NTS MORTGAGE INCOME FUND
10172 Linn Station Road
Louisville, Kentucky 40223
May 1, 1996
DEAR STOCKHOLDER:
We invite you to attend the Seventh Annual Meeting of Stockholders of NTS
Mortgage Income Fund ("Fund") to be convened at the Fawn Lake Clubhouse, 11300
Longstreet Drive, Spotsylvania, Virginia 22555, on June 27, 1996 at 10:00 a.m.
The attached Notice of Annual Meeting and Proxy Statement describe the formal
business to be transacted at the meeting. During the meeting, we will also
report on the operations of the Fund. Directors and Officers of the Fund as well
as representatives of Arthur Andersen LLP will be present to respond to any
questions you may have.
Your vote is important, regardless of the number of shares you own. ON BEHALF OF
THE BOARD OF DIRECTORS, WE URGE YOU TO SIGN, DATE AND RETURN THE ENCLOSED PROXY
CARD AS SOON AS POSSIBLE, EVEN IF YOU CURRENTLY PLAN TO ATTEND THE ANNUAL
MEETING. This will not prevent you from voting in person, but will assure that
your vote is counted if you are unable to attend the meeting.
Refreshments will be available prior to the meeting, during which time other
members of the Board of Directors and I look forward to visiting with you
personally.
Sincerely,
J.D. NICHOLS
Chairman of the Board
<PAGE>
NTS MORTGAGE INCOME FUND
10172 Linn Station Road
Louisville, Kentucky 40223
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 27,1996
To the Stockholders of NTS Mortgage Income Fund:
The Annual Meeting of Stockholders (the "Meeting") of NTS Mortgage Income Fund,
a Delaware corporation (the "Fund"), will be convened in Spotsylvania, Virginia
on June 27, 1996 at the Fawn Lake Clubhouse, 11300 Longstreet Drive,
Spotsylvania, Virginia, at 10:00 a.m. Eastern time (the "Meeting Date") pursuant
to this notice. All Stockholders are entitled to attend the Meeting if they so
elect. The Fund will solicit proxies, pursuant to the enclosed Proxy statement,
for use at the Meeting on the Meeting Date. The Fund expects that a quorum will
be present on the Meeting Date and that the matters to be considered by the
Stockholders at the Meeting will be acted upon then. The Annual Meeting of
Stockholders will be held for the following purposes:
1. To elect five Directors to hold office until the next Annual Meeting of
Stockholders or until their successors are elected and qualified:
2. To approve the designation of auditors for 1996; and
3. To transact such other business as may properly come before the Meeting,
or any adjournment thereof.
The Board of Directors has fixed the close of business on May 1, 1996 as the
record date for the determination of Stockholders entitled to notice of and to
vote at the Meeting.
Whether or not you plan to attend the Meeting in person, please fill in, sign
and return the enclosed form of proxy. Thank you very much.
JOHN W. HAMPTON
Secretary and Treasurer
THE FUND'S 1995 ANNUAL REPORT IS BEING MAILED TO STOCKHOLDERS CONCURRENTLY.
<PAGE>
NTS MORTGAGE INCOME FUND
10172 Linn Station Road
Louisville, Kentucky 40223
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation by and on
behalf of the Board of Directors of NTS Mortgage Income Fund (the "Fund") of
proxies to be voted at the Seventh Annual Meeting of Stockholders (the
"Meeting") when it is convened on Thursday, June 27, 1996 at 10:00 a.m. (the
"Meeting Date"), or any subsequent adjournment thereof, at the Fawn Lake
Clubhouse, 11300 Longstreet Drive, Spotsylvania, Virginia 22555.
THE PROXIES SOLICITED BY THE FUND PURSUANT TO THIS PROXY STATEMENT ARE SOLICITED
FOR USE AT THE MEETING WHEN CONVENED ON THE MEETING DATE AND ANY SUBSEQUENT
ADJOURNMENTS AND MAY NOT BE USED FOR ANY PURPOSE, INCLUDING THE DETERMINATION OF
WHETHER A QUORUM IS PRESENT, PRIOR TO THE MEETING DATE. THEREFORE, IT IS
ANTICIPATED THAT THE BUSINESS OF THE FUND TO BE CONSIDERED AT THE MEETING, WITH
RESPECT TO WHICH PROXIES ARE SOLICITED PURSUANT TO THIS PROXY STATEMENT WILL BE
ADDRESSED ON THE MEETING DATE.
The by-laws of the Fund (the "By-Laws") require that the Annual Meeting of
Stockholders of the Fund for any year be held not less than thirty (30) days
after delivery of the Annual Report, but within six (6) months after the end of
each fiscal year unless extended due to the inability to hold the meeting within
such time, in which case it shall be held as soon as practicable thereafter.
Therefore, the 1995 Annual Meeting of Stockholders of the Fund will be convened
on June 27, 1996 (the "Meeting Date").
The solicitation of proxies will be by mail and the cost will be borne directly
by the Fund. Upon request, the Fund will reimburse banks, brokers, nominees and
related fiduciaries for reasonable expenses incurred by them in sending annual
reports and proxy materials to beneficial owners of shares to the extent
required by Rule 14a-13(a-b) under the Securities Exchange Act of 1934, as
amended.
Shares of common stock of the Fund (the "Shares") represented by properly
executed proxies in the accompanying form received by the Board Directors prior
to the Meeting Date will be voted at the Meeting on the Meeting Date. Shares not
represented by properly executed proxies will not be voted. Where a Stockholder
specifies in a proxy a choice with respect to any matter to be acted upon, the
Shares represented by such proxy will be voted as specified. Where a Stockholder
does not specify a choice, in an otherwise properly executed proxy, with respect
to any proposal referred to therein, the Shares represented by such proxy will
be voted with respect to such proposal in accordance with the recommendations of
the Board of Directors described herein. A Stockholder who signs and returns a
proxy in the accompanying form may revoke it by: (i) giving written notice of
revocation to the Secretary of the Fund before the proxy is voted at the Meeting
on the Meeting date: (ii) executing and delivering a later-dated proxy: or (iii)
attending the Meeting on the Meeting Date and voting his or her Shares in
person.
<PAGE>
The close of business on May 1, 1996 has been fixed as the record date for the
determination of Stockholders entitled to notice of and to vote at the Meeting.
On such date, the Fund had outstanding approximately 3,187,000 shares, each of
which entitles the holder thereof to one vote at the Meeting. Stockholders of
record as of the record date will be entitled to vote at the Meeting or any
adjournments thereof. A quorum, consisting of the holders of at least a majority
of the issued and outstanding Shares eligible to vote, must be present, in
person or by proxy, at the Meeting for valid Stockholder action to be taken.
The mailing address of the principal executive offices of the Fund is 10172 Linn
Station Road, Louisville, Kentucky 40223. This Proxy Statement and the related
proxy card are being mailed to Stockholders on or about May 8, 1996.
<PAGE>
MATTERS TO BE CONSIDERED BY STOCKHOLDERS
ELECTION OF DIRECTORS
Five (5) members of the Board of Directors ("Directors") will be elected at the
Meeting, each to serve until the next Annual Meeting of Stockholders or
otherwise as provided in the By-Laws and until their respective successors are
elected and qualified. Pursuant to the By-Laws, three (3) Directors (the
"Independent Directors") must be unaffiliated with NTS Corporation, the sponsor
of the Fund ("NTS" or the "Sponsor") and NTS Advisory Corporation (the
"Advisor"), while the remaining Directors shall be affiliated with the Advisor
(the "Affiliated Director"). Unless instructions to the contrary are given, the
persons named as proxy voters in the accompanying proxy, or their substitutes,
will vote for the following nominees for Director with respect to all proxies
received by the Fund. If any nominee should become unavailable for any reason,
it is intended that votes will be cast for a substitute nominee designated by
the Independent Directors with respect to the Independent Directors and by the
remaining Directors with respect to the Affiliated Directors. The Board of
Directors has no reason to believe that the nominees named will be unable to
serve if elected.
The By-Laws provide that an Independent Director may not, directly or indirectly
(including through a member of his immediate family), own any interest in, be
employed by, have any present material business or professional relationship
with, or serve as a director or trustee of, more than two other real estate
investment trusts ("REITs") organized by the Advisor or its Affiliates.
Additionally, an Independent Director may not perform other services for the
Fund, except as a Director. The names of the nominees for Independent Director
and certain information regarding them, including their principal occupation for
the past five (5) years, are as follows:
Name: F. Everett Warren, J.D.
