<PAGE> 1
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES CHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 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
--------------
</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 April 30, 1997, there were 12,655,439 shares of common stock outstanding.
===============================================================================
<PAGE> 2
NHP INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations
- Three Months Ended March 31, 1997 and 1996 1
Consolidated Balance Sheets
- March 31, 1997 and December 31, 1996 2
Consolidated Statements of Cash Flows
- Three Months ended March 31, 1997 and 1996 3
Notes to Unaudited Consolidated Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
PART II. OTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
</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 March 31,
----------------------------
1997 1996
-------- --------
<S> <C> <C>
Revenue, substantially all from related parties:
Property management services $14,575 $13,283
On-site personnel, general and administrative
cost reimbursement 32,755 30,532
Administrative and reporting fees 1,186 942
Other 2,601 1,048
------- -------
Total revenue 51,117 45,805
Expenses:
Salaries and benefits:
On-site employees 31,805 29,875
Off-site employees 7,218 6,019
Other general and administrative 4,494 3,101
Costs charged to the Real Estate Companies 950 657
Amortization of purchased management contracts 1,560 879
Other depreciation and amortization 794 194
------- -------
Total expenses 46,821 40,725
Operating income 4,296 5,080
Interest income 487 148
Interest expense (1,265) (557)
Income from continuing operations before
income taxes 3,518 4,671
Provision for income taxes (1,407) (1,868)
Income from continuing operations 2,111 2,803
Income from discontinued operations, net of
income taxes 115 -
------- -------
Net income $ 2,226 $ 2,803
======= =======
Net income per common share:
Continuing operations 0.16 0.22
Discontinued operations 0.01 -
------- -------
Net income $ 0.17 $ 0.22
======= =======
Weighted average common and equivalent shares
outstanding (in thousands) 12,891 12,563
======= =======
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of these statements.
<PAGE> 4
NHP INCORPORATED
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December
31,
1997 1996
(Unaudited) (Restated)
----------- -----------
- -
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,698 $ 4,779
Receivables, net, substantially all from related
parties 11,438 15,270
On-site cost reimbursement receivable,
substantially all from related parties 5,743 3,816
Current portion of net deferred tax asset 4,990 6,357
Investment in real estate held for sale 13,727 13,719
Other current assets 5,583 2,227
-------- --------
Total current assets 48,179 46,168
Purchased management contracts, net 49,360 43,718
Net assets of discontinued operations 22,596 22,528
Goodwill, net 5,733 5,887
Property, equipment and capitalized software, net 11,811 10,415
Other assets 14,268 10,832
Net deferred tax asset 7,575 7,441
-------- --------
Total assets $159,522 $146,989
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of long-term debt, including
amounts payable to related parties of $143 in
1997 and 1996 $ 734 $ 720
Accounts payable 3,635 3,947
Accrued expenses, including amounts associated
with related parties of $2,476 and $4,090 in
1997 and 1996, respectively 8,957 11,452
Accrued on-site salaries and benefits 5,743 3,816
Deferred revenues and other 3,766 3,400
-------- --------
Total current liabilities 22,835 23,335
Long-term debt 68,454 62,607
Other long-term liabilities 9,181 5,034
-------- --------
Total liabilities 100,470 90,976
Commitments and contingencies (Note 6)
Shareholders' equity
Common stock, $0.01 par value, 25,000,000 shares
authorized; 12,652,439 and 12,586,629 shares
issued and outstanding in 1997 and 1996,
respectively 127 126
Additional paid-in capital 132,341 131,529
Accumulated deficit (73,416) (75,642)
-------- --------
Total shareholders' equity 59,052 56,013
-------- --------
Total Liabilities and Shareholders' Equity $159,522 $146,989
======== ========
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of these statements.
2
<PAGE> 5
NHP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 2,226 $ 2,803
Discontinued operations, net of income taxes (115) -
------- -------
Income from continuing operations 2,111 2,803
Depreciation and amortization 2,354 1,073
Income taxes 1,387 1,688
Decrease (increase) in receivables,
substantially all from related parties 2,293 (2,997)
Decrease (increase) in deferred costs and other 969 (937)
Decrease in accounts payable and accrued expenses (876) (1,270)
Increase in deferred revenues and other
liabilities 377 485
Other 110 16
------- -------
Net cash provided by continuing operations 8,725 861
Net cash used by discontinued operations (3,364) -
------- -------
Net cash provided by operating activities 5,361 861
Cash Flows From Investing Activities:
Purchase of management contracts (3,365) (1,479)
Purchase of long-term note receivable (4,236) -
Purchase of fixed assets (1,834) (655)
Other (233) -
------- -------
Net cash used in investing activities (9,668) (2,134)
Cash Flows From Financing Activities:
Additional borrowings 10,000 21,000
Repayments of debt (4,189) (7,015)
Proceeds from stock option exercises 660 -
Payment of financing, offering and disposition
costs (245) (280)
------- -------
Net cash provided by financing activities 6,226 13,705
------- -------
Increase in cash and cash equivalents 1,919 12,432
Cash and Cash Equivalents, beginning of period 4,779 5,996
------- -------
Cash and Cash Equivalents, end of period $ 6,698 $18,428
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash interest payments $ 1,211 $ 487
Cash income tax payments $ 20 $ 180
Non-cash items:
Notes payable given as consideration for
acquisitions $ - $ 848
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of these statements.
