UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
(Mark one)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
-----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-18550
NTS MORTGAGE INCOME FUND
(Exact name of registrant as specified in its charter)
Delaware 61-1146077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10172 Linn Station Road
Louisville, Kentucky 40223
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number,
including area code: (502) 426-4800
Not Applicable
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
As of November 1, 1997 there were approximately 3,187,000 shares of common stock
outstanding.
<PAGE>
TABLE OF CONTENTS
Pages
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 1997 and
December 31, 1996 3
Statements of Income
For the three and nine months ended 4
September 30, 1997 and 1996
Statement of Stockholders' Equity
For the nine months ended September 30, 1997 5
Statements of Cash Flows
For the nine months ended 6
September 30, 1997 and 1996
Notes To Financial Statements 7-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-24
Signatures 25
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NTS MORTGAGE INCOME FUND
BALANCE SHEETS
As of As of
September 30, 1997 December 31, 1996*
------------------ -----------------
ASSETS
Affiliated mortgage loans receivable:
Earning loans $ 56,158,518 $ 63,948,933
Non-earning loans -- 3,838,831
------------- ------------
56,158,518 67,787,764
Less reserves for loan losses (Note 5) -- 1,500,000
------------- -----------
Net affiliated mortgage loans
receivable 56,158,518 66,287,764
Investment in joint venture-
affiliate (Note 6) 4,394,146 --
Cash and equivalents 373,738 716,793
Interest receivable - affiliates 1,108,720 1,589,498
Other assets 41,465 151,654
------------- ------------
Total assets $ 62,076,587 $ 68,745,709
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 304,273 $ 267,800
Dividends payable -- 175,305
Notes payable - affiliates (Note 7) 4,069,242 4,524,667
Notes payable 9,713,069 14,276,850
Deferred revenues 500 301
------------- ------------
Total liabilities 14,087,084 19,244,923
------------- ------------
Commitments and contingencies (Note 10)
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 (6,177,081) (4,665,798)
------------- -------------
Total stockholders' equity 47,989,503 49,500,786
------------- ------------
Total liabilities and stockholders'
equity $ 62,076,587 $ 68,745,709
============= ============
The accompanying notes are an integral part of these financial statements.
* Reference is made to the Fund's audited financial statements in the Form
10-K as filed with the Securities and Exchange Commission on March 31, 1997.
- 3 -
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------ ------ ------ -----
REVENUES:
<S> <C> <C> <C> <C>
Interest income on affiliated
mortgage loans receivable $ 967,896 $ 830,918 $ 2,617,126 $2,422,573
Fee income on affiliated
mortgage loans and other
financial services 250 5,389 7,959 19,623
Recovery on provision for
loan losses (Note 5) 1,500,000 -- 1,500,000 --
Interest income on cash
equivalents and miscellaneous
income 7,993 7,476 25,320 17,722
----------- ---------- ----------- ---------
2,476,139 843,783 4,150,405 2,459,918
----------- ---------- ----------- ---------
EXPENSES:
Advisory fee (Note 7) 131,520 136,351 418,950 408,426
Interest expense 319,764 337,155 970,268 1,005,004
Interest expense - affiliates
(Note 7) 88,153 91,293 263,904 176,141
Professional and administrative 72,621 55,488 197,621 149,414
Other taxes and licenses 5,895 6,975 19,010 20,665
Amortization expense 19,233 18,012 53,803 54,038
Loss from investment in joint
venture - affiliate (Note 6) 3,731,782 -- 3,731,782 --
---------- --------- ----------- ---------
4,368,968 645,274 5,655,338 1,813,688
----------- ---------- ----------- ---------
Income (loss) before income tax
expense (1,892,829) 198,509 (1,504,933) 646,230
Income tax expense (Note 1) (2,650) (1,850) (6,350) (5,550)
---------- ---------- ----------- ---------
Net income (loss) $ (1,895,479) $ 196,659 $ (1,511,283) $ 640,680
=========== ========== =========== =========
Net income (loss) per share of
common stock $ (0.59) $ 0.06 $ (0.47) $ 0.20
=========== ========== =========== =========
Weighted average number of
shares 3,187,333 3,187,333 3,187,333 3,187,333
=========== ========== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 4 -
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<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, 1996 3,187,333 $ 3,187 $ 54,163,397 $ (4,665,798) $ 49,500,786
Net loss -- -- -- (1,511,283) (1,511,283)
Dividends declared -- -- -- -- --
--------- -------- ------------ ------------- ------------
Stockholders' equity
September 30, 1997 3,187,333 $ 3,187 $ 54,163,397 $ (6,177,081) $ 47,989,503
========= ======== ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 5 -
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<CAPTION>
1997 1996
------ -----
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ (1,511,283) $ 640,680
Adjustments to reconcile net income to net cash
provided by operating activities:
Accretion of discount on affiliated mortgage loans
receivable (95,932) (110,783)
Recovery on provision for loan losses (1,500,000) --
Amortization expense 53,803 54,038
Loss from investment in joint venture-affiliate 3,731,782 --
Changes in assets and liabilities:
Interest receivable - affiliates 480,778 (65,776)
Other assets 16,020 (32,295)
Accounts payable and accrued expenses 36,473 68,876
Deferred commitment fees -- (15,000)
Deferred revenues 199 (2,714)
----------- ------------
Net cash provided by operating activities 1,211,840 537,026
----------- ------------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES
Principal collections on affiliated mortgage loans $ 9,299,287 $ 5,954,633
receivable
Investment in affiliated mortgage loans receivable (5,700,037) (8,301,257)
------------ ------------
Net cash provided by (used for) investing activities 3,599,250 (2,346,624)
------------ ------------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES
Proceeds from notes payable - affiliates $ 1,142,041 $ 2,333,073
Payments on notes payable - affiliates (1,597,466) (454,456)
Proceeds from notes payable 510,913 1,335,618
Payments on notes payable (5,074,694) (1,028,259)
Dividends paid (175,305) (325,111)
Other assets 40,366 (70,825)
------------ -----------
Net cash provided by (used for) financing activities (5,154,145) 1,790,040
------------ -----------
Net increase (decrease) in cash and equivalents $ (343,055) $ (19,558)
CASH AND EQUIVALENTS, beginning of period 716,793 535,687
------------ -----------
CASH AND EQUIVALENTS, end of period $ 373,738 $ 516,129
============ ===========
<FN>
Noncash Investing Activity:
Principal reduction on affiliated mortgage loan
receivable by investing in a joint venture $ 8,125,928 $ --
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 6 -
<PAGE>
NTS MORTGAGE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
The financial statements and schedules included herein should be read in
conjunction with the Fund's 1996 Annual Report on Form 10-K. In the opinion of
the Fund's management, all adjustments (only consisting of normal recurring
accruals) necessary for a fair presentation have been made to the accompanying
financial statements for the three and nine months ended September 30, 1997 and
1996. The financial statements do not reflect the impact, if any, of the
proposed transactions discussed in Note 7 regarding a letter of intent.
