<PAGE>
NTS MORTGAGE INCOME FUND
10172 Linn Station Road
Louisville, Kentucky 40223
May 1, 1997
DEAR STOCKHOLDER:
We invite you to attend the Eighth Annual Meeting of Stockholders of NTS
Mortgage Income Fund ("Fund") to be held at the executive offices of the Fund
at 10172 Linn Station Road, Suite 200, Louisville, Kentucky 40223 on June 19,
1997 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.
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 19, 1997
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 Louisville, Kentucky
on June 19, 1997 at the executive offices of the Fund, 10172 Linn Station Road,
Louisville, Kentucky, 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 1997; 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 April 22,
1997 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 1996 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 Eighth Annual Meeting of
Stockholders (the "Meeting") when it is convened on Thursday, June 19, 1997 at
10:00 a.m. (the "Meeting Date"), or any subsequent adjournment thereof, at the
principal executive offices of the Fund, at 10172 Linn Station Road, Suite 200,
Louisville, Kentucky 40223.
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 1996 Annual Meeting of Stockholders of the Fund will
be convened on June 19, 1997 (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.
The close of business on April 22, 1997 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, 1997.
<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: 73 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.
Name: Robert M. Day
Age: 44 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: 58 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.
<PAGE>
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: 55 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.
Name: Richard L. Good
Age: 57
Year First Elected A Director: 1996
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 1996. 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 1997.
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.
Name: Richard L. Good
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.
<PAGE>
Name: John W. Hampton; 47
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
Sturgeon-Thornton-Marrett Development
Company in Louisvisville, Kentucy 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 $34,000 in
fees in 1996. Neither the Affiliated Directors nor the Executive Officers of the
Fund received any compensation from the Fund in 1996 nor will they in 1997.
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, 1997, the Directors and Executive Officers of the Fund,
individually and as a group, owned the number of Shares set forth below:
Name of Beneficial Owner: J.D. Nichols
Amount and Nature of Beneficial Ownership: 96,468 Shares (1)
Percent Of Class: 3%
Name of Beneficial Owner: All Directors and Executive Officers as a Group
Amount and Nature of Beneficial Ownership: 96,468 Shares (1)
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.
<PAGE>
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 $544,776 in 1996 pursuant to the
Advisory Agreement. No Real Estate Management Fees or Subordinated Advisory Fees
were due or paid for 1996.
The business plan of the Fund contemplated the making by the Fund of
mortgage loans (the "Mortgage Loans") which are generally 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 has made Mortgage Loans to borrowers (the
"Borrowers") which are Affiliates of the Sponsor (the "Affiliated Borrowers").
Mortgage Loans are 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, 1996, which information
is incorporated herein by reference.
On February 12, 1997, the Fund entered into a letter of intent (the
Letter of Intent) with NTS Corporation and its Affiliates, NTS Development
Company, Fawn Lake, and Lake Forest regarding the Fund's loans to Fawn Lake and
Lake Forest. The Letter of Intent provided for, among other things, a
restructuring of the Fund's loans to Fawn Lake and Lake Forest. The Letter of
Intent contemplates that ownership of the properties will be transferred to the
Fund, which expects to continue the development to completion of such properties
and ultimately, their orderly sale.
The parties to the Letter of Intent agreed to consider a general
restructuring of the relationship among the Fund, NTS Corporation and its
various Affiliates. The Fund has not yet determined the method by which it will
acquire control of the projects.
Footnote 13 of the Fund's Annual Report provides additional
information regarding this transaction, which information is incorporated by
reference.
STOCKHOLDER PROPOSALS
Stockholder proposals for the 1997 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, 1997. Such proposals must also meet the other requirements
of the rules of the Securities and Exchange Commission relating to stockholder
proposals.
<PAGE>
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
Louisville, Kentucky
May 1, 1997
A COPY OF THE NTS MORTGAGE INCOME FUND 1996 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, 1996 as well as information regarding transactions between the Fund
and NTS Corporation and its affiliates, included in the Fund's 1996 Annual
Report, a copy of which has been delivered concurrently with this Proxy
Statement, is hereby incorporated herein by reference.
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 April 22, 1997, at the annual meeting of stockholders to
be held on June 19, 1997 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 I AND 2.
PROXY
This Proxy is Solicited on Behalf of the Board of Directors
NTS Mortgage Income Fund PLEASE SIGN EXACTLY AS YOUR
10172 Linn Station Road NAME APPEARS TO THE LEFT.
Louisville, KY 40223
When shares are held by joint
tenants, both should sign.
When signing as attorney, executor,
administrator, trustee or
PROXY NUMBER guardian, please give full title as
SHARES 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:________________________ 1997
PLEASE MARK REVERSE, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
<PAGE>
May 1997
Dear Shareholder:
Enclosed are the NTS Mortgage Income Fund financial statements for
1996. Net income dropped by one percent from $858,334 in 1995 to $850,309 in
1996. Revenues during this period climbed by 15% to $3,305,000 from $2,885,000,
but expenses increased 21% from $2,026,000 to $2,455,000. The increased expenses
resulted primarily from an increased average amount of funds borrowed, and thus
interest paid, by the Fund in 1996 verses 1995.
The Board of Directors and management of the Fund continue to pursue
the plan discussed in the letter sent to shareholders on February 13, 1997,
whereby the Fund would take over ownership of the two largest projects for which
loans were made. We hope to have these transfers completed in the second quarter
of 1997.
As stated in the February letter, the Board of Directors has decided
that while the properties are well developed and well maintained, and although
sales have been improving, it is likely that the Fawn Lake and Louisville Lake
Forest properties will not be able to completely meet their interest and loan
repayment obligations. Consequently, in order to protect your capital and to
facilitate the completion of the projects, it is anticipated that the properties
will be transferred to the Fund. The Fund will then control these properties and
realize the profits from the ongoing development and sale of lots and club
memberships. Management has been negotiating with commercial banks to arrange
loan commitments necessary to complete the projects, including the clubhouse for
the country club at Fawn Lake, and to repay loans previously obtained by the
Fund. Because all revenues for the next few years will likely be needed to repay
these loans, dividends have been suspended.
