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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____ to _______________
Commission file number 1-12378
NVR, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1394360
- ------------------------------- -------------------------------
(State or other jurisdiction (IRS employer identification
of incorporation or organization) number)
7601 Lewinsville Road, Suite 300
McLean, Virginia 22102
(703) 761-2000
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(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
____________
Securities registered pursuant to Section 12(b) of the Act:
--------------------------------------------------------------
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common stock, par value $0.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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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__
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
As of January 30, 1997 the aggregate market value of the voting stock held by
non-affiliates of NVR, Inc. based on the closing price reported on the American
Stock Exchange was approximately $157.6 million. As of January 30, 1997 there
were 12,886,996 total shares of common stock outstanding.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No____
-----
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE PROXY STATEMENT OF NVR, INC. TO BE FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO REGULATION 14A OF THE SECURITIES EXCHANGE ACT OF
1934 ON OR PRIOR TO APRIL 30, 1996 ARE INCORPORATED BY REFERENCE INTO PART III
OF THIS REPORT.
Page 1 of 217 pages
The Exhibit Index begins on page 15.
INDEX
PART I PAGE
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Item 1. Business.................................................... 3
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
Executive Officers of the Registrant........................ 7
PART II
--------
Item 5. Market for Registrants' Common Equity and Related Stockholder
Matters..................................................... 8
Item 6. Selected Financial Data..................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Item 8. Financial Statements and Supplementary Data................. 14
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 14
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.......... 14
Item 11. Executive Compensation...................................... 14
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 14
Item 13. Certain Relationships and Related Transactions.............. 14
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 15
2
PART I
------
ITEM 1. BUSINESS
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GENERAL
NVR, Inc. ("NVR" or the "Company"), formed in 1980 as NVHomes, Inc.
("NVH"), is a holding company that currently operates, through its subsidiaries,
in two business segments: 1) the construction and marketing of homes and 2)
financial services, including a mortgage banking operation. Unless the context
otherwise requires, references to "NVR" or the "Company" include its
subsidiaries.
NVR is one of the largest homebuilders in the United States and in the
Washington, D.C. and Baltimore, Maryland metropolitan areas, where NVR derived
approximately 72% of its 1996 homebuilding revenues. NVR's homebuilding
operations construct and sell single-family detached homes, townhomes and
condominium buildings in two distinct product lines, through two divisions: Ryan
Homes and NVHomes. Ryan Homes builds moderately priced homes in sixteen
metropolitan areas located in Maryland, Virginia, Pennsylvania, New York, North
Carolina, South Carolina, Ohio, New Jersey, Delaware and Tennessee, and markets
its homes primarily to first-time buyers. NVHomes builds homes largely in the
Washington, D.C. metropolitan area, and markets its homes primarily to move-up
buyers. In 1996 the average price of a unit settled by NVR was approximately
$182,700.
NVR obtains land for homebuilding by acquiring control over finished
building lots through option contracts with land developers that require
forfeitable deposits, thereby reducing the financial requirements and risks
associated with direct land ownership. NVR generally seeks to maintain control
over an inventory of lots sufficient to provide for the next 18 to 24 months of
projected home sales, based upon projected sales volumes in the various
communities in which it operates.
In addition to building and selling homes, NVR provides a number of
mortgage-related services through its national mortgage banking operations,
which operate in 12 states. Although NVR's mortgage banking operations provide
financing to a substantial portion of NVR's homebuilding customers, NVR's
homebuilding customers accounted for only 45% of the aggregate dollar amount of
loans closed in 1996. In 1996, NVR's mortgage banking business closed
approximately 10,400 loans with an aggregate principal amount of approximately
$1.2 billion. NVR's mortgage banking business sells all of the mortgage loans
it closes into the secondary markets, but it retains the servicing rights
associated with a portion of those loans. During 1996 NVR sold a significant
portion of its servicing portfolio, resulting in a servicing portfolio balance
at December 31, 1996 of approximately $579 million. NVR's mortgage banking
business generates revenues primarily from origination fees, servicing fees,
gains on marketing of loans, title fees, and sales of servicing rights.
Segment information for NVR's homebuilding and financial services
businesses is included in note 2 to NVR's consolidated financial statements.
HOMEBUILDING
PRODUCTS
NVR offers single-family detached homes, townhomes, and condominium
buildings with many different basic home designs which have a variety of
elevations and numerous other options. Homes built by NVR combine traditional or
colonial exterior designs with contemporary interior designs and amenities.
NVR's homes range from 985 to 5,450 square feet, with two to five bedrooms, and
are priced from approximately $74,000 to $660,000.
3
MARKETS
The following table summarizes settlements and contracts for sales of homes
for each of the last three years by region:
CONTRACTS FOR SALE
SETTLEMENTS (NET OF CANCELLATIONS)
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------------- --------------------------
REGION 1996 1995 1994 1996 1995 1994
- ------ -------- ------- --------- ------- ------- --------
Washington/Baltimore 3,834 3,375 3,337 3,751 3,842 3,037
Other (1) 1,861 1,482 1,378 1,939 1,764 1,320
----- ----- ----- ----- ----- -----
Total 5,695 4,857 4,715 5,690 5,606 4,357
----- ----- ----- ----- ----- -----
(1) Includes Pennsylvania, New York, North Carolina, South Carolina, Ohio, New
Jersey, Tennessee and Delaware.
CONSTRUCTION
Construction work on NVR's homes is performed by independent subcontractors
under fixed-price contracts. The work of subcontractors is performed under the
supervision of NVR employees who monitor quality control. NVR uses many
independent subcontractors representing the building trades in its various
markets and is dependent neither on any single subcontractor nor on a small
number of subcontractors.
SALES AND MARKETING
NVR's preferred marketing method is for customers to visit a furnished
model home featuring many built-in options and a landscaped lot. The garages of
these homes are usually converted into temporary sales centers where alternative
facades and floor plans are displayed and designs for other models are available
for review. Sales representatives are compensated largely on a commission
basis.
REGULATION
NVR and its subcontractors must comply with various federal, state and
local zoning, building, pollution, environmental, advertising and consumer
credit statutes, rules and regulations, as well as other regulations and
requirements in connection with its construction and sales activities. All of
these regulations have increased the cost required to market NVR's products.
Counties and cities in which NVR builds homes have at times declared moratoriums
on the issuance of building permits and imposed other restrictions in the areas
in which sewage treatment facilities and other public facilities do not reach
minimum standards. To date, restrictive zoning laws and imposition of
moratoriums have not had a material adverse effect on NVR's construction
activities. However, there is no assurance that such restrictions will not
adversely affect NVR in the future.
COMPETITION AND MARKET FACTORS
The housing industry is highly competitive. NVR competes with numerous
homebuilders of varying size, ranging from local to national in scope, some of
whom have greater financial resources than NVR. The Company also faces
competition from the home resale market. NVR's homebuilding operations compete
primarily on the basis of price, location, design, quality, service and
reputation. NVR's homebuilding operations historically have been one of the
market leaders in each of the markets where NVR operates.
The housing industry is cyclical and is affected by consumer confidence
levels, prevailing economic conditions and interest rates. In addition, a
variety of other factors affect the housing industry
4
and the demand for new homes, including the availability and increases in the
cost of land, labor and materials, changes in consumer preferences, demographic
trends and the availability of mortgage finance programs.
NVR is dependent upon building material suppliers for a continuous flow of
raw materials. Whenever possible, NVR utilizes standard products available from
multiple sources. Such raw materials have been generally available in adequate
supply.
FINANCIAL SERVICES
MORTGAGE BANKING
NVR's financial services business is centered around residential mortgage
lending. NVR provides a number of mortgage related services to its homebuilding
customers and to other customers through its mortgage banking operations. The
mortgage banking operations of NVR also include separate companies which broker
title insurance and perform title searches in connection with mortgage loan
closings for which they receive commissions and fees.
NVR's mortgage banking business sells all of the mortgage loans it closes
to investors in the secondary markets, rather than holding them for investment.
NVR's wholly-owned subsidiary, NVR Mortgage Finance, Inc. ("NVR Finance") is an
approved seller/servicer for FNMA, GNMA, FHLMC, VA and FHA mortgage loans. The
size of its servicing portfolio has decreased to approximately $579 million in
principal amount of loans being serviced at the end of 1996, from $1.4 billion
at the end of 1995.
NVR SAVINGS BANK
NVR's financial statements reflect, as discontinued operations, the
operating results of a federally chartered savings bank, NVR Savings Bank,
F.S.B. ("NVRSB"). In March 1994, NVR completed the sale of the assets and
liabilities of NVRSB to a financial institution. See Note 3 to the consolidated
financial statements.
MORTGAGE-BACKED SECURITIES
NVR's limited purpose subsidiary ("Limited-Purpose Financing Subsidiary")
was organized to facilitate the financing of long-term mortgage loans through
the sale of bonds collateralized by mortgage-backed securities, including
certificates guaranteed as to the full and timely payment of principal and
interest by FNMA, and certificates guaranteed as to payment of principal and
interest by GNMA and FHLMC. The issuance of mortgage-collateralized bonds has
in the past facilitated NVR's ability, through its mortgage-banking
subsidiaries, to provide home mortgage financing to its customers. There have
been no bonds issued since 1988.
COMPETITION AND MARKET FACTORS
NVR's mortgage banking operations operate in 12 states and have 25 offices.
Their main competition comes from national, regional, and local mortgage
bankers, thrifts and banks in each of these markets. NVR's mortgage banking
operations compete primarily on the basis of customer service, variety of
products offered, interest rates offered, prices of ancillary services and
relative financing availability and costs.
5
REGULATION
NVR Finance, as an approved seller/servicer of FNMA, GNMA, FHLMC, FHA and
VA, is subject to the rules, regulations and guidelines of, and examinations by,
those agencies, which restrict certain activities of NVR Finance. NVR Finance
is currently eligible and expects to remain eligible to participate in such
programs; however, any significant impairment of its eligibility could have a
material adverse impact on its operations. In addition, NVR Finance is subject
to regulation at the state and federal level with respect to specific
origination, selling and servicing practices.
EMPLOYEES
At December 31, 1996, NVR employed 1,800 full-time persons, of whom 569
were officers and management personnel, 135 were technical and construction
personnel, 338 were sales personnel, 362 were administrative personnel and 396
were engaged in various other service and labor activities. None of the
Company's employees are subject to a collective bargaining agreement and the
Company has never experienced a work stoppage. Management believes that its
employee relations are good.
ITEM 2. PROPERTIES
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NVR's executive offices are located in McLean, Virginia, where NVR
currently leases office space for a nine and one half year term expiring in
March 2005.
NVR leases two buildings in Robinson Township, a suburb of Pittsburgh,
Pennsylvania. The buildings are leased for a term of twenty-five years expiring
in 2014 and NVR has options to purchase the buildings at various times
throughout the lease term. NVR is obligated to offer to purchase the office
buildings upon termination of the lease at a price equal to the greater of the
fair market value of the buildings on the relevant date under the lease or $11.7
million, the original acquisition cost of the premises, plus certain additional
amounts.
NVR's manufacturing facilities are located in Thurmont, Maryland;
Farmington, New York; and Darlington, Pennsylvania. NVR has leased the Thurmont
and Farmington manufacturing facilities for a term expiring in 2014 with various
options for extension of the leases and for the purchase of the facilities. The
Darlington lease expires in 2005 and also contains various options for extension
of the lease and for the purchase of the facility.
NVR also leases office space in 63 locations in 13 states for field
offices, mortgage banking and title services branches and certain model homes
under leases expiring at various times through 2000. NVR anticipates that, upon
expiration of existing leases, it will be able to renew them or obtain
comparable facilities on acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
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NVR and its subsidiaries are involved in litigation arising from the normal
course of business. In the opinion of management, this litigation will not have
any material adverse effect on the financial position of NVR.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ----------------------------------------------------
NONE
6
EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth pertinent information with respect to the
executive officers of NVR.
NAME AGE POSITIONS
---- --- ---------
Dwight C. Schar 55 Chairman of the Board, President and
Chief Executive Officer of NVR
Michael J.Cannizzo 51 Senior Vice President-Administration of
NVR Homes (NVR's homebuilding operations)
William J.Inman 49 President of NVR Finance (NVR'smortgage
banking operations)
James M.Sack 46 Vice President,Secretary and General
Paul C.Saville 41 Senior Vice President Finance, Chief Financial
Officer, and Treasurer of NVR
Dennis M.Seremet 41 Vice President and Controller of NVR and Vice
President Finance, NVR Homes
__________
Dwight C. Schar has been chairman of the board, president and chief
executive officer of NVR, as well as chairman of the board of NVR Homes, Inc.
("Homes") and NVR Financial Services, Inc. ("NVRFS") since September 30, 1993.
Until September 30, 1993, Mr. Schar had been the chief executive officer of NVR
L.P. since April 1986, a director and the chairman of the NVCompanies, Inc.