Age: 72 Principal Occupation(s)
Year First Elected A Director: 1988 During Past 5 Years:
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.
<PAGE>
Name: Robert M. Day
Age: 43 Principal Occupation(s)
Year First Elected A Director: 1988 During Past 5 Years:
Managing Director of Lambert Smith
Hampton and its predecessor companies,
Atlanta, Georgia, a commercial and
industrial real estate brokerage firm,
since 1985. Prior to such employment.
Mr. Day spent two years as the Chief
Executive Officer of the real estate
syndication subsidiary of Financial
Service Corporation in Atlanta.
Name: Gerald B. Thomas
Age: 57 Principal Occupation(s)
Year First Elected A Director: 1996 During Past 5 Years:
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.
The by-Laws provide that the two (2) Affiliated Directors shall be nominated by
the Directors. The names of the nominees for Affiliated Director and certain
information regarding them, including their principal occupation for the past
five (5) years, is as follows:
Name: J.D. Nichols
Age: 53 Principal Occupation(s)
Year First Elected A Director: 1988 During Past 5 Years
Chairman of the Board and Chief
Executive Officer of NTS Corporation, as
well as its various Affiliates and
predecessor companies, since 1972. NTS
Corporation is a real estate development
and construction company.
<PAGE>
Name: Richard L. Good
Age: 56 Principal Occupation(s)
Year First Elected A Director: 1996 During Past 5 Years
President and Chief Operating Officer of
NTS Corporation from September 1990 to
present and Chairman of NTS Securities,
Inc. from September 1988 to present.
Prior to September 1990, Mr. Good served
as Executive Vice President of NTS
Corporation from January 1985 to August
1990. He also held the position of
President of NTS Securities, Inc. from
January 1985 to August 1988.
The Board of Directors meets at least quarterly to address the business of the
Fund either in person or by telephone conference. The Board of Directors met
four times, either in person or telephonically, in 1995. The Board established
an Audit Committee in 1992. The Audit Committee is composed of the Independent
Directors. The principal functions of the Audit Committee are to review the
scope and results of the audit and review the Fund's accounting policies and
procedures and system of internal controls.
RECOMMENDATION OF THE BOARD: THE FOREGOING NOMINEES FOR DIRECTOR WILL BE
PRESENTED FOR ELECTION BY THE STOCKHOLDERS AT THE ANNUAL MEETING OF STOCKHOLDERS
AND THE BOARD OF DIRECTORS RECOMMENDS THAT THEY BE ELECTED.
Assuming a quorum is present, the affirmative vote of a majority of the votes
cast by Stockholders eligible to vote at the meeting and present in person or by
proxy is required to elect each of the nominees listed above.
APPROVAL OF AUDITOR
Arthur Andersen LLP have been the Fund's auditors since its inception. A
representative of the firm will be present at the Meeting to make a statement if
he desires to do so and to respond to appropriate questions.
RECOMMENDATION OF THE BOARD: THE BOARD OF DIRECTORS RECOMMENDS APPROVAL OF THE
DESIGNATION OF ARTHUR ANDERSEN LLP, WHO ARE INDEPENDENT PUBLIC ACCOUNTANTS, AS
AUDITORS FOR THE YEAR 1996.
EXECUTIVE OFFICERS
The following table sets forth information with respect to the executive
officers of the Fund. Each officer is elected annually by the Board of Directors
and serves until his successor is elected and qualified or until his death,
resignation or removal by the Board of Directors.
<PAGE>
Name: Richard L. Good; 56
Office and Year First Elected: President, 1988
Principal Occupation(s)During Past 5 Years:
President and Chief Operating Officer of
NTS Corporation from September 1990 to
present and Chairman of NTS Securities,
Inc. from September 1988 to present.
Prior to September 1990, Mr. Good served
as Executive Vice President of NTS
Corporation from January 1985 to August
1990. He also held the position of
President of NTS Securities, Inc. from
January 1985 to August 1988.
Name: John W. Hampton; 46
Office and Year First Elected: Secretary and Treasurer; 1994
Principal Occupation(s) During Past 5 Years:
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.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The Independent Directors are paid a fee of $1,000 per month, and are reimbursed
for out-of-pocket expenses incurred in attending meetings of the Board of
Directors. Independent Directors received an aggregate of $24,000 in fees in
1995. Neither the Affiliated Directors nor the Executive Officers of the Fund
received any compensation from the Fund in 1995 nor will they in 1996. However,
the Affiliated Directors will be reimbursed by the Fund for their travel
expenses incurred in connection with attending meetings of the Board of
Directors. The Affiliated Directors and Executive Officers are employees,
officers, directors and/or beneficial owners of the Advisor and/or its
Affiliates and are compensated by such entities, in part, for their services to
the Fund.
SHAREHOLDINGS BY DIRECTORS AND EXECUTIVE OFFICERS
The Fund is not aware of any person who, directly or indirectly, owns
beneficially more than five percent (5%) of the outstanding Shares.
As of May 1, 1996, the Directors and Executive Officers of the Fund,
individually and as a group, owned the number of Shares set forth below:
<PAGE>
Name of Beneficial Owner: J.D. Nichols
Amount and Nature of Beneficial Ownership: 95,996 Shares (1)
Percent Of Class: 3%
Name of Beneficial Owner: All Directors and Executive Officers as a Group
Amount and Nature of Beneficial Ownership: 95,996 Shares
Percent Of Class: 3%
(1) These Shares are owned of record by NTS Corporation or an Affiliate. NTS
Corporation is wholly owned directly and through certain entities by
Messrs. Nichols, Good, and Michael M. Fleishman, with respect to which
Mr. Nichols holds voting and investment authority.
CERTAIN TRANSACTIONS
The Fund and the Advisor entered into an agreement (the "Advisory Agreement")
dated as of March 31, 1989, pursuant to which the Advisor is responsible for
recommending investments and supervising the day-to-day operations of the Fund.
The Advisory Agreement had an initial term of one year and automatically renews
for successive terms unless terminated by a majority of the Board of Directors
or the Advisor. The Advisor is required, under the Advisory Agreement, to
present to the Fund investment opportunities and to provide a continuing and
suitable investment program for the Fund consistent with the investment
objectives and policies of the Fund. This includes responsibility for the
day-to-day management of the Fund. The Advisor must monitor the Fund's assets
and income so that the Fund will comply with the requirements of the Internal
Revenue Code of 1986, as amended, for the activities of a real estate investment
trust ("REIT"). The Advisor will negotiate and otherwise conduct relations on
behalf of the Fund with persons necessary to the operations of the Fund.
For such services, the Fund pays the Advisor: (1) a Management Expense Allowance
in an amount equal to 1% of the net assets of the Fund, per annum, less $100,000
per an agreement effective January 1995, payable monthly: (2) a Real Estate
Management Fee in connection with services rendered for the management of any
residential or commercial real estate investment of the Fund, or properties
acquired through foreclosure, plus certain reimbursed expenses, payable monthly;
and (3) a Subordinated Advisory Fee for services rendered in connection with the
liquidation of the Fund's investments, equal to 5% of the capital proceeds
remaining after Stockholders have received: (a) capital proceeds in an amount
equal to 100% of their original capital contributions; and (b) 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 Advisor
earned a Management Expense Allowance of $528,973 in 1995 pursuant to the
Advisory Agreement. No Real Estate Management Fees or Subordinated Advisory Fees
were due or paid for 1995.
The business plan of the Fund contemplates the making by the Fund of mortgage
loans (the "Mortgage Loans") which will generally be secured by first, and to a
lesser extent, junior mortgages on real properties or by interests in other
REIT-qualifying assets; in addition, the Fund may make direct investments in
select real property. The Fund may make Mortgage Loans to borrowers (the
"Borrowers") which are Affiliates of the Sponsor (the "Affiliated Borrowers") or
<PAGE>
which are not Affiliates of the Sponsor (the "Non-Affiliated Borrowers").
However, it is anticipated that substantially all of the Mortgage Loans will be
made to Affiliated Borrowers. Mortgage Loans will be secured by a lien on the
Borrowers' real property or by other REIT qualifying security approved by the
Directors, including, without limitation, an interest in the Borrower, or by a
similar security interest. The Fund's Annual Report (a copy of which has been
delivered concurrently with this Proxy Statement) provides information regarding
the Fund's investments in Mortgage Loans for the fiscal year ending December 31,
1995, which information is incorporated herein by reference.
STOCKHOLDER PROPOSALS
Stockholder proposals for the 1996 Annual Meeting of Stockholders will not be
included in the Fund's Proxy Statement for that meeting unless received by the
Fund at its executive office in Louisville, Kentucky, on or prior to December
31, 1996. Such proposals must also meet the other requirements of the rules of
the Securities and Exchange Commission relating to stockholder proposals.
