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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
[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 JUNE 30, 1997
Commission file number: 000-26572
NHP INCORPORATED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 52-1445137
- -------- ----------
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 August 11, 1997, there were 12,805,939 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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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations
- Three Months Ended June 30, 1997 and 1996 1
Consolidated Statements of Operations
- Six Months Ended June 30, 1997 and 1996 2
Consolidated Balance Sheets
- June 30, 1997 and December 31, 1996 3
Consolidated Statements of Cash Flows
- Six Months ended June 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 14
PART II. OTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
Signatures 28
</TABLE>
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NHP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
Revenue, substantially all from related parties
(except for rental revenue):
Property management services $14,573 $13,282
On-site personnel, general and administrative
cost reimbursement 32,145 31,214
Administrative and reporting fees 1,185 942
Rental revenue 2,916 -
Other 2,667 1,309
------- -------
Total revenue 53,486 46,747
Expenses:
Salaries and benefits:
On-site employees 31,053 30,532
Off-site employees 7,515 6,070
Other general and administrative 3,949 3,199
Real estate operating costs 1,863 -
Costs charged to the Real Estate Companies 1,092 682
Amortization of purchased management contracts 1,477 1,014
Depreciation and other amortization 1,424 287
Non-recurring expenses 4,850 -
------- -------
Total expenses 53,223 41,784
------- -------
Operating income 263 4,963
Interest income 622 136
Interest expense (2,405) (922)
------- -------
Income (loss) from continuing operations before
income taxes (1,520) 4,177
Benefit (provision) for income taxes 608 (1,673)
------- -------
Income (loss) from continuing operations (912) 2,504
Income from discontinued operations, net of income
taxes 478 421
------- -------
Net income (loss) $ (434) $ 2,925
======= =======
Net income (loss) per common share:
Continuing operations (0.07) 0.20
Discontinued operations 0.04 0.03
------- -------
Net income (loss) $ (0.03) $ 0.23
======= =======
Weighted average common and equivalent shares
outstanding (in thousands) 13,019 12,783
======= =======
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of these statements.
1
<PAGE> 4
NHP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
Revenue, substantially all from related parties
(except for rental revenue):
Property management services $ 29,148 $ 26,565
On-site personnel, general and administrative
cost reimbursement 64,900 61,746
Administrative and reporting fees 2,371 1,884
Rental revenue 2,916 -
Other 5,268 2,357
-------- --------
Total revenue 104,603 92,552
Expenses:
Salaries and benefits:
On-site employees 62,858 60,407
Off-site employees 14,733 12,089
Other general and administrative 7,747 6,300
Real estate operating costs 1,863 -
Costs charged to the Real Estate Companies 2,042 1,339
Amortization of purchased management contracts 3,037 1,893
Depreciation and other amortization 2,218 481
Non-recurring expenses 5,546 -
-------- --------
Total expenses 100,044 82,509
-------- --------
Operating income 4,559 10,043
Interest income 1,109 284
Interest expense (3,670) (1,479)
-------- --------
Income from continuing operations before
income taxes 1,998 8,848
Provision for income taxes (799) (3,541)
-------- --------
Income from continuing operations 1,199 5,307
Income from discontinued operations, net of
income taxes 593 421
-------- --------
Net income $ 1,792 $ 5,728
======== ========
Net income per common share:
Continuing operations 0.09 0.42
Discontinued operations 0.05 0.03
-------- --------
Net income $ 0.14 $ 0.45
======== ========
Weighted average common and equivalent shares
outstanding (in thousands) 12,959 12,684
======== ========
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of these statements.
2
<PAGE> 5
NHP INCORPORATED
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
(Unaudited) (Restated)
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,040 $ 4,779
Restricted cash 2,218 -
Receivables, net, substantially all from
related parties 13,692 15,270
On-site cost reimbursement receivable,
substantially all from related parties 3,600 3,816
Current portion of net deferred tax asset 2,754 6,357
Investment in real estate held for sale - 13,719
Other current assets 10,607 2,227
-------- --------
Total current assets 34,911 46,168
Purchased management contracts, net 46,957 43,718
Real estate, net 82,204 -
Net assets of discontinued operations 22,979 22,528
Goodwill, net 5,579 5,887
Property, equipment and capitalized software, net 12,460 10,415
Other assets 17,344 10,832
Net deferred tax asset 10,043 7,441
-------- --------
Total Assets $232,477 $146,989
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of long-term debt, including
amounts payable to related parties of $143
in 1997 and 1996 $ 847 $ 720
Accounts payable 2,956 3,947
Accrued expenses, including amounts associated
with related parties of $2,184 and $4,090 in 1997
and 1996, respectively 10,252 11,452
Accrued on-site salaries and benefits 3,600 3,816
Deferred revenues and other 5,250 3,400
-------- --------
Total current liabilities 22,905 23,335
Real Estate related debt 71,005 -
Other long-term debt 70,298 62,607
Other long-term liabilities 9,317 5,034
-------- --------
Total Liabilities 173,525 90,976
Commitments and contingencies (Note 10)
Shareholders' equity
Common stock, $0.01 par value, 25,000,000 shares
authorized; 12,677,439 and 12,586,629 shares
issued and outstanding in 1997 and 1996,
respectively 127 126
Additional paid-in capital 132,675 131,529
Accumulated deficit (73,850) (75,642)
-------- --------
Total shareholders' equity 58,952 56,013
-------- --------
Total Liabilities and Shareholders' Equity $232,477 $146,989
======== ========
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of these statements.
