UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2004

 

OR

 

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

 

Commission File Number 333-112467

 

NTS REALTY HOLDINGS LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

 

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

 

10172 Linn Station Road
Louisville, 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 by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                                                      Yes o    No ý

 

Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).            Yes o   No ý

 

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

 

 

TABLE OF CONTENTS

 

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

 

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

 

Any forward-looking statements included in MD&A, or elsewhere in this report, reflect our managing general partner’s best judgment based on known factors, but involve risks and uncertainties. Actual results could differ materially from those anticipated in any forward-looking statements as a result of a number of factors, including but not limited to those described in our filings with the Securities and Exchange Commission, particularly our registration statement on Form S-4 which was made effective October 27, 2004.  Any forward-looking information provided by us pursuant to the safe harbor established by the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors.

 

3

 

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 these balance sheets.

 

4

 

NTS REALTY HOLDINGS LIMITED PARTNERSHIP

NOTES TO BALANCE SHEETS

(UNAUDITED)

 

Note 1 - Summary of Significant Accounting Policies

 

A) Organization and Basis of Presentation

 

NTS Realty Holdings Limited Partnership (“NTS Realty”), a newly formed limited partnership, was organized in the State of Delaware on September 26, 2003.  On February 4, 2004, NTS Realty filed a registration statement on Form S-4 with the Securities and Exchange Commission (“SEC”) with respect to, among other things, a proposed merger of five limited partnerships (the “Partnerships”) registered under the Securities Exchange Act of 1934.  The Partnerships involved in the proposed merger are NTS-Properties III; NTS-Properties IV; NTS-Properties V, a Maryland limited partnership; NTS-Properties VI, a Maryland limited partnership; and NTS-Properties VII, Ltd.  Concurrent with the merger ORIG, LLC (“ORIG”), a Kentucky limited liability company affiliated with the Partnerships’ general partners, will contribute substantially all its assets and all of its liabilities to NTS Realty.  If the proposed merger is completed, each limited partnership will be merged with and into NTS Realty.

 

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

 

Our financial statements as presented include the following pro forma consolidated financial statements and notes, historical combining financial statements and notes, as well as the combined financial statements and notes of NTS Private Group and balance sheets and notes of ORIG.

 

NTS Realty intends to qualify as a partnership for federal income tax purposes for the taxable year in which the merger is completed.  A limited partnership is a legal entity that offers its investors limited liability protection against claims brought against the limited partnership.  A limited partnership also is not subject to federal income tax, but rather, the limited partnership’s profit or loss for federal income tax purposes is reported 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 estimates and assumptions that affect amounts reported in the financial statements and accompanying notes.  Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent.  Actual results could differ from these estimates.

 

C) Other Assets

 

Other assets includes fees paid to a lender related to the financing we expect to use as part of the merger described above.

 

5

 

D) Income Taxes

 

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

 

Note 2 - Borrowings

 

Concurrent with the consummation of the proposed merger, NTS Realty intends to succeed to the borrowings then held by the Partnerships and other merging real estate entities affiliated with their general partners.  NTS Realty will also assume liabilities of ORIG, which consist primarily of mortgage loans secured by commercial retail and residential properties.  We intend to refinance a majority of the debt to be assumed in the merger, which would result in prepayment penalties of approximately $5.8 million.

 

Note 3 - Related Party Transactions

 

NTS Realty will be externally managed under an agreement with NTS Development Company (“NTS Devco”) an affiliate of NTS Realty’s general partners.  NTS Devco will be paid a management fee pursuant to the terms of an agreement entered into with NTS Realty.  NTS Devco will also be reimbursed its actual costs for services rendered to NTS Realty.  Funds were advanced on our behalf by NTS Financial Partnership, an affiliate of NTS Devco, totaling approximately $30,000 for start-up costs and $35,000 for loan fees.  NTS Realty had no other operations from inception on September 26, 2003, to September 30, 2004.

 

Note 4 – Commitments and Contingencies

 

Merger/Settlement Charge

 