Once these loans are repaid, the Board plans to distribute net cash
flow from sales at Fawn Lake and Louisville Lake Forest and loan repayments from
Orlando to the Fund's shareholders. In other words, this is a plan to complete
these projects, collect cash flow into the Fund and then send all remaining
funds to the shareholders. These changes are likely to result in a change in the
Fund's tax status from a Real Estate Investment Trust to a conventional
corporation. Under these circumstances, we believe this change is in the best
interest of the Fund's shareholders and is unavoidable if the Fund is to receive
the benefits of owning and completing the development of the properties.
NTS has reported that a settlement has been reached in the lawsuit
which was pending between the original joint venture partners of Orlando Lake
Forest. Under this settlement, the claims made against the Fund have been
dismissed. The Fund did not contribute any funds to the settlement. With the
settlement in place, the Board is now able to move forward more aggressively
with regard to possible restructuring of the Orlando Lake Forest loan, similar
to that being undertaken with the other loans.
On a very positive note, Orlando Lake Forest won the Grand Award for
the "Best Community" of all residential communities in Central Florida during
the Annual Spring Parade of Homes recently held in Orlando. Due to the success
of the 1996 Southern Living Idea House at Orlando Lake Forest, Southern Living
magazine has decided to feature an Idea House at Fawn Lake during the summer of
1997. If this is as successful as the Orlando Lake Forest Idea House, the event
should draw 40,000 to 50,000 extra visitors to Fawn Lake this year.
<PAGE>
Louisville Lake Forest has been selected as a 1997 Homearama site.
Eight model homes will be featured during the June 1997 Homearama Show. Lake
Forest should have over 30,000 visitors during this event. Of special note,
seven of the eight homes have been sold before the event has opened.
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, 1996 and 1995, and the related
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the NTS Mortgage Income Fund as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
March 24, 1997
<PAGE>
<TABLE>
<CAPTION>
NTS MORTGAGE INCOME FUND
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Affiliated mortgage loans receivable:
Earning loans $ 63,948,933 $ 60,083,323
Non-earning 3,838,831 5,125,780
------------ ------------
67,787,764 65,209,103
Less reserves for loan losses 1,500,000 1,553,397
------------ ------------
Net affiliated mortgage loans
receivable 66,287,764 63,655,706
Cash and equivalents 716,793 535,687
Interest receivable - affiliates 1,589,498 1,142,021
Other assets 151,654 178,219
------------ ------------
Total assets $ 68,745,709 $ 65,511,633
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 267,800 $ 179,307
Dividends payable 175,305 38,248
Notes payable - affiliates (Note 3) 4,524,667 1,885,000
Notes payable 14,276,850 14,149,873
Deferred revenues 301 3,127
------------ ------------
Total liabilities 19,244,923 16,255,555
------------ ------------
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, $0.001 par value,
6,000,000 shares authorized;
3,187,333 shares issued and
outstanding $ 3,187 $ 3,187
Additional paid-in-capital 54,163,397 54,163,397
Distributions in excess of net income (4,665,798) (4,910,506)
------------ ------------
Total stockholders' equity 49,500,786 49,256,078
------------ ------------
Total liabilities and stockholders'
equity $ 68,745,709 $ 65,511,633
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
------------------------
STATEMENTS OF INCOME
--------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
----------------------------------------------------
<CAPTION>
1996 1995 1994
------------ ------------ ---------
Revenues:
<S> <C> <C> <C>
Interest income on affiliated mortgage
loans receivable $3,256,148 $2,849,807 $2,716,804
Fee income on affiliated mortgage loans
and other financial services 24,873 12,924 130,791
Gross receipts and supplemental interest
income - affiliates -- -- 129,338
Interest income on cash equivalents
and miscellaneous income 23,974 21,921 8,071
---------- ---------- ----------
3,304,995 2,884,652 2,985,004
---------- ---------- ----------
Expenses:
Advisory fee (Note 3) $ 544,776 $ 528,973 $ 614,100
Professional and administrative 201,688 162,427 174,900
Interest expense 1,343,241 1,165,078 182,486
Interest expense - affiliates 258,191 82,050 --
Other taxes and licenses 27,340 25,790 20,705
Amortization expense 72,050 52,000 35,642
Provision for loan losses -- -- 150,000
---------- ---------- ----------
2,447,286 2,016,318 1,177,833
---------- ---------- ----------
Income before income tax expense 857,709 868,334 1,807,171
Income tax expense 7,400 10,000 25,000
---------- ---------- ----------
Net income $ 850,309 $ 858,334 $1,782,171
========== ========== ==========
Net income per share of common stock $ .27 $ .27 $ .56
========== ========== ==========
Weighted average number of shares 3,187,333 3,187,333 3,187,333
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<CAPTION>
Common Common Additional Distributions
Stock Stock Paid-in- in Excess of
Shares Amount Capital Net Income Total
------ ------ ------- ---------- -----
<S> <C> <C> <C> <C> <C>
Stockholders' equity
December 31, 1993 3,187,333 $ 3,187 $ 54,163,397 $ (5,441,004) $ 48,725,580
Net income -- -- 1,782,171 1,782,171
Dividends declared -- -- (1,466,166) (1,466,166)
------------ ------------ ------------ ------------ ------------
Stockholders' equity
December 31, 1994 3,187,333 $ 3,187 $ 54,163,397 $ (5,124,999) $ 49,041,585
Net income -- -- 858,334 858,334
Dividends declared -- -- (643,841) (643,841)
------------ ------------ ------------ ------------ ------------
Stockholders' equity
December 31, 1995 3,187,333 $ 3,187 $ 54,163,397 $ (4,910,506) $ 49,256,078
Net income -- -- 850,309 850,309
Dividends declared -- -- (605,601) (605,601)
------------ ------------ ------------ ------------ ------------
Stockholders' equity
December 31, 1996 3,187,333 $ 3,187 $ 54,163,397 $ (4,665,798) $ 49,500,786
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
NTS MORTGAGE INCOME FUND
------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
----------------------------------------------------
<CAPTION>
1996 1995 1994
------------ ------------ -----------
