**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

 

**FORM 10-Q**

 

**ý**** QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30,2004**

 

**OR**

 

**o**** TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Commission File Number 333-112467**

 

**NTSREALTY HOLDINGS LIMITED PARTNERSHIP**

(Exact name of registrant as specified in itscharter)

* *
| **Delaware**                                                    | **41-2111139**                       |
|-----------------------------------------------------------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) | (I.R.S. Employer Identification No.) |

 

**10172 Linn Station RoadLouisville, Kentucky 40223**

(Address of principal executive offices)

 

**(502) 426-4800**

(Registrant’s telephone number, including area code)

 

**N/A**

(Former name, former address and former fiscal year,if changed since last report)

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.                                                                      Yeso    Noý

 

Indicate by check mark whetherregistrant is an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct).            Yes o   Noý

 

The Company has a registrationstatement on Form S-4 under the Securities Act of 1933, as amended, that becameeffective on October 27, 2004.  However,the Company has not yet issued any securities.

 

 

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**TABLE OFCONTENTS**

 
| **PART I - FINANCIAL  INFORMATION** | ** **   |
|-------------------------------------|--------------|
| ** **                          | ** **   | ** ** | ** ** |
| **Item 1.**                         | ** **   | **Financial Statements  (Unaudited)** | ** ** |
|                                |         |   |   |
| *** ***                        | *** *** | ***NTS Realty  Holdings Limited Partnership*** | *** *** |
|                                |         | Balance Sheets as  of September 30, 2004 and January 15, 2004 |   |
|                                |         | Notes  to Balance Sheets |   |
|                                |         | Introductory  Note to Pro Forma Consolidated Financial Information |   |
|                                |         | Pro Forma Consolidated  Balance Sheet as of September 30, 2004 |   |
|                                |         | Pro Forma  Consolidated Statements of Operations for the Nine Months Ended September 30,  2004 |   |
|                                |         | Pro Forma Consolidated  Statements of Operations for the Year Ended December 31, 2003 |   |
|                                |         | Notes and  General Partners’ Assumptions to Pro Forma Consolidated Financial Statements |   |
|                                |         | Introductory  Note to Historical Combining Financial Information |   |
|                                |         | Historical  Combining Statements of Operations for the Three Months Ended September 30,  2004 |   |
|                                |         | Historical  Combining Statements of Operations for the Nine Months Ended September 30,  2004 |   |
|                                |         | Historical Combining  Statements of Operations for the Three Months Ended September 30, 2003 |   |
|                                |         | Historical  Combining Statements of Operations for the Nine Months Ended September 30,  2003 |   |
|                                |         | Historical  Combining Cash Flow Statement for the Nine Months Ended September 30, 2004 |   |
|                                |         | Historical Combining  Cash Flow Statement for the Nine Months Ended September 30, 2003 |   |
|                                |         | Notes  to Historical Combining Financial Statements |   |
|                                |         |   |   |
| *** ***                        | *** *** | ***NTS Private Group*** | *** *** |
|                                |         | Combined Balance Sheets as of  September 30, 2004 and December 31, 2003 |   |
|                                |         | Combined Statements  of Operations for the Three Months and Nine Months Ended September 30, 2004  and 2003 |   |
|                                |         | Combined Statements of Cash Flows  for the Nine Months Ended September 30, 2004 and 2003 |   |
|                                |         | Notes to  Combined Financial Statements |   |
|                                |         |   |   |
| *** ***                        | *** *** | ***ORIG, LLC*** | *** *** |
|                                |         | Balance Sheets  as of September 30, 2004 and September 30, 2003 |   |
|                                |         | Notes  to Balance Sheets |   |
|                                |         |   |   |
| **Item 2.**                         | ** **   | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | ** ** |
|                                |         | Historical Combined |   |
|                                |         | NTS Private Group |   |
|                                |         |   |   |
| **Item 3.**                         | ** **   | **Quantitative and  Qualitative Disclosures About Market Risk** |   |
|                                |         |   |   |
| **Item 4.**                         | ** **   | **Controls and  Procedures** |   |
| ** **                          | ** **   | ** ** | ** ** |
| **PART II - OTHER INFORMATION**     |         |
|                                |         |   |   |
| **Items  1 – 6**               |         |
|                                |         |   |   |
| **Signatures**                      |         |

 

2

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Some of thestatements included in this quarterly report on Form 10-Q, particularly thoseincluded in Part I, Item 2 - Management’s Discussion and Analysis of FinancialCondition and Results of Operations (“MD&A”), may be considered “forward-lookingstatements” because the statements relate to matters which have not yetoccurred.  For example, phrases such as “weanticipate,” “believe” or “expect” indicate that it is possible that the eventanticipated, believed or expected may not occur.  If these events do not occur, the resultwhich we expected also may, or may not, occur in a different manner, which maybe more or less favorable to us.  We donot undertake any obligation to update these forward-looking statements.

 

Any forward-lookingstatements included in MD&A, or elsewhere in this report, reflect our managinggeneral partner’s best judgment based on known factors, but involve risks anduncertainties. Actual results could differ materially from those anticipated inany forward-looking statements as a result of a number of factors, includingbut not limited to those described in our filings with the Securities andExchange Commission, particularly our registration statement on Form S-4 whichwas made effective October 27, 2004.  Anyforward-looking information provided by us pursuant to the safe harborestablished by the Private Securities Litigation Reform Act of 1995 should beevaluated in the context of these factors.

 

3

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# **PART I - FINANCIAL INFORMATION**

## **Item 1 - Financial Statements**

## ** **

**NTS REALTY HOLDINGS LIMITED PARTNERSHIP**

**BALANCE SHEETS******
| ** **                                            | ** ** | **As of  September 30,  2004** | ** ** | **As of  January 15,  2004** | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                            | ** ** | **(UNAUDITED)**                | ** ** | ** **                   | ** ** |
| ASSETS                                                |       |                           |       |                         |       |
| Cash                                                  |       | $                              | 100        |                         | $          | 100 |   |
| Other assets                                          |       | 35,000                         |       | —                       |       |
|                                                  |       |                           |       |                         |       |
| TOTAL ASSETS                                          |       | $                              | 35,100     |                         | $          | 100 |   |
|                                                  |       |                           |       |                         |       |
| LIABILITIES AND PARTNERS’ EQUITY (DEFICIT)       |       |                           |       |                         |       |
| Accrued payables – affiliate                     |       | $                              | 65,616     |                         | $          | — |   |
|                                                  |       |                           |       |                         |       |
| TOTAL LIABILITIES                                     |       | $                              | 65,616     |                         | $          | — |   |
|                                                  |       |                           |       |                         |       |
| COMMITMENTS AND CONTINGENCIES (Note 4)                |       |                           |       |                         |       |
|                                                  |       |                           |       |                         |       |
| PARTNERS’ EQUITY (DEFICIT)                       |       | $                              | (30,516    | )                            | $          | 100 |   |
|                                                  |       |                           |       |                         |       |
| TOTAL LIABILITES AND PARTNERS’ EQUITY  (DEFICIT) |       | $                              | 35,100     |                         | $          | 100 |   |

 

The accompanying notes to balance sheets are an integral part of thesebalance sheets.

 

4

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**NTS REALTY HOLDINGS LIMITED PARTNERSHIP**

**NOTES TO BALANCE SHEETS**

**(UNAUDITED)**

 

**Note 1 - Summary of Significant AccountingPolicies**

 

***A) Organization andBasis of Presentation***

 

NTS Realty Holdings Limited Partnership (“NTS Realty”), a newly formedlimited partnership, was organized in the State of Delaware on September 26,2003.  On February 4, 2004, NTS Realtyfiled a registration statement on Form S-4 with the Securities and ExchangeCommission (“SEC”) with respect to, among other things, a proposed merger offive limited partnerships (the “Partnerships”) registered under the SecuritiesExchange Act of 1934.  The Partnershipsinvolved in the proposed merger are NTS-Properties III; NTS-Properties IV;NTS-Properties V, a Maryland limited partnership; NTS-Properties VI, a Marylandlimited partnership; and NTS-Properties VII, Ltd.  Concurrent with the merger ORIG, LLC (“ORIG”),a Kentucky limited liability company affiliated with the Partnerships’ generalpartners, will contribute substantially all its assets and all of its liabilitiesto NTS Realty.  If the proposed merger iscompleted, each limited partnership will be merged with and into NTS Realty.

 

Our registration statement on Form S-4 was made effective by the SEC onOctober 27, 2004.  The merger vote ispresently being conducted and will close on December 27, 2004.  On December 10, 2004, the American StockExchange approved our application to list our partnership units if the mergeris completed.  We urge you to read ourregistration statement on Form S-4 as filed with the SEC for details of ourmerger, the Partnerships, our affiliates (NTS Private Group, ORIG and NTSDevelopment Company) and their respective interests and roles in the merger andsubsequent operation of our partnership.

 

Our financial statements as presented include the following pro forma consolidatedfinancial statements and notes, historical combining financial statements andnotes, as well as the combined financial statements and notes of NTS PrivateGroup and balance sheets and notes of ORIG.

 

NTS Realty intends to qualify as a partnership for federal income taxpurposes for the taxable year in which the merger is completed.  A limited partnership is a legal entity thatoffers its investors limited liability protection against claims broughtagainst the limited partnership.  Alimited partnership also is not subject to federal income tax, but rather, thelimited partnership’s profit or loss for federal income tax purposes isreported directly by its investors.

 

***B) Use of Estimates***

 

The preparation of the financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that affect amounts reported in the financial statements andaccompanying notes.  Management believesthat the estimates utilized in preparing its financial statements arereasonable and prudent.  Actual resultscould differ from these estimates.

 

***C) Other Assets***

 

Otherassets includes fees paid to a lender related to the financing we expect to useas part of the merger described above.

 

5

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***D) Income Taxes***

 

NTS Realty qualifies to be treated as a partnership under sections ofthe Internal Revenue Code of 1986, as amended (the “Code”), and the regulationspromulgated thereunder and will not elect to be taxed as a corporation forfederal income tax purposes.  NTS Realtypasses through its income and expenses to its investors for tax purposes.

 

**Note 2 - Borrowings**

 

Concurrent with the consummation of the proposed merger, NTS Realtyintends to succeed to the borrowings then held by the Partnerships and othermerging real estate entities affiliated with their general partners.  NTS Realty will also assume liabilities ofORIG, which consist primarily of mortgage loans secured by commercial retailand residential properties.  We intend torefinance a majority of the debt to be assumed in the merger, which wouldresult in prepayment penalties of approximately $5.8 million.

 

**Note 3 - Related Party Transactions**

 

NTS Realty will be externally managed under an agreement with NTSDevelopment Company (“NTS Devco”) an affiliate of NTS Realty’s general partners.  NTS Devco will be paid a management feepursuant to the terms of an agreement entered into with NTS Realty.  NTS Devco will also be reimbursed its actualcosts for services rendered to NTS Realty. Funds were advanced on our behalf by NTS Financial Partnership, anaffiliate of NTS Devco, totaling approximately $30,000 for start-up costs and$35,000 for loan fees.  NTS Realty had noother operations from inception on September 26, 2003, to September 30, 2004.

 

**Note 4 – Commitments and Contingencies**

 

***Merger/Settlement Charge***

 

NTS Realty wasformed as part of a class action settlement where its affiliate and limitedpartner ORIG has agreed to admit a “qualified settlement trust” as a specialmember of ORIG. This special member interest is being created for the benefitof the class members in the litigation who are former limited partners who soldtheir limited partnership interests to ORIG, its affiliates or the partnershipseither as part of tender offers, other repurchase programs or otherwise. Underthe terms of ORIG’s operating agreement, all of the economic and other rightsassociated with up to 620,000 Units owned by ORIG will be designated for thebenefit of the qualified settlement trust. ORIG will own the Units, but all ofthe rights associated with the Units will inure to the qualified settlementtrust. Plaintiffs’ counsel, or his designee, will have the right, acting as arepresentative of these former limited partners, to cause ORIG to vote thesedesignated Units pursuant to his direction. The amount of Units was determinedbased on the $6.2 million non-cash amount of the $6.85 million settlementamount agreed upon by the general partners and plaintiffs’ counsel. Therefore,if each Unit is valued at $10.00, then the economic and other rights associatedwith 620,000 Units will be needed to satisfy the settlement amount. The finalamount of the settlement, however, is based on the amount of valid claims filedby the former limited partners in the class of plaintiffs. If claims are notmade for the full $6.2 million settlement amount, ORIG will designate theeconomic and other rights to fewer Units for the benefit of the qualifiedsettlement trust to satisfy the claims. We refer to these designated Units asthe ‘‘Class Units.’’ Under the terms of the settlement agreement governing thequalified settlement trust, the three members of ORIG (Mr. Nichols, his spouseand Mr. Lavin) are jointly obligated, for a period of two years, to repurchasefrom the qualified settlement trust, using 75% of the distributions that ORIGreceives in respect of the Units owned by ORIG which otherwise would have goneto Mr. Nichols, his spouse or Mr. Lavin, the economic and other rightsassociated with the number of Class Units calculated under the formuladescribed below. Each payment will result in the redesignation of rightsassociated with the number of Class Units equal to the amount of thedistribution divided by 115% of the ‘‘fair market value’’ of the Units. As aresult of each payment, the number of Class Units designated for the benefit ofthe qualified settlement trust will decrease until the economic and otherrights associated with all of the Class Units are ultimately redesignated for thebenefit of Mr. Nichols, his

 

6

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spouse, and/orMr. Lavin within two years of when we begin making distributions. If any ClassUnits remain at the end of this two-year period, Mr. Nichols, his spouse andMr. Lavin must make a final payment to the qualified settlement trust that issufficient to redesignate any remaining Class Units. For these purposes, fairmarket value will be equal to the average closing price of the Units on theAmerican Stock Exchange for the thirty-day period prior to the date of theredesignation.  Our Statement ofOperations will include a non-cash charge for our estimate related to thesettlement with a corresponding credit to Partners’ Equity when the criteria ofStatement of Financial Accounting Standards (“SFAS”) No. 5 “Accounting forContingencies” is met.

 

7

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**INTRODUCTORY NOTE****TO**

**PRO FORMA CONSOLIDATED FINANCIAL INFORMATION**

**(UNAUDITED)**

 

The following unaudited pro formaconsolidated financial data as of and for the nine months ended September 30,2004 and the year ended December 31, 2003 are based upon the historical combiningfinancial statements included herein.

 

The unaudited pro forma consolidated balancesheet as of September 30, 2004 is adjusted to give effect to the merger as ifit occurred on September 30, 2004.  Theunaudited pro forma consolidated statements of operations for the nine monthsended September 30, 2004 and the year ended December 31, 2003 are adjusted togive effect to the merger as if it occurred on January 1, 2003.  The pro forma adjustments are described inthe accompanying notes and are based upon available information and certainassumptions that our management believes are reasonable.

 

The unaudited pro forma consolidatedfinancial data does not purport to represent what our results of operations orfinancial condition would actually have been had the merger occurred on thedates indicated or to project our results of operations or financial conditionfor any future period or date.  Theunaudited pro forma consolidated financial statements should be read inconjunction with the financial statements and related notes thereto includedherein.

 

8

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**PRO FORMA**

**CONSOLIDATED BALANCE SHEET**

**SEPTEMBER 30, 2004**

**(UNAUDITED)**

 
| ** **                                    | ** ** | **NTS**        | ** **       | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**     | ** ** | ** ** | ** ** | ** **      | ** ** | **Total**      | ** **  | ** **      | ** ** | ** **      | ** **     |
|-----------------------------------------------|------------|----------------|------------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|-------------|------------|------------|------------|-----------------|------------|----------------|-------------|-----------------|------------|-----------------|----------------|
| ** **                                    | ** ** | **Properties** | ** **       | **Properties** | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Private** | ** ** | ** ** | ** ** | **Combining**   | ** ** | **Historical** | ** **  | **Pro  Forma**  | ** ** | **Partnership** | ** **     |
| ** **                                    | ** ** | **III**        | ** **       | **IV**         | ** ** | **V**          | ** ** | **VI**         | ** ** | **VII**        | ** ** | **Group**   | ** ** | **BBC 1A** | ** ** | **Adjustments** | ** ** | **Combined**   | ** **  | **Adjustments** | ** ** | **Pro  Forma**  | ** **     |
| ASSETS                                        |       |           |             |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |        |            |       |            |           |
| Cash                                          |       | $              |  533,625    |           | 114,284    |           | 299,273    |           | 242,266    |           | 206,108    |        | 807,649    |       | 21,818     |            | —     |           | 2,225,023   |            | 13,374,587 | (a)(b)          | 15,599,610     |   |
| Cash – restricted                        |       | 64,682         |             | 63,897         |       | 755,976        |       | 375,021        |       | 27,150         |       | 348,195     |       | 42,445     |       | —          |       | 1,677,366      |        | —          |       | 1,677,366       |           |
| Accounts  receivable                          |       | 935,161        |             | 135,667        |       | 661,730        |       | 57,385         |       | 12,115         |       | 622,179     |       | 49,155     |       | —          |       | 2,473,392      |        | (2,070,245      | )(c)       | 403,147         |           |
| Land, buildings  and amenities, net           |       | 8,517,323      |             | 5,581,140      |       | 19,691,909     |       | 38,978,599     |       | 6,796,557      |       | 34,458,150  |       | 2,810,999  |       | —          |       | 116,834,677    |        | 41,840,511      | (d)        | 158,675,188     |           |
| Other assets                                  |       | 323,464        |             | 56,876         |       | 764,140        |       | 1,168,069      |       | 29,263         |       | 1,325,902   |       | 24,269     |       | (737,552        | )(1)       | 2,954,431      |        | 4,860,885       | (b)(d)     | 7,815,316       |           |
| Investments                                   |       | —         |             | 1,187,094      |       | —         |       | —         |       | 839,077        |       | —      |       | —     |       | (2,026,171      | )(1)       | —         |        | —          |       | —          |           |
|                                          |       |           |             |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |        |            |       |            |           |
| TOTAL ASSETS                                  |       | $              |  10,374,255 |           | 7,138,958  |           | 22,173,028 |           | 40,821,340 |           | 7,910,270  |        | 37,562,075 |       | 2,948,686  |            | (2,763,723 | )              | 126,164,889 |            | 58,005,738 |            | 184,170,627    |   |
|                                          |       |           |             |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |        |            |       |            |           |
| LIABILITIES &  PARTNERS’ EQUITY      |       |           |             |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |        |            |       |            |           |
| Mortgages and  notes payable                  |       | $              |  5,979,480  |           | 2,659,878  |           | 13,337,353 |           | 30,248,106 |           | 3,219,830  |        | 34,880,469 |       | 745,135    |            | 13,430,908 | (2)            | 104,501,159 |            | 18,311,951 | (b)             | 122,813,110    |   |
| Accounts payable                              |       | 198,357        |             | 364,471        |       | 926,264        |       | 893,778        |       | 166,168        |       | 935,241     |       | 10,106     |       | —          |       | 3,494,385      |        | —          |       | 3,494,385       |           |
| Accounts payable –  affiliate            |       | —         |             | —         |       | 709,112        |       | 1,102,521      |       | —         |       | —      |       | —     |       | —          |       | 1,811,633      |        | —          |       | 1,811,633       |           |
| Security deposits                             |       | 149,140        |             | 25,385         |       | 240,595        |       | 242,409        |       | 26,500         |       | 189,354     |       | —     |       | —          |       | 873,383        |        | —          |       | 873,383         |           |
| Other liabilities                             |       | 159,468        |             | 163,369        |       | 633,796        |       | 943,709        |       | 83,688         |       | 505,429     |       | 92,388     |       | —          |       | 2,581,847      |        | —          |       | 2,581,847       |           |
|                                          |       |           |             |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |        |            |       |            |           |
| TOTAL LIABILITIES                             |       | 6,486,445      |             | 3,213,103      |       | 15,847,120     |       | 33,430,523     |       | 3,496,186      |       | 36,510,493  |       | 847,629    |       | 13,430,908      |       | 113,262,407    |        | 18,311,951      |       | 131,574,358     |           |
|                                          |       |           |             |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |        |            |       |            |           |
| COMMITMENTS AND  CONTINGENCIES (NOTE (e))     |       |           |             |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |        |            |       |            |           |
|                                          |       |           |             |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |        |            |       |            |           |
| TOTAL MINORITY  INTEREST                      |       | —         |             | —         |       | 968,517        |       | —         |       | —         |       | —      |       | —     |       | (968,517        | )(1)       | —         |        | —          |       | —          |           |
|                                          |       |           |             |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |        |            |       |            |           |
| PARTNERS’ EQUITY                         |       | 3,887,810      |             | 3,925,855      |       | 5,357,391      |       | 7,390,817      |       | 4,414,084      |       | 1,051,582   |       | 2,101,057  |       | (15,226,114     | )          | 12,902,482     |        | 39,693,787      |       | 52,596,269      |           |
|                                          |       |           |             |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |        |            |       |            |           |
| TOTAL LIABILITES  & PARTNERS’ EQUITY |       | $              |  10,374,255 |           | 7,138,958  |           | 22,173,028 |           | 40,821,340 |           | 7,910,270  |        | 37,562,075 |       | 2,948,686  |            | (2,763,723 | )              | 126,164,889 |            | 58,005,738 |            | 184,170,627    |   |
|                                          |       |           |             |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |        |            |       |            |           |
| **Book  value per unit**                      |       |           |             |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |        |            |       | **$**           | ** 4.62** |   |
|                                               |            |                |                  |                |            |                |            |                |            |                |            |             |            |            |            |                 |            |                |             |                 |            |                 |                |  |  |

 

See accompanying Notes and General Partners’ Assumptions to UnauditedPro Forma Consolidated Financial Statements.

 

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**PRO FORMA**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004**

**(UNAUDITED)**

 
| ** **                                             | ** ** | **Total**      | ** ** | ** **      | ** ** | ** **      | ** ** |
|--------------------------------------------------------|------------|----------------|------------|-----------------|------------|-----------------|------------|
| ** **                                             | ** ** | **Historical** | ** ** | **Pro Forma**   | ** ** | **Pro Forma**   | ** ** |
| ** **                                             | ** ** | **Combined**   | ** ** | **Adjustments** | ** ** | **as Adjusted** | ** ** |
| REVENUES                                               |       |           |       |            |       |            |       |
| Rental income                                          |       | $              | 23,341,978 |            | $          | 138,849         | (a)(b)     | $ | 23,480,827 |   |
| Tenant reimbursements                                  |       | 1,766,214      |       | —          |       | 1,766,214       |       |
|                                                   |       |           |       |            |       |            |       |
| TOTAL REVENUES                                         |       | 25,108,192     |       | 138,849         |       | 25,247,041      |       |
|                                                   |       |           |       |            |       |            |       |
| EXPENSES                                               |       |           |       |            |       |            |       |
| Operating expenses                                     |       | 6,266,105      |       | —          |       | 6,266,105       |       |
| Operating expenses - affiliated                        |       | 3,074,450      |       | —          |       | 3,074,450       |       |
| Management fees                                        |       | 1,362,781      |       | —          |       | 1,362,781       |       |
| Real estate taxes                                      |       | 1,533,251      |       | —          |       | 1,533,251       |       |
| Professional and administrative expenses               |       | 2,434,231      |       | 174,750         | (c)        | 2,608,981       |       |
| Professional and administrative expenses -  affiliated |       | 836,163        |       | 155,687         | (d)        | 991,850         |       |
| Depreciation and amortization                          |       | 6,127,974      |       | 1,701,970       | (e)        | 7,829,944       |       |
|                                                   |       |           |       |            |       |            |       |
| TOTAL OPERATING EXPENSES                               |       | 21,634,955     |       | 2,032,407       |       | 23,667,362      |       |
|                                                   |       |           |       |            |       |            |       |
| OPERATING INCOME (LOSS)                                |       | 3,473,237      |       | (1,893,558      | )          | 1,579,679       |       |
|                                                   |       |           |       |            |       |            |       |
| Interest and other income                              |       | 75,563         |       | —          |       | 75,563          |       |
| Interest expense                                       |       | (5,741,946     | )          | 462,341         | (f)        | (5,279,605      | )          |
| Loss on disposal of assets                             |       | (67,733        | )          | —          |       | (67,733         | )          |
|                                                   |       |           |       |            |       |            |       |
| Net loss                                               |       | $              | (2,260,879 | )               | $          | (1,431,217      | )          | $ | (3,692,096 | ) |
|                                                   |       |           |       |            |       |            |       |
| Net loss allocated to limited partners                 |       | $              | (2,118,896 | )               | $          | (1,341,336      | )          | $ | (3,460,232 | ) |
|                                                   |       |           |       |            |       |            |       |
| Net loss per limited partnership interest              |       | $              | (0.18      | )               | $          | (0.12           | )          | $ | (0.30 | ) |
|                                                   |       |           |       |            |       |            |       |
| Number of limited partnership interests                |       | 11,381,608     |       | 11,381,608      |       | 11,381,608      |       |
|                                                   |       |           |       |            |       |            |       |
| **Ratio of earnings to fixed charges**                 | ** ** | ** **     |       |            |       | **0.30**        |       |

 

See accompanying Notes and General Partners’ Assumptions to UnauditedPro Forma Consolidated Financial Statements.