OTHER MATTERS
As of the date of this Proxy Statement, the above is the only business known to
management to be acted upon at the Meeting. However, if other matters not known
to management should properly come before the Meeting, the persons appointed by
the signed proxy intend to vote it in accordance with their best judgment.
By the order of the Board of Directors,
JOHN W. HAMPTON
Secretary and Treasurer
<PAGE>
Louisville, Kentucky
May 1, 1996
A COPY OF THE NTS MORTGAGE INCOME FUND 1995 ANNUAL REPORT TO THE SECURITIES AND
EXCHANGE COMMISSION ON FORM 10-K ("REPORT") WILL BE SUPPLIED WITHOUT CHARGE.
REQUESTS FOR THE REPORT SHOULD BE DIRECTED TO:
NTS Mortgage Income Fund
c/o NTS Corporation
10172 Linn Station Road
Louisville, Kentucky 40223
<PAGE>
YOUR VOTE IS IMPORTANT. THE PROMPT RETURN OF PROXIES WILL SAVE THE
FUND THE EXPENSE OF FURTHER REQUESTS FOR PROXIES. PLEASE MARK, SIGN,
DATE AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE ENCLOSED
ENVELOPE.
The Fund's audited financial statements for the period ended December 31, 1995
as well as information regarding transactions between the Fund and NTS
Corporation and its affiliates, included in the Fund's 1995 Annual Report, a
copy of which has been delivered concurrently with this Proxy Statement, is
hereby incorporated herein by reference.
<PAGE>
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
NTS Mortgage Income Fund PLEASE SIGN EXACTLY AS YOUR NAME
10172 Linn Station Road APPEARS TO THE LEFT.
Louisville, Kentucky 40223
PROXY NUMBER When shares are held by joint tenants,
SHARES both should sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give full
title as such. If a corporation, please
sign in full corporate name by President
or other authorized officer. If a
partnership, please sign in partnership
name by authorized person.
----------------------------------------
Signature
----------------------------------------
Signature if held jointly
Date: ___________________________, 1996
PLEASE MARK REVERSE, SIGN, DATE AND RETURN THE PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE.
The undersigned hereby appoints J.D. Nichols, Richard L. Good and John W.
Hampton, individually, as Proxies, each with the power to appoint his or her
substitute, and hereby authorizes them to represent and to vote, as designated
below, all the shares of common stock of NTS Mortgage Income Fund held of record
by the undersigned on May 1, 1996, at the annual meeting of stockholders to be
held on June 27, 1996 or an adjournment thereof.
1. ELECTION OF DIRECTORS
____ FOR all nominees listed below (except as marked to the
contrary below)
____ WITHHOLD AUTHORITY to vote for all nominees listed below
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE
STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.
F. Everett Warren Robert M. Day Gerald B. Thomas J. D. Nichols
Richard L. Good
2. APPROVAL OF DESIGNATION OF AUDITORS: Arthur Andersen LLP
____ For ____ Against ____ Abstain
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSALS 1 AND 2.
May 1996
Dear Shareholder:
Enclosed are the 1995 financial statements for the NTS Mortgage Income Fund. The
Fund's operations resulted in revenues of $2,885,000 for the year ended December
31, 1995 compared to $2,985,000 for 1994, expenses for 1995 of $2,026,000
compared to $1,203,000 in 1994, and net income of $858,000 in 1995 compared to
$1,782,000 in 1994. The decrease in earnings is due principally to the increase
in interest expense that the Fund pays on borrowed money. Expenses of the Fund
before interest expense decreased 22% from 1994 to 1995 due principally to a
contribution of $100,000 by NTS Advisory Corporation, the Fund's manager, to
operating expenses of the Fund. In addition to this contribution, affiliates of
NTS Corporation, the Fund's sponsor, loaned $1,885,000 to the Fund during 1995.
This includes $750,000 at no interest and $1,135,000 loaned at a average rate of
5 3/4%. On April 15, 1996, the interest rate on all borrowings from affiliates
of the Fund's sponsor increased to the prime interest rate.
The combined sales of the three residential projects to which the Fund has
outstanding loans were $9.8 million in 1995 compared to $9.1 million in 1994.
The first nine holes of the Arnold Palmer designed golf course at the Fawn Lake
development in Fredericksburg, Virginia opened in October, 1995, with the
remainder of the course scheduled to open in the fall of 1996. At the Lake
Forest development in Louisville, Kentucky, the clubhouse for the Lake Forest
Country Club, which also includes an Arnold Palmer designed golf course, is due
to be completed by mid-summer, in time for the PGA golf championship to be held
at a neighboring course in Louisville. At the Lake Forest project in Orlando,
Florida, sales for 1995 were double those in 1994. The August 1996 issue of
Southern Living magazine will feature on its cover, one of the Lake Forest
Orlando model homes.
At the 1996 first quarter Board of Directors meeting, the Board appointed two
additional board members. Mr. Gerald B. Thomas was appointed as a new
Independent Director and Richard L. Good was reappointed as an Affiliated
Director.
Sincerely,
Richard L. Good
President
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of the NTS Mortgage Income Fund:
We have audited the accompanying balance sheets of the NTS Mortgage Income Fund
(a Delaware corporation) as of December 31, 1995 and 1994, and the related
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the NTS Mortgage Income Fund as
of December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
February 21, 1996
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
ASSETS
Mortgage loans receivable:
Earning loans $ 60,083,323 $ 46,123,406
Non-earning 5,125,780 6,098,846
------------ ------------
65,209,103 52,222,252
Less reserves for loan losses 1,553,397 1,638,855
------------ ------------
Net mortgage loans receivable 63,655,706 50,583,397
Cash and equivalents 535,687 308,155
Interest receivable 1,142,021 372,828
Other assets 178,219 --
------------ ------------
Total assets $ 65,511,633 $ 51,264,380
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 179,307 $ 154,615
Dividends payable 38,248 127,493
Notes payable - affiliates (Note 3) 1,885,000 --
Notes payable 14,149,873 1,936,528
Deferred revenues 3,127 4,159
------------ ------------
Total liabilities 16,255,555 2,222,795
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value, 6,000,000 shares
authorized; 3,187,333 shares issued and outstanding $ 3,187 $ 3,187
Additional paid-in-capital 54,163,397 54,163,397
Distributions in excess of net income (4,910,506) (5,124,999)
------------ ------------
Total stockholders' equity 49,256,078 49,041,585
------------ ------------
Total liabilities and stockholders' equity $ 65,511,633 $ 51,264,380
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Interest income on mortgage loans receivable $2,849,807 $2,716,804 $3,248,160
Fee income on mortgage loans and other financial
services 12,924 130,791 118,955
Gross receipts and supplemental interest income -- 129,338 627,784
Interest income on cash equivalents and miscellaneous
income 21,921 8,071 30,402
---------- ---------- ----------
2,884,652 2,985,004 4,025,301
---------- ---------- ----------
Expenses:
Advisory fee (Note 3) $ 528,973 $ 614,100 $ 593,500
Professional and administrative 162,427 174,900 208,501
Interest expense 1,247,128 182,486 91,733
Other taxes and licenses 25,790 20,705 22,013
Amortization expense 52,000 35,642 34,958
Provision for loan losses -- 150,000 1,500,000
---------- ---------- ----------
2,016,318 1,177,833 2,450,705
---------- ---------- ----------
Income before income tax expense 868,334 1,807,171 1,574,596
Income tax expense 10,000 25,000 44,000
---------- ---------- ----------
Net income $ 858,334 $1,782,171 $1,530,596
========== ========== ==========
Net income per share of common stock $ .27 $ .56 $ .48
========== ========== ==========
Weighted average number of shares 3,187,333 3,187,333 3,187,333
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
Common Common Additional Distributions
Stock Stock Paid-in- in Excess of
Shares Amount Capital Net Income Total
------ ------ ------- ---------- -----
<S> <C> <C> <C> <C> <C>
Stockholder's equity
December 31, 1992 3,187,333 $ 3,187 $ 54,163,397 $ (4,532,265) $ 49,634,319
Net income -- -- 1,530,596 1,530,596
Dividends declared -- -- (2,439,335) (2,439,335)
------------ ------------ ------------ ------------ ------------
Stockholders' equity
December 31, 1993 3,187,333 $ 3,187 $ 54,163,397 $ (5,441,004) $ 48,725,580
Net income -- -- 1,782,171 1,782,171
Dividends declared -- -- (1,466,166) (1,466,166)
------------ ------------ ------------ ------------ ------------
Stockholders' equity
December 31, 1994 3,187,333 $ 3,187 $ 54,163,397 $ (5,124,999) $ 49,041,585
Net income -- -- 858,334 858,334
Dividends declared -- -- (643,841) (643,841)
------------ ------------ ------------ ------------ ------------