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 850,309 $ 858,334 $ 1,782,171
Adjustments to reconcile net income to
net cash provided by operating activities:
Accretion of discount on affiliated mortgage
loans receivable (148,472) (125,029) --
Amortization expense 72,050 52,000 35,642
Provision for loan losses -- -- 150,000
Changes in assets and liabilities:
Interest receivable - affiliates (447,477) (769,193) (372,828)
Accounts payable and accrued expenses 88,493 24,692 14,443
Deferred commitment fees (20,000) 20,000 (102,930)
Deferred revenues (2,826) (1,032) (3,105)
------------ ------------ ------------
Net cash provided by operating activities 392,077 59,772 1,503,393
------------ ------------ ------------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES
Principal collections on affiliated mortgage $ 8,099,364 $ 8,219,874 $ 4,310,554
loans receivable
Investment in affiliated mortgage loans
receivable (10,562,950) (21,187,154) (4,056,326)
------------ ------------ ------------
Net cash provided by (used for) investing
activities (2,463,586) (12,967,280) 254,228
------------ ------------ ------------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES
Proceeds from notes payable $ 1,201,999 $ 15,186,873 $ 554,691
Proceeds from notes payable - affiliates 4,077,457 1,885,000 --
Payments on notes payable (1,075,022) (2,973,528) (1,006,151)
Payments on notes payable - affiliates (1,437,790) -- --
Other assets (45,485) (230,219) --
Dividends paid (468,544) (733,086) (1,713,192)
------------ ------------ ------------
Net cash provided by (used for) financing
activities 2,252,615 13,135,040 (2,164,652)
------------ ------------ ------------
Net increase (decrease) in cash and
equivalents $ 181,106 $ 227,532 $ (407,031)
CASH AND EQUIVALENTS, beginning of period 535,687 308,155 715,186
------------ ------------ ------------
CASH AND EQUIVALENTS, end of period $ 716,793 $ 535,687 $ 308,155
============ ============ ============
Cash paid during the period for:
Interest $ 1,510,384 $ 1,130,832 $ 180,235
Income taxes $ -- $ 700 $ 36,082
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NTS MORTGAGE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
------------------------------------------
A) Organization
------------
NTS Mortgage Income Fund (the "Fund"), a Delaware corporation, was
formed on September 26, 1988. The Fund operates as a real estate
investment trust (REIT) under the Internal Revenue Code of 1986 (the
"Code"), as amended. NTS Corporation is the sponsor of the Fund (the
"Sponsor") and its affiliate, NTS Advisory Corporation, is the
advisor to the Fund (the "Advisor").
The Fund has made permanent mortgage loans to Affiliated Borrowers
consisting principally of first, and to a lesser extent, junior
mortgage loans. Each mortgage loan is secured by a lien on the
property, by an interest in the borrower or by a similar security
interest.
The Fund is required to terminate and liquidate its assets by
December 31, 2008.
These financial statements do not reflect the impact, if any, of the
proposed transactions discussed in Note 12.
B) Basis of Accounting
-------------------
The Fund's records are maintained on the accrual basis of accounting
in accordance with generally accepted accounting principles (GAAP).
C) Income Taxes
------------
The Fund has elected and is qualified to be treated as a REIT under
Internal Revenue Code Sections 856-860. In order to qualify, the Fund
is required to distribute at least 95% of its taxable income to
Stockholders and meet certain other requirements. The Fund intends to
continue to qualify as a REIT for Federal income tax purposes. A
reconciliation of net income for financial statement purposes versus
that for income tax reporting at December 31 is as follows:
1996 1995 1994
----------- ----------- ----------
Net income (GAAP) $ 850,309 $ 858,334 $ 1,782,171
Accretion of note discount (148,472) (125,029) --
Loan commitment fee income (20,000) 20,000 (102,930)
Letters of credit income (2,326) (1,032) (3,105)
Supplemental interest
income -- (1,717) (64,668)
Federal income tax expense 5,000 7,000 20,000
Provision for loan losses (53,397) (85,458) (91,145)
----------- ----------- -----------
Taxable income before
dividends paid deduction $ 631,114 $ 672,098 $ 1,540,323
=========== =========== ===========
Dividends declared $ 605,601 $ 643,841 $ 1,466,166
=========== =========== ===========
Distribution percentage 96% 96% 95%
=========== =========== ============
<PAGE>
1. Summary of Significant Accounting Policies - Continued
------------------------------------------------------
D) Use of Estimates in Preparation of Financial Statements
-------------------------------------------------------
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
E) Revenue Recognition and Reserves for Loan Losses
------------------------------------------------
Interest income from mortgage loans is reported as earned on the
accrual basis of accounting. If the Fund has any reason to doubt the
collectability of any principal or interest amounts due pursuant to
the terms of the mortgage loans appropriate reserves would be
established for any principal and accrued interest amounts deemed
unrealizable (see Note 5). Statements of Financial Accounting
Standards Nos. 114 and 118 require that impaired loans be measured
based on the present value of expected future cash flows discounted
at each loan's effective interest rate, at each loan's observable
market price or at the fair value of the collateral if the loan is
collateral dependent.
Commitment fees paid at loan closing are amortized over the life of
the loan using the interest method. Letter of credit income is
amortized over the term of the letter of credit using the
straight-line method. Gross Receipts Interest is recognized with
respect to a mortgage loan secured by real estate held for sale in
the ordinary course of the borrower's business. Gross Receipts
Interest is an amount equal to 5% of the borrower's Gross Receipts,
as defined in the Fund's Prospectus, from the sale of the underlying
real estate during the term of the mortgage loan. Gross Receipts
Interest is reported as earned on the accrual basis of accounting.
F) Statement of Cash Flows
-----------------------
For purposes of reporting cash flows, cash and equivalents include
cash on hand and short-term, highly liquid investments with an
original maturity of three (3) months or less that are readily
convertible to cash.
