Fee
has been reduced $100,000 for each of the years ended December 31, 1996
and 1995. For the years ended December 31, 1996, 1995 and 1994, $544,776,
$528,973 and $614,100, respectively, has been incurred as an Advisory
Fee.
On February 17, 1995, the Fund purchased from an unaffiliated bank an
interest in a $13 million first mortgage (with an outstanding balance of
$9,664,465 as of February 17, 1995) to the Orlando Lake Forest Joint
Venture. An Affiliate of the Sponsor owns the remaining interest via a
participation agreement. The initial ownership percentages were 50% to
the Fund and 50% to the Affiliate, however, the percentage ownership will
fluctuate as additional principal is advanced to the Joint Venture by the
Fund. Ownership percentages will be determined in accordance
- 31 -
<PAGE>
3. Related Party Transactions - Continued
--------------------------------------
with the ratio of each participant's share of the outstanding loan
balance to the total outstanding loan balance. As of December 31, 1996,
the outstanding balance on the first mortgage was $13,086,004, and the
Fund's ownership percentage was approximately 63%.
The Fund has received advances from Affiliates of the Fund's Sponsor, net
of repayments, totalling $4,524,667 and $1,885,000 as of December 31,
1996 and 1995, respectively. As of December 31, 1996, the advances bear
interest at the Prime Rate and mature as follows: $2,320,000 on March
31, 1999 and $2,204,667 is due on demand. Subsequent to year end, the
maturity date of $1,054,667 of the borrowings due on demand was extended
to May 1, 1999. Interest expense to the Affiliates was $258,191 and
$82,050 for the years ended December 31, 1996 and 1995, respectively. No
interest was due to Affiliates in 1994.
4. Affiliated Mortgage Loans Receivable, net
-----------------------------------------
The following tables outline the Fund's mortgage loan portfolio at December
31, 1996. There is currently no readily determinable market value for the
portfolio given its unique and affiliated nature.
Property Pledged Interest Maturity
Borrower as Collateral Rate Date
-------- ------------- ---- ----
1) Earning Loans:
---------------
Temporary Mortgage
- ------------------
Loans:
- ------
NTS/Virginia First mortgage on approximately Prime 07/31/97
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 2,207 acres of residential land Gross
and improvements thereon Receipts
located in Fredericksburg, (a)(b)
Virginia, known as Fawn Lake
NTS/Lake Forest First mortgage on approximately 17% of 07/31/97
II Residential 532 acres of residential land Gross
Corporation in Louisville, Kentucky, known Receipts
as Lake Forest (a)(b)
Orlando Lake First mortgage on approximately 17% of 01/31/98
Forest Joint 398 acres of residential land Gross
Venture in Orlando, Florida known as Receipts
Orlando Lake Forest (c)
(a) Effective July 1, 1994, these Mortgage Loans are paying interest at
the greater of 17% of Gross Receipts or 4.42% of the average
outstanding loan balance.
(b) These Mortgage Loans included a provision for Gross Receipts Interest
through June 30, 1994.
(c) This Mortgage Loan pays interest at the greater of 17% of Gross
Receipts or 6.46% of the average outstanding loan balance.
- 32 -
<PAGE>
4. Mortgage Loans Receivable, net - Continued
--------------------------------------------
Total Balance Interest
Senior Outstanding Commitment Receivable
Liens At Face Amount At Fees At
12/31/96 At 12/31/96 12/31/96(j) Received 12/31/96
-------- ----------- ----------- -------- --------
1) Earning
-------
Loans:
- ------
Temporary
- ---------
Mortgage Loan:
- --------------
NTS/Virginia $1,998,850 $ 2,500,000 $ 1,998,850 $ 20,000 $ 30,466
Development
Company
Mortgage Loans:
- ---------------
NTS/Virginia 243,393 30,000,000 28,966,245 200,000 819,803
Development (d) (f)
Company
NTS/Lake Forest 4,166,187 28,000,000 25,857,472 250,000 607,885
II Residential (e) (g)
Corporation
Orlando Lake -- 14,000,000 7,126,366 -- 131,344
Forest Joint (h) (i)
Venture ___________ __________ _________ ___________
Total Earning
Loans $74,500,000 $63,948,933 $ 470,000 $1,589,498
========== ========== ========= =========
(d) Senior lien applies to approximately 22 acres securing the first
mortgage which are subordinated to an unaffiliated lender.
(e) Senior liens apply to approximately 180 acres securing the first
mortgage which are subordinated to unaffiliated lenders.
(f) NTS Guaranty Corporation guarantees up to $2 million of outstanding
debt exceeding $18 million.
(g) NTS Guaranty Corporation guarantees up to $2,416,500 of outstanding
debt exceeding $22 million.
(h) An Affiliate of the Fund's Sponsor participates with the Fund
regarding this Mortgage Loan. As of December 31, 1996, the Fund's
ownership percentage was approximately 63%.
(i) The carrying amount of this Mortgage Loan is net of an unaccreted
discount of approximately $1,127,407.
(j) The carrying amount of the mortgage loans receivable at December 31,
1996 is net of any unamortized commitment fees.
- 33 -
<PAGE>
4. Affiliated Mortgage Loans Receivable, net - Continued
-----------------------------------------------------
Property Pledged Interest Maturity
Borrower as Collateral Rate Date
-------- ------------- ---- ----
2) Non-Earning Loans:
- ---------------------
Temporary Mortgage
- ------------------
Loans:
- ------
Orlando Lake Pledge by both general partners Prime Demand
Forest Joint of their partnership interests + 2%
Venture in Orlando Lake Forest Joint (k)
Venture located in Orlando,
Florida; a pledge of 390 shares
of the Class A common stock in
NTS/Virginia Development Company,
NTS Guaranty Corporation
guarantees the loan
Total Balance Interest
Senior Outstanding Commitment Receivable
Liens At Face Amount At Fees At
12/31/96 At 12/31/96 12/31/96 Received 12/31/96
-------- ----------- -------- -------- --------
Temporary
- ---------
Mortgage Loan:
- --------------
Orlando Lake $13,086,004 $ 7,818,000 $ 3,838,831 $ 150,000 $ --
Forest Joint (l) (m) (n) (k)
Venture
Total Non
Earning Loans $ 7,818,000 $ 3,838,831 $ 150,000 $ --
========== ========== ======== =========
(k) The Orlando Lake Forest Joint Venture has entered into a forbearance
agreement with the Fund whereby, effective April 1, 1995, no interest
will be due on these loans through January 31, 1998. The Fund has
discontinued accruing interest from the Temporary Mortgage Loan to
the Orlando Lake Forest Joint Venture until the interest payment is
received. Approximately $1,553,000 of interest remains due to the
Fund on this loan but is not accrued in the Fund's financial
statements.
(l) Total senior liens include the Fund's 63% interest in the lien.
(m) NTS/Virginia Development Company (Fawn Lake) and NTS/Lake Forest II
Residential Corporation (Lake Forest) participate with the Fund
regarding the Temporary Mortgage Loan. Their percentage ownership
as of December 31, 1996 is 17.651% and 19.125%, respectively.
(n) The Fund has established a $1,500,000 loan loss reserve as of
December 31, 1996. The Fund has discontinued accruing interest from
the Temporary Mortgage Loan to the Orlando Lake Forest Joint Venture
until the interest payment is received. Approximately $1,553,000 of
interest remains due to the Fund on this loan but is not accrued in
the Fund's financial statements.
- 34 -
<PAGE>
4. Affiliated Mortgage Loans Receivable, net - Continued
---------------------------------------------------
Reconciliation of Affiliated Mortgage Loans Receivable for the year ended:
--------------------------------------------------------------------------
Balance at December 31, 1993 $52,614,695
Additions:
Mortgage Loans $ 4,056,326
Temporary Mortgage Loans --
Amortization of loan fees 117,930 4,174,256
-----------
Reductions:
Mortgage Loans (4,305,330)
Temporary Mortgage Loans (5,224)
Mortgage Loan written-off (241,145)
Loan fees received (15,000) (4,566,699)
----------- -----------
Balance at December 31, 1994 $52,222,252
Additions:
Mortgage Loans $ 20,113,201
Temporary Mortgage Loans 1,073,953
Accretion of discount 125,029
Amortization of loan fees -- 21,312,183
----------
Reductions:
Mortgage Loans (6,177,976)
Temporary Mortgage Loans (2,041,898)
Mortgage Loan written-off (85,458)
Loan fees received (20,000) (8,325,332)
----------- ------------
Balance at December 31, 1995 $65,209,103
Additions:
Mortgage Loans $ 9,371,032
Temporary Mortgage Loans 1,191,918
Accretion of discount 148,472
Amortization of loan fees 20,000 10,731,422
-----------
Reductions:
Mortgage Loans (6,692,948)
Temporary Mortgage Loans (1,406,416)
Mortgage Loan written-off (53,397)
Loan fees received -- (8,152,761)
---------- -----------
Balance at December 31, 1996 $67,787,764
==========
Reserves for Loan Losses:
Balance at December 31, 1993 $ 1,730,000
Additions charged to Expenses $ 150,000
Deduction for Mortgage Loan written-off (241,145) (91,145)
---------- ---------
Balance at December 31, 1994 $ 1,638,855
Additions charged to Expenses $ --
Deduction for Mortgage Loan written-off (85,458) (85,458)
---------- -----------
Balance at December 31, 1995 $ 1,553,397
Additions charged to Expenses $ --
Deduction for Mortgage Loan written-off (53,397) (53,397)
--------- -----------
Balance at December 31, 1996 $ 1,500,000
==========
- 35 -
<PAGE>
5. Reserves for Loan Losses
------------------------
Reserves for loan losses are based on management's evaluation of the
borrower's ability to meet its obligation by comparing the mortgage note
receivable balance with the discounted value of estimated future cash
flows as well as considering current and future economic conditions.
Reserves are based on estimates and ultimate losses could differ
materially from the amounts assumed in arriving at the reserve for
possible loan losses reported in the financial statements. These
estimates are reviewed periodically and, as adjustments become
necessary, they are reported in earnings in the period in which they
become known. On a regular basis, management reviews each mortgage loan
in the Fund's portfolio including an assessment of the recoverability of
the individual mortgage loans. As of December 31, 1996, the Fund has a
loan loss reserve regarding the Temporary Mortgage Loan to the Orlando
Lake Forest Joint Venture (with an outstanding balance of $3,838,831 as
of December 31, 1996) amounting to $1,500,000. Certain of the Fund's
mortgage loans are guaranteed by NTS Guaranty Corporation, an Affiliate
of the Fund's Sponsor (see Note 9). The Fund has not considered this
guarantee when determining future cash flows and the loan loss reserve.
6. Notes Payable
-------------
Notes payable consist of the following:
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 $12,278,000 $13,086,000
Note payable to a bank in the amount
of $2,500,000, bearing interest at
the Prime Rate plus 3/4%, payable
monthly, due July 31, 1997, secured by
approximately 187 acres of residential
land and improvements thereon 1,998,850 1,063,873
---------- ----------
$14,276,850 $14,149,873
========== ==========
The Prime Rate was 8 1/4% and 8 1/2% at December 31, 1996 and 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.
The Fund's Sponsor is working with several lenders, including the Fund's
existing creditors, to refinance the Fund's debt which will mature
within the next twelve months. While management can provide no assurance
that these negotiations will be successful, it is their belief that,
based upon discussions with the various lenders, such refinancing will
be accomplished prior to the respective maturity dates.
- 36 -
<PAGE>
7. Gross Receipts and Supplemental Interest Income
-----------------------------------------------
Gross Receipts Interest is recognized with respect to a Mortgage Loan
secured by real estate held for sale in the ordinary course of the
borrower's business. Gross Receipts Interest is an amount equal to 5% of
the borrower's Gross Receipts, as defined in the Fund's Prospectus, from
the sale of the underlying real estate during the term of the mortgage
loan. Gross Receipts Interest is reported as earned on the accrual basis
of accounting. Effective July 1, 1994, none of the Fund's Mortgage Loans
provided for Gross Receipts Interest.
8. Commitments and Contingencies
-----------------------------
The Fund has commitments to extend credit made in the normal course of
business that are not reflected in the financial statements. At December
31, 1996, the Fund had outstanding funding commitments under standby
letters of credit aggregating $296,597: Orlando Lake Forest Joint
Venture $91,921; NTS/Virginia Development Co. $204,676. These
outstanding funding commitments are part of the maximum funding amount
of the mortgage loans. Committed undisbursed loans were approximately
$4,591,000 at December 31, 1996.
In July 1994, the Fund was named as a defendant in a complaint
originally filed by Jeno Paulucci & Silver Lakes I, Inc.in August 1992
against NTS Corporation (the Fund's Sponsor) and various Affiliates of
the Fund's Sponsor. The terms of the settlement agreement are
confidential. However, as no monetary awards were assessed against or
are payable by the Fund under the agreement, it is not anticipated that
the settlement will have a material impact on the Fund's financial
position or results of operations.
9. Guaranties to the Fund
----------------------
NTS Guaranty Corporation (the "Guarantor"), an Affiliate of the Sponsor,
has agreed to provide the following guaranties to the Fund:
Junior Mortgage Loan Guaranty
-----------------------------
The Guarantor guarantees the payment to the Fund, on a timely basis, of
the Principal (as defined in the Prospectus) of all Junior Mortgage
Loans and Temporary Mortgage Loans made by the Fund to Affiliated
Borrowers. The Guarantor's obligation is limited to the Principal
balance outstanding on the Junior Mortgage Loan or Temporary Mortgage
Loan and does not include the Interest Reserve, as defined in the
Prospectus. This guaranty will not apply to Junior Mortgage Loans or
Temporary Mortgage Loans made to Non-Affiliated Borrowers.
On October 19, 1992, the Fund notified the Orlando Lake Forest Joint
Venture (the "Joint Venture") that the Joint Venture is in payment
default regarding the Fund's Temporary Mortgage Loan to the Joint
Venture. This default gives the Fund the right to pursue the Guarantor
for its guaranty. The Fund's Board of Directors continues to evaluate
the collectability of the guaranty. The Board is also concerned about
the possible detrimental effects that the collection proceedings may
have on the Fund's other loans to other Affiliated Borrowers. The Board
has concluded that it is in the best interest of the Fund and its
Stockholders to continued to pursue the work-out plan to both preserve
the assets of the Fund and support the viability of the projects to
which it has outstanding loans.