Stockholders' equity
December 31, 1995 3,187,333 $ 3,187 $ 54,163,397 $ (4,910,506) $ 49,256,078
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES
Net income $ 858,334 $ 1,782,171 $ 1,530,596
Adjustments to reconcile net income to net cash provided by
operating activities:
Accretion of discount on mortgage loans receivable (125,029) -- --
Amortization expense 52,000 35,642 34,958
Provision for loan losses -- 150,000 1,500,000
Changes in assets and liabilities:
Interest receivable (769,193) (372,828) 502,723
Accounts payable and accrued expenses 24,692 14,443 (5,001)
Deferred commitment fees 20,000 (102,930) (91,210)
Deferred revenues (1,032) (3,105) (386,119)
------------ ------------ ------------
Net cash provided by operating activities 59,772 1,503,393 3,085,947
------------ ------------ ------------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES
Principal collections on mortgage loans receivable $ 8,219,874 $ 4,310,554 $ 7,145,622
Investment in mortgage loans receivable (21,187,154) (4,056,326) (8,729,692)
------------ ------------ ------------
Net cash from (used for) investing activities (12,967,280) 254,228 (1,584,070)
------------ ------------ ------------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES
Proceeds from notes payable $ 15,186,873 $ 554,691 $ 2,653,977
Proceeds from notes payable - affiliates 1,885,000 -- --
Payments on notes payable (2,973,528) (1,006,151) (1,358,052)
Other assets (230,219) -- (22,178)
Dividends paid (733,086) (1,713,192) (2,342,117)
------------ ------------ ------------
Net cash used for financing activities 13,135,040 (2,164,652) (1,068,370)
------------ ------------ ------------
Net increase (decrease) in cash and equivalents $ 227,532 $ (407,031) $ 433,507
CASH AND EQUIVALENTS, beginning of period 308,155 715,186 281,679
------------ ------------ ------------
CASH AND EQUIVALENTS, end of period $ 535,687 $ 308,155 $ 715,186
============ ============ ============
Cash paid during the period for:
- --------------------------------
Interest, net of amounts capitalized $ 1,130,832 $ 180,235 $ 85,271
Income taxes $ 700 $ 36,082 $ 49,492
Noncash investing activities:
- -----------------------------
Principal reductions on mortgage loan receivable by offsetting
deferred revenues $ -- $ -- $ 1,542,604
Principal reductions on mortgage loan receivables by entering
into a participation agreement $ -- $ -- $ 2,235,033
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
NTS MORTGAGE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
A) Organization
------------
NTS Mortgage Income Fund (the "Fund"), a Delaware corporation, was
formed on September 26, 1988. The Fund operates as a real estate
investment trust (REIT) under the Internal Revenue Code of 1986 (the
"Code"), as amended. NTS Corporation is the sponsor of the Fund (the
"Sponsor") and its affiliate, NTS Advisory Corporation, is the
advisor to the Fund (the "Advisor").
The Fund intends to make residential and commercial land development
loans, land acquisition loans, development loans, construction and
permanent mortgage loans to Affiliated Borrowers consisting
principally of first, and to a lesser extent, junior mortgage loans
and to make Equity Investments in real estate in amounts not to
exceed approximately 10% of its Funds Available for Investment as
defined in the Fund's offering prospectus (the "Prospectus"). Equity
Investments are only anticipated to be made if necessary to assist
the Fund to satisfy applicable requirements of the Code. Each
mortgage loan will be secured by a lien on the property, by an
interest in the borrower or by a similar security interest.
The Fund is required to terminate and liquidate its assets by
December 31, 2008, although the Fund expects to seek the
Stockholders' approval to dissolve the Fund by March 30, 2006 which
is approximately 15 years after the Final Closing Date.
B) Basis of Accounting
-------------------
The Fund's records are maintained on the accrual basis of accounting
in accordance with generally accepted accounting principles (GAAP).
C) Income Taxes
------------
The Fund has elected and is qualified to be treated as a REIT under
Internal Revenue Code Sections 856-860. In order to qualify, the Fund
is required to distribute at least 95% of its taxable income to
Stockholders and meet certain other requirements. The Fund intends to
continue to qualify as a REIT for Federal income tax purposes. A
reconciliation of net income for financial statement purposes versus
that for income tax reporting at December 31 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net income (GAAP) $ 858,334 $ 1,782,171 $ 1,530,596
Accretion of note discount (125,029) -- --
Loan commitment fee income 20,000 (102,930) (91,210)
Letters of credit income (1,032) (3,105) 6,438
Supplemental interest income (1,717) (64,668) (424,819)
Federal income tax expense 7,000 20,000 32,124
Provision for loan losses (85,458) (91,145) 1,500,000
----------- ----------- -----------
Taxable income before
dividends paid deduction $ 672,098 $ 1,540,323 $ 2,553,129
=========== =========== ===========
Dividends declared $ 643,841 $ 1,466,166 $ 2,439,335
=========== =========== ===========
Distribution percentage 96% 95% 96%
=========== =========== ===========
</TABLE>
<PAGE>
1. Summary of Significant Accounting Policies - Continued
------------------------------------------------------
D) Organizational and Start-up Costs
---------------------------------
Organizational costs are expenses incurred in the creation of the
Fund such as legal and accounting fees and were amortized over a
five-year period beginning on the Initial Closing Date. Start-up
costs are administration expenses which were capitalized until the
Fund made its first Mortgage Loan on September 29, 1989 and were
amortized over a five-year period.
E) Offering Costs
--------------
Offering costs consist primarily of selling commissions and other
costs associated with the offering of the Shares. Offering costs are
shown as a reduction of stockholders' equity. Pursuant to the Fund's
Prospectus, the offering and organizational costs incurred by the
Fund were equal to 15% of the gross proceeds.
F) Use of Estimates in Preparation of Financial Statements
-------------------------------------------------------
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
G) Revenue Recognition and Reserves for Loan Losses
------------------------------------------------
Interest income from mortgage loans is reported as earned on the
accrual basis of accounting. If the Fund has any reason to doubt the
collectability of any principal or interest amounts due pursuant to
the terms of the mortgage loans appropriate reserves would be
established for any principal and accrued interest amounts deemed
unrealizable (see Note 5). Statements of Financial Accounting
Standards Nos. 114 and 118 require that impaired loans be measured
based on the present value of expected future cash flows discounted
at each loan's effective interest rate, at each loan's observable
market price or at the fair value of the collateral if the loan is
collateral dependent.
Commitment fees paid at loan closing are amortized over the life of
the loan using the interest method. Letter of credit income is
amortized over the term of the letter of credit using the
straight-line method. Gross Receipts Interest is recognized with
respect to a mortgage loan secured by real estate held for sale in
the ordinary course of the borrower's business. Gross Receipts
Interest is an amount equal to 5% of the borrower's Gross Receipts,
as defined in the Fund's Prospectus, from the sale of the underlying
real estate during the term of the mortgage loan. Gross Receipts
Interest is reported as earned on the accrual basis of accounting.
H) Statement of Cash Flows
-----------------------
For purposes of reporting cash flows, cash and equivalents include
cash on hand and short-term, highly liquid investments with an
original maturity of three (3) months or less that are readily
convertible to cash.
<PAGE>
1. Summary of Significant Accounting Policies - Continued
------------------------------------------------------
I) Operating Expense Limitations
-----------------------------
The annual Operating Expenses of the Fund, based upon guidelines
promulgated by the North American Securities Administrators
Association, Inc., are prohibited from exceeding in any fiscal year
the greater of (i) 2% of the Fund's Average Invested Assets during
such fiscal year or (ii) 25% of the Fund's Net Income during such
fiscal year. In the event the Fund's annual Operating Expenses exceed
this limitation, the Advisor must reimburse the Fund within 60 days
after the end of the fiscal year, the amount by which the aggregate
annual Operating Expenses paid or incurred by the Fund exceed the
foregoing limitations. The Fund did not exceed this limitation for
the years ended December 31, 1995, 1994 and 1993.