3
<PAGE> 6
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 and include the accounts of NHP Incorporated (the "Company") 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 month period ended March 31, 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
and the financial statements and the notes thereto in the Company's restated
Financial Statements and Supplementary Data included as Exhibit 99.4 in
Apartment and Management Investment Company's ("AIMCO") 8-K, as amended, dated
April 16, 1997. In the opinion of the Company, the unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the results for the
three month periods ended March 31, 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 NHP
Financial Services to NHP Incorporated discussed in Note 2, have been eliminated
in consolidation.
As of April 1, 1996, NHP Incorporated closed the acquisition of all of the
outstanding capital stock of WMF Holdings, Ltd., which was subsequently renamed
NHP Financial Services, 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. NHP Financial Services, Ltd. 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 (collectively, "NHP Financial Services"). 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 NHP
Financial Services (formerly the Company's Financial Services business segment)
to the Company's current shareholders. Accordingly, the accompanying March 31,
1997, financial statements reflect NHP Financial Services as discontinued
operations in accordance with GAAP. Amounts due from NHP Financial Services to
NHP Incorporated, of approximately $4.5 million and $0.9 million as of March 31,
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. The Consolidated Balance
Sheet as of December 31, 1996 has been restated to reflect NHP Financial
Services as discontinued operations. NHP Financial Services was acquired on
April 1, 1996, therefore, no restatement of the first quarter 1996 Consolidated
Statement of Operations was required. For further discussion, see Note 2.
(2) DISCONTINUED OPERATIONS
On April 21, 1997, the Company entered into a plan to distribute shares of
NHP Financial Services (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 on
that date. Pursuant to the Rights Agreement, the Company will issue to its
stockholders rights (the "Rights") to receive a distribution of one-third of a
share of NHP Financial Services 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. NHP Financial Services has received a commitment,
subject to certain conditions, to purchase 546,498 shares of NHP Financial
Services for an aggregate
4
<PAGE> 7
NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
purchase price of $5 million on or shortly after the distribution of shares,
which is equivalent to $9.15 per share of NHP Financial Services stock. The
distribution of NHP Financial Services stock is conditioned on the consent of
lenders under the Company's credit agreement. The rights were distributed on May
9 to stockholders of record of the Company on May 2, 1997.
Following the distribution of shares of NHP Financial Services, NHP
Incorporated and NHP Financial Services will operate independently and neither
will have any stock ownership in the other. In conjunction with the distribution
of shares of NHP Financial Services, NHP Incorporated and NHP Financial Services
will enter into a separation agreement that will govern their ongoing
relationship. The separation agreement will provide, in part, for NHP Financial
Services to assume all liabilities relating to the business and operations of
NHP Financial Services prior to the distribution (except for the costs of the
distribution) and to indemnify NHP Incorporated for such liabilities and all
expenses and costs and losses related thereto, all on terms reasonably
acceptable to AIMCO.
In addition, the separation agreement will also provide for the settlement,
at or prior to the distribution of shares, of any intercompany amounts owed by
NHP Financial Services to NHP Incorporated. The intercompany amounts owed by NHP
Financial Services will be forgiven by NHP Incorporated up to the amount of
NHP's Free Cash Flow, as defined by the AIMCO merger agreement, generated by NHP
Incorporated from February 1, 1997, through the date of the AIMCO merger, net of
any transactions costs (including severance and related costs) incurred by NHP
Incorporated. The remaining balance will be repaid by NHP Financial Services.
The intercompany balance of approximately $4.5 million, due from NHP Financial
Services to NHP Incorporated as of March 31, 1997, consists primarily of
advances to NHP Financial Services related to the Proctor acquisition and
intercompany tax allocations. In April 1997, NHP Incorporated advanced NHP
Financial Services an additional $4.6 million to fund the Askew acquisition
discussed further in Note 4.
