1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 1995
NHP INCORPORATED
(Commission file number: 33-93110)
(Exact name of registrant as specified in its charter)
DELAWARE 52-1445137
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1225 EYE STREET, N.W.
WASHINGTON, D.C. 20005
(Address of principal executive offices)
(202) 347-6247
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------------- -----------
At October 31, 1995, there were approximately 12,255,700 shares of common stock
outstanding.
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NHP INCORPORATED AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations
- Three Months and Nine Months Ended September 30, 1995
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Balance Sheets
- September 30, 1995 and December 31, 1994 . . . . . . . . . . . . . . . . . . 2
Condensed Consolidated Statements of Cash Flows
- Nine Months ended June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . 3
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NHP INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(In Thousands, Except Per Share Amounts)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- ------------------------
1995 1994 1995 1994
-------- -------- -------- ----------
REVENUES, SUBSTANTIALLY ALL FROM RELATED PARTIES
Property management services $ 12,068 $ 10,204 $ 35,231 $ 30,318
On-site personnel, general and administrative cost
reimbursement 29,899 27,945 87,756 73,530
Administrative and reporting fees 924 1,040 2,772 3,090
Buyers access fees 650 534 1,898 1,564
Insurance advisory services 261 216 815 717
Tax credit investment fees 75 42 324 543
-------- -------- -------- ----------
Total revenue 43,877 39,981 128,796 109,762
-------- -------- -------- ----------
EXPENSES
Salaries and benefits
On-site employees 28,805 26,729 84,336 69,858
Off-site employees 5,385 4,587 16,264 13,871
Other general and administrative 2,584 2,405 8,568 7,580
Costs charged to the Real Estate Companies 1,094 1,216 3,420 3,672
Amortization of purchased management contracts 781 510 2,256 1,530
Depreciation and amortization 172 136 473 343
Other non-recurring expenses - - 45 -
-------- -------- -------- ----------
Total expenses 38,821 35,583 115,362 96,854
-------- -------- -------- ----------
Operating income 5,056 4,398 13,434 12,908
Interest expense, net (1,317) (1,490) (5,072) (4,194)
-------- -------- -------- ----------
Income from continuing operations before income
taxes and extraordinary item 3,739 2,908 8,362 8,714
Benefit for income taxes 19,981 - 19,981 -
-------- -------- -------- ----------
Income from continuing operations before extraordinary item 23,720 2,908 28,343 8,714
DISCONTINUED OPERATIONS
Income (loss) from discontinued operations sold 8/18/95, net
of $1,309 income tax benefit for the three and nine months
ended September 30, 1995, $0 for 1994 90 2,792 (1,963) (1,310)
-------- -------- -------- ----------
Income before extraordinary item 23,810 5,700 26,380 7,404
EXTRAORDINARY ITEM
Write-off of deferred costs associated with terminated credit
agreement, net of $266 income tax benefit (400) - (400) -
-------- -------- -------- ----------
Net income $ 23,410 $ 5,700 $ 25,980 $ 7,404
======== ======== ======== ==========
NET INCOME PER COMMON SHARE
Continuing operations before extraordinary item $ 2.35 $ 0.36 $ 3.25 $ 1.08
Discontinued operations 0.01 0.35 (0.22) (0.16)
Extraordinary item (0.04) - (0.05) -
-------- -------- -------- ----------
Net income per common share $ 2.32 $ 0.71 $ 2.98 $ 0.92
======== ======== ======== ==========
Shares used for computation (000) 10,074 8,010 8,717 8,024
The accompanying notes are an integral part of these condensd consolidated
financial statements.