- 37 -
<PAGE>
9. Guaranties to the Fund - Continued
----------------------------------
Purchase Price Guaranty
-----------------------
The Guarantor has guaranteed that investors of the Fund will receive,
over the life of the Fund, aggregate distributions from the Fund (from
all sources) in an amount at least equal to their Original Capital
Contributions, as defined in the Fund's Prospectus.
The liability of the Guarantor under the above guaranties is expressly
limited to its assets and its ability to draw upon a $10 million demand
note receivable from Mr. J.D. Nichols, Chairman of the Board of
Directors of the Sponsor. There can be no assurance that Mr. Nichols
will, if called upon, be able to honor his obligation to the Guarantor.
The total amounts guaranteed by the Guarantor are in excess of its net
worth, and there is no assurance that the Guarantor will be able to
satisfy its obligation under these guaranties. The Guarantor may in the
future provide guaranties for other Affiliates of the Fund.
- 38 -
<PAGE>
10. Dividends Paid and Payable
--------------------------
Dividends declared for the periods ended December 31, 1994, 1995 and
1996 were as follows:
Average
Date Date of Date Outstanding Amount
Declared Record (1) Paid Shares Per Share Amount
-------- ---------- -------- ----------- --------- --------
01/28/94 01/31/94 02/28/94 3,187,333 $ .06 $ 191,240
01/28/94 02/28/94 03/28/94 3,187,333 .06 191,239
01/28/94 03/31/94 04/28/94 3,187,333 .06 191,240
01/28/94 04/20/94 05/28/94 3,187,333 .03 95,618
01/28/94 05/31/94 06/28/94 3,187,333 .03 95,619
01/28/94 06/30/94 07/28/94 3,187,333 .03 95,619
01/28/94 07/31/94 08/29/94 3,187,333 .03 95,619
01/28/94 08/31/94 09/29/94 3,187,333 .03 95,619
01/28/94 09/30/94 10/28/94 3,187,333 .03 95,620
01/28/94 10/31/94 11/29/94 3,187,333 .03 95,620
01/28/94 11/30/94 12/29/94 3,187,333 .03 95,620
01/28/94 12/31/94 01/27/95 3,187,333 .04 127,493
----- ---------
Total dividends declared in 1994 $ .46 $1,466,166
====== =========
03/09/95 01/31/95 02/27/95 3,187,333 $ .03 $ 95,620
03/09/95 02/28/95 03/28/95 3,187,333 .03 95,620
03/09/95 03/31/95 04/27/95 3,187,333 .03 95,620
03/09/95 04/30/95 05/26/95 3,187,333 .03 95,620
03/09/95 05/31/95 06/27/95 3,187,333 .01 31,873
03/09/95 06/30/95 07/27/95 3,187,333 .01 31,873
03/09/95 07/31/95 08/25/95 3,187,333 .01 31,873
03/09/95 08/31/95 09/26/95 3,187,333 .01 31,873
03/09/95 09/30/95 10/26/95 3,187,333 .01 31,873
03/09/95 10/31/95 11/29/95 3,187,333 .01 31,873
03/09/95 11/30/95 12/26/95 3,187,333 .01 31,873
03/09/95 12/31/95 01/26/96 3,187,333 .01 38,250
----- ---------
Total dividends declared in 1995 $ .20 $ 643,841
===== =========
03/12/96 03/31/96 04/15/96 3,187,333 $ .045 $ 143,432
03/12/96 06/30/96 07/19/96 3,187,333 .045 143,432
06/27/96 09/30/96 10/18/96 3,187,333 .045 143,432
06/27/96 12/31/96 01/27/97 3,187,333 .055 175,305
----- -------
Total dividends declared in 1996 $ .190 $ 605,601
==== ========
It is the Fund's policy to distribute to its Stockholders an amount equal
to at least 95% of taxable income. A portion of the dividends paid during
a subsequent year may be allocable to taxable income earned in the prior
year. For 1993, 1994 and 1995, dividends to Stockholders represent
ordinary income.
The continued needs of the projects to which the Fund has outstanding
loans may significantly reduce the Fund's cash flows. Therefore, the
Fund's Board of Directors has determined to terminate the Fund's
quarterly distribution for the foreseeable future effective as of the
first quarter of 1997.
(1) Cash dividends vary based upon the date of stockholder admittance.
- 39 -
<PAGE>
11. Unaudited Quarterly Financial Data
----------------------------------
Quarters Ended
--------------------
1996 March 31 June 30 September 30 December 31 Total
---- ---------- ---------- ---------- ----------- ----------
Total revenues $ 768,848 $ 847,287 $ 843,784 $ 845,076 $3,304,995
Total expenses 556,974 661,440 645,275 633,597 2,447,286
---------- ---------- ---------- ---------- ----------
Income before
income taxes 211,874 235,847 198,509 211,479 857,709
Income tax expense 1,850 1,850 1,850 1,850 7,400
---------- ---------- ---------- ---------- ----------
Net income $ 210,024 $ 233,997 $ 196,659 $ 209,629 $ 850,309
========== ========== ========== ========== ==========
Net income per
share of common
stock $ .07 $ .07 $ .06 $ .07 $ .27
========== ========== ========== ========== ==========
1995 March 31 June 30 September 30 December 31 Total
- ------ ---------- ---------- ---------- ---------- ----------
Total revenues $ 640,705 $ 751,340 $ 741,441 $ 751,166 $2,884,652
Total expenses 418,094 520,429 522,330 555,465 2,016,318
---------- ---------- ---------- ---------- ----------
Income before
income taxes 222,611 230,911 219,111 195,701 868,334
Income tax expense 2,500 2,500 2,500 2,500 10,000
---------- ---------- ---------- ---------- ----------
Net income $ 220,111 $ 228,411 $ 216,611 $ 193,201 $ 858,334
========== ========== ========== ========== ==========
Net income per
share of common
stock $ .07 $ .07 $ .07 $ .06 $ .27
========== ========== ========== ========== ==========
- 40 -
<PAGE>
12. Subsequent Events
-----------------
On February 12, 1997, the Fund entered into a letter of intent (the
Letter of Intent) with NTS Corporation and its Affiliates, NTS
Development Company, Fawn Lake, and Lake Forest regarding the Fund's
loans to Fawn Lake and Lake Forest. The Letter of Intent provided for,
among other things, a restructuring of the Fund's loans to Fawn Lake
and Lake Forest. The Letter of Intent contemplates that ownership of
the properties will be transferred to the Fund, which expects to
continue the development to completion of such properties and
ultimately, their orderly sale.
The parties to the Letter of Intent agreed to consider a general
restructuring of the relationship among the Fund, NTS Corporation and
its various Affiliates. The Fund has not yet determined the method by
which it will acquire control of the projects.
Generally Accepted Accounting Principles require that transactions as
contemplated by the Letter of Intent be recorded at fair market value.
Management can not determine at this time whether or not such
transactions, if completed, will result in a loss. In addition, in
connection with the ongoing development of the projects, it is likely
that the Fund will be required to change its tax status from a Real
Estate Investment Trust to a conventional corporation.
The Fund, as owner of the Fawn Lake and Lake Forest projects, expects
that it will continue development of the projects and the orderly sale
of lots, golf course memberships and ancillary services through
sell-out, as well as the sale of the Fawn Lake Country Club, when
appropriate. As owner, the Fund will be responsible for continuing
development, operations and marketing costs through the remaining lives
of the projects and it may be necessary for the Fund to borrow
additional funds to complete the development. While the Fund believes
that such funds will be more readily available if it owns the projects,
it is not certain that the Fund will be able to borrow the funds
necessary to complete the projects.
The Letter of Intent also contemplates that NTS Development Company, or
another subsidiary or affiliate of NTS Corporation (the "Manager"),
will enter into a management agreement (the "Management Agreement")
with the Fund pursuant to which the Manager will, as authorized agent
for the Fund, provide exclusive management, development, marketing and
sales efforts and personnel to the Fund, and take all other actions
necessary to manage the development of the projects to completion and
the sale of lots, golf memberships, ancillary services and the Fawn
Lake Country Club. The terms of the Management Agreement have not yet
been finalized. The parties to the Letter of Intent are presently
negotiating the definitive agreements contemplated by the Letter of
Intent but have not yet agreed on final terms.
- 41 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of NTS Guaranty Corporation:
We have audited the accompanying balance sheets of NTS Guaranty Corporation (a
Kentucky corporation) as of December 31, 1996 and 1995. These balance sheets are
the responsibility of NTS Guaranty Corporation's management. Our responsibility
is to express an opinion on these balance sheets based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheets are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheets. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of NTS Guaranty Corporation as of
December 31, 1996, and 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
March 24, 1997
- 42 -
<PAGE>
NTS GUARANTY CORPORATION
(A KENTUCKY CORPORATION)
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
------------ -----------
Cash $ 100 $ 100
------------ ------------
$ 100 $ 100
============ ===========
STOCKHOLDER'S EQUITY
Common stock, no par value;
100 shares issued and outstanding $ 10 $ 10
Additional paid-in capital 10,000,090 10,000,090
------------ -----------
10,000,100 10,000,100
Less non-interest bearing demand
note receivable from a majority
stockholder of NTS Corporation (10,000,000) (10,000,000)
------------ ------------
$ 100 $ 100
============ ===========
NOTES TO BALANCE SHEETS
-----------------------
1. Significant Accounting Policies
-------------------------------
A. Organization
------------
NTS Guaranty Corporation (the "Guarantor"), a Kentucky corporation,
was formed in February 1987 and is an affiliate of NTS Corporation.
NTS Corporation is the Sponsor of the NTS Mortgage Income Fund (the
"Fund"). The balance sheets include only those assets and liabilities
which relate to the Guarantor. The Guarantor is authorized to issue
up to 2,000 shares of common stock with no par value. There are 100
shares issued and outstanding which were purchased by Mr. J. D.
Nichols, Chairman of the Board of Directors of the Sponsor and of the
Fund. In addition, Mr. Nichols has given the Guarantor a non-interest
bearing demand note receivable for $10,000,000, the receipt of which
is included in additional paid-in capital. Expenses (consisting
mostly of state taxes and licenses) of the Guarantor totalling
approximately $15 and $45 for the years ended December 31, 1996 and
1995, respectively, were paid by an affiliate of the Sponsor and
therefore no income statement is presented. These expenses will not
be reimbursed to the affiliate.
B. Use of Estimates in Preparation of Finanacial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
- 43 -
<PAGE>
2. Commitments
-----------
The Guarantor has made commitments to the Fund as follows:
A. Junior Mortgage Loan Guaranty
-----------------------------
The Guarantor guarantees the payment to the Fund, on a timely basis,
of the Principal (as defined in the Fund's Prospectus) of all Junior
Mortgage and Temporary Mortgage Loans made by the Fund to Affiliated
Borrowers. The Guarantor's obligation is limited to the Principal
balance outstanding on the Junior Mortgage Loan or Temporary Mortgage
Loan and does not include the Interest Reserve as defined in the
Fund's Prospectus. This guaranty will not apply to Junior Mortgage
Loans or Temporary Mortgage Loans made to Non-Affiliated Borrowers.
As of December 31, 1996, the Principal balance outstanding on Junior
Mortgage Loans and Temporary Mortgage Loans guaranteed by the
Guarantor was $8,070,602.
The Temporary Mortgage Loan to the Orlando Lake Forest Joint Venture
(with an overall outstanding balance of $6,071,752 as of December 31,
1996) is in default. The Fund's Board of Directors has not called
upon the guaranty at this time. Based on current facts, management
believes that the Fund will continue to pursue the workout plan
regarding the default.
B. Purchase Price Guaranty
-----------------------
The Guarantor has guaranteed that Investors of the Fund will receive,
over the life of the Fund, aggregate distributions from the Fund
(from all sources) in an amount at least equal to their Original
Capital Contributions, as defined in the Fund's Prospectus. As of
December 31, 1996, the Fund has raised approximately $63,690,000 and
has paid distributions of approximately $23,141,000.
C. Mortgage Loan Guaranties
------------------------
The Guarantor has guaranteed the payment, up to $2,000,000, of the
outstanding principal amount of the Mortgage Loan to NTS/Virginia
Development Company which exceeds $18,000,000. The Guarantor has
guaranteed the payment, up to $2,416,500, of the outstanding
principal amount of the Mortgage Loan to NTS/Lake Forest II
Residential Corporation which exceeds $22,000,000. As of December 31,
1996, the outstanding principal balances of the NTS/Virginia
Development Company Mortgage Loan and the NTS/Lake Forest II
Residential Corporation Mortgage Loan were $28,966,245 and
$25,857,472, respectively.
The liability of the Guarantor under the above guaranties and
obligations is expressly limited to its assets and its ability to
draw upon a $10 million demand note receivable from Mr. J. D.
Nichols. Mr. Nichols has contingent liabilities which have arisen in
connection with the acquisition of properties by himself or his
affiliates. There can be no assurance that Mr. Nichols will, if
called upon, be able to honor his obligation to the Guarantor. The
total amounts guaranteed by the Guarantor are in excess of its net
worth, and there is no assurance that the Guarantor will be able to
satisfy its obligation under these commitments. The Guarantor may in
the future provide guaranties to other Affiliates of the Fund.
- 44 -
<PAGE>
3. Subsequent Event
----------------
On February 12, 1997, the Fund entered into a letter of intent (the
Letter of Intent) with NTS Corporation and its Affiliates, NTS
Development Company, Fawn Lake and Lake Forest regarding the Fund's loans
to Fawn Lake and Lake Forest. The Letter of Intent provided for, among
other things, a restructuring of the Fund's loans to Fawn Lake and Lake
Forest. The Letter of Intent contemplates that ownership of the
properties will be transferred to the Fund, which expects to continue the
development to completion of such properties and ultimately, their oderly
sale.
The parties of the Letter of Intent agreed to consider a general
restructuring of the relationship among the Fund, NTS Corporation and its
various Affiliates. The Fund has not yet determined the method by which
it will acquire control of the projects.