3
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NHP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1997 1996
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 1,792 $ 5,728
Discontinued operations, net of income taxes (593) (421)
-------- --------
Income from continuing operations 1,199 5,307
Depreciation and amortization 5,255 2,374
Income taxes 1,010 2,202
Decrease in receivables, substantially all from
related parties 2,182 1,713
Increase in deferred costs and other (616) (68)
Decrease in accounts payable and accrued expenses (3,237) (1,002)
Increase in deferred revenues and other
liabilities 1,389 1,813
Restricted cash (144) -
Other 203 -
-------- --------
Net cash provided by continuing operations 7,241 12,339
Net cash provided (used) by discontinued
operations (8,247) 605
-------- --------
Net cash provided (used) by operating
activities (1,006) 12,944
Cash Flows From Investing Activities:
Purchase of The WMF Group, Ltd. - (17,550)
Investment in real estate held for sale - (13,608)
Purchase of management contracts (3,491) (3,685)
Purchase of long-term note receivable (4,236) -
Purchase of fixed assets (3,221) (2,630)
Other (225) -
-------- --------
Net cash used in investing activities (11,173) (37,473)
Cash Flows From Financing Activities:
Additional borrowings 12,000 35,000
Repayments of debt (4,393) (15,094)
Proceeds from stock option exercises 993 -
Payment of financing, offering and disposition
costs (245) (280)
-------- --------
Net cash provided by financing activities 8,355 19,626
-------- --------
Decrease in cash and cash equivalents (3,824) (4,903)
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 $ 2,040 $ 1,093
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash interest payments $ 2,638 $ 876
Cash income tax payments $ 490 $ 1,742
Non-cash items:
Notes payable given as consideration for
acquisitions $ - $ 2,293
Stock issued for acquisition of The WMF
Group, Ltd. $ - $ 3,780
</TABLE>
The accompanying Notes to Unaudited 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 six
month period ended June 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 for the year ended December 31, 1996, as amended. 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 six month periods ended June 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
$9.1 million and $0.9 million as of June 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 six 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 loss (after-tax) from the operations of the Great Atlantic properties.
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. The Company has
previously 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.
5
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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 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, net of any transactions
costs (including severance and related costs) incurred by NHP . 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 $9.1 million, due from WMF to
NHP as of June 30, 1997, consists primarily of advances to WMF related to the
Proctor and Askew acquisitions and intercompany tax allocations. 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 six months of 1996 include only three months activity. The
operating results of WMF for the three and six month periods ended June 30,
1997, and the period April 1, 1996, to June 30, 1996, are summarized below (in
thousands, except per share amounts):
6
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NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Three Months Six Months
Ended April 1 - Ended
June 30, 1997 June 30, 1996 June 30, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
Financial Services $8,679 $6,595 $15,864
Financial Services interest
income 1,178 1,114 2,111
------ ------ -------
Total revenue 9,857 7,709 17,975
Expenses:
Salaries and benefits 4,097 2,814 7,654
Other general and administrative 2,784 2,085 5,260
Financial Services operating
interest 147 419 275
Provision for loan servicing
losses 279 256 453
Amortization of capitalized
mortgage servicing rights 1,126 951 2,208
Depreciation and other
amortization 406 283 739
------ ------ -------
Total expenses 8,839 6,808 16,589
------ ------ -------
Operating income 1,018 901 1,386
Interest expense (45) (77) (92)
------ ------ -------
Income before taxes 973 824 1,294
Provision for income taxes (495) (403) (701)
------ ------ -------
Net income $ 478 $ 421 $ 593
====== ====== =======
Net income per share of NHP
Incorporated common stock $ 0.04 $ 0.03 $ 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>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
Assets:
Cash and equivalents $ 7,676 $ 6,601
Mortgage loans held for sale, pledged 21,646 40,263
Other current assets 2,984 4,195
------- -------
Current assets 32,306 51,059
Capitalized mortgage servicing rights, net 22,921 22,460
Goodwill 12,182 7,705
Other assets 3,502 4,140
------- -------
Total assets $70,911 $85,364
======= =======
Liabilities:
Warehouse line of credit $20,870 $39,925
Due to NHP Incorporated 9,095 872
Other current liabilities 8,071 12,329
------- -------
Current liabilities 38,036 53,126
Long-term debt 5,047 5,315
Other long-term liabilities 4,849 4,395
------- -------
Total liabilities 47,932 62,836
------- -------
Net assets of discontinued operations $22,979 $22,528
======= =======
</TABLE>
7
<PAGE> 10
NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
WMF results for first six months of 1997 exclude $0.2 million (pre-tax) of
interest expense 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 is conditioned on the approval of the
Company's stockholders and AIMCO stockholders and customary state and federal
regulatory and other approvals.