 

10

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**PRO FORMA**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FOR THE YEAR ENDED DECEMBER 31, 2003**

**(UNAUDITED)**

 
| ** **                                             | ** ** | **Total**      | ** ** | ** **      | ** ** | ** **      | ** ** |
|--------------------------------------------------------|------------|----------------|------------|-----------------|------------|-----------------|------------|
| ** **                                             | ** ** | **Historical** | ** ** | **Pro Forma**   | ** ** | **Pro Forma**   | ** ** |
| ** **                                             | ** ** | **Combined**   | ** ** | **Adjustments** | ** ** | **as Adjusted** | ** ** |
| REVENUES                                               |       |           |       |            |       |            |       |
| Rental income                                          |       | $              | 31,762,268 |            | $          | 270,183         | (a)(b)     | $ | 32,032,451 |   |
| Tenant reimbursements                                  |       | 2,371,880      |       | —          |       | 2,371,880       |       |
|                                                   |       |           |       |            |       |            |       |
| TOTAL REVENUES                                         |       | 34,134,148     |       | 270,183         |       | 34,404,331      |       |
|                                                   |       |           |       |            |       |            |       |
| EXPENSES                                               |       |           |       |            |       |            |       |
| Operating expenses                                     |       | 7,705,887      |       | —          |       | 7,705,887       |       |
| Operating expenses - affiliated                        |       | 3,703,469      |       | —          |       | 3,703,469       |       |
| Management fees                                        |       | 1,854,917      |       | —          |       | 1,854,917       |       |
| Real estate taxes                                      |       | 2,422,711      |       | —          |       | 2,422,711       |       |
| Professional and administrative expenses               |       | 2,514,441      |       | 233,000         | (c)        | 2,747,441       |       |
| Professional and administrative expenses -  affiliated |       | 1,003,346      |       | 207,583         | (d)        | 1,210,929       |       |
| Depreciation and amortization                          |       | 8,006,076      |       | 3,408,517       | (e)        | 11,414,593      |       |
|                                                   |       |           |       |            |       |            |       |
| TOTAL OPERATING EXPENSES                               |       | 27,210,847     |       | 3,849,100       |       | 31,059,947      |       |
|                                                   |       |           |       |            |       |            |       |
| OPERATING INCOME (LOSS)                                |       | 6,923,301      |       | (3,578,917      | )          | 3,344,384       |       |
|                                                   |       |           |       |            |       |            |       |
| Interest and other income                              |       | 364,683        |       | —          |       | 364,683         |       |
| Interest expense                                       |       | (8,185,284     | )          | (5,929,571      | )(f)       | (14,114,855     | )          |
| Loss on disposal of assets                             |       | (303,906       | )          | —          |       | (303,906        | )          |
| Settlement charge                                      |       | —         |       | (2,400,000      | )(g)       | (2,400,000      | )          |
|                                                   |       |           |       |            |       |            |       |
| Net loss                                               |       | $              | (1,201,206 | )               | $          | (11,908,488     | )          | $ | (13,109,694 | ) |
|                                                   |       |           |       |            |       |            |       |
| Net loss allocated to limited partners                 |       | $              | (1,125,770 | )               | $          | (11,160,635     | )          | $ | (12,286,405 | ) |
|                                                   |       |           |       |            |       |            |       |
| Net loss per limited partnership interest              |       | $              | (0.10      | )               | $          | (0.98           | )          | $ | (1.08 | ) |
|                                                   |       |           |       |            |       |            |       |
| Number of limited partnership interests                |       | 11,381,608     |       | 11,381,608      |       | 11,381,608      |       |
|                                                   |       |           |       |            |       |            |       |
| **Ratio of earnings to fixed charges**                 |       |           |       |            |       | **0.07**        |       |

 

See accompanying Notes and General Partners’ Assumptions to UnauditedPro Forma Consolidated Financial Statements.

 

11

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**NOTES AND GENERAL PARTNERS’ ASSUMPTIONS****TO**

**PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

----

Adjustments to Unaudited Pro Forma Consolidated Balance Sheet:

 

(a)          Represents the contribution of cash totaling$1,500,000 to be made to the partnerships pursuant to the litigation settlementdescribed.

 

(b)         Represents the refinancing of approximately$99 million of existing debt with additional financing of approximately $15million.  See Note (f) below.

 

(c)          Represents the adjustments necessary toeliminate the approximate $2,070,000 receivable generated by recordingescalating rents on a straight-line basis.

 

(d)         The merger will be accounted for using thepurchase method of accounting in accordance with U.S. generally acceptedaccounting principles.  Under this methodNTS Realty will be treated as the purchasing entity.  A portion of each partnership’s assets andliabilities will be adjusted to reflect their fair market value.  That portion owned by affiliates of thegeneral partner of the partnerships will be reflected at historical cost.  The assets and liabilities contributedthrough ORIG by NTS Private Group will be accounted for as an exchange ofpartnership units (equivalent to shares) among entities under commoncontrol.  Accordingly, the portion of theassets and liabilities representing Mr. Nichols’ ownership interest in each ofthe respective entities comprising the NTS Private Group will be accounted forat historic cost by ORIG.  The purchasemethod of accounting will be applied by ORIG to the remaining portion of theNTS Private Group assets and liabilities that are not owned by Mr. Nichols.  In accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 141, we allocated the purchase price for eachproperty to net tangible and identified intangible assets acquired based ontheir fair values (including land, buildings, tenant improvements, acquiredabove and below market leases and the origination cost of acquired in-placeleases) and acquired liabilities.  Nocustomer relationship intangibles exist. At September 30, 2004 the carrying value of mortgages and notes payableapproximates fair market value.  Weretained an independent appraiser (CBRE) to assess fair value based onestimated cash flow projections that utilize discount and capitalization ratesdeemed appropriate and available market information.  As part of the allocation of purchase prices,we recorded the following approximate adjustments:

 

Purchase Method Accounting Adjustments:

 
| ** **                         | ** ** | **Residential** | ** ** | **Commercial** | ** ** | **Total**  | ** ** |
|------------------------------------|------------|-----------------|------------|----------------|------------|------------|------------|
| Land, buildings and amenities, net |       |            |       |           |       |       |       |
| Land                               |       | $               | 1,091,000  |           | $          | 2,380,000  |       | $ | 3,471,000 |   |
| Buildings                          |       | 25,040,000      |       | 9,645,000      |       | 34,685,000 |       |
| Tenant improvements                |       | —          |       | 3,684,000      |       | 3,684,000  |       |
|                               |       | $               | 26,131,000 |           | $          | 15,709,000 |       | $ | 41,840,000 |   |
| Other assets                       |       |            |       |           |       |       |       |
| Leasing commissions                |       | $               | —     |           | $          | (17,000    | )          | $ | (17,000 | ) |
| Tenant allowances                  |       | —          |       | (76,000        | )          | (76,000    | )          |
| Loan costs                         |       | —          |       | (109,000       | )          | (109,000   | )          |
| Intangible lease costs:            |       |            |       |           |       |       |       |
| Above/below market leases          |       | —          |       | 1,820,000      |       | 1,820,000  |       |
| Acquired in place leases           |       | 1,139,000       |       | 1,453,000      |       | 2,592,000  |       |
| Customer relationships             |       | —          |       | —         |       | —     |       |
|                               |       | $               | 1,139,000  |           | $          | 3,071,000  |       | $ | 4,210,000 |   |

 

12

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The value of commercial tenant origination costs and intangible leasecosts are to be amortized over the remaining term of each respective lease,primarily ranging from two to ten years. Residential intangible lease costs are amortized over the remaining termof the respective leases, primarily ranging from one to twelve months.

 

(e)          NTSRealty was formed as part of a class action settlement where its affiliate andlimited partner ORIG has agreed to admit a ‘‘qualified settlement trust’’ as aspecial member of ORIG. This special member interest is being created for thebenefit of the class members in the litigation who are former limited partnerswho sold their limited partnership interests to ORIG, its affiliates or thepartnerships either as part of tender offers, other repurchase programs orotherwise. Under the terms of ORIG’s operating agreement, all of the economicand other rights associated with up to 620,000 Units owned by ORIG will bedesignated for the benefit of the qualified settlement trust. ORIG will own theUnits, but all of the rights associated with the Units will inure to thequalified settlement trust. Plaintiffs’ counsel, or his designee, will have theright, acting as a representative of these former limited partners, to causeORIG to vote these designated Units pursuant to his direction. The amount ofUnits was determined based on a $6.2 million non-cash amount of the total $6.85million settlement amount agreed upon by the general partners and plaintiffs’counsel. Therefore, if each Unit is valued at $10.00, then the economic andother rights associated with 620,000 Units will be needed to satisfy thesettlement amount. The final amount of the settlement, however, is based on theamount of valid claims filed by the former limited partners in the class ofplaintiffs. If claims are not made for the full $6.2 million settlement amount,ORIG will designate the economic and other rights to fewer Units for thebenefit of the qualified settlement trust to satisfy the claims. We refer tothese designated Units as the ‘‘Class Units.’’ Under the terms of thesettlement agreement governing the qualified settlement trust, Mr. Nichols, hisspouse and Mr. Lavin are jointly obligated, for a period of two years, to repurchasefrom the qualified settlement trust, using 75% of the distributions that ORIGreceives in respect of the Units owned by ORIG which otherwise would have goneto Mr. Nichols, his spouse or Mr. Lavin, the economic and other rightsassociated with the number of Class Units calculated under the formuladescribed below. Each payment will result in the redesignation of rightsassociated with the number of Class Units equal to the amount of thedistribution divided by 115% of the ‘‘fair market value’’ of the Units. As aresult of each payment, the number of Class Units designated for the benefit ofthe qualified settlement trust will decrease until the economic and otherrights associated with all of the Class Units are ultimately redesignated forthe benefit of Mr. Nichols, his spouse, and/or Mr. Lavin within two years ofwhen we begin making distributions. If any Class Units remain at the end ofthis two-year period, Mr. Nichols, his spouse and Mr. Lavin must make a finalpayment to the qualified settlement trust that is sufficient to redesignate anyremaining Class Units. For these purposes, fair market value will be equal tothe average closing price of the Units on the American Stock Exchange for thethirty-day period prior to the date of the redesignation.  Our Statement of Operations will include anon-cash charge for our estimate related to the settlement with a correspondingcredit to Partners’ Equity when the criteria of SFAS No. 5 “Accounting forContingencies” is met.

 

Adjustments to Unaudited Pro Forma Consolidated Statements ofOperations:

 

(a)          We recognized approximately $215,000 and$287,000, for the nine months ended September 30, 2004 and the year endedDecember 31, 2003, respectively, as a reduction to rental revenue to reflectthe amortization of the intangible lease costs.

 

(b)         Represents adjustments of approximately$354,000 and $558,000, for the nine months ended September 30, 2004 and theyear ended December 31, 2003, respectively, to increase rental revenue for thestraight-line effect of escalating rental terms as if the merger occurred onJanuary 1, 2003.

 

13

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(c)          Represents the additional costs of listingsecurities on an exchange and complying with listing requirements.  These annual costs are estimated to includedirectors’ fees, directors’ and officers’ insurance, investor communicationsand exchange listing fees of approximately $48,000, $125,000 and $60,000,respectively.

 

(d)         Represents the additional personnel andoverhead costs allocable to the group of entities contributed by ORIG.  These costs were formerly absorbed by NTSDevelopment Company and were not passed through to the entities contributed byORIG because no cost sharing agreement existed between the NTS Private Groupand NTS Development Company.  Thesepersonnel cost allocations are based on management’s estimates of time requiredby the respective personnel on behalf of the respective entity.  An apportionment factor for each employee isthen applied to actual payroll and related overhead costs to allocate the costsratably.  Non-personnel related overheadcosts are allocated ratably based on various factors including actual usage,square footage occupied and FTE’s or headcount.

 

(e)          These adjustments reflect our estimate ofdepreciation and amortization expense for our properties as if we owned themfrom January 1, 2003.  The adjustmentsare based upon our estimate of the individual properties’ depreciable costsutilizing our depreciation policy.  (SeeNote (c) in our Adjustments to Unaudited Pro Forma Consolidated Balance Sheetfor additional information).

 

(f)            These adjustments reflect our estimate ofthe reduction of interest expense as if we had refinanced approximately $99.0million of our mortgage debt on January 1, 2003 with additional financing ofapproximately $15.0 million.  Theadjustments are based on our estimate of the interest carrying costs on theproceeds of the loans we anticipate obtaining at the time of the merger.  We expect the new mortgage debt to result inannual interest savings of approximately $600,000.  We expect to incur approximately $5.8 millionof pre-payment penalties Unamortized loan costs on the refinanced debt ofapproximately $759,000 will be written off.

 

(g)         This adjustment for the settlement chargerelated to the class action settlement described above is our best estimate ofthe expected number of valid claims to be filed by former limited partners inthe class of plaintiffs.

 

Adjustments to Historical Combined Balance Sheet:

 

(1)          Representsthe elimination of the equity investment and minority interests for thefollowing joint ventures which are reflected in the consolidated financialstatements of the following public partnerships:

 

*NTS-Properties V:*

Willows II Joint Venture

Lakeshore/University II Joint Venture

 

*NTS-Properties VI:*

Sabal Golf Villas Joint Venture

Plainview Point Office Joint Venture

 

The equity investment balance for NTS-Properties IV’s andNTS-Properties VII’s ownership of BBC 1A has also been eliminated.

 

(2)          Represents an adjustment ofapproximately $13,431,000 of ORIG debt and associated interest expense securedby interests in various entities within the NTS Private Group which will beassumed by NTS Realty in the merger.

 

The pro forma financialinformation reflects all of the real estate assets, debt and operating resultsbeing contributed to us by ORIG and, consequently, management has notseparately presented the historic financial information of ORIG.

 

14

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**INTRODUCTORY NOTE TO**

**HISTORICAL COMBINING FINANCIAL INFORMATION**

**(UNAUDITED)**

 

The following table sets forth historical combining financial andoperating data as if NTS-Properties III, NTS-Properties IV, NTS-Properties V, aMaryland limited partnership, NTS-Properties VI, a Maryland limitedpartnership, NTS-Properties VII, Ltd. (the “Partnerships”) and NTS PrivateGroup were combined on a historical basis. This historical combining presentation reflects adjustments to the actualhistorical data to include a previously unconsolidated joint venture,eliminates the equity investment and minority interests in wholly combinedjoint ventures in the historical financial information of the applicablepartnerships and adjustments to include ORIG’s debt and its related interestcost, secured by interests in various entities within the NTS Private Groupwhich will be assumed by NTS Realty in the merger.

 

We have derived the historical combining statements of operations,balance sheet data and cash flow data as of and for the year ended December 31,2003 from the audited financial statements of the Partnerships and the NTSPrivate Group.  We have derived thehistorical combining statements of operations data and historical cash flowdata consisting of interest expense relating to ORIG’s debt from the unauditedfinancial statements of ORIG for the year ended December 31, 2003.  We have derived the historical combiningbalance sheet data consisting of ORIG’s debt from the unaudited balance sheetof ORIG for the year ended December 31, 2003. We have derived the combining statements of operations, balance sheetdata and cash flow data as of and for the three and nine months ended September30, 2004 and 2003 from the unaudited financial statements of the Partnerships,NTS Private Group and ORIG.

 

In the opinion of our management, our unaudited financial statementshave been prepared on a basis consistent with our audited financial statementsand include all adjustments, consisting of normal recurring accruals, which weconsider necessary for a fair presentation of our financial condition and theresults of operations as of such date and for such periods under U.S. generallyaccepted accounting principles.  Theresults of operations for the interim period are not necessarily indicative of theresults of operations for the full year or any future period.

 

You should read the following historical combining financialinformation in conjunction with the other financial information and analysispresented in this quarterly report, including “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and the financialstatements and related notes of the Partnerships, the NTS Private Group andORIG included herein.

 

15

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**HISTORICAL COMBINING STATEMENTS OF OPERATIONS**

**FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004**

**(UNAUDITED)**

 
| ** **                                                | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**     | ** ** | ** ** | ** ** | ** **      | ** ** | **Total**      | ** ** |
|-----------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|-------------|------------|------------|------------|-----------------|------------|----------------|------------|
| ** **                                                | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Private** | ** ** | ** ** | ** ** | **Combining**   | ** ** | **Historical** | ** ** |
| ** **                                                | ** ** | **III**        | ** ** | **IV**         | ** ** | **V**          | ** ** | **VI**         | ** ** | **VII**        | ** ** | **Group**   | ** ** | **BBC 1A** | ** ** | **Adjustments** | ** ** | **Combined**   | ** ** |
| STATEMENT OF  OPERATIONS DATA REVENUES                    |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Rental income                                             |       | $              | 869,562    |           | $          | 511,773        |       | $              | 971,085    |           | $          | 2,733,715   |       | $          | 408,219    |            | $          | 2,190,874      |       | $ | 188,197 |   | $ | — |   | $ | 7,873,425 |   |
| Tenant reimbursements                                     |       | 85,492         |       | 45,483         |       | 286,827        |       | 408            |       | —         |       | 114,900     |       | 49,056     |       | —          |       | 582,166        |       |
|                                                      |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| TOTAL REVENUES                                            |       | 955,054        |       | 557,256        |       | 1,257,912      |       | 2,734,123      |       | 408,219        |       | 2,305,774   |       | 237,253    |       | —          |       | 8,455,591      |       |
|                                                      |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| EXPENSES                                                  |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Operating  expenses                                       |       | 202,181        |       | 112,013        |       | 432,967        |       | 918,190        |       | 98,310         |       | 423,775     |       | 37,064     |       | —          |       | 2,224,500      |       |
| Operating  expenses – affiliated                     |       | 78,657         |       | 113,674        |       | 153,333        |       | 399,414        |       | 70,278         |       | 175,409     |       | 11,080     |       | —          |       | 1,001,845      |       |
| Management fees                                           |       | 46,060         |       | 30,546         |       | 67,696         |       | 139,907        |       | 19,917         |       | 138,443     |       | 14,236     |       | —          |       | 456,805        |       |
| Real estate taxes                                         |       | 52,146         |       | 29,907         |       | 203,278        |       | 186,599        |       | 19,908         |       | 103,231     |       | 13,248     |       | —          |       | 608,317        |       |
| Professional and  administrative expenses                 |       | 72,087         |       | 117,090        |       | 161,239        |       | 200,250        |       | 65,481         |       | 16,317      |       | —     |       | —          |       | 632,464        |       |
| Professional and  administrative expenses - affiliated    |       | 41,393         |       | 45,547         |       | 57,950         |       | 115,560        |       | 37,489         |       | —      |       | —     |       | —          |       | 297,939        |       |
| Depreciation and  amortization                            |       | 251,894        |       | 119,434        |       | 324,012        |       | 663,382        |       | 101,706        |       | 502,347     |       | 92,993     |       | —          |       | 2,055,768      |       |
|                                                      |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| TOTAL OPERATING  EXPENSES                                 |       | 744,418        |       | 568,211        |       | 1,400,475      |       | 2,623,302      |       | 413,089        |       | 1,359,522   |       | 168,621    |       | —          |       | 7,277,638      |       |
|                                                      |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| OPERATING INCOME  (LOSS)                                  |       | 210,636        |       | (10,955        | )          | (142,563       | )          | 110,821        |       | (4,870         | )          | 946,252     |       | 68,632     |       | —          |       | 1,177,953      |       |
|                                                      |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Interest and  other income                                |       | 3,900          |       | 2,590          |       | 4,906          |       | 3,197          |       | 500            |       | 2,949       |       | 10         |       | —          |       | 18,052         |       |
| Interest expense                                          |       | (99,527        | )          | (51,287        | )          | (239,838       | )          | (589,287       | )          | (60,800        | )          | (655,460    | )          | (22,356    | )          | (183,500        | )(b)       | (1,902,055     | )          |
| Loss on disposal  of assets                               |       | —         |       | (7,846         | )          | (920           | )          | (5,428         | )          | —         |       | —      |       | —     |       | —          |       | (14,194        | )          |
| Income (loss)  from investment in joint Ventures          |       | —         |       | 5,365          |       | —         |       | —         |       | 14,506         |       | —      |       | —     |       | (19,871         | )(a)       | —         |       |
|                                                      |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Income (loss)  before minority interest                   |       | 115,009        |       | (62,133        | )          | (378,415       | )          | (480,697       | )          | (50,664        | )          | 293,741     |       | 46,286     |       | (203,371        | )          | (720,244       | )          |
|                                                      |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Minority interest                                         |       | —         |       | —         |       | (28,098        | )          | 8,675          |       | —         |       | —      |       | —     |       | 19,423          | (a)        | —         |       |
|                                                      |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net income (loss)                                         |       | $              | 115,009    |           | $          | (62,133        | )          | $              | (350,317   | )              | $          | (489,372    | )          | $          | (50,664    | )               | $          | 293,741        |       | $ | 46,286 |   | $ | (222,794 | ) | $ | (720,244 | ) |
|                                                      |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net income (loss)  allocated to the limited partners      |       | $              | 125,578    |           | $          | (61,512        | )          | $              | (346,814   | )              | $          | (484,478    | )          | $          | (50,157    | )               |       |           |       |   |   |   |   |   |
|                                                      |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net income (loss)  per limited partnership interest       |       | $              | 9.99       |           | $          | (2.55          | )          | $              | (11.36     | )              | $          | (12.46      | )          | $          | (0.09      | )               |       |           |       |   |   |   |   |   |
|                                                      |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Weighted average  number of limited partnership interests |       | 12,570         |       | 24,109         |       | 30,521         |       | 38,889         |       | 552,236        |       |        |       |       |       |            |       |           |       |

 

See accompanying notes tounaudited historical combining financial information.