NTS Realty was formed as part of a class action settlement where its affiliate and limited partner ORIG has agreed to admit a “qualified settlement trust” as a special member of ORIG. This special member interest is being created for the benefit of the class members in the litigation who are former limited partners who sold their limited partnership interests to ORIG, its affiliates or the partnerships either as part of tender offers, other repurchase programs or otherwise. Under the terms of ORIG’s operating agreement, all of the economic and other rights associated with up to 620,000 Units owned by ORIG will be designated for the benefit of the qualified settlement trust. ORIG will own the Units, but all of the rights associated with the Units will inure to the qualified settlement trust. Plaintiffs’ counsel, or his designee, will have the right, acting as a representative of these former limited partners, to cause ORIG to vote these designated Units pursuant to his direction. The amount of Units was determined based on the $6.2 million non-cash amount of the $6.85 million settlement amount agreed upon by the general partners and plaintiffs’ counsel. Therefore, if each Unit is valued at $10.00, then the economic and other rights associated with 620,000 Units will be needed to satisfy the settlement amount. The final amount of the settlement, however, is based on the amount of valid claims filed by the former limited partners in the class of plaintiffs. 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 the benefit of the qualified settlement trust to satisfy the claims. We refer to these designated Units as the ‘‘Class Units.’’ Under the terms of the settlement agreement governing the qualified settlement trust, the three members of ORIG (Mr. Nichols, his spouse and Mr. Lavin) are jointly obligated, for a period of two years, to repurchase from the qualified settlement trust, using 75% of the distributions that ORIG receives in respect of the Units owned by ORIG which otherwise would have gone to Mr. Nichols, his spouse or Mr. Lavin, the economic and other rights associated with the number of Class Units calculated under the formula described below. Each payment will result in the redesignation of rights associated with the number of Class Units equal to the amount of the distribution divided by 115% of the ‘‘fair market value’’ of the Units. As a result of each payment, the number of Class Units designated for the benefit of the qualified settlement trust will decrease until the economic and other rights associated with all of the Class Units are ultimately redesignated for the benefit of Mr. Nichols, his

 

6

 

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

 

7

 

INTRODUCTORY NOTE TO

PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

(UNAUDITED)

 

The following unaudited pro forma consolidated 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 combining financial statements included herein.

 

The unaudited pro forma consolidated balance sheet as of September 30, 2004 is adjusted to give effect to the merger as if it occurred on September 30, 2004.  The unaudited pro forma consolidated statements of operations for the nine months ended September 30, 2004 and the year ended December 31, 2003 are adjusted to give effect to the merger as if it occurred on January 1, 2003.  The pro forma adjustments are described in the accompanying notes and are based upon available information and certain assumptions that our management believes are reasonable.

 

The unaudited pro forma consolidated financial data does not purport to represent what our results of operations or financial condition would actually have been had the merger occurred on the dates indicated or to project our results of operations or financial condition for any future period or date.  The unaudited pro forma consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included herein.

 

8

 

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 Unaudited Pro Forma Consolidated Financial Statements.

 

9

 

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 Unaudited Pro Forma Consolidated Financial Statements.

 

10

 

PRO FORMA

CONSOLIDATED STATEMENTS 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 Unaudited Pro Forma Consolidated Financial Statements.

 

11

 

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 settlement described.

 

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

 

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

 

(d)         The merger will be accounted for using the purchase method of accounting in accordance with U.S. generally accepted accounting principles.  Under this method NTS Realty will be treated as the purchasing entity.  A portion of each partnership’s assets and liabilities will be adjusted to reflect their fair market value.  That portion owned by affiliates of the general partner of the partnerships will be reflected at historical cost.  The assets and liabilities contributed through ORIG by NTS Private Group will be accounted for as an exchange of partnership units (equivalent to shares) among entities under common control.  Accordingly, the portion of the assets and liabilities representing Mr. Nichols’ ownership interest in each of the respective entities comprising the NTS Private Group will be accounted for at historic cost by ORIG.  The purchase method of accounting will be applied by ORIG to the remaining portion of the NTS Private Group assets and liabilities that are not owned by Mr. Nichols.  In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, we allocated the purchase price for each property to net tangible and identified intangible assets acquired based on their fair values (including land, buildings, tenant improvements, acquired above and below market leases and the origination cost of acquired in-place leases) and acquired liabilities.  No customer relationship intangibles exist.  At September 30, 2004 the carrying value of mortgages and notes payable approximates fair market value.  We retained an independent appraiser (CBRE) to assess fair value based on estimated cash flow projections that utilize discount and capitalization rates deemed 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

 

The value of commercial tenant origination costs and intangible lease costs 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 term of the respective leases, primarily ranging from one to twelve months.

 