1. Income Taxes
The Fund has to date elected 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 by
February 1 of the following year and meet certain other requirements. The
Fund currently qualifies as a REIT for Federal income tax purposes.
However, as discussed further in Note 7 regarding a letter of intent
between the Fund, NTS Corporation and certain Affiliates which
contemplates restructuring of certain of the Fund's mortgage loans, the
Fund's management is evaluating whether the Fund will be required to
change its tax status from a REIT to a conventional corporation, if such
transaction is completed. If, in fact, the Fund were taxed as a
conventional corporation for the nine months ended September 30, 1997,
the Fund's tax provision would be approximately $288,000.
A reconciliation of net income for financial statement purposes versus
that for income tax reporting for the nine months ended September 30,
1997 is as follows:
Net loss (GAAP) $(1,511,283)
Accretion of note discount (95,932)
Recovery on provision for loan losses (1,500,000)
Loss on investment in joint venture 3,707,227
Federal income tax expense 4,200
Letters of credit income 199
----------
Taxable income before dividends paid
deduction $ 604,411
==========
2. 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.
3. New Accounting Pronouncements
The Financial Accounting Standards Board recently issued Standard No.
128, Earnings Per Share (FAS 128). The Statement simplifies the standards
for computing earnings per share (EPS) and replaces the presentation of
primary EPS with a presentation of basic EPS. FAS 128 is effective for
financial statements for periods ending after December 15, 1997. The
adoption of FAS 128 is not expected to have any impact on the Fund's
financial statements.
- 7 -
<PAGE>
4. Affiliated Mortgage Loans Receivable, net
-----------------------------------------
The following tables outline the Fund's mortgage loan portfolio at
September 30, 1997. 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
Loan:
NTS/Virginia First mortgage on approximately Prime 01/31/98
Development Company 187 acres of residential land + 1 1/4%
and improvements thereon located
in Fredericksburg, Virginia, known
as the Fawn Lake Country Club golf
course; NTS Guaranty Corporation
guarantees the loan
Mortgage Loans:
NTS/Virginia First mortgage on approximately 17% of 12/31/97
Development Company 2,188 acres of residential land Gross
located in Fredericksburg, Receipts
Virginia, known as Fawn Lake (a)
NTS/Lake Forest First mortgage on approximately 17% of 12/31/97
II Residential 497 acres of residential Gross
Corporation land located in Louisville, Receipts
Kentucky, known as Lake Forest (a)
(a) These Mortgage Loans paid interest at the greater of 17% of Gross
Receipts or 4.42% of the average outstanding loan balance. Effective
07/01/97, these Mortgage Loans are paying interest at the greater of 17%
of Gross Receipts or 5.76% of the average outstanding loan balance.
- 8 -
<PAGE>
4. Affiliated Mortgage Loans Receivable, net - Continued
-----------------------------------------------------
<TABLE>
<CAPTION>
Total Balance Interest
Senior Outstanding Commitment Receivable
Liens At Face Amount At Fees At
Borrower 09/30/97 At 09/30/97 09/30/97(b) Received 09/30/97
1) Earning
Loans:
Temporary
Mortgage Loan:
<S> <C> <C> <C> <C> <C>
NTS/Virginia $2,499,503 $ 2,500,000 $ 2,499,532 $ 26,250 $ --
Development
Company
Mortgage Loans:
NTS/Virginia -- 31,000,000 30,175,175 200,000 909,246
Development (c)
Company
NTS/Lake Forest 4,000,000 28,000,000 23,483,811 250,000 199,474
II Residential (d) (e)
Corporation
----------- ----------- ----------- ----------
Total Earning
Loans $61,500,000 $56,158,518 $ 476,250 $1,108,720
=========== =========== =========== ==========
<FN>
(b) The carrying amount of the mortgage loans receivable at September 30,
1997 is net of any unamortized commitment fees.