("NVC") board of directors since September 1984 (NVC was the general partner of
NVR L.P.'s managing general partner) and chairman of Ryan Homes, Inc.'s ("RHI")
board of directors since December 1986. Mr. Schar also was a director of NVRSB
from December 1988 through March 1994.
Michael J. Cannizzo has been senior vice president-administration of Homes
since January, 1995. Mr. Cannizzo was president of Homes from September 30,
1993 through December 1994. Mr. Cannizzo was president and chief executive
officer of RHI from February 1989 to September 1993 and president and chief
executive officer of NVR L.P.'s homebuilding operations from September 1990 to
September 30, 1993.
William J. Inman has been president of NVRFS since October 1988 and NVR
Finance since January 1992. Mr. Inman had been president of NVR Mortgage L.P.
from October 1988 to September 1993. From May 1992 through March 1994, Mr.
Inman served as chairman of the board of directors of NVRSB.
James M. Sack has been vice president, secretary and general counsel of NVR
since September 30, 1993. Mr. Sack was also vice president, secretary and
general counsel of NVC for NVR L.P. from September 1989 through September 1993.
Mr. Sack has been senior vice president of NVR Development L.P. since September
1989. Since July 1992, Mr. Sack has practiced law with Sack & Associates, P.C.
in Vienna, Virginia.
Paul C. Saville has been senior vice president finance, chief financial
officer and treasurer of NVR since September 30, 1993. Mr. Saville was senior
vice president and treasurer of NVC for NVR L.P. and senior vice president of
finance and treasurer of RHI from February 1990 through September 1993.
Dennis M. Seremet has been vice president and controller of NVR since April
1, 1995. Mr. Seremet also currently serves as vice president finance, Homes, to
which he was appointed on September 30, 1993. From June 1990 to September 1993,
Mr. Seremet had been vice president finance of NVR L.P.'s homebuilding
operations.
7
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
- ------- ----------------------------------------------------------------------
NVR's shares of common stock are listed and principally traded on the
American Stock Exchange ("AMEX"). The following table sets forth for the
periods indicated the high and low closing sales prices per share for the years
1996 and 1995 as reported by the AMEX.
HIGH LOW
------ ------
PRICES PER SHARE:
1995:
First Quarter .... 6-1/4 5-3/8
Second Quarter .... 8 5-7/8
Third Quarter .... 11-1/8 6-7/16
Fourth Quarter .... 10-5/8 9-3/8
1996:
First Quarter .... 11 9-1/8
Second Quarter .... 11-1/8 9-1/2
Third Quarter .... 11 9-3/16
Fourth Quarter .... 13 8-7/8
As of the close of business on January 30, 1997, there were 1,245
shareholders of record.
NVR has not paid any cash dividends on its shares of common stock during
the years 1996 or 1995. NVR's bank indebtedness and the indenture governing
NVR's 11% Senior Notes due 2003 contain restrictions on the ability of NVR to
pay dividends on its common stock.
8
ITEM 6. SELECTED FINANCIAL DATA (dollars in thousands, except per Share/Unit
- ------- -----------------------
amounts)
The following tables set forth selected financial information for NVR. The
selected statement of operations and balance sheet data have been extracted from
NVR's consolidated financial statements for each of the periods presented. The
selected financial data should be read in conjunction with, and is qualified in
its entirety by, the consolidated financial statements and related notes
included elsewhere in this report.
(SUCCESSOR) (1) (PREDECESSOR) (1)
(POST-REORGANIZATION) (PRE-REORGANIZATION)
------------------------------------------------------- ------------------------------------------
THREE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
----------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1996 1995 1994 1993 1993(2) 1992(2)
---- ---- ---- ---- ------- -------
STATEMENT OF OPERATIONS DATA:
HOMEBUILDING DATA:
Revenues $1,045,930 $869,119 $820,915 $209,466 $528,418 $ 689,542
Gross profits (3) 139,675 118,084 104,827 19,083 62,064 79,625
FINANCIAL SERVICES GROUP:
Mortgage banking fees (4) 24,029 26,297 25,118 4,354 26,573 34,455
Interest income 5,351 4,744 5,288 2,256 1,919 3,757
Interest expense 2,249 2,090 2,364 1,557 2,296 3,874
CONSOLIDATED DATA:
Income (loss) before
discontinued
operations and
extraordinary gains $ 25,781 $ 16,400 $ 9,018 $ (7,010) $(17,178) $ (9,235)
Income (loss) before
discontinued
operations and
extraordinary gains
per Share/Unit (5) $ 1.72 $ 1.07 $ 0.53 $ (0.40) $ (0.56) $ (0.32)
(PREDECESSOR) (1)
(SUCCESSOR) (1) (PRE-REORG-
(POST-REORGANIZATION) ANIZATION)
----------------------------------------------------------------- ----------
DECEMBER 31,
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 (2) 1992 (2)
-------------- -------------- -------------- -------------- -----------------
CONSOLIDATED BALANCE SHEET DATA:
Homebuilding inventory $ 171,693 $ 154,713 $ 109,538 $ 116,389 $ 115,647
Total assets (6) 501,165 513,598 446,942 558,091 423,009
Notes and loans payable (6) 201,592 221,295 184,414 297,208 154,604
Liabilities subject to
compromise (7) - - - - 281,516
Equity (deficit) (8) 152,010 146,180 129,522 134,797 (122,002)
(1) Under NVR L.P.'s (the "Predecessor") plan of reorganization (the "Plan")
that was completed on September 30, 1993 (the "Effective Date"), the
Predecessor, which was a master limited partnership, was reorganized as a
corporation (the "Incorporation Transaction"). The Incorporation Transaction
included the merger of Ryan Homes, Inc. ("RHI") into NVR, Inc., (the
"Successor") a newly formed Virginia corporation. NVR, Inc. then succeeded to
all of the assets and liabilities of the Predecessor (the "Merger") on the
Effective Date. In connection with the Plan and following a series of other
consolidation and merger transactions, NVR, Inc. conducts substantially all of
its homebuilding operations in NVR Homes, Inc. ("Homes"), NVR's wholly-owned
homebuilding company, and its financial services operations in NVR Financial
Services, Inc. ("NVRFS"), NVR's wholly-owned financial services business holding
company. Unless the context otherwise requires, "NVR" or the "Company" refers to
NVR L.P. prior to the Merger and to NVR, Inc. after the Merger.
9
(2) Effective September 30, 1993, NVRSB is presented on a discontinued
operations basis. Statement of operations and balance sheet data for prior
periods have been reclassified to reflect this change.
(3) Gross profits in the fourth quarter of 1993 include a non-cash $9,000
inventory valuation adjustment. This adjustment negatively impacted gross
profits and was required by Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") issued by the
American Institute of Certified Public Accountants as part of "fresh-start"
accounting and reporting. Effective October 1, 1993, NVR discontinued the
capitalization of interest costs into inventory since the effect of directly
charging such costs to expense as compared to capitalization is not expected to
have a material impact on NVR's results of operations. Capitalized interest
costs relieved to cost of sales for periods prior to October 1, 1993 have not
been reclassified to interest expense.
(4) Effective January 1, 1995, NVR adopted Statement of Financial Accounting
Standards ("SFAS") No. 122, Accounting For Mortgage Servicing Rights. SFAS No.
122 amended SFAS No. 65, Accounting For Certain Mortgage Banking Activities, by
requiring that a mortgage banking enterprise that acquires mortgage servicing
rights through either the purchase or origination of mortgage loans recognize
those rights as separate assets by allocating the total cost of the mortgage
loans to the mortgage servicing rights and the loans (without the mortgage
servicing rights) based on their relative fair value. Retroactive application of
SFAS No. 122 to periods prior to the fiscal year of adoption is prohibited, and
thus, mortgage banking fees for the years ended December 31, 1996 and 1995 are
not directly comparable to prior periods. For the years ended December 31, 1996
and 1995, application of SFAS No. 122 increased mortgage banking fees by $906
and $1,717, respectively.
(5) In connection with the effectiveness of the Plan, NVR was reorganized as a
corporation and 17,057,326 common shares were issued and outstanding on
September 30, 1993. For the years ended December 31, 1996, 1995 and 1994, and
for the three months ended December 31, 1993, income (loss) from continuing
operations per share was computed based on 14,969,111, 15,373,285, 17,097,172
and 17,690,553 shares, respectively, which represents the weighted average
number of shares and share equivalents outstanding. The weighted average number
of Units outstanding and the weighted average number of Unit equivalents, which
include option rights and warrants, were approximately 30,396,000 and 30,393,000
for the nine months ended September 30, 1993 and the year ended December 31,
1992, respectively.
(6) Effective in the fourth quarter of 1996, the Limited Purpose Financing
Subsidiaries are presented on a net basis. Accordingly, balance sheet data for
prior periods have been reclassified to reflect this change. See note 1 to the
accompanying consolidated financial statements.
(7) Effective April 6, 1992, pursuant to the requirements of SOP 90-7, pre-
petition liabilities that management believed were subject to compromise were
reflected in the aggregate on NVR's consolidated balance sheet for December 31,
1992. Liabilities subject to compromise included NVR's subordinated debt
securities along with accrued and unpaid interest thereon, financing and
mortgage obligations on certain office buildings and a manufacturing facility,
and other pre-petition liabilities which were either unsecured or undersecured,
and may have been impaired by the Plan. As a result of the confirmation of the
Plan, these pre-petition liabilities were either settled or discharged in
accordance with the provisions of the Plan.
(8) On September 30, 1993, the preferred partnership interests and the Units,
including the Units issued in connection with NVR's subordinated debt-for-equity
exchange, were exchanged for 17,057,326 common shares with an aggregate fair
value on the date of the exchange of $130,000. No cash dividends for common
stock were declared for any of the periods presented.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS (dollars in thousands except per share data)
----------------------------------------------------------
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NVR, Inc. ("NVR" or the "Company") is a holding company that operates in
two business segments: homebuilding and financial services. The results of these
two segments are discussed separately below. Holding company general and
administrative expenses are fully allocated to the homebuilding and financial
services segments in the information presented below.
HOMEBUILDING SEGMENT
Homebuilding revenues for 1996 increased 20.3% to $1,045,930 from $869,119
in 1995. The increase in revenues was primarily due to a 17.3% increase in the
number of homes settled from 4,857 in 1995 to 5,695 in 1996 and to a 2.8%
increase in the average settlement price from $177.7 in 1995 to $182.7 in 1996.
New orders for 1996 increased 1.5% to 5,690 compared with 5,606 in 1995.
Homebuilding revenues for 1995 increased 5.9% to $869,119 from $820,915 in 1994.
The increase in revenues was primarily due to a 3.0% increase in the number of
homes settled from 4,715 during 1994 to 4,857 in 1995 and to a 2.7% increase in
the average settlement price from $173.0 in 1994 to $177.7 in 1995. New orders
for 1995 increased 28.7% to 5,606 compared with 4,357 in 1994. The increase in
new orders was primarily a result of declining interest rates and to a lesser
extent, new orders generated in markets entered into during 1994.
Gross profit margins decreased to 13.4% in 1996 compared to 13.6% in 1995.
The decrease in gross profit margins from the prior year was primarily
attributable to more competitive market conditions in certain of the Company's
markets and, to a lesser extent, higher lumber costs. Gross profit margins
increased to 13.6% in 1995 compared to 12.8% in 1994. The increase in gross
profit margins from the prior year was primarily attributable to lower lumber
costs and improved operating efficiencies. The higher costs associated with the
severe winter weather conditions in 1994 were not incurred in 1995.
SG&A expenses for 1996 increased $7,984 to $71,184 from $63,200 in 1995,
and as a percentage of revenues decreased from 7.3% in 1995 to 6.8% in 1996. The
dollar increase in SG&A expenses was primarily due to increased costs that
correspond to the aforementioned increase in revenues. SG&A expenses for 1995
increased $5,332 to $63,200 from $57,868 in 1994, and as a percentage of revenue
increased from 7.0% in 1994 to 7.3% in 1995. The increase in SG&A expenses was
primarily due to increased costs that correspond to the expansion into new
markets during 1994 and an increase in the number of communities in existing
markets.
Backlog units and dollars were 2,466 and $453,211, respectively, at
December 31, 1996 compared to backlog units of 2,471 and dollars of $442,268 at
December 31, 1995. The increase in backlog dollars was primarily due to a 2.6%
increase in the average sales prices during 1996 as compared to the same 1995
period. Backlog units of 2,471 and dollars of $442,268 at December 31, 1995
increased by 43.5% and 46.3%, respectively, compared to backlog units of 1,722
and dollars of $302,219 at December 31, 1994. The increase in backlog units was
primarily due to a 55.5% increase in new orders for the six months ended
December 31, 1995 as compared to the same 1994 period.