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NHP INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands)
ASSETS
September 30, 1995 December 31, 1994
------------------ -----------------
(Unaudited)
Cash and cash equivalents $ 4,721 $ 12,090
Receivables, substantially all from related parties, net of allowance
for doubtful accounts of $1,685 and $1,861 in 1995 and 1994,
respectively. 7,684 6,288
On-site cost reimbursement receivable, substantially all from
related parties 4,637 3,376
Other 1,537 85
------------- ------------
Total current assets 18,579 21,839
Purchased management contracts, net of accumulated amortization
of $7,589 and $5,333 in 1995 and 1994, respectively. 33,193 30,153
Property and equipment, net of accumulated depreciation and
amortization of $1,181 and $848 in 1995 and 1994,
respectively. 1,551 1,351
Purchased software, net of accumulated amortization of $313 and
$172 in 1995 and 1994, respectively. 1,742 655
Deferred costs and other 1,947 3,670
Deferred tax asset 22,222 -
------------- ------------
$ 79,234 $ 57,668
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current portion long-term debt, including amounts payable to related
parties of $351 in 1994. $ - $ 7,851
Accounts payable 6,286 10,639
Accrued expenses 7,461 8,349
Accrued on-site salaries and benefits, substantially all to related parties 4,637 3,376
Deferred revenues 1,708 1,685
------------- ------------
Total current liabilities 20,092 31,900
Notes payable to bank 20,000 43,759
Notes payable to related parties 495 18,523
Other long term liabilities 2,656 1,224
Net liabilities of discontinued operations - 9,816
------------- ------------
Total liabilities 43,243 105,222
------------- ------------
Shareholders' Equity (Deficit)
Common stock, $.01 par value; 25,000,000 shares authorized;
12,255,675 and 7,986,925 shares issued and outstanding in 1995
and 1994, respectively. 123 80
Additional paid-in capital 126,400 68,878
Accumulated deficit (90,532) (116,512)
------------- ------------
Total shareholders' equity (deficit) 35,991 (47,554)
------------- ------------
$ 79,234 $ 57,668
============= ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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NHP INCORPORATED AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flow (Unaudited)
(In Thousands)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1995 1994
----------- -----------
Cash Flows From Operating Activities
Net income $ 25,980 $ 7,404
Extraordinary item 400 -
Discontinued operations 1,963 1,310
----------- -----------
Income before extraordinary item and discontinued
operations 28,343 8,714
Adjustments to reconcile net income to net cash
provided by continuing operations:
Depreciation and amortization 2,729 1,873
Amortization of deferred financing costs 386 255
Income tax benefit (19,981) -
Provision for doubtful accounts - 13
Write-off of receivables, substantially all from related parties (176) (30)
Other noncash charges 583 -
(Increase) decrease in receivables (2,481) (343)
(Increase) decrease in deferred costs and other (1,312) (7)
Increase (decrease) in accounts payable and
accrued expenses (555) (1,292)
Increase (decrease) in deferred revenues (203) 97
----------- -----------
Net cash provided by continuing operations 7,333 9,280
Net cash used in discontinued operations (8,554) (7,775)
----------- -----------
Net cash provided by (used in) operating activities (1,221) 1,505
----------- -----------
Cash Flows From Investing Activities
Purchase of management contracts (11,767) (2,167)
Purchase of fixed assets (1,733) (2,248)
----------- -----------
Net cash used in investing activities (13,500) (4,415)
----------- -----------
Cash Flows From Financing Activities
Bank borrowings 27,207 133
Repayment of bank borrowings (58,466) (3,500)
Borrowings from related parties 1,119 3,903
Repayments of notes payable to related parties (10,369) -
Repurchases of common stock from related parties (375) (245)
Proceeds from issuance of common stock, net 51,987
Proceeds from sale of stock to related parties - 26
Payment of financing, offering and disposition costs (3,751) (770)
----------- -----------
Net cash provided by (used in) financing activities 7,352 (453)
----------- -----------
Decrease in Cash and Cash Equivalents (7,369) (3,363)
Cash and Cash Equivalents, beginning of period 12,090 9,234
----------- -----------
Cash and Cash Equivalents, end of period $ 4,721 $ 5,871
=========== ===========
Non-cash Items:
Reduction in notes payable to related parties -
sale of Real Estate Companies $ 9,129 $ -
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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NHP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of NHP Incorporated ("the Company") and its wholly-owned
subsidiaries. On August 18, 1995, the Company sold those of its subsidiaries
which held all of the Company's direct and indirect interests 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 CEO of the Company
("Mr. Heller"). The financial statements include the accounts of the Real
Estate Companies through August 18, 1995, presented as discontinued operations.
The Company will continue to provide services to the Real Estate Companies and,
therefore, intercompany revenues and expenses between the Company and the Real
Estate Companies have not been eliminated from the Company's revenues and
expenses in the accompanying condensed consolidated financial statements. All
other material intercompany accounts and transactions have been eliminated in
consolidation.
Management believes that all adjustments necessary for a fair
statement of results have been included in the condensed consolidated financial
statements for the interim periods presented, which are unaudited. These
interim period condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements contained in Amendment
No. 6 to the Company's Registration Statement on Form S-1, filed with the
Securities and Exchange Commission on August 8, 1995.
(2) INITIAL PUBLIC OFFERING AND OTHER SIGNIFICANT TRANSACTIONS
On August 18, 1995, the Company completed an initial public offering
("IPO") of 4.3 million shares of common stock and received net proceeds of
approximately $52.0 million (the "Closing"). At that time, the Company entered
into a $75 million, three-year unsecured revolving credit facility (the "Credit
Facility"). At the end of two years, the Company may extend the Credit Facility
(as a revolving facility) for an additional year or convert it to a two-year
term loan. Availability under the Credit Facility is subject to the Company's
compliance with various financial ratios, operating covenants and other
customary conditions. Interest on the Credit Facility is equal to, at the
Company's option, either The First National Bank of Boston's base rate from
time to time or 175 basis points over the LIBOR rate in effect from time to
time. The Credit Facility requires that any additional borrowings be
subordinated to the Credit Facility, except that up to $10.0 million of
additional borrowings will be permitted if entered into in connection with the
acquisition of assets after the Closing date.