(c) NTS Guaranty Corporation guarantees up to $2,000,000 of outstanding
debt exceeding $18 million.
(d) Senior lien applies to approximately 176 acres securing the first
mortgage which are subordinated to an unaffiliated lender. The Fund
guarantees this senior lien.
(e) NTS Guaranty Corporation guarantees up to $2,416,500 of outstanding
debt exceeding $22 million.
</FN>
</TABLE>
- 9 -
<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 as well as current and future
economic conditions. Reserves are based on estimates and ultimate
losses could differ materially from the amounts assumed in arriving at
the reserve for possible loan losses reported in the financial
statements. These estimates are reviewed periodically and, as
adjustments become necessary, they are reported in earnings in the
period in which they become known. On a regular basis, management
reviews each mortgage loan in the Fund's portfolio including an
assessment of the recoverability of the individual mortgage loans.
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 loan loss reserves.
The Fund had previously established a $1,500,000 loan loss reserve
regarding a Temporary Mortgage Loan to the Orlando Lake Forest Joint
Venture. As of September 30, 1997, the Fund has received 100% of the
amount due on this loan and has determined the loan loss reserve is no
longer needed.
6. Investment in Joint Venture - Affiliate
In September 1997, the Fund entered into an Amended and Restated Joint
Venture Agreement evidencing the Fund's admission as a partner in the
Orlando Lake Forest Joint Venture (the Joint Venture) effective as of
August 16, 1997. The other partners in the Joint Venture are Orlando
Lake Forest, Inc., Orlando Capital Corporation and OLF II Corporation,
all of whom are Affiliates of and are under common control with NTS
Corporation, the Fund's Sponsor. The Joint Venture will continue to
operate under its current legal name as the Orlando Lake Forest Joint
Venture.
The Joint Venture owns the Orlando Lake Forest project, a single family
residential community located in Seminole County, Florida (near
Orlando) consisting of approximately 360 acres of residential land and
improvements and approximately 20 acres of commercial land. The Joint
Venture will continue to own and develop the Orlando Lake Forest
project.
The Fund contributed to the Joint Venture as a capital contribution its
interest in the principal and interest of the first mortgage loan on
the Orlando Lake Forest project, and obtained a 50% interest in the
Joint Venture. The NTS entities named above hold cumulatively the
remaining 50% interest in the Joint Venture.
The net income or net loss of the joint venture is allocated based on
the respective partner's percentage interest, as defined in the joint
venture agreement. As of September 30, 1997, the Fund's percentage
interest was 50%, and the Fund's share of the joint venture's net
operating loss from August 16, 1997 (when the Fund was admitted as a
partner) through September 30, 1997 was $24,555.
Generally Accepted Accounting Principles require that investments be
recorded at the lower of carrying value or fair market value. The
application of these principles resulted in a non-cash charge of
approximately $3.7 million in the third quarter of 1997. All estimates
used in this evaluation represent management's best estimate based on
the facts present at the date of such evaluations.
- 10 -
<PAGE>
7. Related Party Transactions
In addition to the Affiliated Mortgage Loans and Joint Venture discussed in
Notes 4 and 6 to the Fund's financial statements, the Fund had the following
related party transactions.
As of September 30, 1997, the Sponsor (NTS Corporation) or an Affiliate
owned approximately 96,468 Shares of the Fund.
Pursuant to the Advisory Agreement, the Fund will pay the Advisor (NTS
Advisory Corporation) a Management Expense Allowance (Advisory Fee)
relating to services performed for the Fund in an amount equal to 1% of
the Fund's Net Assets, per annum, which may be increased annually by an
amount corresponding to the percentage increase in the Consumer Price
Index. Effective July 1, 1994, the Fund's Mortgage Loans to Fawn Lake and
Lake Forest were converted to cash flow mortgage loans. As part of the
consideration for this restructuring, the Fund's Board of Directors
required, among other things, that beginning in 1995, NTS Advisory
Corporation pay $100,000 annually towards the expenses of the Fund until
the maturity of the Mortgage Loans. As such, the Advisory Fee has been
reduced $75,000 for each of the nine month periods ended September 30,
1997 and 1996. The net Advisory Fee for the nine months ended September
30, 1997 and 1996 was $418,950 and $408,426, respectively. The Advisory
Fee has been reduced $25,000 for each of the three month periods ended
September 30, 1997 and 1996. The net Advisory Fee for the three months
ended September 30, 1997 and 1996 was $131,520 and $136,351, respectively.
The Fund has received advances from Affiliates of the Fund's Sponsor net
of repayments totalling $4,069,242 and $4,524,667 as of September 30, 1997
and December 31, 1996, respectively. The advances bear interest at
approximately the Prime Rate and mature as follows: $1,824,000 on March
31, 1999, $1,124,158 on May 1, 1999 and $1,121,084 is due on demand.
Interest expense to the Affiliates was $88,153 and $91,293 for the three
months ended September 30, 1997 and 1996, and $263,904 and $176,141 for
the nine months ended September 30, 1997 and 1996, respectively.
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 Fawn Lake and Lake Forest projects.
Generally Accepted Accounting Principles require that transactions as
contemplated by the Letter of Intent be recorded at the lesser of the
carrying amount of the Mortgage Loan or its fair market value. Management
cannot determine at this time whether or not such transactions, if
completed, will result in a loss. In addition, if the ownership of the
properties is transferred to the Fund, the Fund's management is evaluating
whether, in connection with the ongoing development of the projects, the
Fund will be required to change its tax status from a Real Estate
Investment Trust to a conventional corporation. If, in fact, the Fund were
taxed as a conventional corporation for the nine months ended September
30, 1997, the Fund's tax provision would be approximately $288,000.