NHP Financial Services was acquired on April 1, 1996. Therefore, no
comparative amounts are presented below for the first quarter of 1996. The
operating results of NHP Financial Services for the first quarter of 1997 are
summarized below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Quarter Ended
March 31, 1997
--------------
<S> <C>
Revenue:
Financial Services $7,185
Financial Services interest income 933
------
Total Revenue 8,118
Expenses:
Salaries and benefits 3,557
Other general and administrative 2,477
Financial Services operating interest 127
Provision for loan servicing losses 174
Amortization of capitalized mortgage servicing
rights 1,082
Other depreciation and amortization 333
------
Total expenses 7,750
------
Operating income 368
Interest expense (47)
------
Income before taxes 321
Provision for income taxes (206)
------
Net income $ 115
======
Net income per share of NHP Incorporated
common stock $ .01
======
</TABLE>
5
<PAGE> 8
NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The components of the net assets of discontinued operations (the assets and
liabilities of NHP Financial Services) are summarized below (in thousands):
<TABLE>
<CAPTION>
March 31, December
31,
1997 1996
----------- -----------
- -
<S> <C> <C>
Assets:
Cash and equivalents $ 5,507 $ 6,601
Mortgage loans held for sale, pledged 28,683 40,263
Other current assets 2,911 4,195
------- -------
Current assets 37,101 51,059
Capitalized mortgage servicing rights, net 22,751 22,460
Goodwill 7,560 7,705
Other assets 3,342 4,140
------- -------
Total assets $70,754 $85,364
======= =======
Liabilities:
Warehouse line of credit $28,285 $39,925
Due to NHP Incorporated 4,489 872
Other current liabilities 5,508 12,329
------- -------
Current liabilities 38,282 53,126
Long-term debt 5,306 5,315
Other long-term liabilities 4,570 4,395
------- -------
Total liabilities 48,158 62,836
------- -------
Net assets of discontinued operations $22,596 $22,528
======= =======
</TABLE>
(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
Apartment Investment and Management Company ("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 .37383 shares of AIMCO common stock and $10.00 cash per share of
Company common stock, or (ii) .74766 shares of AIMCO common stock. The merger is
conditioned on the approval of the Company's stockholders and AIMCO
stockholders, the completion of the transactions between AIMCO and the majority
stockholders of the Company described below, and customary state and federal
regulatory and other approvals.
AIMCO has separately entered into a Stock Purchase Agreement with Demeter
Holdings Corporation ("Demeter") and Capricorn Investors, L.P. ("Capricorn"),
who together hold a majority of the outstanding shares of the Company's common
stock (approximately 54.8%). Pursuant to the Stock Purchase Agreement, AIMCO
will acquire all of the Company's common stock held by Demeter and Capricorn.
AIMCO will pay Demeter $20 in cash per share for 50% of the Company shares held
directly and indirectly by Demeter. For the remainder of Demeter's shares and
Capricorn's shares, AIMCO will pay .74766 shares of AIMCO common stock per share
of Company common stock. On May 5, 1997, AIMCO acquired 6,496,071 shares of the
Company's stock from Demeter and Capricorn, or approximately 51% of the
Company's outstanding shares, pursuant to the Stock Purchase Agreement. Upon
completion of AIMCO's purchase of this portion of the shares held by Demeter and
Capricorn, AIMCO holds a majority of the issued and outstanding shares of the
Company's common stock. The Stock Purchase Agreement
6
<PAGE> 9
NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 held
by persons other than AIMCO. Stockholder meetings to approve the merger are
expected to be held in late summer.
The Company has also been informed that AIMCO is continuing negotiations on
the terms of a definitive agreement with Demeter and Capricorn to acquire
interests in certain real estate properties owned or controlled by the Real
Estate Companies, which are controlled by Demeter and Capricorn, most of which
properties are managed by the Company pursuant to a long-term property
management contract. Both the Company's and AIMCO's obligations to complete the
merger are conditioned on signing the definitive agreement relating to the sale
of real estate interests and the management agreement remaining in effect. As
consideration for AIMCO's executing the Merger Agreement, the Company has waived
its right of first refusal to purchase the real estate being sold to AIMCO.
(4) 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. 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
liability and is included in other long-term liabilities on the Consolidated
Balance Sheet. 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
7
<PAGE> 10
NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 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 will be accounted for under the purchase method of
accounting.
(5) 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.
Effective March 1, 1997, based on the Company's 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. Going forward, these rates will be
evaluated quarterly and may vary depending on the Company's debt to EBITDA
ratio.
(6) COMMITMENTS AND CONTINGENCIES
CONTINUING OPERATIONS
As of March 31, 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.
8
<PAGE> 11
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
indicated that one or more of them may have the right to terminate the Company's
contracts for the management of the Oxford Properties. The Company believes
these assertions are without merit.
DISCONTINUED OPERATIONS
NHP Financial Services 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 $795 million
at March 31, 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 $4.6 million
as of March 31, 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, NHP Financial Services has also established at
March 31, 1997, a $4.4 million irrevocable letter of credit on FNMA's behalf to
fund any loan losses.