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 holds a majority (approximately 51%) of the issued and outstanding shares
of the Company's common stock. The Stock Purchase Agreement provides for AIMCO
to acquire the remaining 434,051 shares of Company common stock owned by Demeter
and Capricorn. 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. Stockholder meetings to approve the merger are
expected to be held late in the third quarter or early in the fourth quarter of
1997.
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 MERGER RELATED 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, its portion of
the estimated cost of this transition, consisting solely of severance costs. The
$3.8 million of expense is included in Non-recurring expenses on the Company's
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 June 30, 1997, $1.5 million of
the $3.8 million had been paid to 17 departing employees. No adjustment was
recorded to the estimated liability since it was initially recorded during the
quarter.
8
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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 expense and include various professional fees and the Company's
estimated share of cost associated with the joint proxy statement incurred to
date. Additional costs related to the merger are expected to be incurred and
deducted from income during the third and fourth quarters 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 will provide
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 will provide 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 will be 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 Consolidated
Balance Sheet as of June 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 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 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 June 30, 1997, consists of the following (in
thousands):
<TABLE>
<CAPTION>
June 30,
1997
--------
<S> <C>
Land $14,359
Buildings and improvements 70,955
-------
85,314
Accumulated Depreciation (3,110)
-------
$82,204
=======
</TABLE>
(8) REAL ESTATE RELATED DEBT
PARTICIPATION IN JOINT FINANCING
The real estate related debt is associated with the Great Atlantic
properties. The Great Atlantic properties are 12 multifamily properties which
the Company acquired in 1996. The Company owns all of the limited and general
partnership interests in the limited partnerships that in turn own the local
partnerships (the partnerships that own and are responsible for the operations
of the real estate). Eleven of the twelve local partnerships participate in
joint financing, which was executed simultaneously with the acquisition. This
financing consisted of three separate but related loans: (1) a senior mortgage
loan; (2) a junior mortgage loan; and (3) a partnership loan. The junior
mortgage loan was paid in full on December 31, 1996. The remaining loans are
discussed below.
SENIOR MORTGAGE LOAN
The senior mortgage loan consists of eleven separate notes with an original
face value totaling $55.3 million. The outstanding balance as of June 30, 1997,
is $51.0 million. Interest is payable monthly at a rate of 8.53% per annum.
There are no required principal payments until the loans mature on May 31, 2001.
Principal may not be repaid prior to May 31, 1998, without the consent of the
lender.
10
<PAGE> 13
NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The senior loans are secured by first mortgages on each of the properties
and by an assignment of leases and rents. In addition, the senior note
mortgagors have entered into a guaranty agreement wherein they guarantee the
payment of all amounts due under all eleven senior mortgage notes.
Each local partnership is required to make monthly escrow deposits for
taxes, insurance, and a reserve for the replacement of project assets. Also, at
the closing of the loan, the local partnership established with the lender a
liquidity reserve equal to one month of interest on the senior and junior debt.
Under the terms of the loan, the senior mortgagors must complete a schedule of
agreed-upon deferred maintenance projects. At closing of the loan, a reserve
account was established with the lender to be used for the completion of this
work.
PARTNERSHIP LOAN
The partnership loan is evidenced by a single note, maturing June 3, 2001.
The borrowers are the eleven limited partnerships which own the majority limited
partner interests in the local partnerships, which in turn own the real estate.
The note allocates the principal among the limited partnerships, but each is
jointly and severally liable for the indebtedness. The local partnerships'
leases and rents are pledged as collateral for the loan. The debt is secured by
a pledge by each of the borrowers of their limited partnership interest in the
local partnerships. The note also grants the lender the right to receive the
operating income under a cash collateral provision, discussed below.
The partnership loan includes two tiers, totaling $15.9 million. The first
tier partnership loan amount is $9.9 million. Interest at a rate of 8.53% per
annum is payable monthly. There are no required principal payments until the
loan matures. Principal may not be prepaid until May 31, 1998, and then only if
the second tier of the partnership loan has been retired.
The second tier partnership loan amount is $6.0 million. The interest rate
is the amount that would give the lender a pre-tax rate of return of 16%.
Interest is paid at a rate of 12.588%. The difference is recorded as a deferred
payable. There are no required principal payments until May 31, 1998.
Thereafter, monthly principal payments are required in an amount equal to the
lesser of 35% of monthly cash flow or $41,666. Any shortfall is deferred. In
subsequent months, if 35% of monthly cash flow is greater than $41,666, the
excess is applied to reduce prior deferred amounts. Principal prepayments are
permitted prior to May 31, 1998, by paying a prepayment premium of 3% of the
amount prepaid.