- 11 -
<PAGE>
7. Related Party Transactions - Continued
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.
8. Notes Payable
Notes payable consist of the following:
September 30 December 31,
1997 1996
------------ ------------
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 $ 7,213,566 $12,278,000
Note payable to a bank in the amount of
$2,500,000, bearing interest at the
Prime Rate plus 1 1/4%, payable monthly,
due January 31, 1998, secured by
approximately 187 acres of residential
land and improvements thereon, known as
the Fawn Lake Country Club golf course,
guaranteed by Mr. J. D. Nichols, Chairman
of the Board of the Fund's Sponsor 2,499,503 1,998,850
----------- ----------
$ 9,713,069 $14,276,850
=========== ==========
The Prime Rate was 8 1/2% and 8 1/4% at September 30, 1997 and December 31,
1996, 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.
- 12 -
<PAGE>
8. Notes Payable - Continued
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 the Fund's 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.
9.Guaranties to the Fund
NTS Guaranty Corporation (the Guarantor), an Affiliate of the Fund's
Sponsor, has provided the following guaranties to the Fund:
Junior Mortgage Loan Guaranty
The Guarantor guarantees the payment to the Fund, on a timely basis, of the
Principal (as defined in the Prospectus) of all Junior Mortgage Loans and
Temporary Mortgage Loans made by the Fund to Affiliated Borrowers. The
Guarantor's obligation is limited to the Principal balance outstanding on
the Junior Mortgage Loan or Temporary Mortgage Loan and does not include the
Interest Reserve, as defined in the Prospectus. This guaranty will not apply
to Junior Mortgage Loans or Temporary Loans made to Non-Affiliated
Borrowers.
Purchase Price Guaranty
The Guarantor has guaranteed that investors of the Fund will receive, over
the life of the Fund, aggregate distributions from the Fund (from all
sources) in an amount at least equal to their Original Capital
Contributions, as defined in the Prospectus.
The liability of the Guarantor under the above guaranties is expressly
limited to its assets and its ability to draw upon a $10 million demand note
receivable from Mr. J. D. Nichols, Chairman of the Board of Directors of the
Fund's Sponsor. There can be no assurance that Mr. Nichols will, if called
upon, be able to honor his obligation to the Guarantor. In addition, Mr.
Nichols' ability to make any payments to the Guarantor pursuant to the $10
million demand note may be affected by additional liabilities and
obligations that he has or may incur.
There are no limitations on Mr. Nichols' ability to incur liabilities or
obligations in the future. The total amounts guaranteed by the Guarantor are
in excess of its net worth, and there is no assurance that the Guarantor
will be able to satisfy its obligation under these guaranties. The Guarantor
may in the future provide guaranties for other Affiliates of the Fund.
10.Commitments and Contingencies
The Fund has commitments to extend credit made in the normal course of
business that are not reflected in the financial statements. At September
30, 1997, the Fund had outstanding funding commitments under standby letters
of credit or surety bonds aggregating $571,597: Orlando Lake Forest Joint
Venture $91,921; NTS/Virginia Development Co. $479,676. Committed
undisbursed loans were approximately $4.3 million at September 30, 1997.
The Fund, together with, inter alia, the other partners in the Orlando Lake
Forest Joint Venture, is a guarantor on a $5.6 million revolving development
line of credit between the Orlando Lake Forest Joint Venture and an
unaffiliated bank. The outstanding balance on the loan was $3,512,991 as of
September 30, 1997.
- 13 -
<PAGE>
11. Supplemental Financial Information
The Fund has invested in various temporary investments and mortgage loans
(see Note 4). The following presents condensed financial information with
respect to Affiliated Borrowers whose loan balance as of September 30, 1997
represents a substantial concentration of the Fund's assets.
<TABLE>
<CAPTION>
NTS/Lake Forest II Residential Corporation
- ------------------------------------------
September 30, December 31,
1997 1996
-------------- ---------------
Balance Sheets
- --------------
<S> <C> <C>
Notes receivable $ 740,734 $ 789,303
Inventory 28,436,815 29,870,625
Other, net 2,023,662 2,506,190
-------------- ---------------
Total assets $ 31,201,211 $ 33,166,118
============== ===============
Notes payable $ 28,608,129 $ 31,349,964
Other liabilities,net 2,585,129 1,650,968
Equity 7,953 165,186
-------------- ---------------
Total liabilities and
equity $ 31,201,211 $ 33,166,118
============== ===============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---------------- --------------- ---------------- -------------------
Statements of Operations
- ------------------------
<S> <C> <C> <C> <C>
Lot sales $ 1,609,222 $ 866,811 $ 4,145,148 $ 2,259,257
Cost of sales (1,215,410) (654,006) (3,116,981) (1,677,647)
Other income
(expense), net (501,934) (305,623) (1,185,400) (817,326)
---------------- --------------- ---------------- -----------------
Net income (loss) $ (108,122) $ (92,818) $ (157,233) $ (235,716)
================ =============== ================ =================
</TABLE>
<TABLE>
<CAPTION>
NTS/Virginia Development Company
- --------------------------------
September 30, December 31,
1997 1996
--------------- ---------------
Balance Sheets
- --------------
<S> <C> <C>
Notes receivable $ 3,248,780 $ 4,150,515
Inventory 34,146,810 32,768,228
Other, net 964,670 997,969
--------------- ---------------
Total assets $ 38,360,260 37,916,712
=============== ===============
Notes payable $ 35,758,615 $ 35,245,593
Other liabilities,
net 2,753,942 2,361,741
Equity (152,297) 309,378
--------------- ---------------
Total liabilities
and equity $ 38,360,260 $ 37,916,712
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---------------- ---------------- ----------------- ------------------
Statements of Operations
- ------------------------
<S> <C> <C> <C> <C>
Lot sales $ 148,000 $ 1,207,039 $ 1,149,000 $ 2,461,753
Cost of sales (94,070) (760,853) (730,975) (1,570,216)
Other income
(expense), net (308,172) (400,325) (879,700) (1,092,402)
---------------- ---------------- ----------------- -----------------
Net income (loss) $ (254,242) $ 45,861 $ (461,675) $ (200,865)
================ ================ ================= =================
</TABLE>
- 14 -
<PAGE>
11. Supplemental Financial Information - Continued
NTS Guaranty Corporation has provided material guaranties to the Fund. The
following presents condensed financial information for NTS Guaranty
Corporation.