(7) NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share," 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
(8) SUBSEQUENT EVENTS
As discussed further in Note 3, on May 5, 1997, the majority (approximately
51%) of the outstanding shares of the Company's common stock were acquired by
AIMCO. As new majority owner, AIMCO has indicated that it is likely the Great
Atlantic properties will not be sold. 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. Accordingly, the Company has historically accounted for its
ownership interests in the Great Atlantic properties 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 and as a single line item on the Consolidated
Balance Sheet. Beginning in the second quarter of 1997, the Company will
consolidate the results of operations and financial position of the Great
Atlantic properties.
The following is summary of the consolidated results of operations of the
Great Atlantic properties for the first quarter of 1997 (in thousands):
<TABLE>
<CAPTION>
Quarter Ended
March 31, 1997
--------------
<S> <C>
Revenue $4,504
Expenses 5,315
------
Net loss $ (811)
======
</TABLE>
9
<PAGE> 12
NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following is summary of the consolidated balance sheet of the Great
Atlantic properties as of March 31, 1997 (in thousands):
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Total assets $85,931 $86,863
Total liabilities 73,570 73,691
------- -------
Partners' capital $12,361 $13,172
======= =======
</TABLE>
10
<PAGE> 13
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") 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").
As of April 1, 1996, NHP Incorporated closed the acquisition of all of the
outstanding capital stock of WMF Holdings, Ltd., which was subsequently renamed
NHP Financial Services, 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. NHP Financial Services, Ltd. 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 (collectively, "NHP Financial Services"). 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 NHP
Financial Services (the Company's former Financial Services business segment) to
the Company's current shareholders. The plan provides for the distribution of
shares of NHP Financial Services to existing shareholders pursuant to the terms
of a Rights Agreement approved by the Board of Directors on that date. For
further discussion, see Note 2 to the Consolidated Financial Statements.
Accordingly, the March 31, 1997, Consolidated Financial Statements reflect NHP
Financial Services as discontinued operations in accordance with GAAP. In
addition, the 1996 Consolidated Financial Balance Sheet presented in this report
has been restated to present NHP Financial Services as discontinued operations.
NHP Financial Services was acquired on April 1, 1996. Therefore, no restatement
of the first quarter 1996 Consolidated Statement of Operations was required.
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
Apartment Investment and Management Company ("AIMCO"), a real estate investment
trust whose shares are traded on the New York Stock Exchange. AIMCO has
separately entered into a Stock Purchase Agreement with Demeter and Capricorn,
who together hold a majority of the outstanding shares of the Company's common
stock (approximately 54.8%). Pursuant to the Stock Purchase Agreement, AIMCO
will
11
<PAGE> 14
acquire all of the Company's common stock held by Demeter and Capricorn. On May
5, 1997, AIMCO acquired 6,496,071 shares of the Company's stock from Demeter and
Capricorn, or approximately 51% of the Company's outstanding shares, pursuant to
the Stock Purchase Agreement. Upon completion of AIMCO's purchase of this
portion of the shares held by Demeter and Capricorn, AIMCO holds a majority 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 held by persons other than AIMCO. Stockholder meetings to approve the
merger are expected to be held in late summer. 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 Consolidated Financial Statements.
The Company has also been informed that AIMCO is continuing negotiations on
the terms of a definitive agreement with Demeter and Capricorn to acquire
interests in certain real estate properties owned or controlled by the Real
Estate Companies, which are controlled by Demeter and Capricorn, most of which
properties are managed by the Company pursuant to a long-term property
management contract. Both the Company's and AIMCO's obligations to complete the
merger are conditioned on signing the definitive agreement relating to the sale
of real estate interests and the management agreement remaining in effect. For
further discussion, see Note 3 to the Consolidated Financial Statements.
No effect has been given to the potential impact of a 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 4 to the 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 4 to the Consolidated Financial Statements.
DISCONTINUED OPERATIONS
On April 16, 1997, Washington Mortgage Financial completed the acquisition
of the assets 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
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 HUD's rental assistance programs under
Section 8 of the United States Housing Act of 1937 ("Section 8"), under which
many affiliated properties receive rental subsidies. One such proposal has
recently been introduced in the U.S. Senate, and two such proposals have
recently been introduced in the U.S. House of Representatives. These proposals
generally seek to lower subsidized rents to market levels and to lower required
debt service costs as needed to ensure financial viability at the reduced rents,
but utilize varying approaches to achieve that goal. Congress is currently also
considering various
12
<PAGE> 15
proposals for the renewal of Section 8 contracts that will expire during the
federal fiscal year 1998 (October 1997 through September 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 first quarter of 1997, the Company recorded pre-tax income from
continuing operations of $3.5 million compared with $4.7 million for the first
quarter of 1996, an decrease of $1.2 million, or 24.7%. Both revenues and
expenses from continuing operations of the Company show increases in the three
month periods of 1997 over 1996, primarily as a result of the acquisition of
Preferred Home Health, Inc. in July 1996 and the acquisition of additional
property management contracts. The $1.2 million decrease in pre-tax income from
continuing operations for the quarter resulted primarily from approximately
$0.7 million in expenses recorded related to the AIMCO merger, 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.