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NHP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At Closing, the Company drew $20.0 million on the Credit Facility and
used those funds together with the net proceeds of the IPO as follows: (i)
$54.7 million was used to repay in full the Company's indebtedness under its
previous credit facility, which was simultaneously terminated by the Company;
(ii) $7.0 million was used to repay a note to a former institutional
shareholder of the Company; and (iii) $5.5 million was used to repay Company
indebtedness to Demeter, Capricorn and Mr. Heller. The remaining proceeds were
added to the Company's working capital.
In connection with the repayment of the Company's previous credit
facility, the Company wrote off $666,000 of deferred financing costs which have
been recorded net of a $266,000 income tax benefit and classified as an
extraordinary item in the accompanying consolidated statements of operations.
In consideration for the sale of the Real Estate Companies, Demeter,
Capricorn and Mr. Heller canceled approximately $9.1 million of indebtedness
owed to them by the Company. The net liabilities of the Real Estate Companies
as of the date of sale were approximately $4.6 million, and transaction costs
related to the sale were estimated to be $4.6 million, which resulted in the
Company recording a net gain of approximately $9.1 million. The gain was
recorded as a direct adjustment to additional paid-in capital.
(3) NOTES PAYABLE
As a result of the transactions described in Note 2 above, the Company
has reduced its debt from the June 30, 1995 levels. Notes Payable at September
30, 1995, consist of the following (in thousands):
Notes payable to banks $20,000
Note payable to related parties 495
-------
Total notes payable $20,495
======
(4) INCOME TAXES
As of December 31, 1994, the Company had net operating loss
carryforwards ("NOLs") of over $140.0 million. In connection with the sale of
the Real Estate Companies (discontinued operations), the Company utilized
approximately $60.0 million of its NOLS, and the remaining NOLs were allocated
between the Company and the Real Estate Companies. At September 30, 1995, the
Company estimates that it has approximately
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NHP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
$80.0 million of gross unused NOLs for Federal tax purposes which expire from
2004 through 2008.
Historically, the Company has established a valuation allowance for
the full amount of the NOLs. The valuation allowance was created due to the
uncertainty surrounding the Company's ability to generate sufficient taxable
income to utilize the NOLs. Upon the sale of the Real Estate Companies, the
Company reduced its valuation allowance resulting in a net deferred tax asset
of $22.2 million. Management reduced the valuation allowance due to the sale
of the Real Estate Companies as these entities have historically generated
operating losses, while continuing operations have historically generated
operating income.
The following table summarizes the consolidated tax effect related to
the Company's deferred tax assets and liabilities as of September 30, 1995 (in
thousands):
Deferred tax assets:
Net operating loss carryforwards $28,696
Tax credit carryforwards 471
Other 553
--------
Total deferred tax assets 29,720
Valuation allowance for deferred tax assets 5,020
-------
Deferred tax assets 24,700
Deferred tax liabilities:
Amortization of purchased management contracts 1,135
Management fees receivable 1,343
-------
Total deferred tax liabilities 2,478
-------
Net deferred tax asset $22,222
======
The Company did not record a tax provision during the first and second
quarter of 1995. The third quarter financial statements reflect the Company's
year-to-date tax provision. A reconciliation of income tax expense computed at
the statutory Federal rate to the provision for income taxes included in the
condensed consolidated statement of operations is as follows (in thousands):
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NHP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three and Nine Months
Ended
September 30, 1995
------------------
Tax provision - continuing operations
at the Federal statutory rate - 35% $ 2,927
State income tax, net of Federal tax
benefit - 5% 418
Change in valuation allowance (23,326)
-------
Benefit for income taxes - continuing operations $(19,981)
=======
The components of the provision (benefit) for income taxes
attributable to continuing operations for the three and nine months ended
September 30, 1995 are as follows (in thousands):
Current provision $ 284
Deferred provision 3,061
Decrease in valuation allowance for deferred tax assets (23,326)
-------
Benefit for income taxes - continuing operations $(19,981)
=======
(5) RELATED PARTY AGREEMENTS
In connection with the sale of the Real Estate Companies, at Closing
the Company and the Real Estate Companies entered into agreements (the
"Intercompany Agreements") which govern their ongoing relationship.
