<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 1997
Commission file number: 000-26572
NHP INCORPORATED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 52-1445137
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State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
8065 LEESBURG PIKE, SUITE 400, VIENNA, VIRGINIA 22182-2738
- ----------------------------------------------- ----------
Address of principal executive offices Zip Code
Registrant's telephone number including area code (703) 394-2400
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</TABLE>
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 X No
--- ---
At October 1, 1997, there were 12,996,939 shares of common stock outstanding.
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NHP INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Operations
- Three Months Ended September 30, 1997 and 1996 1
Unaudited Consolidated Statements of Operations
- Nine Months Ended September 30, 1997 and 1996 2
Consolidated Balance Sheets
- September 30, 1997 (Unaudited) and December 31, 1996 3
Unaudited Consolidated Statements of Cash Flows
- Nine Months ended September 30, 1997 and 1996 4
Notes to Unaudited Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 26
ITEM 5. OTHER INFORMATION 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
Signatures 27
</TABLE>
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NHP INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
-------- --------
<S> <C> <C>
Revenue, substantially all from related
parties (except for rental revenue):
Property management services $14,134 $14,001
On-site personnel, general and administrative
cost reimbursement 34,567 30,448
Administrative and reporting fees 1,425 1,029
Rental revenue 4,394 -
Other 2,965 2,455
------- -------
Total revenue 57,485 47,933
Expenses:
Salaries and benefits:
On-site employees 33,622 28,838
Off-site employees 7,524 7,095
Other general and administrative 3,481 3,987
Real estate operating costs 2,776 -
Costs charged to the Real Estate Companies 945 1,610
Amortization of purchased management contracts 1,460 1,114
Other depreciation and other amortization 1,760 529
Non-recurring expenses 955 -
------- -------
Total expenses 52,523 43,173
------- -------
Operating income 4,962 4,760
Interest income 554 47
Interest expense (2,981) (1,239)
------- -------
Income from continuing operations before income taxes 2,535 3,568
Provision for income taxes (1,014) (1,427)
------- -------
Income from continuing operations 1,521 2,141
Income from discontinued operations, net of
income taxes 1,381 182
------- -------
Net income $ 2,902 $ 2,323
======= =======
Net income per common share:
Continuing operations 0.12 0.17
Discontinued operations 0.10 0.01
------- -------
Net income $ 0.22 $ 0.18
======= =======
Weighted average common and equivalent shares
outstanding (in thousands) 13,206 12,797
======= =======
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of these statements.
1
<PAGE> 4
NHP INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
-------- --------
<S> <C> <C>
Revenue, substantially all from related parties
(except for rental revenue):
Property management services $ 43,282 $ 40,566
On-site personnel, general and administrative
cost reimbursement 99,467 92,194
Administrative and reporting fees 3,796 2,913
Rental revenue 7,310 -
Other 8,233 4,812
-------- --------
Total revenue 162,088 140,485
Expenses:
Salaries and benefits:
On-site employees 96,480 89,245
Off-site employees 22,257 19,183
Other general and administrative 11,228 10,288
Real estate operating costs 4,639 -
Costs charged to the Real Estate Companies 2,987 2,949
Amortization of purchased management contracts 4,497 3,007
Other depreciation and other amortization 3,978 1,010
Non-recurring expenses 6,501 -
-------- --------
Total expenses 152,567 125,682
-------- --------
Operating income 9,521 14,803
Interest income 1,663 331
Interest expense (6,651) (2,719)
-------- -------
Income from continuing operations before income taxes 4,533 12,415
Provision for income taxes (1,813) (4,968)
-------- -------
Income from continuing operations 2,720 7,447
Income from discontinued operations, net of income
taxes 1,974 604
------- -------
Net income $ 4,694 $ 8,051
======== =======
Net income per common share:
Continuing operations 0.21 0.58
Discontinued operations 0.15 0.05
-------- -------
Net income $ 0.36 $ 0.63
======== =======
Weighted average common and equivalent shares
outstanding (in thousands) 13,051 12,717
======== =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
2
<PAGE> 5
NHP INCORPORATED
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited) (Restated)
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,618 $ 4,779
Restricted cash 2,440 -
Receivables, net, substantially all from related
parties 7,784 15,270
On-site cost reimbursement receivable,
substantially all from related parties 6,271 3,816
Current portion of net deferred tax asset 3,901 6,357
Other current assets 12,698 2,227
-------- --------
Total current assets 37,712 32,449
Purchased management contracts, net 45,478 43,718
Real estate, net 81,857 84,871
Net assets of discontinued operations 24,252 22,528
Goodwill, net 5,425 5,887
Property, equipment and capitalized
software, net 13,366 10,415
Other assets 17,709 10,832
Net deferred tax asset 8,982 7,441
-------- --------
Total Assets $234,781 $218,141
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of long-term debt, including
amounts payable to related parties of $143 in
1997 and 1996 $ 861 $ 720
Accounts payable 3,565 3,947
Accrued expenses, including amounts associated
with related parties of $2,032 and $4,090 in
1997 and 1996, respectively 9,583 11,452
Accrued on-site salaries and benefits 6,271 3,816
Deferred revenues and other 4,276 3,400
-------- --------
Total current liabilities 24,556 23,335
Real Estate related debt 70,981 71,152
Other long-term debt 62,138 62,607
Other long-term liabilities 9,592 5,034
-------- --------
Total Liabilities 167,267 162,128
Commitments and contingencies (Note 9)
Shareholders' equity
Common stock, $0.01 par value, 25,000,000
shares authorized; 12,981,939 and 12,586,629
shares issued and outstanding in 1997 and 1996,
respectively 130 126
Additional paid-in capital 140,140 133,337
Accumulated deficit (72,756) (77,450)
-------- --------
Total shareholders' equity 67,514 56,013
-------- --------
Total Liabilities and Shareholders' Equity $234,781 $218,141
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
<PAGE> 6
NHP INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 4,694 $ 8,051
Discontinued operations, net of income taxes (1,974) (604)
-------- --------
Income from continuing operations 2,720 7,447
Depreciation and amortization 8,475 4,017
Income taxes 1,728 3,580
Decrease in receivables, substantially all from
related parties 5,419 779
Increase in deferred costs and other (2,607) (229)
Increase (decrease) in accounts payable and
accrued expenses (878) 2,780
Increase in deferred revenues and other liabilities 713 1,188
Restricted cash (366) -
Other 329 115
-------- --------
Net cash provided by continuing operations 15,533 19,677
Net cash provided (used) by discontinued
operations (7,999) 388
-------- --------
Net cash provided by operating activities 7,534 20,065
Cash Flows From Investing Activities:
Purchase of businesses - (19,776)
Investment in real estate held for sale, net of
debt assumed - (13,608)
Purchase of management contracts (3,471) (8,708)
Purchase of long-term notes receivable (4,236) (8,374)
Purchase of fixed assets (5,375) (4,736)
Other (225) -
-------- --------
Net cash used in investing activities (13,307) (55,202)
Cash Flows From Financing Activities:
Additional borrowings 12,000 48,000
Repayments of debt (12,606) (19,283)
Proceeds from stock option exercises 5,378 1,000
Payment of financing, offering and disposition
costs (245) (452)
-------- --------
Net cash provided by financing activities 4,527 29,265
-------- --------
Decrease in cash and cash equivalents (1,246) (5,872)
Great Atlantic beginning cash (5/3/97) 1,085 -
Cash and Cash Equivalents, beginning of period 4,779 5,996
-------- --------
Cash and Cash Equivalents, end of period $ 4,618 $ 124
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash interest payments $ 6,716 $ 2,211
Cash income tax payments $ 490 $ 2,040
Non-cash items:
Notes payable given as consideration for
acquisitions $ - $ 6,293
Stock issued for acquisition of The WMF Group,
Ltd. $ - $ 3,780
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
<PAGE> 7
NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") and include the accounts of NHP Incorporated (the "Company"
or "NHP") and its wholly-owned subsidiaries. Although certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles ("GAAP") have been
condensed or omitted pursuant to such rules and regulations, the Company
believes that the disclosures included herein are adequate to make the
information presented not misleading. Operating results for the three and nine
month periods ended September 30, 1997, are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997. These
unaudited consolidated financial statements should be read in conjunction with
the financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K, as amended, for the year ended December 31, 1996. In the
opinion of the Company, the unaudited consolidated financial statements contain
all adjustments (consisting only of normal recurring accruals, except for
amounts discussed in Note 4) necessary for a fair presentation of the results
for the three and nine month periods ended September 30, 1997 and 1996. Certain
prior year amounts have been reclassified to conform to current year
presentation. All material intercompany accounts and transactions, except for
the amounts due from The WMF Group, Ltd. ("WMF") to NHP discussed in Note 2,
have been eliminated in consolidation.
As of April 1, 1996, NHP closed the acquisition of all of the outstanding
capital stock of WMF Holdings, Ltd., which was subsequently renamed The WMF
Group, Ltd., for consideration of approximately $21 million in the form of
$16.8 million in cash and 210,000 shares of the Company's common stock. WMF is
the owner of Washington Mortgage Financial Group, Ltd. ("Washington Mortgage
Financial") of Fairfax County, Virginia, one of the nation's leading multifamily
mortgage originators and servicers. Included in Washington Mortgage Financial is
WMF/Huntoon, Paige Associates Limited ("WMF/Huntoon, Paige"), a leading FHA
mortgage originator and servicer located in Edison, New Jersey.
On April 21, 1997, the Company entered into a plan to spin off WMF
(formerly the Company's Financial Services business segment) to the Company's
current shareholders. Accordingly, the accompanying financial statements reflect
WMF as discontinued operations in accordance with generally accepted accounting
principles ("GAAP"). Amounts due from WMF to NHP Incorporated, of approximately
$9.6 million and $0.9 million as of September 30, 1997, and December 31, 1996,
respectively, have not been eliminated in consolidation and are included as a
receivable in other current assets and as a liability in the net assets of
discontinued operations. See Note 2 for discussion of the terms of the
settlement of these amounts. The Consolidated Statements of Operations for the
three and nine month periods of 1996 have also been restated to reflect WMF as
discontinued operations. For further discussion, see Note 2.