See the discussion below for further explanations of changes in revenues and
expenses. The Company's EBITDA for the first quarter of 1997 was $7.1 million
compared with $6.3 million for the first quarter of 1996, an improvement of
$0.8 million, or 13.3%. EBITDA is widely used in the industry as a measure of a
company's operating performance, but should not be considered as an alternative
either (i) to income from continuing operations (determined in accordance with
generally accepted accounting principles) as a measure of profitability or
(ii) to cash flows from operating activities (determined in accordance with
generally accepted accounting principles). EBITDA does not take into account the
Company's debt service requirements and other commitments and, accordingly, is
not necessarily indicative of amounts that may be available for discretionary
uses.
Net income for the first quarter of 1997 was $2.1 million, including a
$1.4 million provision for income taxes, compared with $2.8 million in the first
quarter of 1996, which included a $1.9 million provision for income taxes. Net
income for the first quarter of 1997 also includes $0.1 million of income from
discontinued operations which represents the net income for the quarter of NHP
Financial Services (formerly the Company's Financial Services business segment).
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 months ended
March 31, 1997, versus the same period 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.
13
<PAGE> 16
TABLE 1
SUMMARY FINANCIAL OPERATIONAL DATA - REVENUE AND
EXPENSES FROM CONTINUING OPERATIONS
AS A PERCENTAGE OF TOTAL REVENUE
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
-------- --------
<S> <C> <C>
REVENUE
Property management services 28.5% 29.0%
On-site personnel, general and administrative
cost reimbursement 64.1% 66.6%
Administrative and reporting fees 2.3% 2.1%
Other 5.1% 2.3%
----- -----
Total revenue 100.0% 100.0%
----- -----
EXPENSES
Salaries and benefits
On-site employees 62.2% 65.2%
Off-site employees 14.1% 13.1%
Other general and administrative 8.8% 6.8%
Costs charged to the Real Estate Segment 1.9% 1.5%
Amortization of purchased management contracts 3.1% 1.9%
Depreciation and amortization 1.6% 0.4%
----- -----
Total expenses 91.7% 88.9%
----- -----
Operating Income 8.3% 11.1%
===== =====
EBITDA 14.0% 13.8%
===== =====
</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 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 months ended
March 31, 1997 versus the same period 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.
14
<PAGE> 17
TABLE 2
SUMMARY FINANCIAL AND OPERATIONAL DATA - ADJUSTED REVENUE AND
ADJUSTED OPERATING EXPENSES FROM CONTINUING OPERATIONS (IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
-------- --------
<S> <C> <C>
REVENUE
Property management services $14,575 $13,283
Administrative and reporting fees 1,186 942
Other 2,601 1,048
------- -------
Adjusted revenue (1) 18,362 15,273
EXPENSES
Salaries and benefits, off-site employees 7,218 6,019
Other general and administrative 4,494 3,101
Amortization of purchased management contracts 1,560 879
Depreciation and amortization 794 194
------- -------
Adjusted operating expenses (2) 14,066 10,193
------- -------
Operating Income $ 4,296 $ 5,080
======= =======
EBITDA $ 7,137 $ 6,301
======= =======
</TABLE>
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 March 31,
----------------------------
1997 1996
-------- --------
<S> <C> <C>
REVENUE
Property management services 79.3% 86.9%
Administrative and reporting fees 6.5% 6.2%
Other 14.2% 6.9%
----- -----
Adjusted revenue (1) 100.0% 100.0%
----- -----
EXPENSES
Salaries and benefits, off-site employees 39.3% 39.4%
Other general and administrative 24.5% 20.3%
Amortization of purchased management contracts 8.5% 5.7%
Depreciation and amortization 4.3% 1.3%
----- -----
Adjusted operating expenses (2) 76.6% 66.7%
----- -----
Operating Income 23.4 % 33.3%
===== =====
EBITDA 38.9% 41.3%
===== =====
</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.
15
<PAGE> 18
RESULTS OF OPERATIONS - CONTINUING OPERATIONS - FIRST QUARTER 1997 COMPARED WITH
FIRST QUARTER 1996
REVENUE
Total revenue consists of property management services fees, on-site
personnel, general and administrative cost reimbursement, administrative and
reporting fees, and other revenue. Adjusted revenue equals total revenue less
on-site personnel, general and administrative cost reimbursement. First quarter
1997 total revenue increased $5.3 million, or 11.6%, over first quarter 1996.