Operating Expenses are defined as operating, general and
administrative expenses of the Fund as determined under generally
accepted accounting principles, including but not limited to rent,
utilities, capital equipment, salaries, fringe benefits, travel
expenses, the Management Expense Allowance, expenses paid by third
parties to the Advisor and its Affiliates based upon its relationship
with the Fund (e.g. loan administration, servicing, engineering and
inspection expenses) and other administrative items, but excluding
the expenses of raising capital, interest payments, taxes, non-cash
expenditures (e.g., depreciation, amortization, bad debt reserves),
the Subordinated Advisory Fee, and the costs related directly to a
specific Mortgage Loan investment or Real Estate Investment by the
Fund, such as expenses for originating, acquiring, servicing or
disposing of said specific Mortgage Loan or Real Estate Investment.
2. Affiliations
------------
The Fund operates under the direction of its Board of Directors who have
retained the Advisor to manage the Fund's operations and to make
recommendations concerning investments. The Advisor has delegated
substantially all of its duties to the Sponsor (see Note 3).
3. Related Party Transactions
--------------------------
As of December 31, 1995, the Sponsor (NTS Corporation) or an Affiliate
owned 58,918 shares of the Fund.
Pursuant to the Advisory Agreement, the Fund will pay the Advisor (NTS
Advisory Corporation) a Management Expense Allowance (Advisory Fee)
relating to services performed for the Fund in an amount equal to 1% of
the Fund's Net Assets, per annum, which amount may be increased annually
by an amount corresponding to the percentage increase in the Consumer
Price Index. Effective July 1, 1994, the Fund's Mortgage Loans to Fawn
Lake and Lake Forest were converted to cash flow mortgage loans. As part
of the consideration for this restructuring, the Fund's Board of
Directors required, among other things, that beginning in 1995, NTS
Advisory Corporation pay $100,000 annually towards the expenses of the
Fund until the maturity of the Mortgage Loans. As such, the Advisory Fee
has been reduced $100,000 for the year ended December 31, 1995. For the
years ended December 31, 1995, 1994 and 1993, $528,973, $614,100 and
$593,500, respectively, has been incurred as an Advisory Fee.
On February 17, 1995, the Fund purchased from an unaffiliated bank an
interest in a $13 million first mortgage (with an outstanding balance of
$9,664,465 as of February 17, 1995) to the Orlando Lake Forest Joint
Venture. An Affiliate of the Sponsor owns the remaining interest via a
participation agreement. The initial ownership percentages were 50% to
the Fund and 50% to the Affiliate,
<PAGE>
3. Related Party Transactions - Continued
--------------------------------------
however, the percentage ownership will fluctuate as additional principal
is advanced to the Joint Venture by the Fund. Ownership percentages will
be determined in accordance with the ratio of each participant's share of
the outstanding loan balance to the total outstanding loan balance. As of
December 31, 1995, the outstanding balance on the first mortgage was
$11,741,899, and the Fund's ownership percentage was approximately 59%.
During the third quarter of 1995, the Fund borrowed $750,000 from an
Affiliate of the Fund's Sponsor. The advance is in the form of an
unsecured non-interest bearing note payable and matures April 15, 1996.
The advance was made to meet the development plans of the projects to
which the Fund has outstanding loans.
During the fourth quarter of 1995, the Fund borrowed an additional
$1,135,000 from Affiliates of the Fund's Sponsor in a series of advances.
The advances bear interest at various rates averaging approximately 5.75%
and mature April 15, 1996. Interest paid to the Affiliates was $13,023
for the year ended December 31, 1995. These advances are unsecured.
On October 14, 1993, Fawn Lake and Lake Forest entered into a
participation agreement with the Fund whereby they were each assigned an
interest in the Fund's Temporary Mortgage Loan with the Orlando Lake
Forest Joint Venture. The respective assignment of interest was
$1,072,727 to Fawn Lake and $1,162,306 to Lake Forest. The consideration
given the Fund for the acquisition of an interest in the note was a
reduction in the amount of the Supplemental Interest credit due by the
Fund to Fawn Lake and Lake Forest (see Note 7).
<PAGE>
4. Mortgage Loans Receivable, net
------------------------------
The following tables outline the Fund's mortgage loan portfolio at December
31, 1995. There is currently no readily determinable market value for the
portfolio given its unique and affiliated nature.
<TABLE>
<CAPTION>
Property Pledged Interest Maturity
Borrower as Collateral Rate Date
-------- ------------- ---- ----
<S> <C> <C> <C>
1) Earning Loans:
Temporary Mortgage
Loan:
NTS/Virginia First mortgage on approximately Prime 11/30/96
Development Company 187 acres of residential land and + 3/4%
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 2,237 17% of 07/01/97
Development Company acres of residential land and Gross
improvements thereon located in Receipts
Fredericksburg, Virginia, known as (a)(b)
Fawn Lake
NTS/Lake Forest II First mortgage on approximately 556 17% of 07/01/97
Residential acres of residential land in Gross
Corporation Louisville, Kentucky, known as Receipts
Lake Forest (a)(b)
Orlando Lake Forest First mortgage on approximately 425 17% of 01/31/98
Joint Venture acres of residential land in Orlando, Gross
Florida known as Orlando Lake Forest Receipts
(c)
(a) Effective July 1, 1994, these Mortgage Loans are paying interest at
the greater of 17% of Gross Receipts or 4.42% of the average
outstanding loan balance.
(b) These Mortgage Loans included a provision for Gross Receipts Interest
through June 30, 1994.
(c) This Mortgage Loan pays interest at the greater of 17% of Gross
Receipts or 6.46% of the average outstanding loan balance.
</TABLE>
<PAGE>
<TABLE>
4. Mortgage Loans Receivable, net - Continued
<CAPTION>
Total Balance Interest
Senior Outstanding Commitment Receivable
Liens At Face Amount At Fees At
12/31/95 At 12/31/95 12/31/95(j) Received 12/31/95
-------- ----------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
1) Earning Loans:
--------------
Temporary Mortgage
- ------------------
Loan:
- -----
NTS/Virginia $ 1,063,873 $ 2,000,000 $ 1,053,953 $ 20,000 $ 10,443
Development Company
Mortgage Loans:
- ---------------
NTS/Virginia 502,937 28,000,000 27,459,598 200,000 618,591
Development Company (d) (f)
NTS/Lake Forest II 562,873 28,000,000 25,935,985 250,000 313,171
Residential Corporation (e) (g)
Orlando Lake Forest -- 13,000,000 5,633,787 -- 199,816
Joint Venture (h) (i)
----------- ----------- ----------- -----------
Total Earning Loans $71,000,000 $60,083,323 $ 470,000 $ 1,142,021
=========== =========== =========== ===========
(d) Senior lien applies to approximately 37 acres securing the first
mortgage which are subordinated to an unaffiliated lender.
(e) Senior liens apply to approximately 180 acres securing the first
mortgage which are subordinated to unaffiliated lenders.
(f) NTS Guaranty Corporation guarantees up to $2 million of outstanding debt
exceeding $18 million.
(g) NTS Guaranty Corporation guarantees up to $2,416,500 of outstanding debt
exceeding $22 million.
(h) An Affiliate of the Fund's Sponsor participates with the Fund regarding
this Mortgage Loan. As of December 31, 1995, the Fund's ownership
percentage was approximately 59%.
(i) The carrying amount of this Mortgage Loan is net of an unaccreted discount
of approximately $1,275,879.
(j) The carrying amount of the mortgage loans receivable at December 31, 1995
is net of any unamortized commitment fees.
</TABLE>
<PAGE>
<TABLE>
4. Mortgage Loans Receivable, net - Continued
<CAPTION>
Property Pledged Interest Maturity
Borrower as Collateral Rate Date
-------- ---------------- -------- --------
<S> <C> <C> <C>
2) Non-Earning
-----------
Loans:
------
Temporary Mortgage
------------------
Loan:
-----
Orlando Lake Forest Pledge by both general partners of their Prime Demand
Joint Venture partnership interests in Orlando Lake + 2%
Forest Joint Venture located in Orlando,
(k) Florida; a pledge of 390 shares of
the Class A common stock in NTS/Virginia
Development Company; NTS Guaranty
Corporation guarantees the loan
Mortgage Loan:
--------------
Orlando Lake Forest First mortgage on approximately 2 acres Prime Demand
Joint Venture of residential land located in Orlando, + 2%
Florida known as Orlando Lake Forest (k)
Joint Venture
(k) The Orlando Lake Forest Joint Venture has entered into a forbearance
agreement with the Fund whereby, effective April 1, 1995, no interest
will be due on these loans through January 31, 1998.