(e)          NTS Realty was formed as part of a class action settlement where its affiliate and limited partner ORIG has agreed to admit a ‘‘qualified settlement trust’’ as a special member of ORIG. This special member interest is being created for the benefit of the class members in the litigation who are former limited partners who sold their limited partnership interests to ORIG, its affiliates or the partnerships either as part of tender offers, other repurchase programs or otherwise. Under the terms of ORIG’s operating agreement, all of the economic and other rights associated with up to 620,000 Units owned by ORIG will be designated for the benefit of the qualified settlement trust. ORIG will own the Units, but all of the rights associated with the Units will inure to the qualified settlement trust. Plaintiffs’ counsel, or his designee, will have the right, acting as a representative of these former limited partners, to cause ORIG to vote these designated Units pursuant to his direction. The amount of Units was determined based on a $6.2 million non-cash amount of the total $6.85 million settlement amount agreed upon by the general partners and plaintiffs’ counsel. Therefore, if each Unit is valued at $10.00, then the economic and other rights associated with 620,000 Units will be needed to satisfy the settlement amount. The final amount of the settlement, however, is based on the amount of valid claims filed by the former limited partners in the class of plaintiffs. 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 the benefit of the qualified settlement trust to satisfy the claims. We refer to these designated Units as the ‘‘Class Units.’’ Under the terms of the settlement agreement governing the qualified settlement trust, Mr. Nichols, his spouse and Mr. Lavin are jointly obligated, for a period of two years, to repurchase from the qualified settlement trust, using 75% of the distributions that ORIG receives in respect of the Units owned by ORIG which otherwise would have gone to Mr. Nichols, his spouse or Mr. Lavin, the economic and other rights associated with the number of Class Units calculated under the formula described below. Each payment will result in the redesignation of rights associated with the number of Class Units equal to the amount of the distribution divided by 115% of the ‘‘fair market value’’ of the Units. As a result of each payment, the number of Class Units designated for the benefit of the qualified settlement trust will decrease until the economic and other rights associated with all of the Class Units are ultimately redesignated for the benefit of Mr. Nichols, his spouse, and/or Mr. Lavin within two years of when we begin making distributions. If any Class Units remain at the end of this two-year period, Mr. Nichols, his spouse and Mr. Lavin must make a final payment to the qualified settlement trust that is sufficient to redesignate any remaining Class Units. For these purposes, fair market value will be equal to the average closing price of the Units on the American Stock Exchange for the thirty-day period prior to the date of the redesignation.  Our Statement of Operations will include a non-cash charge for our estimate related to the settlement with a corresponding credit to Partners’ Equity when the criteria of SFAS No. 5 “Accounting for Contingencies” is met.

 

Adjustments to Unaudited Pro Forma Consolidated Statements of Operations:

 

(a)          We recognized approximately $215,000 and $287,000, for the nine months ended September 30, 2004 and the year ended December 31, 2003, respectively, as a reduction to rental revenue to reflect the 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 the year ended December 31, 2003, respectively, to increase rental revenue for the straight-line effect of escalating rental terms as if the merger occurred on January 1, 2003.

 

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

 

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

 

(e)          These adjustments reflect our estimate of depreciation and amortization expense for our properties as if we owned them from January 1, 2003.  The adjustments are based upon our estimate of the individual properties’ depreciable costs utilizing our depreciation policy.  (See Note (c) in our Adjustments to Unaudited Pro Forma Consolidated Balance Sheet for additional information).

 

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

 

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

 

Adjustments to Historical Combined Balance Sheet:

 

(1)          Represents the elimination of the equity investment and minority interests for the following joint ventures which are reflected in the consolidated financial statements 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 and NTS-Properties VII’s ownership of BBC 1A has also been eliminated.

 

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

 

The pro forma financial information reflects all of the real estate assets, debt and operating results being contributed to us by ORIG and, consequently, management has not separately presented the historic financial information of ORIG.

 

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INTRODUCTORY NOTE TO

HISTORICAL COMBINING FINANCIAL INFORMATION

(UNAUDITED)

 

The following table sets forth historical combining financial and operating data as if NTS-Properties III, NTS-Properties IV, NTS-Properties V, a Maryland limited partnership, NTS-Properties VI, a Maryland limited partnership, NTS-Properties VII, Ltd. (the “Partnerships”) and NTS Private Group were combined on a historical basis.  This historical combining presentation reflects adjustments to the actual historical data to include a previously unconsolidated joint venture, eliminates the equity investment and minority interests in wholly combined joint ventures in the historical financial information of the applicable partnerships and adjustments to include ORIG’s debt and its related interest cost, secured by interests in various entities within the NTS Private Group which 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 NTS Private Group.  We have derived the historical combining statements of operations data and historical cash flow data consisting of interest expense relating to ORIG’s debt from the unaudited financial statements of ORIG for the year ended December 31, 2003.  We have derived the historical combining balance sheet data consisting of ORIG’s debt from the unaudited balance sheet of ORIG for the year ended December 31, 2003.  We have derived the combining statements of operations, balance sheet data and cash flow data as of and for the three and nine months ended September 30, 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 statements have been prepared on a basis consistent with our audited financial statements and include all adjustments, consisting of normal recurring accruals, which we consider necessary for a fair presentation of our financial condition and the results of operations as of such date and for such periods under U.S. generally accepted accounting principles.  The results of operations for the interim period are not necessarily indicative of the results of operations for the full year or any future period.

 

You should read the following historical combining financial information in conjunction with the other financial information and analysis presented in this quarterly report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes of the Partnerships, the NTS Private Group and ORIG included herein.

 

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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 to unaudited historical combining financial information.

 

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