First quarter 1997 adjusted revenue increased $3.1 million, or 20.2% over first
quarter 1996. The reasons for these changes are set forth below.
PROPERTY MANAGEMENT SERVICES revenue increased $1.3 million, or 9.7%,
during the first quarter of 1997 versus 1996. As a percentage of total revenue,
property management revenue decreased to 28.5% from 29.0%. As a percentage of
adjusted revenue, property management revenue decreased to 79.3% from 86.9%. 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 more than
proportional increase in other revenue discussed below.
ADMINISTRATIVE AND REPORTING FEES increased $0.2 million, or 25.9%, during
the first quarter of 1997 versus 1996. As a percentage of total revenue,
administrative and reporting fees revenue increased to 2.3% from 2.1%. As a
percentage of adjusted revenue, administrative and reporting fees revenue
increased to 6.5% from 6.2%. 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.
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 $1.6 million, or 148.2%, during the
first quarter of 1997 versus 1996. As a percentage of total revenue, other
revenue increased to 5.1% from 2.3%. As a percentage of adjusted revenue, other
revenue increased to 14.2% from 6.9%. 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
$0.9 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 quarter of 1997 versus 1996, and fees
related to the CRI asset management contract which did not start until late in
the first quarter of 1996.
EXPENSES
Total expenses consist of salaries and benefits for on-site and off-site
employees, other general and administrative expenses, costs charged to the Real
Estate Companies, amortization of purchased management contracts, and other
depreciation and 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 $6.1 million, or 15.0%, in the first
quarter of 1997 versus the first quarter of 1996. Adjusted operating expenses
increased $3.9 million, or 38.0%, in the first quarter of 1997 versus the first
quarter of 1996. The reasons for these changes are set forth below.
SALARIES AND BENEFITS - OFF-SITE EMPLOYEES expenses increased $1.2 million,
or 19.9%, in the first quarter 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
expenses remained essentially the same. The increase in absolute terms and as a
percentage of total revenue resulted primarily from additional personnel costs
associated with Preferred Home Health ($0.7 million) and additional personnel
costs incurred related to management of additional properties and addition of
personnel to expand the Company's customer and equity services.
16
<PAGE> 19
OTHER GENERAL AND ADMINISTRATIVE expenses increased $1.4 million, or 44.9%,
in the first quarter of 1997 versus 1996. As a percentage of total revenue,
other general and administrative expenses increased to 8.8% from 6.8%. As a
percentage of adjusted revenue, other general and administrative expenses
increased to 24.5% from 20.3%. The increase in absolute terms and as a
percentage of total and adjusted revenues resulted primarily from higher
professional fees related to the AIMCO merger ($0.7 million) and growth in the
Company's business and increased costs associated with the Company's new
facilities in Vienna, Virginia and Indianapolis, Indiana, offset by a lower
provision for doubtful accounts in the first quarter of 1997.
AMORTIZATION OF PURCHASED MANAGEMENT CONTRACTS increased $0.7 million, or
77.5%, in the first quarter of 1997 versus 1996. As a percentage of total
revenue, amortization of purchased management contracts increased to 3.1% from
1.9%. As a percentage of adjusted revenue, amortization of purchased management
contracts increased to 8.5% from 5.7%. The increase in absolute terms and as a
percentage of total and adjusted revenues resulted primarily from acquisitions
of additional management contracts.
OTHER dEPRECIATION AND AMORTIZATION expense increased $0.6 million, or
309.3%, in the first quarter of 1997 versus 1996. As a percentage of total
revenue, depreciation and amortization expense increased to 1.6% from 0.4%. As a
percentage of adjusted revenue, depreciation and amortization expense increased
to 4.3% from 1.3%. The increase in absolute terms and as a percentage of total
and adjusted revenue resulted primarily from 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 $0.3 million, or 229.1% for the first quarter of
1997 verses 1996. This increase is due primarily to interest income recognized
on the Goldberg and PRC notes receivable, offset slightly by a decrease in
interest income on amounts due from the Real Estate Companies.
Interest expense increased $0.7 million, or 127.1%, for the first quarter
of 1997 versus 1996. The increase is due primarily to a higher level of 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 (NHP FINANCIAL SERVICES)
As previously discussed, earnings from discontinued operations represents
the net results of operations of NHP Financial Services which includes
Washington Mortgage Financial. NHP Financial Services' primary business
activities are multifamily and commercial loan servicing, multifamily and
commercial loan origination and secondary marketing. NHP Financial Services does
not hold the mortgages it originates or purchases long-term but resells them
through various programs. NHP Financial Services' 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 NHP
Financial Services are included in the Company's results of operations, as
discontinued operations, from the date of acquisition, April 1, 1996.