September 30, December 31,
1997 1996
----------------- --------------
Cash $ 100 $ 100
================= ==============
Common stock and paid-in-capital $ 10,000,100 $ 10,000,100
Note receivable from stockholder (10,000,000) (10,000,000)
----------------- --------------
Equity $ 100 $ 100
================= ==============
- 15 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The NTS Mortgage Income Fund (the "Fund") was formed September 26, 1988 to
operate as a real estate investment trust (REIT) under the Internal Revenue Code
of 1986, as amended. The Fund commenced an offering to the public on March 31,
1989 and was authorized to sell up to 2,500,000 shares of common stock at $20.00
per share (subject to an increase to 5,000,000 shares at the option of the
Fund). Approximately 3,187,000 shares were sold representing approximately $64
million in sales and approximately $9.5 million in selling expenses and other
offering costs. The net offering proceeds remaining, after payment of brokerage
commissions, organizational expenses and other costs, have been used to make
Mortgage Loans and Temporary Investments and such other investments as permitted
by the Fund's Prospectus. Capitalized terms shall have the meaning ascribed in
the "Glossary" on pages 75 to 81 of the Fund's Prospectus, which is filed
herewith and incorporated by reference.
Liquidity and Capital Resources
The Fund's primary investment strategy has been to make investments in Mortgage
Loans. As of September 30, 1997, the Fund had commitments outstanding for
Mortgage Loans aggregating $58,000,000 of which approximately $53,660,000 had
been funded. Also, the Fund has invested in Temporary Investments totalling
approximately $2,500,000 as of September 30, 1997. Reference is made to Note 4
of the Notes to Financial Statements for further information regarding the
Fund's investments as of September 30, 1997.
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 Mortgage Loan from the Fund in the amount of $31,000,000 (with an
outstanding balance of $30,175,175 as of September 30, 1997) to fund the
development of the Fawn Lake project, a specified investment. The loan is
secured by a first mortgage on approximately 2,188 acres of residential
land and improvements thereon located in Fredericksburg, Virginia. The loan
bears interest at an annualized rate equal to the greater of 17% of Gross
Receipts or 5.76% of the average outstanding loan balance and matures
December 31, 1997.
A Temporary Mortgage Loan from the Fund in the amount of $2,500,000 (with
an outstanding balance of $2,499,532 as of September 30, 1997) to fund the
construction of the Fawn Lake Country Club golf course. The loan bears
interest at the Prime Rate plus 1 1/4 %, payable monthly, and matures
January 31, 1998. 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 bank in the amount of $4,000,000 (with
an outstanding balance of $4,000,000 as of September 30, 1997) which is
secured by a first mortgage on the Lake Forest Country Club golf course
(approximately 176 acres of land and improvements thereon). 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 1/2 %, payable monthly, and matures August 22, 2002. The
loan is guaranteed by the Fund.
- 16 -
<PAGE>
Liquidity and Capital Resources - Continued
A Mortgage Loan from the Fund in the amount of $28,000,000 (with an
outstanding balance of $23,483,811 as of September 30, 1997) 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 5.76% of the average outstanding loan balance and matures
December 31, 1997. The loan is secured by a first mortgage on approximately
497 acres of residential land and improvements thereon located in
Louisville, Kentucky of which approximately 176 acres have been
subordinated regarding the loan discussed above.
On February 21, 1997, the Fund's Board of Directors approved an increase in the
loan commitment amount to Fawn Lake from $30,000,000 to $31,000,000. The purpose
of the increase is to pay ongoing development costs.
On June 19, 1997, the Fund's Board of Directors approved an extension of the
maturity date of the Fawn Lake and Lake Forest Mortage Loans to December 31,
1997. In addition, the interest rate was changed to the greater of 17% of Gross
Receipts or 5.76% of the average outstanding loan balance effective July 1,
1997.
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 Fawn Lake and Lake Forest projects.
Generally Accepted Accounting Principles require that transactions as
contemplated by the Letter of Intent be recorded at the lesser of the carrying
amount of the Mortgage Loan or its fair market value. Management cannot
determine at this time whether or not such transactions, if completed, will
result in a loss. In addition, if the ownership of the properties is transferred
to the Fund, the Fund's management is evaluating whether, in connection with the
ongoing development of the projects, the Fund will be required to change its tax
status from a Real Estate Investment Trust to a conventional corporation. If, in
fact, the Fund were taxed as a conventional corporation for the nine months
ended September 30, 1997, the Fund's tax provision would be approximately
$288,000.