Significant aspects of the Intercompany Agreements include provisions whereby
(i) the Company will be selected to provide property management and related
services for properties in which the Real Estate Companies have a controlling
interest subject to certain conditions, for an initial period of 25 years; (ii)
upon the disposal by the Real Estate Companies of properties or interests in
properties which the Company managed on August 18, 1995, the Real Estate
Companies will make a payment of up to 200%, subject to certain conditions, of
the annual fees the Company receives with respect to the property; (iii) the
Company will provide to the Real Estate Companies, at cost, certain
administrative services and advice regarding acquisition, financing, asset
restructuring, disposition and similar activities relating to investments in
multi-family properties, terminable on short notice by either party; (iv) the
Real Estate Companies and their equity holders have granted the Company a right
of first refusal with respect to any transaction resulting in a change of
control of the Real Estate Companies, as
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NHP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
defined, of the Real Estate Companies; (v) the Real Estate Companies have
indemnified the Company against any loss directly or indirectly caused by,
relating to, based upon, arising out of, or incurred in connection with the
Company's ownership (as opposed to management) of properties prior to, on and
after August 18, 1995; (vi) the Real Estate Companies will limit the Company's
liability, by an agreed-upon formula, for taxes arising from the sale of the
Real Estate Companies. The Intercompany Agreements may only be amended with
the approval of the Real Estate Companies and the Company, and a majority of
the members of the Board of Directors of the Company having no interest in the
Real Estate Companies must approve such amendments if they involve a conflict
of interest with directors having an interest in the Real Estate Companies.
(6) SUPPLEMENTAL EARNINGS PER SHARE INFORMATION
Earnings per common share is computed by dividing net income by the
weighted average number of common shares and common share equivalents
outstanding during each period presented. On August 18, 1995, the Company
completed an IPO of 4.3 million shares of common stock and used the net
proceeds in their entirety to repay certain outstanding debt. The following is
provided as supplemental information to illustrate the effect on earnings per
share as if the Company had issued the 4.3 million shares on January 1, 1994
and used the $52.0 million of net proceeds to repay debt at that time, thereby
increasing shares outstanding for all periods and reducing interest expense:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
1995 1994 1995 1994
---- ---- ---- ----
Earnings per share
as reported $2.32 $0.71 $2.98 $0.92
Earnings per share
pro forma(a) $1.93 $0.54 $2.25 $0.84
(a) Assuming 4.3 million additional shares of common stock had been issued
January 1, 1994 and debt reduced by $52.0 million at that time.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
On August 18, 1995, NHP Incorporated ("the Company") completed an
initial public offering ("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 interests 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 CEO of the Company ("Mr. Heller"). Accordingly, operating results
and cash flows attributable to the Real Estate Companies have been presented as
discontinued operations for the three and nine months ended September 30, 1995
and 1994. Therefore, the following discussion relates solely to the continuing
operations of the Company.
The Company continued implementing its acquisition strategy during the
third quarter, increasing total units managed by approximately 2% from June 30
levels to 126,893 units at September 30, 1995. On October 31, 1995, the Company
acquired the right to manage 15 properties, consisting of 2,552 apartment
units, from the Savings and Loan Network, formerly known as Rescorp, for
consideration of approximately $2.3 million. At that time, a subsidiary of the
Real Estate Companies acquired the stock of entities owning general partnership
interests in 11 of the properties in exchange for the right to receive
partnership cash flow and incentive fees. Two of the properties (424 units)
are classified as conventional, and 13 of the properties (2,128 units) are
classified as affordable, that is, they receive at least one form of government
assistance or subsidy. The Company continues to pursue additional acquisitions.
However, there can be no assurance that the Company's pursuit of acquisition
opportunities will be successful.
RESULTS OF OPERATIONS
Table 1 below sets forth the percentage of the Company's total revenue
represented by each operating statement line presented. This table is presented
as supplemental information to enable the reader to better analyze the
Company's change in revenues and expenses during the three and nine months
ended September 30, 1995 versus the same periods of 1994. 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 the
Company's additional management contracts. Such a presentation would also
reflect economies in the Company's operating expenses, to the extent they
exist.
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TABLE 1 - SUMMARY FINANCIAL AND OPERATIONAL DATA
REVENUE AND EXPENSE AS A PERCENTAGE OF TOTAL REVENUE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1995 1994 1995 1994
-------- -------- ------- ---------
REVENUES
Property management services 27.5% 25.5% 27.4% 27.6%
On-site personnel, general and administrative cost
reimbursement 68.1% 69.9% 68.1% 67.0%
Administrative and reporting fees 2.1% 2.6% 2.1% 2.8%
Buyers access fees 1.5% 1.3% 1.5% 1.4%
Insurance advisory services 0.6% 0.6% 0.6% 0.7%
Tax credit investment fees 0.2% 0.1% 0.3% 0.5%
-------- -------- ------- ---------
Total revenue 100.0% 100.0% 100.0% 100.0%
-------- -------- ------- ---------
EXPENSES
Salaries and benefits
On-site employees 65.6% 66.9% 65.5% 63.7%
Off-site employees 12.3% 11.5% 12.6% 12.6%
Other general and administrative 5.9% 6.0% 6.6% 6.9%
Costs charged to the Real Estate Segment 2.5% 3.0% 2.7% 3.3%
Amortization of purchased management contracts 1.8% 1.3% 1.8% 1.4%
Depreciation and amortization 0.4% 0.3% 0.4% 0.3%
Provision for doubtful accounts 0.0% 0.0% 0.0% 0.0%
Other non-recurring expenses 0.0% 0.0% 0.0% 0.0%
-------- -------- ------- ---------
Total expenses 88.5% 89.0% 89.6% 88.3%
-------- -------- ------- ---------
Operating Income 11.5% 11.0% 10.4% 11.8%
Interest expense, net -3.0% -3.7% -3.9% -3.8%
-------- -------- ------- ---------
Income from continuing operations before income
taxes and extraordinary items 8.5% 7.3% 6.5% 8.0%
The Company's expenses include salaries and benefits with respect to
employees working at managed properties, which 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 exclude 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 operating statement line presented.