For a summary of NHP Financial Services' results of operations and the
components of net assets of discontinued operations, see Note 2 to the
Consolidated Financial Statements. NHP Financial Services 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, Financial Services' first quarter results
may not be indicative of future period results. NHP Financial Services results
also reflect the impact of certain purchase accounting adjustments. The purchase
accounting adjustments relate primarily to the write-up of acquired servicing
17
<PAGE> 20
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.
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 three months of 1997
was $8.7 million compared with $0.9 million for the first three months of 1996.
On March 31, 1997, cash and cash equivalents totaled $6.7 million.
Net cash used by discontinued operations includes cash flows from
operating, investing and financing activities of NHP Financial Services. The net
cash used by discontinued operations in the first quarter of 1997 represents
primarily the $3.7 million paid to purchase Proctor and Associates. This
acquisition closed as of December 31, 1996, but the cash was not paid until
early January 1997.
For the first three months of 1997, net cash used in investing activities
was $9.7 million, primarily reflecting payments for the acquisition of property
management rights, the purchase of a long-term note receivable related to the
PRC transaction, and cash used to purchase hardware and develop software 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 three months of 1996 of $2.1 million
primarily reflects payments for acquisition of property management rights.
For the first three months of 1997, net cash provided by financing
activities was $6.2 million, primarily reflecting borrowings on the Credit
Facility related to the acquisitions of PRC and Broad Street and borrowings by
the Company for NHP Financial Services' acquisition of Askew, which closed in
mid-April, net of repayments on the Credit Facility. In the first three months
of 1996, net cash provided by financing activities was $13.7 million, primarily
reflecting borrowings to purchase NHP Financial Services, net of repayments on
the Credit Facility.
The Company's future capital expenditures are expected to consist largely
of funds required in connection with acquisitions by NHP Financial Services,
prior to its spin-off. 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
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.
Effective March 1, 1997, based on the Company's 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. Going forward, these rates will be
evaluated quarterly and may vary
18
<PAGE> 21
depending on the Company's debt to EBITDA ratio. On March 31, 1997, the Company
had $12 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 limitation. 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 NHP Financial Services, discussed in Note 2. The
amount of gain recognized by the Company will be the excess of the fair market
value of NHP Financial Services on the date of the distribution of the rights,
over the Company's tax basis in NHP Financial Services. The Company expects to
have regular federal NOLs available in sufficient amount to offset the gain
under the regular federal income tax, but does not expect to have sufficient
alternative minimum tax NOLs available to offset the gain under the alternative
minimum tax.
The Company has provided working capital advances to the Real Estate
Companies. These advances, which are included in receivables and totaled
$0.1 million as of March 31, 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 signing of a definitive
agreement with Demeter and Capricorn to acquire interests in certain real estate
properties owned or controlled by the Real Estate Companies will impact this
arrangement.
Following the distribution of shares of NHP Financial Services, NHP
Incorporated and NHP Financial Services will operate independently and neither
will have any stock ownership in the other. In conjunction with the distribution
of shares of NHP Financial Services, NHP Incorporated and NHP Financial Services
will enter into a separation agreement that will govern their ongoing
relationship. The separation agreement will provide, in part, for NHP Financial
Services to assume all liabilities relating to the business and operations of
NHP Financial Services prior to the distribution (except for the costs of the
distribution) and to indemnify NHP Incorporated for such liabilities and all
expenses and costs and losses related thereto, all on terms reasonably
acceptable to AIMCO.
In addition, the separation agreement will also provide for the settlement,
at or prior to the distribution of shares, of any intercompany amounts owed by
NHP Financial Services to NHP Incorporated. The intercompany amounts owed by NHP
Financial Services will be forgiven by NHP Incorporated up to the amount of
NHP's Free Cash Flow, as defined by the AIMCO merger agreement, generated by NHP
Incorporated from February 1, 1997, through the date of the AIMCO merger, net of
any transactions costs (including severance and related costs) incurred by NHP
Incorporated. The remaining balance will be repaid by NHP Financial Services.
The intercompany balance of approximately $4.5 million, due from NHP Financial
Services to NHP Incorporated as of March 31, 1997, consists primarily of
advances to NHP Financial Services related to the Proctor acquisition and
intercompany tax allocations. In April 1997, NHP Incorporated advanced NHP
Financial Services an additional $4.6 million to fund the Askew acquisition
discussed further in Note 4 to the 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
19
<PAGE> 22
have indicated 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 NHP
believe these assertions are without merit.
PART II - OTHER INFORMATION
ITEM 2 - CHANGE IN SECURITIES
On April 21, 1997, the Company, NHP Financial Services, Ltd. ("NHP
Financial Services") (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 NHP Financial Services 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>
11.0 Statement regarding computation of per share
earnings.