As discussed further in Note 3, on May 5, 1997, the majority (approximately
51%) of the outstanding shares of the Company's common stock was acquired by
Apartment Investment and Management Company ("AIMCO"). As a result of the change
in control, the Company no longer intends to sell the Great Atlantic properties
and, therefore, the results of the real estate operations of the Great Atlantic
properties are included in the Company's consolidated financial statements
beginning May 5, 1997. The Company's results of operations include a $0.3
million and $0.6 million loss (after-tax) from the operations of the Great
Atlantic properties for the three and nine month periods ended September 30,
1997. The Great Atlantic properties are 12 multifamily properties which the
Company acquired in 1996, including the right to manage the properties, with the
intention of selling the real estate ownership interests to outside investors
while retaining the management rights to the properties. Prior to the second
quarter of 1997, the Company presented its ownership interests in the Great
Atlantic properties on the Consolidated Balance Sheet as an investment in real
estate held for sale, which was reported at the lower of carrying value or fair
value less estimated cost to sell. The associated debt is reported as real
estate related debt on the Consolidated Balance Sheets.
5
<PAGE> 8
NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(2) DISCONTINUED OPERATIONS
On April 21, 1997, the Company entered into a plan to distribute shares of
WMF (formerly the Company's Financial Services business segment) to the
Company's existing shareholders pursuant to the terms of a Rights Agreement (the
"Rights Agreement") approved by the Board of Directors (the "WMF Spin-Off").
Pursuant to the Rights Agreement, the Company has issued to its stockholders
rights (the "Rights") to receive a distribution of one-third of a share of WMF
for each right at the earlier of the time of the AIMCO merger discussed in Note
3, or on December 1, 1997, if the AIMCO merger has not occurred by that date. On
April 21, 1997, Capricorn II (an affiliate of Capricorn) entered into the
Capricorn II Investment Commitment with WMF pursuant to which Capricorn II
would, following the negotiation and execution of definitive documentation and
subject to the satisfaction of the conditions that will be specified therein,
purchase from WMF 546,498 shares of WMF common stock for a price of $9.15 per
share in connection with the WMF Spin-Off. The Capricorn II Commitment does not
purport to constitute a legally binding agreement with respect to the
investment. The distribution of WMF stock is conditioned on the consent of
lenders under the Company's credit agreement. The rights were distributed on May
9, 1997, to stockholders of record of the Company on May 2, 1997.
Following the distribution of shares of WMF, NHP and WMF will operate
independently and neither will have any stock ownership in the other. In
conjunction with the distribution of shares of WMF, NHP and WMF will enter into
a separation agreement that will govern their ongoing relationship. The
separation agreement will provide for the settlement, at or prior to the
distribution of shares, of any intercompany amounts owed by WMF to NHP. WMF will
not be required to repay the intercompany balance to the extent it is offset by
a capital contribution of the intercompany balances up to the amount of NHP's
Free Cash Flow, as defined by the AIMCO merger agreement, generated by NHP from
February 1, 1997, through the date of the AIMCO merger. The remaining balance,
if any, will be repaid by WMF. NHP will contribute to WMF the excess, if any, of
NHP's Free Cash Flow, as defined, over the intercompany amounts owed to NHP. The
intercompany balance of approximately $9.6 million, due from WMF to NHP as of
September 30, 1997, consists primarily of advances to WMF related to the Proctor
and Askew acquisitions, intercompany tax allocations and accumululated interest
on amounts due to NHP. For further discussion of WMF's acquisition of Askew, see
Note 5. In addition, the separation agreement will provide, in part, for WMF and
NHP to assume all liabilities relating to their separate businesses and
operations prior to the distribution (except for the costs of the distribution
for which NHP will be responsible) and to indemnify each other for such
liabilities and all expenses and costs and losses related thereto, all on terms
reasonably acceptable to AIMCO.
WMF was acquired on April 1, 1996. Therefore, operating results presented
for the first nine months of 1996 include only six months activity. The
operating results of WMF for the three and nine month periods ended
September 30, 1997, the three month period ended September 30, 1996, and the
period April 1, 1996, to September 30, 1996, are summarized below (in thousands,
except per share amounts):
6
<PAGE> 9
NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Three Three Nine
Months Months Months
Ended Ended Ended April 1 -
September September September September
30, 1997 30, 1996 30, 1997 30, 1996
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Revenue:
Financial Services $12,452 $ 6,316 $28,316 $12,911
Financial Services
interest income 1,542 1,133 3,653 2,247
------- ------- ------- -------
Total revenue 13,994 7,449 31,969 15,158
Expenses:
Salaries and benefits 5,471 3,106 13,125 5,920
Other general and
administrative 3,703 2,088 8,963 4,173
Financial Services operating
interest 451 176 727 595
Provision for loan servicing
losses 261 247 714 503
Amortization of capitalized
mortgage servicing rights 1,146 1,024 3,354 1,975
Depreciation and other
amortization 441 305 1,180 588
------- ------- ------- -------
Total expenses 11,473 6,946 28,063 13,754
------- ------- ------- -------
Operating income 2,521 503 3,906 1,404
Interest expense (54) (72) (145) (148)
------- ------- ------- -------
Income before taxes 2,467 431 3,761 1,256
Provision for income taxes (1,086) (249) (1,787) (652)
------- ------- ------- -------
Net income $ 1,381 $ 182 $ 1,974 $ 604
======= ======= ======= =======
Net income per share of NHP
Incorporated common stock $ 0.11 $ 0.01 $ 0.15 $ 0.05
======= ======= ======= =======
</TABLE>
The components of the net assets of discontinued operations (the assets and
liabilities of WMF) are summarized below (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
============= ============
<S> <C> <C>
Assets:
Cash and equivalents $ 9,912 $ 6,601
Mortgage loans held for sale, pledged 35,650 40,263
Other current assets 6,544 4,195
------- -------
Current assets 52,106 51,059
Capitalized mortgage servicing rights, net 22,520 22,460
Goodwill 11,936 7,705
Other assets 4,077 4,140
------- -------
Total assets $90,639 $85,364
======= =======
Liabilities:
Warehouse line of credit $34,875 $39,925
Due to NHP Incorporated 9,561 872
Other current liabilities 12,291 12,329
------- -------
Current liabilities 56,727 53,126
Long-term debt 4,788 5,315
Other long-term liabilities 4,872 4,395
------- -------
Total liabilities 66,387 62,836
------- -------
Net assets of discontinued operations $24,252 $22,528
======= =======
</TABLE>
7
<PAGE> 10
NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
WMF results for three and nine month periods ended September 30, 1997
exclude $0.2 million and $0.4 million (pre-tax) of interest expense,
respectively, on amounts due to NHP which has been eliminated in consolidation.
(3) CHANGE IN CONTROL AND MERGER AGREEMENT
On April 21, 1997, the Company announced that it had entered into a
definitive Merger Agreement pursuant to which the Company will be acquired by
AIMCO, a real estate investment trust whose shares are traded on the New York
Stock Exchange (AIV-NYSE). Upon completion of the merger, each of the Company's
stockholders will receive for each share of Company common stock, at the
stockholder's election, either (i) a combination of 0.37383 shares of AIMCO
common stock and $10.00 cash per share of Company common stock, or (ii) 0.74766
shares of AIMCO common stock. The merger with AIMCO will, however, require
approval by two-thirds vote of all shares of Company common stock, excluding
shares deemed to be owned by AIMCO or its affiliates, and customary state and
federal regulatory and other approvals. Stockholder meetings to approve the
merger are expected to be held in the fourth quarter of 1997.
On May 5, 1997, AIMCO acquired, pursuant to the Stock Purchase Agreement,
6,496,073 shares of the Company's stock from Demeter Holdings Corporation
("Demeter") and Capricorn Investors, L.P. ("Capricorn"), who together held a
majority of the outstanding shares of the Company's common stock (approximately
54.8%). As consideration for the sale of the Company's common stock, Demeter
received $72.6 million in cash and 1,224,463 shares of AIMCO common stock, and
Capricorn received 918,394 shares of AIMCO common stock. Upon completion of
AIMCO's purchase of this portion of the shares held by Demeter and Capricorn,
AIMCO held a majority (approximately 51%) of the issued and outstanding shares
of the Company's common stock. AIMCO acquired the remaining 434,049 shares of
Company common stock owned by Demeter and Capricorn on September 12, 1997,
bringing the total shares of the Company's stock owned by AIMCO to 6,930,122 or
approximately 54% of the Company's issued and outstanding shares of common
stock.
On June 3, 1997, AIMCO acquired NHP Partners, Inc. and NHP Partners Two
Limited Partnership (the "Real Estate Companies") from Demeter, Capricorn,
Phemus Corporation (an affiliate of Demeter), J. Roderick Heller, III (the
Chairman, President and Chief Executive Officer of the Company), and NHP
Partners Two LLC, for total consideration of $54.8 million cash and warrants to
purchase 399,999 shares of AIMCO common stock at an exercise price of $36.00 per
share. Prior to the AIMCO purchase, the Real Estate Companies were controlled by
Demeter and Capricorn. Prior to the Company's initial public offering in August
1995, the Real Estate Companies were owned by the Company. Most of the
properties owned or controlled by the Real Estate Companies are currently
managed by the Company pursuant to a long-term property management contract.
Pursuant to the Merger Agreement, the Company waived its right of first refusal
to purchase the real estate sold to AIMCO.
(4) NON-RECURRING EXPENSES
In conjunction with the acquisition of majority ownership of the Company by
AIMCO and the purchase of 100% of the Real Estate Companies by AIMCO, the
Company has entered into a plan to relocate the various functions performed at
its current corporate headquarters to its facilities in Indianapolis, Indiana,
to AIMCO's headquarters in Denver, Colorado, or to office space currently leased
by the Real Estate Companies in Washington, D.C. Accordingly, the Company
recorded $3.8 million of expense in the second quarter of 1997, and a $0.6
million adjustment to its previous estimate in the third quarter of 1997,
consisting solely of severance costs related to this transition. The total of
$4.4 million of expense is included in Non-recurring expenses on the Company's
Unaudited Consolidated Statements of Operations. The Company expects that
approximately 165 employees will be terminated as a result of the planned
relocation. The affected employee group is limited to employees at NHP's
Vienna, Virginia headquarters office, which will be closed. As of September 30,
1997, $2.7 million of the $4.4 million had been paid to 78 departing employees.