 

16

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**HISTORICALCOMBINING STATEMENTS OF OPERATIONS**

**FOR THE NINE MONTHS ENDED****SEPTEMBER 30, 2004**

**(UNAUDITED)**

 
| ** **                                                  | ** ** | **NTS**        | ** **       | **NTS**        | ** ** | **NTS**          | ** ** | **NTS**        | ** **       | **NTS**        | ** ** | **NTS**          | ** ** | ** ** | ** **       | ** **      | ** ** | **Total**        | ** **        |
|-------------------------------------------------------------|------------|----------------|------------------|----------------|------------|------------------|------------|----------------|------------------|----------------|------------|------------------|------------|------------|------------------|-----------------|------------|------------------|-------------------|
| ** **                                                  | ** ** | **Properties** | ** **       | **Properties** | ** ** | **Properties**   | ** ** | **Properties** | ** **       | **Properties** | ** ** | **Private**      | ** ** | ** ** | ** **       | **Combining**   | ** ** | **Historical**   | ** **        |
| ** **                                                  | ** ** | **III**        | ** **       | **IV**         | ** ** | **V**            | ** ** | **VI**         | ** **       | **VII**        | ** ** | **Group**        | ** ** | **BBC 1A** | ** **       | **Adjustments** | ** ** | **Combined**     | ** **        |
| STATEMENT OF  OPERATIONS DATA REVENUES                      |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| Rental income                                               |       | $              |   2,573,208 |           | $          |   1,602,066 |       | $              |   2,897,850 |           | $          |   8,004,665 |       | $          |   1,178,939 |            | $          |   6,520,660 |              | $ |  564,590 |   | $ |  — |   | $ |  23,341,978 |   |
| Tenant reimbursements                                       |       | 257,270        |             | 136,713        |       | 854,953          |       | 1,203          |             | —         |       | 368,907          |       | 147,168    |             | —          |       | 1,766,214        |              |
|                                                        |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| TOTAL REVENUES                                              |       | 2,830,478      |             | 1,738,779      |       | 3,752,803        |       | 8,005,868      |             | 1,178,939      |       | 6,889,567        |       | 711,758    |             | —          |       | 25,108,192       |              |
|                                                        |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| EXPENSES                                                    |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| Operating  expenses                                         |       | 611,748        |             | 361,707        |       | 1,172,015        |       | 2,435,113      |             | 298,526        |       | 1,284,811        |       | 102,185    |             | —          |       | 6,266,105        |              |
| Operating  expenses – affiliated                       |       | 248,169        |             | 355,960        |       | 467,984          |       | 1,196,791      |             | 209,299        |       | 562,288          |       | 33,959     |             | —          |       | 3,074,450        |              |
| Management fees                                             |       | 135,023        |             | 99,023         |       | 205,273          |       | 406,825        |             | 59,013         |       | 414,913          |       | 42,711     |             | —          |       | 1,362,781        |              |
| Real estate taxes                                           |       | 156,438        |             | 91,168         |       | 466,924          |       | 409,640        |             | 59,724         |       | 309,613          |       | 39,744     |             | —          |       | 1,533,251        |              |
| Professional and  administrative expenses                   |       | 280,175        |             | 425,059        |       | 604,832          |       | 730,655        |             | 261,431        |       | 132,079          |       | —     |             | —          |       | 2,434,231        |              |
| Professional and  administrative expenses – affiliated |       | 117,334        |             | 125,778        |       | 160,445          |       | 325,398        |             | 107,208        |       | —           |       | —     |             | —          |       | 836,163          |              |
| Depreciation and  amortization                              |       | 782,469        |             | 372,342        |       | 970,532          |       | 1,990,038      |             | 306,672        |       | 1,502,082        |       | 203,839    |             | —          |       | 6,127,974        |              |
|                                                        |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| TOTAL OPERATING  EXPENSES                                   |       | 2,331,356      |             | 1,831,037      |       | 4,048,005        |       | 7,494,460      |             | 1,301,873      |       | 4,205,786        |       | 422,438    |             | —          |       | 21,634,955       |              |
|                                                        |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| OPERATING INCOME  (LOSS)                                    |       | 499,122        |             | (92,258        | )          | (295,202         | )          | 511,408        |             | (122,934       | )          | 2,683,781        |       | 289,320    |             | —          |       | 3,473,237        |              |
|                                                        |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| Interest and  other income                                  |       | 9,593          |             | 7,075          |       | 17,161           |       | 18,409         |             | 2,829          |       | 20,408           |       | 88         |             | —          |       | 75,563           |              |
| Interest expense                                            |       | (301,192       | )                | (164,113       | )          | (729,062         | )          | (1,784,755     | )                | (182,620       | )          | (1,993,110       | )          | (70,291    | )                | (516,803        | )(b)       | (5,741,946       | )                 |
| Loss on disposal  of assets                                 |       | (1,261         | )                | (11,602        | )          | (5,095           | )          | (9,890         | )                | (1,287         | )          | (38,598          | )          | —     |             | —          |       | (67,733          | )                 |
| Income (loss)  from investment in joint ventures            |       | —         |             | 63,272         |       | —           |       | —         |             | 68,671         |       | —           |       | —     |             | (131,943        | )(a)       | —           |              |
|                                                        |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| Income (loss)  before minority interest                     |       | 206,262        |             | (197,626       | )          | (1,012,198       | )          | (1,264,828     | )                | (235,341       | )          | 672,481          |       | 219,117    |             | (648,746        | )          | (2,260,879       | )                 |
|                                                        |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| Minority interest                                           |       | —         |             | —         |       | (37,767          | )          | 22,284         |             | —         |       | —           |       | —     |             | 15,483          | (a)        | —           |              |
|                                                        |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| Net income (loss)                                           |       | $              | 206,262          |           | $          | (197,626         | )          | $              | (974,431         | )              | $          | (1,287,112       | )          | $          | (235,341         | )               | $          | 672,481          |              | $ | 219,117 |   | $ | (664,229 | ) | $ | (2,260,879 | ) |
|                                                        |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| Net income (loss)  allocated to the limited partners        |       | $              |  239,356    |           | $          |  (195,650   | )          | $              |  (964,687   | )              | $          |  (1,274,241 | )          | $          |  (232,988   | )               |       |             |              |   |   |   |   |   |
|                                                        |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| Net income (loss)  per limited partnership interest         |       | $              |  19.04      |           | $          | (8.12            | )          | $              | (31.61           | )              | $          | (32.77           | )          | $          | (0.42            | )               |       |             |              |   |   |   |   |   |
|                                                        |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| Weighted average  number of limited partnership interests   |       | 12,570         |             | 24,109         |       | 30,521           |       | 38,889         |             | 552,236        |       |             |       |       |             |            |       |             |              |
|                                                        |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| Ratio of earnings  to fixed charges                         |       | 1.68           |             | (0.20          | )          | (0.34            | )          | 0.28           |             | (0.29          | )          | 1.34             |       | 1.32       |             | N/A             |       | 0.61             |              |
|                                                        |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| Deficiency to  cover fixed charges                          |       | N/A            |             | $              | 197,626    |             | $          | 974,431        |             | $              | 1,287,112  |             | $          | 235,341    |             | N/A             |       | N/A              |              | N/A |   | $ | 2,260,879 |   |
|                                                        |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| BALANCE SHEET  DATA (end of period)                         |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| Land, buildings  & amenities, net                       |       | $              |  8,517,323  |           | $          |  5,581,140  |       | $              |  19,691,909 |           | $          |  38,978,599 |       | $          |  6,796,557  |            | $          |  34,458,150 |              | $ |  2,810,999 |   | $ |  — |   | $ |  116,834,677 |   |
| Total assets                                                |       | 10,374,255     |             | 7,138,958      |       | 22,173,028       |       | 40,821,340     |             | 7,910,270      |       | 37,562,075       |       | 2,948,686  |             | (2,763,723      | )(a)       | $                |  126,164,889 |   |
| Mortgages and  notes payable                                |       | 5,979,480      |             | 2,659,878      |       | 13,337,353       |       | 30,248,106     |             | 3,219,830      |       | 34,880,469       |       | 745,135    |             | 13,430,908      | (b)        | $                |  104,501,159 |   |
|                                                        |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| Book value per  unit                                        |       | $              |  309        |           | $          | 163              |       | $              |  176        |           | $          |  190        |       | $          |  8          |            | N/A        |             | N/A               |   | N/A |   | N/A |   |
|                                                        |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| CASH FLOW DATA                                              |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| From operating  activities                                  |       | $              |  850,892    |           | $          |  379,942    |       | $              |  705,298    |           | $          |  2,319,954  |       | $          |  55,109     |            | $          |  2,647,036  |              | $ |  490,546 |   | $ |  (516,803 | )(a)(b) | $ |  6,931,974 |   |
| From investing  activities                                  |       | (166,646       | )                | (43,261        | )          | (316,791         | )          | (579,098       | )                | 6,531          |       | (796,885         | )          | —     |             | (37,092         | )(a)       | (1,933,242       | )                 |
| From financing activities                                   |       | (331,532       | )                | (520,637       | )          | (280,555         | )          | (1,623,932     | )                | (119,187       | )          | (1,482,551       | )          | (502,705   | )                | —          |       | (4,861,099       | )                 |
|                                                        |       |           |             |           |       |             |       |           |             |           |       |             |       |       |             |            |       |             |              |
| Net change in  cash                                         |       | $              |  352,714    |           | $          |  (183,956   | )          | $              |  107,952    |           | $          |  116,924    |       | $          |  (57,547    | )               | $          |  367,600    |              | $ |  (12,159 | ) | $ |  (553,895 | ) | $ |  137,633 |   |
|                                                             |            |                |                  |                |            |                  |            |                |                  |                |            |                  |            |            |                  |                 |            |                  |                   |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes tounaudited historical combining financial information.

 

17

----

 

**HISTORICAL COMBINING STATEMENTS OF OPERATIONS**

**FOR THE THREE MONTHS ENDED****SEPTEMBER 30, 2003**

**(UNAUDITED)**

 
| ** **                                                  | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**     | ** ** | ** ** | ** ** | ** **      | ** ** | **Total**      | ** ** |
|-------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|-------------|------------|------------|------------|-----------------|------------|----------------|------------|
| ** **                                                  | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Private** | ** ** | ** ** | ** ** | **Combining**   | ** ** | **Historical** | ** ** |
| ** **                                                  | ** ** | **III**        | ** ** | **IV**         | ** ** | **V**          | ** ** | **VI**         | ** ** | **VII**        | ** ** | **Group**   | ** ** | **BBC 1A** | ** ** | **Adjustments** | ** ** | **Combined**   | ** ** |
| STATEMENT OF  OPERATIONS DATA REVENUES                      |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Rental income                                               |       | $              | 845,044    |           | $          | 564,562        |       | $              | 972,431    |           | $          | 2,693,946   |       | $          | 398,423    |            | $          | 2,252,309      |       | $ | 188,197 |   | $ | — |   | $ | 7,914,912 |   |
| Tenant  reimbursements                                      |       | 86,793         |       | 49,642         |       | 259,836        |       | 255            |       | —         |       | 114,737     |       | 49,056     |       | —          |       | 560,319        |       |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| TOTAL REVENUES                                              |       | 931,837        |       | 614,204        |       | 1,232,267      |       | 2,694,201      |       | 398,423        |       | 2,367,046   |       | 237,253    |       | —          |       | 8,475,231      |       |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| EXPENSES                                                    |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Operating  expenses                                         |       | 212,024        |       | 123,618        |       | 356,111        |       | 780,352        |       | 101,301        |       | 406,228     |       | 39,821     |       | —          |       | 2,019,455      |       |
| Operating  expenses – affiliated                       |       | 65,243         |       | 85,495         |       | 127,541        |       | 371,770        |       | 65,344         |       | 147,658     |       | 12,183     |       | —          |       | 875,234        |       |
| Management fees                                             |       | 44,799         |       | 35,723         |       | 66,852         |       | 136,652        |       | 19,514         |       | 145,679     |       | 14,238     |       | —          |       | 463,457        |       |
| Real estate taxes                                           |       | 52,041         |       | 24,813         |       | 127,014        |       | 235,377        |       | 15,924         |       | 102,896     |       | 13,083     |       | —          |       | 571,148        |       |
| Professional and  administrative expenses                   |       | 40,530         |       | 53,442         |       | 132,515        |       | 149,667        |       | 38,244         |       | 91,211      |       | —     |       | —          |       | 505,609        |       |
| Professional and  administrative expenses – affiliated |       | 33,286         |       | 33,711         |       | 43,145         |       | 92,880         |       | 34,757         |       | —      |       | —     |       | —          |       | 237,779        |       |
| Depreciation and  amortization                              |       | 267,107        |       | 127,852        |       | 308,569        |       | 656,821        |       | 102,557        |       | 481,222     |       | 52,480     |       | —          |       | 1,996,608      |       |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| TOTAL OPERATING  EXPENSES                                   |       | 715,030        |       | 484,654        |       | 1,161,747      |       | 2,423,519      |       | 377,641        |       | 1,374,894   |       | 131,805    |       | —          |       | 6,669,290      |       |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| OPERATING INCOME                                            |       | 216,807        |       | 129,550        |       | 70,520         |       | 270,682        |       | 20,782         |       | 992,152     |       | 105,448    |       | —          |       | 1,805,941      |       |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Interest and  other income                                  |       | 3,749          |       | 3,001          |       | 1,952          |       | 4,582          |       | 2,258          |       | 3,891       |       | 49         |       | —          |       | 19,482         |       |
| Interest income –  affiliated                          |       | —         |       | —         |       | —         |       | —         |       | —         |       | —      |       | —     |       | —          |       | —         |       |
| Interest expense                                            |       | (106,064       | )          | (64,450        | )          | (238,760       | )          | (631,524       | )          | (64,556        | )          | (712,085    | )          | (31,512    | )          | (166,588        | )(b)       | (2,015,539     | )          |
| Interest expense –  affiliated                         |       | —         |       | —         |       | —         |       | —         |       | —         |       | —      |       | —     |       | —          |       | —         |       |
| Loss on disposal  of assets                                 |       | (4,077         | )          | —         |       | (1,430         | )          | —         |       | —         |       | —      |       | (51,513    | )          | —          |       | (57,020        | )          |
| Income (loss)  from investment in joint ventures            |       | —         |       | 12,747         |       | —         |       | —         |       | 7,043          |       | —      |       | —     |       | (19,790         | )(a)       | —         |       |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Income (loss)  before minority interest                     |       | 110,415        |       | 80,848         |       | (167,718       | )          | (356,260       | )          | (34,473        | )          | 283,958     |       | 22,472     |       | (186,378        | )          | (247,136       | )          |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Minority interest                                           |       | —         |       | —         |       | (4,925         | )          | 7,674          |       | —         |       | —      |       | —     |       | (2,749          | )(a)       | —         |       |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net income (loss)                                           |       | $              | 110,415    |           | $          | 80,848         |       | $              | (162,793   | )              | $          | (363,934    | )          | $          | (34,473    | )               | $          | 283,958        |       | $ | 22,472 |   | $ | (183,629 | ) | $ | (247,136 | ) |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net income (loss)  allocated to the limited partners        |       | $              | 121,030    |           | $          | 80,040         |       | $              | (161,165   | )              | $          | (360,295    | )          | $          | (34,128    | )               |       |           |       |   |   |   |   |   |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net income (loss)  per limited partnership interest         |       | $              | 9.63       |           | $          | 3.32           |       | $              | (5.28      | )              | $          | (9.26       | )          | $          | (0.06      | )               |       |           |       |   |   |   |   |   |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Weighted average  number of limited partnership interests   |       | 12,570         |       | 24,109         |       | 30,521         |       | 38,889         |       | 552,236        |       |        |       |       |       |            |       |           |       |

 

See accompanying notes tounaudited historical combining financial information.

 

18

----

 

**HISTORICAL COMBINING STATEMENTS OF OPERATIONS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30****, 2003**

**(UNAUDITED)**

 
| ** **                                                  | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**     | ** ** | ** ** | ** ** | ** **      | ** ** | **Total**      | ** ** |
|-------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|-------------|------------|------------|------------|-----------------|------------|----------------|------------|
| ** **                                                  | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Private** | ** ** | ** ** | ** ** | **Combining**   | ** ** | **Historical** | ** ** |
| ** **                                                  | ** ** | **III**        | ** ** | **IV**         | ** ** | **V**          | ** ** | **VI**         | ** ** | **VII**        | ** ** | **Group**   | ** ** | **BBC 1A** | ** ** | **Adjustments** | ** ** | **Combined**   | ** ** |
| STATEMENT OF  OPERATIONS DATA REVENUES                      |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Rental income                                               |       | $              | 2,578,309  |           | $          | 1,735,354      |       | $              | 2,988,568  |           | $          | 8,150,947   |       | $          | 1,257,056  |            | $          | 6,495,921      |       | $ | 564,590 |   | $ | — |   | $ | 23,770,745 |   |
| Tenant  reimbursements                                      |       | 269,165        |       | 136,184        |       | 842,115        |       | 2,390          |       | —         |       | 382,198     |       | 147,168    |       | —          |       | 1,779,220      |       |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| TOTAL REVENUES                                              |       | 2,847,474      |       | 1,871,538      |       | 3,830,683      |       | 8,153,337      |       | 1,257,056      |       | 6,878,119   |       | 711,758    |       | —          |       | 25,549,965     |       |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| EXPENSES                                                    |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Operating  expenses                                         |       | 643,017        |       | 373,853        |       | 1,062,354      |       | 2,276,971      |       | 324,603        |       | 1,107,884   |       | 84,833     |       | —          |       | 5,873,515      |       |
| Operating  expenses – affiliated                       |       | 222,514        |       | 276,690        |       | 421,112        |       | 1,153,281      |       | 205,503        |       | 488,979     |       | 32,570     |       | —          |       | 2,800,649      |       |
| Management fees                                             |       | 137,710        |       | 104,475        |       | 216,111        |       | 414,067        |       | 63,811         |       | 415,991     |       | 42,722     |       | —          |       | 1,394,887      |       |
| Real estate taxes                                           |       | 156,123        |       | 87,345         |       | 394,668        |       | 852,732        |       | 59,616         |       | 308,689     |       | 39,249     |       | —          |       | 1,898,422      |       |
| Professional and  administrative expenses                   |       | 182,542        |       | 226,259        |       | 504,975        |       | 579,203        |       | 162,066        |       | 91,211      |       | —     |       | —          |       | 1,746,256      |       |
| Professional and  administrative expenses – affiliated |       | 107,612        |       | 109,737        |       | 139,868        |       | 295,550        |       | 98,193         |       | —      |       | —     |       | —          |       | 750,960        |       |
| Depreciation and  amortization                              |       | 820,660        |       | 382,850        |       | 929,563        |       | 1,958,424      |       | 305,102        |       | 1,432,776   |       | 156,837    |       | —          |       | 5,986,212      |       |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| TOTAL OPERATING  EXPENSES                                   |       | 2,270,178      |       | 1,561,209      |       | 3,668,651      |       | 7,530,228      |       | 1,218,894      |       | 3,845,530   |       | 356,211    |       | —          |       | 20,450,901     |       |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| OPERATING INCOME                                            |       | 577,296        |       | 310,329        |       | 162,032        |       | 623,109        |       | 38,162         |       | 3,032,589   |       | 355,547    |       | —          |       | 5,099,064      |       |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Interest and  other income                                  |       | 13,949         |       | 4,435          |       | 4,778          |       | 17,306         |       | 5,150          |       | 69,229      |       | 273        |       | —          |       | 115,120        |       |
| Interest income –  affiliated                          |       | —         |       | —         |       | —         |       | —         |       | —         |       | —      |       | —     |       | —          |       | —         |       |
| Interest expense                                            |       | (330,794       | )          | (202,609       | )          | (733,053       | )          | (1,888,403     | )          | (190,925       | )          | (2,249,620  | )          | (103,190   | )          | (448,624        | )(b)       | (6,147,218     | )          |
| Interest expense –  affiliated                         |       | —         |       | —         |       | —         |       | —         |       | —         |       | —      |       | —     |       | —          |       | —         |       |
| Loss on disposal  of assets                                 |       | (4,077         | )          | (3,953         | )          | (1,430         | )          | (103,506       | )          | —         |       | (119,773    | )          | (51,513    | )          | —          |       | (284,252       | )          |
| Income (loss)  from investment in joint ventures            |       | —         |       | 85,460         |       | —         |       | —         |       | 63,030         |       | —      |       | —     |       | (148,490        | )(a)       | —         |       |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Income (loss)  before minority interest                     |       | 256,374        |       | 193,662        |       | (567,673       | )          | (1,351,494     | )          | (84,583        | )          | 732,425     |       | 201,117    |       | (597,114        | )          | (1,217,286     | )          |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Minority interest                                           |       | —         |       | —         |       | (283           | )          | 22,753         |       | —         |       | —      |       | —     |       | (22,470         | )(a)       | —         |       |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net income (loss)                                           |       | $              | 256,374    |           | $          | 193,662        |       | $              | (567,390   | )              | $          | (1,374,247  | )          | $          | (84,583    | )               | $          | 732,425        |       | $ | 201,117 |   | (574,644 | ) | $ | (1,217,286 | ) |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net income (loss)  allocated to the limited partners        |       | $              | 289,455    |           | $          | 191,725        |       | $              | (561,716   | )              | $          | (1,360,505  | )          | $          | (83,737    | )               |       |           |       |   |   |   |   |   |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net income (loss)  per limited partnership interest         |       | $              | 23.03      |           | $          | 7.95           |       | $              | (18.40     | )              | $          | (34.98      | )          | $          | (0.15      | )               |       |           |       |   |   |   |   |   |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Weighted average  number of limited partnership interests   |       | 12,570         |       | 24,109         |       | 30,521         |       | 38,889         |       | 552,236        |       |        |       |       |       |            |       |           |       |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Ratio of earnings  to fixed charges                         |       | 1.78           |       | 1.96           |       | 0.23           |       | 0.27           |       | 0.56           |       | 1.33        |       | 2.95       |       | N/A             |       | 0.80           |       |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Deficiency to  cover fixed charges                          |       | N/A            |       | N/A            |       | $              | 567,390    |           | $          | 1,374,247      |       | $           | 84,583     |       | N/A        |            | N/A        |           | N/A        |   | $ | 1,217,286 |   |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| BALANCE SHEET  DATA (end of period)                         |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Land, buildings  & amenities, net                       |       | $              | 9,158,323  |           | $          | 5,923,289      |       | $              | 20,562,424 |           | $          | 41,065,761  |       | $          | 7,192,552  |            | $          | 35,350,079     |       | $ | 3,071,041 |   | $ | — |   | $ | 122,323,469 |   |
| Total assets                                                |       | 10,575,413     |       | 7,785,136      |       | 22,784,711     |       | 43,151,508     |       | 8,356,009      |       | 38,042,985  |       | 3,311,894  |       | (2,665,397      | )(a)       | 131,342,259    |       |
| Mortgages and notes  payable                                |       | 6,416,185      |       | 3,335,507      |       | 13,339,546     |       | 32,001,024     |       | 3,377,592      |       | 37,374,501  |       | 1,327,763  |       | 13,047,630      | (b)        | 110,219,748    |       |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Book value per  unit                                        |       | $              | 292        |           | $          | 168            |       | $              | 211        |           | $          | 227         |       | $          | 9          |            | N/A        |           | N/A        |   | N/A |   | N/A |   |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| CASH FLOW DATA                                              |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| From operating  activities                                  |       | $              | 988,859    |           | $          | 519,476        |       | $              | 962,104    |           | $          | 1,589,999   |       | $          | 278,576    |            | $          | 2,658,736      |       | $ | 438,642 |   | $ | (448,624 | )(a)(b) | $ | 6,987,768 |   |
| From investing  activities                                  |       | (237,274       | )          | (28,905        | )          | (731,610       | )          | (735,215       | )          | (237,372       | )          | 5,608,867   |       | (155,023   | )          | 71,997          | (a)        | 3,555,465      |       |
| From financing  activities                                  |       | (879,903       | )          | (449,937       | )          | (207,388       | )          | (1,535,404     | )          | (116,626       | )          | (8,542,323  | )          | (280,310   | )          | —          |       | (12,011,891    | )          |
|                                                        |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net change in cash                                          |       | $              | (128,318   | )              | $          | 40,634         |       | $              | 23,106     |           | $          | (680,620    | )          | $          | (75,422    | )               | $          | (274,720       | )          | $ | 3,309 |   | $ | (376,627 | ) | $ | (1,468,658 | ) |

 

See accompanying notes tounaudited historical combining financial information.

 

19

----

 

**HISTORICAL COMBINING CASH FLOW STATEMENT**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004**

**(UNAUDITED)**

 
| ** **                                                                                           | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**     | ** ** | ** ** | ** ** | ** **      | ** ** | **Total**      | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|-------------|------------|------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                           | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Private** | ** ** | ** ** | ** ** | **Combining**   | ** ** | **Historical** | ** ** |
| ** **                                                                                           | ** ** | **III**        | ** ** | **IV**         | ** ** | **V**          | ** ** | **VI**         | ** ** | **VII**        | ** ** | **Group**   | ** ** | **BBC 1A** | ** ** | **Adjustments** | ** ** | **Combined**   | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                                                |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net income (loss)                                                                                    |       | $              | 206,262    |           | $          | (197,626       | )          | $              | (974,431   | )              | $          | (1,287,112  | )          | $          | (235,341   | )               | $          | 672,481        |       | $ | 219,117 |   | $ | (664,229 | )(a)(b) | $ | (2,260,879 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Loss on disposal  of assets                                                                          |       | 1,261          |       | 11,602         |       | 5,095          |       | 9,890          |       | 1,287          |       | 38,598      |       | —     |       | —          |       | 67,733         |       |
| Depreciation and  amortization                                                                       |       | 868,495        |       | 395,426        |       | 1,137,542      |       | 2,032,523      |       | 309,013        |       | 1,704,736   |       | 238,529    |       | —          |       | 6,694,935      |       |
| Income from  investment in joint ventures                                                            |       | —         |       | (63,272        | )          | —         |       | —         |       | (68,671        | )          | —      |       | —     |       | 131,943         | (a)        | —         |       |
| Minority interest  income (loss)                                                                     |       | —         |       | —         |       | (37,767        | )          | 22,284         |       | —         |       | —      |       | —     |       | 15,483          | (a)        | —         |       |
| Changes in assets  and liabilities:                                                                  |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Cash and  equivalents – restricted                                                              |       | (55,449        | )          | (16,796        | )          | (392,333       | )          | (129,422       | )          | (525           | )          | (268,131    | )          | (34,531    | )          | —          |       | (897,187       | )          |
| Accounts  receivable                                                                                 |       | (131,134       | )          | 35,765         |       | (85,617        | )          | 75,474         |       | (7,538         | )          | 94,331      |       | 18,752     |       | —          |       | 33             |       |
| Other assets                                                                                         |       | (76,470        | )          | 12,643         |       | (34,073        | )          | 17,456         |       | 14,417         |       | (248,206    | )          | 10,344     |       | —          |       | (312,560       | )          |
| Accounts payable                                                                                     |       | (93,143        | )          | 117,531        |       | 615,344        |       | 1,173,849      |       | (18,449        | )          | 338,962     |       | (5,216     | )          | —          |       | 2,128,878      |       |
| Security deposits                                                                                    |       | 5,848          |       | (3,278         | )          | 30,343         |       | 2,980          |       | (200           | )          | (23,044     | )          | —     |       | —          |       | 12,649         |       |
| Other liabilities                                                                                    |       | 125,222        |       | 87,947         |       | 441,195        |       | 402,032        |       | 61,116         |       | 337,309     |       | 43,551     |       | —          |       | 1,498,372      |       |
|                                                                                                 |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net cash provided  by (used in) operating activities                                                 |       | 850,892        |       | 379,942        |       | 705,298        |       | 2,319,954      |       | 55,109         |       | 2,647,036   |       | 490,546    |       | (516,803        | )          | 6,931,974      |       |
|                                                                                                 |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                                                |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Additions to  land, buildings and Amenities                                                          |       | (166,646       | )          | (117,863       | )          | (307,128       | )          | (532,090       | )          | (12,630        | )          | (796,885    | )          | —     |       | —          |       | (1,933,242     | )          |
| Investment in and  advances (to) from joint ventures                                                 |       | —         |       | 74,602         |       | —         |       | (47,008        | )          | 19,161         |       | —      |       | —     |       | (46,755         | )(a)       | —         |       |
| Minority interest                                                                                    |       | —         |       | —         |       | (9,663         | )          | —         |       | —         |       | —      |       | —     |       | 9,663           | (a)        | —         |       |
|                                                                                                 |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net cash (used  in) provided by investing activities                                                 |       | (166,646       | )          | (43,261        | )          | (316,791       | )          | (579,098       | )          | 6,531          |       | (796,885    | )          | —     |       | (37,092         | )          | (1,933,242     | )          |
|                                                                                                 |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                                |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Proceeds from  mortgages and notes payable                                                           |       | —         |       | —         |       | 279,969        |       | 19,216         |       | —         |       | 400,000     |       | —     |       | —          |       | 699,185        |       |
| Principal  payments on mortgages and notes payable                                                   |       | (329,557       | )          | (520,637       | )          | (557,408       | )          | (1,643,148     | )          | (119,187       | )          | (2,119,451  | )          | (441,564   | )          | —          |       | (5,730,952     | )          |
| Cash  distributions                                                                                  |       | —         |       | —         |       | —         |       | —         |       | —         |       | (160,100    | )          | (61,141    | )          | —          |       | (221,241       | )          |
| Cash  contributions                                                                                  |       | —         |       | —         |       | —         |       | —         |       | —         |       | 397,000     |       | —     |       | —          |       | 397,000        |       |
| Additions to loan  costs                                                                             |       | (1,975         | )          | —         |       | (3,116         | )          | —         |       | —         |       | —      |       | —     |       | —          |       | (5,091         | )          |
|                                                                                                 |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net cash used in  provided by financing activities                                                   |       | (331,532       | )          | (520,637       | )          | (280,555       | )          | (1,623,932     | )          | (119,187       | )          | (1,482,551  | )          | (502,705   | )          | —          |       | (4,861,099     | )          |
|                                                                                                 |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net increase  (decrease) in cash and equivalents                                                     |       | 352,714        |       | (183,956       | )          | 107,952        |       | 116,924        |       | (57,547        | )          | 367,600     |       | (12,159    | )          | (553,895        | )          | 137,633        |       |
|                                                                                                 |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| CASH AND  EQIVALENTS, beginning of period                                                            |       | 180,911        |       | 298,240        |       | 191,321        |       | 125,342        |       | 263,655        |       | 440,049     |       | 33,977     |       | —          |       | 1,533,495      |       |
|                                                                                                 |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| CASH AND  EQUIVALENTS, end of period                                                                 |       | $              | 533,625    |           | $          | 114,284        |       | $              | 299,273    |           | $          | 242,266     |       | $          | 206,108    |            | $          | 807,649        |       | $ | 21,818 |   | $ | (553,895 | ) | $ | 1,671,128 |   |
|                                                                                                 |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Interest paid on  a cash basis                                                                       |       | $              | 297,616    |           | $          | 161,916        |       | $              | 687,325    |           | $          | 1,767,610   |       | $          | 182,016    |            | $          | 1,944,171      |       | $ | 63,288 |   | $ | 511,639 | (b) | $ | 5,620,745 |   |

 

See accompanying notes tounaudited historical combining financial information.