G) Operating Expense Limitations
-----------------------------
The annual Operating Expenses of the Fund, based upon guidelines
promulgated by the North American Securities Administrators
Association, Inc., are prohibited from exceeding in any fiscal year
the greater of (i) 2% of the Fund's Average Invested Assets during
such fiscal year or (ii) 25% of the Fund's Net Income during such
fiscal year. In the event the Fund's annual Operating Expenses exceed
this limitation, the Advisor must reimburse the Fund within 60 days
after the end of the fiscal year, the amount by which the aggregate
annual Operating Expenses paid or incurred by the Fund exceed the
foregoing limitations. The Fund did not exceed this limitation for
the years ended December 31, 1996, 1995 and 1994.
Operating Expenses are defined as operating, general and
administrative expenses of the Fund as determined under generally
accepted accounting principles, including but not limited to rent,
utilities, capital equipment, salaries, fringe benefits, travel
expenses, the Management Expense Allowance, expenses paid by third
<PAGE>
1. Summary of Significant Accounting Policies - Continued
------------------------------------------------------
G) Operatings Expense Limitations - Continued
------------------------------------------
parties to the Advisor and its Affiliates based upon its relationship
with the Fund (e.g. loan administration, servicing, engineering and
inspection expenses) and other administrative items, but excluding
the expenses of raising capital, interest payments, taxes, non-cash
expenditures (e.g., depreciation, amortization, bad debt reserves),
the Subordinated Advisory Fee, and the costs related directly to a
specific Mortgage Loan investment or Real Estate Investment by the
Fund, such as expenses for originating, acquiring, servicing or
disposing of said specific Mortgage Loan or Real Estate Investment.
2. Affiliations
-------------
The Fund operates under the direction of its Board of Directors who have
retained the Advisor to manage the Fund's operations and to make
recommendations concerning investments. The Advisory Agreement
automatically renews for successive one year periods unless terminated by
the Fund's Independent Directors upon sixty days notice. The Advisor has
delegated substantially all of its duties to the Sponsor (see Note 3).
The Chairman of the Board of Directors of the Fund is also the majority
shareholder of NTS Corporation (the Fund's Sponsor), NTS/Virginia
Development Company, an Affiliated Borrower, NTS/Lake Forest II
Residential Corporation, an Affiliated Borrower, and is a majority
shareholder of the managing general partner in the Orlando Lake Forest
Joint Venture, an Affiliated Borrower.
3. Related Party Transactions
--------------------------
In addition to the Affiliated Mortgage Loans discussed in Note 4 to the
Fund's Financial Statements, the Fund had the following related party
transactions.
As of December 31, 1996, the Sponsor or an Affiliate owned 96,468 shares
of the Fund.
Pursuant to the Advisory Agreement, the Fund will pay the Advisor (NTS
Advisory Corporation) a Management Expense Allowance (Advisory Fee)
relating to services performed for the Fund in an amount equal to 1% of
the Fund's Net Assets, per annum, which amount may be increased annually
by an amount corresponding to the percentage increase in the Consumer
Price Index. Effective July 1, 1994, the Fund's Mortgage Loans to Fawn
Lake and Lake Forest were converted to cash flow mortgage loans. As part
of the consideration for this restructuring, the Fund's Board of
Directors required, among other things, that beginning in 1995, NTS
Advisory Corporation pay $100,000 annually towards the expenses of the
Fund until the maturity of the Mortgage Loans. As such, the Advisory Fee
has been reduced $100,000 for each of the years ended December 31, 1996
and 1995. For the years ended December 31, 1996, 1995 and 1994, $544,776,
$528,973 and $614,100, respectively, has been incurred as an Advisory
Fee.
On February 17, 1995, the Fund purchased from an unaffiliated bank an
interest in a $13 million first mortgage (with an outstanding balance of
$9,664,465 as of February 17, 1995) to the Orlando Lake Forest Joint
Venture. An Affiliate of the Sponsor owns the remaining interest via a
participation agreement. The initial ownership percentages were 50% to
the Fund and 50% to the Affiliate, however, the percentage ownership will
fluctuate as additional principal is advanced to the Joint Venture by the
Fund. Ownership percentages will be determined in accordance
<PAGE>
3. Related Party Transactions - Continued
--------------------------------------
with the ratio of each participant's share of the outstanding loan
balance to the total outstanding loan balance. As of December 31, 1996,
the outstanding balance on the first mortgage was $13,086,004, and the
Fund's ownership percentage was approximately 63%.
The Fund has received advances from Affiliates of the Fund's Sponsor, net
of repayments, totalling $4,524,667 and $1,885,000 as of December 31,
1996 and 1995, respectively. As of December 31, 1996, the advances bear
interest at the Prime Rate and mature as follows: $2,320,000 on March
31, 1999 and $2,204,667 is due on demand. Subsequent to year end, the
maturity date of $1,054,667 of the borrowings due on demand was extended
to May 1, 1999. Interest expense to the Affiliates was $258,191 and
$82,050 for the years ended December 31, 1996 and 1995, respectively. No
interest was due to Affiliates in 1994.
4. Affiliated Mortgage Loans Receivable, net
-----------------------------------------
The following tables outline the Fund's mortgage loan portfolio at December
31, 1996. There is currently no readily determinable market value for the
portfolio given its unique and affiliated nature.