CASH COLLATERAL ACCOUNTS
All property income is required to be deposited directly into bank accounts
controlled by the lender. These funds are swept periodically into a cash
collateral account, also controlled by the lender. To the extent sufficient
funds are available in the cash collateral account, funds are disbursed monthly
for interest on the senior mortgage loan, escrows and reserves. The excess funds
are transferred monthly to a second lender-controlled cash collateral account,
from which required interest payments on the partnership loan are made. The
remaining funds are then transferred to the properties for project operating
expenses. The guaranty agreements, discussed below, allow the lender to make up
the shortfall of any borrower from the income of the other borrowers.
GUARANTY AGREEMENT
Concurrent with the closing of the loan, the local partnerships entered
into a guaranty agreement making them jointly and severally liable for the
senior mortgage notes payable. Under the terms of this contract, each of the
senior note mortgagors unconditionally guarantee the full and prompt payment of
all amounts due under the senior mortgage loans. Under a related contribution
agreement, the guarantors have agreed to allow funds from the cash
11
<PAGE> 14
NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
collateral account to be used to satisfy any shortfall of an affiliate
partnership. A separate guaranty agreement was entered into by the limited
partnerships related to the partnership loan, with similar terms.
NONRECOURSE
The liability of the local partnerships under the senior mortgage note and the
guaranty, and the liability of the limited partnerships under the partnership
note and guaranty, is limited to the underlying value of the real estate
collateral plus amounts deposited with the lender.
MORTGAGE NOTE PAYABLE
The twelfth property has a separate mortgage note payable with a remaining
balance as of June 30, 1997, of $4.2 million. The mortgage note payable is
secured by a deed of trust on the real estate. The note bears interest at a rate
of 7.95%. Principal and interest payments are payable by the local partnership
in equal monthly installments of $35,794 to June 2016. The local partnership is
required to make monthly escrow deposits for taxes, insurance, and reserves for
the replacement of project assets, and is subject to restrictions as to
operating policies, rental charges, operating expenditures, and distributions to
partners. The liability of the local partnership under the mortgage note is
limited to the underlying value of the real estate collateral plus other amounts
deposited with the lender.
(9) 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. These rates are evaluated
quarterly and may vary depending on the Company's debt to EBITDA ratio.
(10) COMMITMENTS AND CONTINGENCIES
CONTINUING OPERATIONS
As of June 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.
12
<PAGE> 15
NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In connection with AIMCO's purchase of greater than 50% of the outstanding
common stock of the Company, certain entities and individuals associated with
Oxford Realty Financial Group, Inc. and Oxford Holdings Corporation have
asserted that one or more of them may have the right to terminate the Company's
contracts for the management of the Oxford Properties. AIMCO and the Company
believe these assertions are without merit.
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 $815 million at June 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 $4.8 million as of June 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 June 30, 1997, a $4.4 million irrevocable
letter of credit on FNMA's behalf to fund any loan losses.
(11) 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 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.
(12) 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 $0.9 million in property management revenues associated with
management of the Hall Portfolio for the year and six months ended December 31,
1996, and June 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.
13
<PAGE> 16
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, 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 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.
14
<PAGE> 17
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 is conditioned on the approval of the
Company's stockholders and AIMCO stockholders and customary state and federal
regulatory and other approvals.
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 holds a majority (approximately 51%) of the issued
and outstanding shares of the Company's common stock. The Stock Purchase
Agreement provides for AIMCO to acquire the remaining 434,051 shares of Company
common stock owned by Demeter and Capricorn. 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.
Stockholder meetings to approve the merger are expected to be held in the fourth
quarter of 1997. 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 $5.5 million of non-recurring merger related expenses discussed
in Note 4 to the 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.
LEGISLATIVE ACTION REGARDING PROPOSED HUD REORGANIZATION AND RESTRUCTURING OF
HUD PROGRAMS
The Company manages approximately 43,800 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
15
<PAGE> 18
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. 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. Three such proposals are now pending
before Congress. These proposals generally seek to lower subsidized rents to
market levels, thereby reducing rent subsidies, and to lower required debt
service costs as needed to ensure financial viability at the reduced rents and
rent subsidies, but vary greatly as to how that result is to be achieved. Some
proposals include a phase-out of project-based subsidies on a property-by-
property basis upon expiration of a property's Housing Assistance Payments
Contract ("HAP Contract"), 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. Congress has not yet
accepted any of these restructuring proposals. With respect to HAP Contracts
expiring on or before September 30, 1997, Congress has elected to renew expiring
HAP Contracts for one year terms, generally at existing rents. Congress is now
considering what action to take with respect to HAP Contracts expiring October
1, 1997 through September 30, 1998. 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 second quarter of 1997, the Company recorded a pre-tax loss from
continuing operations of $1.5 million compared with pre-tax income of
$4.2 million for the second quarter of 1996, a decrease of $5.7 million. For the
six months ended June 30, 1997, the Company recorded pre-tax income of $2.0
million compared with $8.8 million for the same period of 1996, a decrease of
$6.8 million. Excluding non-recurring merger related expenses of $4.9 million
related to the pending AIMCO merger, second quarter pre-tax earnings were $3.4
million. Excluding non-recurring merger related expenses of $5.5 million related
to the pending AIMCO merger, pre-tax earnings for the first six months of 1997
were $7.5 million.