The Company believes that earnings before interest, taxes, depreciation and
amortization ("EBITDA") provides a meaningful comparison of operating
performance of the homebuilding segment because it excludes the amortization of
certain intangible assets and other non-cash items. Although the Company
believes the calculation is helpful in understanding the performance of the
homebuilding segment, EBITDA should not be considered a substitute for net
income or cash flow as indicators of the Company's financial performance or its
ability to generate liquidity.
11
CALCULATION OF HOMEBUILDING EBITDA:
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
Operating income $62,755 $49,413 $42,461
Depreciation 2,863 2,211 1,820
Amortization of excess reorganization
value 7,048 7,048 7,404
Other non-cash items 2,239 1,740 1,343
------- ------- -------
Homebuilding EBITDA $74,905 $60,412 $53,028
======= ======= =======
% of Homebuilding revenues 7.2% 7.0% 6.5%
Homebuilding EBITDA in 1996 was 24.0% higher than in 1995, and as a
percentage of revenues increased from 7.0% to 7.2%. Homebuilding EBITDA in 1995
was 13.9% higher than 1994 and as a percentage of revenues increased from 6.5%
to 7.0%.
FINANCIAL SERVICES SEGMENT
The Financial Services segment generated operating income of $2,583 for the
year ended December 31, 1996 compared to operating income of $1,162 during the
year ended December 31, 1995 and an operating loss of $92 during the year ended
December 31, 1994. Mortgage loan closings were $1,243,945, $1,092,676 and
$1,115,337 during the respective years ended December 31, 1996, 1995 and 1994.
The increases in operating income and mortgage loan closings were achieved
despite continued strong price competition and fewer operating branch offices
during the current year as compared to the prior year periods.
Mortgage banking fees decreased $2,268 when comparing 1996 and 1995 and
increased $1,179 when comparing 1995 and 1994. A summary of mortgage banking
fees is noted below:
MORTGAGE BANKING FEES: 1996 1995 1994
---------- ---------- ----------
Net gain (loss) on sale of loans $ 14,401 $ 8,320 $ (5,959)
Servicing 4,894 7,128 7,073
Title services 5,928 5,315 5,279
Gain (loss) on sale of servicing (1,194) 5,534 18,725
---------- ---------- ----------
$ 24,029 $ 26,297 $ 25,118
========== ========== ==========
Effective as of January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights.
SFAS No. 122 amended SFAS No. 65, Accounting for Certain Mortgage Banking
Activities, by requiring that a mortgage banking enterprise that acquires
mortgage servicing rights through either the purchase or origination of mortgage
loans recognize those rights as separate assets by allocating the total cost of
the mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values. Retroactive
application of SFAS No. 122 to periods prior to the fiscal year of adoption is
prohibited. In addition, SFAS No. 122 requires that a mortgage banking
enterprise assess its capitalized mortgage servicing rights for impairment based
on the fair value of those rights. Such adoption caused Financial Services
operating income to increase by $610 and $1,511, respectively, during the years
ended December 31, 1996 and 1995.
Mortgage banking fees in 1996 were lower in comparison to 1995, which is
primarily attributable to the loss on sale of servicing rights and lower
servicing fee revenues resulting from the reduction in the mortgage loan
servicing portfolio. These lower revenues were partially offset by the improved
marketing results on the sale of mortgage loans and higher servicing values
realized through the sale of mortgage servicing rights recognized under SFAS No.
122. Operating income was higher in 1996 in comparison to 1995 as a result of
the cost cutting measures enacted by the financial services group during 1996
and the increase in mortgage loan closings noted above.
12
Mortgage banking fees in 1995 were comparable with 1994 despite a slightly
lower volume of loan closings. Operating income was higher due to the
aforementioned adoption of SFAS 122 and to second-half 1995 declining interest
rates that had improved overall market conditions and contributed to stronger
loan closing activity and marketing results in the last quarter of 1995. In
response to market conditions, the financial services segment closed thirteen
mortgage origination branches during the third quarter of 1995 and accrued
approximately $1,000 in office closure expenses.
SEASONALITY
The results of NVR's homebuilding operations generally reflect the
seasonality of the housing market in the Middle Atlantic region of the United
States. NVR historically has entered into more sales contracts in this region
during the first and second quarters, and the highest numbers of settlements
historically have occurred in the second, third and fourth quarters. Because
NVR's financial services operations generate part of their business from NVR's
homebuilding operations and from outside homebuilders affected by seasonality,
to the extent that homebuilding is adversely affected by seasonality, financial
services operations may also be affected. The existence of mortgage banking and
title services offices outside of the Middle Atlantic region and the existence
of third-party business tend to reduce the effects of seasonality on the results
of NVR's operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 125 establishes accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. SFAS No. 125 is effective for financial
statements for fiscal years beginning after December 15, 1996. Upon adoption,
the Company does not believe that SFAS No. 125 will have a material impact on
its consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
NVR's homebuilding segment generally provides for its working capital cash
requirements using cash generated from operations and a credit facility. The
homebuilding segment has available a $60,000 unsecured Working Capital Revolving
Credit agreement to fund its working capital needs, under which no amounts were
outstanding at December 31, 1996.
NVR's financial services segment provides for its mortgage origination and
other operating activities using cash generated from operations as well as
various short-term credit facilities. NVR Mortgage Finance, Inc. ("NVR Finance")
has available a $105,000 mortgage warehouse facility to fund its mortgage
origination activities, under which $61,259 was outstanding at December 31,
1996. NVR Finance also has available two annually renewable, gestation mortgage-
backed security repurchase agreements ( "Repo Facility"), one of which is
uncommitted, with a maximum of $100,000 in borrowings available. There was an
aggregate of $6,204 outstanding under the Repo Facility at December 31, 1996.
Various debt agreements limit the ability of NVR's subsidiaries to transfer
funds to NVR in the form of dividends, loans or advances. NVR's subsidiaries had
net assets (after intercompany eliminations) of $253,435 as of December 31,
1996, that were so restricted.
As shown in NVR's consolidated statement of cash flows for the year ended
December 31, 1996, NVR's operating activities provided cash of $38,782 for this
period. The cash was provided primarily by cash outflows of $1,243,945 used
to close or purchase mortgage loans held for sale offset by cash inflows of
$1,268,254 from the sale of such loans.
13
Net cash provided by investing activities was $84,862 for the year ended
December 31, 1996. The primary sources of cash were principal payments on and
proceeds from the sale of mortgage-backed securities, which are primarily used
for the redemption of bonds as discussed below, and proceeds from the sale of
mortgage servicing rights.
Net cash used for financing activities was $104,431 for the year ended
December 31, 1996. Cash was primarily used to repay borrowings under credit
lines and for the redemption of bonds using cash provided by the related
mortgage backed securities as discussed above. NVR also purchased
approximately 3.3 million shares of its common stock for an aggregate purchase
price of $35,137 during the year ending December 31, 1996. The company may,
from time to time, repurchase additional shares of its common stock, pursuant to
repurchase authorizations by the Board of Directors and subject to the
restrictions contained within the Company's debt agreements. Additionally, NVR
received approximately $13,161 from the exercise of warrants during 1996.
The Company believes that internally generated cash and borrowings
available under credit facilities will be sufficient to satisfy near term cash
requirements for working capital in both its homebuilding and mortgage banking
operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
The financial statements required by this Item are included in the
financial statements and schedules included herein under Item 14 and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
Not applicable.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------- ---------------------------------------------------
Item 10 is hereby incorporated by reference to NVR's Proxy Statement to be
filed with the Securities and Exchange Commission on or prior to April 30, 1997.
Reference is also made regarding the executive officers of the registrant to
"Executive Officers of the Registrant" following Item 4 of Part I of this
report.
ITEM 11. EXECUTIVE COMPENSATION.
- -------- -----------------------
Item 11 is hereby incorporated by reference to NVR's Proxy Statement to be
filed with the Securities and Exchange Commission on or prior to April 30, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- ---------------------------------------------------------------
Item 12 is hereby incorporated by reference to NVR's Proxy Statement to be
filed with the Securities and Exchange Commission on or prior to April 30, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
Item 13 is hereby incorporated by reference to NVR's Proxy Statement to be
filed with the Securities and Exchange Commission on or prior to April 30, 1997.
14
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
- -------- ----------------------------------------------------------------
FINANCIAL STATEMENTS
NVR, INC. - CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
NVR FINANCIAL SERVICES, INC. - CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholder's Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
NVR HOMES, INC. - CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholder's Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
RVN, INC. - FINANCIAL STATEMENTS
Report of Independent Auditors
Balance Sheet
Statement of Income
Statement of Shareholder's Equity
Statement of Cash Flows
Notes to Financial Statements
FINANCIAL STATEMENT SCHEDULES
Schedule I - Condensed Financial Information of Registrant
DESCRIPTION OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Debtors' Second Amended Joint Plan of Reorganization under
Chapter 11 of the Bankruptcy Code (as modified to July 21, 1993).
Incorporated by reference to Exhibit 2.1 in NVR, Inc.'s 1993
Registration Statement on Form S-1 (No. 33-63190) (the "1993
Registration Statement").
3.1 Restated Articles of Incorporation of NVR, Inc. Incorporated by
reference to Exhibit 3.7 in NVR, Inc.'s 1993 Registration
Statement.
15
3.2 Bylaws of NVR, Inc. Incorporated by reference to Exhibit 3.8 in
NVR, Inc.'s 1993 Registration Statement.
3.3 Restated Articles of Incorporation of NVR Homes, Inc.
Incorporated by reference to Exhibit 3.9 in NVR, Inc.'s 1993
Registration Statement.
3.4 Bylaws of NVR Homes, Inc. Incorporated by reference to Exhibit
3.10 in NVR, Inc.'s 1993 Registration Statement.
3.5 Articles of Incorporation of NVR Financial Services, Inc., as
amended. Incorporated by reference to Exhibit 3.5 and 3.11 in
NVR, Inc.'s 1993 Registration Statement.
3.6 Bylaws of NVR Financial Services, Inc. Incorporated by reference
to Exhibit 3.6 in NVR, Inc.'s 1993 Registration Statement.
*3.7 Certificate of Incorporation of RVN, Inc.
*3.8 Bylaws of RVN, Inc.
4.1 Form of Trust Indenture between NVR, Inc., as issuer, NVR Homes,
Inc. and NVR Financial Services, Inc., as guarantors, and IBJ
Schroder Bank & Trust Company, as trustee. Incorporated by
reference to Exhibit 4.1 in NVR, Inc.'s 1993 Registration
Statement.
4.2 Form of Note (included in Indenture filed as Exhibit 4.1).
4.3 Form of Warrant Agreement dated September 30, 1993 between NVR,
Inc. and Chemical Bank, as warrant agent. Incorporated by
reference to Exhibit 10.14 in NVR, Inc.'s 1993 Registration
Statement.
*4.4 Form of Supplemental Trust Indenture between NVR, Inc., as
issuer, NVR Homes, Inc., NVR Financial Services, Inc. and RVN,
Inc, as guarantors, and IBJ Schroder Bank & Trust Company, as
trustee.
10.1 Employment Agreement between NVR, Inc. and Dwight C. Schar dated
January 1, 1996.
10.2 Executive Employment Agreement between NVR, Inc. and Michael J.
Cannizzo dated January 1, 1995.
10.3 Executive Employment Agreement between NVR, Inc. and Paul C.
Saville dated January 1, 1995.
10.5 Employment Agreement between NVR, Inc. and William J. Inman dated
November 13, 1995.
*10.6 Second Amended and Restated Loan Agreement dated as of June 13,
1996 among NVR Mortgage Finance, Inc. and Bank One, Texas, N.A.,
as Agent, and the other lenders party thereto.
10.7 NVR, Inc. Equity Purchase Plan. Incorporated by reference to
Exhibit 10.10 in NVR, Inc.'s 1993 Registration Statement.
10.8 NVR, Inc. Directors Long-Term Incentive Plan. Incorporated by
reference to Exhibit 10.11 in NVR, Inc.'s 1993 Registration
Statement.
10.9 NVR, Inc. Management Equity Incentive Plan. Incorporated by
reference to Exhibit 10.2 in NVR, Inc.'s 1993 Registration
Statement.
10.10 Pledge Agreement dated September 30, 1993 between IBJ Schroder
Bank & Trust Company, as collateral agent, and NVR, Inc.
Incorporated by reference to Exhibit 10.18 in NVR, Inc.'s 1993
Registration Statement.
16
10.11 Credit and Security Agreement dated September 30, 1993 among NVR
Homes, Inc., NVR, Inc. and The First National Bank of Boston, as
agent. Incorporated by reference to Exhibit 10.2 in NVR, Inc.'s
Current Report on Form 8-K dated October 4, 1993.
10.12 Guaranty of Collection between NVR, Inc. and The First National
Bank of Boston, as agent. Incorporated by reference to Exhibit
10.3 in NVR, Inc.'s Current Report on Form 8-K dated October 4,
1993.