Property Pledged Interest Maturity
Borrower as Collateral Rate Date
-------- ------------- ---- ----
1) Earning Loans:
---------------
Temporary Mortgage
- ------------------
Loans:
- ------
NTS/Virginia First mortgage on approximately Prime 07/31/97
Development Company 187 acres of residential land + 3/4%
and improvements thereon
located in Fredericksburg, Virginia,
known as the Fawn Lake Golf Course;
NTS Guaranty Corporation guarantees
the loan
Mortgage Loans:
- ---------------
NTS/Virginia First mortgage on approximately 17% of 07/01/97
Development Company 2,207 acres of residential land Gross
and improvements thereon Receipts
located in Fredericksburg, (a)(b)
Virginia, known as Fawn Lake
NTS/Lake Forest First mortgage on approximately 17% of 07/31/97
II Residential 532 acres of residential land Gross
Corporation in Louisville, Kentucky, known Receipts
as Lake Forest (a)(b)
Orlando Lake First mortgage on approximately 17% of 01/31/98
Forest Joint 398 acres of residential land Gross
Venture in Orlando, Florida known as Receipts
Orlando Lake Forest (c)
(a) Effective July 1, 1994, these Mortgage Loans are paying interest at
the greater of 17% of Gross Receipts or 4.42% of the average
outstanding loan balance.
(b) These Mortgage Loans included a provision for Gross Receipts Interest
through June 30, 1994.
(c) This Mortgage Loan pays interest at the greater of 17% of Gross
Receipts or 6.46% of the average outstanding loan balance.
<PAGE>
4. Mortgage Loans Receivable, net - Continued
--------------------------------------------
Total Balance Interest
Senior Outstanding Commitment Receivable
Liens At Face Amount At Fees At
12/31/96 At 12/31/96 12/31/96(j) Received 12/31/96
-------- ----------- ----------- -------- --------
1) Earning
-------
Loans:
- ------
Temporary
- ---------
Mortgage Loan:
- --------------
NTS/Virginia $1,998,850 $ 2,500,000 $ 1,998,850 $ 20,000 $ 30,466
Development
Company
Mortgage Loans:
- ---------------
NTS/Virginia 243,393 30,000,000 28,966,245 200,000 819,803
Development (d) (f)
Company
NTS/Lake Forest 4,166,187 28,000,000 25,857,472 250,000 607,885
II Residential (e) (g)
Corporation
Orlando Lake -- 14,000,000 7,126,366 -- 131,344
Forest Joint (h) (i)
Venture
Total Earning
Loans $74,500,000 $63,948,933 $ 470,000 $1,589,498
========== ========== ======== =========
(d) Senior lien applies to approximately 22 acres securing the first
mortgage which are subordinated to an unaffiliated lender.
(e) Senior liens apply to approximately 180 acres securing the first
mortgage which are subordinated to unaffiliated lenders.
(f) NTS Guaranty Corporation guarantees up to $2 million of outstanding
debt exceeding $18 million.
(g) NTS Guaranty Corporation guarantees up to $2,416,500 of outstanding
debt exceeding $22 million.
(h) An Affiliate of the Fund's Sponsor participates with the Fund
regarding this Mortgage Loan. As of December 31, 1996, the Fund's
ownership percentage was approximately 63%.
(i) The carrying amount of this Mortgage Loan is net of an unaccreted
discount of approximately $1,127,407.
(j) The carrying amount of the mortgage loans receivable at December 31,
1996 is net of any unamortized commitment fees.
<PAGE>
4. Affiliated Mortgage Loans Receivable, net - Continued
-----------------------------------------------------
Property Pledged Interest Maturity
Borrower as Collateral Rate Date
-------- ------------- ---- ----
2) Non-Earning Loans:
- ---------------------
Temporary Mortgage
- ------------------
Loans:
- ------
Orlando Lake Pledge by both general partners Prime Demand
Forest Joint of their partnership interests + 2%
Venture in Orlando Lake Forest Joint (k)
Venture located in Orlando,
Florida; a pledge of 390 shares
of the Class A common stock in
NTS/Virginia Development Company,
NTS Guaranty Corporation
guarantees the loan
Total Balance Interest
Senior Outstanding Commitment Receivable
Liens At Face Amount At Fees At
12/31/96 At 12/31/96 12/31/96 Received 12/31/96
-------- ----------- -------- -------- --------
Temporary
- ---------
Mortgage Loan:
- --------------
Orlando Lake $13,086,004 $ 7,818,000 $ 3,838,831 $ 150,000 $ --
Forest Joint (l) (m) (n) (k)
Venture
Total Non
Earning Loans $ 7,818,000 $ 3,838,831 $ 150,000 $ --
========== ========== ======== =========
(k) The Orlando Lake Forest Joint Venture has entered into a forbearance
agreement with the Fund whereby, effective April 1, 1995, no interest
will be due on these loans through January 31, 1998. The Fund has
discontinued accruing interest from the Temporary Mortgage Loan to
the Orlando Lake Forest Joint Venture until the interest payment is
received. Approximately $1,553,000 of interest remains due to the
Fund on this loan but is not accrued in the Fund's financial
statements.
(l) Total senior liens include the Fund's 63% interest in the lien.
(m) NTS/Virginia Development Company (Fawn Lake) and NTS/Lake Forest II
Residential Corporation (Lake Forest) participate with the Fund
regarding the Temporary Mortgage Loan. Their percentage ownership
as of December 31, 1996 is 17.651% and 19.125%, respectively.
(n) The Fund has established a $1,500,000 loan loss reserve as of
December 31, 1996. The Fund has discontinued accruing interest from
the Temporary Mortgage Loan to the Orlando Lake Forest Joint Venture
until the interest payment is received. Approximately $1,553,000 of
interest remains due to the Fund on this loan but is not accrued in
the Fund's financial statements.