 

20

----

 

**HISTORICAL COMBINING CASH FLOW****STATEMENT**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003**

**(UNAUDITED)**

 
| ** **                                                                                           | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**        | ** ** | **NTS**     | ** ** | ** ** | ** ** | ** **      | ** ** | **Total**      | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|-------------|------------|------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                           | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Properties** | ** ** | **Private** | ** ** | ** ** | ** ** | **Combining**   | ** ** | **Historical** | ** ** |
| ** **                                                                                           | ** ** | **III**        | ** ** | **IV**         | ** ** | **V**          | ** ** | **VI**         | ** ** | **VII**        | ** ** | **Group**   | ** ** | **BBC 1A** | ** ** | **Adjustments** | ** ** | **Combined**   | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                                                |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net income (loss)                                                                                    |       | $              | 256,374    |           | $          | 193,662        |       | $              | (567,390   | )              | $          | (1,374,247  | )          | $          | (84,583    | )               | $          | 732,425        |       | $ | 201,117 |   | $ | (574,644 | )(a)(b) | $ | (1,217,286 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Loss on disposal  of assets                                                                          |       | 4,077          |       | 3,953          |       | 1,430          |       | 103,506        |       | —         |       | 119,773     |       | 51,513     |       | —          |       | 284,252        |       |
| Depreciation and  amortization                                                                       |       | 906,230        |       | 413,991        |       | 1,089,584      |       | 1,997,315      |       | 307,442        |       | 1,640,623   |       | 180,853    |       | —          |       | 6,541,612      |       |
| Income from  investment in joint ventures                                                            |       | —         |       | (85,460        | )          | —         |       | 22,753         |       | (63,030        | )          | —      |       | —     |       | 125,737         | (a)        | —         |       |
| Minority interest  income (loss)                                                                     |       | —         |       | —         |       | (283           | )          | —         |       | —         |       | —      |       | —     |       | 283             | (a)        | —         |       |
| Changes in assets  and liabilities:                                                                  |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Cash and  equivalents – restricted                                                              |       | (58,113        | )          | (91,386        | )          | (496,135       | )          | (145,287       | )          | 550            |       | (179,235    | )          | (42,141    | )          | —          |       | (1,011,747     | )          |
| Accounts  receivable                                                                                 |       | (89,486        | )          | (58,000        | )          | (100,796       | )          | (6,821         | )          | 2,633          |       | 111,753     |       | (17,350    | )          | —          |       | (158,067       | )          |
| Other assets                                                                                         |       | (135,177       | )          | (24,410        | )          | (311,844       | )          | (70,271        | )          | (9,424         | )          | (48,009     | )          | 8,590      |       | —          |       | (596,119       | )          |
| Accounts payable                                                                                     |       | 86,593         |       | 86,654         |       | 879,567        |       | 377,301        |       | 69,496         |       | (71,531     | )          | 18,530     |       | —          |       | 1,446,610      |       |
| Security deposits                                                                                    |       | (17,773        | )          | (500           | )          | 48,205         |       | 6,961          |       | (2,150         | )          | 17,259      |       | —     |       | —          |       | 52,002         |       |
| Other liabilities                                                                                    |       | 36,134         |       | 80,972         |       | 419,766        |       | 678,789        |       | 57,642         |       | 335,678     |       | 37,530     |       | —          |       | 1,646,511      |       |
|                                                                                                 |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net cash provided  by (used in) operating activities                                                 |       | 988,859        |       | 519,476        |       | 962,104        |       | 1,589,999      |       | 278,576        |       | 2,658,736   |       | 438,642    |       | (448,624        | )          | 6,987,768      |       |
|                                                                                                 |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                                                |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Additions to  land, buildings and Amenities                                                          |       | (237,274       | )          | (51,453        | )          | (728,996       | )          | (682,582       | )          | (198,074       | )          | (552,374    | )          | (155,023   | )          | —          |       | (2,605,776     | )          |
| Notes receivable -  affiliate                                                                        |       | —         |       | —         |       | —         |       | —         |       | —         |       | 6,161,241   |       | —     |       | —          |       | 6,161,241      |       |
| Investment in and  advances (to) from joint ventures                                                 |       | —         |       | 22,548         |       | —         |       | (52,633        | )          | (39,298        | )          | —      |       | —     |       | 69,383          | (a)        | —         |       |
| Minority interest                                                                                    |       | —         |       | —         |       | (2,614         | )          | —         |       | —         |       | —      |       | —     |       | 2,614           | (a)        | —         |       |
|                                                                                                 |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net cash (used  in) provided by investing activities                                                 |       | (237,274       | )          | (28,905        | )          | (731,610       | )          | (735,215       | )          | (237,372       | )          | 5,608,867   |       | (155,023   | )          | 71,997          |       | 3,555,465      |       |
|                                                                                                 |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                                |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Proceeds from  mortgages and notes payable                                                           |       | —         |       | —         |       | 465,714        |       | —         |       | —         |       | 152,928     |       | —     |       | —          |       | 618,642        |       |
| Principal  payments on mortgages and notes payable                                                   |       | (879,903       | )          | (449,937       | )          | (643,538       | )          | (1,535,404     | )          | (116,626       | )          | (2,247,729  | )          | (405,703   | )          | —          |       | (6,278,840     | )          |
| Notes payable -  affiliate                                                                           |       | —         |       | —         |       | —         |       | —         |       | —         |       | (6,664,748  | )          | —     |       | —          |       | (6,664,748     | )          |
| Cash  distributions                                                                                  |       | —         |       | —         |       | —         |       | —         |       | —         |       | (313,414    | )          | (2,917     | )          | —          |       | (316,331       | )          |
| Cash  contributions                                                                                  |       | —         |       | —         |       | —         |       | —         |       | —         |       | 531,629     |       | 128,310    |       | —          |       | 659,939        |       |
| Additions to loan  costs                                                                             |       | —         |       | —         |       | (29,564        | )          | —         |       | —         |       | (989        | )          | —     |       | —          |       | (30,553        | )          |
|                                                                                                 |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net cash used in  financing activities                                                               |       | (879,903       | )          | (449,937       | )          | (207,388       | )          | (1,535,404     | )          | (116,626       | )          | (8,542,323  | )          | (280,310   | )          | —          |       | (12,011,891    | )          |
|                                                                                                 |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Net increase  (decrease) in cash and equivalents                                                     |       | (128,318       | )          | 40,634         |       | 23,106         |       | (680,620       | )          | (75,422        | )          | (274,720    | )          | 3,309      |       | (376,627        | )          | (1,468,658     | )          |
|                                                                                                 |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| CASH AND  EQIVALENTS, beginning of period                                                            |       | 388,449        |       | 205,729        |       | 235,801        |       | 1,058,814      |       | 382,533        |       | 431,624     |       | 42,955     |       | —          |       | 2,745,905      |       |
|                                                                                                 |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| CASH AND  EQUIVALENTS, end of period                                                                 |       | $              | 260,131    |           | $          | 246,363        |       | $              | 258,907    |           | $          | 378,194     |       | $          | 307,111    |            | $          | 156,904        |       | $ | 46,264 |   | $ | (376,627 | ) | $ | 1,277,247 |   |
|                                                                                                 |       |           |       |           |       |           |       |           |       |           |       |        |       |       |       |            |       |           |       |
| Interest paid on  a cash basis                                                                       |       | $              | 330,525    |           | $          | 199,884        |       | $              | 693,476    |           | $          | 1,872,569   |       | $          | 190,329    |            | $          | 2,126,183      |       | $ | 99,149 |   | $ | 506,272 | (b) | $ | 6,109,229 |   |

 

See accompanying notes tounaudited historical combining financial information.

 

21

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**NOTES TO HISTORICAL COMBINING FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

----

(a)          Representsthe elimination of the equity investment, minority interests and income (loss)from investment in joint ventures for the following joint ventures which arereflected in the consolidated financial statements of the following publicpartnerships:

 

*NTS-Properties V:*

Willows II Joint Venture

Lakeshore/University II Joint Venture

 

*NTS-Properties VI:*

Sabal Golf Villas Joint Venture

Plainview Point Office Joint Venture

 

The equity investment balance for NTS-Properties IV’s andNTS-Properties VII’s ownership of BBC 1A has also been eliminated.

 

(b)         Representsthe adjustments to include ORIG’s debt and associated interest expense.  This debt is secured by interest in variousentities within the NTS Private Group which will be assumed by NTS Realty inthe merger.

 

Mortgages and Notes Payable Adjustments

 
| ** **         | ** ** | **ORIG**   | ** ** |
|--------------------|------------|------------|------------|
| September 30, 2004 |       | $          | 13,430,908 |   |
| September 30, 2003 |       | 13,047,630 |       |
|                    |            |            |            |  |

 

 

Interest Expense Adjustments

 
| ** **         | ** ** | **ORIG** | ** ** |
|--------------------|------------|----------|------------|
| September 30, 2004 |       | $        | 516,803    |   |
| September 30, 2003 |       | 448,624  |       |
|                    |            |          |            |  |

 

22

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**NTS PRIVATE GROUP**

**COMBINED BALANCE SHEETS**

 
| ** **                                                     | ** ** | **As of  September 30,  2004** | ** ** | **As of  December 31,  2003** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                     | ** ** | **(UNAUDITED)**                | ** ** | ** **                    | ** ** |
| ASSETS                                                         |       |                           |       |                          |       |
| Cash and equivalents                                           |       | $                              | 807,649    |                          | $          | 440,049 |   |
| Cash and equivalents – restricted                         |       | 348,195                        |       | 80,064                        |       |
| Accounts receivable, net                                       |       | 622,179                        |       | 716,510                       |       |
| Land, buildings and amenities, net                             |       | 34,458,150                     |       | 35,115,339                    |       |
| Other assets                                                   |       | 1,325,902                      |       | 1,366,956                     |       |
|                                                           |       |                           |       |                          |       |
| TOTAL ASSETS                                                   |       | $                              | 37,562,075 |                          | $          | 37,718,918 |   |
|                                                           |       |                           |       |                          |       |
| LIABILITIES AND PARTNERS’ AND MEMBERS’  EQUITY       |       |                           |       |                          |       |
| Mortgages and note payable                                     |       | $                              | 34,880,469 |                          | $          | 36,599,920 |   |
| Accounts payable and accrued expenses                          |       | 935,241                        |       | 596,279                       |       |
| Security deposits                                              |       | 189,354                        |       | 212,398                       |       |
| Other liabilities                                              |       | 505,429                        |       | 168,120                       |       |
|                                                           |       |                           |       |                          |       |
| TOTAL LIABILITIES                                              |       | 36,510,493                     |       | 37,576,717                    |       |
|                                                           |       |                           |       |                          |       |
| COMMITMENTS AND CONTINGENCIES (Note 8)                         |       |                           |       |                          |       |
|                                                           |       |                           |       |                          |       |
| PARTNERS’ AND MEMBERS’ EQUITY                        |       | 1,051,582                      |       | 142,201                       |       |
|                                                           |       |                           |       |                          |       |
| TOTAL LIABILITIES AND PARTNERS’ AND MEMBERS’  EQUITY |       | $                              | 37,562,075 |                          | $          | 37,718,918 |   |

 

The accompanying notes to combined financial statements are an integralpart of these statements.

 

23

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**NTS PRIVATE GROUP**

**COMBINED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                               | ** ** | **2004**               | ** ** | **2003**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| REVENUES                                 |       |                   |       |                  |       |   |   |   |   |
| Rental income                            |       | $                      | 2,190,874  |                  | $          | 2,252,309 |   | $ | 6,520,660 |   | $ | 6,495,921 |   |
| Tenant reimbursements                    |       | 114,900                |       | 114,737               |       | 368,907 |   | 382,198 |   |
|                                     |       |                   |       |                  |       |   |   |   |   |
| TOTAL REVENUES                           |       | 2,305,774              |       | 2,367,046             |       | 6,889,567 |   | 6,878,119 |   |
|                                     |       |                   |       |                  |       |   |   |   |   |
| EXPENSES                                 |       |                   |       |                  |       |   |   |   |   |
| Operating expenses                       |       | 423,775                |       | 406,228               |       | 1,284,811 |   | 1,107,884 |   |
| Operating expenses – affiliated     |       | 175,409                |       | 147,658               |       | 562,288 |   | 488,979 |   |
| Management fees                          |       | 138,443                |       | 145,679               |       | 414,913 |   | 415,991 |   |
| Real estate taxes                        |       | 103,231                |       | 102,896               |       | 309,613 |   | 308,689 |   |
| Professional and administrative expenses |       | 16,317                 |       | 91,211                |       | 132,079 |   | 91,211 |   |
| Depreciation and amortization            |       | 502,347                |       | 481,222               |       | 1,502,082 |   | 1,432,776 |   |
|                                     |       |                   |       |                  |       |   |   |   |   |
| TOTAL OPERATING EXPENSES                 |       | 1,359,522              |       | 1,374,894             |       | 4,205,786 |   | 3,845,530 |   |
|                                     |       |                   |       |                  |       |   |   |   |   |
| OPERATING INCOME                         |       | 946,252                |       | 992,152               |       | 2,683,781 |   | 3,032,589 |   |
|                                     |       |                   |       |                  |       |   |   |   |   |
| Interest and other income                |       | 2,949                  |       | 3,891                 |       | 20,408 |   | 14,994 |   |
| Interest income – affiliated        |       | —                 |       | —                |       | — |   | 54,235 |   |
| Interest expense                         |       | (655,460               | )          | (712,085              | )          | (1,993,110 | ) | (2,180,051 | ) |
| Interest expense – affiliated       |       | —                 |       | —                |       | — |   | (69,569 | ) |
| Loss on disposal of assets               |       | —                 |       | —                |       | (38,598 | ) | (119,773 | ) |
|                                     |       |                   |       |                  |       |   |   |   |   |
| Net income                               |       | $                      | 293,741    |                  | $          | 283,958 |   | $ | 672,481 |   | $ | 732,425 |   |

 

The accompanying notes to combined financial statements are an integralpart of these statements.

 

24

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**NTS PRIVATE GROUP**

**COMBINED STATEMENTS****OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **September 30,**     | ** ** |
| ** **                                                                         | ** ** | **2004**              | ** ** | **2003** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                               |       |                  |       |   |   |
| Net income                                                                         |       | $                     | 672,481    |   | $ | 732,425 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                  |       |   |   |
| Provision for doubtful accounts                                                    |       | 143,462               |       | 6,101 |   |
| Write-off of uncollectible accounts  receivable                                    |       | (16,329               | )          | (4,076 | ) |
| Loss on disposal of assets                                                         |       | 38,598                |       | 119,773 |   |
| Depreciation and amortization                                                      |       | 1,704,736             |       | 1,640,623 |   |
| Changes in assets and liabilities:                                                 |       |                  |       |   |   |
| Cash and equivalents – restricted                                             |       | (268,131              | )          | (179,235 | ) |
| Accounts receivable                                                                |       | (32,802               | )          | 109,728 |   |
| Other assets                                                                       |       | (248,206              | )          | (48,009 | ) |
| Accounts payable and accrued expenses                                              |       | 338,962               |       | (71,531 | ) |
| Security deposits                                                                  |       | (23,044               | )          | 17,259 |   |
| Other liabilities                                                                  |       | 337,309               |       | 335,678 |   |
|                                                                               |       |                  |       |   |   |
| Net cash provided by operating activities                                          |       | 2,647,036             |       | 2,658,736 |   |
|                                                                               |       |                  |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                               |       |                  |       |   |   |
| Additions to land, buildings and amenities                                         |       | (796,885              | )          | (552,374 | ) |
| Notes receivable – affiliate                                                  |       | —                |       | 6,161,241 |   |
|                                                                               |       |                  |       |   |   |
| Net cash (used in) provided by investing  activities                               |       | (796,885              | )          | 5,608,867 |   |
|                                                                               |       |                  |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                               |       |                  |       |   |   |
| Principal payments on mortgages and note  payable                                  |       | (2,119,451            | )          | (2,247,729 | ) |
| Proceeds from mortgage loans and note  payable                                     |       | 400,000               |       | 152,928 |   |
| Notes payable – affiliate                                                     |       | —                |       | (6,664,748 | ) |
| Cash distributions                                                                 |       | (160,100              | )          | (313,414 | ) |
| Cash contributions                                                                 |       | 397,000               |       | 531,629 |   |
| Additions to loan costs                                                            |       | —                |       | (989 | ) |
|                                                                               |       |                  |       |   |   |
| Net cash used in financing activities                                              |       | (1,482,551            | )          | (8,542,323 | ) |
|                                                                               |       |                  |       |   |   |
| Net increase (decrease) in cash and  equivalents                                   |       | 367,600               |       | (274,720 | ) |
|                                                                               |       |                  |       |   |   |
| CASH AND EQUIVALENTS, beginning of period                                          |       | 440,049               |       | 431,624 |   |
|                                                                               |       |                  |       |   |   |
| CASH AND EQUIVALENTS, end of period                                                |       | $                     | 807,649    |   | $ | 156,904 |   |
|                                                                               |       |                  |       |   |   |
| Interest paid on a cash basis, net of  amounts capitalized                         |       | $                     | 1,944,171  |   | $ | 2,126,183 |   |

 

The accompanying notes to combined financial statements are an integralpart of these statements.

 

25

----

 

**NTS PRIVATE GROUP**

**NOTES TO COMBINED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**Note 1- Organization**

 

NTS Private Group (the “Group”) is a group of partnerships andpass-through entities under the common ownership and control of Mr. J.D.Nichols.  These entities are in thebusiness of developing, constructing, owning and operating commercial realestate and retail land leases.  The Groupincludes those properties that are to be contributed to ORIG as part of arestructuring and then to NTS Realty as part of the merger.

 

**Note 2- Significant Accounting Policies**

 

***A) ConsolidationPolicy***

 

The combined financial statements include the accounts of eachrespective property and joint venture included in the Group.  Intercompany transactions and balances havebeen eliminated. The terms “we,” “us” or “our,” as the context requires, mayrefer to the Group, a partnership or an interest in a property or joint venturelisted below.

 

***B) Properties andJoint Ventures***

 

The following properties and joint ventures are included in the Group:

 

•                                          AtriumCenter, an office center with approximately 104,200 net rentable square feet inLouisville, Kentucky.

 

•                                          AnthemOffice Center, an office building with approximately 84,700 net rentable squarefeet in Louisville, Kentucky.

 

•                                          BlankenbakerBusiness Center 1B, a business center with approximately 60,000 net rentablesquare feet in Louisville, Kentucky.

 

•                                          BlankenbakerBusiness Center II, a business center with approximately 74,700 net rentablesquare feet in Louisville, Kentucky.

 

•                                          ClarkeAmerican, a business center with approximately 50,000 net rentable square feetin Louisville, Kentucky.

 

•                                          OutletsMall, a retail center with approximately 162,600 net rentable square feet inLouisville, Kentucky.

 

•                                          SearsOffice Building, an office building with approximately 66,900 net rentablesquare feet in Louisville, Kentucky.

 

•                                          SpringsMedical Office Center Phase I, an office center with approximately 97,400 netrentable square feet in Louisville, Kentucky.

 

•                                          SpringsOffice Center, an office center with approximately 125,300 net rentable squarefeet in Louisville, Kentucky.

 

26

----

 

•                                          Bed,Bath & Beyond, a retail company with approximately 35,000 net rentablesquare feet in Louisville, Kentucky.

 

•                                          SpringsStation, a retail center with approximately 12,000 net rentable square feet inLouisville, Kentucky.

 

•                                          ITTParking Lot, a ground lease relating to a 120-space parking lot located inLouisville, Kentucky.

 

***C) Use of Estimatesin the Preparation of Financial Statements***

 

The preparation of financial statements in accordance with U.S.generally accepted accounting principles requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

***D) Cash andEquivalents - Restricted***

 

Cash and equivalents - restricted represents funds which have beenescrowed with mortgage companies for property taxes, insurance and tenantimprovements in accordance with the loan agreements.

 

***E) Basis of Propertyand Depreciation***

 

Land, buildings and amenities are stated at cost.  Costs directly associated with theacquisition, development and construction of a project are capitalized.  Depreciation is computed using thestraight-line method over the estimated useful lives of the assets which are7-30 years for land improvements, 5-40 years for buildings and improvements and5-40 years for amenities. Tenant improvements are generally depreciated overthe life of the respective tenant lease. The aggregate cost of our properties for federal tax purposes isapproximately $55,309,000.

 

Statement of Financial Accounting Standards No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets,” specifies circumstances inwhich certain long-lived assets must be reviewed for impairment.  If the carrying amount of an asset exceedsthe sum of its expected future cash flows, the asset’s carrying value must bewritten down to fair value. In determining the value of an investment propertyand whether the investment property is impaired, management considers severalfactors such as projected rental and vacancy rates, property operatingexpenses, capital expenditures and interest rates. The capitalization rate usedto determine property valuation is based on the market in which the investmentproperty is located, length of leases, tenant financial strength, the economyin general, demographics, environment, property location, visibility, age andphysical condition among others. All of these factors are considered bymanagement in determining the value of any particular investment property. Thevalue of any particular investment property is sensitive to the actual resultsof any of these factors, either individually or taken as a whole. If the actualresults differ from management’s judgment, the valuation could be negatively orpositively affected.  Application of thisstandard has not resulted in an impairment loss.

 

***F) Statements ofCash Flows***

 

For purposes of reporting cash flows, cash and equivalents include cashon hand and short-term, highly liquid investments with initial maturities ofthree months or less.

 

27

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**Note 3 - Concentration of Credit Risk**

 

We own and operate, either wholly or through a joint venture,commercial and retail properties in Louisville, Kentucky.

 

Our financial instruments that are exposed to concentrations of creditrisk consist of cash and equivalents.  Wemaintain our cash accounts primarily with banks located in Kentucky.  The total cash balances are insured by theFDIC up to $100,000 per bank account.  Wemay at times, in certain accounts, have deposits in excess of $100,000.

 

**Note 4 - Notes Receivable - Affiliate**

 

NTS Financial Partnership, an affiliate of ours, borrows workingcapital from affiliated entities’ surplus cash and subsequently loans suchfunds to affiliates requiring temporary financing.  Additionally, NTS Financial Partnership maylend to affiliated entities requiring funds until alternative sources offinancing can be obtained.  Loans to andfrom affiliates bear interest at the Applicable Federal Rate (“AFR”) and aretreated as revolving credit arrangements without a stated maturity date.  In June 2003 the affiliates paid the notesreceivable.