10.13 Master Repurchase Agreement dated as of July 7, 1993 between NVR
Mortgage Finance, Inc. and Merrill Lynch Mortgage Capital, Inc.
Incorporated by reference to Exhibit 10.16 in NVR, Inc.'s 1993
Registration Statement.
10.14 Gestation Financing Agreement dated January 14, 1994 between NVR
Mortgage Finance, Inc. and Bank One, Texas, National Association.
Incorporated by reference to Exhibit 10.14 in NVR, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1993.
10.18 Agreement among Crestar Bank, NVR Savings Bank, FSB, and NVR
Financial Services, Inc. dated November 8, 1993. Incorporated by
reference to NVR's Current Report on Form 8-K dated March 17,
1994.
10.19 Employee Stock Ownership Plan of NVR, Inc.
10.20 Amended and restated credit and security agreement dated as of
May 5, 1995 among NVR Homes, Inc. as borrower and NVR, Inc. as
Guarantor and Certain Banks and The First National Bank of
Boston, as Agent for itself and Certain Banks.
10.22 NVR, Inc. 1994 Management Equity Incentive Plan.
10.25 First modification of amended and restated credit and security
agreement dated as of January 16, 1996 among NVR Homes, Inc. as
borrower and NVR, Inc. as Guarantor and Certain Banks and The
First National Bank of Boston, as Agent for itself and Certain
Banks.
10.26 NVR, Inc. Management Long-Term Stock Option Plan. Incorporated by
reference to Exhibit 99.3 of NVR, Inc.'s Form S-8 Registration
Statement filed May 31, 1996.
10.27 NVR, Inc. Directors' Long-Term Stock Option Plan. Incorporated by
reference to Exhibit 99.3 of NVR, Inc.'s Form S-8 Registration
Statement filed May 31, 1996.
*10.28 Second modification of amended and restated credit and security
agreement dated as of May 5, 1996 among NVR Homes, Inc. as
borrower and NVR, Inc. as Guarantor and Certain Banks and The
First National Bank of Boston, as Agent for itself and Certain
Banks.
*10.29 Third modification of amended and restated credit and security
agreement dated as of December 31, 1996 among NVR Homes, Inc. as
borrower and NVR, Inc. as Guarantor and Certain Banks and The
First National Bank of Boston, as Agent for itself and Certain
Banks.
*10.30 NVR, Inc. High Performance Compensation Plan dated as of January
1, 1996.
*10.31 Uncommitted Gestation Financing Agreement dated as of March 15,
1996 between NVR Mortgage Finance, Inc. and Bank One, Texas,
National Association.
17
*11 Computation of earnings per Share.
*21 NVR, Inc. Subsidiaries.
*23 Consent of KPMG Peat Marwick LLP (independent auditors).
*27 Financial Data Schedule
*Filed herewith.
_________________
REPORTS ON FORM 8-K (NONE)
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
NVR, Inc.
By: /s/ Dwight C. Schar
-------------------------------------
Dwight C. Schar
Chairman of the Board of Directors,
President and Chief Executive Officer
Dated: March 12, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
---------- ------ ----
Chairman of the Board
of Directors, President and
/s/ Dwight C. Schar Chief Executive Officer
- ---------------------
Dwight C. Schar March 12, 1997
/s/ C. Scott Bartlett, Jr. Director
- ----------------------------
C. Scott Bartlett, Jr. March 12, 1997
/s/ Manuel H. Johnson Director
- ----------------------
Manuel H. Johnson March 12, 1997
/s/ William A. Moran Director
- ---------------------
William A. Moran March 12, 1997
/s/ Richard H. Norair, Sr. Director
- ---------------------------
Richard H. Norair, Sr. March 12, 1997
/s/ David A. Preiser Director
- -----------------------
David A. Preiser March 12, 1997
19
/s/ George E. Slye Director
- ---------------------
George E. Slye March 12, 1997
/s/ John M. Toups Director
- ---------------------
John M. Toups March 12, 1997
/s/ Frederick W. Zuckerman Director
- -----------------------------
Frederick W. Zuckerman March 12, 1997
Senior Vice President,
Chief Financial Officer
/s/ Paul C. Saville and Treasurer
- ----------------------
Paul C. Saville March 12, 1997
20
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Shareholders
NVR, Inc.:
We have audited the accompanying consolidated balance sheets of NVR, Inc. and
subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NVR, Inc. and
subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, effective
January 1, 1995, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights."
/s/ KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
January 30, 1997
21
NVR, INC.
Consolidated Balance Sheets
(dollars in thousands, except share data)
DECEMBER 31,
------------------
1996 1995
-------- --------
ASSETS
HOMEBUILDING:
Cash and cash equivalents $ 71,533 $ 51,911
Receivables 2,927 7,894
Inventory:
Lots and housing units, covered under
sales agreements with customers 126,456 116,140
Unsold lots and housing units 37,940 33,399
Manufacturing materials and other 7,297 5,174
-------- --------
171,693 154,713
Property, plant and equipment, net 17,916 16,882
Reorganization value in excess of amounts
allocable to identifiable assets, net 75,818 89,867
Contract land deposits 36,383 31,315
Other assets 21,008 15,993
-------- --------
397,278 368,575
-------- --------
FINANCIAL SERVICES:
Cash and cash equivalents 3,247 3,656
Mortgage loans held for sale, net 75,735 96,311
Mortgage servicing rights, net 6,309 18,017
Property and equipment, net 917 1,708
Reorganization value in excess of amounts
allocable to identifiable assets, net 12,788 13,877
Other assets 4,891 11,454
-------- --------
103,887 145,023
-------- --------
TOTAL ASSETS $501,165 $513,598
======== ========
See notes to consolidated financial statements.
22
NVR, INC.
Consolidated Balance Sheets
(dollars in thousands, except share data)
DECEMBER 31,
--------------------
1996 1995
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
HOMEBUILDING:
Accounts payable $ 54,894 $ 49,679
Accrued expenses and other liabilities 85,260 88,943
Note payable 86 93
Other term debt 14,043 14,025
Senior notes 120,000 120,000
-------- --------
274,283 272,740
-------- --------
FINANCIAL SERVICES:
Accounts payable and other liabilities 7,409 7,501
Notes payable 67,463 87,177
-------- --------
74,872 94,678
-------- --------
Total liabilities 349,155 367,418
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $0.01 par value; 60,000,000
shares authorized; 19,881,515 and
18,384,083 shares issued
for 1996 and 1995, respectively 199 184
Additional paid-in-capital 157,842 144,072
Retained earnings 47,098 21,626
Less treasury stock at cost - 6,307,108
and 3,170,721 shares at December 31,
1996 and 1995, respectively (53,129) (19,702)
-------- --------
Total shareholders' equity 152,010 146,180
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $501,165 $513,598
======== ========
See notes to consolidated financial statements.
23
NVR, INC.
Consolidated Statements of Income
(dollars in thousands, except share data)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ ------------------ ------------------
HOMEBUILDING:
Revenues $1,045,930 $ 869,119 $ 820,915
Other income 1,312 1,577 2,906
Cost of sales (906,255) (751,035) (716,088)
Selling, general and administrative (71,184) (63,200) (57,868)
Amortization of reorganization value
in excess of amounts allocable to
identifiable assets (7,048) (7,048) (7,404)
---------- --------- ---------
Operating income 62,755 49,413 42,461
Interest expense (16,611) (17,166) (20,208)
---------- --------- ---------
Homebuilding income 46,144 32,247 22,253
FINANCIAL SERVICES:
Mortgage banking fees 24,029 26,297 25,118
Interest income 5,351 4,744 5,288
Other income 47 46 283
General and administrative (23,507) (26,747) (27,327)
Amortization of reorganization value
in excess of amounts allocable to
identifiable assets (1,088) (1,088) (1,090)
Interest expense (2,249) (2,090) (2,364)
---------- --------- ---------
Operating income (loss) 2,583 1,162 (92)
TOTAL SEGMENT INCOME 48,727 33,409 22,161
Income tax expense (22,946) (17,009) (13,143)
---------- --------- ---------
Income before discontinued
operations and extraordinary gains 25,781 16,400 9,018
Discontinued operations - - 617
---------- --------- ---------
Income before extraordinary gains 25,781 16,400 9,635
Extraordinary gain-repurchase
of debt (net of tax expense of $645
and $580 for the years ended December
31, 1995 and 1994, respectively) - 927 834
---------- --------- ---------
NET INCOME $ 25,781 $ 17,327 $ 10,469
========== ========= =========
EARNINGS PER SHARE:
Income before discontinued
operations and extraordinary gain $ 1.72 $ 1.07 $ 0.53
Discontinued operations - - 0.04
Extraordinary gain - 0.06 0.05
---------- --------- ---------
Earnings per share $ 1.72 $ 1.13 $ 0.62
========== ========= =========
See notes to consolidated financial statements.
24
NVR, INC.
Consolidated Statements of Shareholders' Equity
(dollars in thousands)
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS TREASURY
STOCK CAPITAL (DEFICIT) STOCK
------ -------- ---------- ---------
BALANCE, DECEMBER 31, 1993 $ 179 $140,788 $(6,170) $ -
Net income - - 10,469 -
Purchase of common stock
for treasury - - - (17,121)
Performance share activity 2 1,341 - -
Option activity - 34 - -
------ ------- ------- ---------
BALANCE, DECEMBER 31, 1994 181 142,163 4,299 (17,121)
Net income - - 17,327 -
Purchase of common stock
for treasury - - - (2,581)
Performance share activity 1 1,739 - -
Warrant Activity - 1 - -
Option activity 2 169 - -
------ -------- ------- ---------
BALANCE, DECEMBER 31, 1995 184 144,072 21,626 (19,702)
Net income - - 25,781 -
Purchase of common stock
for treasury - - - (35,137)
Performance share activity - 529 - 1,710
Warrant Activity 15 13,146 (309) -
Option activity - 95 - -
------ -------- ------- --------
BALANCE, DECEMBER 31, 1996 $ 199 $157,842 $47,098 $(53,129)
====== ======== ======= ========
See notes to consolidated financial statements.
25
NVR, INC.
Consolidated Statements of Cash Flows
(dollars in thousands)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ ------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25,781 $ 17,327 $ 10,469
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Extraordinary gain - extinguishment of debt - (1,572) (1,414)
Depreciation and amortization 15,417 14,814 13,817
Loss (gain) on sales of loans (14,401) (8,320) 5,959
Deferred tax provision (322) (3,596) 4,884
Interest accrued and added to bond principal 1,180 2,749 5,214
Mortgage loans closed (1,243,945) (1,092,676) (1,115,337)
Proceeds from sales of mortgage loans 1,268,254 1,052,550 1,194,247
(Gain) loss on sales of mortgage servicing rights 1,194 (5,534) (18,725)
Net change in assets and liabilities:
Decrease (increase) in inventories (16,980) (45,175) 6,851
Decrease (increase) in receivables 5,084 (2,191) (1,584)
Increase (decrease) in accounts payable and
accrued expenses (611) 20,720 (3,004)
Other, net (1,869) (7,184) (7,071)
----------- ----------- -----------
Net cash provided (used) by operating activities 38,782 (58,088) 94,306
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale/(purchase) of marketable securities - 5,000 (5,000)
Proceeds from sales of mortgage-backed securities 45,835 1,069 2,417
Purchase of property, plant and equipment (4,267) (3,590) (2,636)
Principal payments on mortgage-backed securities 15,511 16,932 51,466
Change in net assets of discontinued operations - - (617)
Proceeds from sale of discontinued operations - - 40,319
Purchase of mortgage servicing rights (193) (10,664) (1,830)
Proceeds from sales of mortgage servicing rights 23,518 16,050 15,525
Other, net 4,458 1,242 11,094
----------- ----------- -----------
Net cash provided by investing activities 84,862 26,039 110,738
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of land acquisition and
construction debt and other term debt - - (1,746)
Redemption of bonds (62,306) (20,104) (66,785)
Repurchase of senior notes - (12,962) (22,760)
Purchases of treasury stock (35,137) (2,581) (17,121)
Net borrowings (repayments) under credit lines (19,935) 51,663 (86,238)
Payment of financing fees - (48) (43)
Other, net 12,947 172 34
----------- ----------- -----------
Net cash provided (used) by financing activities (104,431) 16,140 (194,659)
----------- ----------- -----------
Net increase (decrease) in cash 19,213 (15,909) 10,385
Cash, beginning of year 55,567 71,476 61,091
----------- ----------- -----------
Cash, end of year $ 74,780 $ 55,567 $ 71,476
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the year $ 22,160 $ 25,214 $ 30,062
=========== =========== ===========
Income taxes paid during the year, net of refunds $ 26,492 $ 16,745 $ 5,716
=========== =========== ===========
See notes to consolidated financial statements.