- 45 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of NTS/Lake Forest II Residential Corporation:
We have audited the accompanying balance sheets of NTS/Lake Forest II
Residential Corporation (a Kentucky corporation) as of December 31, 1996 and
1995, and the related statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NTS/Lake Forest II Residential
Corporation as of December 31, 1996 and 1995 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
March 24, 1997
- 46 -
<PAGE>
<TABLE>
NTS/LAKE FOREST II RESIDENTIAL CORPORATION
------------------------------------------
BALANCE SHEETS
--------------
AS OF DECEMBER 31, 1996 AND 1995
--------------------------------
<CAPTION>
1996 1995
------------ ----------
ASSETS
<S> <C> <C>
Cash $ 165,818 $ 201,928
Membership initiation fees and other accounts
receivable 1,256,542 1,724,974
Notes receivable 789,303 1,677,064
Notes receivable - affiliate
Earning loan 562,826 1,734,518
Non-earning loan, net of a loan loss
reserve of $1,161,207 (1996) and $765,932
(1995) -- 395,275
Inventory 29,870,625 25,748,612
Property & equipment, net of accumulated
depreciation of $324,968 (1996) and
$265,384 (1995) 184,331 176,453
Prepaid and other assets, net of accumulated
amortization of $190,070 (1996) and $168,553
(1995) 336,673 311,117
----------- -----------
Total assets $33,166,118 $31,969,941
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses
including retainage of $26,396 (1996) and
$39,939 (1995) $ 1,573,684 $ 832,165
Advances from an affiliate -- 1,669,346
Notes and mortgage loans payable (Note 5) 31,349,964 28,628,987
Lot deposits 8,498 10,500
Deferred revenue 68,786 77,224
----------- -----------
Total liabilities 33,000,932 31,218,222
----------- -----------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, no par value, 2,000 shares
authorized, 100 shares issued and
outstanding 1,000 1,000
Retained earnings 164,186 750,719
----------- -----------
Total stockholders' equity 165,186 751,719
----------- -----------
Total liabilities and stockholders'
equity $33,166,118 $31,969,941
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
- 47 -
<PAGE>
<TABLE>
NTS/LAKE FOREST II RESIDENTIAL CORPORATION
------------------------------------------
STATEMENTS OF OPERATIONS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
----------------------------------------------------
<CAPTION>
1996 1995 1994
---------- ----------- ----------
Revenues:
<S> <C> <C> <C>
Lot sales, net of discounts $ 3,307,163 $ 4,329,717 $ 4,110,735
Interest and other income 243,166 460,944 397,950
Interest income - affiliate 76,807 116,371 109,112
----------- ----------- -----------
3,627,136 4,907,032 4,617,797
Cost of sales 2,477,330 3,161,765 2,735,786
----------- ----------- -----------
Gross profit 1,149,806 1,745,267 1,882,011
Expenses:
Cost reimbursement (Note 6) 653,635 835,033 --
Marketing and development fee -- -- 382,789
(Note 6)
General and administrative 85,651 283,690 278,753
Interest 578,344 691,813 681,046
Gross receipts interest (Note 6) 1,918 5,355 61,555
Depreciation and amortization 21,516 62,497 129,034
Provision for loan losses 395,275 465,932 --
----------- ----------- -----------
1,736,339 2,344,320 1,533,177
----------- ----------- -----------
Net income (loss) $ (586,533) $ (599,053) $ 348,834
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
- 48 -
<PAGE>
<TABLE>
NTS/LAKE FOREST II RESIDENTIAL CORPORATION
------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
----------------------------------------------------
<CAPTION>
Common Retained
Stock Earnings Total
----- -------- -----
<S> <C> <C> <C>
Balances at December 31, 1993 $ 1,000 $ 1,000,938 $ 1,001,938
Net income -- 348,834 348,834
----------- ----------- ----------
Balances at December 31, 1994 1,000 1,349,772 1,350,772
Net loss -- (599,053) (599,053)
----------- ----------- -----------
Balances at December 31, 1995 1,000 750,719 751,719
Net loss -- (586,533) (586,533)
----------- ----------- -----------
Balances at December 31, 1996 $ 1,000 $ 164,186 $ 165,186
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
- 49 -
<PAGE>
<TABLE>
NTS/LAKE FOREST II RESIDENTIAL CORPORATION
------------------------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
----------------------------------------------------
<CAPTION>
1996 1995 1994
------------ ------------ -----------
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $(586,533) $(599,053) $ 348,834
Adjustments to reconcile net income to net
cash from (used for) operating activities:
Depreciation and amortization 21,516 62,497 129,034
Provision for loan losses 395,275 465,932 --
Accrued interest on performance bonds (2,692) (1,343) --
Changes in assets and liabilities:
Membership initiation fees and other 468,432 (504,271) (405,101)
accounts receivable
Notes receivable 887,761 377,661 672,917
Inventory (4,062,429) 731,035 (1,205,288)
Prepaid and other assets (36,589) (51,000) (105,500)
Accounts payable and accrued expenses 741,519 (331,493) 231,112
Lot deposits (2,002) (47,024) (26,740)
Deferred revenue (8,438) 12,367 43,440
----------- ----------- -----------
Net cash from (used for) operating activities (2,184,180) 115,308 (317,292)
----------- ----------- -----------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES
Property and equipment (67,461) (3,777) (76,450)
Notes receivable - affiliate 1,171,692 (59,442) (108,013)
----------- ----------- -----------
Net cash from (used for) investing activities 1,104,231 (63,219) (184,463)
----------- ----------- -----------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES
Proceeds from mortgage loans 4,650,096 5,055,933 4,474,634
Repayments on mortgage loans (1,125,296) (4,670,797) (3,099,776)
Proceeds from notes payable -- -- 39,124
Repayments on notes payable (12,010) (129,563) (137,553)
Net repayments under warehouse line of credit
agreements (791,813) (164,488) (594,288)
Prepaid and other assets (7,792) (75,948) (33,288)
Advances (to) from an affiliate (1,669,346) 55,696 (157,646)
----------- ----------- -----------
Net cash from financing activities 1,043,839 70,833 491,207
----------- ----------- -----------
Net increase (decrease) in cash (36,110) 122,922 (10,548)
CASH, beginning of period 201,928 79,006 89,554
----------- ----------- -----------
CASH, end of period $ 165,818 $ 201,928 $ 79,006
=========== =========== ===========
Cash paid during period for:
Interest, net of amounts capitalized $ 259,012 $ 569,266 $ 688,217
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
- 50 -
<PAGE>
NTS/LAKE FOREST II RESIDENTIAL CORPORATION
------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. Significant Accounting Policies
-------------------------------
A) Organization
------------
NTS/Lake Forest II Residential Corporation (Lake Forest) was
organized on July 6, 1988 as a Kentucky corporation. Lake Forest is
an Affiliate under common control with NTS Corporation, the Sponsor
of the NTS Mortgage Income Fund. The NTS Mortgage Income Fund (the
Fund) is the primary creditor of Lake Forest. Lake Forest is in the
process of developing approximately 726 acres of land located in
Louisville, Kentucky into a single-family residential community and a
country club with a championship golf course for the purpose of
selling such residential lots and country club memberships. Lake
Forest will have amenities consisting of a clubhouse, pools, tennis
courts, recreation fields and several lakes. As of December 31, 1996,
approximately 480 acres have been developed.
These financial statements do not reflect the impact, if any, of the
proposed transaction discussed in Note 8.
B) Revenue Recognition
-------------------
Lake Forest recognizes revenue and related costs from lot sales using
the accrual method in accordance with generally accepted accounting
principles, which is when payment has been received and title,
possession and other attributes of ownership have been transferred to
the buyer, and Lake Forest is not obligated to perform significant
activities after the sale. Lake Forest generally requires a minimum
down payment of at least 10% of the sales price of the lot.
C) Reserves for Loan Losses
------------------------
Interest income is reported as earned on the accrual basis of
accounting. If Lake Forest has any reason to doubt the collectability
of any principal and interest amounts due pursuant to the terms of
the notes and accounts receivable, appropriate reserves are
established for any principal and accrued interest amounts deemed
unrealizable. Notes receivable in the accompanying balance sheets are
presented at lower of cost or market. The amounts Lake Forest will
ultimately realize could differ from the amounts assumed in arriving
at the reserve for loan losses reported in the financial statements.
D) Inventory
---------
Inventory is stated at the lower of cost or net realizable value.
Inventory includes all direct costs of land, land development, and
amenities, including interest, real estate taxes, and certain other
costs incurred during the development period, less amounts charged to
cost of sales. Inventory costs are allocated to individual lots sold
using the relative sales values. The use of the relative sales value
method to record cost of sales requires the use of estimates of sales
values, development costs and absorption periods over the life of the
project. Given the long-term nature of the project and inherent
economic volatility of residential real estate, it is reasonably
possible that such estimates could change in the near term. Any
changes in estimates would be accounted for prospectively over the
life of the project.
- 51 -
<PAGE>
1. Significant Accounting Policies - Continued
-------------------------------------------
E) Tax Status
----------
Lake Forest has elected, for income tax purposes, to include its
income with that of its stockholders, an S-Corporation election.
Accordingly, no provision for income taxes is included in the
accompanying financial statements.
F) Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
G) New Accounting Pronouncement
----------------------------
Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, specifies circumstances in which certain
long-lived assets must be reviewed for impairment. If such review
indicates that the carrying amount of an asset exceeds the sum of its
expected future cash flows, the asset's carrying value must be
written down to fair market value. Application of this standard
during the year ended December 31, 1996 did not result in an
impairment loss.
H) Advertising
-----------
Lake Forest expenses advertising-type costs as incurred. Advertising
expense, a component of Cost Reimbursements (see Note 6), was
approximately $75,000 and $85,000 during the years ended December 31,
1996 and 1995, respectively. Advertising expense for the year ended
December 31, 1994 is a component of the Marketing and Development Fee
(see Note 6) and is not separately determinable.
I) Reclassification of 1995 Financial Statements
---------------------------------------------
Certain reclassifications have been made to the December 31, 1995
financial statements to conform with December 31, 1996
classifications. These classifications have no effect on previously
reported operations.
2. Member Initiation Fees and Other Accounts Receivable
----------------------------------------------------
Lake Forest Country Club (the "Country Club") membership initiation fees
receivable totalled approximately $870,000 and $1,530,000 as of December
31, 1996 and 1995, respectively. The receivable is net of a discount
recorded to allow for the present value of the receivables considering
the estimated timing of collections.
3. Notes Receivable
----------------
Notes receivable are secured by a first mortgage on lots sold to
individuals. The notes bear interest at the prevailing market rates at
the time the lots were sold. The majority of the notes are due between
five to seven years, monthly payments are based on a 30-year amortization
and the balance is due at the maturity date. As of December 31, 1996,
notes totalling $772,065 are pledged as security for notes payable to
banks under
- 52 -
<PAGE>
3. Notes Receivable - Continued
----------------------------
certain Warehouse Line of Credit Agreements. There are also $17,238 of
notes held by Lake Forest that are not pledged. Approximately $121,889,
$208,073, $68,617, $324,619 and $48,867 of the notes receivable balance
as of December 31, 1996 are due for the years ended December 1997 through
2001, respectively, with $17,238 due thereafter.
4. Inventory
---------
Inventory consists of the following as of December 31:
1996 1995
----------- ----------
Land held for future development,
under development and completed
lots $12,608,256 $11,674,237
Country club (net of membership
initiation fees) 10,568,113 7,648,039
Amenities 6,694,256 6,426,336
----------- -----------
$29,870,625 $25,748,612
=========== ===========
Lake Forest capitalized in inventory $1,184,137 and $1,123,366 of
interest and real estate taxes in 1996 and 1995, respectively. Interest
and real estate taxes incurred were $1,772,550 and $1,514,674 for the
years ended December 31, 1996 and 1995, respectively.
Inventory as reflected above includes $15,477,112, net of $4,908,999 of
Country Club membership initiation fees, of costs incurred to date for
the development of the Country Club. Pursuant to an agreement between the
Country Club and Lake Forest regarding the cost to develop the Country
Club, Lake Forest is to receive all initiation fees from membership sales
for a period not to exceed 12 years from the date of the agreement
(ending 2003). The remaining cost to be incurred for the current
projected Country Club operating deficit for the period covered by the
agreement is approximately $2,200,000 which is expected to be offset by
member initiation fees. During 1996, the Country Club operating deficit
was approximately $380,000 and was capitalized as a cost of inventory.
5. Notes and Mortgage Loans Payable (See Note 8)
---------------------------------------------
Notes and mortgage loans payable consist of the following as of December
31:
1996 1995
----------- ----------
Mortgage loan payable to the Fund in
the amount of $28,000,000 bearing
interest equal to the greater of 17%
of Gross Receipts or 4.42% of the
outstanding loan balance, due July 1,
1997, secured by inventory and a
subordinated first mortgage on
approximately 180 acres of land,
advances are made as needed for
project costs, generally principal
payments consist of approximately 83%
of the Gross Receipts of lot sales $25,857,472 $25,935,987
(Continued next page)
- 53-
<PAGE>
5. Notes and Mortgage Loans Payable (See Note 8) - Continued
---------------------------------------------------------
1996 1995
----------- ---------
Warehouse Line of Credit Agreements
with three banks bearing interest at
the Prime Rate + 1%, the Prime Rate +
3/4% and the Prime Rate + 1/2%, due
December 15, 1997 ($259,910),
September 30, 1997 ($240,569) and
February 28, 1997 ($815,956), secured
by notes receivable (see Note 3),
principal payments consist of
payments received from notes
receivable securing the obligation $ 1,316,437 $ 2,108,249
Mortgage loan payable in the amount
of $4,965,000, bearing interest at
the Prime Rate + 1%, due July 31,
1999, secured by the Lake Forest
Country Club golf course, 10 acres
of land upon which the clubhouse was
constructed and inventory, advances
are made as needed for project costs,
principal payments consist of 100% of
the Club's net membership fees prior
to the loan closing (September 1,
1995) and 95% of the Club's net
memberships after the loan closing 3,908,127 438,960
Mortgage loan payable in the amount
of $875,000, bearing interest at the
Prime Rate + 1%, due November 24,
1996, secured by inventory, advances
are made as needed for project costs,
principal payments consist of 85% of
gross proceeds of lot sales to builders
and 75% of the gross proceeds of the lot
sales to individuals 258,060 123,913
Equipment loan in the amount of
$38,961, bearing interest of 10.5%,
due October 1, 1997, secured by
equipment purchased for use at the
Country Club 9,870 21,878
---------- ----------
$31,349,964 $28,628,987
========== ==========
As of December 31, 1996, substantially all of the assets of Lake Forest
secure the above notes and mortgage loans payable.