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.
- 17 -
<PAGE>
Liquidity and Capital Resources - Continued
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.
In September 1997, the Fund entered into an Amended and Restated Joint Venture
Agreement evidencing the Fund's admission as a partner in the Orlando Lake
Forest Joint Venture (the Joint Venture) effective as of August 16, 1997. The
other partners in the Joint Venture are Orlando Lake Forest, Inc., Orlando
Capital Corporation and OLF II Corporation, all of whom are Affiliates of and
are under common control with NTS Corporation, the Fund's Sponsor. The Joint
Venture will continue to operate under its current legal name as the Orlando
Lake Forest Joint Venture.
The Joint Venture owns the Orlando Lake Forest project, a single family
residential community located in Seminole County, Florida (near Orlando)
consisting of approximately 360 acres of residential land and improvements and
approximately 20 acres of commercial land. The Joint Venture will continue to
own and develop the Orlando Lake Forest project.
The Fund contributed to the Joint Venture as a capital contribution its interest
in the principal and interest of the first mortgage loan on the Orlando Lake
Forest project, and obtained a 50% interest in the Joint Venture. The NTS
entities named above hold cumulatively the remaining 50% interest in the Joint
Venture.
The net income or net loss of the joint venture is allocated based on the
respective partner's percentage interest, as defined in the joint venture
agreement. As of September 30, 1997, the Fund's percentage interest was 50%, and
the Fund's share of the joint venture's net operating loss from August 16, 1997
(when the Fund was admitted as a partner) through September 30, 1997 was
$24,555.
On September 30, 1997, the principal balance outstanding on the Fund's Temporary
Mortgage Loan to the Orlando Lake Forest Joint Venture was paid in full.
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 was to refinance the Fund's then existing credit facility,
increase the Fund's investment portfolio and provide additional operating
capital for the Fund. The loan bears interest at the Prime Rate plus 1%, payable
monthly, and matures December 27, 1997. The Fund's Sponsor is working with
several lenders, including the existing creditor, to refinance the debt. The
Fund made principal payments on the loan equal to $13,500 per lot from lot sales
at Lake Forest and $1,000 per lot from lot sales at Fawn Lake during 1996. The
Fund made principal
- 18 -
<PAGE>
Liquidity and Capital Resources - Continued
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 until the maximum
required principal paydown of $1,803,250 was met. In addition, the Fund made a
$3,319,934 principal paydown using proceeds received from the Orlando Lake
Forest Joint Venture. The loan is guaranteed by Mr. J. D. Nichols, Chairman of
the Board of the Fund's Sponsor. The loan balance was $7,213,566 at September
30, 1997.
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 Country Club golf course. The
purpose of the loan was to fund the remaining construction of the Fawn Lake Golf
Course, which was completed in 1996. The loan bears interest at the Prime Rate
plus 3/4%, payable monthly. In February 1997, the loan was increased to
$2,500,000. The maturity date was extended to July 31, 1997 and subsequently
extended to January 31, 1998. The loan is guaranteed by Mr. J. D. Nichols,
Chairman of the Board of the Fund's Sponsor. The loan balance was $2,499,503 at
September 30, 1997.
The Fund has received advances from Affiliates of the Fund's Sponsor net of
repayments totalling $4,069,242 as of September 30, 1997. The advances had been
at various rates averaging approximately 5.75% and matured April 15, 1996. On
April 15, 1996, the interest rate on all borrowings from Affiliates of the
Fund's Sponsor increased to the Prime Rate. The maturity date on $1,824,000 of
borrowings from Affiliates is March 31, 1999 and $1,121,084 of the advances are
due on demand. In February 1997, the maturity date on $1,124,158 of the Fund's
current borrowings was extended to May 1, 1999 and the interest rate was changed
to the Prime Rate plus 3/4%. In addition, the Fund is making principal payments
on the advances equal to $3,000 per lot from lot sales at Fawn Lake, Lake Forest
and the Orlando Project from April 15, 1996 through March 31, 1997; $5,000 per
lot from April 1, 1997 through March 1, 1998; and $7,500 per lot from April 1,
1998 through March 31, 1999. Interest paid to the Affiliates was $88,153 and
$91,293 for the three months ended September 30, 1997 and 1996, respectively.
Interest paid to the Affiliates for the nine months ended September 30, 1997 and
1996 was $263,904 and $176,141 respectively. The advances were made to meet the
development plans of the projects to which the Fund has outstanding loans.
During the nine months ended September 30, 1997, the Fund received repayment on
three mortgage loans and two temporary investments in the aggregate principal
amount of $9,299,287. Repayments on mortgage loans are generally equal to
approximately 83% of the Gross Receipts received on lot sales less closing
costs. The Fund made investments in three mortgage loans and one temporary
investment in the aggregate principal amount of $5,700,037.
During the nine months ended September 30, 1996, the Fund received repayment on
four mortgage loans and two temporary investment in the aggregate principal
amount of $5,954,633. The Fund made investments in three mortgage loans and one
temporary investment in the aggregate principal amount of $8,301,257.
During the nine months ended September 30, 1997, the Fund borrowed $510,913 on
its credit facilities. The Fund repaid $5,074,694 of its borrowings using
proceeds from loan repayments made by NTS/Lake Forest II Residential
Corporation, Orlando Lake Forest Joint Venture and NTS/Virginia Development
Company.