 

28

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**Note 5 - Mortgages and Notes Payable**

 

Mortgages and notes payable consist of the following:

 

 
| ** **                                                                                                                                                                                                                                                                                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                 | ** ** | **2004**          | ** ** | **2003**         | ** ** |
| ** **                                                                                                                                                                                                                                                                                                 | ** ** | **(UNAUDITED)**   | ** ** | ** **       | ** ** |
| Mortgage payable to an insurance company,  payable in monthly installments, bearing interest at 6.875%, paid March 5,  2004, secured by certain land and a building.                                                                                                                                       |       | $                 | —     |             | $          | 111,301 |   |
|                                                                                                                                                                                                                                                                                                       |       |              |       |             |       |
| Mortgage payable to an insurance company,  payable in monthly installments, bearing interest at 6.875%, paid March 5,  2004, secured by certain land and a building.                                                                                                                                       |       | —            |       | 25,684           |       |
|                                                                                                                                                                                                                                                                                                       |       |              |       |             |       |
| Mortgage payable to an insurance company,  payable in monthly installments, bearing interest at 7.39%, maturing July 1,  2008, secured by certain land and a building.                                                                                                                                     |       | 1,702,530         |       | 1,982,989        |       |
|                                                                                                                                                                                                                                                                                                       |       |              |       |             |       |
| Mortgage payable to an insurance company,  payable in monthly installments, bearing interest at 7.39%, maturing July 1,  2008, secured by certain land and a building and guaranteed by NTS  Corporation, an affiliate of ours, and J.D. Nichols.                                                          |       | 352,856           |       | 410,982          |       |
|                                                                                                                                                                                                                                                                                                       |       |              |       |             |       |
| Mortgage payable to an insurance company,  payable in monthly installments, bearing interest at 8.45%, maturing November  1, 2015, secured by certain land and a building.                                                                                                                                 |       | 3,144,226         |       | 3,267,522        |       |
|                                                                                                                                                                                                                                                                                                       |       |              |       |             |       |
| Mortgage payable to an insurance company,  payable in monthly installments, bearing interest at 6.90%, maturing November  1, 2008, secured by certain land and a building.                                                                                                                                 |       | 8,997,693         |       | 9,271,886        |       |
|                                                                                                                                                                                                                                                                                                       |       |              |       |             |       |
| Mortgage payable to an insurance company,  payable in monthly installments, bearing interest at 7.12%, maturing August  1, 2008, secured by certain land and a building.                                                                                                                                   |       | 7,117,963         |       | 7,248,371        |       |
|                                                                                                                                                                                                                                                                                                       |       |              |       |             |       |
| Mortgage payable to an insurance company,  payable in monthly installments, bearing interest at 7.90%, maturing February  1, 2011, secured by certain land and a building.                                                                                                                                 |       | 3,262,175         |       | 3,546,735        |       |
|                                                                                                                                                                                                                                                                                                       |       |              |       |             |       |
| Note payable to a bank on demand with  interest payable in monthly installments, bearing interest at the Prime Rate,  maturing June 1, 2005.  The interest  rate on September 30, 2004 was 4.75%.                                                                                                     |       | 400,000           |       | —           |       |
|                                                                                                                                                                                                                                                                                                       |       |              |       |             |       |
| Mortgage payable to a bank, payable in  monthly installments, bearing interest at 8.125%, maturing June 22, 2008,  secured by certain land and personally guaranteed by J.D. Nichols.                                                                                                                      |       | 211,108           |       | 246,280          |       |
|                                                                                                                                                                                                                                                                                                       |       |              |       |             |       |
| Mortgage payable to an insurance company,  payable in monthly installments, bearing interest at 8.50%, maturing November  15, 2005, secured by certain land and a building.                                                                                                                                |       | 465,709           |       | 741,686          |       |
|                                                                                                                                                                                                                                                                                                       |       |              |       |             |       |
| Mortgage payable to an insurance company,  payable in monthly installments, bearing interest at 7.96%, maturing August  5, 2009, secured by certain land and a building.                                                                                                                                   |       | 2,762,229         |       | 2,803,615        |       |
|                                                                                                                                                                                                                                                                                                       |       |              |       |             |       |
| Mortgage payable to an insurance company on  demand with interest payable in monthly installments, currently bearing  interest at 4.15%, maturing November 15, 2005, secured by certain land and a  building.                                                                                              |       | 1,043,241         |       | 1,065,676        |       |
|                                                                                                                                                                                                                                                                                                       |       |              |       |             |       |
| Mortgage payable to an insurance company,  payable in monthly installments, bearing interest at 7.90%, maturing August  1, 2005, secured by certain land and a building.                                                                                                                                   |       | 942,865           |       | 1,274,774        |       |
|                                                                                                                                                                                                                                                                                                       |       |              |       |             |       |
| Mortgage payable to a bank, payable in  monthly installments, bearing interest at a variable rate based on EURO  one-month rate plus 2.15%, maturing October 4, 2005, secured by certain land  and a building and guaranteed by NTS Corporation.  The interest rate on September 30, 2004 was  3.84%. |       | 1,651,500         |       | 1,683,000        |       |
|                                                                                                                                                                                                                                                                                                       |       |              |       |             |       |
| Note payable to a bank, payable in monthly  installments, bearing interest at a variable rate of Prime –0.75%, paid May  1, 2004, secured by certain land, a building and guaranteed by NTS  Corporation.                                                                                             |       | —            |       | 35,000           |       |
|                                                                                                                                                                                                                                                                                                       |       |              |       |             |       |
| Mortgage payable to a bank, payable in  monthly installments, bearing interest at 9.00%, maturing August 1, 2010,  secured by certain land and a building.                                                                                                                                                 |       | 2,826,374         |       | 2,884,419        |       |
|                                                                                                                                                                                                                                                                                                       |       |              |       |             |       |
| ** **                                                                                                                                                                                                                                                                                                 | ** ** | $                 | 34,880,469 |             | $          | 36,599,920 |   |

 

Our mortgages may be prepaid but are generally subject to prepaymentpenalties or a yield-maintenance premium.

 

Based on the borrowing rates currently available to us for mortgageswith similar terms and average maturities, the fair value of long-term debt onSeptember 30, 2004 and December 31, 2003 was approximately $36,925,000 and$38,977,000, respectively.

 

29

----

 

**Note 6 - Notes Payable - Affiliate**

 

NTS Financial Partnership, an affiliate of ours, lends working capitalto affiliated entities requiring funds until alternative sources of financingcan be obtained.  Additionally, NTSFinancial Partnership may borrow from affiliated entities’ surplus cash andsubsequently loan such funds to affiliates requiring temporary financing.  Loans to and from affiliates bear interest atthe AFR and are treated as revolving credit arrangements without a statedmaturity date.  In June 2003 the notespayable were paid to the affiliates.

 

**Note 7 - Related Party Transactions**

 

NTS Development Company, our affiliate, receives property managementfees on a monthly basis.  The fee isequal to 6% of the gross revenues from commercial and retail properties and$100 monthly for each commercial land lease. Also pursuant to an agreement, NTSDevelopment Company receives a repair and maintenance fee equal to 5% of costsincurred which relate to capital improvements and major repair and renovationprojects.  These repair and maintenancefees are capitalized as part of land, buildings and amenities.

 

We were charged the following amounts by NTS Development Company forthe nine months ended September 30, 2004 and 2003.  These charges include items which have beenexpensed as operating expenses - affiliated and items which have beencapitalized as other assets or as land, buildings and amenities.

 

 
| ** **                                    | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **September 30,**     | ** ** |
| ** **                                    | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | **(UNAUDITED)**       | ** ** | **(UNAUDITED)** | ** ** |
|                                          |       |                  |       |   |   |
| Property management fees                      |       | $                     | 414,913    |   | $ | 415,991 |   |
|                                          |       |                  |       |   |   |
| Property management                           |       | 355,928               |       | 307,974 |   |
| Leasing                                       |       | 63,088                |       | 86,160 |   |
| Administrative – operating               |       | 129,135               |       | 86,226 |   |
| Other                                         |       | 14,137                |       | 8,619 |   |
|                                          |       |                  |       |   |   |
| Total operating expenses – affiliated    |       | 562,288               |       | 488,979 |   |
|                                          |       |                  |       |   |   |
| Repairs and maintenance fees                  |       | 38,689                |       | 64,028 |   |
| Leasing commissions                           |       | 28,169                |       | 36,385 |   |
| Construction management                       |       | —                |       | 5,000 |   |
|                                          |       |                  |       |   |   |
| Total related party transactions  capitalized |       | 66,858                |       | 105,413 |   |
|                                          |       |                  |       |   |   |
| Total related party transactions              |       | $                     | 1,044,059  |   | $ | 1,010,383 |   |

 

During the nine months ended September 30, 2004 and 2003, we werecharged $25,356 and $17,079, respectively, for property maintenance fees froman affiliate of NTS Development Company, which are included in the operatingexpenses on our combined statements of operations.

 

NTS Private Group would have reimbursed NTS Development Company forprofessional and administrative services provided by its employees ofapproximately $156,000 for each of the nine months ended September 30, 2004 and2003, respectively, had a management agreement for those services existedbetween the entities comprising NTS Private Group and NTS Development Company.

 

30

----

 

**Note 8 - Commitments and Contingencies**

 

We, as an owner of real estate, are subject to various environmentallaws of federal, state and local governments. Our compliance with existing laws has not had a material adverse effecton our financial condition and results of operations.  However, we cannot predict the impact of newor changed laws or regulations on our current properties or on properties thatwe may acquire in the future.

 

We do not believe there is any litigation threatened against us otherthan routine litigation arising out of the ordinary course of business, some ofwhich is expected to be covered by insurance, none of which is expected to havea material effect on our combined financial position or results of operations.

 

**Note 9 – Segment Reporting**

 

Our reportable operating segments include - retail and commercial realestate operations as well as land leases. The retail operations represent our ownership and operating resultsrelative to Springs Station and Outlets Mall properties located in Louisville,Kentucky.  The commercial operationsrepresent our ownership and operating results relative to suburban commercialoffice space located in Louisville, Kentucky. The land operations represent our ownership and operating resultsrelative to a ground lease located in Louisville, Kentucky.

 

The financial information of the operating segments has been preparedusing a management approach, which is consistent with the basis and manner inwhich our management internally disaggregates financial information for thepurposes of assisting in making internal operating decisions.  We evaluate performance based on stand-aloneoperating segment net income.

 
| ** **                                                   | ** ** | **Three Months Ended September 30, 2004** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                   | ** ** | **Land**                                  | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Total** | ** ** |
| ** **                                                   | ** ** | **(UNAUDITED)**                           | ** ** |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Rental income                                                |       | $                                         | 9,276      |   | $ | 316,034 |   | $ | 1,865,564 |   | $ | 2,190,874 |   |
| Tenant reimbursements                                        |       | —                                    |       | 13,113 |   | 101,787 |   | 114,900 |   |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Total revenues                                               |       | 9,276                                     |       | 329,147 |   | 1,967,351 |   | 2,305,774 |   |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Operating expenses and operating expenses –  affiliated |       | 98                                        |       | 31,263 |   | 567,823 |   | 599,184 |   |
| Management fees                                              |       | 300                                       |       | 20,789 |   | 117,354 |   | 138,443 |   |
| Real estate taxes                                            |       | 398                                       |       | 7,479 |   | 95,354 |   | 103,231 |   |
| Professional and administrative expenses                     |       | 3,497                                     |       | 3,497 |   | 9,323 |   | 16,317 |   |
| Depreciation and amortization                                |       | 1,272                                     |       | 90,782 |   | 410,293 |   | 502,347 |   |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Total operating expenses                                     |       | 5,565                                     |       | 153,810 |   | 1,200,147 |   | 1,359,522 |   |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Operating income                                             |       | 3,711                                     |       | 175,337 |   | 767,204 |   | 946,252 |   |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Interest and other income                                    |       | —                                    |       | 555 |   | 2,394 |   | 2,949 |   |
| Interest expense                                             |       | —                                    |       | (101,725 | ) | (553,735 | ) | (655,460 | ) |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Net income                                                   |       | $                                         | 3,711      |   | $ | 74,167 |   | $ | 215,863 |   | $ | 293,741 |   |
|                                                              |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

31

----

 
| ** **                                                   | ** ** | **Three Months Ended September 30, 2003** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                   | ** ** | **(UNAUDITED)**                           | ** ** |
| ** **                                                   | ** ** | **Land**                                  | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Total** | ** ** |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Rental income                                                |       | $                                         | 13,384     |   | $ | 324,148 |   | $ | 1,914,777 |   | $ | 2,252,309 |   |
| Tenant reimbursements                                        |       | —                                    |       | 16,210 |   | 98,527 |   | 114,737 |   |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Total revenues                                               |       | 13,384                                    |       | 340,358 |   | 2,013,304 |   | 2,367,046 |   |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Operating expenses and operating expenses –  affiliated |       | 461                                       |       | 24,656 |   | 528,769 |   | 553,886 |   |
| Management fees                                              |       | 300                                       |       | 21,426 |   | 123,953 |   | 145,679 |   |
| Real estate taxes                                            |       | 399                                       |       | 7,650 |   | 94,847 |   | 102,896 |   |
| Professional and administrative expenses                     |       | 19,545                                    |       | 19,545 |   | 52,121 |   | 91,211 |   |
| Depreciation and amortization                                |       | 1,272                                     |       | 75,043 |   | 404,907 |   | 481,222 |   |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Total operating expenses                                     |       | 21,977                                    |       | 148,320 |   | 1,204,597 |   | 1,374,894 |   |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Operating (loss) income                                      |       | (8,593                                    | )          | 192,038 |   | 808,707 |   | 992,152 |   |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Interest and other income                                    |       | —                                    |       | 39 |   | 3,852 |   | 3,891 |   |
| Interest income - affiliated                                 |       | —                                    |       | — |   | — |   | — |   |
| Interest expense                                             |       | —                                    |       | (112,496 | ) | (599,589 | ) | (712,085 | ) |
| Interest expense - affiliated                                |       | —                                    |       | — |   | — |   | — |   |
| Loss on disposal of assets                                   |       | —                                    |       | — |   | — |   | — |   |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Net (loss) income                                            |       | $                                         | (8,593     | ) | $ | 79,581 |   | $ | 212,970 |   | $ | 283,958 |   |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| ** **                                                   | ** ** | **Nine Months Ended September 30, 2004**  | ** ** |
| ** **                                                   | ** ** | **(UNAUDITED)**                           | ** ** |
| ** **                                                   | ** ** | **Land**                                  | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Total** | ** ** |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Rental income                                                |       | $                                         | 36,044     |   | $ | 963,341 |   | $ | 5,521,275 |   | $ | 6,520,660 |   |
| Tenant reimbursements                                        |       | —                                    |       | 42,905 |   | 326,002 |   | 368,907 |   |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Total revenues                                               |       | 36,044                                    |       | 1,006,246 |   | 5,847,277 |   | 6,889,567 |   |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Operating expenses and operating Expenses –  affiliated |       | 874                                       |       | 204,924 |   | 1,641,301 |   | 1,847,099 |   |
| Management fees                                              |       | 900                                       |       | 60,839 |   | 353,174 |   | 414,913 |   |
| Real estate taxes                                            |       | 1,195                                     |       | 22,437 |   | 285,981 |   | 309,613 |   |
| Professional and administrative expenses                     |       | 28,303                                    |       | 28,303 |   | 75,473 |   | 132,079 |   |
| Depreciation and amortization                                |       | 3,815                                     |       | 240,881 |   | 1,257,386 |   | 1,502,082 |   |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Total operating expenses                                     |       | 35,087                                    |       | 557,384 |   | 3,613,315 |   | 4,205,786 |   |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Operating income                                             |       | 957                                       |       | 448,862 |   | 2,233,962 |   | 2,683,781 |   |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Interest and other income                                    |       | —                                    |       | 625 |   | 19,783 |   | 20,408 |   |
| Interest expense                                             |       | —                                    |       | (309,937 | ) | (1,683,173 | ) | (1,993,110 | ) |
| Loss on disposal of assets                                   |       | —                                    |       | — |   | (38,598 | ) | (38,598 | ) |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| Net income                                                   |       | $                                         | 957        |   | $ | 139,550 |   | $ | 531,974 |   | $ | 672,481 |   |

 

32

----

 
| ** **                                                   | ** ** | **Nine Months Ended September 30, 2003** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                   | ** ** | **(UNAUDITED)**                          | ** ** |
| ** **                                                   | ** ** | **Land**                                 | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Total** | ** ** |
|                                                         |       |                                     |       |   |   |   |   |   |   |
| Rental income                                                |       | $                                        | 40,153     |   | $ | 956,411 |   | $ | 5,499,357 |   | $ | 6,495,921 |   |
| Tenant reimbursements                                        |       | —                                   |       | 57,899 |   | 324,299 |   | 382,198 |   |
|                                                         |       |                                     |       |   |   |   |   |   |   |
| Total revenues                                               |       | 40,153                                   |       | 1,014,310 |   | 5,823,656 |   | 6,878,119 |   |
|                                                         |       |                                     |       |   |   |   |   |   |   |
| Operating expenses and operating expenses –  affiliated |       | 2,048                                    |       | 70,207 |   | 1,524,608 |   | 1,596,863 |   |
| Management fees                                              |       | 900                                      |       | 60,746 |   | 354,345 |   | 415,991 |   |
| Real estate taxes                                            |       | 1,196                                    |       | 22,950 |   | 284,543 |   | 308,689 |   |
| Professional and administrative expenses                     |       | 19,545                                   |       | 19,545 |   | 52,121 |   | 91,211 |   |
| Depreciation and amortization                                |       | 3,815                                    |       | 218,454 |   | 1,210,507 |   | 1,432,776 |   |
|                                                         |       |                                     |       |   |   |   |   |   |   |
| Total operating expenses                                     |       | 27,504                                   |       | 391,902 |   | 3,426,124 |   | 3,845,530 |   |
|                                                         |       |                                     |       |   |   |   |   |   |   |
| Operating income                                             |       | 12,649                                   |       | 622,408 |   | 2,397,532 |   | 3,032,589 |   |
|                                                         |       |                                     |       |   |   |   |   |   |   |
| Interest and other income                                    |       | —                                   |       | 390 |   | 14,604 |   | 14,994 |   |
| Interest income - affiliated                                 |       | 3,741                                    |       | 11,613 |   | 38,881 |   | 54,235 |   |
| Interest expense                                             |       | —                                   |       | (343,088 | ) | (1,836,963 | ) | (2,180,051 | ) |
| Interest expense - affiliated                                |       | (238                                     | )          | — |   | (69,331 | ) | (69,569 | ) |
| Loss on disposal of assets                                   |       | —                                   |       | — |   | (119,773 | ) | (119,773 | ) |
|                                                         |       |                                     |       |   |   |   |   |   |   |
| Net income                                                   |       | $                                        | 16,152     |   | $ | 291,323 |   | $ | 424,950 |   | $ | 732,425 |   |

 

33

----

 

**ORIG****, LLC**

**BALANCE****SHEETS**

 
| ** **                                 | ** ** | **As of**         | ** ** |
|--------------------------------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **September 30,** | ** ** |
| ** **                                 | ** ** | **2004**          | ** ** | **2003** | ** ** |
| ** **                                 | ** ** | **(UNAUDITED)**   | ** ** | **(UNAUDITED)** | ** ** |
| ASSETS                                     |       |              |       |   |   |
| Cash and equivalents                       |       | $                 | 10,452     |   | $ | 39,195 |   |
| Investments in unconsolidated affiliates   |       | 15,085,904        |       | 15,553,288 |   |
| Other assets                               |       | —            |       | 199 |   |
|                                       |       |              |       |   |   |
| TOTAL ASSETS                               |       | $                 | 15,096,356 |   | $ | 15,592,682 |   |
|                                       |       |              |       |   |   |
| LIABILITIES AND MEMBERS’ EQUITY       |       |              |       |   |   |
| Notes payable                              |       | $                 | 13,430,908 |   | $ | 13,047,630 |   |
| Accrued expenses                           |       | 274,250           |       | 90,619 |   |
|                                       |       |              |       |   |   |
| TOTAL LIABILITIES                          |       | 13,705,158        |       | 13,138,249 |   |
|                                       |       |              |       |   |   |
| COMMITMENTS AND CONTINGENCIES (Note 5)     |       |              |       |   |   |
|                                       |       |              |       |   |   |
| MEMBERS’ EQUITY                       |       | 1,391,198         |       | 2,454,433 |   |
|                                       |       |              |       |   |   |
| TOTAL LIABILITIES AND MEMBERS’ EQUITY |       | $                 | 15,096,356 |   | $ | 15,592,682 |   |

 

The accompanying notes to balance sheets are an integral part of thesebalance sheets.

 

34

----

 

**ORIG, LLC**

**NOTES TO BALANCE****SHEETS**

**(UNAUDITED)**

 

**Note 1 - Organization**

 

ORIG, LLC (“ORIG”) is a limited liability company organized under thelaws of the State of Kentucky in 1999. We are in the business of investing in entities that own commercial andresidential real estate property.  Our currentmembers are J.D. Nichols, Barbara Nichols and Brian F. Lavin.

 

**Note 2- Significant Accounting Policies**

 

***A) InvestmentAccounting***

 

The balance sheets include our investments in unconsolidated affiliatesaccounted for mainly using the equity method. Intercompany transactions and balances have been eliminated. The terms“we,” “us” or “our,” as the context requires, may refer to ORIG or itsinterests in its investments.  Our equityinvestments are recorded at the lesser of carrying value or fair market value.

 

***B) Investments******in UnconsolidatedAffiliates***

 

Our investments at September 30, 2004 were:

 

•                                          NTS-PropertiesIII - a real estate limited partnership, 4,602 Interests, representing 36.60%.

 

•                                          NTS-PropertiesIV - a real estate limited partnership, 10,377 Interests, representing 43.03%.

 

•                                          NTS-PropertiesV - a real estate limited partnership, 11,934 Interests, representing 39.09%.

 

•                                          NTS-PropertiesVI - a real estate limited partnership, 18,293 Interests, representing 47.03%.

 

•                                          NTS-PropertiesVII - a real estate limited partnership, 218,772 Interests, representing39.62%.

 

•                                          BlankenbakerBusiness Center Joint Venture - a real estate joint venture interest,representing a 39.05% ownership interest.

 

•                                          Lakeshore/UniversityII Joint Venture - a real estate joint venture interest, representing a 7.69%ownership interest.

 

In addition, we have an 8.47% investment in the NTS Mortgage IncomeFund, a Delaware Corporation.  Thisinvestment is accounted for using the cost method.

 

35

----

 

Presented below are approximate condensedbalance sheets for our unconsolidated affiliated real estate limitedpartnership investments. 

 
| ** **                         | ** ** | **As of**         | ** ** |
|------------------------------------|------------|-------------------|------------|
| ** **                         | ** ** | **September 30,** | ** ** |
| ** **                         | ** ** | **2004**          | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(UNAUDITED)**   | ** ** | **(UNAUDITED)** | ** ** |
| CONDENSED BALANCE SHEETS           |       |              |       |   |   |
| Cash and accounts receivable       |       | $                 | 4,598,000  |   | $ | 4,153,000 |   |
| Land, buildings and amenities, net |       | 82,376,000        |       | 86,973,000 |   |
| Other assets                       |       | 1,629,000         |       | 2,173,000 |   |
|                               |       |              |       |   |   |
| TOTAL ASSETS                       |       | $                 | 88,603,000 |   | $ | 93,299,000 |   |
|                               |       |              |       |   |   |
| Mortgage and notes payable         |       | $                 | 56,190,000 |   | $ | 59,798,000 |   |
| Other liabilities                  |       | 7,131,000         |       | 5,564,000 |   |
| Equity                             |       | 25,282,000        |       | 27,937,000 |   |
|                               |       |              |       |   |   |
| TOTAL LIABILITIES AND EQUITY       |       | $                 | 88,603,000 |   | $ | 93,299,000 |   |

 

For the nine months ended September 30, 2004 and 2003, theunconsolidated Joint Ventures had total rental revenues of approximately$18,219,000 and $18,672,000, respectively, and net losses of $(2,397,000) and$(1,501,000), respectively.

 

***C) Use of Estimatesin the Preparation of Financial Statements***

 

The preparation of financial statements in accordance with U.S.generally accepted accounting principles requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during the reportingperiod.  Actual results could differ fromthose estimates.

 

***D) Income Taxes***

 

We have elected to be treated as a partnership under the InternalRevenue Code for both federal and state purposes.  Our taxable income or loss is included in thetax returns of the individual members. Accordingly, we make no provision for income taxes.

 

**Note 3 - Concentration of Credit Risk**

 

We own investments in entities that own and operate, either wholly orthrough joint ventures, residential and commercial properties in Kentucky(Louisville and Lexington), Georgia (Atlanta), Indiana (Indianapolis), Virginia(Spotsylvania), and Florida (Ft. Lauderdale and Orlando).  Substantially all of the commercialproperties’ tenants are local businesses or are businesses which have operationsin the Louisville area.

 

Our financial instruments that are exposed to concentrations of creditrisk consist of cash and equivalents.  Wemaintain our cash accounts primarily with banks located in Kentucky.  The total cash balances are insured by the FDICup to $100,000 per bank account.  We mayat times, in certain accounts, have deposits in excess of $100,000.