<PAGE>
4. Affiliated Mortgage Loans Receivable, net - Continued
---------------------------------------------------
Reconciliation of Affiliated Mortgage Loans Receivable for the year ended:
--------------------------------------------------------------------------
Balance at December 31, 1993 $52,614,695
Additions:
Mortgage Loans $ 4,056,326
Temporary Mortgage Loans --
Amortization of loan fees 117,930 4,174,256
-----------
Reductions:
Mortgage Loans (4,305,330)
Temporary Mortgage Loans (5,224)
Mortgage Loan written-off (241,145)
Loan fees received (15,000) (4,566,699)
----------- -----------
Balance at December 31, 1994 $52,222,252
Additions:
Mortgage Loans $ 20,113,201
Temporary Mortgage Loans 1,073,953
Accretion of discount 125,029
Amortization of loan fees -- 21,312,183
----------
Reductions:
Mortgage Loans (6,177,976)
Temporary Mortgage Loans (2,041,898)
Mortgage Loan written-off (85,458)
Loan fees received (20,000) (8,325,332)
----------- ------------
Balance at December 31, 1995 $65,209,103
Additions:
Mortgage Loans $ 9,371,032
Temporary Mortgage Loans 1,191,918
Accretion of discount 148,472
Amortization of loan fees 20,000 10,731,422
-----------
Reductions:
Mortgage Loans (6,692,948)
Temporary Mortgage Loans (1,406,416)
Mortgage Loan written-off (53,397)
Loan fees received -- (8,152,761)
---------- -----------
Balance at December 31, 1996 $67,787,764
==========
Reserves for Loan Losses:
Balance at December 31, 1993 $ 1,730,000
Additions charged to Expenses $ 150,000
Deduction for Mortgage Loan written-off (241,145) (91,145)
---------- ---------
Balance at December 31, 1994 $ 1,638,855
Additions charged to Expenses $ --
Deduction for Mortgage Loan written-off (85,458) (85,458)
---------- -----------
Balance at December 31, 1995 $ 1,553,397
Additions charged to Expenses $ --
Deduction for Mortgage Loan written-off (53,397) (53,397)
--------- -----------
Balance at December 31, 1996 $ 1,500,000
==========
<PAGE>
5. Reserves for Loan Losses
------------------------
Reserves for loan losses are based on management's evaluation of the
borrower's ability to meet its obligation by comparing the mortgage note
receivable balance with the discounted value of estimated future cash
flows as well as considering current and future economic conditions.
Reserves are based on estimates and ultimate losses could differ
materially from the amounts assumed in arriving at the reserve for
possible loan losses reported in the financial statements. These
estimates are reviewed periodically and, as adjustments become
necessary, they are reported in earnings in the period in which they
become known. On a regular basis, management reviews each mortgage loan
in the Fund's portfolio including an assessment of the recoverability of
the individual mortgage loans. As of December 31, 1996, the Fund has a
loan loss reserve regarding the Temporary Mortgage Loan to the Orlando
Lake Forest Joint Venture (with an outstanding balance of $3,838,831 as
of December 31, 1996) amounting to $1,500,000. Certain of the Fund's
mortgage loans are guaranteed by NTS Guaranty Corporation, an Affiliate
of the Fund's Sponsor (see Note 9). The Fund has not considered this
guarantee when determining future cash flows and the loan loss reserve.
6. Notes Payable
-------------
Notes payable consist of the following:
1996 1995
--------- ---------
Note payable to a bank in the amount
of $13,800,000, bearing interest at
the Prime Rate plus 1%, payable
monthly due December 27, 1997,
secured by a collateral assignment
of the Fund's mortgages on Lake
Forest and Fawn Lake, guaranteed
by Mr. J. D. Nichols, Chairman of
the Board of the Fund's Sponsor $12,278,000 $13,086,000
Note payable to a bank in the amount
of $2,500,000, bearing interest at
the Prime Rate plus 3/4%, payable
monthly, due July 31, 1997, secured by
approximately 187 acres of residential
land and improvements thereon 1,998,850 1,063,873
---------- ----------
$14,276,850 $14,149,873
========== ==========
The Prime Rate was 8 1/4% and 8 1/2% at December 31, 1996 and 1995,
respectively.
Based on the borrowing rates currently available to the Fund for bank
loans with similar terms and average maturities, the fair value of the
above debt instruments approximates the carrying value.
The Fund's Sponsor is working with several lenders, including the Fund's
existing creditors, to refinance the Fund's debt which will mature
within the next twelve months. While management can provide no assurance
that these negotiations will be successful, it is their belief that,
based upon discussions with the various lenders, such refinancing will
be accomplished prior to the respective maturity dates.
<PAGE>
7. Gross Receipts and Supplemental Interest Income
-----------------------------------------------
Gross Receipts Interest is recognized with respect to a Mortgage Loan
secured by real estate held for sale in the ordinary course of the
borrower's business. Gross Receipts Interest is an amount equal to 5% of
the borrower's Gross Receipts, as defined in the Fund's Prospectus, from
the sale of the underlying real estate during the term of the mortgage
loan. Gross Receipts Interest is reported as earned on the accrual basis
of accounting. Effective July 1, 1994, none of the Fund's Mortgage Loans
provided for Gross Receipts Interest.
8. Commitments and Contingencies
-----------------------------
The Fund has commitments to extend credit made in the normal course of
business that are not reflected in the financial statements. At December
31, 1996, the Fund had outstanding funding commitments under standby
letters of credit aggregating $296,597: Orlando Lake Forest Joint
Venture $91,921; NTS/Virginia Development Co. $204,676. These
outstanding funding commitments are part of the maximum funding amount
of the mortgage loans. Committed undisbursed loans were approximately
$4,591,000 at December 31, 1996.
In July 1994, the Fund was named as a defendant in a complaint
originally filed by Jeno Paulucci & Silver Lakes I, Inc.in August 1992
against NTS Corporation (the Fund's Sponsor) and various Affiliates of
the Fund's Sponsor. The terms of the settlement agreement are
confidential. However, as no monetary awards were assessed against or
are payable by the Fund under the agreement, it is not anticipated that
the settlement will have a material impact on the Fund's financial
position or results of operations.
9. Guaranties to the Fund
----------------------
NTS Guaranty Corporation (the "Guarantor"), an Affiliate of the Sponsor,
has agreed to provide the following guaranties to the Fund:
Junior Mortgage Loan Guaranty
-----------------------------
The Guarantor guarantees the payment to the Fund, on a timely basis, of
the Principal (as defined in the Prospectus) of all Junior Mortgage
Loans and Temporary Mortgage Loans made by the Fund to Affiliated
Borrowers. The Guarantor's obligation is limited to the Principal
balance outstanding on the Junior Mortgage Loan or Temporary Mortgage
Loan and does not include the Interest Reserve, as defined in the
Prospectus. This guaranty will not apply to Junior Mortgage Loans or
Temporary Mortgage Loans made to Non-Affiliated Borrowers.