See discussion regarding Table 1 above.
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TABLE 2 -- SUMMARY FINANCIAL AND OPERTIONAL DATA
ADJUSTED REVENUE AND ADJUSTED EXPENSES
(IN THOUSANDS)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- --------------------------
1995 1994 1995 1994
---------- ----------- ----------- -------------
REVENUES
Property management services $ 12,068 $ 10,204 35,231 $ 30,318
Administrative and reporting fees 924 1,040 2,772 3,090
Buyers access fees 650 534 1,898 1,564
Insurance advisory services 261 216 815 717
Tax credit investment fees 75 42 324 543
---------- ----------- ----------- -------------
Adjusted Revenue (1) 13,978 12,036 41,040 36,232
---------- ----------- ----------- -------------
EXPENSES
Salaries and benefits - off-site employees 5,385 4,587 16,264 13,871
Other general and administrative 2,584 2,405 8,568 7,580
Amortization of purchased management contracts 781 510 2,256 1,530
Depreciation and amortization 172 136 473 343
Other non-recurring expenses - - 45 -
---------- ----------- ----------- -------------
Adjusted Expense (2) 8,922 7,638 27,606 23,324
---------- ----------- ----------- -------------
Operating Income 5,056 4,398 13,434 12,908
Interest expense, net (1,317) (1,490) (5,072) (4,194)
---------- ----------- ----------- -------------
Income from continuing operations before income taxes 3,739 2,908 8,362 8,714
(1) Adjusted revenue excludes on-site personnel, general and administrative
cost reimbursement.
(2) Adjusted expense excludes salaries and benefits for on-site employees and
costs charged to the Real Estate Companies
TABLE 3 - SUMMARY FINANCIAL AND OPERATIONAL DATA
ADJUSTED REVENUE AND ADJUSTED EXPENSES AS A PERCENTAGE OF ADJUSTED REVENUE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------
1995 1994 1995 1994
-------- --------- ------ --------
REVENUES
Property management services 86.3% 84.8% 85.8% 83.7%
Administrative and reporting fees 6.6% 8.6% 6.8% 8.5%
Buyers access fees 4.7% 4.4% 4.6% 4.3%
Insurance advisory services 1.9% 1.8% 2.0% 2.0%
Tax credit investment fees 0.5% 0.4% 0.8% 1.5%
-------- --------- ------ --------
Adjusted Revenue (1) 100.0% 100.0% 100.0% 100.0%
-------- --------- ------ --------
EXPENSES
Salaries and benefits - off-site employees 38.6% 38.1% 39.6% 38.3%
Other general and administrative 18.5% 20.0% 20.8% 20.9%
Amortization of purchased management contracts 5.6% 4.2% 5.5% 4.2%
Depreciation and amortization 1.2% 1.1% 1.2% 0.9%
Other non-recurring expenses 0.0% 0.0% 0.1% 0.0%
-------- --------- ------ --------
Adjusted Expense (2) 63.9% 63.4% 67.2% 64.3%
-------- --------- ------ --------
Operating Income 36.1% 36.6% 32.8% 35.7%
Interest expense, net -9.4% -12.4% -12.4% -11.6%
-------- --------- ------ --------
Income from continuing operations before income taxes 26.7% 24.2% 20.4% 24.1%
(1) Adjusted revenue excludes on-site personnel, general and administrative
cost reimbursement.