During the nine months ended September 30, 1997, the Fund borrowed $1,142,041
from an Affiliate of the Fund's Sponsor. The Fund repaid $1,597,466 of its
borrowings from Affiliates using proceeds from loan repayments made by NTS/Lake
Forest II Residential Corporation, Orlando Lake Forest Joint Venture, and
NTS/Virginia Development Company.
- 19 -
<PAGE>
Liquidity and Capital Resources - Continued
During the nine months ended September 30, 1996, the Fund borrowed $1,335,618 on
its credit facilities. The Fund repaid $1,028,259 of its borrowings from loan
repayments made by NTS/Lake Forest II Residential Corporation and NTS/Virginia
Development Company.
During the nine months ended September 30, 1996, the Fund borrowed $2,333,073
from an Affiliate of the Fund's Sponsor. The Fund repaid $454,456 of its
borrowings from Affiliates using proceeds from loan repayments made by NTS/Lake
Forest II Residential Corporation, Orlando Lake Forest Joint Venture and
NTS/Virginia Development Company.
The Fund intends to maintain a working capital reserve equal to 1% of the gross
proceeds received from the Fund's original public offering. The Fund may alter
the percentage of such reserves if deemed necessary. As of September 30, 1997,
the Fund had cash and equivalents of approximately $370,000.
The Fund's primary source of liquidity has been from the interest earned on the
Mortgage Loans and on the Temporary Investments. It is expected that this will
continue to be a primary source of future liquidity until the consummation of
the transactions contemplated in the Letter of Intent, as discussed on pages 17
and 18, 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 in
an attempt 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 distributions 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 (loss) using Generally Accepted Accounting Principles (GAAP) was
$(1,895,479) and $196,659 and using tax-reporting accounting (TRA) was $293,811
and $155,314 for the three months ended September 30, 1997 and 1996
respectively. Net income (loss) using GAAP was $(1,511,283)and $640,680 and
using TRA was $604,411 and $360,618 for the nine months ended September 30, 1997
and 1996, 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, adjustment of asset values to the lower of
carrying value or fair market value and provision for loan losses. GAAP requires
that discounts on mortgage loan receivables be recognized as an adjustment to
yield over the estimated life of the loan; for tax purposes the discount is
recognized as income when received. GAAP requires that loan commitment fee
income be recognized as income over the term of the related loans; for tax
purposes the fees are recognized as income when received. GAAP requires that
income received from letters of
- 20 -
<PAGE>
Results of Operations - Continued
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. GAAP requires that investments be recorded at the lesser
of carrying value or fair market value; for tax purposes any loss on investment
would be recognized at the point the investment is sold or becomes worthless
within the taxable year. 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, and the provision is reversed if the fair value of the asset should
subsequently become greater that the carrying value of the asset; for tax
purposes, a provision for loan losses is allowed when the debt becomes worthless
within the taxable year. TRA income is used in applying the REIT-qualifying test
that requires 95% of taxable income to be paid out in dividends. (See Note 1 to
Notes to Financial Statements).
Cash provided by operations was $1,211,840 and $537,026 and dividends declared
were $-0- and $430,295 for the nine months ended September 30, 1997 and 1996,
respectively. Total dividends declared provided Stockholders with an annualized
return of 0.90% for the nine months ended September 30, 1996.
The increase in interest income on mortgage loans receivable for the three
months and nine months ended September 30, 1997 over the comparable period in
1996 is due to a combination of an increase in the average outstanding balances
of the earning loans and an increase in the average rate of interest earned on
the loans. The average outstanding balances of the earning loans increased from
approximately $62,600,000 for the nine months ended September 30, 1996 to
$63,600,000 for the nine months ended September 30, 1997. The average rate of
interest earned by the Fund increased from approximately 5% in 1996 to
approximately 5.5% in 1997.
In September 1997, the Fund entered into an Amended and Restated Joint Venture
Agreement evidencing the Fund's admission as a partner in the Orlando Lake
Forest Joint Venture (the Joint Venture) effective as of August 16, 1997. The
other partners in the Joint Venture are Orlando Lake Forest, Inc., Orlando
Capital Corporation and OLF II Corporation, all of whom are Affiliates of and
are under common control with NTS Corporation, the Fund's Sponsor. The Joint
Venture will continue to operate under its current legal name as the Orlando
Lake Forest Joint Venture.
The Joint Venture owns the Orlando Lake Forest project, a single family
residential community located in Seminole County, Florida (near Orlando)
consisting of approximately 360 acres of residential land and improvements and
approximately 20 acres of commercial land. The Joint Venture will continue to
own and develop the Orlando Lake Forest project.
The Fund contributed to the Joint Venture as a capital contribution its interest
in the principal and interest of the first mortgage loan on the Orlando Lake
Forest project, and obtained a 50% interest in the Joint Venture. The NTS
entities named above hold cumulatively the remaining 50% interest in the Joint
Venture.
The net income or net loss of the joint venture is allocated based on the
respective partner's percentage interest, as defined in the joint venture
agreement. As of September 30, 1997, the Fund's percentage interest was 50%, and
the Fund's share of the joint venture's net operating loss from August 16, 1997
(when the Fund was admitted as a partner) through September 30, 1997 was
$24,555.