On October 19, 1992, the Fund notified the Orlando Lake Forest Joint
Venture (the "Joint Venture") that the Joint Venture is in payment
default regarding the Fund's Temporary Mortgage Loan to the Joint
Venture. This default gives the Fund the right to pursue the Guarantor
for its guaranty. The Fund's Board of Directors continues to evaluate
the collectability of the guaranty. The Board is also concerned about
the possible detrimental effects that the collection proceedings may
have on the Fund's other loans to other Affiliated Borrowers. The Board
has concluded that it is in the best interest of the Fund and its
Stockholders to continued to pursue the work-out plan to both preserve
the assets of the Fund and support the viability of the projects to
which it has outstanding loans.
<PAGE>
9. Guaranties to the Fund - Continued
----------------------------------
Purchase Price Guaranty
-----------------------
The Guarantor has guaranteed that investors of the Fund will receive,
over the life of the Fund, aggregate distributions from the Fund (from
all sources) in an amount at least equal to their Original Capital
Contributions, as defined in the Fund's Prospectus.
The liability of the Guarantor under the above guaranties is expressly
limited to its assets and its ability to draw upon a $10 million demand
note receivable from Mr. J.D. Nichols, Chairman of the Board of
Directors of the Sponsor. There can be no assurance that Mr. Nichols
will, if called upon, be able to honor his obligation to the Guarantor.
The total amounts guaranteed by the Guarantor are in excess of its net
worth, and there is no assurance that the Guarantor will be able to
satisfy its obligation under these guaranties. The Guarantor may in the
future provide guaranties for other Affiliates of the Fund.
<PAGE>
10. Dividends Paid and Payable
--------------------------
Dividends declared for the periods ended December 31, 1994, 1995 and
1996 were as follows:
Average
Date Date of Date Outstanding Amount
Declared Record (1) Paid Shares Per Share Amount
-------- ---------- -------- ----------- --------- --------
01/28/94 01/31/94 02/28/94 3,187,333 $ .06 $ 191,240
01/28/94 02/28/94 03/28/94 3,187,333 .06 191,239
01/28/94 03/31/94 04/28/94 3,187,333 .06 191,240
01/28/94 04/20/94 05/28/94 3,187,333 .03 95,618
01/28/94 05/31/94 06/28/94 3,187,333 .03 95,619
01/28/94 06/30/94 07/28/94 3,187,333 .03 95,619
01/28/94 07/31/94 08/29/94 3,187,333 .03 95,619
01/28/94 08/31/94 09/29/94 3,187,333 .03 95,619
01/28/94 09/30/94 10/28/94 3,187,333 .03 95,620
01/28/94 10/31/94 11/29/94 3,187,333 .03 95,620
01/28/94 11/30/94 12/29/94 3,187,333 .03 95,620
01/28/94 12/31/94 01/27/95 3,187,333 .04 127,493
----- ---------
Total dividends declared in 1994 $ .46 $1,466,166
====== =========
03/09/95 01/31/95 02/27/95 3,187,333 $ .03 $ 95,620
03/09/95 02/28/95 03/28/95 3,187,333 .03 95,620
03/09/95 03/31/95 04/27/95 3,187,333 .03 95,620
03/09/95 04/30/95 05/26/95 3,187,333 .03 95,620
03/09/95 05/31/95 06/27/95 3,187,333 .01 31,873
03/09/95 06/30/95 07/27/95 3,187,333 .01 31,873
03/09/95 07/31/95 08/25/95 3,187,333 .01 31,873
03/09/95 08/31/95 09/26/95 3,187,333 .01 31,873
03/09/95 09/30/95 10/26/95 3,187,333 .01 31,873
03/09/95 10/31/95 11/29/95 3,187,333 .01 31,873
03/09/95 11/30/95 12/26/95 3,187,333 .01 31,873
03/09/95 12/31/95 01/26/96 3,187,333 .01 38,250
----- ---------
Total dividends declared in 1995 $ .20 $ 643,841
===== =========
03/12/96 03/31/96 04/15/96 3,187,333 $ .045 $ 143,432
03/12/96 06/30/96 07/19/96 3,187,333 .045 143,432
06/27/96 09/30/96 10/18/96 3,187,333 .045 143,432
06/27/96 12/31/96 01/27/97 3,187,333 .055 175,305
----- -------
Total dividends declared in 1996 $ .190 $ 605,601
==== ========
It is the Fund's policy to distribute to its Stockholders an amount equal
to at least 95% of taxable income. A portion of the dividends paid during
a subsequent year may be allocable to taxable income earned in the prior
year. For 1993, 1994 and 1995, dividends to Stockholders represent
ordinary income.
The continued needs of the projects to which the Fund has outstanding
loans may significantly reduce the Fund's cash flows. Therefore, the
Fund's Board of Directors has determined to terminate the Fund's
quarterly distribution for the foreseeable future effective as of the
first quarter of 1997.
(1) Cash dividends vary based upon the date of stockholder admittance.
<PAGE>
11. Supplemental Financial Information
NTS Guaranty Corporation has provided material guaranties to the Fund. The
following presents condensed financial information for NTS Guaranty
Corporation.
1996 1995
------------ ------------
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
============ ============
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 December 31, 1996 represents a
substantial concentration of the Fund's assets.