8
<PAGE> 11
NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company has recorded other costs, which have been incurred to date,
associated with the pending AIMCO merger. These costs are also included in Non-
recurring expenses on the Unaudited Consolidated Statement of Operations and
include various professional fees and the Company's estimated share of the cost
associated with the joint proxy statement incurred to date. These additional
non-recurring expenses amounted to $0.4 million and $2.1 million for the
three and nine month periods ended September 30, 1997, respectively.
Additional costs related to the merger are expected to be incurred and
deducted from income during the fourth quarter of 1997.
(5) ACQUISITIONS
CONTINUING OPERATIONS
In November 1996, the Company and Property Resources Corporation ("PRC")
signed an agreement to enter into three separate joint ventures (the "PRC
Acquisition"). The Company purchased a 15% interest in NHP/PRC Management
Company, LLC ("NHPPRC"), a limited liability property management company, from
PRC. NHPPRC is the management agent for a portfolio of 19 HUD subsidized
properties containing 2,426 apartments in New York City and has subcontracted
the management of these properties to the Company. Because the Company's
interest in NHPPRC constitutes 100% of the Class A membership interest, it has
operational and voting control over this entity, and the results of NHPPRC are
consolidated with those of the Company and PRC's interest is accounted for as a
minority interest.
The Company and PRC also formed Aptek Management Co. LLC which provides
property management services for third-party-owned condominiums, cooperatives,
public housing, university and hospital housing in the New York metropolitan
region. In addition, the Company and PRC formed Aptek Maintenance Services, LLC,
which provides maintenance services for Company-managed properties and third-
party-owned properties where competitive, initially in New York and the
Washington, D.C. area. Both Aptek Management Co. LLC and Aptek Maintenance
Services, LLC are owned equally by PRC and the Company, but PRC will control and
oversee their operations. These two joint ventures are accounted for under the
equity method of accounting.
The PRC Acquisition closed in escrow in late 1996 but did not receive HUD
2530 approval until January 1997. Therefore, for financial accounting purposes,
the transaction is accounted for as a 1997 acquisition. Total consideration paid
by the Company to PRC was approximately $1.4 million. The Company also has a
commitment to issue approximately 31,000 shares of the Company's common stock in
five years, or the cash equivalent of its then current market value. The
estimated value of this commitment is $0.7 million and has been recorded as a
liability and is included in other long-term liabilities on the Unaudited
Consolidated Balance Sheet as of September 30, 1997. As part of the transaction,
PRC has the right to require the Company, at any time, upon 30 days notice
through January 2002, to purchase the remaining 85% interest of NHPPRC for
$3.8 million (the "Put Option"). The Company recorded a $3.2 million liability
related to the Put Option. This liability represents the estimate of the
difference between the amount to be paid by the Company ($3.8 million) and the
estimate of the present value of the remaining cash flows to be acquired at the
time the Put Option is expected to be exercised. This liability is included in
other long-term liabilities on the Unaudited Consolidated Balance Sheet. Total
purchased management contracts recorded associated with the PRC acquisition was
$5.4 million. Also in conjunction with the transaction, the Company lent
$4.2 million to PRC under a promissory note. The note, which is included in
other assets on the Unaudited Consolidated Balance Sheet, has a rate of 7% and
requires PRC to make quarterly interest payments with the principal amount due
in January 2002.
In January 1997, the Company acquired all of the outstanding shares of
Broad Street Management, Inc. ("Broad Street"), a Columbus, Ohio-based property
management company for approximately $1.8 million. Broad Street, as a wholly
owned subsidiary, will continue to manage a portfolio of 17 apartment
communities aggregating 1,942 units, located in Columbus, Ohio, Louisville,
Kentucky and Augusta, Georgia. The Broad Street acquisition has
9
<PAGE> 12
NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
been accounted for under the purchase method of accounting and resulted in the
entire purchase price being allocated to purchased management contracts.
DISCONTINUED OPERATIONS
On April 16, 1997, Washington Mortgage Financial completed the acquisition
of the assets of Askew Investment Company ("Askew"), the third largest
commercial mortgage banking firm in metropolitan Dallas-Fort Worth, Texas, for
$4.6 million. Included in the transaction is Askew's $425 million loan servicing
portfolio of office building, warehouse, retail and multifamily properties, as
well as the firm's 14 active correspondent relationships with life insurance
companies. The acquisition has been accounted for under the purchase method of
accounting.
(6) RESTRICTED CASH
Restricted cash relates to the real estate operations of the Great Atlantic
properties and includes tenant security deposits held in trust, escrows and
capital replacement reserves.
(7) REAL ESTATE, NET
Real estate, net at September 30, 1997, consists of the following (in
thousands):
<TABLE>
<CAPTION>
September 30,
1997
-------------
<S> <C>
Land $14,359
Buildings and improvements 71,222
-------
85,581
Accumulated Depreciation (3,724)
-------
$81,857
=======
</TABLE>
(8) OTHER LONG-TERM DEBT AND LINES OF CREDIT
AMENDMENT TO CREDIT FACILITY
In February 1997, the terms of the Company's $75 million Credit Facility
were amended. The significant changes in the agreement include the allowance of
up to $100 million in additional senior unsecured term debt, an increase in the
amount of unsubordinated borrowing allowed in connection with acquisitions from
$10 million to $25 million, and a reduction in the Credit Facility's overall
pricing. The interest rate has been reduced from The First National Bank of
Boston's base rate or LIBOR plus 175 basis points to a sliding scale rate which
ranges from LIBOR plus 75 basis points to LIBOR plus 125 basis points, depending
on the Company's ratio of debt to income from continuing operations before
interest expense, income taxes, depreciation and amortization ("EBITDA"). In
addition, the commitment fee on the unused portion of the Credit Facility may be
reduced from 37.5 basis points per annum to 25 basis points per annum, also
depending on the ratio of debt to EBITDA.
Beginning March 1, 1997, based on the Company's ongoing debt to EBITDA
ratio, the interest rate on the Company's Credit Facility was reduced to LIBOR
plus 75 basis points and the commitment fee on the unused portion of the Credit
Facility was reduced to 25 basis points per annum. Effective September 1, 1997,
the interest rate on the Company's Credit Facility was adjusted to LIBOR plus
100 basis points per annum. The commitment fee remained at 25 basis points per
annum. These rates are evaluated quarterly and may vary depending on the
Company's debt to EBITDA ratio.
10
<PAGE> 13
NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(9) COMMITMENTS AND CONTINGENCIES
CONTINUING OPERATIONS
As of September 30, 1997, the Company was committed to performance
guarantees, loan guarantees and other guarantees totaling $8.3 million, which
largely relate to transactions consummated by the Real Estate Companies prior to
their sale in August 1995. The Real Estate Companies have indemnified the
Company for any costs which might be incurred by the Company related to these
guarantees. In the opinion of management, future calls, if any, on these
guarantees are not expected to have a material adverse effect on the Company's
financial position or results of operations.
Pursuant to contracts among certain entities and individuals associated
with Oxford Realty Financial Group, Inc. and Oxford Holdings Corporation
(collectively "Oxford") and NHP, NHP manages a portfolio of properties (the
"Oxford Properties") controlled by Oxford. The management contracts for
individual properties (the "Oxford Management Contracts") have terms of one year
and provide for management fees ranging from 3.25% to 9% of each property's
rental revenue. Unless 30 days notice of non-renewal is provided by Oxford to
NHP, the Oxford Management Contracts automatically renew for additional one year
periods. Such contracts are terminable for failure by NHP to meet certain
financial performance standards with respect to the management of individual
properties, and for cause in certain circumstances, including material breaches
of NHP's obligations under the contracts. However, NHP possesses voting rights
with respect to certain Oxford entities that NHP believes prevent Oxford from
terminating or failing to renew the Oxford Management Contracts without NHP's
consent, except in the event of a sale of the managed Oxford properties. In
connection with AIMCO's purchase of greater than 50% of the outstanding common
stock of the Company, Oxford has indicated that it believes it has the right not
to renew the Oxford Management Contracts without NHP's consent. AIMCO and the
Company believe these assertions are without merit. Although AIMCO and NHP
intend to vigorously oppose any attempt by Oxford to terminate or not to renew
the Oxford Management Contracts, there can be no assurance that Oxford will not
prevail in any such attempt.
NHP received $12.9 million of management fees from management of the Oxford
Properties in 1996 and $9.6 million in the first nine months of 1997. The Stock
Purchase Agreement provides that Demeter and Capricorn will indemnify AIMCO
against certain losses in excess of $3 million resulting from claims made by
Oxford under the Oxford Management Contracts. This indemnification obligation is
subject to a number of exceptions and qualifications. Termination of the Oxford
Management Contracts could have a material adverse effect on NHP's results of
operations.
DISCONTINUED OPERATIONS
WMF bears the Level I risk of loss associated with the loans it services
under the FNMA DUS program. The Level I risk of loss imposes a lender deductible
of 5 percent of the unpaid principal balance and limits the maximum loss to 20
percent of the original mortgage. The unpaid principal balance of the FNMA DUS
loan servicing portfolio was approximately $838 million at September 30, 1997.
The DUS loans are secured by first liens on the underlying multifamily
properties and are concentrated primarily in Texas, Nevada, Arizona, Ohio and
New York. The Company has provided a reserve for losses of $4.9 million as of
September 30, 1997. This reserve represents management's estimate of losses
which may be incurred on loans underwritten to date that are currently being
serviced. Under the DUS program, WMF has also established at September 30, 1997,
a $4.4 million irrevocable letter of credit on FNMA's behalf to fund any loan
losses.