27.0 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
The Company filed a report on Form 8-K, dated February 20, 1997, reporting,
under Item 5, Other Events, (i) the announcement that Apartment Investment and
Management Company ("AIMCO") had entered into a letter agreement to acquire all
the shares of the Company's common stock owned by Demeter Holdings Corporation
("Demeter") and Capricorn Investors, L.P. ("Capricorn"), who together own
approximately 54.8% of the Company's outstanding common stock; (ii) the
announcement that the Company had received a merger proposal from AIMCO,
pursuant to which AIMCO would acquire the balance of the outstanding shares of
the Company's common stock on the same terms agreed to by Demeter and Capricorn;
(iii) the announcement that the Company had received a letter from Insignia
Financial Group, Inc. ("Insignia"), stating that Insignia wished to make an
offer to buy 100% of the outstanding common stock of the Company at a price
higher than the offer by AIMCO; and (iv) the announcement that the Company had
received a second letter from Insignia stating that Insignia is prepared to
offer $24 per share of the Company's common stock -- 50% cash and 50% in
Insignia Class A Common Stock -- for all outstanding stock on the Company,
including the stock held by Demeter and Capricorn.
20
<PAGE> 23
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>
May 14, 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>
21
<PAGE> 1
EXHIBIT 11, FORM 10-Q
COMMISSION FILE NUMBER 000-26572
NHP INCORPORATED
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
NET INCOME:
Income from continuing operations $ 2,111 $ 2,803
Income from discontinued operations 115 -
----------- -----------
Net income $ 2,226 $ 2,803
=========== ===========
ADJUSTMENTS TO COMMON SHARES OUTSTANDING:
Average number of shares of common stock 12,632,597 12,264,675
Primary adjustment:
Assume exercise of options (treasury
stock method) 258,064 297,884
----------- -----------
Total average number of common shares
and equivalents used for primary
computation 12,890,661 12,562,559
=========== ===========
Average number of shares of common stock 12,632,597 12,264,675
Fully diluted adjustment:
Assume exercise of options (treasury stock
method) 397,028 317,406
----------- -----------
Total average number of common shares and
equivalents used for fully diluted
computation 13,029,625 12,582,081
=========== ===========
INCOME PER COMMON SHARE:
Net income per common share - primary:
Income from continuing operations $ .16 $ .22
Income from discontinued operations .01 -
----------- -----------
Net income per common share - primary $ .17 $ .22
=========== ===========
Net income per common share - fully diluted:
Income from continuing operations $ .16 $ .22
Income from discontinued operations .01 -
----------- -----------
Net income per common share - fully
diluted $ .17 $ .22
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997, AND THE RELATED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS THEN ENDED, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 6,698
<SECURITIES> 0
<RECEIVABLES> 13,990
<ALLOWANCES> 2,552
<INVENTORY> 0
<CURRENT-ASSETS> 48,179
<PP&E> 14,809
<DEPRECIATION> 2,998
<TOTAL-ASSETS> 159,522
<CURRENT-LIABILITIES> 22,835
<BONDS> 68,454
0
0
<COMMON> 127
<OTHER-SE> 58,925
<TOTAL-LIABILITY-AND-EQUITY> 159,522
<SALES> 0
<TOTAL-REVENUES> 51,117
<CGS> 0
<TOTAL-COSTS> 46,821
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,265
<INCOME-PRETAX> 3,518
<INCOME-TAX> 1,407
<INCOME-CONTINUING> 2,111
<DISCONTINUED> 115
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,226
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED RESTATED CONSOLIDATED BALANCE SHEETS AS OF THE DATES INDICATED, AND
THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR-TO-DATE PERIODS
THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 1,093 124 4,779
<SECURITIES> 0 0 0
<RECEIVABLES> 12,216 11,493 17,771
<ALLOWANCES> 2,271 2,411 2,501
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 35,418 36,143 46,168
<PP&E> 9,669 12,259 12,774
<DEPRECIATION> 2,259 2,690 2,359
<TOTAL-ASSETS> 118,922 138,547 146,989
<CURRENT-LIABILITIES> 20,685 23,096 23,335
<BONDS> 44,888 57,896 62,607
0 0 0
0 0 0
<COMMON> 125 126 126
<OTHER-SE> 48,537 52,070 55,887
<TOTAL-LIABILITY-AND-EQUITY> 118,922 138,547 146,989
<SALES> 0 0 0
<TOTAL-REVENUES> 92,551 140,485 194,979
<CGS> 0 0 0
<TOTAL-COSTS> 82,508 125,681 174,302
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 1,479 2,720 3,982
<INCOME-PRETAX> 8,848 12,415 17,442
<INCOME-TAX> 3,541 4,968 6,977
<INCOME-CONTINUING> 5,307 7,447 10,465
<DISCONTINUED> 421 604 1,155
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 5,728 8,051 11,620
<EPS-PRIMARY> .45 .63 .91
<EPS-DILUTED> .45 .63 .91
</TABLE>