<TABLE>
NTS/Lake Forest II Residential Corporation
<CAPTION>
1996 1995
------------ ------------
Balance Sheets
<S> <C> <C> <C>
Notes receivable $ 789,303 $ 1,677,064
Inventory 29,870,625 25,748,612
Other, net 2,506,190 4,544,265
------------ ------------
Total assets $ 33,166,118 $ 31,969,941
============ ============
Notes payable $ 31,349,964 $ 28,628,987
Other liabilities,net 1,650,968 2,589,235
Equity 165,186 751,719
------------ ------------
Total liabilities and equity $ 33,166,118 $ 31,969,941
============ ============
1996 1995 1994
------------ ------------ ------------
Statements of Operations
Lot sales $ 3,307,163 $ 4,329,717 $ 4,110,735
Cost of sales (2,477,330) (3,161,765) (2,735,786)
Provision for loan losses (395,275) (465,932) (--)
Other income(expense), net (1,021,091) (1,301,073) (1,026,115)
------------ ------------ ------------
Net income (loss) $ (586,533) $ (599,053) $ 348,834
============ ============ ============
NTS/ Virginia Development Company
1996 1995
------------ ------------
Balance Sheets
Notes receivable $ 4,150,515 $ 5,215,716
Inventory 32,768,228 30,802,664
Other, net 997,969 1,502,934
------------ ------------
Total assets $ 37,916,712 $ 37,521,314
============ ============
Notes payable $ 35,245,593 $ 34,369,132
Other liabilities, net 2,361,741 2,175,663
Equity 309,378 976,519
------------ ------------
Total liabilities and equity $ 37,916,712 $ 37,521,314
============ ============
1996 1995 1994
------------ ------------ ------------
Statements of Operations
<S> <C> <C> <C>
Lot sales $ 2,936,404 $ 3,073,548 $ 3,508,281
Cost of sales (1,875,642) (1,978,369) (2,097,208)
Provision for loan losses (364,974) (406,739) (--)
Other income(expense), net (1,362,929) (1,350,011) (1,005,474)
------------ ------------ ------------
Net income (loss) $ (667,141) $ (661,571) $ 405,599
============ ============ ============
</TABLE>
12. Unaudited Quarterly Financial Data
----------------------------------
Quarters Ended
--------------------
1996 March 31 June 30 September 30 December 31 Total
---- ---------- ---------- ---------- ----------- ----------
Total revenues $ 768,848 $ 847,287 $ 843,784 $ 845,076 $3,304,995
Total expenses 556,974 661,440 645,275 633,597 2,447,286
---------- ---------- ---------- ---------- ----------
Income before
income taxes 211,874 235,847 198,509 211,479 857,709
Income tax expense 1,850 1,850 1,850 1,850 7,400
---------- ---------- ---------- ---------- ----------
Net income $ 210,024 $ 233,997 $ 196,659 $ 209,629 $ 850,309
========== ========== ========== ========== ==========
Net income per
share of common
stock $ .07 $ .07 $ .06 $ .07 $ .27
========== ========== ========== ========== ==========
1995 March 31 June 30 September 30 December 31 Total
- ------ ---------- ---------- ---------- ---------- ----------
Total revenues $ 640,705 $ 751,340 $ 741,441 $ 751,166 $2,884,652
Total expenses 418,094 520,429 522,330 555,465 2,016,318
---------- ---------- ---------- ---------- ----------
Income before
income taxes 222,611 230,911 219,111 195,701 868,334
Income tax expense 2,500 2,500 2,500 2,500 10,000
---------- ---------- ---------- ---------- ----------
Net income $ 220,111 $ 228,411 $ 216,611 $ 193,201 $ 858,334
========== ========== ========== ========== ==========
Net income per
share of common
stock $ .07 $ .07 $ .07 $ .06 $ .27
========== ========== ========== ========== ==========
<PAGE>
13. Subsequent Events
-----------------
On February 12, 1997, the Fund entered into a letter of intent (the
Letter of Intent) with NTS Corporation and its Affiliates, NTS
Development Company, Fawn Lake, and Lake Forest regarding the Fund's
loans to Fawn Lake and Lake Forest. The Letter of Intent provided for,
among other things, a restructuring of the Fund's loans to Fawn Lake
and Lake Forest. The Letter of Intent contemplates that ownership of
the properties will be transferred to the Fund, which expects to
continue the development to completion of such properties and
ultimately, their orderly sale.
The parties to the Letter of Intent agreed to consider a general
restructuring of the relationship among the Fund, NTS Corporation and
its various Affiliates. The Fund has not yet determined the method by
which it will acquire control of the projects.
Generally Accepted Accounting Principles require that transactions as
contemplated by the Letter of Intent be recorded at fair market value.
Management can not determine at this time whether or not such
transactions, if completed, will result in a loss. In addition, in
connection with the ongoing development of the projects, it is likely
that the Fund will be required to change its tax status from a Real
Estate Investment Trust to a conventional corporation.
The Fund, as owner of the Fawn Lake and Lake Forest projects, expects
that it will continue development of the projects and the orderly sale
of lots, golf course memberships and ancillary services through
sell-out, as well as the sale of the Fawn Lake Country Club, when
appropriate. As owner, the Fund will be responsible for continuing
development, operations and marketing costs through the remaining lives
of the projects and it may be necessary for the Fund to borrow
additional funds to complete the development. While the Fund believes
that such funds will be more readily available if it owns the projects,
it is not certain that the Fund will be able to borrow the funds
necessary to complete the projects.
The Letter of Intent also contemplates that NTS Development Company, or
another subsidiary or affiliate of NTS Corporation (the "Manager"),
will enter into a management agreement (the "Management Agreement")
with the Fund pursuant to which the Manager will, as authorized agent
for the Fund, provide exclusive management, development, marketing and
sales efforts and personnel to the Fund, and take all other actions
necessary to manage the development of the projects to completion and
the sale of lots, golf memberships, ancillary services and the Fawn
Lake Country Club. The terms of the Management Agreement have not yet
been finalized. The parties to the Letter of Intent are presently
negotiating the definitive agreements contemplated by the Letter of
Intent but have not yet agreed on final terms.
<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)
Vice President
Citizens Bank of Kentucky
Louisville, Kentucky
Annual Meeting
The annual meeting of the stockholders
F. Everett Warren (1988) will be convened at 10:00 A.M., local
Retired time on Thursday, June 19, 1997
Citizens Fidelity Mortgage Company NTS Corporation
Louisville, Kentucky 10172 Linn Station Road
Louisville, Kentucky 40223
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
<PAGE>