(10) NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"),
which will change the reporting of earnings per share effective
11
<PAGE> 14
NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
in the fourth quarter of 1997. Basic earnings per share, a measure required by
the new standard, will not include stock options as common stock equivalents
and, therefore, is expected to be higher than if the previously required primary
earnings per share were to be reported. Under the Company's current capital
structure, diluted earnings per share, also required by the new standard, will
be calculated the same as the previously required primary earnings per share.
(11) PENDING SALE OF HALL PORTFOLIO
Pursuant to the terms of the NHP Southwest Partners, L.P. partnership
agreement, on July 29, 1997, the Real Estate Companies elected to sell their
interests in 32 multifamily properties (collectively, the "Hall Portfolio") to
other unaffiliated joint venture partners. Effective at the closing of the sale,
which is not expected to occur until after the effective date of the AIMCO
merger, NHP will no longer provide property management services to the 32
properties which comprise the Hall Portfolio. NHP recognized approximately $1.8
million and $1.3 million in property management revenues associated with
management of the Hall Portfolio for the year and nine months ended December 31,
1996, and September 30, 1997, respectively. Although NHP is entitled to a
termination fee in connection with this transaction, if (as expected) the
termination occurs after the AIMCO merger, the termination fee, if paid, would
be an intercompany payment for AIMCO and would not impact their financial
results. The sale is subject to customary closing conditions and approvals from
unrelated third parties and is expected to be completed by the end of 1997,
although there can be no assurance that the sale will ultimately close.
12
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements in certain circumstances. Certain
information included in this Report and other Company filings (collectively "SEC
Filings") under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (as well as information communicated orally or
in writing between the dates of such SEC Filings) contains or may contain
information that is forward looking, including statements regarding the effect
of government regulations and regarding the effect of acquisitions. Actual
results may differ materially from those described in the forward looking
statements and will be affected by a variety of factors including the completion
of the merger discussed below, national and local economic conditions, the
general level of interest rates, terms of governmental regulations that affect
the Company and interpretations of those regulations, the competitive
environment in which the Company operates, the availability of working capital,
dispositions of properties managed by the Company, and the availability of
acquisition opportunities. Additional factors that could affect results are set
forth below and in the Company's 1996 Annual Report on Form 10-K, filed March
21, 1997, as amended, and the Company's Registration Statement on Form S-1,
filed June 5, 1995, as amended.
On August 18, 1995, NHP Incorporated (the "Company" or "NHP") completed an
initial public offering (the "IPO") of 4.3 million shares of its common stock
for net proceeds of approximately $52.0 million. Prior to that date the Company
had been owned by various private investors. Concurrently with the closing of
the IPO, the Company sold those of its subsidiaries which held all of the
Company's direct and indirect interest in property-owning partnerships, along
with its captive insurance subsidiary and certain other related assets
(collectively referred to as the "Real Estate Companies") to the two controlling
shareholders of the Company, Demeter Holdings Corporation ("Demeter") and
Capricorn Investors, L.P. ("Capricorn"), and J. Roderick Heller, III, the
Chairman, President and Chief Executive Officer of the Company ("Mr. Heller").
On June 3, 1997, Apartment Investment and Management Company ("AIMCO") acquired
the Real Estate Companies from Demeter, Capricorn, Phemus Corporation, an
affiliate of Demeter, Mr. Heller, and NHP Partners Two LLC, for total
consideration of $54.8 million cash and warrants to purchase 399,999 shares of
AIMCO common stock at an exercise price of $36.00 per share. Most of the
properties owned or controlled by the Real Estate Companies are currently
managed by the Company pursuant to a long-term property management contract.
Pursuant to the Merger Agreement discussed below, the Company waived its right
of first refusal to purchase the real estate sold to AIMCO. For further
discussion, see Note 3 to the Unaudited Consolidated Financial Statements.
As of April 1, 1996, The Company closed the acquisition of all of the
outstanding capital stock of WMF Holdings, Ltd., which was subsequently renamed
The WMF Group, Ltd. ("WMF"), for consideration of approximately $21 million in
the form of $16.8 million in cash and 210,000 shares of the Company's common
stock. WMF is the owner of Washington Mortgage Financial Group, Ltd.
("Washington Mortgage Financial") of Fairfax County, Virginia, one of the
nation's leading multifamily and commercial mortgage originators and servicers.
Included in Washington Mortgage Financial is WMF/Huntoon, Paige Associates
Limited ("WMF/Huntoon, Paige"), a leading FHA mortgage originator and servicer
located in Edison, New Jersey.
On April 21, 1997, the Company entered into a plan to spin off WMF (the
Company's former Financial Services business segment) to the Company's current
shareholders. The plan provides for the distribution of shares of WMF to
existing shareholders pursuant to the terms of a Rights Agreement approved by
the Board of Directors. For further discussion, see Note 2 to the Unaudited
Consolidated Financial Statements. Accordingly, the accompanying Unaudited
Consolidated Financial Statements reflect WMF as discontinued operations in
accordance with GAAP. In addition, the 1996 Consolidated Financial Statements
have been restated to present WMF as discontinued operations.
13
<PAGE> 16
On April 21, 1997, the Company announced that it had entered into a
definitive Merger Agreement pursuant to which the Company will be acquired by
AIMCO, a real estate investment trust whose shares are traded on the New York
Stock Exchange (AIV-NYSE). Upon completion of the merger, each of the Company's
stockholders will receive for each share of Company common stock, at the
stockholder's election, either (i) a combination of 0.37383 shares of AIMCO
common stock and $10.00 cash per share of Company common stock, or (ii) 0.74766
shares of AIMCO common stock. The merger with AIMCO will, however, require
approval by two-thirds vote of all shares of Company common stock, excluding
shares deemed to be owned by AIMCO or its affiliates, and customary state and
federal regulatory and other approvals. Stockholder meetings to approve the
merger are expected to be held in the fourth quarter of 1997.
On May 5, 1997, AIMCO acquired, pursuant to a stock purchase agreement,
dated April 16, 1997, 6,496,073 shares of the Company's stock from Demeter
Holdings Corporation ("Demeter") and Capricorn Investors, L.P. ("Capricorn"),
who together held a majority of the outstanding shares of the Company's common
stock (approximately 54.8%). As consideration for the sale of the Company's
common stock, Demeter received $72.6 million in cash and 1,224,463 shares of
AIMCO common stock, and Capricorn received 918,394 shares of AIMCO common stock.
Upon completion of AIMCO's purchase of this portion of the shares held by
Demeter and Capricorn, AIMCO held a majority (approximately 51%) of the issued
and outstanding shares of the Company's common stock. AIMCO acquired the
remaining 434,051 shares of Company common stock owned by Demeter and Capricorn
on September 12, 1997, bringing the total shares of the Company's stock owned by
AIMCO to 6,930,122, or approximately 54% of the issued and outstanding stock.
For further discussion of the pending AIMCO merger and AIMCO's purchase of
Company shares held by Demeter and Capricorn, see Note 3 to the Unaudited
Consolidated Financial Statements.
Except for $6.5 million of non-recurring expenses discussed in Note 4 to
the Unaudited Consolidated Financial Statements, no effect has been given to the
potential impact of the merger with AIMCO in the following discussion of the
Company's results of operations and financial position.
ACQUISITIONS AND NEW BUSINESSES
CONTINUING OPERATIONS
In November 1996, the Company and Property Resources Corporation ("PRC")
signed an agreement to enter into three separate joint ventures (the "PRC
Acquisition"). The PRC Acquisition closed in escrow in late 1996 but did not
receive HUD 2530 approval until January 1997. Therefore, for financial
accounting purposes, the transaction is accounted for as a 1997 acquisition.
For further discussion, see Note 5 to the Unaudited Consolidated Financial
Statements.
In January 1997, the Company acquired all of the outstanding shares of
Broad Street Management, Inc. ("Broad Street"), a Columbus, Ohio-based property
management company for approximately $1.8 million. For further discussion, see
Note 5 to the Unaudited Consolidated Financial Statements.
DISCONTINUED OPERATIONS
On April 16, 1997, Washington Mortgage Financial completed the acquisition
of the assets of Askew Investment Company ("Askew"), the third largest
commercial mortgage banking firm in metropolitan Dallas-Fort Worth, Texas, for
$4.6 million. Included in the transaction is Askew's $425 million loan servicing
portfolio of office building, warehouse, retail and multifamily properties, as
well as the firm's 14 active correspondent relationships with life insurance
companies. The acquisition will be accounted for under the purchase method of
accounting.
14
<PAGE> 17
LEGISLATIVE ACTION REGARDING PROPOSED HUD REORGANIZATION AND RESTRUCTURING OF
HUD PROGRAMS
The Company manages approximately 44,000 units that are subsidized under
Section 8 of the United States Housing Act of 1937, as amended ("Section 8").
These subsidies are generally provided pursuant to project-based contracts with
the owners of the properties or, with respect to a limited number of units
managed by the Company, pursuant to vouchers received by tenants. A substantial
number of the Section 8 subsidies are scheduled to expire prior to 2005, unless
renewed. For the past several years, various proposals have been advanced by the
United States Department of Housing and Urban Development ("HUD"), Congress and
others proposing the restructuring of Section 8. Congress has now approved one
such proposal and has sent it to the President for signature. This proposal
would reduce subsidized rents to market levels, thereby reducing rent subsidies,
and would lower required debt service costs as needed to ensure financial
viability at the reduced rents and rent subsidies. The proposal would retain
project-based subsidies for most properties (properties in tight rental markets,
properties serving the elderly, and certain other properties). The proposal
would phase-out project-based subsidies on selected properties serving families
and not located in tight rental markets, with a conversion to a tenant-based
subsidy. Under a tenant-based system, rent vouchers would be issued to qualified
tenants who then could elect to reside at a property of their choice, provided
the tenant has the financial ability to pay the difference between the selected
property's monthly rent and the value of the voucher, which would be established
based on HUD's regulated fair market rent for that geographical area. The
proposal provides that properties will begin the restructuring process in
federal fiscal year 1999 (beginning October 1, 1998). With respect to Housing
Assistance Payments Contracts ("HAP Contracts") expiring before that date,
Congress has elected to renew expiring HAP Contracts for one year terms,
generally at existing rents, so long as the properties remain in compliance with
the HAP Contracts. While the Company does not believe that the proposed changes
would result in a significant number of tenants relocating from properties
managed by the Company, there can be no assurance that the proposed changes
would not significantly affect the Company's management portfolio. Furthermore,
there can be no assurance that changes in Federal subsidies will not be more
restrictive than those currently proposed or that other changes in policy will
not occur. Any such changes could have an adverse effect on the Company's
property management revenues.