26
NVR, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of NVR, Inc. ("NVR" or "The Company"), its wholly-owned
subsidiaries and certain partially-owned entities. NVR Savings Bank
("NVRSB") is accounted for on a discontinued operations basis through March
17, 1994 (see note 3). All significant intercompany transactions have been
eliminated in consolidation. Certain information related to the 1995 and
1994 years have been reclassified to conform to the 1996 presentation.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes short-term investments with
original maturities of three months or less.
HOMEBUILDING INVENTORY
Inventory is stated at the lower of cost or market value. Cost of
lots and completed and uncompleted housing units represent the accumulated
actual cost thereof. Field construction supervisors' salaries and related
direct overhead expenses are included in inventory costs. Interest costs
are not capitalized into inventory. Upon settlement, the cost of the units
is expensed on a specific identification basis. Cost of manufacturing
materials is determined on a first-in, first-out basis.
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS
Reorganization value in excess of amounts allocable to identifiable
assets ("reorganization value") is being amortized on a straight-line basis
over 15 years. Accumulated amortization as of December 31, 1996 and 1995
was $26,948 and $18,812, respectively. Determination of any impairment
losses related to this intangible asset is based on consideration of
projected undiscounted cash flows.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are valued at the lower of cost or market
on a net aggregate basis.
27
NVR, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
MORTGAGE-BACKED SECURITIES AND MORTGAGE-BACKED BONDS
In prior years, the Company's ownership interests in mortgage-backed
securities and the related mortgage-backed bonds were presented on a gross
basis on the consolidated balance sheets and income statements.
Accordingly, the book values of the mortgage-backed securities and
mortgage-backed bonds were presented separately as assets and liabilities,
respectively, on the consolidated balance sheets, and interest income on
mortgage-backed securities and interest expense of the mortgage-backed
bonds were presented separately as income and expense, respectively, on the
consolidated income statements. All of such interests are at, or are
nearing, the ends of their economic useful lives, and as such, NVR does not
anticipate that such assets will generate significant amounts of income or
cash flow in the future. Beginning in the fourth quarter of 1996, the
Company's consolidated balance sheets for all periods presented reflect its
ownership interests in mortgage-backed securities net of the related
mortgage-backed bonds as a component of other assets of the financial
services segment, and the consolidated statements of income for all periods
presented reflect earnings from such interests net of the related interest
expense as a component of other income of the financial services segment.
EARNINGS PER SHARE
Earnings per share was computed based upon the weighted average number
of shares and share equivalents outstanding of approximately 14,969,111,
15,373,285 and 17,097,172 for the years ending December 31, 1996, 1995 and
1994, respectively. Fully diluted earnings per share has not been
presented because it is not significantly different than the primary
earnings per share presented.
REVENUES-HOMEBUILDING OPERATIONS
NVR Homes, Inc. ("Homes"), a wholly owned subsidiary of NVR, builds
light-frame, low-rise residences which generally are produced on a pre-sold
basis for the ultimate customer. Revenues are recognized at the time units
are completed and title passes to the customer. Additionally, to a
significantly lesser degree, Homes sells house packages to builder-dealers
and other homebuilders and recognizes revenue at the time the product is
delivered to the builder-dealer or homebuilder.
MORTGAGE BANKING FEES
Mortgage banking fees include income earned by NVR's mortgage banking
subsidiaries for originating and processing mortgage loans, servicing
mortgage loans held in the servicing portfolio, title fees, gains and
losses on the sale of mortgage loans and mortgage servicing and other
activities incidental to mortgage banking. Loan origination fees and
direct loan origination costs are deferred and the net deferred fees, or
costs, are recognized either upon the sale of the loan or as an adjustment
of the yield over the life of the loan.
MORTGAGE SERVICING RIGHTS
NVR adopted Statement of Financial Accounting Standards ("SFAS") No.
122, Accounting for Mortgage Servicing Rights effective January 1, 1995.
SFAS No. 122 requires the allocation of the total cost of acquiring
mortgage loans to the mortgage servicing rights and the
28
NVR, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
loans (without the mortgage servicing rights) based on their relative fair
values. Retroactive application of SFAS 122 to periods prior to the fiscal
year of adoption is prohibited.
NVR measures the impairment of the mortgage servicing rights based on
their current fair value. Current fair value is determined through the
discounted present value of estimated future net servicing cashflows using
a risk-based discount rate and assumptions based upon market estimates for
future servicing revenues and expenses (including prepayment expectations,
servicing costs, default rates, and interest earnings on escrows). For the
purposes of evaluating and measuring impairment of the mortgage servicing
rights, they are stratified using the predominant risk characteristic of
the underlying mortgage loans. NVR has determined that the predominant
risk characteristic of the underlying mortgage loans is interest rate.
Impairment, and subsequent changes in measurement of impairment, of any
individual stratum is recognized through a valuation allowance for that
stratum. The mortgage servicing rights are amortized to general and
administrative expense in proportion to, and over the period of, the
estimated net servicing income. The adoption of SFAS No. 122 caused the
financial services segment income and net income to increase by $610 and
$366 ($0.02 per share) for the year ended December 31, 1996 and by $1,511
and $891 ($0.06 per share) for the year ended December 31, 1995.
DEPRECIATION
Depreciation is based on the estimated useful lives of the assets
using the straight-line method. Amortization of capital lease assets is
included in depreciation expense.
INCOME TAXES
NVR files a consolidated federal income tax return. Deferred income
taxes reflect the impact of "temporary differences" between the amount of
assets and liabilities for financial reporting purposes and such amounts as
measured by enacted tax rules and regulations.
FINANCIAL INSTRUMENTS
Except as otherwise noted in notes 1 and 5 to the financial
statements, NVR believes that insignificant differences exist between the
carrying value and the fair value of its financial instruments. The
estimated fair value of NVR's 11% Senior Notes due 2003 ("Senior Notes") as
of December 31, 1996 and 1995 was $127,044 and $120,600, with a carrying
value of $120,000 at both respective dates. The estimated fair values are
based on quoted market prices for these instruments.
IMPAIRMENT OF LONG-LIVED ASSETS
During 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be disposed of. SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Such adoption did not have a
material impact on the Company's financial condition or results of
operations.
29
NVR, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
STOCK-BASED COMPENSATION
During 1996, the Company adopted SFAS No. 123, Accounting for Stock-
Based Compensation. As provided for under SFAS No. 123, NVR has elected to
continue to follow the guidance of Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, in accounting for its stock-
based employee compensation arrangements. Because NVR elected the
disclosure-only method available under SFAS No. 123, the adoption of SFAS
No. 123 did not have an impact on NVR's consolidated financial statements.
2. SEGMENT INFORMATION, NATURE OF OPERATIONS, AND CERTAIN CONCENTRATIONS
NVR is a holding company that operates in two business segments:
homebuilding and financial services. The homebuilding segment is one of the
largest homebuilders in the United States and in the Washington, D.C. and
Baltimore, Maryland metropolitan areas, where NVR derived approximately 72% of
its 1996 homebuilding revenues. NVR's homebuilding segment primarily constructs
and sells single-family detached homes, townhomes and condominium buildings in
two distinct product lines, through two divisions: Ryan Homes and NVHomes. Ryan
Homes builds moderately priced homes in sixteen metropolitan areas located in
Maryland, Virginia, Pennsylvania, New York, North Carolina, South Carolina,
Ohio, New Jersey, Delaware and Tennessee, and markets its homes primarily to
first-time buyers. NVHomes builds homes largely in the Washington, D.C.
metropolitan area, and markets its homes primarily to move-up buyers.
The financial services segment, which operates under NVR Financial
Services, Inc. ("NVRFS"), currently includes a national mortgage banking
operation and a limited-purpose financing subsidiary (the "Limited-Purpose
Financing Subsidiary") which was formed to facilitate the financing of long-term
mortgage loans through the sale of non-recourse bonds collateralized by
mortgage-backed securities. The Company sells all of the mortgage loans it
closes into the secondary markets, but it retains the servicing rights
associated with a portion of those loans. A significant portion of the Company's
mortgage operations are conducted in the Washington, D.C. and Baltimore,
Maryland metropolitan area. Although NVR's mortgage banking operations provide
financing to a substantial portion of NVR's homebuilding customers, NVR's
homebuilding customers accounted for only 45% of the dollar amount of loans
closed in 1996.
Because there are no significant holding company revenues, unallocable
selling, general and administrative expense and assets other than its investment
in the homebuilding and financial services subsidiaries, the holding company
(excluding its investment in its subsidiaries) is presented as part of the
homebuilding segment in the accompanying consolidated financial statements and
following:
30
NVR, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
REVENUES:
Homebuilding $ 1,047,242 $ 870,696 $ 823,821
Financial Services 29,427 31,087 30,689
------------- ------------- -------------
$ 1,076,669 $ 901,783 $ 854,510
============= ============= =============
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
OPERATING INCOME:
Homebuilding $ 62,755 $ 49,413 $ 42,461
Financial Services 1,804 1,005 (591)
Intersegment transactions* 779 157 499
------------- ------------- -------------
$ 65,338 $ 50,575 $ 42,369
============= ============= =============
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
IDENTIFIABLE ASSETS:
Homebuilding $ 397,278 $ 368,575
Financial Services 103,887 145,023
------------- -------------
$ 501,165 $ 513,598
============= =============
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
DEPRECIATION AND AMORTIZATION:
Homebuilding $ 10,899 $ 10,322 $ 10,332
Financial Services 4,518 4,492 3,485
------------- ------------- -------------
Total $ 15,417 $ 14,814 $ 13,817
============= ============= =============
CAPITAL EXPENDITURES:
Homebuilding $ 4,019 $ 2,448 $ 2,169
Financial Services 248 1,142 467
------------- ------------- -------------
Total $ 4,267 $ 3,590 $ 2,636
============= ============= =============
*Intersegment transactions primarily represent intercompany advances and
related interest income/expense of the financial services segment.
3. DISCONTINUED OPERATIONS
On March 17, 1994, NVR closed the sale of the operations of NVRSB pursuant
to the terms of an agreement dated as of November 8, 1993. The purchaser
acquired approximately $463,000 of NVRSB's assets and assumed approximately
$426,000 of NVRSB's liabilities. NVR received net cash proceeds from the sale of
approximately $40,300, representing the final book value of NVRSB at March 17,
1994, plus a premium of approximately $6,800, reduced by certain adjustments
including the withholding of certain assets not sold in the transaction. The
sale did not result in any after-tax gain or loss. From the period January 1,
1994 to March 17, 1994, NVRSB's revenues, income before taxes and net income
were $6,963, $781 and $617, respectively.
31
NVR, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
4. RELATED PARTY TRANSACTIONS
During 1996, 1995, and 1994, NVR purchased, at market prices, developed
lots from a company that is controlled by a member of the board of directors.
Those purchases totaled $6,612, $8,877 and $8,738 during 1996, 1995 and 1994,
respectively, and NVR expects to purchase the remaining lots under contract as
of December 31, 1996 over the next 18 to 24 months for an aggregate purchase
price of approximately $26,000.
During the years ended December 31, 1996, 1995 and 1994, one of the
executive officers of NVR was a partner in a law firm which billed NVR
approximately $344, $324 and $360, respectively, in fees and expenses for legal
services.
During the years ended December 31, 1995 and 1994, NVR paid $181 and $228,
respectively, to a company partially owned by the chief executive officer of NVR
as rent for its executive office space. Effective October 1995, the chief
executive officer divested his ownership interest.
During 1996, NVR repurchased, at market prices, 2,370,839 shares of its
common stock for an aggregate purchase price of $25,401 from certain investors
who at the time of the purchases were beneficial owners of greater than five
percent (5%) of the Company's common stock. In addition, during 1996, the
Company also repurchased, at market prices, 304,735 warrants to purchase the
Company's common stock at an aggregate purchase price of $166 from certain of
the aforementioned investors.
5. LOAN SERVICING PORTFOLIO, MORTGAGE LOAN COMMITMENTS AND OFF-BALANCE SHEET
RISK
At December 31, 1996 and 1995, NVRFS was servicing approximately 9,200 and
19,500 mortgage loans for various investors with aggregate balances of
approximately $579,000 and $1,434,000, respectively.
At December 31, 1996, NVRFS had capitalized mortgage servicing rights of
$6,309 (including $492 in capitalized excess servicing fees), which related to
approximately $514 million of the aggregate $579 million in loans serviced. The
mortgage servicing rights associated with the remaining $65 million in loans
serviced are not subject to capitalization because the loans were originated and
sold prior to NVR's adoption of SFAS No. 122 on January 1, 1995 (see Note 1).
At December 31, 1995, NVRFS had capitalized purchased mortgage servicing rights
of $18,017.