 

36

----

 

**Note 4 -Notes Payable**

 

Notes payable consist of the following:

 
| ** **                                                                                                                                                                                          | ** ** | **As of**         | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                          | ** ** | **September 30,** | ** ** |
| ** **                                                                                                                                                                                          | ** ** | **2004**          | ** ** | **2003** | ** ** |
| Note payable to a bank, bearing interest at  Prime +0.25%, due August 31, 2005, personally guaranteed by J.D. Nichols and  Brian F. Lavin.  The current rate on  September 30, 2004 was 5.00%. |       | $                 | 2,000,000  |   | $ | 2,000,000 |   |
|                                                                                                                                                                                                |       |              |       |   |   |
| Note payable to a bank, bearing interest at  Prime +0.50%, due August 31, 2005, personally guaranteed by J.D. Nichols and  Brian F. Lavin.  The current rate on  September 30, 2004 was 5.25%. |       | 2,000,000         |       | 2,000,000 |   |
|                                                                                                                                                                                                |       |              |       |   |   |
| Note payable to a bank, bearing interest at  Prime +1.00%, due August 31, 2005, personally guaranteed by J.D. Nichols and  Brian F. Lavin.  The current rate on  September 30, 2004 was 5.75%. |       | 2,000,000         |       | 2,000,000 |   |
|                                                                                                                                                                                                |       |              |       |   |   |
| Note payable to a bank, bearing interest at  Prime +1.25%, due August 31, 2005, personally guaranteed by J.D. Nichols and  Brian F. Lavin.  The current rate on  September 30, 2004 was 6.00%. |       | 7,430,908         |       | 7,047,630 |   |
|                                                                                                                                                                                                |       |              |       |   |   |
|                                                                                                                                                                                                |       | $                 | 13,430,908 |   | $ | 13,047,630 |   |

 

The notes payable require monthly interestpayments and are secured by the interests owned in our unconsolidated realestate limited partnership affiliates and certain interests in NTS/Mall LimitedPartnership and NTS/BBC1.

 

Scheduled maturities of debt are as follows:

 
| ** ** | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2004       |       | $          | —     |   |
| 2005       |       | 13,430,908 |       |
| 2006       |       | —     |       |
| 2007       |       | —     |       |
| 2008       |       | —     |       |
| Thereafter |       | —     |       |
|       |       | $          | 13,430,908 |   |

 

Based on the borrowing rates currently available to us for notes withsimilar terms and average maturities, the fair value of long-term debt onSeptember 30, 2004 and 2003 was approximately $13,431,000 and $13,048,000,respectively.

 

**Note 5 - Commitments and Contingencies**

 

We, as an owner of real estate, are subject to various environmentallaws of federal, state and local governments. Our compliance with existing laws has not had a material adverse effecton our financial condition and results of operations.  However, we cannot predict the impact of newor changed laws or regulations on our current properties or on properties thatwe may acquire in the future.

 

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We are contingently liable for joint venture debt, which is recorded asa liability of the joint venture and secured by the respective joint ventureproperty.  As of September 30, 2004, wehave guaranteed or are otherwise contingently liable for approximately$9,055,000 of joint venture mortgages and other indebtedness in the event thejoint venture defaults under the terms of such mortgages.  The mortgages guaranteed are secured by theproperty of the joint venture which could be sold in order to satisfy theoutstanding obligations.

 

***Litigation***

 

On December 12, 2001, three individuals filed an action in the SuperiorCourt of the State of California for the County of Contra Costa (the “SuperiorCourt”) originally captioned *Buchanan, etal. v. NTS-Properties Associates, et al*. (Case No. C 01-05090)**against us, the general partners (the“General Partners”) of NTS-Properties III, NTS-Properties IV, NTS-Properties V,NTS-Properties VI and NTS-Properties VII, Ltd. (the “Partnerships”), as well asseveral individuals and entities affiliated with us.  The action purported to bring claims onbehalf of a class of limited partners. These claims are based on, among other things, tender offers made by thePartnerships and us, as well as the operation of the Partnerships by theGeneral Partners.  The plaintiffs allege,among other things, that the prices at which limited partnership interests werepurchased in these tender offers were too low. The plaintiffs sought monetary damages and equitable relief, including anorder directing the disposition of the properties owned by the Partnerships andthe distribution of the proceeds.  Noamounts have been accrued as a liability for this action in our financialstatements.

 

On February 27, 2003, two individuals filed a class and derivativeaction in the Circuit Court of Jefferson County, Kentucky captioned *Bohm, et al. v. J.D. Nichols, et al.*(CaseNo. 03-CI-01740) against us, certain of the General Partners and severalindividuals and entities affiliated with us. The complaint was amended to include the general partner ofNTS-Properties III and the general partner of NTS-Properties Plus Ltd., whichis no longer in existence.  In theamended complaint, the plaintiffs purport to bring claims on behalf of a classof limited partners and derivatively on behalf of us and the Partnerships basedon alleged overpayment of fees, prohibited investments, improper failures tomake distributions, purchases of limited partnerships interests at insufficientprices and other violations of the limited partnership agreements.  The plaintiffs are seeking, among otherthings, compensatory and punitive damages in an unspecified amount, anaccounting, the appointment of a receiver or liquidating trustee, the entry ofan order of dissolution against the Partnerships, a declaratory judgment andinjunctive relief.  No amounts have beenaccrued for the settlement of this action in our financial statements.  Our general partner and legal counsel believethat this action is without merit and are vigorously defending it.

 

On June 20, 2003, the General Partners reached an agreement inprinciple with the representatives of the class of plaintiffs to settle the *Buchanan* litigation.  This agreed upon settlement includes releasesfor all of the parties for all of the claims asserted in the *Buchanan*litigation and the *Bohm* litigation.  As part of the agreed upon settlement, theGeneral Partners agreed to pursue a merger of the Partnerships and other realestate entities affiliated with the General Partners into a newly-formed entitynamed NTS Realty Holdings Limited Partnership (“NTS Realty”).

 

On December 5, 2003, the General Partners, certain of their affiliatesand the class of plaintiffs in the *Buchanan*litigationjointly filed a Stipulation and Agreement of Settlement (the “SettlementAgreement”) with the Superior Court.  TheSettlement Agreement sets forth in writing the terms of the agreed uponsettlement the parties reached on June 20, 2003.  On February 26, 2004, the Superior Courtpreliminarily approved the Settlement Agreement as within the range ofreasonableness and that it is fair, just and adequate to the class ofplaintiffs.  The Superior Court scheduleda hearing to finally determine whether the Settlement Agreement is in the bestinterests of the class of plaintiffs and whether the *Buchanan*litigation should be dismissed with prejudice.

 

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On March 2, 2004, we, along with all defendants, filed a Motion toDismiss the *Bohm* litigation.After the Motion to Dismiss was fully briefed, the settlement agreement in the *Buchanan* litigation received final courtapproval. The Circuit Court of Jefferson County, Kentucky, instructed theplaintiffs in the *Bohm* litigationto file an amended complaint in light of the approved settlement of the *Buchanan* litigation. The plaintiffs in the*Bohm* litigation filed a correctedSecond Amended Complaint on August 11, 2004. We, along with all defendants,filed a Motion to Strike the corrected Second Amended Complaint. A hearing onthis motion is scheduled for January 14, 2005. Our general partner believesthat the claims asserted in the corrected Second Amended Complaint have nomerit.

 

On May 6, 2004, the Superior Court granted its final approval of theSettlement Agreement.  At the finalhearing, any member of the class of plaintiffs was given the opportunity toobject to the final approval of the Settlement Agreement, the entry of a finaljudgment dismissing with prejudice the *Buchanan*litigation, or an application of an award for attorneys’ fees andexpenses to plaintiffs’ counsel.  TheSuperior Court’s order provides, among other things, that: (1) the SettlementAgreement, and all transactions contemplated thereby, including the proposedmerger of the Partnerships into NTS Realty, are fair, reasonable and adequate,and in the best interests of the class of plaintiffs; (2) the plaintiffs’complaint and each and every cause of action and claim set forth therein isdismissed with prejudice; (3) each class member is barred from transferring,selling or otherwise disposing of (other than by operation of law) theirinterests until the earlier of the closing date of the merger, the terminationof the settlement or June 30, 2004; and (4) each class member who requested tobe excluded from the settlement released their claims in the *Bohm* litigation.

 

On June 11, 2004, Joseph Bohm and David Duval, class members whoobjected to the Settlement Agreement but were overruled by the Superior Court,filed an appeal in the Court of Appeals of the State of California, firstAppellate District.  Our general partnerbelieves that this appeal has no merit and intends to defend it and thedecision of the Superior Court.

 

We do not believe there is any other litigation threatened against usother than routine litigation arising out of the ordinary course of business,some of which is expected to be covered by insurance, none of which is expectedto have a material effect on our financial position or results of operations,except as discussed herein.

 

***Proposed Merger***

 

As part of the Settlement Agreement, the General Partners have agreedto pursue a merger of the partnerships and several other affiliated real estateentities into NTS Realty.  The merger issubject to, among other things, approval by a majority of the limited partnerinterests in each partnership.

 

On February 4, 2004, NTS Realty filed a joint consent solicitationstatement/prospectus on Form S-4 with the Securities and ExchangeCommission.  The solicitationstatement/prospectus presents the merger of NTS-Properties III; NTS-PropertiesIV; NTS-Properties V; NTS-Properties VI; and NTS-Properties VII, Ltd. with NTSRealty.  Concurrent with the merger, wewill contribute substantially all our real estate assets and all of ourliabilities to NTS Realty.

 

On October 27, 2004, the Securities and Exchange Commission signed anorder declaring NTS Realty’s registration statement to be effective and thePartnerships began mailing the joint consent solicitation statement/prospectusto their respective limited partners.

 

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## **Item 2**-Management’s Discussion and Analysis of Financial Condition and Results ofOperations

## ** **

*Certainstatements in this “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and elsewhere in this Quarterly Report on Form 10-Qconstitute “forward-looking statements” within the meaning of the FederalPrivate Securities Litigation Reform Act of 1995.  Forward-looking statements are statementsthat are not historical, including statements regarding management’sintentions, beliefs, expectations, representations, plans or predictions of thefuture and are typically identified by such words as “believe,” “expect,”“anticipate,” “intend,” “estimate,” “may,” “will,” “should” and “could.”  The Company intends that such forward-lookingstatements be subject to the safe harbors created by Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934.  These forward-looking statementsinvolve numerous risks and uncertainties that could cause our actual results tobe materially different from those set forth in the forward-lookingstatements.  Examples of factors whichcould affect our performance are set forth in our Registration Statement onForm S-4 dated October 27, 2004, as filed with the Securities and ExchangeCommission under the heading “Risk Factors.” The Company disclaims any intention or obligation to update or reviseany forward-looking statements whether as a result of new information, futureevents or otherwise.*

 

**HISTORICAL COMBINED**

 

This section provides the Historical Combined Management’s Discussionand Analysis of Financial Condition and Results of Operations (“MD&A”) asif the partnerships, ORIG and the NTS Private Group were combined on anhistorical basis.

 

The following discussion should be read in conjunction with thehistorical and pro forma financial statements appearing elsewhere in thisquarterly report.  This discussion isbased primarily on our historical combining statements of operations for thethree and nine months ended September 30, 2004 and 2003 and historicalcombining cash flow information for the nine months ended September 30, 2004and 2003.  In addition, this sectionprovides a narrative discussion of our pro forma consolidated balance sheet asof September 30, 2004 and our pro forma consolidated statements of operationsfor the nine months ended September 30, 2004 and for the year ended December31, 2003.  These pro forma amountsreflect adjustments made to our historical combined financial information togive effect to the impact that completing the merger would have had on certainitems as though the merger had been completed on September 30, 2004, for thepro forma balance sheet and January 1, 2003, for the pro forma incomestatements for the nine months ended September 30, 2004 and for the year endedDecember 31, 2003.  Finally, in our“future liquidity” section, we discuss our estimates of the net change in cashfor the nine months ended September 30, 2004 and 2003, based on certainassumptions.

 

**Critical Accounting Policies**

 

***General***

 

A critical accounting policy is one that would materially affect ouroperations or financial condition, and requires management to make estimates orjudgments in certain circumstances. These judgments often result from the need to make estimates about theeffect of matters that are inherently uncertain. Critical accounting policiesdiscussed in this section are not to be confused with accounting principles andmethods disclosed in accordance with U.S. generally accepted accountingprinciples (“GAAP”).  GAAP requiresinformation in financial statements about accounting principles, methods usedand disclosures pertaining to significant estimates.  The following disclosure discusses judgmentsknown to management pertaining to trends, events or uncertainties known whichwere taken into consideration upon the application of those policies and thelikelihood that materially different amounts would be reported upon taking intoconsideration different conditions and assumptions.

 

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***Impairment and Valuation***

 

Statement of Financial Accounting Standards (“SFAS”) No. 144“Accounting for the Impairment or Disposal of Long Lived Assets,” specifiescircumstances in which certain long lived assets must be reviewed forimpairment.  If the carrying amount of anasset exceeds the sum of its expected future cash flows, the asset’s carryingvalue must be written down to fair value. In determining the value of an investment property and whether theinvestment property is impaired, management considers several factors such asprojected rental and vacancy rates, property operating expenses, capitalexpenditures and interest rates.  Thecapitalization rate used to determine property valuation is based on the marketin which the investment property is located, length of leases, tenant financialstrength, the economy in general, demographics, environment, property location,visibility, age and physical condition among others.  All of these factors are considered bymanagement in determining the value of any particular investment property.  The value of any particular investmentproperty is sensitive to the actual results of any of these factors, eitherindividually or taken as a whole.  If theactual results differ from management’s judgment, the valuation could benegatively or positively affected.

 

The merger will be accounted for using the purchase method ofaccounting in accordance with SFAS No. 141 “Business Combinations.”  NTS Realty will be treated as the purchasingentity.  The portion of each partnership’sassets and liabilities will be adjusted to reflect their fair marketvalue.  That portion owned by affiliatesof the general partners of the partnerships will be reflected at historicalcost.  The assets and liabilitiescontributed by NTS Private Group will be adjusted to reflect their fair marketvalue, except for that portion owned by J.D. Nichols which will be reflected athistorical cost due to his common control over the contributing entities.

 

In accordance with SFAS No. 141, we have allocated the purchase priceof each acquired investment property among land, building and improvements,other intangibles, including acquired above market leases, acquired belowmarket leases and acquired in place lease origination cost which is the marketcost avoidance of executing the acquired leases.  Allocation of the purchase price is an areathat requires complex judgments and significant estimates. We used theinformation contained in a third party appraisal as the primary basis forallocating the purchase price between land and buildings.  A pro rata portion of the purchase price wasallocated to the value of avoiding a lease-up period for acquired in-placeleases.  The value of in-place leases isamortized to expense over the remaining initial term of the respectiveleases.  A portion of the purchase pricewas allocated to the estimated lease origination cost based on estimated leaseexecution costs for similar leases and considered various factors includinggeographic location and size of leased space. We then evaluated acquired leases based upon current market rates at theacquisition date and various other factors including geographic location, sizeand the location of leased space within the property, tenant profile and thecredit risk of the tenant in determining whether the acquired lease is above orbelow market.  After acquired leases weredetermined to be at, above or below market, we allocated a pro rata portion ofthe purchase price to any acquired above or below market lease based upon thepresent value of the difference between the contractual lease rate and theestimated market rate.  We also consideran allocation of purchase price to in-place leases that have a customerrelationship intangible value.  Thecharacteristics we consider in allocating these values include the nature andextent of existing business relationships with the tenant, growth prospects fordeveloping new business with the tenant and the tenant’s credit quality andexpectations of lease renewals.  Wecurrently do not have tenants with whom we have developed a relationship thatwe believe has any current intangible value.

 

***Recognition of Rental Income***

 

Our commercial property leases are accounted for as operatingleases.  We accrue minimum rents on astraight-line basis over the terms of their respective leases.  We structure our leases to allow us torecover a significant portion of our property operating expenses, real estatetaxes and repairs and maintenance expenses from our tenants.  Property operating expenses typically includeutility, insurance, security, janitorial, landscaping and other administrativeexpenses.  We accrue reimbursements fromtenants for recoverable portions of all these

 

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expenses as revenue in the period the applicable expenditures areincurred.  We also receive estimatedpayments for these reimbursements from substantially all our tenants throughoutthe year.  We do this to reduce the riskof loss on uncollectible accounts once we perform the final year-end billingsfor recoverable expenditures.  Werecognize the difference between estimated recoveries and the final billedamounts in the subsequent year and we believe these differences were notmaterial in any period presented.

 

Under GAAP, we are required to recognize rental income based on theeffective monthly rent for each lease. The effective monthly rent is equal to the average monthly rent duringthe term of the lease, not the stated rent for any particular month.  The process, known as “straight lining” or“stepping” rent generally has the effect of increasing rental revenues duringthe early phases of a lease and decreasing rental revenues in the latter phasesof a lease.  Due to the impact of “straightlining,” on a historical combining basis, rental income exceeded the cashcollected for rent by approximately $119,000 and $153,000 for the nine monthsended September 30, 2004 and 2003, respectively.  If rental income calculated on a straightline basis exceeds the cash rent due under the lease, the difference isrecorded as an increase in deferred rent receivable and included as a componentof accounts receivable on the relevant balance sheet.  If the cash rent due under the lease exceedsrental income calculated on a straight line basis, the difference is recordedas a decrease in deferred rent receivable and is recorded as a decrease ofaccounts receivable on the relevant balance sheet.  We defer recognition of contingent rentalincome, such as percentage or excess rent, until the specified target thattriggers the contingent rental income is achieved.  We periodically review the collectability ofoutstanding receivables.  Allowances aregenerally taken for tenants with outstanding balances due for a period greaterthan ninety days and tenants with potentially uncollectible outstandingbalances due for a period less than ninety days.

 

***Recognition of Lease Termination Income***

 

We recognize lease termination income upon receipt of the income.  We accrue lease termination income if thereis a signed termination agreement, all of the conditions of the agreement havebeen met and the tenant is no longer occupying the property.

 

***Cost Capitalization and Depreciation Policies***

 

We review all expenditures and capitalize any item exceeding $1,000deemed to be an upgrade or a tenant improvement with an expected useful lifegreater than one year.  Land, buildingsand amenities are stated at cost. Depreciation expense is computed using the straight line method over theestimated useful lives of the assets. Buildings and improvements have estimated useful lives between 3 - 40years, land improvements have estimated useful lives between 5 - 30 years, andamenities have estimated useful lives between  3 - 40 years. Acquiredabove and below market leases are amortized on a straight line basis over thelife of the related leases as an adjustment to rental income.  Acquired in place lease origination cost isamortized over the life of the lease as a component of amortization expense.

 

***Liquidity and Capital Resources***

 

Our most liquid asset is our cash and cash equivalents, which consistof cash and short term investments, but do not include any restricted cash. Ona pro forma basis, assuming the merger and refinancing took place on September30, 2004, our cash and cash equivalents as of September 30, 2004 would havebeen approximately $15.6 million, which includes $1.5 million to be paid by NTSDevelopment Company to the partnerships as part of the settlement describedelsewhere in this quarterly report and the additional proceeds from ourrefinancing.  Operating income generatedby the properties will be the primary source from which we generate cash. Othersources of cash include the proceeds from mortgage loans and notes payable. Ourmain uses of cash will relate to capital expenditures, required payments ofmortgages and notes payable, distributions and payments of deferred fees andexpenses to NTS Development Company.  Asof September 30, 2004, NTS-Properties V, a Maryland limited partnership, andNTS-Properties VI, a Maryland limited partnership, have deferred the payment offees and expenses to NTS Development Company of

 

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approximately $709,000 and $1,103,000, respectively. Below is a chartwhich summarizes our unaudited combined cash flow from operating, investing andfinancing activities for the nine months ended September 30, 2004 and 2003.

 

***Summary Historical Combined Cash FlowInformation***

 
| ** **                          | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|
| ** **                          | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| ** **                          | ** ** | **(UNAUDITED)**                      | ** ** | **(UNAUDITED)** | ** ** |
| Cash flow from operating activities |       | $                                    | 6,931,974  |   | $ | 6,987,768 |   |
| Cash flow from investing activities |       | (1,933,242                           | )          | 3,555,465 |   |
| Cash flow from financing activities |       | (4,861,099                           | )          | (12,011,891 | ) |
|                                |       |                                 |       |   |   |
| TOTAL                               |       | $                                    | 137,633    |   | $ | (1,468,658 | ) |
|                                     |            |                                      |            |  |  |  |  |  |

 

***Cash Flow from Operating Activities***

 

Net cash provided by operating activities decreased from approximately$7.0 million for the nine months ended September 30, 2003, to approximately$6.9 million for the nine months ended September 30, 2004, primarily due to theincreased net operating loss which was negatively impacted by the costs of theongoing litigation filed by limited partners and settlement directed mergercosts.

 

***Cash Flow from Investing Activities***

 

Net cash flow used by investing activities was approximately $1.9million for the nine months ended September 30, 2004, as compared to the ninemonths ended September 30, 2003 when investing activities providedapproximately $3.6 million, primarily from the affiliate notes receivable,which was offset by capital additions.

 

***Cash Flow from Financing Activities***

 

Net cash flow used by financing activities decreased to approximately$4.9 million from $12.0 million for the nine months ended September 30, 2004and 2003, respectively, primarily due to decreased cash principal payments onmortgages and notes payable.

 

***Future Liquidity***

 

We believe the current occupancy levels are adequate to fund theoperations of our properties.  However,our future liquidity depends significantly on our properties’ occupancyremaining at a level which allows us to make debt payments and have adequateworking capital, currently and in the future. If occupancy were to fall below that level and remain at or below thatlevel for a significant period of time, our ability to make payments due underour debt agreements and to continue paying daily operational costs would begreatly impaired.  In the next twelvemonths, we intend to operate the properties in a similar manner to theiroperation in recent years.  As part ofthe merger, we intend to refinance approximately $99 million of debt assumed inthe merger at lower interest rates and on thirty-year amortization schedulesinstead of the current ten to fifteen year schedules.  We expect to incur approximately $5.8 millionof prepayment penalties as a result of this refinancing.  We expect approximately $11.9 million ofadditional proceeds from refinancing.  Webelieve that refinancing this debt will allow us to generate cash flow to paycapital expenditures, principal and interest expenses from mortgages and notespayable, deferred fees and expenses to NTS Development Company and the requiredminimum distributions to our partners, per our distribution policy.  As of September 30, 2004, NTS-Properties V, aMaryland limited partnership, and NTS-Properties VI, a Maryland limitedpartnership, have deferred the payment of fees and expenses to NTS DevelopmentCompany of approximately $709,000 and $1,103,000, respectively.

 

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We expect to incur capital expenditures of approximately $10.0 millionduring the first twelve months after the merger primarily for roof replacementsand tenant origination costs necessary to continue leasing our properties.

 

**Results of Operations**

 

This section describes our results of operations on a historicalcombined basis for the three and nine months ended September 30, 2004 and2003.  In addition, we describe our proforma adjusted results of operations for the nine months ended September 30,2004 and for the year ended December 31, 2003 which reflects certainadjustments assuming the merger took place on January 1, 2003. As of September30, 2004, we would have owned nineteen office and business centers, ninemultifamily properties, three retail properties and one ground lease. Wegenerate substantially all of our operating income from property operations.

 

***Merger/Settlement Charge***

 

NTS Realty wasformed as part of a class action settlement where its affiliate and limitedpartner ORIG has agreed to admit a “qualified settlement trust” as a specialmember of ORIG. This special member interest is being created for the benefitof the class members in the litigation who are former limited partners who soldtheir limited partnership interests to ORIG, its affiliates or the partnershipseither as part of tender offers, other repurchase programs or otherwise. Underthe terms of ORIG’s operating agreement, all of the economic and other rightsassociated with up to 620,000 Units owned by ORIG will be designated for thebenefit of the qualified settlement trust. ORIG will own the Units, but all ofthe rights associated with the Units will inure to the qualified settlementtrust. Plaintiffs’ counsel, or his designee, will have the right, acting as arepresentative of these former limited partners, to cause ORIG to vote thesedesignated Units pursuant to his direction. The amount of Units was determinedbased on the $6.2 million non-cash amount of the $6.85 million settlementamount agreed upon by the general partners and plaintiffs’ counsel. Therefore,if each Unit is valued at $10.00, then the economic and other rights associatedwith 620,000 Units will be needed to satisfy the settlement amount. The finalamount of the settlement, however, is based on the amount of valid claims filedby the former limited partners in the class of plaintiffs. If claims are notmade for the full $6.2 million settlement amount, ORIG will designate theeconomic and other rights to fewer Units for the benefit of the qualifiedsettlement trust to satisfy the claims. We refer to these designated Units asthe ‘‘Class Units.’’ Under the terms of the settlement agreement governing thequalified settlement trust, Mr. Nichols, his spouse and Mr. Lavin are jointlyobligated, for a period of two years, to repurchase from the qualifiedsettlement trust, using 75% of the distributions that ORIG receives in respectof the Units owned by ORIG which otherwise would have gone to Mr. Nichols, hisspouse or Mr. Lavin, the economic and other rights associated with the numberof Class Units calculated under the formula described below. Each payment willresult in the redesignation of rights associated with the number of Class Unitsequal to the amount of the distribution divided by 115% of the ‘‘fair marketvalue’’ of the Units. As a result of each payment, the number of Class Unitsdesignated for the benefit of the qualified settlement trust will decreaseuntil the economic and other rights associated with all of the Class Units areultimately redesignated for the benefit of Mr. Nichols, his spouse, and/or Mr.Lavin within two years of when we begin making distributions. If any ClassUnits remain at the end of this two-year period, Mr. Nichols, his spouse andMr. Lavin must make a final payment to the qualified settlement trust that issufficient to redesignate any remaining Class Units. For these purposes, fairmarket value will be equal to the average closing price of the Units on theAmerican Stock Exchange for the thirty-day period prior to the date of theredesignation.  Our Statement ofOperations will include a non-cash charge for our estimate related to thesettlement with a corresponding credit to Partners’ Equity when the criteria ofSFAS No. 5 “Accounting for Contingencies” is met.