</TABLE>
<PAGE>
<TABLE>
4. Mortgage Loans Receivable, net - Continued
<CAPTION>
Total Balance Interest
Senior Face Outstanding Commitment Receivable
Liens At Amount At Fees At
12/31/95 At 12/31/95 12/31/95 Received 12/31/95
-------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
2) Non-Earning
-----------
Loans:
------
Temporary Mortgage
------------------
Loan:
-----
Orlando Lake Forest $11,889,454 $ 7,818,000 $ 4,978,225 $ 150,000 $ --
Joint Venture (l) (m) (n) (p)
Mortgage Loan:
--------------
Orlando Lake Forest -- 3,000,000 147,555 30,000 --
Joint Venture (o) (p)
----------- ----------- ---------- ----------
Total Non-Earning
Loans $10,818,000 $ 5,125,780 $ 180,000 $ --
=========== =========== ========== ==========
(l) Total senior liens include a $147,555 mortgage loan with the Fund and
a 59% interest in a senior lien totalling $11,741,899 with the Fund.
(m) NTS/Virginia Development Company (Fawn Lake) and NTS/Lake Forest II
Residential Corporation (Lake Forest) participate with the Fund
regarding this Temporary Mortgage Loan. The percentage ownership as
of December 31, 1995 is 14.862% and 16.103%, respectively.
(n) The Fund has established a $1,500,000 loan loss reserve as of December
31, 1995.
(o) The Fund has established a $53,397 loan loss reserve as of December
31, 1995.
(p) The Fund has discontinued accruing interest from the Temporary Mortgage
Loan and the Phase-In Mortgage Loan to the Orlando Lake Forest Joint
Venture until the interest payment is received. Approximately
$1,827,000 of interest remains due to the Fund on these loans but is
not accrued in the Fund's financial statements.
</TABLE>
<PAGE>
<TABLE>
4. Mortgage Loans Receivable, net - Continued
Reconciliation of Mortgage Loans Receivable for the year ended:
<S> <C> <C>
Balance at December 31, 1992 $54,717,053
Additions:
Mortgage Loans $ 90,084
Temporary Mortgage Loans --
Amortization of loan fees 106,210 196,294
-----------
Reductions:
Mortgage Loans --
Temporary Mortgage Loans (2,283,652)
Mortgage Loan written-off --
Loan fees received (15,000) (2,298,652)
----------- -----------
Balance at December 31, 1993 $52,614,695
Additions:
Mortgage Loans $ --
Temporary Mortgage Loans --
Amortization of loan fees 117,930 117,930
-----------
Reductions:
Mortgage Loans (249,004)
Temporary Mortgage Loans (5,224)
Mortgage Loan written-off (241,145)
Loan fees received (15,000) (510,373)
------------ -----------
Balance at December 31, 1994 $52,222,252
Additions:
Mortgage Loans $14,060,254
Temporary Mortgage Loans --
Amortization of loan fees -- 14,060,254
-----------
Reductions:
Mortgage Loans --
Temporary Mortgage Loans (967,945)
Mortgage Loan written-off (85,458)
Loan fees received (20,000) (1,073,403)
----------- -----------
Balance at December 31, 1995 $65,209,103
===========
</TABLE>
<PAGE>
<TABLE>
4. Mortgage Loans Receivable, net - Continued
<S> <C> <C>
Reserves for Loan Losses:
Balance at December 31, 1992 $ 230,000
Additions charged to Expenses $ 1,500,000
Deduction for Mortgage Loan written-off -- 1,500,000
----------- -----------
Balance at December 31, 1993 $ 1,730,000
Additions charged to Expenses $ 150,000
Deduction for Mortgage Loan written-off (241,145) (91,145)
----------- -----------
Balance at December 31, 1994 $ 1,638,855
Additions charged to Expenses $ --
Deduction for Mortgage Loan written-off (85,458) (85,458)
----------- -----------
Balance at December 31, 1995 $ 1,553,397
===========
</TABLE>
5. Reserves for Loan Losses
Reserves for loan losses are based on management's evaluation of the
borrower's ability to meet its obligation as well as current and future
economic conditions. Reserves are based on estimates and ultimate losses
could differ materially from the amounts assumed in arriving at the reserve
for possible loan losses reported in the financial statements. These
estimates are reviewed periodically and, as adjustments become necessary,
they are reported in earnings in the period in which they become known. On a
regular basis, management reviews each mortgage loan in the Fund's portfolio
including an assessment of the recoverability of the individual mortgage
loans. As of December 31, 1995, the Fund has a loan loss reserve regarding
the $3,000,000 Phase-In Mortgage Loan to the Orlando Lake Forest Joint
Venture (with an outstanding balance of $147,555 as of December 31, 1995)
amounting to $53,397 and a loan loss reserve regarding the Temporary
Mortgage Loan to the Orlando Lake Forest Joint Venture (with an outstanding
balance of $4,978,225 as of December 31, 1995) amounting to $1,500,000.
6. Notes Payable
-------------
Notes payable consist of the following:
1995 1994
------------ -----------
Note payable to a bank in the amount
of $13,800,000 bearing interest at the
Prime Rate plus 1%, payable monthly, due
December 27, 1997, secured by a collateral
assignment of the Fund's mortgages on Lake
Forest and Fawn Lake, guaranteed by Mr.
J. D. Nichols, Chairman of the Board of
the Fund's Sponsor $13,086,000 $ --
Note payable to a bank in the amount of
$2,000,000, bearing interest at the
Prime Rate plus 3/4%, payable quarterly
due November 30, 1996, secured by
approximately 187 acres of residential
land and improvements thereon 1,063,873 --
Note payable to a bank in the amount of
$2,800,000, bearing interest at the Prime
Rate plus 1%, payable monthly, secured
by a collateral assignment of the Fund's
mortgage on Lake Forest, paid in full
on January 10, 1995 -- 1,936,522
---------- ----------
$14,149,873 $ 1,936,528
========== ==========
The Prime Rate was 8 1/2% at December 31, 1995 and 1994.
<PAGE>
6. Notes Payable - Continued
-------------------------
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.
7. Gross Receipts and Supplemental Interest Income
-----------------------------------------------
Gross Receipts Interest is recognized with respect to a Mortgage Loan
secured by real estate held for sale in the ordinary course of the
borrower's business. Gross Receipts Interest is an amount equal to 5% of the
borrower's Gross Receipts, as defined in the Fund's Prospectus, from the
sale of the underlying real estate during the term of the mortgage loan.
Gross Receipts Interest is reported as earned on the accrual basis of
accounting. Effective July 1, 1994, the only loan which provides for Gross
Receipts Interest is the Phase-In Mortgage Loan to the Orlando Lake Forest
Joint Venture, however, none was earned for the year ended December 31,
1995.
In addition to regular interest and Gross Receipts Interest, borrowers were
required to pay Supplemental Interest. Supplemental Interest was paid to the
Fund through March 31, 1992, in order for the Fund to make distributions to
its Stockholders equal to a 12% per annum, noncompounded return on their
capital contribution. Supplemental Interest was credited against 50% of the
amounts later due as Gross Receipts Interest, thereby reducing the amount of
Gross Receipts Interest paid. Supplemental Interest was classified as
deferred revenue on the Fund's balance sheet when received and was amortized
into income equal to the amount credited against Gross Receipts Interest
thereby reflecting the full amount of Gross Receipts Interest as income as
earned on the accrual basis of accounting. The Fund received $4,731,000 in
Supplemental Interest from Affiliated Borrowers during the Cash Flow
Guaranty period. None of this amount was advanced by the Guarantor (see Note
9). Supplemental Interest of $160,185 which has been recognized in income
for the year ended December 31, 1993 represents the amount of Supplemental
Interest paid in prior years that was credited against 50% of the amount due
as Gross Receipts Interest for the period from certain Affiliated Borrowers.
In addition, on February 18, 1993 the Fund's Board of Directors changed the
interest rate to be charged on the Mortgage Loans to NTS/Virginia
Development Company and NTS/Lake Forest II Residential Corporation.
Effective January 1, 1993, for the first quarter of 1993, these loans were
charged interest at the Federal Funds Rate plus 3.7%. In consideration for
the interest rate change, NTS/Virginia Development Company and NTS/Lake
Forest II Residential Corporation agreed to reduce the amount of future
Gross Receipts Interest credit to be received by $97,500 and $121,875,
respectively. This total amount of $219,375 has been recognized as Gross
Receipts Income on the statement of income for the year ended December 31,
1993.