RESULTS OF OPERATIONS
SUMMARY
For the third quarter of 1997, the Company recorded pre-tax income from
continuing operations of $2.5 million compared with $3.6 million for the third
quarter of 1996, a decrease of $1.0 million. For the nine months ended September
30, 1997, the Company recorded pre-tax income of $4.5 million compared with
$12.4 million for the same period of 1996, a decrease of $7.9 million. Excluding
non-recurring expenses of $1.0 million discussed in Note 4 to the Unaudited
Consolidated Financial Statements, third quarter pre-tax earnings were $3.5
million. Excluding non-recurring expenses of $6.5 million, pre-tax earnings for
the first nine months of 1997 were $11.0 million.
Both revenues and expenses from continuing operations of the Company show
increases in the three and nine month periods of 1997 over 1996, primarily as a
result of the acquisition of Preferred Home Health, Inc. in July 1996, the
acquisition of additional property management contracts, and the inclusion of
the operating results of the Great Atlantic properties beginning May 5, 1997.
The decrease in pre-tax income from continuing operations for the three and nine
month periods, excluding non-recurring expenses, resulted primarily from
increased costs in 1997 as a result of the move of the Company's headquarters
and Indianapolis offices to new locations in 1996, amortization of goodwill
related to the acquisition of Preferred Home Health, Inc. and increased
amortization of purchased management contracts resulting from acquisitions along
with the related increased interest expense on borrowings to finance the
acquisitions. In addition, the three and nine month periods ended September 30,
1997, include $0.6 million and $1.0 million, respectively, of pre-tax losses
from the real estate operations of the Great Atlantic properties. See the
discussion below for further explanations of changes in revenues and expenses.
The Company's earnings from continuing operations before interest expense,
income taxes, depreciation and amortization ("EBITDA") for the third quarter of
1997, including the results of operations of the Great Atlantic
15
<PAGE> 18
properties and excluding non-recurring expenses, was $9.7 million compared with
$6.5 million for the third quarter of 1996, an improvement of $3.2 million, or
50.2%. EBITDA for the first nine months of 1997, including the results of
operations of the Great Atlantic properties and excluding non-recurring
expenses, was $26.2 million compared with $19.2 million for the same period of
1996, an improvement of $7.0 million, or 36.6%. Approximately $1.9 million and
$3.1 million of the increase in EBITDA for the three and nine month periods,
respectively, is attributable to including the operating results of the Great
Atlantic properties from May 5, 1997 (for further discussion of the Great
Atlantic properties, see Note 1 to the Unaudited Consolidated Financial
Statements). EBITDA is widely used in the industry as a measure of a company's
operating performance, but should not be considered as an alternative either
(i) to income from continuing operations (determined in accordance with
generally accepted accounting principles) as a measure of profitability or
(ii) to cash flows from operating activities (determined in accordance with
generally accepted accounting principles). EBITDA does not take into account the
Company's debt service requirements and other commitments and, accordingly, is
not necessarily indicative of amounts that may be available for discretionary
uses.
The Company recorded a net income for the third quarter of 1997 of
$2.9 million, compared with net income of $2.3 million in the third quarter of
1996. For the first nine months of 1997, net income was $4.7 million, compared
with net income of $8.1 million for the same period of 1996.
Table 1 below sets forth the percentage of the Company's total revenue from
continuing operations represented by each revenue and expense line presented.
This table is presented as supplemental information to enable the reader to
better analyze the change in revenues and expenses during the three and nine
months ended September 30, 1997, versus the same periods of 1996. The percent of
revenue comparison is intended to make the periods more comparable by removing
the absolute effect of growth in revenues and expenses which results from
expansion of the Company's business.
TABLE 1
SUMMARY FINANCIAL OPERATIONAL DATA - REVENUE AND EXPENSES FROM
CONTINUING OPERATIONS AS A PERCENTAGE OF TOTAL REVENUE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Property management services 24.6% 29.2% 26.7% 28.9%
On-site personnel, general and
administrative cost
reimbursement 60.1% 63.6% 61.4% 65.6%
Administrative and reporting
fees 2.5% 2.1% 2.3% 2.1%
Rental revenue 7.6% - 4.5% -
Other 5.2% 5.1% 5.1% 3.4%
----- ----- ----- -----
Total revenue 100.0% 100.0% 100.0% 100.0%
EXPENSES
Salaries and benefits
On-site employees 58.5% 60.2% 59.5% 63.5%
Off-site employees 13.1% 14.8% 13.7% 13.7%
Other general and administrative 6.1% 8.3% 6.9% 7.3%
Real estate operating costs 4.8% - 2.9% -
Costs charged to the Real
Estate Companies 1.6% 3.4% 1.8% 2.1%
Amortization of purchased
management contracts 2.5% 2.3% 2.8% 2.1%
Other depreciation and
amortization 3.1% 1.1% 2.5% 0.7%
Non-recurring expenses 1.7% - 4.0% -
----- ----- ----- -----
Total expenses 91.4% 90.1% 94.1% 89.4%
----- ----- ----- -----
Operating Income 8.6% 9.9% 5.9% 10.6%
===== ===== ===== =====
EBITDA 15.2% 13.5% 12.1% 13.6%
===== ===== ===== =====
</TABLE>
16
<PAGE> 19
The Company's expenses include salaries and benefits with respect to
employees working at managed properties that are fully reimbursed by the
property-owning partnerships, and certain general and administrative costs that
are fully reimbursed by the Real Estate Companies. The reimbursements, recorded
as revenue under "On-site personnel, general and administrative cost
reimbursement," fully offset the corresponding expenses, with no impact on the
Company's net income. Therefore, reimbursed expenses and related revenue are not
analyzed in any detail below. Table 2 below shows the Company's adjusted revenue
and expenses, which excludes on-site personnel, general and administrative cost
reimbursements, and related expenses.
Table 3 below sets forth the percentage of the Company's total revenue
excluding on-site personnel, general and administrative cost reimbursement
("adjusted revenue") represented by each revenue and expense line presented.
This table is presented as supplemental information to enable the reader to
better analyze the change in revenues and expenses during the three and nine
month periods ended September 30, 1997, versus the same periods of 1996. The
percent of revenue comparison is intended to make the periods more comparable by
removing the absolute effect of growth in revenues and expenses which results
from expansion of the Company's business. Such a presentation would also reflect
economies in operating expenses, to the extent they exist.
TABLE 2
SUMMARY FINANCIAL AND OPERATIONAL DATA - ADJUSTED REVENUE AND
ADJUSTED OPERATING EXPENSES FROM CONTINUING OPERATIONS (IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Property management services $14,134 $14,001 $43,282 $40,566
Administrative and reporting
fees 1,425 1,029 3,796 2,913
Rental revenue 4,394 - 7,310 -
Other 2,965 2,455 8,233 4,812
------- ------- ------- -------
Adjusted revenue (1) 22,918 17,485 62,621 48,291
EXPENSES
Salaries and benefits,
off-site employees 7,524 7,095 22,257 19,183
Other general and administrative 3,481 3,987 11,228 10,288
Real estate operating costs 2,776 - 4,639 -
Amortization of purchased
management contracts 1,460 1,114 4,497 3,007
Other depreciation and
amortization 1,760 529 3,978 1,010
Non-recurring expenses 955 - 6,501 -
------- ------- ------- -------
Adjusted operating
expenses (2) 17,956 12,725 53,100 33,488
------- ------- ------- -------
Operating Income $ 4,962 $ 4,760 $ 9,521 $14,803
======= ======= ======= =======
EBITDA $ 8,736 $ 6,450 $19,659 $19,151
======= ======= ======= =======
</TABLE>
17
<PAGE> 20
TABLE 3
SUMMARY FINANCIAL AND OPERATIONAL DATA - ADJUSTED REVENUE AND
ADJUSTED OPERATING EXPENSES FROM CONTINUING OPERATIONS AS A
PERCENTAGE OF ADJUSTED REVENUE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Property management services 61.7% 80.1% 69.1% 84.0%
Administrative and reporting
fees 6.2% 5.9% 6.1% 6.0%
Rental revenue 19.2% - 11.7% -
Other 12.9% 14.0% 13.1% 10.0%
----- ----- ----- -----
Adjusted revenue (1) 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
EXPENSES
Salaries and benefits, off-site
employees 32.8% 40.6% 35.5% 39.7%
Other general and
administrative 15.2% 22.8% 17.9% 21.3%
Real estate operating costs 12.1% - 7.4% -
Amortization of purchased
management contracts 6.4% 6.4% 7.2% 6.2%
Other depreciation and
amortization 7.7% 3.0% 6.4% 2.1%
Non-recurring expenses 4.2% - 10.4% -
----- ----- ----- -----
Adjusted operating
expenses (2) 78.4% 72.8% 84.8% 69.3%
----- ----- ----- -----
Operating Income 21.6% 27.2% 15.2% 30.7%
===== ===== ===== =====
EBITDA 38.1% 36.9% 31.4% 39.7%
===== ===== ===== =====
</TABLE>
- ------------------
(1) Adjusted revenue excludes on-site personnel, general and administrative
cost reimbursement.
(2) Adjusted operating expenses exclude salaries and benefits for on-site
employees and costs charged to the Real Estate Companies.
RESULTS OF OPERATIONS - CONTINUING OPERATIONS - THIRD QUARTER 1997 COMPARED WITH
THIRD QUARTER 1996
REVENUE
Total revenue consists of property management services fees, on-site
personnel, general and administrative cost reimbursement, administrative and
reporting fees, rental revenue, and other revenue. Adjusted revenue equals total
revenue less on-site personnel, general and administrative cost reimbursement.