 

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***Operations Summary***

 

The decrease in revenues in each period was caused primarily bydecreased average occupancy and decreased rents per unit at some of ourcommercial and residential properties. This decrease was partially offset by increased average occupancy at oneof our retail properties and several commercial properties.  This does not appear to be indicative of anytrend as there is always significant uncertainty relative to renewing leasesfor existing leases, re-leasing space vacated by tenants and the time requiredto locate suitable replacement tenants and the resultant opportunity cost.  The decrease in interest expense in eachperiod is directly related to the reduction of our debt balances due to thecontinued amortization of the principal balances on the debt.  The following tables offer summarizedoperating information for the three and nine months ended September 30, 2004and 2003.

 

 
| ** **                    | ** ** | **Three Months Ended September 30, 2004** | ** ** |
|-------------------------------|------------|-------------------------------------------|------------|
| ** **                    | ** ** | **Land**                                  | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Residential** | ** ** | **Non Segment** | ** ** | **Total** | ** ** |
| ** **                    | ** ** | **(UNAUDITED)**                           | ** ** |
|                          |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Revenues                      |       | $                                         | 9,276      |   | $ | 329,147 |   | $ | 4,659,971 |   | $ | 3,457,197 |   | $ | — |   | $ | 8,455,591 |   |
| Operating expenses            |       | 98                                        |       | 31,263 |   | 1,548,261 |   | 1,646,723 |   | — |   | 3,226,345 |   |
| Interest expense              |       | —                                    |       | 101,725 |   | 849,642 |   | 582,935 |   | 367,753 |   | 1,902,055 |   |
| Depreciation and amortization |       | 1,272                                     |       | 90,782 |   | 1,139,880 |   | 793,814 |   | 30,020 |   | 2,055,768 |   |
| Net income (loss)             |       | 3,711                                     |       | 74,167 |   | 476,345 |   | 34,339 |   | (1,308,806 | ) | (720,244 | ) |
|                          |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| ** **                    | ** ** | **Three Months Ended September 30, 2003** | ** ** |
| ** **                    | ** ** | **Land**                                  | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Residential** | ** ** | **Non Segment** | ** ** | **Total** | ** ** |
| ** **                    | ** ** | **(UNAUDITED)**                           | ** ** |
|                          |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Revenues                      |       | $                                         | 13,384     |   | $ | 340,358 |   | $ | 4,579,419 |   | $ | 3,542,070 |   | $ | — |   | $ | 8,475,231 |   |
| Operating expenses            |       | 461                                       |       | 24,656 |   | 1,391,960 |   | 1,477,612 |   | — |   | 2,894,689 |   |
| Interest expense              |       | —                                    |       | 112,496 |   | 913,994 |   | 402,382 |   | 586,667 |   | 2,015,539 |   |
| Depreciation and amortization |       | 1,272                                     |       | 75,043 |   | 1,098,599 |   | 785,244 |   | 36,450 |   | 1,996,608 |   |
| Net (loss) income             |       | (8,593                                    | )          | 79,581 |   | 510,803 |   | 439,408 |   | (1,268,335 | ) | (247,136 | ) |
|                          |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| ** **                    | ** ** | **Nine Months Ended September 30, 2004**  | ** ** |
| ** **                    | ** ** | **Land**                                  | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Residential** | ** ** | **Non Segment** | ** ** | **Total** | ** ** |
| ** **                    | ** ** | **(UNAUDITED)**                           | ** ** |
|                          |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Revenues                      |       | $                                         | 36,044     |   | $ | 1,006,246 |   | $ | 13,748,538 |   | $ | 10,317,364 |   | $ | — |   | $ | 25,108,192 |   |
| Operating expenses            |       | 874                                       |       | 204,924 |   | 4,441,327 |   | 4,693,430 |   | — |   | 9,340,555 |   |
| Interest expense              |       | —                                    |       | 309,937 |   | 2,589,423 |   | 1,762,881 |   | 1,079,705 |   | 5,741,946 |   |
| Depreciation and amortization |       | 3,815                                     |       | 240,881 |   | 3,406,108 |   | 2,374,251 |   | 102,919 |   | 6,127,974 |   |
| Net income (loss)             |       | 957                                       |       | 139,550 |   | 1,453,189 |   | 455,990 |   | (4,310,565 | ) | (2,260,879 | ) |
|                          |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| ** **                    | ** ** | **Nine Months Ended September 30, 2003**  | ** ** |
| ** **                    | ** ** | **Land**                                  | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Residential** | ** ** | **Non Segment** | ** ** | **Total** | ** ** |
| ** **                    | ** ** | **(UNAUDITED)**                           | ** ** |
|                          |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Revenues                      |       | $                                         | 40,153     |   | $ | 1,014,310 |   | $ | 13,696,224 |   | $ | 10,799,278 |   | $ | — |   | $ | 25,549,965 |   |
| Operating expenses            |       | 2,048                                     |       | 70,207 |   | 4,167,449 |   | 4,434,460 |   | — |   | 8,674,164 |   |
| Interest expense              |       | 238                                       |       | 343,088 |   | 2,890,078 |   | 1,212,694 |   | 1,701,120 |   | 6,147,218 |   |
| Depreciation and amortization |       | 3,815                                     |       | 218,454 |   | 4,891,426 |   | 763,167 |   | 109,350 |   | 5,986,212 |   |
| Net income (loss)             |       | 16,152                                    |       | 291,323 |   | 1,483,676 |   | 1,192,002 |   | (4,200,439 | ) | (1,217,286 | ) |

 

45

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***Rental Income and Tenant Reimbursements***

 

Rental income and tenant reimbursements for the three months endedSeptember 30, 2004 and 2003 were approximately $8,456,000 and $8,475,000,respectively.  Rental income and tenantreimbursements for the nine months ended September 30, 2004 and 2003 wereapproximately $25,108,000 and $25,550,000, respectively.  The decreases of approximately $19,000 and$442,000, or 2%, respectively, were not significant changes and are notindicative of any known trend or uncertainty. There were no offsetting material changes.

 

On a pro forma basis, rental income and tenant reimbursements for thenine months ended September 30, 2004 and the year ended December 31, 2003 wouldhave been approximately $25,247,000 and $34,404,000, respectively, whichreflects adjustments for the straight-line effect of escalating rental terms,and amortization of intangible lease costs.

 

***Operating Expenses and Operating Expenses –Affiliated***

 

Operating expenses and operating expense – affiliated for the threemonths ended September 30, 2004 and 2003 were approximately $3,226,000 and$2,895,000, respectively.  The increaseof approximately $331,000, or 11%, was primarily due to increased repairs andmaintenance expenses for the residential segments, as well as increased baddebt expense at Lakeshore Business Center Phase II.  Operating expenses and operating expenses –affiliated for the nine months ended September 30, 2004 and 2003 wereapproximately $9,341,000 and $8,674,000, respectively.  The increase of approximately $667,000, or8%, was primarily due to increased bad debt expense at NTS Outlets Mall due tothe tenant declaring bankruptcy during February 2004.

 

On a pro forma basis operating expenses and operating expenses –affiliated for the nine months ended September 30, 2004 and the year endedDecember 31, 2003 would have been approximately $9,341,000 and $11,409,000,respectively.  No pro forma adjustmentswere made.

 

Operating expenses – affiliated are for the services performed byemployees of NTS Development Company, an affiliate of our General Partner.  These employee services include propertymanagement, leasing, maintenance, security and other services necessary tomanage and operate our business.

 

***Real Estate Taxes***

 

Real estate taxes for the three months ended September 30, 2004 and2003 were approximately $608,000 and $571,000, respectively.  The increase of approximately $37,000, or 6%,was primarily the result of increased tax assessments for Lakeshore BusinessCenter Phases I, II and III.  Real estatetaxes for the nine months ended September 30, 2004 and 2003 were approximately$1,533,000 and $1,898,000, respectively. The decrease of approximately $365,000, or 19%, in 2004 was primarilydue to decreased tax assessments at Willow Lake Apartments.  We received notice of the increasedassessments in early 2003 and retained a consultant to negotiate a reduction ofthe assessments.  During the ensuing timeperiod, the general partners decided to accrue property tax expense accordingto the assessed rate and not at the anticipated reduced rate.  During the first quarter of 2004, the generalpartners received notice of the reduction of the assessments and were able toadjust the periodic expense accordingly. The general partners have not recorded a gain contingency for anyproperty tax over-payments that are expected to be refunded in 2004.

 

***Professional and Administrative Expenses andProfessional and Administrative Expenses - Affiliated***

 

Our professional and administrative expenses and professional andadministrative expenses – affiliated for the three and nine months endedSeptember 30, 2004 were approximately $930,000 and $3,270,000, respectively, ascompared to approximately $743,000 and $2,497,000, respectively, for the sameperiods in 2003.  The

 

46

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increases of approximately $187,000, or 25%, and $773,000, or 31%,respectively, were primarily the result of increased legal and professionalfees related to the litigation filed by limited partners and settlementdirected merger.  Professional andadministrative expenses for the nine months ended September 30, 2004 includedapproximately $1,412,000 and $602,000 of merger and litigation expenses,respectively.  Professional andadministrative expenses for the nine months ended September 30, 2003 includedapproximately $440,000 and $493,000 of merger and litigation expenses,respectively.

 

On a pro forma basis our professional and administrative expenses andprofessional and administrative expenses – affiliated would have beenapproximately $3,601,000 for the nine months ended September 30, 2004, and$3,958,000 for the year ending December 31, 2003, which includes adjustments ofapproximately $330,000 and $441,000, respectively, which represents additionalcosts of listing our Units on the AMEX and other costs of being public, such asdirectors’ fees, directors and officers’ insurance and investor communications,as well as additional personnel and overhead costs.

 

Professional and administrative expenses – affiliated are for theservices performed by employees of NTS Development Company, an affiliate of ourgeneral partners.  These employeeservices include legal, financial and other services necessary to manage andoperate our business.

 

Professional and administrative expenses – affiliated consisted of thefollowing for the periods presented:

 
| ** **         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **         | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|               |       |                                  |       |                                 |       |   |   |   |   |
| Finance            |       | $                                     | 78,000     |                                 | $          | 46,000 |   | $ | 230,000 |   | $ | 180,000 |   |
| Accounting         |       | 140,000                               |       | 111,000                              |       | 374,000 |   | 313,000 |   |
| Investor Relations |       | 36,000                                |       | 36,000                               |       | 102,000 |   | 118,000 |   |
| Human Resources    |       | 19,000                                |       | 19,000                               |       | 54,000 |   | 56,000 |   |
| Overhead           |       | 25,000                                |       | 28,000                               |       | 76,000 |   | 84,000 |   |
|               |       |                                  |       |                                 |       |   |   |   |   |
| Total              |       | $                                     | 298,000    |                                 | $          | 240,000 |   | $ | 836,000 |   | $ | 751,000 |   |
|                    |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |

 

***Depreciation and Amortization Expenses***

 

Our depreciation and amortization expenses for the three and ninemonths ended September 30, 2004 were approximately $2,056,000 and $6,128,000,respectively, as compared to approximately $1,997,000 and $5,986,000 for thesame periods in 2003.  The increases ofapproximately $59,000, or 3%, and $142,000, or 2%, respectively, were notsignificant and are not indicative of any known trend or uncertainty.  There were no material offsetting changes.

 

On a pro forma basis our depreciation and amortization expenses wouldhave been approximately $7,830,000 for the nine months ended September 30,2004, and $11,415,000 for the year ending December 31, 2003, which includesadjustments of approximately $1,702,000 and $3,409,000, respectively to reflectour estimate of depreciation and amortization expense for our properties as ifwe owned them from January 1, 2003.

 

47

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**Contractual Obligations and CommercialCommitments**

 

The following table represents our obligationsand commitments to make future payments as of December 31, 2003 undercontracts, such as debt and lease agreements, and under contingent commitments,such as debt guarantees.

 

 
| ** **                         | ** ** | **Payment Due by Period** | ** **  |
|------------------------------------|------------|---------------------------|-------------|
| ** **                         | ** ** | ** **                | ** **  | **Within One** | ** ** | **One - Three** | ** ** | **Three - Five** | ** ** | **After 5** | ** ** |
| **Contractual Obligations**        | ** ** | **Total**                 | ** **  | **Year** | ** ** | **Years** | ** ** | **Years** | ** ** | **Years** | ** ** |
| Mortgages and notes payable        |       | $                         | 109,258,373 |   | $ | 12,402,096 |   | $ | 30,924,031 |   | $ | 29,590,020 |   | $ | 36,342,226 |   |
|                               |       |                      |        |   |   |   |   |   |   |   |   |
| Capital lease obligations (1)      |       | $                         | 7,441       |   | $ | 7,441 |   | $ | — |   | $ | — |   | $ | — |   |
|                               |       |                      |        |   |   |   |   |   |   |   |   |
| Operating leases (2)               |       | $                         | —      |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                               |       |                      |        |   |   |   |   |   |   |   |   |
| Other long-term obligations (3)    |       | $                         | —      |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                               |       |                      |        |   |   |   |   |   |   |   |   |
| Total contractual cash obligations |       | $                         | 109,265,814 |   | $ | 12,409,537 |   | $ | 30,924,031 |   | $ | 29,590,020 |   | $ | 36,342,226 |   |

 

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(1)          Thelease is for six golf carts purchased for Willow Lake Apartments, Park PlaceApartments and The Willows of Plainview Apartments (two golf carts each).

(2)          Weare party to numerous small operating leases for office equipment such ascopiers, postage machines and fax machines, which represent an insignificantobligation.

(3)          Weare party to several annual maintenance agreements with vendors for such itemsas outdoor maintenance, pool service and security systems, which represent aninsignificant obligation.

 
| ** **                               | ** ** | **Total**     | ** ** | **Amount of Commitment Expiration Per Period** | ** ** |
|------------------------------------------|------------|---------------|------------|------------------------------------------------|------------|
| **Other Commercial**                     | ** ** | **Amounts**   | ** ** | **Within One**                                 | ** ** | **One - Three** | ** ** | **Three - Five** | ** ** | **After 5** | ** ** |
| **Commitments**                          | ** ** | **Committed** | ** ** | **Year**                                       | ** ** | **Years** | ** ** | **Years** | ** ** | **Years** | ** ** |
| Line of credit                           |       | $             | —     |                                           | $          | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                     |       |          |       |                                           |       |   |   |   |   |   |   |
| Standby letters of credit and guarantees |       | $             | —     |                                           | $          | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                     |       |          |       |                                           |       |   |   |   |   |   |   |
| Other commercial commitments (1)         |       | $             | —     |                                           | $          | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                     |       |          |       |                                           |       |   |   |   |   |   |   |
| Total commercial commitments             |       | $             | —     |                                           | $          | — |   | $ | — |   | $ | — |   | $ | — |   |

 

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(1)          We donot, as a practice, enter into long term purchase commitments for commoditiesor services.  We may from time to timeagree to “fee for service arrangements” which are for a term of greater thanone year.

 

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**THE NTS PRIVATE GROUP**

 

This section provides the Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (“MD&A”) for the NTS PrivateGroup.  The NTS Private Group, referredto in this MD&A as “us,” “we,” or “our,” as the context requires, is atheoretical combined entity which combines a group of partnerships and passthrough entities under common ownership and control of Mr. J.D. Nichols.  All of the partnerships and pass throughentities which together represent the NTS Private Group, will either merge withand into ORIG or will contribute all of its assets and liabilities to ORIG aspart of the proposed merger between the five public partnerships.

 

The following discussion is based primarily on the Combined FinancialStatements of NTS Private Group as of and for the three and nine months endedSeptember 30, 2004 and 2003.  First, wediscuss the critical accounting policies that impact the treatment of certainitems for financial purposes, such as how we recognize rental income anddepreciate our assets.  Next, we discussthe balance sheets and statements of cash flows and how the changes in balancesheet and cash flow items from year to year impact our liquidity and capitalresources.  Finally, we discuss resultsof operations, including changes in net income from period to period.

 

## **Private Group Entities and Properties**

## ** **

The following entities together constitute theNTS Private Group.

 

*NTS Atrium Center*

 

NTS Atrium Center is a Kentucky limited partnership which owns AtriumCenter.  Atrium Center is a commercialoffice center with approximately 104,200 square feet located in Louisville,Kentucky.

 

*NTS BBC I*

 

NTS BBC is a Kentucky limited partnership which owns BlankenbakerBusiness Center IB and Blankenbaker Business Center II.  Blankenbaker Business Center IB andBlankenbaker Business Center II are business centers located in Louisville,Kentucky with approximately 60,000 and 74,700 square feet, respectively.

 

*NTS/BBX Office Acquisition LLC*

 

NTS/BBX Office Acquisition is a Kentucky limited liability company whichowns Anthem Office Center.  Anthem OfficeCenter is a commercial office center with approximately 84,700 square feetlocated in Louisville, Kentucky.

 

*NTS BluegrassCommonwealth Park LTD.*

 

NTS Bluegrass is a Kentucky limited partnership which owns ClarkeAmerican.  Clarke American is a businesscenter with approximately 50,000 net rentable square feet located inLouisville, Kentucky.

 

*NTS Breckinridge,LTD.*

 

NTS Breckinridge is a Kentucky limited partnership with a joint ventureownership interest in an approximate 35,000 square foot retail property locatedin Louisville, Kentucky, leased to Bed, Bath & Beyond.  NTS Breckinridge owns Springs Station, aretail center with approximately 12,000 square feet located in Louisville,Kentucky.

 

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*NTS Mall Limited Partnership*

 

NTS Mall Limited Partnership is a Kentucky limited partnership whichowns Outlets Mall.  Outlets Mall is aretail center with approximately 162,600 square feet located in Louisville,Kentucky.

 

*NTS Pickford, LTD.*

 

NTS Pickford, LTD is a Kentucky limited partnership which owns SearsOffice Building.  Sears Office Buildingis an office building with approximately 66,900 square feet located inLouisville, Kentucky.

 

*NTS Springs Medical Office Center, LTD*

 

NTS Springs Medical Office Center is a Kentucky limited partnershipwhich owns Springs Medical Office Center Phase I.  Springs Medical Office Center Phase I is amedical office complex with approximately 97,400 square feet located inLouisville, Kentucky.

 

*NTS Springs Office LTD*

 

NTS Springs Office is a Kentucky limited partnership which owns SpringsOffice Center.  Springs Office Center isan office center with approximately 125,300 square feet located in Louisville,Kentucky.

 

*NTS Whetstone Limited Partnership*

 

NTS Whetstone is a Kentucky limited partnership which owns ITT ParkingLot.  ITT Parking Lot is a ground leaserelating to a 120-space parking lot located in Louisville, Kentucky and leasedto ITT Educational Services, Inc.

 

*NTS Willow Lake Partners Limited Partnership*

 

NTS Willow Lake is an Indiana limited partnership with a joint ventureownership interest in an approximate 35,000 square foot retail property locatedin Louisville, Kentucky, leased to Bed, Bath & Beyond.

 

## **Critical Accounting Policies**

## ** **

***General***

 

A critical accounting policy is one that would materially affect ouroperations or financial condition, and requires management to make estimates orjudgments in certain circumstances. These judgments often result from the needto make estimates about the effect of matters that are inherently uncertain.Critical accounting policies discussed in this section are not to be confusedwith accounting principles and methods disclosed in accordance with U.S.generally accepted accounting principles (“GAAP”). GAAP requires information infinancial statements about accounting principles, methods used and disclosurespertaining to significant estimates. The following disclosure discussesjudgments known to management pertaining to trends, events or uncertaintiesknown which were taken into consideration upon the application of thosepolicies and the likelihood that materially different amounts would be reportedupon taking into consideration different conditions and assumptions.

 

50

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***Impairment and Valuation***

 

Statement of Financial Accounting Standards No. 144 “Accounting for theImpairment or Disposal of Long-Lived Assets,” specifies circumstances in whichcertain long-lived assets must be reviewed for impairment.  If the carrying amount of an asset exceedsthe sum of its expected future cash flows, the asset’s carrying value must bewritten down to fair value.  Indetermining the value of an investment property and whether the investmentproperty is impaired, management considers several factors such as projectedrental and vacancy rates, property operating expenses, capital expenditures andinterest rates.  The capitalization rateused to determine property valuation is based on the market in which theinvestment property is located, length of leases, tenant financial strength,the economy in general, demographics, environment, property location,visibility, age and physical condition among others.  All of the aforementioned factors areconsidered by management in determining the value of any particular investmentproperty.  The value of any particularinvestment property is sensitive to the actual results of any of theseuncertain factors, either individually or taken as a whole.  If the actual results differ frommanagement’s judgment, the valuation could be negatively or positivelyaffected. For the nine months ended September 30, 2004 and 2003, we have notrecognized an impairment loss on our properties.

 

***Recognition of Rental Income***

 

Our commercial property leases are accounted for as operatingleases.  We accrue minimum rents on astraight-line basis over the terms of their respective leases.  We structure our leases to allow us to recovera significant portion of our property operating expenses, real estate taxes andrepairs and maintenance expenses from our tenants.  Property operating expenses typically includeutility, insurance, security, janitorial, landscaping and other administrativeexpenses.  We accrue reimbursements fromtenants for recoverable portions of all these expenses as revenue in the periodthe applicable expenditures are incurred. We also receive estimated payments for these reimbursements fromsubstantially all our tenants throughout the year.  We do this to reduce the risk of loss onuncollectible accounts once we perform the final year-end billings forrecoverable expenditures.  We recognizethe difference between estimated recoveries and the final billed amounts in thesubsequent year and we believe these differences were not material in anyperiod presented.

 

Under GAAP, we are required to recognize rental income based on theeffective monthly rent for each lease. The effective monthly rent is equal to the average monthly rent duringthe term of the lease, not the stated rent for any particular month.  The process, known as “straight-lining” or“stepping” rent generally has the effect of increasing rental revenues duringthe early phases of a lease and decreasing rental revenues in the latter phasesof a lease.  Due to the impact of“straight-lining,” the cash collected for rent exceeded rental income byapproximately $101,000 and $38,000 for the nine months ended September 30, 2004and 2003, respectively.  If rental incomecalculated on a straight-line basis exceeds the cash rent due under the lease,the difference is recorded as an increase in deferred rent receivable andincluded as a component of accounts receivable on the relevant balance sheets.  If the cash rent due under the lease exceedsrental income calculated on a straight-line basis, the difference is recordedas a decrease in deferred rent receivable and is recorded as a decrease ofaccounts receivable on the relevant balance sheet.  We defer recognition of contingent rentalincome, such as percentage or excess rent, until the specified target thattriggers the contingent rental income is achieved.  We periodically review the collectability ofoutstanding receivables.  Allowances aregenerally taken for tenants with outstanding balances due for a period greaterthan ninety days and tenants with potentially uncollectible outstandingbalances due for a period less than ninety days.

 

51

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***Recognition of Lease Termination Income***

 

We recognize lease termination income upon receipt of the income.  We accrue lease termination income if thereis a signed termination agreement, all of the conditions of the agreement havebeen met and the tenant is no longer occupying the property.

 

***Cost Capitalization and Depreciation Policies***

 

We review all expenditures and capitalize any item exceeding $1,000deemed to be an upgrade or a tenant improvement with an expected useful lifegreater than one year.  Land, buildingsand amenities are stated at cost. Depreciation expense is computed using the straight-line method over theestimated useful lives of the assets. Buildings and improvements have estimated useful lives between 5-40years, land improvements have estimated useful lives between 7-30 years, andamenities have estimated useful lives between 5-40 years.

 

***Liquidity and Capital Resources***

 

This section describes our balance sheet and discusses our liquidityand capital commitments.  Our most liquidasset is our cash and cash equivalents which consists of cash and short-terminvestments, but does not include our cash which is restricted.  Our historical cash and cash equivalents asof the nine months ended September 30, 2004 was $807,649.  Operating income generated from our propertiesis the primary source from which we generate cash.  Other sources of cash include proceeds frommortgage loans and notes payable.  Belowis a chart which reflects our cash flow from operating, investing and financingactivities for the nine months ended September 30, 2004 and 2003, followed by acomparison of the respective periods.