Both revenues and expenses from continuing operations of the Company show
increases in the three and six 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
two months of operations of the Great Atlantic properties in the second quarter
of 1997. The decrease in pre-tax income from continuing operations for the three
and six 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, as well as a $0.5 million pre-tax loss 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 before interest expense, income taxes, depreciation
and amortization ("EBITDA") for the second quarter of 1997, excluding non-
recurring expenses, was $8.6 million compared with $6.4 million for the second
quarter of 1996, an improvement of $2.2 million, or 34.9%. EBITDA for the first
six months of 1997, including the results of operations of the Great Atlantic
properties and excluding non-recurring expenses, was $16.5 million compared with
$12.7 million for the same period of 1996, an improvement of $3.8 million, or
29.7%. Approximately $1.2 million of the increase in EBITDA for the three and
six month periods 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
16
<PAGE> 19
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 loss for the second quarter of 1997 of
$0.4 million, compared with net income of $2.9 million in the second quarter of
1996. For the first six months of 1997, net income was $1.8 million, compared
with net income of $5.7 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 six
months ended June 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE
Property management
services 27.2% 28.4% 27.9% 28.7%
On-site personnel,
general and
administrative cost
reimbursement 60.1% 66.8% 62.0% 66.8%
Administrative and
reporting fees 2.2% 2.0% 2.3% 2.0%
Rental revenue, net 5.5% - 2.8% -
Other 5.0% 2.8% 5.0% 2.5%
----- ----- ----- -----
Total revenue 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
EXPENSES
Salaries and benefits
On-site employees 58.1% 65.3% 60.1% 65.3%
Off-site employees 14.1% 13.0% 14.1% 13.1%
Other general and
administrative 7.4% 6.8% 7.4% 6.8%
Real estate operating
costs 3.5% - 1.8% -
Costs charged to the
Real Estate Companies 2.0% 1.5% 2.0% 1.4%
Amortization of
purchased management
contracts 2.8% 2.2% 2.9% 2.0%
Depreciation and other
amortization 2.7% 0.6% 2.1% 0.5%
Non-recurring expenses 9.1% - 5.3% -
----- ----- ----- -----
Total expenses 99.7% 89.4% 95.7% 89.1%
----- ----- ----- -----
Operating Income 0.3% 10.6% 4.3% 10.9%
===== ===== ===== =====
EBITDA 7.1% 13.7% 10.4% 13.7%
===== ===== ===== =====
</TABLE>
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
17
<PAGE> 20
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 six
month periods ended June 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE
Property management
services $14,573 $13,282 $29,148 $26,565
Administrative and
reporting fees 1,185 942 2,371 1,884
Rental revenue, net 2,916 - 2,916 -
Other 2,667 1,309 5,268 2,357
------- ------- ------- -------
Adjusted revenue (1) 21,341 15,533 39,703 30,806
EXPENSES
Salaries and benefits,
off-site employees 7,515 6,070 14,733 12,089
Other general and
administrative 3,949 3,199 7,747 6,300
Real estate operating
costs 1,863 - 1,863 -
Amortization of
purchased management
contracts 1,477 1,014 3,037 1,893
Depreciation and other
amortization 1,424 287 2,218 481
Non-recurring expenses 4,850 - 5,546 -
------- ------- ------- -------
Adjusted operating
expenses (2) 21,078 10,570 35,144 20,763
------- ------- ------- -------
Operating Income
(Loss) $ 263 $ 4,963 $ 4,559 $10,043
======= ======= ======= =======
EBITDA $ 3,786 $ 6,400 $10,923 $12,701
======= ======= ======= =======
</TABLE>
18
<PAGE> 21
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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE
Property management
services 68.3% 85.5% 73.4% 86.2%
Administrative and
reporting fees 5.6% 6.1% 6.0% 6.1%
Rental revenue, net 13.6% - 7.3% -
Other 12.5% 8.4% 13.3% 7.7%
----- ----- ----- -----
Adjusted revenue (1) 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
EXPENSES
Salaries and benefits,
off-site employees 35.2% 39.1% 37.1% 39.2%
Other general and
administrative 18.5% 20.6% 19.5% 20.5%
Real estate operating
costs 8.7% - 4.7% -
Amortization of
purchased management
contracts 6.9% 6.5% 7.6% 6.1%
Depreciation and other
amortization 6.7% 1.8% 5.6% 1.6%
Non-recurring expenses 22.7% - 14.0% -
----- ----- ----- -----
Adjusted operating
expenses (2) 98.7% 68.0% 88.5% 67.4%
----- ----- ----- -----
Operating Income 1.3% 32.0% 11.5% 32.6%
===== ===== ===== =====
EBITDA 17.7% 41.2% 27.5% 41.2%
===== ===== ===== =====
</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 - SECOND QUARTER 1997 COMPARED
WITH SECOND 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.