On October 14, 1993, the Fund's Board of Directors accepted a proposal
whereby the residential projects securing the Fund's Mortgage Loans would
agree to begin paying Gross Receipts Interest in an amount equal to 5% of
the net sales price of residential lots sales in consideration for a credit
of the balance of Supplemental Interest credit due from the Fund. The amount
of Supplemental Interest credit due from the Fund as of October 14, 1993 was
$3,777,637. The adjustment of the Supplemental Interest credit was as
follows:
In connection with the Fund's Supplemental Interest credit
obligation, the Fund credited Fawn Lake and Lake Forest for
$750,000, each, representing a reduction in each project's
Mortgage Loan.
In connection with the Fund's Supplemental Interest credit
obligation, the Fund credited Orlando Lake Forest Joint Venture
for $42,604 representing a reduction in the Fund's Temporary
Mortgage Loan with the Orlando Lake Forest Joint Venture.
<PAGE>
7. Gross Receipts and Supplemental Interest Income - Continued
-----------------------------------------------------------
In connection with the Fund's Supplemental Interest credit
obligation, the Fund credited Fawn Lake and Lake Forest for the
Supplemental Interest credit balance by assigning Fawn Lake and
Lake Forest an interest in the Fund's Temporary Mortgage Loan with
the Orlando Lake Forest Joint Venture. The interest assigned to
Fawn Lake and Lake Forest was $1,072,727 and $1,162,306,
respectively.
8. Commitments and Contingencies
-----------------------------
The Fund has commitments to extend credit made in the normal course of
business that are not reflected in the financial statements. At December 31,
1995, the Fund had outstanding funding commitments under standby letters of
credit aggregating $985,664: Orlando Lake Forest Joint Venture $517,813;
NTS/Virginia Development Co. $467,851. These outstanding funding commitments
are part of the maximum funding amount of the mortgage loans. Committed
undisbursed loans were approximately $6,084,000 at December 31, 1995.
In August 1992, Jeno Paulucci & Silver Lakes I, Inc., individually and d/b/a
PR Partners (PR Partners) filed a complaint ("Original Complaint") against
J. D. Nichols, NTS Corporation, NTS/Florida Residential Properties, Inc.,
Orlando Lake Forest, Inc. and Banc One Mortgage Corporation. The Original
Complaint alleges, inter alia, mismanagement of the Orlando Lake Forest
project by Orlando Lake Forest, Inc. as well as conspiracy among the
defendants against PR Partners and its principals. The Original Complaint
requested unspecified damages and declaratory and injunctive relief against
the defendants. The Fund was not named as a defendant in the Original
Complaint. In July 1994, the plaintiffs filed an amended complaint ("Amended
Complaint") adding NTS/Residential Properties, Inc. - Florida, Lake Forest
Realty, Inc. and the Fund as defendants, and have amended the Complaint
twice more in response to rulings by the trial judge requiring clarification
of certain claims asserted by the plaintiffs. The case is in the early
discovery phase, and certain of the defendants have answered the Complaint
and asserted counterclaims against the plaintiffs, including a claim that PR
Partners has breached its fiduciary duty. Lake Forest Realty, Inc., the Fund
and Banc One Mortgage Corporation have again moved to dismiss the Complaint,
as amended. Therefore, an outcome to this litigation cannot be predicted at
present. Mr. J. D. Nichols and the principals of the defendants have
indicated that the suit will be vigorously defended, and that counterclaims
will be vigorously prosecuted against the plaintiffs. Management believes
that this lawsuit will have no material effect on the Fund's operations or
financial condition.
9. Guaranties to the Fund
----------------------
NTS Guaranty Corporation (the "Guarantor"), an Affiliate of the Sponsor, has
agreed to provide the following guaranties to the Fund:
Cash Flow Guaranty
------------------
As defined in the Fund's Prospectus, the Cash Flow Guaranty ended on March
31, 1992. It was anticipated that the Mortgage Loans would be structured to
provide for the payment by Affiliated Borrowers of Points, Regular Interest,
and either Incentive Interest or Gross Receipts Interest, as defined in the
Prospectus, at a combined rate sufficient to allow the Fund to make
distributions to the Stockholders at a rate equal to a minimum 12% per
annum, noncompounded return.
<PAGE>
9. Guaranties to the Fund - Continued
----------------------------------
Cash Flow Guaranty - Continued
------------------------------
In order to achieve such distributions, Affiliated Borrowers were required
to pay Supplemental Interest which was an amount in excess of Points,
Regular Interest, Incentive Interest and Gross Receipts Interest, other cash
balances available for distribution at the discretion of the Board of
Directors of the Fund, and all other cash receipts of the Fund net of all
cash expenditures of the Fund. Payments of Supplemental Interest were
credited against 50% of the amounts of Incentive or Gross Receipts Interest
which the Fund received from Affiliated Borrowers in later years. The Fund
received $4,731,000 in Supplemental Interest from Affiliated Borrowers
during the Cash Flow Guaranty period. None of this amount was advanced by
the Guarantor.
Junior Mortgage Loan Guaranty
The Guarantor guarantees the payment to the Fund, on a timely basis, of the
Principal (as defined in the Prospectus) of all Junior Mortgage Loans and
Temporary Mortgage Loans made by the Fund to Affiliated Borrowers. The
Guarantor's obligation is limited to the Principal balance outstanding on
the Junior Mortgage Loan or Temporary Mortgage Loan and does not include the
Interest Reserve, as defined in the Prospectus. This guaranty will not apply
to Junior Mortgage Loans or Temporary Mortgage Loans made to Non-Affiliated
Borrowers.
On October 19, 1992, the Fund notified the Orlando Lake Forest Joint Venture
(the "Joint Venture") that the Joint Venture is in payment default regarding
the Fund's Temporary Mortgage Loan to the Joint Venture. This default gives
the Fund the right to pursue the Guarantor for its guaranty. The Fund's
Board of Directors continues to evaluate the collectability of the guaranty.
The Board is also concerned about the possible detrimental effects that the
collection proceedings may have on the Fund's other loans to other
Affiliated Borrowers. The Board has concluded that it is in the best
interest of the Fund and its Stockholders to pursue a work-out plan to both
preserve the assets of the Fund and support the viability of the projects to
which it has outstanding loans.
Purchase Price Guaranty
The Guarantor has guaranteed that investors of the Fund will receive, over
the life of the Fund, aggregate distributions from the Fund (from all
sources) in an amount at least equal to their Original Capital
Contributions, as defined in the Fund's Prospectus.
The liability of the Guarantor under the above guaranties is expressly
limited to its assets and its ability to draw upon a $10 million demand note
receivable from Mr. J.D. Nichols, Chairman of the Board of Directors of the
Sponsor. There can be no assurance that Mr. Nichols will, if called upon, be
able to honor his obligation to the Guarantor. The total amounts guaranteed
by the Guarantor are in excess of its net worth, and there is no assurance
that the Guarantor will be able to satisfy its obligation under these
guaranties. The Guarantor may in the future provide guaranties for other
Affiliates of the Fund.