Third quarter 1997 total revenue increased $9.6 million, or 19.9%, over third
quarter 1996. Third quarter 1997 adjusted revenue increased $5.4 million, or
31.1% over third quarter 1996. The reasons for these changes are set forth
below.
PROPERTY MANAGEMENT SERVICES revenue increased $0.1 million, or 0.9%,
during the third quarter of 1997 versus 1996. As a percentage of total revenue,
property management revenue decreased to 24.6% from 29.2%. As a percentage of
adjusted revenue, property management revenue decreased to 61.7% from 80.1%. The
slight increase in absolute terms resulted primarily from an increase in the
average number of units managed, due to acquisitions in 1996 and early 1997,
offset by the absence of termination fees in the third quarter of 1997 verses
1996. The decrease as a percentage of total and adjusted revenue reflects the
addition of rental revenue related to the Great Atlantic properties.
ADMINISTRATIVE AND REPORTING FEES increased $0.4 million, or 38.5%, during
the third quarter of 1997 versus 1996. As a percentage of total revenue,
administrative and reporting fees revenue increased to 2.5% from 2.1%. As a
percentage of adjusted revenue, administrative and reporting fees revenue
increased to 6.2% from 5.9%. This revenue is subject to fluctuations from year
to year and is recorded on an estimated basis throughout the year, subject to
18
<PAGE> 21
adjustment depending on actual fees received during the year. In the future, the
Company expects administrative and reporting fees to decline as a percentage of
adjusted revenue because these fees are not received with respect to
newly-acquired management contracts and as the properties which have
administrative and reporting fees are lost due to sale or other reasons.
RENTAL REVENUE consists of gross rental revenue less vacancies and
concessions. Rental revenue represents three months activity of the Great
Atlantic properties which have been included in the results of the Company from
May 5, 1997, the date of change in control of the Company.
OTHER REVENUE, which includes Buyers Access (Registered Trademark) fees,
revenues from Preferred Home Health, tax credit investment fees, insurance
advisory fees and other revenue, increased $0.5 million, or 20.8%, during the
third quarter of 1997 versus 1996. As a percentage of total revenue, other
revenue increased to 5.2% from 5.1%. As a percentage of adjusted revenue, other
revenue decreased to 12.9% from 14.0%. The increase in absolute terms and as a
percentage of total revenue resulted primarily from the acquisition of Preferred
Home Health in July 1996, and an increase in the average number of units
enrolled in the Buyers Access (Registered Trademark) program during the third
quarter of 1997 versus 1996. These increases were offset somewhat by a decrease
in certain transaction driven asset management and tax credit investment fees in
the third quarter of 1997 versus 1996. The decrease as a percentage of adjusted
revenue resulted primarily from the increase in revenue from the addition of
rental revenue related to the Great Atlantic properties.
EXPENSES
Total expenses consist of salaries and benefits for on-site and off-site
employees, other general and administrative expenses, real estate operating
costs, costs charged to the Real Estate Companies, amortization of purchased
management contracts, other depreciation and amortization and non-recurring
expenses. Adjusted operating expenses equal total expenses less salaries and
benefits for on-site employees and costs charged to the Real Estate Companies.
Total expenses increased $9.4 million, or 21.7%, in the third quarter of 1997
versus the of 1996. Adjusted operating expenses increased $5.2 million, or
41.1%, in the third quarter of 1997 versus the third quarter of 1996. The
reasons for these changes are set forth below.
SALARIES AND BENEFITS - OFF-SITE EMPLOYEES expenses increased $0.4 million,
or 6.0%, in the third quarter of 1997 versus 1996. As a percentage of total
revenue, salary and benefits - off-site employees decreased to 13.1% from 14.8%.
As a percentage of adjusted revenue, salary and benefits - off-site employees
decreased to 32.8% from 40.6%. The increase in absolute terms resulted primarily
from personnel costs associated with Preferred Home Health and management of
additional properties. The decrease as a percentage of total and adjusted
revenue resulted primarily from the increase in revenue and expenses due to the
addition of rental revenue and real estate operating expenses from the Great
Atlantic properties.
OTHER GENERAL AND ADMINISTRATIVE expenses decreased $0.4 million, or 12.7%,
in the third quarter of 1997 versus 1996. As a percentage of total revenue,
other general and administrative expenses decreased to 6.1% from 8.3%. As a
percentage of adjusted revenue, other general and administrative expenses
decreased to 15.2% from 22.8%. The decrease in absolute terms resulted primarily
from a lower provision for doubtful accounts in the third quarter of 1997 versus
1996. The decrease as a percentage of total and adjusted revenue resulted
primarily from the increase in revenue and expenses due to the addition of
rental revenue and real estate operating expenses from the Great Atlantic
properties.
REAL ESTATE OPERATING COSTS represent three months of operating costs of
the Great Atlantic properties which have been included in the results of the
Company from May 5, 1997, the date of change in control of the Company.
AMORTIZATION OF PURCHASED MANAGEMENT CONTRACTS increased $0.3 million, or
31.1%, in the third quarter of 1997 versus 1996. As a percentage of total
revenue, amortization of purchased management contracts increased to 2.5% from
2.3%. As a percentage of adjusted revenue, amortization of purchased management
contracts remained the same at 6.4%. The increase in absolute terms and as a
percentage of total revenues resulted primarily from amortization of additional
purchased management contracts.
19
<PAGE> 22
OTHER DEPRECIATION AND AMORTIZATION expense increased $1.2 million, or
232.7%, in the third quarter of 1997 versus 1996. As a percentage of total
revenue, depreciation and amortization expense increased to 3.1% from 1.1%. As a
percentage of adjusted revenue, depreciation and amortization expense increased
to 7.7% from 3.0%. The increase in absolute terms and as a percentage of total
and adjusted revenue resulted primarily from depreciation associated with the
Great Atlantic properties ($0.8 million), increased depreciation on computer
hardware and software purchased and developed in connection with the Company's
move from mainframe to client-server based technology, leasehold improvements,
furniture and equipment purchased in connection with the movement of the
Company's headquarters to Vienna, Virginia and the movement of the Company's
Indianapolis, Indiana facilities to a new location in Indianapolis, and
amortization of goodwill associated with the acquisition of Preferred Home
Health.
NON-RECURRING EXPENSES represent costs recorded related to NHP's plan to
close its Vienna, Virginia offices and to the pending AIMCO merger. In
conjunction with the acquisition of majority ownership of the Company by AIMCO
and the purchase of 100% of the Real Estate Companies by AIMCO, the Company has
entered into a plan to relocate the various functions performed at its current
corporate headquarters to its facilities in Indianapolis, Indiana, to AIMCO's
headquarters in Denver, Colorado, or to office space currently leased by the
Real Estate Companies in Washington, D.C. Accordingly, the Company recorded $3.8
million of expense in the second quarter of 1997, and a $0.6 million adjustment
to its previous estimate in the third quarter of 1997, consisting solely of
severance costs related to this transition. The total of $4.4 million of expense
is included in Non-recurring expenses on the Company's Unaudited Consolidated
Statements of Operations. The Company has recorded other costs, which have been
incurred to date, associated with the pending AIMCO merger. These costs are also
included in Non-recurring costs on the Unaudited Consolidated Statement of
Operations and include various professional fees and the Company's estimated
share of the cost associated with the joint proxy statement incurred to date.
The Company recorded total non-recurring expenses of $1.0 million and $6.5
million for the three and nine month periods ended September 30, 1997.
Additional costs related to the merger are expected to be incurred and deducted
from income during the fourth quarter of 1997.
RESULTS OF OPERATIONS - CONTINUING OPERATIONS - NINE MONTHS OF 1997 COMPARED
WITH NINE MONTHS OF 1996
REVENUE
Total revenue increased $21.6 million, or 15.4%, for the first nine months
of 1997 verses 1996. Adjusted revenue increased $14.3 million, or 29.7% for the
first nine months of 1997 over the same period of 1996. The reasons for these
changes are set forth below.
PROPERTY MANAGEMENT SERVICES revenue increased $2.7 million, or 6.7%,
during the first nine months of 1997 versus 1996. As a percentage of total
revenue, property management revenue decreased to 26.7% from 28.9%. As a
percentage of adjusted revenue, property management revenue decreased to 69.1%
from 84.0%. The increase in absolute terms resulted primarily from an increase
in the average number of units managed, due to acquisitions in 1996 and early
1997. The decrease as a percentage of total and adjusted revenue reflects the
addition of rental revenue related to the Great Atlantic properties and the more
than proportional increase in other revenue discussed below.
ADMINISTRATIVE AND REPORTING FEES increased $0.9 million, or 30.3%, during
the first nine months of 1997 versus 1996. As a percentage of total revenue,
administrative and reporting fees revenue increased to 2.3% from 2.1%. As a
percentage of adjusted revenue, administrative and reporting fees revenue
increased to 6.1% from 6.0%. This revenue is subject to fluctuations from year
to year and is recorded on an estimated basis throughout the year, subject to
adjustment depending on actual fees received during the year. In the future, the
Company expects administrative and reporting fees to decline as a percentage of
adjusted revenue because these fees are not received with respect to newly-
acquired management contracts and as the properties which have administrative
and reporting fees are lost due to sale or other reasons.
20
<PAGE> 23
RENTAL REVENUE represents five months activity of the Great Atlantic
properties which has been included in the results of the Company from May 5,
1997, the date of change in control of the Company.
OTHER REVENUE increased $3.4 million, or 71.1%, during the first nine
months of 1997 versus 1996. As a percentage of total revenue, other revenue
increased to 5.1% from 3.4%. As a percentage of adjusted revenue, other revenue
increased to 13.1% from 10.0%. The increase in absolute terms and as a
percentage of total and adjusted revenue resulted primarily from the acquisition
of Preferred Home Health in July 1996 and an increase in the average number of
units enrolled in the Buyers Access (Registered Trademark) program.
EXPENSES
Total expenses increased $26.9 million, or 21.4%, in the first nine months
of 1997 versus 1996. Adjusted operating expenses increased $19.6 million, or
58.6%, in the first nine months of 1997 versus of 1996. The reasons for these
changes are set forth below.