NVRFS assesses the fair value of the capitalized mortgage servicing rights
by stratifying the underlying loans by interest rate. The fair value of the
mortgage servicing rights is then determined through the present value of
estimated future net servicing cashflows using a risk based discount rate, and
assumptions based upon market estimates for future servicing revenues and
expenses (including prepayment expectations, servicing costs, default rates, and
interest earnings on escrows). The fair value of the capitalized mortgage
servicing rights was $7,563 and $19,501 at December 31, 1996 and 1995,
respectively. The fair value of the mortgage servicing rights not subject to
capitalization due to the loans being originated or sold prior to the adoption
of SFAS No. 122 was $650 and $528 at December 31, 1996 and 1995, respectively.
Based on management's estimate of the fair value of the designated strata, no
impairment valuation allowance is necessary.
32
NVR, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
NVRFS amortizes the capitalized mortgage servicing rights in proportion to,
and over the period of, the estimated net servicing income. The amortization
for the periods ending December 31, 1996 and 1995 was $1,627 and $2,665
respectively.
In the normal course of business, NVR Finance enters into contractual
commitments involving financial instruments with off-balance sheet risk. These
financial instruments include commitments to extend mortgage loans to customers
and forward contracts to sell mortgage-backed securities to broker/dealers.
These instruments involve, to varying degrees, elements of credit and market
rate risk in excess of the amounts recognized in the balance sheet.
NVR Finance's exposure to credit loss, in the event of non-performance by
the customers, is represented by the contractual amount of the commitment for
the mortgage loans. NVR Finance uses the same credit policies in making
commitments as it does for on-balance sheet mortgage loans.
There were mortgage loan commitments aggregating approximately $94,901 and
$54,358 outstanding at December 31, 1996 and 1995, respectively. There were
open forward delivery contracts aggregating approximately $130,891 and $134,366
at December 31, 1996 and 1995, respectively.
NVR Finance enters into contractual commitments to extend credit to buyers
of single-family homes with fixed expiration dates. The commitments become
effective when the borrowers "lock-in" a specified interest rate within time
frames established by NVR Finance. All mortgagors are evaluated for credit
worthiness prior to the extension of the commitment. Market risk arises if
interest rates move adversely between the time of the "lock-in" of rates by the
borrower and the sale date to a broker/dealer and is managed by entering into
forward contracts. Since certain of the commitments are expected to expire
without a loan closing, the total contractual amounts do not necessarily
represent future cash requirements. Collateral for loans granted is obtained by
a first mortgage security interest in real estate whose appraised values exceed
the contractual amount of the commitment.
NVR Finance enters into optional and mandatory forward delivery contracts
to sell mortgage-backed securities at specific prices and dates to
broker/dealers. NVR Finance has established policies governing which
broker/dealers can be used to conduct these activities. Credit risk associated
with forward contracts is limited to the replacement cost of those forward
contracts in a gain position, and at December 31, 1996 there were no such
positions. There were no counterparty default losses on forward contracts in
1996, 1995 or 1994. Market risk with respect to forward contracts arises from
changes in the value of contractual positions due to fluctuations in interest
rates. NVR Finance limits its exposure to market risk by monitoring differences
between commitments to customers and forward contracts with broker/dealers. In
the event NVR Finance has forward delivery contract commitments in excess of
available mortgage-backed securities, NVR Finance completes the transaction by
either paying or receiving a fee to/from the broker/dealer equal to the
increase/decrease in the market value of the forward contract. NVRFS has no
market risk associated with optional delivery contracts because NVRFS has the
right but not the obligation to deliver mortgage backed securities to
broker/dealers under these contracts.
33
NVR, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
6. PROPERTY, PLANT AND EQUIPMENT, NET
DECEMBER 31,
-------------------------
1996 1995
--------- ---------
HOMEBUILDING:
Office facilities and other $ 7,460 $ 8,020
Model home furniture and fixtures 4,255 2,410
Manufacturing facilities 7,964 7,620
Property under capital leases 14,177 14,177
-------- --------
33,856 32,227
Less accumulated depreciation
and amortization (15,940) (15,345)
-------- --------
$ 17,916 $ 16,882
======== ========
FINANCIAL SERVICES:
Office facilities and other $ 4,284 $ 5,392
Less accumulated depreciation and amortization (3,367) (3,684)
-------- --------
$ 917 $ 1,708
======== ========
Included in Homebuilding are amounts for land totaling $1,732 at December
31, 1996 and 1995.
Certain property, plant and equipment listed above is collateral for
various debt of NVR and certain of its subsidiaries as more fully described in
note 7.
7. DEBT
DECEMBER 31,
------------------------
1996 1995
-------- --------
HOMEBUILDING:
Notes payable:
Working capital revolving credit (a) $ - $ -
Other (b) 86 93
-------- --------
$ 86 $ 93
======== ========
Other term debt:
Capital lease and financing obligations
and mortgages due in monthly
installments through 2014 (c) $ 14,043 $ 14,025
======== ========
Senior notes (d) $120,000 $120,000
======== ========
FINANCIAL SERVICES:
Mortgage warehouse revolving credit (e) $ 61,259 $ 87,177
Mortgage repurchase facility (f) 6,204 -
-------- --------
$ 67,463 $ 87,177
======== ========
(a) On September 30, 1993, Homes as borrower and NVR as guarantor entered into
a working capital revolving credit agreement (the "Working Capital Revolving
Credit" or "Senior Bank Indebtedness"). This facility was amended and restated
during December 1996 and currently provides for unsecured borrowings
34
NVR, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
up to $60,000, subject to certain borrowing base limitations, and is generally
available to fund working capital needs of Homes and for overhead, taxes and
certain interest payments of NVR. Up to approximately $24,000 of this facility
is currently available for issuance in the form of letters of credit of which
$5,345 and $5,360 were outstanding at December 31, 1996 and 1995, respectively.
The Working Capital Revolving Credit is for a three year period ending May 31,
1999 and outstanding amounts bear interest at the election of the Company, at
(i) the base rate of interest announced by the Facility agent or (ii) 2.0% above
the Eurodollar Rate. The weighted average interest rate for the amounts
outstanding under the facility was 8.0% and 9.6% for 1996 and 1995,
respectively. NVR's guarantee is a guarantee of collection only and is
unsecured.
The Working Capital Revolving Credit agreement contains numerous operating
and financial covenants, including required levels of net worth, fixed charge
coverage ratios, and several other covenants related to the construction
operations of Homes. In addition, the Working Capital Revolving Credit agreement
contains restrictions on the ability of Homes and, in certain cases, NVR to,
among other things, incur debt and make investments. Also, the Working Capital
Revolving Credit agreement prohibits NVR from paying dividends to shareholders.
(b) Other notes payable as of December 31, 1996 and 1995 is comprised of a $100
face value note. This note accrues interest at the rate of 8% per annum and is
due in various amounts through September 30, 2001.
(c) The capital lease and financing obligations and mortgages have either fixed
or variable interest rates ranging from 3.0% to 13.9% and are collateralized by
land, buildings and equipment with a net book value of $12,181 and $12,777 at
December 31, 1996 and 1995, respectively.
The following schedule provides future minimum lease payments under all
financing and capital leases together with the present value as of December 31,
1996:
YEARS ENDING DECEMBER 31:
------------------------
1997 $ 1,824
1998 1,783
1999 1,844
2000 1,851
2001 1,870
Thereafter 36,677
--------
45,849
Amount representing interest (31,806)
--------
$ 14,043
========
(d) On September 30, 1993, NVR received gross proceeds of $160,000 from the
sale of its Senior Notes. The Senior Notes bear interest at a rate of 11% per
annum, payable semi-annually on June 1 and December 1 of each year and are due
in 2003. The Senior Notes will be redeemable at the option of the Company, in
whole or in part, at any time on or after December 1, 1998 at redemption prices
ranging from 105.5% of par in 1998 to par beginning in 2001.
The Senior Notes are senior obligations of the Company and rank pari passu
in right of payment to all existing and future senior indebtedness of the
Company and senior in right of payment to all existing and future subordinated
indebtedness of the Company. The Senior Notes are secured by a first priority
pledge of the capital stock of Homes, NVRFS and RVN, Inc. ("RVN") (Homes, NVRFS
and RVN, collectively, the "Guarantors"). The Senior Notes also are guaranteed
on a senior, unsecured basis by the Guarantors;
35
NVR, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
provided, however, that the guarantee by Homes is subordinated to up to $60,000
of Senior Bank Indebtedness. During the years ended 1995 and 1994, the Company
purchased in the open market, $15,000 and $25,000, respectively, in principal
amount of its Senior Notes. These transactions resulted in pre-tax gains of
$1,572 and $1,414 for the years ended 1995 and 1994, respectively, and are
included in the accompanying financial statements as extraordinary items, net of
applicable taxes.
The indenture governing the Senior Notes has, among other items,
limitations on asset sales by NVR and the Guarantors and requires that NVR, on a
consolidated basis, maintain net worth of at least $80,000. In addition, the
indenture limits dividends, certain investments and NVR's and the Guarantors'
ability to incur additional debt if NVR is in default under the indenture or if
NVR does not meet certain fixed charge coverage ratios.
(e) The mortgage warehouse facility (the "Mortgage Warehouse Revolving Credit")
of NVR Mortgage Finance, Inc. ("NVR Finance") currently has a borrowing limit of
$105,000. The interest rate under the Mortgage Warehouse Revolving Credit is
either: (i) the federal funds rate plus 1.25% to 2.0% based on the collateral or
(ii) 1.25% to the extent that NVR provides compensating balances. The weighted
average interest rate for amounts outstanding under the Mortgage Warehouse
Revolving Credit line was 3.6% and 2.8% during 1996 and 1995, respectively. The
Mortgage Warehouse Revolving Credit is collateralized primarily by mortgage
loans and NVR Finance's mortgage loan servicing portfolio. The Mortgage
Warehouse Revolving Credit Agreement is an annually renewable facility and
currently expires in June 1997.
The Mortgage Warehouse Revolving Credit Agreement includes, among other
items, restrictions on NVR Finance incurring additional borrowings and making
intercompany dividends and tax payments. In addition, NVR Finance is required to
maintain a minimum servicing portfolio, a minimum net worth and a minimum
tangible net worth.
(f) NVR Finance has two annually renewable mortgage-backed security repurchase
agreements with a broker/dealer, (the "Repo Facility"), one of which is an
uncommitted credit facility. The maximum amount available under the Repo
Facility is $100,000, and amounts outstanding thereunder accrue interest at
various rates tied to the Federal funds rate. Borrowings outstanding under the
Repo Facility are collateralized by gestation mortgage-backed securities. The
Repo Facility requires NVR Finance to, among other items, maintain a minimum net
worth and limit its level of liabilities in relation to its net worth. The
weighted average interest rate for amounts outstanding under the Repo Facility
was 6.1% and 6.8% during 1996 and 1995, respectively.
Maturities with respect to the other notes payable, other term debt, and
the Senior Notes as of December 31, 1996 are as follows:
YEARS ENDING DECEMBER 31:
------------------------------------
1997 $ 240
1998 203
1999 235
2000 271
2001 295
Thereafter 136,401
The $136,401 maturing after 2001 includes $120,000 in Senior Notes which
mature in April 2003.
36
NVR, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
Various debt agreements limit the ability of NVR's subsidiaries to transfer
funds to NVR in the form of dividends, loans or advances. NVR's subsidiaries
had net assets, after intercompany eliminations, of $253,435 as of December 31,
1996 that were so restricted.
At December 31, 1996, the homebuilding and financial services segments had
restricted cash of $2,934 and $2,103, respectively, which includes customer
deposits, mortgagor tax, insurance, completion escrows and other amounts
collected at closing which relates to mortgage loans held for sale and to home
sales.
8. COMMON STOCK
There were 13,574,402 and 15,213,362 common shares outstanding at December
31, 1996 and 1995, respectively. During the three year period ending December
31, 1996, NVR purchased, at market prices, a cumulative total of 6,481,144
shares of its common stock for an aggregate purchase price of $54,839. In
February 1996, 174,036 common shares were issued from the treasury in
satisfaction of an employee benefit liability accrued at December 31, 1995. The
average cost basis for the shares reissued from the treasury was $9.82/share.
On September 30, 1993, NVR issued warrants to purchase 2,162,828 shares of
common stock at an exercise price of $8.80 per share with an expiration date of
September 30, 1996. During 1996, 1,495,515 warrants were exercised for a like
number of common shares, with NVR realizing $13,161 in aggregate equity
proceeds. In addition, during 1996 NVR repurchased 561,135 warrants, at market
prices, for an aggregate purchase price of $309. NVR retired the repurchased
warrants with a charge to retained earnings equal to the purchase price. A total
of 106,178 warrants expired unexercised.
9. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ ------------------ -----------------
CURRENT:
Federal $19,070 $16,383 $ 6,618
State 4,198 4,222 1,641
DEFERRED:
Federal (539) (3,071) 3,695
State 217 (525) 1,189
------- ------- -------
$22,946 $17,009 $13,143
======= ======= =======
Deferred income taxes on NVR's consolidated balance sheets are comprised of
the following:
DECEMBER 31,
-------------------------
1996 1995
------- -------
Total deferred tax assets $23,830 $24,261
Less: valuation allowance 2,852 9,852
------- -------
20,978 14,409
Less: deferred tax liabilities 10,056 10,809
------- -------
$10,922 $ 3,600
======= =======
37
NRV, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
Deferred tax assets arise principally as a result of various reserves
required for financial reporting purposes which are not currently deductible for
tax return purposes. Deferred tax liabilities arise principally as a result of
depreciation and accounting for certain sales on the installment method for tax
return purposes.
Management believes the Company will have sufficient available carry-backs
and future taxable income to make it more likely than not that the net deferred
tax asset will be realized. Taxable income was $59,323, $43,454, and $21,921 for
the years ended December 31, 1996, 1995 and 1994.
Tax benefits realized in subsequent periods related to unrecognized
deferred tax assets as of September 30, 1993 will be recorded as a reduction of
reorganization value in excess of amounts allocable to identifiable assets. For
the years ended December 31, 1996, 1995 and 1994, $7,000, $0 and $4,890,
respectively, of such benefits were realized. Unrecognized deferred tax assets
which arose as of September 30, 1993 amounted to $2,852 and $9,852 as of
December 31, 1996 and 1995, respectively.
A reconciliation of income tax expense in the accompanying statements of
income to the amount computed by applying the statutory Federal income tax rate
to income before income taxes, discontinued operations and extraordinary gains
is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
Income taxes computed at the
Federal statutory rate $17,054 $11,693 $ 7,756
State income taxes, net of Federal
income tax benefit 2,870 2,403 1,893
Non-deductible amortization 2,848 2,848 2,972
Other, net 174 65 522
------- ------- -------
$22,946 $17,009 $13,143
======= ======= =======
10. PROFIT SHARING AND INCENTIVE PLANS
Profit Sharing Plans--NVR has a trustee-administered, profit sharing
retirement plan (the "Profit Sharing Plan") and an Employee Stock Ownership Plan
("ESOP") covering substantially all employees. The Profit Sharing Plan and the
ESOP provide for annual contributions in amounts as determined by the NVR board
of directors. The combined retirement plan expense for the years ended December
31, 1996, 1995 and 1994 was $4,627, $3,993 and $4,023, respectively.
During 1996 and 1995, the ESOP purchased in the open market 150,000 and
480,000 shares respectively of NVR common stock using cash contributions
provided by NVR. As of December 31, 1996, all shares held by the ESOP have been
allocated to participant accounts.
Management incentive plans provide several types of equity incentives to
NVR's executives and managers. Participants in the management incentive plans
ultimately received options to purchase a total of 1,117,949 NVR shares (the
"1993 NVR Share Options"). Each 1993 NVR Share Option entitles the holder to
buy a share of NVR common stock during a ten-year exercise period. All of the
1993 NVR Share Options have vested at December 31, 1996. These options expire
in September 2003.
38
NRV, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
Information with respect to the 1993 NVR Share Options is as follows:
1993 NVR SHARE OPTIONS
----------------------------------
PRICE PER SHARE NUMBER OF OPTIONS
--------------- -----------------
Options outstanding at
December 31, 1994 $5.06 - 8.44 1,130,213
Granted to employees - 1995 $5.29 - 9.11 24,528
Canceled - 1995 $ 7.62 (46,965)
Exercised - 1995 $ 7.62 (22,326)
---------
Options outstanding at
December 31, 1995 $5.06 - 9.11 1,085,450
Granted to employees-1996 $ 8.21 6,503
Canceled-1996 $ 7.62 (800)
Exercised-1996 $5.06 - 7.62 (14,729)
---------
Exercisable at
December 31, 1996 $5.06 - 9.11 1,076,424
=========
At December 31, 1996, there were no NVR Share Options available for future
grants.
Certain participants in the Management Incentive Plan also received a total
of 836,551 NVR shares subject to achievement of certain performance goals (the
"1993 Performance Shares"). As of December 31, 1996, all of the 1993
Performance Shares have vested.
In addition, during 1994, the Board of Directors adopted the 1994 Incentive
Plan (the "1994 Incentive Plan") under which executive officers and other key
employees of the company will be eligible to receive stock options (the "1994
NVR Share Options") and performance shares (the "1994 Performance Shares").
There are 48,195 1994 NVR Share Options and 1,124,929 1994 Performance Shares
authorized for grant under the 1994 Incentive Plan. A total of 1,040,000 1994
Performance Shares have been granted to employees as of December 31, 1996.
There have been no grants issued of 1994 NVR Share Options.
Each 1994 NVR Share Option entitles the holder to buy a share of NVR common
stock during a ten year exercise period. Thirty-three and one third percent of
the 1994 NVR Share Options vest on each of December 31, 1997 and 1998 and 33.4%
vest on December 31, 1999 with vesting based upon continued employment. The
1994 NVR Share Options expire in November 2004. Up to 33.3% of the 1994
Performance Shares vest on each of December 31, 1997 and 1998 and up to 33.4%
vest on December 31, 1999 if certain earnings targets are met or exceeded. All
1994 Performance Shares that do not vest are forfeited back to NVR on December
31, 1999.
Directors' Long Term Incentive Plan -- The NVR Directors' Long Term
Incentive Plan provides for each eligible director to be granted options
("Directors' Options") to purchase 22,750 shares of common stock with a maximum
number of shares issuable under the plan of 364,000. The option exercise price
for those options granted on the Effective Date was $16.60 per share. There were
182,000 Directors' Options granted to existing directors during 1993, leaving
182,000 options available for future grants. None of the Directors' Options
granted have been canceled or exercised since the grant date. The options became
exercisable six
39
NVR, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
months after the date of grant and expire in September 2003. Pursuant to the
plan, each outside director also is entitled to receive a cash payment of $200
if certain performance goals are achieved during the five-year period following
the Effective Date.
During 1996, the Company's Shareholders approved the Board of Directors'
adoption of the Management Long-Term Stock Option Plan (the "Stock Option Plan")
and the Directors' Long-Term Stock Option Plan (the "Directors' Plan").
Under the Stock Option Plan, awards of non-qualified stock options
("Options") to purchase 2,000,000 Shares of the Company's common stock
("Shares") may be granted to executive officers and other key management
personnel. Each Option is granted for a period of ten (10) years from the date
of grant. During 1996, 1,554,000 Options have been granted under the Stock
Option Plan at exercise prices ranging from $9.13 to $10.63 per share, the
prices of which were equal to the market price of the Company's Shares on the
date of grant. The weighted average exercise price and the weighted average
grant-date fair value of the options granted during the year were $10.58 and
$6.14 per share, respectively. The fair value was calculated using the Black-
Scholes option pricing model, under the following assumptions: i) the estimated
option life is equal to ten years, ii) the risk free interest rate was 7.0%
(based on the U.S. Treasury Strip quote on the date of grant, iii) the expected
volatility equals 28.9%, and iv) the estimated dividend yield was 0%. The
Options granted will vest as to thirty-three and one-third percent (33 1/3 %) of
the underlying Shares on each of December 31, 2000, 2001, and 2002, with vesting
based upon continued employment.
Also as of December 31, 1996, the 192,000 Options authorized under the
Directors' Plan were granted to the Company's outside directors at an exercise
price of $10.25, which was equal to the fair market value of the Company's
Shares on the date of grant. The Options were granted for a ten (10) year
period beginning from the date of grant, and vest as to thirty three and one-
third percent (33 1/3%) of the underlying Shares on each of December 31, 1999,
2000, and 2001. The weighted average grant-date fair value of the options
granted during the year was $5.98 per share. The fair value was calculated
using the Black-Scholes option pricing model, under the following assumptions:
i) the estimated option life is equal to ten years, ii) the risk free interest
rate was 7.1% (based on the U.S. Treasury Strip quote on the date of grant, iii)
the expected volatility equals 28.9%, and iv) the estimated dividend yield was
0%.
SFAS No. 123 requires companies who continue to apply Opinion 25 to account
for their stock-based employee compensation arrangements to provide pro forma
net income and earnings per share as if the fair value based method had been
used to account for compensation cost. Accordingly, pro forma net income and
earnings per share would have been $24,849 ($1.66 per share) and $17,327 ($1.13
per share) for the years ended December 31, 1996 and 1995, respectively, if the
Company had accounted for its stock based employee compensation arrangements
using the fair value method. The 1996 effect of applying SFAS No. 123 for
providing pro forma disclosures is not likely to be representative of the
effects on reported net income and earnings per share for future years because
the number of option grants and the fair value assigned to the grants could
differ.
40
NVR, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
11. COMMITMENTS AND CONTINGENT LIABILITIES
NVR is committed under several non-cancelable operating leases involving
office space and equipment, manufacturing facilities and equipment. Future
minimum lease payments under these operating leases as of December 31, 1996 are
as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 $ 3,405
1998 2,645
1999 1,498
2000 909
2001 700
Thereafter 3,089
-------
$12,246
=======
Total rent expense incurred under operating leases was approximately
$3,180, $3,363 and $4,063 for the years ended December 31, 1996, 1995 and 1994,
respectively.
During the ordinary course of operating the financial services and
homebuilding businesses, NVR is required to enter into bond or letter of credit
arrangements with local municipalities, government agencies, or land developers
to collateralize its obligations under various contracts. NVR had approximately
$14,166 of contingent obligations under such agreements as of December 31, 1996.
NVR believes it will fulfill its obligations under the related contracts and
does not anticipate any losses under these bonds or letters of credit.
NVR and its subsidiaries are also involved in litigation arising from the
normal course of business. In the opinion of management, and based on advice of
legal counsel, this litigation will not have any material adverse effect on the
financial position of NVR.
12. MORTGAGE-BACKED SECURITIES, NET OF MORTGAGE-BACKED BONDS, AND RELATED
ASSETS AND LIABILITIES
Mortgage-backed securities ("MBS") serve as collateral for the related
mortgage-backed bonds ("Bonds") sold to third parties. The MBS cannot be sold
except upon specified call dates of the Bonds. The calling of the Bonds at those
dates is solely at the option of the Company. Principal and interest payments on
the MBS are used to make the monthly, quarterly and semi-annual payments on the
Bonds. In addition, prepayments of the underlying MBS are passed through as
repayments of the Bonds so that the Bonds may be fully paid prior to their
stated maturities. The Bonds are not guaranteed by NVR or any of its
subsidiaries, other than the issuing Limited-Purpose Financing Subsidiary.
The MBS and the reserve amounts which constitute the collateral for the
Bonds of a series are held by a trustee for the benefit of the bondholders. The
specific collateral pledged to secure a particular series is not available as
collateral for any other series. Under certain circumstances, amounts of
collateral no longer needed to make required payments of principal and interest
on the Bonds of a series may be withdrawn. In addition, the Company may, under
certain circumstances, redeem certain series of Bonds. In such certain
circumstances, the Bonds are redeemed at par and any market appreciation or
depreciation accrues to the Company.
41
NVR, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
During 1996, NVR sold, at a premium, MBS totaling $45,835, the proceeds of
which were used to redeem in full the related outstanding Bonds which totaled
$44,518. The sales of the MBS resulted in a pre-tax gain of $2,077, which was
partially offset by a pre-tax loss on the related Bonds of $1,586.
The following comprise the assets and liabilities of the Limited Purpose
Financing Subsidiary:
DECEMBER 31,
----------------------
1996 1995
-------- --------
ASSETS:
Mortgage-backed securities, net $37,294 $ 94,403
Funds held by trustee 557 2,534
Other assets 1,388 4,338
------- --------
TOTAL ASSETS 39,239 101,275
------- --------
LIABILITIES:
Accrued expenses and other liabilities 771 1,724
Mortgage-backed bonds 39,211 100,337
Unamortized discounts (747) (1,788)
------- --------
TOTAL LIABILITIES 39,235 100,273
------- --------
Mortgage-backed securities, net of mortgage-
backed bonds, and related assets and liabilities $ 4 $ 1,002
======= ========
The weighted average portfolio yield on the MBS was 8.9% at December 31,
1996 and 1995. The Bonds mature through May 2017 and bear interest ranging
from 8.0% to 9.4%.
42
NVR, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
13. QUARTERLY RESULTS [UNAUDITED]
The following table sets forth unaudited selected financial data and operating
information on a quarterly basis for the years ended December 31, 1996 and 1995.