<PAGE>
<TABLE>
10. Dividends Paid and Payable
Dividends declared for the periods ended December 31, 1993, 1994 and 1995
were as follows:
<CAPTION>
Average
Date Date of Date Outstanding Amount
Declared Record (1) Paid Shares Per Share Amount
-------- ---------- -------- ----------- --------- --------
<C> <C> <C> <C> <C> <C>
02/18/93 01/31/93 02/26/93 3,187,333 $ .05 $ 161,974
02/18/93 02/28/93 03/29/93 3,187,333 .05 146,618
02/18/93 03/31/93 04/27/93 3,187,333 .05 162,556
02/18/93 04/30/93 05/28/93 3,187,333 .05 159,366
02/18/93 05/31/93 06/28/93 3,187,333 .05 159,336
02/18/93 06/30/93 07/28/93 3,187,333 .05 159,366
02/18/93 07/31/93 08/26/93 3,187,333 .07 223,144
02/18/93 08/31/93 09/30/93 3,187,333 .07 223,114
02/18/93 09/30/93 10/28/93 3,187,333 .07 223,114
02/18/93 10/31/93 11/29/93 3,187,333 .07 223,114
02/18/93 11/30/93 12/27/93 3,187,333 .07 223,114
02/18/93 12/31/93 01/26/94 3,187,333 .12 374,519
------- ---------
Total dividends declared in 1993 $ .77 $2,439,335
======= =========
01/28/94 01/31/94 02/28/94 3,187,333 $ .06 $ 191,240
01/28/94 02/28/94 03/28/94 3,187,333 .06 191,239
01/28/94 03/31/94 04/28/94 3,187,333 .06 191,240
01/28/94 04/20/94 05/28/94 3,187,333 .03 95,618
01/28/94 05/31/94 06/28/94 3,187,333 .03 95,619
01/28/94 06/30/94 07/28/94 3,187,333 .03 95,619
01/28/94 07/31/94 08/29/94 3,187,333 .03 95,619
01/28/94 08/31/94 09/29/94 3,187,333 .03 95,619
01/28/94 09/30/94 10/28/94 3,187,333 .03 95,620
01/28/94 10/31/94 11/29/94 3,187,333 .03 95,620
01/28/94 11/30/94 12/29/94 3,187,333 .03 95,620
01/28/94 12/31/94 01/27/95 3,187,333 .04 127,493
------- ---------
Total dividends declared in 1994 $ .46 $1,466,166
======= =========
03/09/95 01/31/95 02/27/95 3,187,333 $ .03 $ 95,620
03/09/95 02/28/95 03/28/95 3,187,333 .03 95,620
03/09/95 03/31/95 04/27/95 3,187,333 .03 95,620
03/09/95 04/30/95 05/26/95 3,187,333 .03 95,620
03/09/95 05/31/95 06/27/95 3,187,333 .01 31,873
03/09/95 06/30/95 07/27/95 3,187,333 .01 31,873
03/09/95 07/31/95 08/25/95 3,187,333 .01 31,873
03/09/95 08/31/95 09/26/95 3,187,333 .01 31,873
03/09/95 09/30/95 10/26/95 3,187,333 .01 31,873
03/09/95 10/31/95 11/29/95 3,187,333 .01 31,873
03/09/95 11/30/95 12/26/95 3,187,333 .01 31,873
03/09/95 12/31/95 01/26/96 3,187,333 .01 38,250
------- ---------
Total dividends declared in 1995 $ .20 $ 643,841
======= =========
It is the Fund's policy to distribute to its Stockholders an amount equal
to at least 95% of taxable income. A portion of the dividends paid during
a subsequent year may be allocable to taxable income earned in the prior
year. For 1993, 1994 and 1995, dividends to Stockholders represent
ordinary income.
(1) Cash dividends vary based upon the date of stockholder admittance.
</TABLE>
<PAGE>
11. Supplemental Financial Information
A) NTS Guaranty Corporation has provided material guaranties to the
Fund. The following presents condensed financial information for NTS
Guaranty Corporation.
1995 1994
---- ----
Cash $ 100 $ 100
=========== ============
Common stock and paid-in-capital $ 10,000,100 $ 10,000,010
Note receivable from stockholder (10,000,000) (10,000,000)
------------ ------------
Equity $ 100 $ 100
============ ============
B) The Fund has invested in various temporary investments and mortgage
loans (see Note 4). The following presents condensed financial
information with respect to borrowers whose loan balance as of December
31, 1995 represents a substantial concentration of the Fund's assets.
<TABLE>
NTS/Lake Forest II Residential Corporation
<CAPTION>
Balance Sheets 1995 1994
- -------------- ---- ----
<S> <C> <C> <C>
Notes receivable $ 1,677,064 $ 2,054,725
Inventory 25,783,989 26,445,755
Other, net 4,508,888 4,287,882
------------ ------------
Total assets $ 31,969,941 $ 32,788,362
============ ===========
Notes payable $ 28,628,987 $ 28,537,902
Other liabilities, net 2,589,235 2,899,688
Equity 751,719 1,350,772
------------ ------------
Total liabilities and equity $ 31,969,941 $ 32,788,362
============ ===========
Statements of Operations 1995 1994 1993
- ------------------------ ---- ---- ----
Lot sales $ 4,329,717 $ 4,110,735 $ 5,380,689
Cost of sales (3,161,765) (2,735,786) (2,886,001)
Marketing and development fee ( -- ) (382,789) (1,111,004)
Provision for loan losses (465,932) ( -- ) (300,000)
Other income (expense), net (1,301,073) (643,326) (843,058)
------------ -------------- -------------
Net income (loss) $ (599,053) $ 348,834 $ 240,626
============ ============== =============
NTS/Virginia Development Company
Balance Sheets 1995 1994
- -------------- ---- ----
Notes receivable $ 5,215,716 $ 5,437,417
Inventory 30,812,235 25,467,805
Other, net 1,493,363 1,647,151
------------ ------------
Total Assets $ 37,521,314 $ 32,552,373
============ ===========
Notes payable $ 34,369,132 $ 28,450,059
Other liabilities, net 2,175,663 2,464,224
Equity 976,519 1,638,090
------------ ------------
Total liabilities and equity $ 37,521,314 $ 32,552,373
============ ===========
Statements of Operations 1995 1994 1993
- ------------------------ ---- ---- ----
Lot sales $ 3,073,548 $ 3,508,281 $ 4,325,632
Cost of sales (1,923,221) (2,097,208) (2,404,933)
Marketing and development fee ( -- ) (505,950) (1,025,204)
Provision for loan losses (406,739) ( -- ) (300,000)
Other income (expense), net (1,405,159) (499,524) (884,659)
------------ -------------- -------------
Net income (loss) $ (661,571) $ 405,599 $ (289,164)
============ ============== =============
</TABLE>
<PAGE>
12. Subsequent Events - Unaudited
A) On March 12, 1996, the Fund's Board of Directors, including a majority
of the Independent Directors, took the following action:
* Fixed the number of directors on the Fund's Board of Directors at
five and elected Gerald B. Thomas as an Independent Director and
Richard L. Good as an Affiliated Director. Messrs. Thomas and
Good will serve as members of the Board of Directors until the
annual meeting and until they or their successors are duly
elected and qualified.
* Set May 1, 1996 as the record date for determination of
Stockholders entitled to notice of and vote at the annual meeting
to be held on June 27, 1996.
* Approved an increase in the loan commitment amount to NTS/Virginia
Development Company from $28,000,000 to $30,000,000.
13. Unaudited Quarterly Financial Data
<TABLE>
<CAPTION>
Quarters Ended
1995 March 31 June 30 September 30 December 31 Total
---- ---------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Total revenues $ 640,705 $ 751,340 $ 741,441 $ 751,166 $2,884,652
Total expenses 418,094 520,429 522,330 555,465 2,016,318
--------- --------- --------- --------- ----------
Income before
income taxes 222,611 230,911 219,111 195,701 868,334
Income tax expense 2,500 2,500 2,500 2,500 10,000
--------- --------- --------- ---------- ----------
Net income $ 220,111 $ 228,411 $ 216,611 $ 193,201 $ 858,334
========= ========= ========= ========= ==========
Net income per
share of common
stock $ .07 $ .07 $ .07 $ .06 $ .27
========= ========= ========= ========= ==========
1994 March 31 June 30 September 30 December 31 Total
---- ----------- ----------- ------------ ----------- -----------
Total revenues $ 916,883 $ 902,970 $ 615,566 $ 549,585 $2,985,004
Total expenses 256,355 412,773 256,658 252,047 1,177,833
---------- ---------- ---------- ---------- ----------
Income before
income taxes 660,528 490,197 358,908 297,538 1,807,171
Income tax expense 10,000 10,000 5,000 -- 25,000
---------- ---------- ---------- ---------- ----------
Net income $ 650,528 $ 480,197 $ 353,908 $ 297,538 $1,782,171
========== ========== ========== ========== ==========
Net income per
share of common
stock $ .20 $ .15 $ .11 $ .09 $ .56
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
Corporate Information
Board of Directors (Year Elected) Auditors
Robert M. Day (1988) Arthur Andersen LLP
Managing Director 2300 Meidinger Tower
Lambert Smith Hampton Louisville Galleria
Atlanta, Georgia Louisville, Kentucky 40202
Gerald B. Thomas (1996) Annual Meeting
Vice President
Citizens Bank of Kentucky The annual meeting of the stockholders
Louisville, Kentucky will be convened at 10:00 A.M., local
time on Thursday, June 27, 1996
Fawn Lake Clubhouse
F. Everett Warren (1988) 11300 Longstreet Drive
Retired Spotsylvania, Virginia 22553
Citizens Fidelity Mortgage Company
Louisville, Kentucky
J. D. Nichols (1988)
Chairman of the Board
Chief Executive Officer
NTS Corporation
Louisville, Kentucky
Richard L. Good (1996)
President
NTS Corporation
Louisville, Kentucky
Officers
Richard L. Good
President
NTS Mortgage Income Fund
Louisville, Kentucky
John W. Hampton
Secretary/Treasurer
NTS Mortgage Income Fund
Louisville, Kentucky