SALARIES AND BENEFITS - OFF-SITE EMPLOYEES expenses increased $3.1 million,
or 16.0%, in the first nine months of 1997 versus 1996. As a percentage of total
revenue, salary and benefits - off-site employees remained the same at 13.7%. As
a percentage of adjusted revenue, salary and benefits - off-site employees
decreased to 35.5% from 39.7%. The increase in absolute terms resulted primarily
from personnel costs associated with Preferred Home Health and management of
additional properties. The decrease as a percentage of adjusted revenue resulted
primarily from the increase in adjusted revenue due to the addition of rental
revenue from the Great Atlantic properties without a proportional increase in
salaries and benefits - off-site employees.
OTHER GENERAL AND ADMINISTRATIVE expenses increased $0.9 million, or 9.1%,
in the first nine months of 1997 versus 1996. As a percentage of total revenue,
other general and administrative expenses decreased to 6.9% from 7.3%. As a
percentage of adjusted revenue, other general and administrative expenses
decreased to 17.9% from 21.3%. The increase in absolute terms resulted primarily
from growth in the Company's business and increased costs associated with the
Company's new facilities in Vienna, Virginia and Indianapolis, Indiana. The
decrease as a percentage of total and adjusted revenue resulted primarily from
the increase in adjusted revenue due to the addition of rental revenue from the
Great Atlantic properties.
REAL ESTATE OPERATING COSTS represent five months of operating costs of the
Great Atlantic properties which have been included in the results of the Company
from May 5, 1997, the date of change in control of the Company.
AMORTIZATION OF PURCHASED MANAGEMENT CONTRACTS increased $1.5 million, or
49.6%, in the first nine months of 1997 versus 1996. As a percentage of total
revenue, amortization of purchased management contracts increased to 2.8% from
2.1%. As a percentage of adjusted revenue, amortization of purchased management
contracts increased to 7.2% from 6.2%. The increase in absolute terms and as a
percentage of total and adjusted revenues resulted primarily from amortization
of additional purchased management contracts.
OTHER DEPRECIATION AND AMORTIZATION expense increased $3.0 million, or
293.9%, in the first nine months of 1997 versus 1996. As a percentage of total
revenue, depreciation and other amortization expense increased to 2.5% from
0.7%. As a percentage of adjusted revenue, depreciation and amortization expense
increased to 6.4% from 2.1%. The increase in absolute terms and as a percentage
of total and adjusted revenue resulted primarily from depreciation associated
with the Great Atlantic properties ($1.3 million), increased depreciation on
computer hardware and software purchased and developed in connection with the
Company's move from mainframe to client-server based technology, leasehold
improvements, furniture and equipment purchased in connection with the movement
of the Company's headquarters to Vienna, Virginia, and the movement of the
Company's Indianapolis, Indiana facilities to a new location in Indianapolis,
and amortization of goodwill associated with the acquisition of Preferred Home
Health.
NON-RECURRING EXPENSES represent costs recorded related to NHP's plan to
close its Vienna, Virginia offices and to the pending AIMCO merger, as
previously discussed. The Company recorded total non-recurring expenses of
21
<PAGE> 24
$6.5 million for the nine month period ended September 30, 1997. Additional
costs related to the merger are expected to be incurred and deducted from income
during the fourth quarter of 1997.
INTEREST INCOME AND INTEREST EXPENSE
Interest income increased $0.5 million, or 1078.7%, for the third quarter
of 1997 versus 1996. Interest income increased $1.3 million, or 402.4%, for the
first nine months of 1997 versus 1996. This increase for the three and nine
month periods is due primarily to interest income recognized on the Goldberg and
PRC notes receivable, offset slightly by a decrease in interest income on
amounts due from the Real Estate Companies.
Interest expense increased $1.7 million, or 140.6%, for the third quarter
of 1997 versus 1996. Interest expense increased $3.9 million, or 144.6%, for the
first nine months of 1997 verses 1996. The increase is due primarily to
approximately $1.7 million and $2.9 million of interest expense recorded in the
three and nine month periods ended September 30, 1997, respectively, related to
the Great Atlantic properties' real estate related debt, as well as a higher
level of other debt during 1997 as a result of acquisitions in 1996 and early
1997.
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS (WMF)
As previously discussed, earnings from discontinued operations represents
the net results of operations of WMF which includes Washington Mortgage
Financial. WMF's primary business activities are multifamily and commercial loan
servicing, multifamily and commercial loan origination and secondary marketing.
WMF does not hold the mortgages it originates or purchases long-term but resells
them through various programs. WMF's revenue includes loan servicing fees, net
gain on sale of mortgage loans, interest income, placement fee income,
origination fee income and other income. The results of WMF are included in the
Company's results of operations, as discontinued operations, from the date of
acquisition, April 1, 1996.
For a summary of WMF's results of operations and the components of net
assets of discontinued operations, see Note 2 to the Unaudited Consolidated
Financial Statements. WMF's revenue is to a large degree activity driven and is
somewhat sensitive to economic factors such as the general level of interest
rates. Future revenues may fluctuate as a result of changes in these factors.
Therefore, WMF's third quarter and nine month results may not be indicative of
future period results. WMF results also reflect the impact of certain purchase
accounting adjustments. The purchase accounting adjustments relate primarily to
the write-up of acquired servicing rights to market value as of the date of
acquisition and the recording of the excess of purchase price over net assets
acquired ("goodwill"). These adjustments resulted in significantly increased
amortization expense related to acquired servicing rights and goodwill. For
further discussion, reference is made to Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Company's 1996
Annual Report on Form 10-K, as amended, filed March 21, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Continuing operations, particularly property management operations, have
historically provided a steady, noncyclical source of cash flow to the Company.
Net cash provided by continuing operations for the first nine months of 1997 was
$15.5 million compared with $19.7 million for the first nine months of 1996. On
September 30, 1997, cash and cash equivalents totaled $4.6 million.
Net cash provided (used) by discontinued operations includes cash flows
from operating, investing and financing activities of WMF, as well as WMF's
allocable portion of tax payments and intercompany interest amounts due to NHP.
The $8.0 million net cash used by discontinued operations for the first nine
months of 1997 represents primarily $3.7 million paid to purchase Proctor and
Associates ("Proctor") and $4.6 million paid to purchase the assets of Askew
Investment Company ("Askew"). The Proctor acquisition closed as of December 31,
1996, but the cash was not paid until early January 1997. For further
discussion of the Askew acquisition, see Note 5 to the Unaudited Consolidated
Financial Statements. Net cash provided by discontinued operations for 1996
represents cash flow from
22
<PAGE> 25
the date of purchase, April 1, 1996, and represents primarily borrowings on
WMF's acquisition line of credit partially offset by the purchase of mortgage
servicing rights and cash used by operations.
For the first nine months of 1997, net cash used in investing activities
was $13.3 million, primarily reflecting payments for the acquisition of property
management rights, the purchase of a long-term note receivable related to the
PRC transaction, the purchase of hardware and software development related to
the Company's ongoing move from mainframe technology to client-server based
technology and costs of leasehold improvements, furniture and equipment for
additional space at the Company's Vienna, Virginia headquarters. Net cash used
in investing activities in the first nine months of 1996 of $55.2 million
primarily reflects cash paid for the purchase of WMF, Preferred Home Health, and
real estate held for sale (prior to May 5, 1997, the Great Atlantic properties
were accounted for as real estate held for sale), as well as payments for
acquisition of property management rights, and the costs of computer hardware
and the related software development required for the Company's conversion to
client-server based technology.
For the first nine months of 1997, net cash provided by financing
activities was $4.5 million, primarily reflecting borrowings on the Credit
Facility related to the acquisitions of PRC and Broad Street and borrowings by
the Company for WMF's acquisition of Askew, net of repayments on the Credit
Facility and cash received from exercises of options under the Company's stock
option plans. In the first nine months of 1996, net cash provided by financing
activities was $29.3 million, primarily reflecting borrowings to purchase WMF,
Preferred Home Health and the real estate held for sale, net of repayments on
the Credit Facility.
The Company's future capital expenditures are expected to consist largely
of funds required in connection with any acquisitions by WMF, prior to its spin
off and continued investment in computer technology. The Company intends to
finance such acquisitions primarily out of operating cash flow and bank or other
borrowings, including borrowings under its various credit facilities. The
Company believes that it can repay its current indebtedness out of operating
cash flow, alternative debt arrangements or additional equity offerings. Due to
the pending merger with AIMCO, NHP Incorporated is not currently pursuing any
significant acquisitions of additional businesses and the Company currently has
no material commitments for capital expenditures.
In February 1997, the terms of the Company's $75 million Credit Facility
were amended. The significant changes in the agreement include the allowance of
up to $100 million in additional senior unsecured term debt, an increase in the
amount of unsubordinated borrowing allowed in connection with acquisitions from
$10 million to $25 million, and a reduction in the Credit Facility's overall
pricing. The interest rate has been reduced from The First National Bank of
Boston's base rate or LIBOR plus 175 basis points to a sliding scale rate which
ranges from LIBOR plus 75 basis points to LIBOR plus 125 basis points, depending
on the Company's ratio of debt to EBITDA. In addition, the commitment fee on the
unused portion of the Credit Facility may be reduced from 37.5 basis points per
annum to 25 basis points per annum, also depending on the ratio of debt to
EBITDA.
Beginning March 1, 1997, based on the Company's ongoing debt to EBITDA
ratio, the interest rate on the Company's Credit Facility was reduced to LIBOR
plus 75 basis points and the commitment fee on the unused portion of the Credit
Facility was reduced to 25 basis points per annum. These rates are evaluated
quarterly and may vary depending on the Company's debt to EBITDA ratio. On
September 30, 1997, the Company had $18 million of available borrowings under
this revolving Credit Facility.