The Prime Rate was 8 1/4% and 8 1/2% at December 31, 1996 and 1995
respectively.
The $259,910 Warehouse Line of Credit Agreement is guaranteed by NTS
Corporation.
- 54 -
<PAGE>
5. Notes and Mortgage Loans Payable (See Note 8) - Continued
---------------------------------------------------------
There is currently no readily determinable market value for the
$28,000,000 mortgage loan payable to the Fund given its unique and
affiliated nature. Based on the borrowing rates currently available to
Lake Forest for bank loans with similar terms and average maturities, the
fair value of all other debt instruments approximates the carrying value
for these debt instruments.
Lake Forest is working with several lenders, including existing
creditors, to refinance the debt which matures within the next twelve
months. While management can provide no assurance that these negotiations
will be successful, it is their belief that such financing will be
accomplished during fiscal 1997 or prior to the respective maturity
dates.
6. Related Party Transactions
--------------------------
Development and marketing activities in Kentucky, which include
accounting, are managed by NTS Residential Properties, Inc., a Kentucky
corporation (Residential), a wholly-owned subsidiary of NTS Development
Company. NTS Development Company is a Kentucky corporation and a
wholly-owned subsidiary of NTS Corporation, the Sponsor of the Fund.
These entities are under common control with Lake Forest. During fiscal
1994, pursuant to an agreement, Residential received 25% of the gross
proceeds of lot sales to individuals and 15% of the gross proceeds of lot
sales to builders as a fee for its service. The fee amounted to $382,789
for the year ended December 31, 1994. Subsequent to June 30, 1994, the
fee was no longer charged by Residential.
Lake Forest incurred expenditures with various affiliates for preliminary
planning, start-up, and construction overhead costs and has recorded
these expenditures as a cost of inventory. The amounts charged were
approximately $ 360,000, $459,000 and $112,500 for each of the three
years ended December 31, 1996, 1995 and 1994, respectively. In addition,
for 1996 and 1995, pursuant to an agreement effective July 1, 1994 with
an affiliate, reimbursements were made to Residential for actual
personnel, marketing and administrative costs as they relate to Lake
Forest of approximately $654,000 and $835,000, respectively. These
reimbursements are reflected as Cost Reimbursements in the accompanying
Statements of Operations.
In addition to the mortgage loan with the Fund, Lake Forest had the
following transactions with the Fund:
1996 1995 1994
-------- -------- -------
Regular interest - capitalized $893,864 $916,922 $859,745
Regular interest - expensed $264,788 $299,067 $325,578
Gross receipts interest $ -- $ -- $ 52,124
Letters of credit fees $ -- $ -- $ 3,295
Lake Forest has made advances in 1993 and 1992 to an affiliate in
connection with the expansion of the sewage treatment plant servicing the
project which is owned and operated by the affiliate. The advances are
due December 27, 1997 and bear interest at 6.74%. The amount outstanding,
including interest, at December 31, 1996 and 1995 was $562,826 and
$1,734,518, respectively. Interest income earned on the advances was
$76,807, $116,371 and $109,112 for the years ended December 31, 1996,
1995 and 1994, respectively.
- 55 -
<PAGE>
6. Related Party Transactions - Continued
--------------------------------------
As of December 31, 1995, Lake Forest had received advances from an
affiliate totalling $1,669,346. The advances bear interest at a rate
approximating the Prime Rate. Interest paid to the affiliate for the
years ended December 31,1996, 1995 and 1994 totalled $60,077, $146,976,
and $131,940 respectively. The advances were repaid during 1996.
As of December 31, 1996, Lake Forest has a participation agreement with
the Fund whereby Lake Forest has been assigned an interest in the Fund's
Temporary Mortgage Loan with the Orlando Lake Forest Joint Venture (the
"Joint Venture"). The loan is on a demand basis and is in default due to
the failure of the Joint Venture to pay the interest due on the loan.
Based on management's evaluation of the Joint Venture's future cash
flows, Lake Forest increased the loan loss reserve by $395,275 during
1996. The loan loss reserve is equal to the note amount. Reserves for
loan losses are based on management's evaluation of the borrower's
ability to meet its obligation as well as current and future economic
conditions. Reserves are based on estimates and ultimate losses may vary.
These estimates are reviewed periodically and, as adjustments become
necessary, they are reported in earnings in the period in which they
become known.
7. Commitments and Contingencies
-----------------------------
It is estimated that development of the remaining homeowners association
amenities will be substantially completed by December 2000. Based on
engineering studies and projections, Lake Forest will incur additional
costs, excluding interest, of approximately $420,000 during 2000 to
complete the homeowners association amenities.
Lake Forest has various letters of credit outstanding to governmental
agencies and utility companies totalling approximately $158,000.
8. Subsequent Event
----------------
On February 12, 1997, Lake Forest entered into a letter of intent (the
Letter of Intent) with the Fund and NTS Corporation and its Affiliates,
NTS Development Company and NTS/Virginia Development Company (Fawn Lake)
regarding the Fund's loans to Lake Forest and Fawn Lake. The Letter of
Intent provided for, among other things, a restructuring of the Fund's
loans to Fawn Lake and Lake Forest. The Letter of Intent contemplates
that ownership of the properties will be transferred to the Fund, which
expects to continue the development to completion of such properties and
ultimately, their orderly sale.
The parties of the Letter of Intent agreed to consider a general
restructuring of the relationship among the Fund, NTS Corporation and its
various Affiliates. The method by which the Fund will acquire control of
Lake Forest has not yet been determined.
Generally Accepted Accounting Principles require that transactions as
contemplated by the Letter of Intent be recorded at fair market value.
Management can not determine at this time whether or not such
transactions, if completed, will result in a loss.
The Fund, as owner of the Lake Forest project, expects that it will
continue development of the project and the orderly sale of lots, golf
course memberships and ancillary services through sell-out. As owner, the
Fund will be responsible for continuing development, operations and
marketing costs through the remaining life of the project and it may be
necessary for the Fund to borrow additional funds to complete the
development. While the Fund believes that such funds will be more readily
available if it owns the project, it is not certain that the Fund will be
able to borrow the funds necessary to complete the project.
- 56 -
<PAGE>
8. Subsequent Event - Continued
----------------------------
The Letter of Intent contemplates that NTS Development Company or another
subsidiary or affiliate of NTS Corporation (the "Manager"), will enter
into a management agreement (the "Management Agreement") with the Fund
pursuant to which the Manager will, as authorized agent for the Fund,
provide exclusive management, development, marketing and sales efforts
and personnel to the Fund, and take all other actions necessary to manage
the development of the project to completion and the sale of lots, golf
memberships and ancillary services. The terms of the Management Agreement
have not yet been finalized.
- 57 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders of NTS/Virginia Development Company:
We have audited the accompanying balance sheets of NTS/Virginia Development
Company (a Virginia corporation) as of December 31, 1996 and 1995, and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NTS/Virginia Development
Company as of December 31, 1996 and 1995 and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1996
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
March 24, 1997
- 58 -
<PAGE>
<TABLE>
<CAPTION>
NTS/VIRGINIA DEVELOPMENT COMPANY
--------------------------------
BALANCE SHEETS
--------------
AS OF DECEMBER 31, 1996 AND 1995
--------------------------------
1996 1995
------------ ---------
ASSETS
<S> <C> <C>
Cash $ 61,142 $ 48,466
Membership initiation fees and other accounts
receivables 512,473 670,861
Notes receivable 4,150,515 5,215,716
Non-earning note receivable - affiliate, net
of loan loss reserve of $1,071,713 (1996) and
$706,739 (1995) -- 364,974
Inventory 32,768,228 30,802,664
Property and equipment, net of accumulated
depreciation of $151,886 (1996) and $78,664
(1995) 307,213 231,227
Prepaid and other assets, net of amortization
of $758,297 (1996) and $658,615 (1995) 117,141 187,406
----------- -----------
Total assets $37,916,712 $37,521,314
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses,
including retainage of $ -0- (1996)
and $90,303 (1995) $ 1,669,753 $ 1,384,132
Advances from an affiliate 583,700 729,531
Notes and mortgage loans payable (Note 5) 35,245,593 34,369,132
Lot deposits and other liabilities 108,288 62,000
----------- -----------
Total liabilities 37,607,334 36,544,795
----------- -----------
Commitments and Contingencies (Note 7)
Stockholders' equity:
Class A common stock, no par value, 70,000
shares authorized, 910 shares issued and
outstanding 910 910
Class B common stock, no par value, 30,000
shares authorized, 90 shares issued and
outstanding 90 90
Retained earnings 308,378 975,519
----------- -----------
Total stockholders' equity 309,378 976,519
----------- -----------
Total liabilities and stockholders' equity $37,916,712 $37,521,314
</TABLE>
=========== ===========
The accompanying notes to financial statements are an integral part of these
balance sheets.
- 59 -
<PAGE>
<TABLE>
NTS/VIRGINIA DEVELOPMENT COMPANY
--------------------------------
STATEMENTS OF OPERATIONS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
----------------------------------------------------
<CAPTION>
1996 1995 1994
----------- ----------- -----------
Revenues:
<S> <C> <C> <C>
Lot sales, net of discounts $ 2,936,404 $ 3,073,548 $ 3,508,281
Interest and other income 479,733 516,898 485,903
----------- ----------- -----------
3,416,137 3,590,446 3,994,184
Cost of sales 1,875,642 1,978,369 2,097,208
----------- ----------- -----------
Gross profit 1,540,495 1,612,077 1,896,976
----------- ----------- -----------
Expenses:
Cost reimbursements (Note 6) 1,034,613 984,435 --
Marketing and development fee (Note 6) -- -- 505,950
General and administrative 111,220 77,210 100,469
Interest 530,011 592,786 611,128
Gross receipts interest (Note 6) 13,638 13,932 85,881
Depreciation and amortization 153,180 198,546 187,949
Provision for loan losses 364,974 406,739 --
----------- ----------- -----------
2,207,636 2,273,648 1,491,377
----------- ----------- -----------
Net income (loss) $ (667,141) $ (661,571) $ 405,599
</TABLE>
=========== =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
- 60 -
<PAGE>
<TABLE>
<CAPTION>
NTS/VIRGINIA DEVELOPMENT COMPANY
--------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
----------------------------------------------------
Common Retained
Stock Earnings Total
--------- ---------- ---------
<S> <C> <C> <C>
Balances at December 31, 1993 $ 1,000 $ 1,231,491 $ 1,232,491
Net income -- 405,599 405,599
----------- ----------- -----------
Balances at December 31, 1994 1,000 1,637,090 1,638,090
Net loss -- (661,571) (661,571)
----------- ----------- -----------
Balances at December 31, 1995 1,000 975,519 976,519
Net loss -- (667,141) (667,141)
----------- ----------- -----------
Balances at December 31, 1996 $ 1,000 $ 308,378 $ 309,378
=========== ========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
- 61 -
<PAGE>
<TABLE>
<CAPTION>
NTS/VIRGINIA DEVELOPMENT COMPANY
--------------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
----------------------------------------------------
1996 1995 1994
------------ ------------ ------------
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ (667,141) $ (661,571) $ 405,599
Adjustments to reconcile net income (loss) to
net cash from (used for) operating
activities:
Depreciation and amortization 153,180 198,546 187,949
Provision for loan losses 364,974 406,739 --
Accrued interest on Performance Bonds (413) (333) --
Changes in assets and liabilities:
Membership initiation fees and other
accounts receivable 158,388 (118,208) (91,339)
Notes receivable 1,065,200 221,701 269,523
Inventory (1,945,839) (5,334,859) (1,732,505)
Prepaid and other assets (13,132) (14,145) 45,065
Accounts payable and accrued expenses 285,624 778,072 (375,434)
Lot deposits and other liabilities 46,288 (5,000) (13,000)
------------ ------------ ------------
Net cash used for operating
activities (552,871) (4,529,058) (1,304,142)
------------ ------------ ------------
CASH FLOWS USED FOR INVESTING ACTIVITIES
Additions to property and equipment (149,209) (210,724) (99,167)
------------ ------------ ------------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES
Proceeds from mortgage loans 4,662,029 12,022,452 2,691,653
Repayments on mortgage loans (2,490,031) (6,122,937) (3,030,471)
Proceeds from notes payable 96,235 320,280 79,545
Repayments on notes payable (90,233) (179,947) (5,935)
Net repayments under warehouse line of credit
agreements (1,301,542) (120,773) (117,278)
Loan costs (15,871) (76,818) (5,304)
Advances (to) from an affiliate (145,831) (1,061,634) 1,791,165
------------ ------------ ------------
Net cash from financing activities 714,756 4,780,623 1,403,375
------------ ------------ ------------
Net increase in cash 12,676 40,841 66
CASH, beginning of period 48,466 7,625 7,559
------------ ------------ ------------
CASH, end of period $ 61,142 $ 48,466 $ 7,625
============ ============ ============
Cash paid during period for:
Interest, net of amounts capitalized $ 332,813 $ 147,867 $ 611,128
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
- 62 -
<PAGE>
NTS/VIRGINIA DEVELOPMENT COMPANY
--------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. Significant Accounting Policies
-------------------------------
A) Organization
------------
NTS/Virginia Development Company (Fawn Lake) was organized on
December 8, 1987 as a Virginia corporation. Fawn Lake is an Affiliate
under common control with NTS Corporation, the Sponsor of the NTS
Mortgage Income Fund. The NTS Mortgage Income Fund (the Fund) is the
primary creditor of Fawn Lake. Fawn Lake is in the process of
developing approximately 2,825 acres of land located in the
Chancellor district of Spotsylvania County, Virginia, approximately
60 miles south of Washington D.C., into a single-family residential
community and a country club with a championship golf course for the
purpose of selling such residential lots and country club
memberships. Included on the property is a 285 acre lake. Fawn Lake
will have amenities consisting of a clubhouse, pool, tennis courts
and boat docks. As of December 31, 1996, approximately 1,200 acres
have been developed.
These financial statements do not reflect the impact, if any, of the
proposed transaction discussed in Note 8.
B) Revenue Recognition
-------------------
Fawn Lake recognizes revenue and related costs from lot sales using
the accrual method in accordance with generally accepted accounting
principles, which is when payment has been received and title,
possession and other attributes of ownership have been transferred to
the buyer, and Fawn Lake is not obligated to perform significant
activities after the sale. Fawn Lake generally requires a minimum
down payment of at least 10% of the sales price of the lot.