(2) Adjusted expense excludes salaries and benefits for on-site employees and
costs charged to the Real Estate Companies
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THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1994
For the quarter ended September 30, 1995, the Company recorded pre-tax
income (before discontinued operations and extraordinary item) of approximately
$3.7 million versus approximately $2.9 million for the same period of 1994, or
an improvement of $0.8 million (28.6%). Both the revenues and expenses of the
Company show increases in the third quarter of 1995 compared with the third
quarter of 1994, primarily as a result of the acquisition of additional property
management contracts in late 1994 and during 1995. The Company's earnings from
continuing operations before interest, income taxes, depreciation and
amortization ("EBITDA") was approximately $6.0 million for the third quarter of
1995 versus approximately $5.0 million in 1994, or an improvement of
approximately $1.0 million, or 19.1%. EBITDA is widely used in the industry as a
measure of a company's operating performance, but should not be construed 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's third quarter 1995 net income of $23.4 million includes a
$20.0 million income tax benefit which results primarily from the Company's
ability to recognize an asset related to its tax net operating losses ("NOLs")
following the sale of the Real Estate Companies on August 18, 1995. In addition,
the Company recorded an extraordinary after-tax charge of approximately $0.4
million in the third quarter related to early termination of a credit facility.
REVENUE
The Company's total revenue increased $3.9 million (9.7%) during the
third quarter of 1995 versus the same period of 1994. Adjusted revenue
increased $1.9 million (16.1%) during the same year-over-year period. PROPERTY
MANAGEMENT SERVICES revenue increased $1.9 million (18.3%) during the third
quarter of 1995 versus 1994 primarily due to the acquisition of management
contracts in late 1994 and during 1995. As a percentage of total revenue,
property management services revenue increased from 25.5% to 27.5%. As a
percentage of adjusted revenue, property management services revenue increased
from 84.8% to 86.3%. During the third quarter of 1995, the Company managed, on
average, 22.1% more apartment units than the same period of 1994 at, on average,
12.3% more property locations. ADMINISTRATIVE AND REPORTING FEE revenue
decreased $0.1 million (11.2%). Administrative and reporting fee revenue, as a
percentage of total revenue, decreased from 2.6% to 2.1%. As a percentage of
adjusted revenue, administrative and reporting fees decreased from 8.6% to 6.6%.
This revenue is subject to fluctuation 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. During the
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fourth quarter of 1994, a reduction in revenue was recorded based on actual
fees received during the year. The 1995 estimate has been calculated and
recorded largely based on 1994 actual experience. The Company's recent
acquisitions of property management rights have not included a provision to
receive administrative and reporting fees. Further, the Company does not expect
to receive such fees as a result of typical future acquisitions. Therefore, the
Company expects that administrative and reporting fees, as a percent of total
revenue, will decrease in the future. BUYERS ACCESS FEES increased 21.7% as a
result of additional members participating in the program in 1995 versus 1994.
As a percentage of total revenue, buyers access fees increased slightly from
1.3% to 1.5%. As a percentage of adjusted revenue, buyers access fees increased
from 4.4% to 4.7%. INSURANCE ADVISORY SERVICES revenues increased 20.8% during
the third quarter of 1995 compared with 1994 primarily as a result of the
acquisition of additional management contracts and the related corresponding
increase in these services. As a percentage of total revenue, insurance
advisory services revenue remained the same. Insurance advisory services
revenue as a percentage of adjusted revenue also remained essentially the same.
EXPENSE
The Company's total operating expense increased by $3.2 million (9.1%)
during the third quarter of 1995 compared with the same period of 1994 primarily
as a result of the Company's acquisition of additional management contracts.
Adjusted expense increased $1.3 million (16.8%) during the same year-over-year
period. Total operating expenses as a percentage of total revenue remained
essentially the same. As a percentage of adjusted revenue, total operating
expenses also remained essentially the same. The Company's SALARIES AND BENEFITS
- - - OFF-SITE EMPLOYEES increased $0.8 million (17.4%) during the third quarter of
1995 compared with 1994 primarily as a result of the increase in properties
managed. As a percentage of total revenue, salary and benefits increased from
11.5% to 12.3%. Salary and benefits as a percentage of adjusted revenue
increased slightly from 38.1% to 38.6%. OTHER GENERAL AND ADMINISTRATIVE expense
increased $0.2 million (7.4%) as a result of increases in several expense
categories including new business transition costs. Other general and
administrative expense as a percentage of total revenue remained essentially the
same, while as a percentage of adjusted revenue, these expenses decreased from
20.0% to 18.5%. AMORTIZATION OF PURCHASED MANAGEMENT CONTRACTS increased $0.3
million (53.1%) as a result of the purchase of additional property management
rights late in 1994 and during 1995. As a percentage of total revenue,
amortization of purchased management contracts increased from 1.3% to 1.8%. As
a percentage of adjusted revenues, these expenses increased from 4.2% to 5.6%.
DEPRECIATION AND AMORTIZATION increased $0.04 million (26.5%) during the third
quarter of 1995 compared with 1994 primarily as a result of the purchase of
computer equipment. As a percentage of adjusted revenue, these expenses remained
essentially the same.