The Company has unused NOLs for Federal tax purposes which compose most of
the Company's deferred tax asset. The amount of deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced. Furthermore, if the
Internal Revenue Service were to determine that the consideration received by
the Company in the sale of the Real Estate Companies was less than the fair
market value of the assets transferred or that other valuations of assets made
in connection with the sale were inaccurate, the amount of the net operating
loss carryforwards available to the Company could be reduced, thus increasing
the Company's future federal income tax liability. The ability of the Company to
utilize NOLs is also limited as a result of an "ownership change" within the
meaning of Section 382 of the Internal Revenue Code of 1986, as amended. The
sale of the Company's common stock by Demeter and Capricorn to AIMCO triggered
the Section 382
23
<PAGE> 26
limitations. As a result, Section 382 imposes an annual limit on the ability of
the Company to utilize NOLs. The amount of NOLs is, in any event, subject to
uncertainty until such time as they are used to offset income as their validity
is not reviewed by the Internal Revenue Service until such time as they are
utilized. The Company believes that the Section 382 limitations will not
significantly impact the Company's future tax liability.
The Company expects to recognize capital gain for federal income tax
purposes as a result of the distribution of the rights combined with the later
distribution of shares of WMF, discussed in Note 2 to the Unaudited Consolidated
Financial Statements. The amount of gain recognized by the Company will be the
excess of the fair market value of WMF on the date of the distribution of the
rights, over the Company's tax basis in WMF. The Company expects to have regular
federal NOLs available in sufficient amount to offset the gain under the regular
federal income tax, but may not have sufficient alternative minimum tax NOLs
available to offset the gain under the alternative minimum tax.
Following the distribution of shares of WMF, NHP and WMF will operate
independently and neither will have any stock ownership in the other. In
conjunction with the distribution of shares of WMF, NHP and WMF will enter into
a separation agreement that will govern their ongoing relationship. The
separation agreement will provide for the settlement, at or prior to the
distribution of shares, of any intercompany amounts owed by WMF to NHP. WMF will
not be required to repay the intercompany amounts to the extent offset by a
capital contribution of the intercompany balances up to the amount of NHP's Free
Cash Flow, as defined by the AIMCO merger agreement, generated by NHP from
February 1, 1997, through the date of the AIMCO merger. The remaining balance,
if any, will be repaid by WMF. NHP will contribute to WMF the excess, if any, of
NHP's Free Cash Flow, as defined, over the intercompany amounts owed to NHP. The
intercompany balance of approximately $9.6 million, due from WMF to NHP as of
September 30, 1997, consists primarily of advances to WMF related to the Proctor
and Askew acquisitions, intercompany tax allocations and accumulated interest on
amounts due to NHP. For further discussion of WMF's acquisition of Askew, see
Note 5 to the Unaudited Consolidated Financial Statements. In addition, the
separation agreement will provide, in part, for WMF and NHP to assume all
liabilities relating to their separate businesses and operations prior to the
distribution (except for the costs of the distribution for which NHP will be
responsible) and to indemnify each other for such liabilities and all expenses
and costs and losses related thereto, all on terms reasonably acceptable to
AIMCO.
Pursuant to contracts among certain entities and individuals associated
with Oxford Realty Financial Group, Inc. and Oxford Holdings Corporation
(collectively "Oxford") and NHP, NHP manages a portfolio of properties (the
"Oxford Properties") controlled by Oxford. The management contracts for
individual properties (the "Oxford Management Contracts") have terms of one year
and provide for management fees ranging from 3.25% to 9% of each property's
rental revenue. Unless 30 days notice of non-renewal is provided by Oxford to
NHP, the Oxford Management Contracts automatically renew for additional one year
periods. Such contracts are terminable for failure by NHP to meet certain
financial performance standards with respect to the management of individual
properties, and for cause in certain circumstances, including material breaches
of NHP's obligations under the contracts. However, NHP possesses voting rights
with respect to certain Oxford entities that NHP believes prevent Oxford from
terminating or failing to renew the Oxford Management Contracts without NHP's
consent, except in the event of a sale of the managed Oxford properties. In
connection with AIMCO's purchase of greater than 50% of the outstanding common
stock of the Company, Oxford has indicated that it believes it has the right not
to renew the Oxford Management Contracts without NHP's consent. AIMCO and the
Company believe these assertions are without merit. Although AIMCO and NHP
intend to vigorously oppose any attempt by Oxford to terminate or not to renew
the Oxford Management Contracts, there can be no assurance that Oxford will not
prevail in any such attempt.
NHP received $12.9 million of management fees from management of the Oxford
Properties in 1996 and $9.6 million in the first nine months of 1997. The Stock
Purchase Agreement provides that Demeter and Capricorn will indemnify AIMCO
against certain losses in excess of $3 million resulting from claims made by
Oxford under the Oxford Management Contracts. This indemnification obligation is
subject to a number of exceptions and qualifications. Termination of the Oxford
Management Contracts could have a material adverse effect on NHP's results of
operations.
24
<PAGE> 27
Pursuant to the terms of the NHP Southwest Partners, L.P. partnership
agreement, on July 29, 1997, the Real Estate Companies elected to sell their
interests in 32 multifamily properties (collectively, the "Hall Portfolio") to
other unaffiliated joint venture partners. Effective at the closing of the sale,
which is not expected to occur until after the effective date of the AIMCO
merger, NHP will no longer provide property management services to the 32
properties which comprise the Hall Portfolio. NHP recognized approximately $1.8
million and $1.3 million in property management revenues associated with
management of the Hall Portfolio for the year and nine months ended December 31,
1996, and September 30, 1997, respectively. Although NHP is entitled to a
termination fee in connection with this transaction, if (as expected) the
termination occurs after the AIMCO merger, the termination fee, if paid, would
be an intercompany payment for AIMCO and would not impact their financial
results. The sale is subject to customary closing conditions and approvals from
unrelated third parties and is expected to be completed by the end of 1997,
although there can be no assurance that the sale will ultimately close.
The Company has provided working capital advances to the Real Estate
Companies. These advances, which are included in receivables and totaled
$0.3 million as of September 30, 1997, are payable on demand and incur interest
at the rate equal to prime plus 1%. It has not yet been determined how the
purchase by AIMCO of the majority of Company's stock and AIMCO's purchase of the
Real Estate Companies will impact this arrangement.
25
<PAGE> 28
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
In October 1997, NHP received a subpoena from the Inspector general of HUD
requesting documents relating to any arrangement whereby NHP or any of its
affiliates provides or has provided compensation to owners of HUD multifamily
projects in exchange for on in connection with management of a HUD project. NHP
believes that other owners and managers of HUD projects have received similar
subpoenas. Documents relating to certain of NHP's acquisitions of management
rights for HUD projects - including its acquisition of management rights from
Oxford - may be responsive to the subpoena. NHP intends to comply with the
subpoena and believes that its operations are in compliance, in all material
respects, with all laws, rules and regulations relating to HUD properties.
Although the Inspector General has not initiated any action against NHP or, to
NHP's knowledge, any owner of a HUD property managed by NHP, if any such action
is taken in the future, it could affect existing arrangements with respect to
HUD projects or otherwise have a material adverse effect on NHP and AIMCO.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
11.0 Statement regarding computation of per share
earnings.
27.0 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
None
26
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NHP INCORPORATED
(Registrant)
<TABLE>
<CAPTION>
October 24, 1997 By: /S/ ANN TORRE GRANT
--------------------------------------------
<S> <C>
Ann Torre Grant
Executive Vice President, Chief Financial
Officer, and Treasurer (Authorized Officer
and Principal Financial Officer)
</TABLE>
27
<PAGE> 1
EXHIBIT 11, FORM 10-Q
COMMISSION FILE NUMBER 000-26572
NHP INCORPORATED
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
NET INCOME:
Income from
continuing
operations $ 1,521 $ 2,141 $ 2,720 $ 7,447
Income from
discontinued
operations 1,381 182 1,974 604
----------- ----------- ----------- -----------
Net income $ 2,902 $ 2,323 $ 4,694 $ 8,051
=========== =========== =========== ===========
ADJUSTMENTS TO COMMON
SHARES OUTSTANDING:
Average number of
shares of common
stock 12,834,604 12,494,620 12,710,158 12,411,627
Primary adjustment:
Assume exercise of
options (treasury
stock method) 370,952 302,398 340,975 305,318
----------- ----------- ----------- -----------
Total average number
of common shares
and equivalents
used for primary
computation 13,205,556 12,797,018 13,051,133 12,716,945
=========== =========== =========== ===========
Average number of
shares of common
stock 12,834,604 12,494,620 12,710,158 12,411,627
Fully diluted
adjustment:
Assume exercise of
options (treasury
stock method) 431,537 305,737 483,724 318,224
----------- ----------- ----------- -----------
Total average number
of common shares
and equivalents
used for fully
diluted
computation 13,266,141 12,800,357 13,193,882 12,729,851
=========== =========== =========== ===========
INCOME PER COMMON SHARE:
Net income per common
share - primary:
Income from
continuing
operations $ .12 $ .17 $ .21 $ .58
Income from
discontinued
operations .10 .01 .15 .05
----------- ----------- ----------- -----------
Net income per
common share -
primary $ .22 $ .18 $ .36 $ .63
=========== =========== =========== ===========
Net income per common
share - fully diluted:
Income from
continuing
operations $ .12 $ .17 $ .21 $ .58
Income from
discontinued
operations .10 .01 .15 .05
----------- ----------- ----------- -----------
Net income per
common share -
fully diluted $ .22 $ .18 $ .36 $ .63
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997, AND THE RELATED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS THEN ENDED, AND IS
QUALIFIED IN ITS ENTIRETY IN REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,618
<SECURITIES> 0
<RECEIVABLES> 10,290
<ALLOWANCES> 2,506
<INVENTORY> 0
<CURRENT-ASSETS> 37,712
<PP&E> 103,419
<DEPRECIATION> 8,196
<TOTAL-ASSETS> 234,781
<CURRENT-LIABILITIES> 24,556
<BONDS> 133,119
0
0
<COMMON> 130
<OTHER-SE> 67,384
<TOTAL-LIABILITY-AND-EQUITY> 234,781
<SALES> 0
<TOTAL-REVENUES> 162,088
<CGS> 0
<TOTAL-COSTS> 152,567
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,651
<INCOME-PRETAX> 4,533
<INCOME-TAX> 1,813
<INCOME-CONTINUING> 2,720
<DISCONTINUED> 1,974
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,694
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