C) Reserves for Loan Losses
------------------------
Interest income from notes receivable is reported as earned on the
accrual basis of accounting. If Fawn Lake has any reason to doubt the
collectability of any principal and interest amounts due pursuant to
the terms of the notes and accounts receivable, appropriate reserves
are established for any principal and accrued interest amounts deemed
unrealizable. Notes receivable in the accompanying balance sheets are
presented at lower of cost or fair value. The amounts Fawn Lake will
ultimately realize could differ from the amounts assumed in arriving
at the reserve for loan losses reported in the financial statements.
D) Inventory
---------
Inventory is stated at the lower of cost or net realizable value.
Inventory includes all direct costs of land, land development, and
amenities, including interest, real estate taxes, and certain other
costs incurred during the development period, less amounts charged to
cost of sales. Inventory costs are allocated to individual lots sold
using the relative sales values. The use of the relative sales value
method to record cost of sales requires the use of estimates of sales
values, development costs and absorption periods over the life of the
project. Given the long-term nature of the project and inherent
economic volatility of residential real estate, it is reasonably
possible that such estimates could change in the near term. Any
changes in estimates would be accounted for prospectively over the
life of the project.
- 63 -
<PAGE>
1. Significant Accounting Policies - Continued
-------------------------------------------
E) Tax Status
----------
Fawn Lake has elected, for income tax purposes, to include its income
with that of its stockholders, an S-Corporation election.
Accordingly, no provision for income taxes is included in the
accompanying financial statements.
F) Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
G) New Accounting Pronouncement
----------------------------
Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of, specifies circumstances in which
certain long-lived assets must be reviewed for impairment. If such
review indicates that the carrying amount of an asset exceeds the sum
of its expected future cash flows, the asset's carrying value must be
written down to fair value. Application of this standard during the
year ended December 31, 1996 did not result in an impairment loss.
H) Advertising
-----------
Fawn Lake expenses advertising-type costs as incurred. Advertising
expense, a component of Cost Reimbursement (See Note 6), was
approximately $410,000 and $310,000 during the years ended December
31, 1996 and 1995, respectively. Advertising expense for the year
ended December 31, 1994 is a component of the Marketing and
Development Fee (See Note 6) and is not separately determinable.
I) Reclassification of 1995 and 1994 Financial Statements
------------------------------------------------------
Certain reclassifications have been made to the December 31, 1995 and
1994 financial statements to conform with December 31, 1996
classifications. These classifications have no effect on previously
reported operations.
2. Member Initiation Fees and Other Accounts Receivable
----------------------------------------------------
Fawn Lake Country Club membership initiation fees receivable totalled
approximately $460,000 and $660,000 as of December 31, 1996 and 1995,
respectively. The receivable is net of a discount recorded to allow for
the present value of the membership initiation fee receivables
considering the estimated timing of collections.
3. Notes Receivable
----------------
Notes receivable are secured by a first mortgage on lots sold to
individuals. The notes bear interest at the prevailing market rates at
the time the lots were sold. The majority of the notes are due between
five to seven years, monthly payments are based on a 30-year amortization
and the balance is due at the maturity date. As of
- 64 -
<PAGE>
3. Notes Receivable - Continued
---------------- -----------
December 31, 1996, notes totalling $3,946,565 are pledged as security for
notes payable to banks under certain Warehouse Line of Credit Agreements.
There are also $203,950 of notes held by Fawn Lake that are not pledged.
Approximately $1,041,296, $1,464,463, $701,746, $527,628 and $222,614 of
the notes receivable balance as of December 31, 1996 are due for the
years ended December 1997 through 2001, respectively, with $192,768 due
thereafter.
4. Inventory
---------
Inventory consists of the following as of December 31:
1996 1995
----------- ----------
Land held for future development,
under development and completed
lots $21,633,702 $20,714,958
Country club (net of membership
initiation fees) 6,749,630 5,198,132
Amenities 4,384,896 4,889,574
----------- -----------
$32,768,228 $30,802,664
=========== ===========
Fawn Lake capitalized in inventory approximately $1,407,284 and
$1,216,410 of interest and real estate taxes in 1996 and 1995,
respectively. Interest and real estate taxes incurred was approximately
$2,017,650 and $1,838,322 as of December 31, 1996 and 1995, respectively.
Inventory for 1996 as reflected above includes $8,025,573, net of
$1,275,943 of country club membership initiation fees, of costs incurred
to date for the development of Fawn Lake Country Club.
5. Notes and Mortgage Loans Payable (See Note 8)
---------------------------------------------
Notes and mortgage loans payable consist of the following as of December
31:
1996 1995
----------- -----------
Mortgage loan payable to the Fund in
the amount of $30,000,000, bearing
interest equal to the greater of 17% of
Gross Receipts or 4.42% of the
outstanding loan balance, due July 1,
1997, secured by inventory and a
subordinated first mortgage on 22 acres
of land, generally principal payments
consist of approximately 83% of the
Gross Receipts of lot sales $28,966,245 $27,459,598
Mortgage payable to the Fund in the
amount of $2,500,000, bearing interest
at the Prime Rate + 3/4%, due July 31,
1997 secured by the Fawn Lake Golf
Course 1,998,850 1,073,953
(Continued next page)
- 65 -
<PAGE>
5. Notes and Mortgage Loans Payable - Continued
--------------------------------------------
1996 1995
----------- -----------
Warehouse Line of Credit Agreements
with two banks bearing interest at the
Prime Rate + 1% and Prime Rate + 3/4%,
due December 15, 1997 ($613,718) and
September 30, 1997 ($3,203,442),
secured by notes receivable (See Note 3),
principal payments consist of payments
received from notes receivable
securing the obligation $ 3,817,160 $ 5,118,702
Mortgage loan payable in the amount of
$325,000 bearing interest at the Prime
Rate + 1% and gross receipts interest
of 2% of the gross proceeds from lot
sales, due September 15, 1997, secured
by a first mortgage on 14 lots in Fawn
Lake, principal payments consist of 85%
of the gross proceeds of lot sales to
builders and 75% of the gross proceeds
of lot sales to individuals 243,393 502,936
Bank note payable in the amount of
$165,276, bearing interest at the rate
of 8.75%, due January 14, 1999, secured
by golf course maintenance equipment 115,028 165,276
Bank note payable in the amount of
$42,435, bearing interest at the rate
of 10.5%, due October 15, 1999, secured
by golf course maintenance equipment 36,421 --
Bank note payable in the amount of
$34,505, bearing interest at the rate
of 10.5%, due October 15, 1999, secured
by golf course maintenance equipment 30,366 --
Bank note payable in the amount of
$79,545, bearing interest at the rate
of 7.99%, due October 1, 1997, secured
by golf course maintenance equipment 21,680 48,667
Bank note payable in the amount of
$19,144, bearing interest at the rate
of 10.5%, due October 15, 1999, secured
by golf course maintenance equipment 16,450 --
---------- ----------
$35,245,593 $34,369,132
As of December 31, 1996, substantially all of the assets of Fawn Lake
secure the above notes and mortgage loans payable.
The Prime Rate was 8 1/4% and 8 1/2% at December 31, 1996 and 1995,
respectively.
The $613,718 Warehouse Line of Credit Agreement is guaranteed by NTS
Corporation.
- 66 -
<PAGE>
5. Notes and Mortgage Loans Payable - Continued
--------------------------------------------
There is currently no readily determinable market value for the
$30,000,000 loan payable to the Fund given its unique and affiliated
nature. Based on the borrowing rates currently available to Fawn Lake for
bank loans with similar terms and average maturities, the fair value of
all other debt instruments approximates the carrying value for these debt
instruments.
Fawn Lake is working with several lenders, including existing creditors
to refinance the debt which will mature within the next twelve months.
While management can provide no assurance that these negotiations will be
successful, it is their belief that such financing will be accomplished
prior to the respective maturity dates.
6. Related Party Transactions
--------------------------
Development and marketing activities in Virginia, which include
accounting, are managed by NTS Residential Properties, Inc. - Virginia
(Residential),a Virginia corporation and a wholly-owned subsidiary of NTS
Development Company. NTS Development Company is a wholly-owned subsidiary
of NTS Corporation, the Sponsor of the Fund. These entities are under
common control with Fawn Lake. During fiscal 1994, pursuant to an
agreement, Residential received 25% of the gross proceeds of lot sales to
individuals and 15% of the gross proceeds of lot sales to builders as a
fee for its service. The fee amounted to $505,950 for the year ended
December 31, 1994. Subsequent to June 30, 1994, the fee is no longer
being charged by Residential.
Fawn Lake incurred expenditures with various affiliates for acquisition,
preliminary planning, start-up and construction overhead costs and has
recorded these expenditures as a cost of inventory. The amounts charged
were approximately $260,000, $206,000 and $811,900 for each of the three
years ended December 31, 1996, 1995 and 1994 respectively. In addition,
for 1996 and 1995, pursuant to an agreement effective July 1, 1994 with
Residential, reimbursements were made to Residential for actual
personnel, marketing and administrative costs as they relate to Fawn Lake
of approximately $1,035,000 and $985,000 respectively. These
reimbursements are reflected as Cost Reimbursements in the accompanying
Statements of Operations.
In addition to the mortgage loans with the Fund, Fawn Lake had the
following additional transactions with the Fund:
1996 1995
----------- ----------
Regular interest - capitalized $1,310,224 $1,074,591
Regular interest - expensed $ 123,216 $ 82,261
Letters of credit fees $ 1,933 $ 4,679
Fawn Lake has received non-interest bearing advances from an affiliate
totalling $583,700 as of December 31, 1996. The advances were used to
fund development costs and will be repaid to the affiliate as cash flow
permits.
As of December 31, 1996, Fawn Lake has a participation agreement with the
Fund whereby Fawn Lake has been assigned an interest in the Fund's
Temporary Mortgage Loan with the Orlando Lake Forest Joint Venture (the
"Joint Venture"). The loan is on a demand basis and is in default due to
the failure of the Joint Venture to pay the interest due on the loan.
Based on managements's evaluation of the Joint Venture's future cash
flows, Fawn Lake increased the loan loss reserve by $364,974 during 1996.
The loan loss reserve is equal to the note amount. Reserves for loan
losses are based on management's evaluation of the
- 67 -
<PAGE>
6. Related Party Transactions - Continued
--------------------------------------
borrower's ability to meet its obligation as well as current and future
economic conditions. Reserves are based on estimates and ultimate losses
may vary. These estimates are reviewed periodically and, as adjustments
become necessary, they are reported in earnings in the period in which
they become known.
7. Commitments and Contingencies
-----------------------------
It is estimated that the country club and homeowners association
amenities will be substantially completed by December 2002. Based on
engineering studies and projections, Fawn Lake will incur additional
costs, excluding interest, of approximately $4,450,000 to complete the
country club and homeowners association amenities for the project. These
costs are estimated to be incurred as follows: $225,000 for 1997,
$2,400,000 for 1998, $1,210,000 for 1999, $210,000 for 2000, $5,000 for
2001 and $400,000 for 2002.
Fawn Lake has letters of credit outstanding to governmental agencies
totalling approximately $480,000 at December 31, 1996.
8. Subsequent Event
----------------
On February 12, 1997, Fawn Lake entered into a letter of intent (the
Letter of Intent) with the Fund and NTS Corporation and its Affiliates,
NTS Development Company and NTS/Lake Forest II Residential Corporation
(Lake Forest) regarding the Fund's loans to Fawn Lake and Lake Forest.
The Letter of Intent provided for, among other things, a restructuring of
the Fund's loans to Fawn Lake and Lake Forest. The Letter of Intent
contemplates that ownership of the properties will be transferred to the
Fund, which expects to continue the development to completion of such
properties and ultimately, their orderly sale.
The parties to the Letter of Intent agreed to consider a general
restructuring of the relationship among the Fund, NTS Corporation and its
various Affiliates. The method by which the Fund will acquire control of
Fawn Lake has not been determined.
Generally Accepted Accounting Principles require that transactions as
contemplated by the Letter of Intent be recorded at fair market value.
Management can not determine at this time whether or not such
transactions, if completed, will result in a loss.
The Fund, as owner of the Fawn Lake project, expects that it will
continue development of the project and the orderly sale of lots, golf
course memberships and ancillary services through sell-out, as well as
the sale of the Fawn Lake Country Club, when appropriate. As owner, the
Fund will be responsible for continuing development, operations and
marketing costs through the remaining life of the project and it may be
necessary for the Fund to borrow additional funds to complete the
development. While the Fund believes that such funds will be more readily
available if it owns the projects, it is not certain that the Fund will
be able to borrow the funds necessary to complete the projects.
The Letter of Intent contemplates that NTS Development, or another
subsidiary or affiliate of NTS Corporation (the "Manager"), will enter
into a management agreement (the "Management Agreement") with the Fund
pursuant to which the Manager will, as authorized agent for the Fund,
- 68 -
<PAGE>
8. Subsequent Event -Continued
---------------------------
provide exclusive management, development, marketing and sales efforts
and personnel to the Fund, and take all other actions necessary to manage
the development of the project to completion and the sale of lots, golf
memberships, ancillary services and the Fawn Lake Country Club. The terms
of the Management Agreement have not yet been finalized.
- 69 -
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
There have been no changes in accountants or reported disagreements on any
matter of accounting principles, practices or financial statement disclosure.
Part III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The directors and principal officers of the Fund are as follows:
Name Office With the Fund
---- --------------------
J. D. Nichols Chairman of the Board of Directors
Robert M. Day Director*
Gerald B. Thomas Director*
F. Everett Warren, J.D. Director*
Richard L. Good President and Director
John W. Hampton Secretary and Treasurer
________________________________________________________________________________
* Messrs. Day, Thomas and Warren are the Independent Directors of the Fund.
Neither of them are employees, partners, officers or directors of the
Sponsor or any of its Affiliates.
J. D. Nichols (age 55)is Chairman of the Board and Chief Executive Officer of
NTS Corporation and its various Affiliates and is a member and Chairman of the
Board of Directors of the NTS Mortgage Income Fund. He is a graduate of the
University of Louisville School of Law. His undergraduate studies were at the
University of Kentucky, where he concentrated in Accounting, Marketing and
Business Administration. Mr. Nichols entered the real estate construction and
development business in 1965 and has been involved in the development and
construction of over 6,500 acres of land and over 6,500,000 square feet of
office, residential, commercial and industrial space in numerous states
throughout the eastern half of the United States. He is a member of both the
Louisville and National Homebuilders Associations, and has served as Vice
President and Director of the Louisville and National Apartment Associations.