INTEREST EXPENSE, NET decreased $0.2 million (11.6%) as a result of a
lower level of debt during the third quarter of 1995 because the proceeds from
the Company's IPO were used to repay debt. As a percentage of total revenue,
interest expense decreased from 3.7% to 3.0%. As a percentage of adjusted
revenue, interest expense decreased
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from 12.4% to 9.4%. The Company's PROVISION (BENEFIT) FOR INCOME TAXES reflects
a $20.0 million benefit for the third quarter of 1995 as a result of a $23.3
million reduction of the valuation allowance for deferred tax assets following
the sale of the Real Estate Companies, offset by a year-to-date tax expense of
approximately $3.3 million recorded in the third quarter of 1995. See Note 4 to
the Company's Condensed Consolidated Financial Statements. No tax provision
was recorded during 1994 due to NOLs generated by the Real Estate Companies in
prior years.
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1994
For the nine months ended September 30, 1995, the Company recorded
pre-tax income (before discontinued operations and extraordinary item) of
approximately $13.4 million versus approximately $12.9 million for the same
period of 1994, or an improvement of $0.5 million (4.1%). Both the revenues and
expenses of the Company show increases in the first nine months of 1995 compared
with the first nine months of 1994, primarily as a result of the acquisition of
additional property management contracts in late 1994 and during 1995. The
Company's EBITDA was approximately $16.2 million for the first nine months of
1995 versus approximately $14.8 million in 1994, or an improvement of
approximately $1.4 million, or 9.3%. See additional discussion about EBITDA
above.
The Company's year-to-date 1995 net income of $26.0 million includes a
$20.0 million income tax benefit and a $0.4 million extraordinary expense item,
both recorded during the third quarter and discussed above.
REVENUE
The Company's total revenue increased $19.0 million (17.3%) during the
first nine months of 1995 versus the same period of 1994. Adjusted revenue
increased $4.8 million (13.3%) during the same year-over-year period. PROPERTY
MANAGEMENT SERVICES revenue increased $4.9 million (16.2%) during the first nine
months of 1995 versus 1994 primarily due to the acquisition of management
contracts in late 1994 and during 1995. During the first nine months of 1995,
the Company managed, on average, 19.9% more apartment units than the same period
of 1994 at, on average, 11.6% more property locations. Property management
services revenue as a percentage of total revenue decreased slightly from 27.6%
to 27.4%. As a percentage of adjusted revenue, these revenues increased from
83.7% to 85.8%. ADMINISTRATIVE AND REPORTING FEE revenue decreased $0.3 million
(10.3%). As a percentage of total revenue, administrative and reporting fee
revenue decreased from 2.8% to 2.1%. As a percentage of adjusted revenues, these
revenues decreased from 8.5% to 6.8%. This revenue is subject to fluctuation
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. During
the fourth quarter of 1994, a reduction in revenue was recorded based on actual
fees received
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during the year. The 1995 estimate has been calculated and recorded largely
based on 1994 actual experience. Also see discussion above regarding
administrative and reporting fees and new management contracts. BUYERS ACCESS
FEES increased 21.4% as a result of additional members participating in the
program in 1995 versus 1994. As a percentage of total revenue, buyers access
fees increased slightly from 1.4% to 1.5%. As a percentage of adjusted revenue,
buyers access fees increased from 4.3% to 4.6%. INSURANCE ADVISORY SERVICES
revenues increased 13.7% during the first nine months of 1995 compared with
1994 primarily as a result of the acquisition of additional management
contracts and the related corresponding increase in these services. As a
percentage of total revenue, insurance advisory services decreased slightly
from 0.7% to 0.6%. As a percentage of adjusted revenue, insurance advisory
services remained the same. TAX CREDIT INVESTMENT FEES decreased $0.2 million
(40.3%) during the first nine months of 1995 compared with 1994 due to a lower
level of transactions during 1995. These fees, as a percentage of total
revenue, decreased from 0.5% to 0.3%, while as a percentage of adjusted
revenue, they decreased from 1.5% to 0.8%.
EXPENSE
The Company's total operating expense increased by $18.5 million
(19.1%) during the first nine months of 1995 compared with the same period of
1994 primarily as a result of the Company's acquisition of additional management
contracts. Total adjusted expense increased $4.3 million (18.4%) during the same
year-over-year period. As a percentage of total revenue, total operating
expenses increased from 88.3% to 89.6%. Total operating expenses as a percentage
of adjusted revenue increased from 64.3% to 67.2%. The Company's SALARIES AND
BENEFITS - OFF-SITE EMPLOYEES increased $2.4 million (17.3%) during the third
quarter of 1995 compared with 1994, primarily as a result of the increase in the
number of properties managed. As a percentage of total revenue, salaries and
benefits remained the same. As a percentage of adjusted revenues, these expenses
increased from 38.3% to 39.6%. OTHER GENERAL AND ADMINISTRATIVE expense
increased $1.0 million (13.0%) as a result of increases in several expense
categories including new business transition costs. As a percentage of total
revenue, other general and administrative expenses decreased from 3.3% to 2.7%.