Generally Accepted Accounting Principles require that investments be recorded at
the lower of carrying value or fair market value. The application of these
principles resulted in a non-cash charge of approximately $3.7 million in the
third quarter of 1997. All estimates used in this evaluation represent
management's best estimate based on the facts present at the date of such
evaluations.
- 21 -
<PAGE>
Results of Operations - Continued
Commitment fees paid at loan closings were amortized over the life of the loan
using the interest method. Letter of credit fees are amortized over the term of
the letter of credit. Fee income on mortgage loans and other financial services
is the amount of commitment fees and letter of credit fees being amortized for
the period. Fee income is comparable between periods.
The Fund had previously established a $1,500,000 loan loss reserve regarding a
Temporary Mortgage Loan to the Orlando Lake Forest Joint Venture. As of
September 30, 1997, the Fund has received 100% of the amount due on this loan
and has determined the loan loss reserve is no longer needed.
In addition to Regular Interest, the Fund may receive Incentive Interest in
connection with Mortgage Loans made to Affiliated Borrowers secured by
properties not held for sale in the ordinary course of the Affiliated Borrower's
business; except that in certain cases the Fund may forego Incentive Interest in
order to maintain compliance with REIT qualification requirements and may
instead either seek additional Points or Regular
Interest or will seek to obtain Gross Receipts Interest. The Fund does not
anticipate receiving Incentive Interest and Gross Receipts Interest on the same
Mortgage Loan. The amount of Incentive Interest which the Fund will receive from
Affiliated Borrowers will be equal to a specified percentage of the "Increase in
Value" of the underlying property securing the Mortgage Loan, which Increase in
Value occurred during the period beginning from the date that the Mortgage Loan
was funded and ending upon the repayment of the Mortgage Loan at maturity or
upon the Sale or Refinancing of the underlying property excluding a sale or
transfer to an Affiliate, so long as the Fund retains an interest in the
property subsequent to the sale or transfer. No Incentive Interest has been
included in revenues for either the three or nine months ended September 30,
1997 and 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 either
the three or nine months ended September 30, 1997 or 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 $75,000 for each of
the nine month periods ended September 30, 1997 and 1996. The net Advisory Fee
for the nine months ended September 30, 1997 and 1997 was $418,950 and $408,426,
respectively. The Advisory Fee has been reduced $25,000 for each of the three
month periods ended September 30, 1997 and 1996 The net Advisory Fee for the
three months ended September 30, 1997 and 1996 was $131,520 and $136,351,
respectively. Increases and decreases in the Advisory Fee generally correspond
directly to increases and decreases in the Fund's Net Assets.
Increases and decreases in interest expense generally correspond directly to
increases and decreases in the outstanding balances of the Fund's borrowings.
The average interest rate paid by the Fund for the three and nine months ended
September 30, 1997 and 1996 was approximately 9%.
- 22 -
<PAGE>
Results of Operations - Continued
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 three and nine month periods
is due to increased professional fees related to the proposed reorganization
discussed on pages 17 and 18 of this Form 10-Q.
Income tax expense is the Fund's estimated liability for Federal, state, and
local income taxes due on the amount of earnings which are in excess of
dividends for the period should at least 95% of taxable income be distributed to
the stockholders. If the Fund were taxed as a conventional corporation for the
nine months ended September 30, 1997, the Fund's tax provision would be
approximately $288,000.
While the Fund's revenues for the nine month period (excluding the recovery on
provision for loan losses) have increased approximately 6% from 1996 to 1997,
net income as a percentage of revenues has increased approximately 0.5%. This is
due primarily to the fact the Fund's professional and administrative expenses
have increased as a result of costs related to the reorganization of the Fund's
investments.
The Fund has invested in Mortgage Loans totalling approximately $53,659,000 as
of September 30, 1997. Also, the Fund has invested in Temporary Investments
totalling approximately $2,500,000 as of September 30, 1997. The balance of
funds were invested in short-term cash equivalents.
The Fund's investments at September 30, 1997 were as follows:
A Mortgage Loan to NTS/Lake Forest II Residential Corporation, an
Affiliated Borrower, to fund the development of Lake Forest, a specified
investment. The loan balance was $23,483,811 at September 30, 1997.
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 $30,175,175 at September 30, 1997.
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 $2,499,532 at September 30, 1997.
The Fund's investment of $23,483,811 in NTS/Lake Forest II Residential
Corporation represents approximately 36% of the Fund's portfolio and the Fund's
commitment of $28,000,000 represents approximately 43% of the Fund's portfolio.
The Fund's investment of $30,175,175 in NTS/Virginia Development Company
represents approximately 46% of the Fund's portfolio and the Fund's commitment
of $31,000,000 represents approximately 47% of the Fund's portfolio. Both loans
are current in their interest payments to the Fund. In addition, the Fund's
Temporary Mortgage Loan to NTS/Virginia Development Company is current in its
interest payments to the Fund.
Some of the statements included in Item 2, Management's Discussion and Analysis
of Financial Condition and Results of Operations, and 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.
- 23 -
<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 of the Fund, including general or local economic conditions,
competition, interest rates, real estate tax rates, other operating expenses,
the supply of and demand for properties, zoning laws, other governmental rules
and fiscal policies and acts of God.
- - The Affiliated Borrowers are engaged in the development and sale of
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.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, NTS Mortgage Income Fund has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NTS Mortgage Income Fund
(Registrant)
/s/ John W. Hampton
John W. Hampton
Secretary/Treasurer (principal
accounting and chief financial
officer)
Date: April 27, 1998
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