Mr. Nichols is also lifetime member of the President's Society of Bellarmine
College, Louisville, Kentucky and a past member of the Board of Overseers and
Board of Trustee of the University of Louisville, the Governors Council for
Education Technology and the Board of Directors of the Louisville Chamber of
Commerce. Mr. Nichols is currently a member of the Board of Directors of the
Regional Airport Authority of Louisville and Jefferson County and is a member of
the Board of Directors of the Greater Louisville Economic Development
Partnership.
Robert M. Day (age 44) has been Managing Director of Lambert, Smith & Hampton
and its predecessor companies, Atlanta, Georgia, a commercial and industrial
real estate brokerage firm since 1985. Mr. Day received a Bachelor of Business
Administration degree from Georgia State University and holds an MAI designation
from the Appraisal Institute. Mr. Day is a member of the Atlanta Board of
Realtors, the Urban Land Institute and is on the operating committee of the
Atlanta Chapter of Young Life.
Gerald B. Thomas (age 58) has 24 years experience in Commercial Real Estate
lending. Formerly a Senior Vice President with Mid-American Bank of Louisville,
Mr. Thomas joined Citizens Bank of Kentucky in February 1996 as Vice President,
with responsibility of developing real estate portfolios for four Kentucky
affiliate banks of CNB Bancshares, Inc., Evansville, Indiana. Mr. Thomas has
attended Eastern Kentucky University, National School of Real Estate Finance
(Ohio State University) and National Institute of Real Estate Appraisers
(University of Louisville). He is a board member of Big Brothers/Big Sisters,
Louisville and Co-chairman of the Programs, Planning and Evaluation Committee.
- 70 -
<PAGE>
Item 10. Directors and Executive Officers of the Registrant - Continued
--------------------------------------------------------------
F. Everett Warren, J.D. (age 73) retired in 1985 from Citizens Fidelity Mortgage
Company, Louisville, Kentucky, a division of Citizens Fidelity Bank Corporation
and Pittsburgh National Corporation. From 1972 to 1985, Mr. Warren served as
Chairman, President and Chief Executive Officer of Citizens Fidelity Mortgage
Company. Mr. Warren attended both the University of Kentucky and University of
Louisville and received a Bachelor of Law degree and a Juris Doctorate degree.
He serves on the Board of Directors of Louisville Mortgage Bankers Association,
National Mortgage Bankers Association, United Cerebral Palsy and Louisville Deaf
Oral School. Mr. Warren is a member of both the Kentucky and Louisville Bar
Associations.
Richard L. Good (age 57) is President and Chief Operating Officer of NTS
Corporation, and Chairman of the Board of NTS Securities, Inc. As such, Mr. Good
oversees all operations of NTS Corporation and its various subsidiaries and is
responsible for residential developments, commercial properties, property
management, securities, finance and corporate administration. From 1981 to 1984,
Mr. Good was Executive Vice President of Jacques-Miller, Inc., a real estate
syndication, property management and financial planning firm, and was
responsible for corporate systems, marketing and planning. Prior to 1981, Mr.
Good held sales, marketing and management positions, including sixteen years
with IBM Corporation, where he served as Branch Manager of the Data Processing
Division in Nashville. Mr. Good attended Stanford University and Case Western
Reserve University and holds a Bachelor of Science degree in Management Science
from Case. He is a registered securities principal and member of the
International Association for Financial Planning and the Real Estate Securities
and Syndication Institute and is past President of the Hurstbourne Corridor
Business Association in Louisville. In addition, he has served on the Board of
Directors of Junior Achievement, the Boy Scouts and Christ Church United
Methodist and is a member of the Leadership Louisville Class of 1990.
John W. Hampton (age 47) is Senior Vice President of NTS Corporation with
responsibility for all accounting operations. Before joining NTS in March 1991,
Mr. Hampton was Vice President - Finance and Chief Financial Officer of the
Sturgeon-Thornton-Marrett Development Company in Louisville, Kentucky for nine
years. Prior to that he was with Alexander Grant & Company CPA's. Mr. Hampton is
a Certified Public Accountant and a graduate of the University of Louisville
with a Bachelor of Science degree in Commerce. He is a member of the American
Institute of CPA's and the Kentucky Society of CPA's.
The Directors are not required to devote all of their time to the Fund, they are
only required to devote such of their time to the affairs of the Fund as their
duties require, and will meet quarterly or more frequently if necessary. It is
not expected that the Directors will be required to devote substantial portions
of their time to discharge their duties as Directors. For a description of
provisions concerning indemnification, see "Fiduciary Responsibility" on page 14
of the Fund's Prospectus, which description is filed herewith and incorporated
herein by reference.
The Directors, although not precluded from engaging in activities similar to the
Fund's, are required to disclose any interest held directly or indirectly by
them, or an Affiliate in an investment presented to the Fund. Furthermore,
Affiliated Directors must offer the Fund the right to engage in an investment
opportunity, which is within the Fund's objectives and policies, prior to
entering into such transaction themselves. The Fund will not pay a commission to
an Affiliate of any Director for presenting or disposing of the Fund's
investments.
- 71 -
<PAGE>
Item 10. Directors and Executive Officers of the Registrant - Continued
--------------------------------------------------------------
The Fund will initially pay to each Independent Director a fee of $1,000 per
month (which amount may be increased or decreased in the discretion of the
Directors) and will reimburse such persons and Affiliated Directors for travel
expenses and other out-of-pocket disbursements incurred in connection with
attending any meetings. Affiliated Directors will not receive any compensation
from the Fund for their services as Directors or Officers of the Fund.
The Directors have retained NTS Advisory Corporation (the Advisor) to manage the
Fund's day-to-day affairs, and recommend investments suitable for the Fund. The
Advisor has delegated substantially all of its duties to NTS Corporation (NTS),
an affiliate of the Advisor. NTS has substantial experience in all phases of
real estate activities, including acquisition, financing, property management
and disposition.
The following persons are the executive officers and key employees of NTS and/or
an affiliate and will provide services to the Advisor and the Fund:
Name Office
---- ------
J. D. Nichols Chairman and Chief Executive Officer
Richard L. Good President and Chief Operating Officer
H. L. Heiner Executive Vice President, NTS Development Company
B. J. DeVries President, NTS Residential Properties, Inc.
and President, NTS/Residential Properties, Inc.-
Virginia
Margaret O. Templeton President, NTS/Residential Properties, Inc. -
Florida
David G. Williams President, NTS Securities, Inc.
John W. Hampton, CPA Senior Vice President, NTS Corporation
Gary D. Adams Senior Vice President, NTS Development Company
Gregory A. Compton Senior Vice President, NTS Corporation
Sally A. Judah Senior Vice President, NTS Corporation
The following provides additional information regarding the above-mentioned
persons. Information regarding Messrs. Nichols, Good and Hampton is
provided in the section entitled "Directors and Officers of the Fund."
H. L. Heiner (age 45) is Executive Vice President of NTS Development Company
with responsibility for development, leasing and property management activities
for commercial and retail properties. Mr. Heiner attended Purdue University and
received his Master's degree in Engineering, magna cum laude, from the
University of Louisville. From 1974 until joining NTS in 1985, Mr. Heiner was a
consultant responsible for the successful planning of development projects in
South Carolina, Florida, Kentucky and Indiana, many of which were planned for
NTS. During this period, Mr. Heiner held the position of Vice President and
partner of Sabak, Wilson, Heiner & Lingo, Inc., a development planning and
consulting firm in Louisville. Mr. Heiner is registered as a professional
engineer in several states.
B. J. DeVries (age 36) is President of NTS Residential Properties, Inc. in
Kentucky and President of NTS/ Residential Properties, Inc. - Virginia with
responsibility for single-family residential development, marketing and
operations, in the states of Kentucky and Virginia. Mr. DeVries' experience with
NTS includes the positions of Residential Sales Representative, Builder Sales
Representative, Residential Sales Manager and Vice President - Sales and
Marketing. Prior to joining NTS in June 1992, Mr. DeVries served eight years as
a United States Marine Corps officer. Mr. DeVries was a pilot with additional
management experience in operations, maintenance and logistics. Mr. DeVries
received his Bachelor of Arts degree from Centre College.
- 72 -
<PAGE>
Item 10. Directors and Executive Officers of the Registrant - Continued
--------------------------------------------------------------
Margaret O. Templeton (age 47) is President of NTS/Residential Properties, Inc.
- - Florida with responsibility for single family residential development,
marketing and operations in the state of Florida. Prior to joining NTS in
November 1994, Ms. Templeton was President of Templeton Development Corporation,
a real estate development firm in Tampa, Florida from 1992 to November 1994. She
has extensive experience in marketing, construction and land development
including seven years (1985 to 1992) as Vice President of Tampa Palms and
Gulfstream Land and Development Company, whose holdings included 30,000 acres in
Florida, Georgia and Virginia. Ms. Templeton received a Bachelor of Arts degree
from the University of Florida. Ms. Templeton is a member and Director of the
National Association of Homebuilders, Florida Homebuilders Association as well
as Director and Vice President of the Builders Association of Greater Tampa and
Orlando. Ms. Templeton is also a member of the Florida Board of Realtors and the
Urban Land Institute.
David G. Williams (age 62) is President of NTS Securities, Inc. and serves as
the General Securities Principal with responsibilities for managing NTS's
securities operations. Mr. Williams is also Senior Vice President of NTS
Corporation and is responsible for Management Information Systems and Corporate
Administration of NTS Corporation and NTS Development Company. Prior to joining
NTS in March 1989, Mr. Williams served as President of Systemedics, Inc., a
physicians claim processing company in Princeton, New Jersey. Mr. Williams has a
Bachelor of Science degree from Tufts University, Medford, Massachusetts and
attended graduate school at Harvard University.
Gary D. Adams (age 51) is Senior Vice President of NTS Development Company with
responsibility for single-family residential development, multi-family
operations and commercial properties in the state of Florida. Since joining the
NTS organization in May 1977, Mr. Adams has been involved in the development,
construction and management of numerous apartment, office, industrial and
commercial developments in the southeastern portion of the United States. Mr.
Adams received his undergraduate degree in Engineering from the University of
Cincinnati, and he holds a Master of Business Administration from Xavier
University. He is a member of the Building Owners and Managers Association and
is a licensed general contractor in the State of Florida.
Gregory A. Compton (age 36) is Senior Vice President, Secretary and General
Counsel of NTS Corporation. Prior to joining NTS in March 1992, Mr. Compton was
a senior associate in the Real Estate and Finance Department of Greenebaum, Doll
& McDonald for seven years, where he was responsible for many of NTS's corporate
real estate transactions. He is a member of the Board of Directors of and is
General Counsel for Goodwill Industries of Kentucky. He received a B.B.A. in
Finance from the University of Kentucky and a J. D. from the University of
Cincinnati College of Law.
Sally A. Judah (age 38) is Senior Vice President of NTS Corporation with
responsibility for multi-family property management of NTS's apartment
communities in Kentucky and Indiana and the Human Resources area of Corporate
Administration of NTS Development Company. From July 1991 to 1994, Ms. Judah was
Vice President of NTS Corporation with responsibility for Corporate Marketing,
Human Resources and the Graphics Division. From June of 1987 when she joined NTS
until July 1991, Ms. Judah was responsible for leasing activities for commercial
properties in Louisville, Kentucky. Ms. Judah is a member of the Louisville
Board of Realtors and is a Certified Commercial Investment Member (CCIM)
Candidate and is a member of the national and Kentucky CCIM chapters. Ms. Judah
is also a member of the Louisville Apartment Association and is a member of the
Leadership Louisville Class of 1993. Ms. Judah holds a Bachelor of Arts degree
from the University of Kentucky.
- 73 -
<PAGE>
Item 11. Executive Compensation
----------------------
(a, b, c & d) The Fund will pay each Independent Director a fee of $12,000 per
year and will reimburse such persons and Affiliated Directors for travel
expenses and other out-of-pocket disbursements incurred in connection with
attending any meetings of the Board of Directors. During the years ended
December 31, 1996, 1995 and 1994, the Fund paid directors fees of $34,000,
$24,000 and $24,000, respectively, representing annual compensation. The
Affiliated Directors will not receive any compensation from the Fund for their
services to the Fund. The present officers of the Fund receive compensation from
the Advisor or its affiliates which indirectly relates to services to the Fund
(see Item 13).
The Fund is entitled to engage in various transactions involving the Advisor and
its affiliates, as described under captions "Compensation Table" at pages 9 and
10 of the Prospectus and "Conflicts of Interest" on pages 11 to 14 of the
Prospectus, which descriptions are filed herewith and incorporated herein by
reference. Reference is made to Note 3 to Notes to the Fund's Financial
Statements filed with this report for various transactions with affiliates.
(e) There are no compensatory plans or arrangements resulting from resignation
or retirement of the Directors and executive officers which require payments to
be received from the Fund.
Item 12. Security Ownership of Certain Beneficial Owners and Management
---------------------------------------------------------------
(a) As of the date hereof, no person owns of record or is known by the Fund to
own beneficially more than five percent (5%) of the outstanding shares of common
stock of the Fund.
(b) The following table sets forth the ownership of shares owned directly or
indirectly by the Directors and principal officers of the Fund as of the date
hereof:
Amount of Percent
Name of Beneficial of
Title of Class Beneficial Owner Ownership Interest
-------------- ---------------- --------- --------
Shares of Common J. D. Nichols 96,468 * 3.0%
Stock, $0.001 Shares
Par Shares
* These shares are owned of record by NTS Corporation or an Affiliate of which
Mr. Nichols directly or beneficially holds voting and investment authority.
(c) There are no known arrangements which may at a subsequent date result in
change in control of the Fund.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
Pursuant to the Advisory Agreement, the Fund will pay the Advisor a Management
Expense Allowance relating to services performed for the Fund in an amount equal
to 1% of the Fund's Net Assets, per annum, which amount may be increased
annually by an amount corresponding to the percentage increase in the Consumer
Price Index. 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 Management Expense Allowance for each of the years
ended December 31, 1996 and 1995 has been
- 74 -
<PAGE>
Item 13. Certain Relationships and Related Transactions - Continued
------------------------------------------------------------
reduced by $100,000. For the years ended December 31, 1996, 1995 and 1994,
$544,776, $528,973 and $614,100, respectively, has been incurred as a Management
Expense Allowance.