Second quarter 1997 total revenue increased $6.7 million, or 14.4%, over second
quarter 1996. Second quarter 1997 adjusted revenue increased $5.8 million, or
37.4% over second quarter 1996. The reasons for these changes are set forth
below.
PROPERTY MANAGEMENT SERVICES revenue increased $1.3 million, or 9.7%,
during the second quarter of 1997 versus 1996. As a percentage of total revenue,
property management revenue decreased to 27.2% from 28.4%. As a percentage of
adjusted revenue, property management revenue decreased to 68.3% from 85.5%. 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 $0.2 million, or 25.8%, during
the second quarter of 1997 versus 1996. As a percentage of total revenue,
administrative and reporting fees revenue increased to 2.2% from 2.0%. As a
percentage of adjusted revenue, administrative and reporting fees revenue
decreased to 5.6% from 6.1%. 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
19
<PAGE> 22
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 two 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, which includes Buyers Access (Registered Trademark) fees,
revenues from Preferred Home Health, tax credit investment fees, insurance
advisory fees and other revenue, increased $1.4 million, or 103.7%, during the
second quarter of 1997 versus 1996. As a percentage of total revenue, other
revenue increased to 5.0% from 2.8%. As a percentage of adjusted revenue, other
revenue increased to 12.5% from 8.4%. 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, which contributed approximately
$1.0 million in revenue, an increase in the average number of units enrolled in
the Buyers Access (Registered Trademark) program during the second quarter of
1997 versus 1996, and an increase in fees related to asset management services.
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, and depreciation and other amortization. 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 $11.4 million, or 27.4%, in the second quarter of 1997 versus the
second quarter of 1996. Adjusted operating expenses increased $10.5 million, or
99.4%, in the second quarter of 1997 versus the second quarter of 1996. The
reasons for these changes are set forth below.
SALARIES AND BENEFITS - OFF-SITE EMPLOYEES expenses increased $1.4 million,
or 23.8%, in the second quarter of 1997 versus 1996. As a percentage of total
revenue, salary and benefits - off-site employees increased to 14.1% from 13.0%.
As a percentage of adjusted revenue, salary and benefits - off-site employees
decreased to 35.2% from 39.1%. The increase in absolute terms and as a
percentage of total revenue resulted primarily from personnel costs associated
with Preferred Home Health ($0.8 million) 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 $0.8 million, or 23.4%,
in the second quarter of 1997 versus 1996. As a percentage of total revenue,
other general and administrative expenses increased to 7.4% from 6.8%. As a
percentage of adjusted revenue, other general and administrative expenses
decreased to 18.5% from 20.6%. The increase in absolute terms and as a
percentage of total revenue 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.
REAL ESTATE OPERATING COSTS represent two 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 $0.5 million, or
45.7%, in the second quarter of 1997 versus 1996. As a percentage of total
revenue, amortization of purchased management contracts increased to 2.8% from
2.2%. As a percentage of adjusted revenue, amortization of purchased management
contracts increased to 6.9% from 6.5%. The increase in absolute terms and as a
percentage of total and adjusted revenues resulted primarily from amortization
on acquisitions of additional management contracts.
20
<PAGE> 23
DEPRECIATION AND OTHER AMORTIZATION expense increased $1.1 million, or
396.2%, in the second quarter of 1997 versus 1996. As a percentage of total
revenue, depreciation and amortization expense increased to 2.7% from 0.6%. As a
percentage of adjusted revenue, depreciation and amortization expense increased
to 6.7% from 1.8%. The increase in absolute terms and as a percentage of total
and adjusted revenue resulted primarily from depreciation associated with the
Great Atlantic properties ($0.5 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, AIMCO's
headquarters in Denver, Colorado, or office space currently leased by the Real
Estate Companies in Washington, D.C. Accordingly, the Company recorded $3.8
million in the second quarter of 1997, its portion of the estimated cost of this
transition, consisting solely of severance costs. The Company has recorded other
costs associated with the pending AIMCO merger which have been incurred to date,
including various professional fees and the Company's share of cost associated
with the joint proxy statement. The Company recorded total non-recurring costs
of $4.9 million and $5.5 million in the three and six-month periods ended June
30, 1997, respectively. Additional costs related to the merger are expected to
be incurred and deducted from income during the third and fourth quarters of
1997.
RESULTS OF OPERATIONS - CONTINUING OPERATIONS - SIX MONTH OF 1997 COMPARED WITH
SIX MONTHS OF 1996
REVENUE
Total revenue increased $12.1 million, or 13.0%, for the first six months
of 1997 verses 1996. Adjusted revenue increased $8.9 million, or 28.9% for the
first six months of 1997 over the same period of 1996. The reasons for these
changes are set forth below.