 

***Summary Historical Combined Cash FlowInformation***

 

 
| ** **                          | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|
| ** **                          | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| ** **                          | ** ** | **(UNAUDITED)**                      | ** ** | **(UNAUDITED)** | ** ** |
| Cash flow from operating activities |       | $                                    | 2,647,036  |   | $ | 2,658,736 |   |
| Cash flow from investing activities |       | (796,885                             | )          | 5,608,867 |   |
| Cash flow from financing activities |       | (1,482,551                           | )          | (8,542,323 | ) |
|                                |       |                                 |       |   |   |
| TOTAL                               |       | $                                    | 367,600    |   | $ | (274,720 | ) |

 

***Cash Flows from Operating Activities***

 

Net cash provided by operating activities decreased from approximately$2,659,000 for the nine months ended September 30, 2003 to approximately$2,647,000 for the nine months ended September 30, 2004.  The decrease is due, among other things, tothe increased cash used to reduce amounts owed to our vendors included inaccounts payable and other liabilities, as well as increased accountsreceivable.

 

***Cash Flows from Investing Activities***

 

Net cash provided by investing activities was approximately $5,609,000for the nine months ended September 30, 2003. For the nine months ended September 30, 2004, we used approximately$(797,000) in net cash for investing activities.  The decrease in net cash used was primarilydue to a decrease in notes receivable from affiliates as a result of thereceivables being paid in their entirety from NTS Financial Partnership onSeptember 30, 2003.

 

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***Cash Flows from Financing Activities***

 

Net cash used in financing activities decreased from approximately$8,542,000 for the nine months ended September 30, 2003 to approximately$1,483,000 for the nine months ended September 30, 2004.  The decrease in net cash used was primarilydue to cash distributions and a decrease in notes payable-affiliate as a resultof the notes being paid in their entirety to NTS Financial Partnership onSeptember 30, 2003.  The increase ispartially offset by cash contributions.

 

***Future Liquidity***

 

On June 30, 2003, the notes receivable-affiliate of approximately$6,161,000 for the year ended December 31, 2002 was paid in its entirety by NTSFinancial Partnership.  In the sametransaction we paid the notes payable-affiliate in its entirety owed to NTSFinancial Partnership of approximately $6,665,000 for the year ended December31, 2002.  As a result of thesimultaneous transactions, we paid the difference of approximately $500,000 incash to NTS Financial Partnership.

 

We believe the current occupancy levels are adequate to fund theoperations of our properties.  However,our future liquidity depends significantly on our properties’ occupancyremaining at a level which provides for debt payments and adequate workingcapital, currently and in the future.  Ifoccupancy were to fall below that level and remain at or below that level for asignificant period of time, our ability to make payments due under our debtagreements and to continue paying daily operational costs would be greatlyimpaired.

 

**Results of Operations**

 

Below is a discussion of our results from operations for the three andnine months ended September 30, 2004 and 2003.

 

This section describes our results from operations for the three andnine months ended September 30, 2004 as compared to the three and nine monthsended September 30, 2003.  As ofSeptember 30, 2004, we owned three retail properties, eight commercialproperties and operated a land lease.  Wegenerate almost all of our operating income from property operations.  In order to evaluate our overall portfolio,management analyzes the operating performance of the properties based onoperating segments, which include retail operations, commercial real estateoperations and land leases.  Thefinancial information of the operating segments have been prepared in a mannerwhich is consistent with the basis and manner in which our managementinternally disaggregates financial information for the purpose of decisionmaking.

 

Net income for the three and nine months ended September 30, 2004 wasapproximately $294,000 and $672,000, respectively, as compared to $284,000 and$732,000, respectively, for the three and nine months ended September 30,2003.  The changes in net income aredescribed in more detail below.  Thefollowing tables include certain selected summarized operating data for thethree and nine months ended September 30, 2004 and 2003.  This data should be read in conjunction withour financial statements, including the notes attached hereto.

 
| ** **                                                   | ** ** | **Three Months Ended September 30, 2004** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                   | ** ** | **Land**                                  | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Total** | ** ** |
| ** **                                                   | ** ** | **(UNAUDITED)**                           | ** ** |
| Total revenues                                               |       | $                                         | 9,276      |   | $ | 329,147 |   | $ | 1,967,351 |   | $ | 2,305,774 |   |
| Operating expenses and operating expenses –  affiliated |       | 98                                        |       | 31,263 |   | 567,823 |   | 599,184 |   |
| Depreciation and amortization                                |       | 1,272                                     |       | 90,782 |   | 410,293 |   | 502,347 |   |
| Total interest expense                                       |       | —                                    |       | 101,725 |   | 553,735 |   | 655,460 |   |
| Net income                                                   |       | 3,711                                     |       | 74,167 |   | 215,863 |   | 293,741 |   |
|                                                              |            |                                           |            |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                                   | ** ** | **Three Months Ended September 30, 2003** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                   | ** ** | **Land**                                  | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Total** | ** ** |
| ** **                                                   | ** ** | **(UNAUDITED)**                           | ** ** |
| Total revenues                                               |       | $                                         | 13,384     |   | $ | 340,358 |   | $ | 2,013,304 |   | $ | 2,367,046 |   |
| Operating expenses and operating expenses –  affiliated |       | 461                                       |       | 24,656 |   | 528,769 |   | 553,886 |   |
| Depreciation and amortization                                |       | 1,272                                     |       | 75,043 |   | 404,907 |   | 481,222 |   |
| Total interest expense                                       |       | —                                    |       | 112,496 |   | 599,589 |   | 712,085 |   |
| Net (loss) income                                            |       | (8,593                                    | )          | 79,581 |   | 212,970 |   | 283,958 |   |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| ** **                                                   | ** ** | **Nine Months Ended September 30, 2004**  | ** ** |
| ** **                                                   | ** ** | **Land**                                  | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Total** | ** ** |
| ** **                                                   | ** ** | **(UNAUDITED)**                           | ** ** |
| Total revenues                                               |       | $                                         | 36,044     |   | $ | 1,006,246 |   | $ | 5,847,277 |   | $ | 6,889,567 |   |
| Operating expenses and operating expenses –  affiliated |       | 874                                       |       | 204,924 |   | 1,641,301 |   | 1,847,099 |   |
| Depreciation and amortization                                |       | 3,815                                     |       | 240,881 |   | 1,257,386 |   | 1,502,082 |   |
| Total interest expense                                       |       | —                                    |       | 309,937 |   | 1,683,173 |   | 1,993,110 |   |
| Net income                                                   |       | 957                                       |       | 139,550 |   | 531,974 |   | 672,481 |   |
|                                                         |       |                                      |       |   |   |   |   |   |   |
| ** **                                                   | ** ** | **Nine Months Ended September 30, 2004**  | ** ** |
| ** **                                                   | ** ** | **Land**                                  | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Total** | ** ** |
| ** **                                                   | ** ** | **(UNAUDITED)**                           | ** ** |
| Total revenues                                               |       | $                                         | 40,153     |   | $ | 1,014,310 |   | $ | 5,823,656 |   | $ | 6,878,119 |   |
| Operating expenses and operating expenses –  affiliated |       | 2,048                                     |       | 70,207 |   | 1,524,608 |   | 1,596,863 |   |
| Depreciation and amortization                                |       | 3,815                                     |       | 218,454 |   | 1,210,507 |   | 1,432,776 |   |
| Total interest expense                                       |       | 238                                       |       | 343,088 |   | 1,906,294 |   | 2,249,620 |   |
| Net income                                                   |       | 16,152                                    |       | 291,323 |   | 424,950 |   | 732,425 |   |

 

 

During the nine months ended September 30, 2004 compared to the ninemonths ended September 30, 2003, our total revenues did not changesignificantly. Increased operating expenses and depreciation and amortization,partially offset by decreased interest expense negatively affected our netincome.

 

Rental and lease income generated by our properties for the nine monthsended September 30, 2004 and 2003 were as follows:

 

Rental and Lease Income

 
| **Properties**                        | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|---------------------------------------|------------|-----------|------------|-----------|------------|
| Anthem Office Center                  |       | $         | 608,019    |      | $          | 608,019 |   |
| Atrium Center                         |       | 519,173   |       | 800,932   |       |
| Sears Office Building                 |       | 581,074   |       | 568,175   |       |
| Springs Medical Office Center Phase I |       | 1,275,016 |       | 1,158,486 |       |
| Springs Office Center                 |       | 1,542,775 |       | 1,307,767 |       |
| Blankenbaker Business Center IB       |       | 433,265   |       | 433,265   |       |
| Blankenbaker Business Center II       |       | 478,880   |       | 541,290   |       |
| Clarke American                       |       | 409,075   |       | 405,722   |       |
| Bed, Bath & Beyond                |       | 300,969   |       | 325,864   |       |
| NTS Outlet Mall                       |       | 500,179   |       | 497,129   |       |
| Springs Station                       |       | 205,098   |       | 191,317   |       |
| ITT Parking Lot                       |       | 36,044    |       | 40,153    |       |
|                                  |       |      |       |      |       |
| TOTAL                                 |       | $         | 6,889,567  |      | $          | 6,878,119 |   |

 

54

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The average occupancy levels at our properties for the nine monthsended September 30, 2004 and 2003 were as follows:

 

OccupancyLevels

 
| **Properties**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Anthem Office Center                  |       | 100      | %          | 100      | %          |
| Atrium Center                         |       | 51       | %          | 67       | %          |
| Sears Office Building                 |       | 100      | %          | 100      | %          |
| Springs Medical Office Center Phase I |       | 94       | %          | 90       | %          |
| Springs Office Center                 |       | 97       | %          | 88       | %          |
| Blankenbaker Business Center IB       |       | 100      | %          | 100      | %          |
| Blankenbaker Business Center II       |       | 79       | %          | 90       | %          |
| Clarke American                       |       | 100      | %          | 100      | %          |
| Bed, Bath & Beyond                |       | 100      | %          | 100      | %          |
| NTS Outlet Mall                       |       | 100      | %          | 100      | %          |
| Springs Station                       |       | 98       | %          | 93       | %          |
| ITT Parking Lot                       |       | 100      | %          | 100      | %          |

 

We believe the changes in occupancy on September 30, from year to year,are temporary effects of each property’s specific mix of lease maturities andare not indicative of any known trend.

 

We are making efforts to increase our occupancy levels at ourproperties.  The leasing and renewalnegotiations are conducted by leasing agents, who are employees of NTSDevelopment Company, located in Louisville, Kentucky.  The leasing agents are located in the samecity as the property.  All advertising iscoordinated by NTS Development Company’s marketing staff located in Louisville,Kentucky.  The staff facilitates allon-site visits from potential tenants, negotiates lease renewals with currenttenants and coordinates all local advertising with NTS Development Company’smarketing staff.

 

The following discussion relating to changes in our results ofoperations includes only those line items within our Statements of Operationsfor which there was a material change between the three and nine months endedSeptember 30, 2004 and 2003.

 

***Rental Income and Tenant Reimbursements***

 

Rental income and tenant reimbursements for the three months endedSeptember 30, 2004 and 2003 were approximately $2,306,000 and $2,367,000,respectively.  The decrease ofapproximately $61,000, or 3%, was primarily a result of decreased averageoccupancy at Blankenbaker Business Center II, Springs Station and Atrium Center.  The decrease is partially offset by increasedaverage occupancy at Springs Medical I and Springs Office.  Rental income and tenant reimbursements forthe nine months ended September 30, 2004 and 2003 were approximately $6,890,000and $6,878,000, respectively.  Theincrease of approximately $12,000 was primarily a result of increased averageoccupancy at Springs Office Center, Springs Medical Office Center Phase I,Sears Office and Springs Station.  Theincrease is partially offset by decreased average occupancy at Atrium OfficeCenter and Blankenbaker Business Center II.

 

***Operating Expenses and Operating Expenses –Affiliated***

 

Operating expenses for the three months ended September 30, 2004 and2003 were approximately $424,000 and $406,000, respectively.  The increase of approximately $18,000, or 4%,was not a significant change and is not indicative of any known trend oruncertainty.  There were no offsettingmaterial changes.  Operating expenses forthe nine months ended September 30, 2004 and 2003 were approximately $1,285,000and $1,108,000, respectively.  Theincrease of approximately $177,000, or 16%, was primarily due to increased baddebt expense at NTS Outlet Mall due to the tenant declaring bankruptcy duringFebruary 2004.

 

55

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Operating expenses – affiliated for the three and nine months endedSeptember 30, 2004 were approximately $175,000 and $562,000, respectively, ascompared to approximately $148,000 and $489,000 for the same periods in2003.  The increases of approximately$27,000, or 18%, and $73,000, or 15%, were primarily due to increased personnelcosts.

 

Operating expenses – affiliated are for services performed by employeesof NTS Development Company.  Theseemployee services include property management, leasing, maintenance, securityand other services necessary to manage and operate our business.

 

***Professional and Administrative Expenses***

 

Professional and administrative expenses for the three months endedSeptember 30, 2004 and 2003, were approximately $16,000 and $91,000,respectively.  Professional andadministrative expenses for the nine months ended September 30, 2004 and 2003,were approximately $132,000 and $91,000, respectively.  The changes were the result of costs incurredfor legal and professional fees related to our proposed merger.

 

***Depreciation and Amortization***

 

Depreciation and amortization expenses were approximately $502,000 and$1,502,000 for the three and nine months ended September 30, 2004,respectively, as compared to approximately $481,000 and $1,433,000 for the sameperiods in 2003.  The increases wereprimarily the result of assets being placed in service.  Assets placed in service were tenantimprovements at Spring Office Center, Springs Medical Office Center Phase I,Springs Station, Blankenbaker Business Center II and Atrium Center, buildingimprovements at Springs Medical Office Center Phase I, Springs Station, SearsOffice Building and Blankenbaker Business Center IB and furniture, fixtures andequipment at Springs Office Center, Blankenbaker Business Center II and AtriumCenter.  The increase is partially offsetby assets (primarily land and building improvements at Atrium Center and tenantfinish at Springs Medical Office Center Phase I) becoming fully depreciated.

 

***Interest Income – Affiliated***

 

Interest income from affiliates decreased approximately $54,000 for thenine months ended September 30, 2004, as compared to the same period in 2003,as a result of the notes being paid in their entirety by NTS FinancialPartnership on June 30, 2003.

 

***Interest Expense***

 

Interest expense was approximately $655,000 and $1,993,000 for thethree and nine months ended September 30, 2004, respectively, as compared toapproximately $712,000 and $2,180,000 for the same periods in 2003.   The decreases are primarily due to decreasedprincipal balances as a result of continued principal payments.

 

***Interest Expense – Affiliated***

 

Interest expense paid to affiliates decreased approximately $70,000 forthe nine months ended September 30, 2004, as compared to the same period in2003, as a result of the notes being paid in their entirety to NTS FinancialPartnership on June 30, 2003.

 

56

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***Loss on Disposal of Assets***

 

The loss on disposal of assets for the nine months ended September 30,2004 was primarily due to the retirement of the roof which was not fullydepreciated at Blankenbaker Business Center IB. The loss on disposal of assets for the nine months ended September 30,2003 was primarily due to the retirements of assets (primarily tenant finish)not fully depreciated at Springs Office Center.

 

**Contractual Obligations and CommercialCommitments**

 

The following table represents ourobligations and commitments to make future payments as of December 31, 2003under contracts, such as debt and lease agreements, and under contingentcommitments, such as debt guarantees.

 
| ** **                               | ** ** | **Payment Due by Period** | ** ** |
|------------------------------------------|------------|---------------------------|------------|
| ** **                               | ** ** | ** **                | ** ** | **Within One** | ** ** | **One - Three** | ** ** | **Three - Five** | ** ** | **After 5** | ** ** |
| **Contractual Obligations**              | ** ** | **Total**                 | ** ** | **Year** | ** ** | **Years** | ** ** | **Years** | ** ** | **Years** | ** ** |
| Mortgages and notes payable              |       | $                         | 36,599,920 |   | $ | 5,470,243 |   | $ | 5,077,595 |   | $ | 17,597,412 |   | $ | 8,454,670 |   |
|                                     |       |                      |       |   |   |   |   |   |   |   |   |
| Capital lease obligations                |       | $                         | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                     |       |                      |       |   |   |   |   |   |   |   |   |
| Operating leases                         |       | $                         | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                     |       |                      |       |   |   |   |   |   |   |   |   |
| Other long-term obligations              |       | $                         | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                     |       |                      |       |   |   |   |   |   |   |   |   |
| Total contractual cash obligations       |       | $                         | 36,599,920 |   | $ | 5,470,243 |   | $ | 5,077,595 |   | $ | 17,597,412 |   | $ | 8,454,670 |   |
|                                     |       |                      |       |   |   |   |   |   |   |   |   |
| ** **                               | ** ** | ** **                | ** ** | **Amount  of Commitment Expiration Per Period** | ** ** |
| ** **                               | ** ** | **Total**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  Commercial**                    | ** ** | **Amounts**               | ** ** | **Within  One** | ** ** | **One -  Three** | ** ** | **Three -  Five** | ** ** | **After 5** | ** ** |
| **Commitments**                          | ** ** | **Committed**             | ** ** | **Year** | ** ** | **Years** | ** ** | **Years** | ** ** | **Years** | ** ** |
| Line of credit                           |       | $                         | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                     |       |                      |       |   |   |   |   |   |   |   |   |
| Standby letters of credit and guarantees |       | $                         | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                     |       |                      |       |   |   |   |   |   |   |   |   |
| Other commercial commitments             |       | $                         | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                     |       |                      |       |   |   |   |   |   |   |   |   |
| Total commercial commitments             |       | $                         | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |

 

57

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## **Item 3** -Quantitative and Qualitative Disclosures About Market Risk

## ** **

## **Our primarymarket risk exposure with regard to financial instruments is expected to be ourexposure to changes in interest rates. We expect to refinance substantially all of our debt to be acquired atthe time of our merger with instruments which bear interest at a fixed ratewith the exception of an approximately $14 million mortgage.  We anticipate that a hypothetical 100 basispoint increase in interest rates would result in an approximate $10.6 milliondecrease in the fair value of our fixed rate debt while increasing interestexpense on our variable rate debt by approximately $140,000 annually.**

 

## **Item 4** -Controls and Procedures

 

**Evaluation of Disclosure Controls andProcedures**

 

The Companythrough the management of its general partner, NTS Realty Capital, Inc., withthe participation of the chief executive officer and chief financial officer ofNTS Realty Capital, has evaluated the effectiveness of the Company’sdisclosures and procedures (as such is defined in Rules 13a-15(e) and 15d-15(e)under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) asof the end of the period covered by this report.  Based on such evaluation, the chief executiveofficer and chief financial officer have concluded that, as of the end of suchperiod, the Company’s disclosure and procedures are effective.

 

**Changes in Internal Controls**

** **

There have notbeen any changes in the Company’s internal control over financial reporting (assuch term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)during the fiscal quarter to which this report relates that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

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**PART II****- OTHER INFORMATION**

 

**Item 1 - LegalProceedings**

 

On May 6, 2004, the Superior Court of the State of California for theCounty of Contra Costa granted its final approval of the Stipulation andAgreement of Settlement (the “Settlement Agreement”) jointly filed by thegeneral partners (the “General Partners”) of NTS-Properties III, NTS-PropertiesIV, NTS-Properties V, NTS-Properties VI and NTS-Properties VII, Ltd. (the“Partnerships”), along with certain of their affiliates, with the class ofplaintiffs in the action originally captioned *Buchanan,et al. v. NTS-Properties Associates, et al.* (Case No. C 01-05090) onDecember 5, 2003.  At the final hearing, any member of the class ofplaintiffs was given the opportunity to object to the final approval of theSettlement Agreement, the entry of a final judgment dismissing with prejudicethe *Buchanan* litigation, or anapplication of an award for attorneys’ fees and expenses to plaintiffs’counsel. The Superior Court’s order provides, among other things, that:(1) the Settlement Agreement, and all transactions contemplated thereby,including the proposed merger of the Partnerships into NTS Realty HoldingsLimited Partnership, are fair, reasonable and adequate, and in the bestinterests of the class of plaintiffs; (2) the plaintiffs’ complaint and eachand every cause of action and claim set forth therein is dismissed withprejudice; (3) each class member is barred from transferring, selling orotherwise disposing of (other than by operation of law) their interests untilthe earlier of the closing date of the merger, the termination of thesettlement or June 30, 2004; and (4) each class member who requested to beexcluded from the settlement released their claims in the *Bohm* litigation.

 

On June 11, 2004, Joseph Bohm and David Duval, class members whoobjected to the Settlement Agreement but were overruled by the Superior Court,filed an appeal in the Court of Appeals of the State of California, firstAppellate District.

 

On February 27, 2003, two individuals filed a class and derivativeaction in the Circuit Court of Jefferson County, Kentucky captioned *Bohm, et al. v. J.D. Nichols, et al.* (CaseNo. 03-CI-01740) against certain of the General Partners and severalindividuals and entities affiliated with us. The complaint was amended toinclude the general partner of NTS-Properties III and the general partner ofNTS-Properties Plus Ltd., which is no longer in existence. In the amendedcomplaint, the plaintiffs purport to bring claims on behalf of a class oflimited partners and derivatively on behalf of us and the Partnerships based onalleged overpayment of fees, prohibited investments, improper failures to makedistributions, purchases of limited partnerships interests at insufficientprices and other violations of the limited partnership agreements. Theplaintiffs are seeking, among other things, compensatory and punitive damagesin an unspecified amount, an accounting, the appointment of a receiver orliquidating trustee, the entry of an order of dissolution against thePartnerships, a declaratory judgment and injunctive relief. No amounts havebeen accrued for the settlement of this action in our financial statements. TheGeneral Partners believe that this action is without merit and are vigorously defendingit.

 

On March 2, 2004, the defendants filed a Motion to Dismiss the *Bohm* litigation. After the Motion toDismiss was fully briefed, the settlement agreement in the *Buchanan* litigation received final courtapproval. The Circuit Court of Jefferson County, Kentucky, instructed theplaintiffs in the *Bohm* litigationto file an amended complaint in light of the approved settlement of the *Buchanan* litigation. The plaintiffs in the*Bohm* litigation filed a correctedSecond Amended Complaint on August 11, 2004. The defendants filed a Motion toStrike the corrected Second Amended Complaint. A hearing on this motion isscheduled for January 14, 2005. The General Partners believe that the claimsasserted in the corrected Second Amended Complaint have no merit.

 

59

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## **Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds**

## ** **

Not Applicable

 

## **Item 3 - Defaults Upon Senior Securities**

## ** **

NotApplicable.

 

## **Item 4 - Submission of Matters to a Vote of Security Holders**

## ** **

Not Applicable.

 

## **Item 5 - Other Information**

## ** **

NotApplicable.

 

## **Item 6 - Exhibits**

 
| **Exhibit  No.** | ** ** | ** **                                                                                                                                 | ** ** | ** ** |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| 3.01             |       | Certificate of Limited Partnership of NTS Realty Holdings Limited  Partnership                                                             |       | ****       |
|             |       |                                                                                                                                       |       |       |
| 3.02             |       | Form of Agreement of Limited Partnership of NTS Realty Holdings  Limited Partnership.                                                      |       | ****       |
|             |       |                                                                                                                                       |       |       |
| 10.01            |       | Form of Management Agreement between NTS Realty Holdings Limited  Partnership and NTS Development Company                                  |       | ****       |
|             |       |                                                                                                                                       |       |       |
| 31.1             |       | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)  and Rule 15d-14(a) of the Securities Exchange Act, as amended.        |       | ***        |
|             |       |                                                                                                                                       |       |       |
| 31.2             |       | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)  and Rule 15d-14(a) of the Securities Exchange Act, as amended.        |       | ***        |
|             |       |                                                                                                                                       |       |       |
| 32.1             |       | Certification of Chief Executive Officer Pursuant to18 U.S.C. 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |       | ***        |
|             |       |                                                                                                                                       |       |       |
| 32.2             |       | Certification of Chief Financial Officer Pursuant to18 U.S.C. 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |       | ***        |
|             |       |                                                                                                                                       |       |       |
| 99.1             |       | Registration Statement on Form S-4 as filed and made effective by the  Securities and Exchange Commission on October 27, 2004.             |       | ****       |

 

60

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|   |   |                                                                                                          |   |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------|--------|--------|
| ***    |   | Attached as an exhibit with this Form 10-Q.                                                                   |   |   |
|   |   |                                                                                                          |   |   |
| ****   |   | Incorporated by reference to our Registration Statement on Form S-4 under  Commission File number 333-112467. |   |   |

 

**Reports on Form 8-K**

 

A Form 8-K was furnished onDecember 17, 2004, under Items 8.01 and 9.01, relating to our press releasedated December 17, 2004.

 

61

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, as amended, theregistrant has duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 
| NTS REALTY HOLDINGS LIMITED PARTNERSHIP |
|-----------------------------------------|
|                                    |
| By:                                     | NTS REALTY CAPITAL, INC. |
|                                    | Its: | Managing Partner |
|                                    |   |   |
|                                    | By: | /s/ | Brian F. Lavin |   |
|                                    |   | Brian F. Lavin |
|                                    |   | Its: | President and Chief Executive Officer |
|                                    |   | Date: | December 20, 2004 |
|                                    |   |   |   |
|                                    |   |   |   |
|                                    | By: | /s/ | Gregory A. Wells |   |
|                                    |   | Gregory A. Wells |
|                                    |   | Its: | Chief Financial Officer |
|                                    |   | Date: | December 20, 2004 |

 

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