Neither the Certificate of Incorporation, By-Laws nor the Advisory Agreement
restricts the Affiliated Directors, the Advisor or its affiliates from engaging
in other business activities which may give rise to conflicts of interest with
the Fund. One of the three Directors is an Affiliated Director. This individual
holds a position with the Advisor and is affiliated with other related entities,
including partnerships that borrow money from the Fund. In such cases, this
individual will have fiduciary obligations to such other entities which may
conflict with his fiduciary obligations to the Fund. Transactions between the
Fund and any affiliates will be subject to potential conflicts of interest. With
respect to the conflicts of interest described herein, the Advisor and its
affiliates will endeavor to balance the interests of the Fund with the interests
of the Advisor and its affiliates in making any determinations.
- 75 -
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
-------------------------------------------------------
Form 8-K
--------
1. Financial statements
The financial statements for the NTS Mortgage Income Fund, NTS Guaranty
Corporation, NTS/Lake Forest II Residential Corporation and NTS/Virginia
Development Company together with the reports of Arthur Andersen LLP
dated March 24, 1997.
2. Financial statement schedules
All schedules have been omitted because they are not applicable, are not
required, or because the required information is included in the
financial statements or notes thereto.
3. Exhibits
The following exhibits are incorporated by reference from the Fund's
Registration Statement on Form S-11, referencing the exhibit number used
in such Registration Statement.
Exhibit Number Description
-------------- -----------
3 (a)(2) Restated Certificate of Incorporation
3 (b) By-Laws
10 (c) Form of Advisory Agreement
10 (b) Form of Guaranty Agreement
The following are additional exhibits filed with the Form 10-K Report.
Exhibit Number Description
-------------- -----------
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 include
pages 9 to 14 and pages 75 to 81.
4. Reports on Form 8-K.
None.
- 76 -
<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
/s/ Richard L. Good Date: March 27, 1997
- -----------------------------------------
Richard L. Good
President and Director of the NTS Mortgage Income Fund
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
registrant in their capacities and on the date indicated.
/s/ J. D. Nichols Date: March 27, 1997
- -----------------------------------------
J. D. Nichols
Chairman of the Board of Directors
of the NTS Mortgage Income Fund
/s/ F. Everett Warren J.D. Date: March 27, 1997
F. Everett Warren J.D.
Director of the NTS Mortgage Income Fund
/s/ Robert M. Day Date: March 27, 1997
- -----------------------------------------
Robert M. Day
Director of the NTS Mortgage Income Fund
/s/ Gerald B. Thomas Date: March 27, 1997
- -----------------------------------------
Gerald B. Thomas
Director of the NTS Mortgage Income Fund
/s/ Richard L. Good Date: March 27, 1997
- -----------------------------------------
Richard L. Good
President and Director of the
NTS Mortgage Income Fund
/s/ John W. Hampton Date: March 27, 1997
- -----------------------------------------
John W. Hampton
Secretary and Treasurer (principal
financial and chief accounting officer)
- 77 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF DECEMBER 31, 1996 AND FROM THE STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE T0 SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 716,796
<SECURITIES> 0
<RECEIVABLES> 67,787,784
<ALLOWANCES> 1,500,000
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 68,745,709
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 18,801,517
0
0
<COMMON> 3,187
<OTHER-SE> 49,497,599
<TOTAL-LIABILITY-AND-EQUITY> 68,745,709
<SALES> 0
<TOTAL-REVENUES> 3,304,995
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 544,776
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,601,432
<INCOME-PRETAX> 857,709
<INCOME-TAX> 7,400
<INCOME-CONTINUING> 850,309
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 850,309
<EPS-PRIMARY> .27
<EPS-DILUTED> 0
<FN>
<F1>THE COMPANY HAS AN UNCLASSIFIED BALANCE SHEET; THEREFORE, THE VALUE IS $0.
</FN>
</TABLE>
<PAGE>
EXHIBIT NO. 99 - ADDITIONAL EXHIBITS
Included is this Exhibit Number 99 are pages 9 to 14 of the NTS Mortgage Income
Fund's Prospectus dated March 31, 1989 which discuss Compensation, Conflicts of
Interest and Fiduciary Responsibility and the Glossary of Terms from pages 75 to
81 of NTS Mortgage Income Fund's Prospectus. The text of these pages has been
duplicated in type style and font compatible with the other portions of the
Fund's Form 10-K Annual 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 respective sections 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.
COMPENSATION TABLE
The following table is a description of the compensation and fees which the
Advisor and its Affiliates are anticipated to receive from the Fund. These
amounts are estimated and were not determined by arm's-length negotiations.
Other than as set forth herein, no other compensation is expected to be paid
to the Advisor and its Affiliates by the Fund. See "Conflicts of Interest."
Method and Amount of Compensation Assuming
Form of Compensation Minimum Amount/Maximum Amount/Increased
and Entity Receiving Maximum Amount
- -------------------- --------------
Organization and Offering Stage
Sales Commissions -
NTS Securities Up to 8% of the Gross Proceeds for each
Share sold by NTS Securities directly. Up
to $120,000/$4,000,000/$8,000,000 if NTS
Securities, which acts primarily as a
wholesaler, sells all the Shares directly.
It is anticipated that a substantial portion
of these fees will be paid to Non-Affiliated
Participating Dealers.
Non-Accountable
Expense Allowance -
NTS Securities 1% of the Gross
Proceeds.(1)(2) $15,000/
$500,000/$1,000,000.
Operational Stage (3)
Management Expense
Allowance - The Advisor Relating to services performed for the Fund
in an amount equal to 1% of the Fund's Net
Assets per annum, payable quarterly(4). The
actual amount is not determinable at this
time.(5)(6)
- 9 -
<PAGE>
Real Estate Management
Fee - Advisor or its
Affiliates 5% and 6% of gross revenues from any
residential and commercial Real Estate
Investments of the Fund, respectively, and
properties acquired through foreclosure,
plus certain reimbursed expenses, paid
monthly. If NTS or an Affiliate does not
perform substantially all of the leasing,
releasing and leasing related services with
respect to a property, the fee payable for
that property will be limited to 3% of the
gross revenues of the property. A
competitive fee may be paid for the one-time
initial rent-up or lease-up of a newly
constructed property (provided such fee is
not already included in the purchase price
of the property). In the event industrial
or commercial properties are leased on a
long-term (defined as at least ten years,
excluding renewals) triple net basis, the
management fee will be 1% of the gross
revenues from such property, except for a
one-time initial leasing fee equal to 3% of
total base rents payable for the entire
lease term (excluding renewals), which
amount shall be paid in five equal annual
installments. The actual amount is not
determinable at this time and the
acquisition and development of this type of
property is not anticipated by the
Fund.(5)(6)
Distributions - NTS and
its Affiliates Distributions on Shares acquired pursuant to
this Offering on the same basis as
distributions paid to other Stockholders.
The amount to be received by NTS and its
Affiliates as Stockholders is dependent upon
the operation of the Fund and will be
equivalent to that received by other
Stockholders.(6)
Loan Repayments -
Affiliated lenders Repayment of loans with proceeds from
Mortgage Loans made by the Fund.(6)(7)
- 10 -
<PAGE>
Affiliate Indebtedness -
NTS and its Affiliates Benefits that all shareholders and partners
of Affiliated entities receive in
conjunction with distributions made on the
refinancing of loans made to such entities
with proceeds from Mortgage Loans made by
the Fund; and benefits from the use of Fund
funds as compensating balances.(6)(8)
Service Fees - NTS
Development Corporation
and other Affiliates Fees paid by Affiliated Borrowers for
services performed with proceeds from
Mortgage Loans made by the Fund.(6)(9)
Liquidation Stage
Subordinated Advisory
Fee - The Advisor For services in connection with the
liquidation of the Fund's investments, a fee
equal to 5% of the Capital Proceeds
remaining after Stockholders have received
(i) Capital Proceeds in an amount equal to
100% of their Original Capital Contributions
and (ii) total distributions from all
sources in an amount equal to a 15% per
annum cumulative, non compounded return on
their Adjusted Contributions, to the extent
not already received, beginning on the
Offering Termination Date. The actual
amount is not determinable at this time.(6)
Distributions - The
Advisor On Shares acquired pursuant to this Offering
on the same basis as distributions to other
Stockholders. The actual amount is not
determinable at this time.(5)(6)
(1) The Non-Accountable Expense Allowance to NTS Securities will be paid
for overhead expenses such as rent, remuneration for personnel,
telephone, travel, marketing and other expenses, related to the
Offering. In addition, NTS Securities will receive an Accountable Due
Diligence Expense Allowance up to 1/2% of the Gross Proceeds. The Fund
will also reimburse NTS Securities for expenses included in the Fund's
Organization and Offering Expenses which are also subject to the
restriction discussed in footnote 3 below. See "Plan of Distribution."
(2) NTS Securities may reallow a portion of its Non-Accountable Expense
Allowance to Participating Dealers. See "Plan of Distribution."
- 11 -
<PAGE>
(3) Based on guidelines promulgated by the North American Securities
Administrators Association, Inc., the annual Operating Expenses of the
Fund, including compensation and reimbursement to the Advisor and its
Affiliates during the operational stage of the Fund, may not exceed in
any fiscal year the greater of (i) 2% of the Fund's Average Invested
Assets during such fiscal year or (ii) 25% of the Fund's Net Income
during such fiscal year. See "Business and Objectives of the
Fund-Operating Expense Limitations."
If the Fund acquires a property because of a foreclosure, an Affiliate
of the Advisor, subject to such Affiliate qualifying as an "independent
contractor" pursuant to the Code, may provide property management
services, should such services be required by the Fund, for a fee equal
to the usual and customary amounts charged for similar services in the
geographic area.
(4) The Advisor's 1% Management Expense Allowance will be increased
annually by an amount corresponding to the percentage increase in the
Consumer Price Index for all urban consumers ("CPI-AUC")-Louisville or
a comparable Consumer Price Index, if any, which increase will in no
event result in the Fund's Operating Expenses exceeding the limitation
noted in footnote (3) above. The Management Expense Allowance shall
exclude amounts paid by the Advisor on behalf of the Fund to third
parties.
(5) No Acquisition Fees or Acquisition Expenses will be paid by the Fund in
connection with the selection, acquisition, or origination of the
Fund's Mortgage Loans and no Acquisition Fees will be paid by the Fund
to Affiliated parties in connection with the acquisition of Real Estate
Investments. Since it is expected that most if not all Fund Mortgage
Loans will be made to Affiliated Borrowers, Affiliates of the Advisor
may realize benefits and receive compensation from such Affiliated
Borrowers. See "Compensation Table."
(6) The Advisor and its Affiliates cannot accurately estimate this amount.
Any such prediction would necessarily involve assumptions of future
events or operating results which cannot be made at this time.
(7) Proceeds of loans made by the Fund may be used to repay amounts
borrowed from other Affiliated persons, which repayment may benefit the
Affiliated lenders. However, this benefit cannot be quantified.
(8) Proceeds of loans by the Fund may be distributed to partners and
shareholders of the Affiliated Borrower, and Affiliates may benefit
from the economies of scale which may result from contracting for
services with the Fund. The value of these benefits cannot be
quantified.
- 12 -
<PAGE>
(9) NTS and its Affiliates may receive fees for services rendered to
Affiliated Borrowers which could, in certain instances, be deemed to be
from the proceeds of the Fund's Mortgage Loans. These services could
include such items as management, leasing or construction and
development related fees. For example, NTS Development Corporation,
itself and through subsidiaries, will receive fees in connection with
the management of the developments which will secure the Initial Fund
Investments. The amount of the compensation to be received by NTS
Development Corporation, itself and through subsidiaries, in connection
with these loans and other properties with which it is engaged is
dependent upon many factors including the time period, amount of
development undertaken and the actual costs of the development.
CONFLICTS OF INTEREST
A majority of the Directors of the Fund will be Independent Directors.
Nonetheless, because the Fund's principal activity will be the investment in
Mortgage Loans to Affiliated Borrowers and because NTS and its Affiliates are
engaged in business activities involving real estate investments and anticipate
engaging in additional business activities in the future which may be
competitive with the Fund, the relationship between the Fund, the Directors
(Affiliated and Independent), the Advisor and its Affiliates will result in
various conflicts of interest. In order to resolve these conflicts, all
transactions between the Fund and any Director, the Advisor or any of its
Affiliates must be approved by a majority of the Independent Directors prior to
entering into the transaction. As discussed elsewhere in this Prospectus, the
Directors will exercise their fiduciary duties to the Fund and the Stockholders
in a manner which is intended to preserve and protect the rights of the Fund and
the Stockholders.
(a) Loans to Affiliated Borrowers. The principal purpose of the Fund is to
invest in Mortgage Loans secured by properties owned or to be acquired by
Affiliated Borrowers (and, to a lesser extent, in Real Estate Investments). Each
such Mortgage Loan will be secured by a lien on the property, by an interest in
the Borrower or by a similar security interest. In addition, the Guarantor has
agreed to guaranty repayment of the Principal of all Junior Mortgage Loans and
Temporary Mortgage Loans made to Affiliated Borrowers. The expected terms and
conditions of non-specified Mortgage Loans are set forth under "Business and
Objectives of the Fund." Transactions entered into between the Fund and the
Advisor and its Affiliates are subject to an inherent conflict of interest. The
Directors and the Advisor may face certain conflicts of interest in enforcing
the rights of the Fund against any Affiliated Borrower.
The Directors would consider the following factors in resolving certain
inherent conflicts of interest:
(1) When considering an advance of additional funds to an Affiliated
Borrower, factors such as projections for the development and operation
of the property, market value and market conditions generally and for
the type of property anticipated to be developed by
- 13 -
<PAGE>
the Affiliated Borrower, the creditworthiness and equity interest of
the Affiliated Borrower, the current value of the property, the
security and the availability of additional collateral.
(2) In deciding whether to waive a default by an Affiliated Borrower,
foreclose on a Mortgage Loan or remedy a default on senior
indebtedness, the Directors will consider the nature of the default,
its materiality, the anticipated time and expense of pursuing the
foreclosure as well as the cost of waiving the default, the anticipated
viability of the Affiliated Borrower and the likelihood of the
Affiliated Borrower remedying the default within a reasonable time.