PROPERTY MANAGEMENT SERVICES revenue increased $2.6 million, or 9.7%,
during the first six months of 1997 versus 1996. As a percentage of total
revenue, property management revenue decreased to 27.9% from 28.7%. As a
percentage of adjusted revenue, property management revenue decreased to 73.4%
from 86.2%. 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 $0.5 million, or 25.8%, during
the first six months of 1997 versus 1996. As a percentage of total revenue,
administrative and reporting fees revenue increased to 2.3% from 2.0%. As a
percentage of adjusted revenue, administrative and reporting fees revenue
decreased to 6.0% from 6.1%. 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.
RENTAL REVENUE represents two 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 $2.9 million, or 123.5%, during the first six
months of 1997 versus 1996. As a percentage of total revenue, other revenue
increased to 5.0% from 2.5%. As a percentage of adjusted revenue, other
21
<PAGE> 24
revenue increased to 13.3% from 7.7%. 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, which contributed approximately
$2.0 million in revenue, an increase in the average number of units enrolled in
the Buyers Access (Registered Trademark) program, an increase in the level of
tax credit related fees during the first six months of 1997 versus 1996, and
fees related to asset management services which did not start until late in the
first quarter of 1996.
EXPENSES
Total expenses increased $17.5 million, or 21.3%, in the first six months
of 1997 versus 1996. Adjusted operating expenses increased $14.4 million, or
69.3%, in the first six months of 1997 versus of 1996. The reasons for these
changes are set forth below.
SALARIES AND BENEFITS - OFF-SITE EMPLOYEES expenses increased $2.6 million,
or 21.9%, in the first six months of 1997 versus 1996. As a percentage of total
revenue, salary and benefits - off-site employees increased to 14.1% from 13.1%.
As a percentage of adjusted revenue, salary and benefits - off-site employees
decreased to 37.1% from 39.2%. The increase in absolute terms and as a
percentage of total revenue resulted primarily from personnel costs associated
with Preferred Home Health ($1.5 million) 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 $1.4 million, or 23.0%, in
the first six months of 1997 versus 1996. As a percentage of total revenue,
other general and administrative expenses increased to 7.4% from 6.8%. As a
percentage of adjusted revenue, other general and administrative expenses
decreased to 19.5% from 20.5%. The increase in absolute terms and as a
percentage of total revenue 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.
REAL ESTATE OPERATING COSTS represent two 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 $1.1 million, or
60.4%, in the first six months of 1997 versus 1996. As a percentage of total
revenue, amortization of purchased management contracts increased to 2.9% from
2.0%. As a percentage of adjusted revenue, amortization of purchased management
contracts increased to 7.6% from 6.1%. The increase in absolute terms and as a
percentage of total and adjusted revenues resulted primarily from amortization
on acquisitions of additional management contracts.
DEPRECIATION AND OTHER AMORTIZATION expense increased $1.7 million, or
361.1%, in the first six months of 1997 versus 1996. As a percentage of total
revenue, depreciation and other amortization expense increased to 2.1% from
0.5%. As a percentage of adjusted revenue, depreciation and amortization expense
increased to 5.6% from 1.6%. The increase in absolute terms and as a percentage
of total and adjusted revenue resulted primarily from depreciation associated
with the Great Atlantic properties ($0.5 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.
INTEREST INCOME AND INTEREST EXPENSE
Interest income increased $0.5 million, or 357.4%, for the second quarter
of 1997 verses 1996. Interest income increased $0.8 million, or 290.5%, for the
first six months of 1997 verses 1996. This increase for the three and six 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.
22
<PAGE> 25
Interest expense increased $1.5 million, or 160.8%, for the second quarter
of 1997 versus 1996. Interest expense increased $2.2 million, or 148.1%, for the
first six months of 1997 verses 1996. The increase is due primarily to
approximately $1.1 million of interest expense recorded on 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. Going forward,
interest expense is expected to continue to be higher than 1996 levels as a
result of additional borrowings related to the previously discussed
acquisitions.
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 second quarter and six 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, filed March 21, 1997, as amended.
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 six months of 1997 was
$7.2 million compared with $12.3 million for the first six months of 1996. On
June 30, 1997, cash and cash equivalents totaled $2.0 million.
Net cash provided (used) by discontinued operations includes cash flows
from operating, investing and financing activities of WMF. The $8.2 million net
cash used by discontinued operations for the first six 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 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 six months of 1997, net cash used in investing activities was
$11.2 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 six months of 1996 of $37.5 million
primarily reflects cash paid for the purchase of WMF and real estate held for
sale (prior to May 5, 1997, the Great Atlantic properties were accounted for as
real estate held for sale), payments for
23
<PAGE> 26
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 six months of 1997, net cash provided by financing activities
was $8.4 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. In the
first six months of 1996, net cash provided by financing activities was
$19.6 million, primarily reflecting borrowings to purchase WMF 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 June
30, 1997, the Company had $10 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 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.