As a percentage of adjusted revenue, these expenses decreased slightly from
20.9% to 20.8%. AMORTIZATION OF PURCHASED MANAGEMENT CONTRACTS increased $0.7
million (47.5%) as a result of the purchase of additional property management
rights late in 1994 and during 1995. As a percentage of total revenue,
amortization of purchased management contracts increased from 1.3% to 1.8%. As a
percentage of adjusted revenue, these expenses increased from 4.2% to 5.5%.
DEPRECIATION AND AMORTIZATION increased $0.1 million (37.9%) during the first
nine months of 1995 compared with 1994 primarily as a result of the purchase of
computer equipment. Depreciation and amortization increased slightly from 0.3%
to 0.4% as a percentage of total revenues. As a percentage of adjusted revenues,
these expenses increased from 0.9% to 1.2%.
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INTEREST EXPENSE, NET increased $0.9 million (20.9%) as a result of a
higher average level of debt and interest rates during the first nine months of
1995. As a percentage of total revenue, interest expense increased slightly from
3.8% to 3.9%. As a percentage of adjusted revenue, interest expense increased
from 11.6% to 12.4%. The Company's PROVISION (BENEFIT) FOR INCOME TAXES reflects
a $20.0 million benefit (all recorded in the third quarter of 1995) as a result
of a $23.3 million reduction of the valuation allowance for deferred tax assets
following the sale of the Real Estate Companies, offset by a year-to-date tax
expense of approximately $3.3 million recorded in the third quarter of 1995. See
Note 4 to the Company's Condensed Consolidated Financial Statements. No tax
provision was recorded during 1994 due to NOLs generated by the Real Estate
Companies in prior years.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by continuing operations for the first nine months of 1995
was $7.3 million. On September 30, 1995, cash and cash equivalents totaled
approximately $4.7 million. In addition, the Company had $55.0 million of
available borrowings under its revolving credit facility with a group of banks
(the "Credit Facility") as of September 30, 1995.
Net cash used in investing activities for the first nine months of 1995
was $13.5 million, primarily reflecting cash used for the acquisition of
additional property management rights. The Company's future capital expenditures
are expected to consist largely of the acquisition of additional property
management rights. The Company intends to fund such acquisitions primarily out
of operating cash flow and bank and other borrowings, including borrowings under
the Credit Facility.
On August 18, 1995, the Company completed an IPO of 4.3 million shares
of common stock and received net proceeds of approximately $52.0 million (the
"Closing"). At that time, the Company entered into a $75 million, three-year
unsecured revolving credit facility. At the end of two years, the Company may
extend the Credit Facility (as a revolving facility) for an additional year or
convert it to a two-year term loan. Availability under the Credit Facility is
subject to the Company's compliance with various financial ratios, operating
covenants and other customary conditions. Interest on the Credit Facility is
equal to, at the Company's option, either The First National Bank of Boston's
base rate from time to time or 175 basis points over the LIBOR rate in effect
from time to time. The Credit Facility requires that any additional borrowings
be subordinated to the Credit Facility, except that up to $10.0 million of
additional borrowings will be permitted if entered into in connection with the
acquisition of assets after the Closing date.
At Closing, the Company drew $20.0 million on the Credit Facility and
used those funds together with the net proceeds of the IPO as follows: (i)
$54.7 million was used to repay in full the Company's indebtedness under its
previous credit facility, which was simultaneously terminated by the Company;
(ii) $7.0 million was used to repay a
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note to a former institutional shareholder of the Company; and (iii) $5.5
million was used to repay indebtedness to Demeter, Capricorn, and Mr. Heller.
The remaining proceeds were added to the Company's working capital.
In consideration for the sale of the Real Estate Companies, Demeter,
Capricorn and Mr. Heller canceled approximately $9.1 million of indebtedness
owed by the Company to them. See Note 2 to the Company's Condensed Consolidated
Financial Statements.
As discussed in Note 4 to the Company's Condensed Consolidated Financial
Statements, the Company has substantial unused NOLs for Federal tax purposes
which result in the $22.2 million deferred tax asset reflected in the Company's
balance sheet. In addition, the company estimates that, based on current
projections, it has sufficient Federal alternative minimum tax ("AMT") NOLs to
offset the allowable limit of Federal alternative minimum taxable income at
least through 1996.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS FORM 8-K
(a) Exhibits
Exhibit No. Description
- - ----------- -----------
11.0 Statement regarding computation of per share earnings.
27.0 Financial Data Schedule.
(b) Reports on Form 8-K
None
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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)
November 13, 1995 By: /s/ Ann Torre Grant
--------------------------------------------------
Ann Torre Grant
Executive Vice President, Chief Financial Officer,
and Treasurer (Authorized Officer and Principal
Financial Officer)
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