When considering enforcing a due-on-sale clause, the Directors will
review the Fund's anticipated investments and the need for additional
funds, as well as market conditions, focusing on the specific intended
use of the property and the creditworthiness of the purchaser.
(3) In establishing the amount of the Interest Reserve to be funded,
the Directors will review the expected return on the reserve, the
variability of the interest rate on the Mortgage Loan, the outstanding
indebtedness, the Affiliated Borrower's anticipated cash flow, the
operating history and the appraised value and potential appreciation of
the property.
(4) In determining whether to vary the terms of Mortgage Loans from the
anticipated terms specified in the Prospectus, the Directors will
review economic and market conditions and focus upon the locale of the
property, the availability of additional security to collateralize the
loan and the equity that the Affiliated Borrower has invested in the
property.
(5) In considering whether to refinance a property, factors relating to
the value of the property compared to the Affiliated Borrower's total
debt, the terms of the proposed financing and the Affiliated Borrower's
ability to service the total debt, the Fund's participation in the
potential appreciation of the property, as well as other investment
opportunities available to the Fund will be considered. If the
Affiliated Borrower seeks to refinance to prevent a default and
subsequent foreclosure, the Directors would consider the factors set
forth in (2) above.
(b) Purchase of Real Estate Investments from Affiliates. The Fund may purchase
Real Estate Investments from the Advisor and its Affiliates. Any such purchase
by the Fund from an Affiliate of the Advisor will require the receipt of an
appraisal evidencing the property's fair market value and must be at a price not
exceeding the lesser of the fair market value of the property or its cost to the
Affiliate increased by amounts expended to improve and hold the asset through
its sale to the Fund (unless the Directors, including a majority of the
Independent Directors, determine that substantial justification exists for an
increased amount but in no event exceeding the Appraised Value). The Fund will
also obtain an opinion of a qualified, Independent Advisor that the terms of
such purchase are as fair
- 14 -
<PAGE>
to the Fund as would be available from an unaffiliated party. In addition, any
such transaction must be approved by a majority of the Independent Directors of
the Fund.
(c) Provision of Property Management Services by Affiliates. Affiliates of NTS
manage certain of the properties owned by Affiliates and are anticipated to
provide management services with regard to Real Estate Investments acquired by
the Fund. Any such agreement will be on terms no less favorable to the Fund than
those customarily required for similar services in the areas in which the Real
Estate Investments are located and will be terminable by either party without
penalty upon 60 days prior notice. Although the affiliated property management
entity may provide services to Affiliates as well as the Fund, NTS believes that
it has sufficient personnel and resources to adequately manage the Real Estate
Investments.
(d) Receipt of Opinion of Independent Advisor. In connection with the making of
any Mortgage Loan to an Affiliated Borrower the Independent Directors are
required to obtain an opinion from an independent advisor that the proposed
Mortgage Loan is as fair and at least as favorable to the Fund as a Mortgage
Loan to a Non-Affiliated borrower in similar circumstances. The Independent
Advisor's fees will generally be paid by the Affiliated Borrower. The
Independent Advisor may face certain conflicts of interest in rendering its
opinion due to the fact that its fees may be paid by the Affiliated Borrower.
However, the opinion of the Independent Advisor will be requested by and
rendered to the Fund.
(e) Competition by Affiliates for Real Estate and Mortgage Loan Investments.
Existing, contemplated and future real estate investment entities managed or
advised directly or through Affiliates of the Advisor, as well as other real
estate investment entities in which Affiliates of the Advisor are participants,
may compete for and with the Fund for Real Estate and Mortgage Loan Investments.
If at the time the Fund is actively seeking to acquire a Real Estate or Mortgage
Loan Investment, the Advisor and its Affiliates or any entity managed or advised
by any of them (a "Competing Entity"), are also seeking to acquire such an
investment, and an opportunity to acquire such an investment arises, the Advisor
will initially review the portfolio of the Fund and of the Competing Entities
and will determine whether or not such investment should be acquired by the Fund
or such Competing Entity based upon such factors as cash flow, investment
objectives, borrowing limitations, type and location of the Real Estate or the
collateral property for the Loan, proposed loan or acquisition terms, economic
conditions around the location of the property, risks associated with
acquisition of the property, the estimated income tax effects of the purchase
and operation on each such Competing Entity, the amount of funds available and
the length of time such funds have been available for investment. In the event
that an investment opportunity appears equally appropriate for the Fund and one
or more Competing Entities, the acquisition or Loan will be made by the entity
which first had uninvested funds available to make the acquisition or Mortgage
Loan, or if the Fund and a Competing Entity have had available funds for equal
periods, the entity which has the greatest amount of time weighted funds
available for the acquisition of properties or the making of a Mortgage Loan.
- 15 -
<PAGE>
(f) Provision of Services. The Fund will not have independent management and
will rely on the Advisor and its Affiliates for the day-to-day management of the
operations of the Fund, subject to the direction of the Board of Directors.
These Affiliates (including officers and directors) will have conflicts of
interest in allocating management time, services and functions among the various
Affiliated publicly-held and privately-held entities and any other entities
which they have or may organize. Furthermore, there is no prohibition from
having an interest, direct or indirect, in entities which will be engaged to
provide services to the Fund. The Advisor and its Affiliates believe they have
sufficient staff personnel to be fully capable of discharging their
responsibilities to all entities to which they are responsible and to ensure
that any conflicts which other relationships may create will be dealt with
fairly. The officers of the Affiliates of the Advisor will devote such time to
the affairs of the Fund as they, within their sole discretion, exercised in good
faith, determine to be necessary to carry out their obligations. These conflicts
will be reviewed by Directors and if they determine that the Advisor or its
Affiliates are not satisfactorily performing their duties the Agreement in
question will not be renewed. See "Management."
(g) Non-Arm's Length Agreements. The following factors will lessen the conflicts
that result because the agreements made by the Fund with the Advisor and its
Affiliates are not a result of arm's length negotiations: (i) such agreements
and arrangements are subject to approval by a majority of the Independent
Directors; (ii) the offering is registered in all states and the Fund is
therefore subject to specific state securities laws as well as the Statement of
Policy Regarding Real Estate Investment Trusts adopted by the North American
Securities Administrators Association, Inc. or NASD rules, which limit fees and
the amount of the Fund's Operating Expenses, including compensation to the
Selling Agent and Advisor; and (iii) the Advisor's performance will be affected
by other lending programs being offered in the marketplace with which the Fund
will compete.
(h) Common Representation. Shefsky, Saitlin & Froelich, Ltd. ("Counsel")
represents the Fund, the Advisor and the Selling Agent in connection with this
Offering. Counsel may in the future act as counsel to NTS and its Affiliates in
connection with other matters. In addition, Counsel is expected to represent the
Fund in connection with its future activities. There is a possibility that in
the future the interests of the various Affiliated parties may become adverse
and, under the Code of Professional Responsibility of the legal profession
Counsel may be precluded from representing any one or all of such parties. If
any situation arises in which the interests of the Fund appear to be in conflict
with those of the Advisor, its Affiliates or the Selling Agent, the Independent
Directors will decide whether separate counsel should be retained by the Fund to
assure that the interests of the Fund are adequately protected. (i) Computation
and Payment of Incentive or Gross Receipts Interest. There may be conflicts
between the Fund and an Affiliated Borrower in establishing Incentive interest
or Gross Receipts Interest, which is based on either the increase in value
("Increase in Value") of the property securing the loan or the Gross Receipts
from the sale of the property. The Fund will resolve this conflict by requiring
that a majority of the Independent Directors
- 16 -
<PAGE>
approve each Mortgage Loan to an Affiliated Borrower and that the Independent
Advisor issue a fairness opinion for each such Mortgage Loan. In joint ventures,
the Fund's right to participate fully in the Increase in Value will be affected
if the Non-Affiliate prohibits the Fund from participating in the
Non-Affiliate's share in the Increase in Value. In such a case, the Fund may
only be entitled to a percentage interest in the Affiliate's share in the
Increase in Value. A conflict arises because the Affiliate might agree to the
Non-Affiliate's insistence on this reduced amount of Incentive Interest or Gross
Receipts Interest in exchange for some other concession that benefits the
Affiliate but not the Fund. In addition, because the Fund's Mortgage Loans will
generally be prepayable by the Affiliated Borrowers, the possibility exists that
Mortgage Loans may be prepaid in a manner intended to minimize Gross Receipts or
Incentive Interest due to the Fund. The Board will monitor such prepayments and,
if necessary, modify the terms of Mortgage Loans.
(j) Joint Investments with Affiliates. To the extent the Fund enters into joint
investments with Affiliates, there may under certain circumstances be risks not
otherwise present, including, for example, risks associated with the possibility
that the Fund's joint venturer might become bankrupt, and that such joint
venturer may at any time have economic or business interests or goals which are
inconsistent with the interests or goals of the Fund. Prior to entering into
joint investments with an Affiliate, the Fund is required to obtain the approval
of a majority of Directors, including a majority of Independent Directors, which
approval must find that the joint investment is fair and reasonable to the Fund
and on substantially the same terms and conditions as those of the other
Affiliates participating in the joint investment.
(k) Other Transactions and Affiliates. The Fund may make a Mortgage Loan which
is secured by a property in which an Affiliate of the Advisor also has a
security interest. In such case, the Advisor would face certain conflicts of
interest in the event of a default on the investment if, by enforcing the Fund's
rights, the Affiliated entity's interest in the property would be lost. The Fund
may also have conflicts of interest in negotiating the terms of a Mortgage Loan
with an unaffiliated entity if such entity is negotiating to purchase a property
from an Affiliate of the Advisor. Furthermore, if the Advisor or its Affiliates
acquire properties which are adjacent to properties or other activities in which
the Fund has an interest as a mortgagee or otherwise, there could be conflicts
because the properties may be enhanced by the development of the properties in
which the Fund holds an interest.
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(l) Purchase of Adjacent Properties. In the event that the Advisor or its
Affiliates acquire a property which is adjacent to properties or other
activities in which the Fund has an interest, there could be conflicts of
interest due to the potential that the adjacent property could be enhanced by
the improvement of the property in which the Fund has an interest. Neither the
Advisor nor its Affiliates have any current intention to acquire properties
adjacent to those in which the Fund will hold an interest.
(m) Receipt of Commissions, Fees and Other Compensation by the Advisor and its
Affiliates. The Advisor and its Affiliates will be subject to a conflict of
interest in recommending investments and in structuring these investments. The
Fund will retain an Independent Advisor to render an opinion regarding the
choice and structure of an investment prior to making a Mortgage Loan to an
Affiliated Borrower or purchasing property from an Affiliate. See "Business and
Objectives of the Fund-Independent Advisor."
(n) Selling Agent. The Selling Agent is a wholly-owned subsidiary of the Sponsor
and will therefore experience a conflict in performing its obligation to
exercise due diligence with respect to the statements made in the Prospectus.
This due diligence review cannot be considered independent although NTS
Securities believes that such due diligence has in fact been exercised. However,
NTS Securities is subject to potential liability under the Securities Act of
1933.
(o) Initial Fund Investments. The Fund has stated that it intends to invest in
the initial Fund Loans as discussed under "Specified Investments." These
Mortgage Loans will be made to Affiliated Borrowers and will be secured by a
lien on the underlying property, by an interest in the Borrower or by similar
security interest. These Mortgage Loans are expected to generate Regular
Interest as well as either Incentive Interest or Gross Receipts Interest. The
Initial Fund Loans are to be made to Affiliates of the Fund and will be subject
to an inherent conflict of interest, including a conflict over the order in
which the Initial Fund Loans are made, a desire on the part of the Affiliated
Borrower to retire the Mortgage Loan early to avoid the payment of increased
Incentive Interest or Gross Receipts Interest and a conflict in negotiating any
modifications to the terms of the Mortgage Loans subsequent to their initial
funding. The Fund believes that it has mitigated these conflicts of interest by
the requirement that a majority of the Independent Directors approve any changes
in the terms of a Mortgage Loan as well as requiring the opinion of an
Independent Advisor prior to funding a Mortgage Loan.
FIDUCIARY RESPONSIBILITY
Consistent with the duties and obligations of, and limitations on, the
Directors, as set forth in the Fund's Organizational Documents and under the
laws of Delaware, the Directors are accountable to the Fund and the Stockholders
as fiduciaries and are required to perform their duties in good faith in a
manner which each Director believes to be in the best interests of the Fund and
the Stockholders with such care, including reasonable inquiry, as an ordinarily
prudent person in a like position would use under similar circumstances.
However, the Organizational Documents and the
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Advisory Agreement provide that the Directors, the Advisor and their Affiliates
will be indemnified against certain liabilities incurred in connection with
serving in such capacities. Generally, any such person will be entitled to
indemnification if (i) such person has determined, in good faith, that the
course of conduct which caused the loss or liability was in the best interest of
the Fund, (ii) such liability or loss was not the result of negligence or
misconduct by such person, and (iii) such indemnification is recoverable only
out of the assets of the Fund and not from the Stockholders.
Notwithstanding the foregoing, indemnification will not be allowed for any
liability imposed by judgment arising from or out of a violation of state or
federal securities laws. Indemnification will not be allowed for losses,
liabilities, settlements and related expenses of lawsuits alleging securities
law violations unless a court (i) approves the settlement and finds that
indemnification of the settlement and related costs should be made, or (ii)
approves indemnification of litigation costs if there has been a dismissal with
prejudice or a successful adjudication on the merits of each count involving
alleged securities law violations as to the particular indemnitee.
To the extent that any provision concerning indemnification or limitation of
liabilities applies to liabilities arising under the Securities Act of 1933, the
Fund has been advised that, in the opinion of the Securities and Exchange
Commission, such provisions are contrary to public policy and therefore
unenforceable. In the event that a claim for indemnification against such
liabilities is asserted by such person in connection with the offering of the
Shares (other than for the payment by the Fund of expenses incurred or paid by a
Director or any of his agents in the successful defense of any action, suit or
proceeding), the Fund will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
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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.
"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.
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"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.
"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.
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"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.
"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.
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"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.
"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
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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.
"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
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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.
"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
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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.
"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.
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"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.
"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.
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"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.
"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
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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.
"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.
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"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.
"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.
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"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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