24
<PAGE> 27
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, net of any transactions
costs (including severance and related costs) incurred by NHP. 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 $9.1 million, due from WMF to
NHP as of June 30, 1997, consists primarily of advances to WMF related to the
Proctor and Askew acquisitions and intercompany tax allocations. 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.
In connection with AIMCO's purchase of greater than 50% of the outstanding
common stock of the Company, certain entities and individuals associated with
Oxford Realty Financial Group, Inc. and Oxford Holdings Corporation have
asserted that one or more of them may have the right to terminate the Company's
contracts for the management of the Oxford Properties. AIMCO and the Company
believe these assertions are without merit.
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 $0.9 million in property management revenues associated with
management of the Hall Portfolio for the year and six months ended December 31,
1996, and June 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
$0.7 million as of June 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 2 - CHANGE IN SECURITIES
On April 21, 1997, the Company, The WMF Group, Ltd. ("WMF") (a wholly-owned
subsidiary of the Company) and The First National Bank of Boston entered into a
Rights Agreement, pursuant to which the Company issued to its stockholders of
record on May 2, 1997, and to persons who are issued shares thereafter, the
right to receive a distribution of all of the common stock of WMF held by the
Company (the "Rights") subject to certain conditions. The Rights were
distributed on May 9, 1997, but the Rights are not transferable separately from
the shares of the Company. Additional information regarding the Rights and the
Rights Agreement is set forth in the Company's Current Report of Form 8-K, dated
April 16, 1997, and the Company's Registration Statement on Form 8-A filed April
28, 1997, both of which are incorporated herein by reference.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2.1* Agreement and Plan of Merger, dated as of April 21,
1997, by and among Apartment Investment and
Management Company, AIMCO/NHP Acquisition Corp. and
NHP Incorporated.
2.2* Rights Agreement, dated as of April 21, 1997 by and
between NHP Incorporated, NHP Financial Services,
Ltd. and The First National Bank of Boston.
10.1** Amendment No. 2 to Revolving Credit Agreement, dated
as of February 11, 1997, by and among NHP
Incorporated, The First National Bank of Boston,
Fleet National Bank, and Morgan Guaranty Trust
Company of New York.
11.0** Statement regarding computation of per share
earnings.
27.0** Financial Data Schedule.
</TABLE>
*Previously filed as an exhibit to the Company's report on Form 8-K,
dated April 16, 1997, and filed with the Commission on April 22,
1997.
**Previously filed.
(b) Reports on Form 8-K
The Company filed a report on April 22, 1997, Form 8-K dated April 16,
1997, reporting events under Item 1, Changes in Control of the Registrant; Item
2, Acquisition or Disposition of Assets; and Item 5, Other Events. Under Item 1,
the Company reported that on April 16, 1997, Apartment and Investment Management
26
<PAGE> 29
Company ("AIMCO") entered into a Stock Purchase Agreement with Demeter Holdings
Corporation ("Demeter") and Capricorn Investors, L.P. ("Capricorn"). Pursuant to
and subject to the conditions set forth in the Stock Purchase Agreement, AIMCO
would acquire all of the shares of the Company's common stock currently held by
Demeter and Capricorn. Upon purchase of these shares, AIMCO will be the
beneficial owner of approximately 54.8% of the Company's common stock.
Under Item 2 of the report on Form 8-K dated April 16, 1997, the Company
reported that on April 21, 1997, the Company entered into an Agreement and Plan
of Merger by and among AIMCO, AIMCO/NHP Acquisition Corp. (the "Merger Sub") and
the Company (the "Merger Agreement").
Under Item 5 of the report on Form 8-K dated April 16, 1997, the Company
reported that on April 21, 1997, the Company, NHP Financial Services, Ltd.
(subsequently renamed The WMF Group, Ltd.) ("WMF") and The First National Bank
of Boston entered into a Rights Agreement, pursuant to which the Company would
issue to its stockholders of record on May 2, 1997 and to persons who are issued
shares thereafter, the right to receive a distribution of all of the common
stock of WMF (the "Rights") Subject to certain conditions. The rights were
distributed on May 9, 1997, but the rights are not transferable separately from
shares of the Company's common stock.
The Company filed a report on June 10, 1997, on Form 8-K, dated April 21,
1997, reporting, under Item 5, Other Events, the spin-off of WMF, pursuant to
the rights agreement discussed above. Accordingly, the Company's 1996
Consolidated Financial Statements and 1996 Management's Discussion and Analysis
of Financial Condition and Results of Operations have been restated to reflect
WMF as discontinued operations from the date of its acquisition by the Company,
April 1, 1996. The 1996 Consolidated Financial Statements were previously
restated in late April 1997 in conjunction with an 8-K filing by AIMCO and were
included in the Company's report on Form 8-K as Exhibit 99.1. The 1996
Management's Discussion and Analysis of Financial Condition and Results of
Operations has been restated currently and was included in the Company's report
on Form 8-K as Exhibit 99.2.
27
<PAGE> 30
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 3, 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>
28