YEAR ENDED DECEMBER 31, 1996
----------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
Revenues-homebuilding
operations $200,235 $283,532 $312,658 $249,505
Gross profit - homebuilding
operations $ 26,390 $ 38,175 $ 42,283 $ 32,827
Mortgage banking fees $ 5,999 $ 6,819 $ 6,225 $ 4,986
Income before discontinued
operations and extraordinary gain $ 3,740 $ 8,770 $ 8,274 $ 4,997
Earnings per share before discontinued
operations and extraordinary gain $0.24 $0.54 $0.59 $0.34
Contracts for sale, net
of cancellations (homes) 1,492 1,801 969 1,428
Settlements (homes) 1,107 1,556 1,672 1,360
Backlog, end of period (homes) 2,856 3,101 2,398 2,466
Loans closed $289,228 $321,795 $338,895 $294,027
YEAR ENDED DECEMBER 31, 1995
----------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
Revenues-homebuilding
operations $144,069 $207,322 $256,110 $261,618
Gross profit - homebuilding
operations $ 18,723 $ 29,808 $ 34,995 $ 34,558
Mortgage banking fees $ 4,702 $ 4,949 $ 7,146 $ 9,500
Income before discontinued
operations and extraordinary gain $ 653 $ 5,096 $ 5,863 $ 4,788
Earnings per share before discontinued
operations and extraordinary gain $0.04 $0.33 $0.38 $0.31
Contracts for sale, net
of cancellations (homes) 1,137 1,807 1,144 1,518
Settlements (homes) 849 1,162 1,420 1,426
Backlog, end of period (homes) 2,010 2,655 2,379 2,471
Loans closed $146,765 $253,571 $359,756 $332,584
43
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Shareholders
NVR, Financial Services, Inc.:
We have audited the accompanying consolidated balance sheets of NVR, Financial
Services, Inc. and subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NVR, Financial
Services, Inc. and subsidiaries as of December 31, 1996 and 1995 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, effective
January 1, 1995, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights."
/s/ KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
January 30, 1997
44
NVR FINANCIAL SERVICES, INC.
Consolidated Balance Sheets
(dollars in thousands, except share data)
DECEMBER 31,
-------------------
1996 1995
-------- --------
ASSETS
FINANCIAL SERVICES:
Cash and cash equivalents $ 3,247 $ 3,656
Receivables 3,596 7,897
Mortgage loans held for sale, net 75,735 96,311
Property and equipment, net 917 1,708
Real estate acquired through foreclosure 538 705
Mortgage servicing rights, net 6,309 18,017
Reorganization value in excess of amount
allocable to identifiable assets, net 12,788 13,877
Other assets 753 1,850
-------- --------
103,883 144,021
LIMITED-PURPOSE FINANCING SUBSIDIARIES:
Mortgage-backed securities, net 37,294 94,403
Funds held by trustee 557 2,534
Receivables 548 2,404
Other assets 840 1,934
-------- --------
39,239 101,275
-------- --------
TOTAL ASSETS $143,122 $245,296
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
FINANCIAL SERVICES:
Accounts payable $ 3,480 $ 2,612
Accrued expenses and other liabilities 4,286 5,435
Due to affiliates 1,173 124
Notes payable 67,463 87,177
-------- --------
76,402 95,348
LIMITED-PURPOSE FINANCING SUBSIDIARIES:
Accrued expenses and other liabilities 771 1,724
Bonds payable, net 38,464 98,549
-------- --------
39,235 100,273
-------- --------
TOTAL LIABILITIES 115,637 195,621
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, $1 par value, 1,000
shares authorized; 100 shares issued
and outstanding - -
Additional paid-in capital 28,711 51,504
Retained deficit (1,226) (1,829)
-------- --------
Total shareholder's equity 27,485 49,675
-------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $143,122 $245,296
======== ========
See notes to consolidated financial statements.
45
NVR FINANCIAL SERVICES, INC.
Consolidated Statements of Income
(dollars in thousands)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ ------------------ ------------------
FINANCIAL SERVICES:
Interest income $ 5,351 $ 4,744 $ 5,288
Gain (loss) on sales of
mortgage loans 14,401 8,320 (5,959)
Servicing fees 4,894 7,128 7,073
Gain (loss) on sales of servicing (1,194) 5,534 18,725
Title insurance fees 3,426 2,931 4,203
Other, net 2,530 2,384 1,230
------------------ ------------------ ------------------
Total revenues 29,408 31,041 30,560
------------------ ------------------ ------------------
Interest expense (2,249) (2,090) (2,364)
Interest on advances
from affiliates (779) (138) (499)
General and administrative (21,880) (24,082) (25,454)
Amortization of mortgage
servicing rights (1,627) (2,665) (1,873)
Amortization of reorganization
value in excess of amounts
allocable to identifiable
assets (1,088) (1,088) (1,090)
------------------ ------------------ ------------------
Total expenses (27,623) (30,063) (31,280)
------------------ ------------------ ------------------
Operating income (loss) 1,785 978 (720)
LIMITED-PURPOSE FINANCING SUBSIDIARIES:
Interest income 6,260 8,309 14,772
Interest expense (6,398) (8,143) (14,319)
Other, net 157 (139) (324)
------------------ ------------------ ------------------
Operating income 19 27 129
------------------ ------------------ ------------------
TOTAL OPERATING INCOME (LOSS) 1,804 1,005 (591)
Income tax expense (1,201) (859) (20)
------------------ ------------------ ------------------
Income (loss) before
discontinued operations 603 146 (611)
Discontinued operations - - 617
------------------ ------------------ ------------------
NET INCOME $ 603 $ 146 $ 6
================== ================== ==================
See Notes to Consolidated Financial Statements.
46
NVR FINANCIAL SERVICES, INC.
Consolidated Statements of Shareholder's Equity
(dollars in thousands)
ADDITIONAL
COMMON PAID-IN RETAINED TOTAL
STOCK CAPITAL DEFICIT EQUITY
------ -------- -------- --------
BALANCE, DECEMBER 31, 1993 $ - $ 95,000 $(1,981) $ 93,019
Return of capital - (40,496) - (40,496)
Net income - - 6 6
------ -------- ------- --------
BALANCE, DECEMBER 31, 1994 - 54,504 (1,975) 52,529
Return of capital - (3,000) - (3,000)
Net income - - 146 146
------ -------- ------- --------
BALANCE, DECEMBER 31, 1995 - 51,504 (1,829) 49,675
Return of capital - (22,793) - (22,793)
Net income - - 603 603
------ -------- ------- --------
BALANCE, DECEMBER 31, 1996 $ - $ 28,711 $(1,226) $ 27,485
====== ======== ======= ========
See notes to consolidated financial statements.
47
NVR FINANCIAL SERVICES, INC.
Consolidated Statements of Cash Flows
(dollars in thousands)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ ------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 603 $ 146 $ 6
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Accretion of net discount on
mortgage-backed securities (237) 1,469 (2,513)
Amortization 4,083 2,320 5,107
Loss (gain) on sales of loans (14,401) (8,320) 5,959
Mortgage loans closed (1,243,945) (1,092,676) (1,115,337)
Proceeds from sales of mortgage loans 1,268,254 1,052,550 1,194,247
(Gain) loss on sales of mortgage
servicing rights 1,194 (5,534) (18,725)
Interest accrued and added to bond principal 1,180 2,749 5,214
Deferred tax provision 278 (1,650) (442)
Other, net (2,380) 5,844 (4,572)
--------------- --------------- ---------------
Net cash provided by
(used in) operating activities 14,629 (43,102) 68,944
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in funds held by trustee 1,977 141 9,144
Principal payments on mortgage-
backed securities 15,511 16,932 51,466
Proceeds from sales of mortgage-
backed securities 45,835 1,069 2,417
Purchases of office facilities and equipment (248) (1,142) (467)
Proceeds from sales of mortgage
servicing rights 23,518 16,050 15,525
Discontinued operations - - (617)
Proceeds from sale of discontinued operations - - 40,319
Purchases of mortgage servicing rights (193) (10,664) (1,830)
Other, net 2,326 1,215 1,300
--------------- --------------- ---------------
Net cash provided by investing activities 88,726 23,601 117,257
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable (19,714) 51,936 (78,288)
Redemption of bonds (62,306) (20,104) (66,785)
Return of capital/dividend to parent (22,793) (3,000) (40,496)
Payment of financing fees - (48) (43)
Change in due to affiliates 1,049 (10,483) 1,471
--------------- --------------- ---------------
Net cash provided by (used in)
financing activities (103,764) 18,301 (184,141)
--------------- --------------- ---------------
Net increase (decrease) in cash (409) (1,200) 2,060
Cash, beginning of year 3,656 4,856 2,796
--------------- --------------- ---------------
Cash, end of year $ 3,247 $ 3,656 $ 4,856
=============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the year $ 7,211 $ 9,166 $ 11,211
=============== =============== ===============
See notes to consolidated financial statements.
48
NVR FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of NVR Financial Services, Inc. ("NVRFS" or the "Company"), its
wholly owned subsidiaries and certain majority owned entities. NVRFS is a
wholly-owned subsidiary of NVR, Inc. ("NVR"). NVR Savings Bank ("NVRSB") is
accounted for on a discontinued operations basis through March 17, 1994
(see note 4). All significant intercompany transactions have been
eliminated in consolidation.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes short-term investments with
original maturities of three months or less.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are valued at the lower of cost or market
on a net aggregate basis.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities of the Limited-Purpose Financing Subsidiary
(the "Limited-Purpose Financing Subsidiary") serve as collateral for the
Limited-Purpose Financing Subsidiary bonds sold to third parties. The
mortgage-backed securities cannot be sold except upon specified call dates
of the bonds. The calling of the bonds at those dates is at the option of
the Limited-Purpose Financing Subsidiary.
PROPERTY AND EQUIPMENT
Property and equipment are valued at cost less accumulated
depreciation of $3,367 and $3,684 at December 31, 1996 and 1995,
respectively. Depreciation is based on the estimated useful lives of the
assets using the straight-line method.
MORTGAGE SERVICING RIGHTS
NVRFS adopted Statement of Financial Accounting Standards ("SFAS") No.
122, Accounting for Mortgage Servicing Rights effective January 1, 1995.
SFAS No. 122 requires the allocation of the total cost of acquiring
mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values. Retroactive
application to periods prior to the fiscal year of adoption is prohibited.
49
NVR FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
NVRFS measures the impairment of the mortgage servicing rights based
on their current fair value. Current fair value is determined through the
discounted present value of estimated future net servicing cashflows using
a risk-based discount rate and assumptions based upon market estimates for
future servicing revenues and expenses (including prepayment expectations,
servicing costs, default rates and interest earnings on escrows). For the
purposes of evaluating and measuring impairment of the mortgage servicing
rights, they are stratified using the predominant risk characteristic of
the underlying mortgage loans. NVRFS has determined that the predominant
risk characteristic of the underlying mortgage loans is interest rate.
Impairment, and subsequent changes in measurement of impairment, of any
individual stratum is recognized through a valuation allowance for that
stratum. The mortgage servicing rights are amortized to general and
administrative expense in proportion to, and over the period of, the
estimated net servicing income. The adoption of SFAS No. 122 caused segment
income and net income to increase by $610 and $366, respectively, for the
year ended December 31, 1996 and by $1,511 and $891, respectively, for the
year ended December 31, 1995.
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS
Reorganization value in excess of amounts allocable to identifiable
assets is being amortized on a straight-line basis over 15 years.
Accumulated amortization as of December 31, 1996 and 1995 was $3,570 and
$2,482, respectively. Determination of any impairment losses related to
this intangible asset is based on consideration of projected undiscounted
cash flows.
MORTGAGE SERVICING
Trust funds of mortgagors on deposit in special bank accounts in
connection with serviced mortgage loans are not included in the
accompanying consolidated balance sheets. The amount of such trust funds as
of December 31, 1996 and 1995 was $6,859 and $29,635, respectively.
Servicing fees are recognized after cash payments are received.
GAIN ON SALES OF MORTGAGE LOANS
Gains on sales of mortgage loans are recorded at the time of funding
by the investor as the difference between the sale proceeds and NVRFS's
cost (including adjustments, if any, to value loans at the lower of cost or
market) as adjusted for loan origination fees, direct loan origination
costs and adjustment to the gain or loss recognized in an amount measured
by the present value of the estimated excess mortgage servicing fees to be
received on such loans.
LOAN ORIGINATION FEES
Loan origination fees offset by direct loan origination costs are
deferred and recognized either upon the sale of the loan or amortized as an
adjustment of yield over the life of the loan if held for investment.
FINANCIAL INSTRUMENTS
Management believes that insignificant differences exist between the
carrying value and fair value of NVRFS's financial instruments except as
otherwise noted in notes 9 and 11 to the financial statements. As discussed
in Note 5, NVRFS has guaranteed the 11% Senior Notes due
50
NVR FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
2003 of NVR. Management believes that it is not practical to estimate the
fair value of such guarantee.
IMPAIRMENT OF LONG-LIVED ASSETS
During 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be disposed of. SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Such adoption did not have a
material impact on the Company's financial condition or results of
operations.
2. LIMITED-PURPOSE FINANCING SUBSIDIARY
The Limited-Purpose Financing Subsidiary was organized to facilitate the
financing of long-term mortgage loans on homes sold by Ryan Homes, Inc., the
predecessor to NVR, and its subsidiaries and affiliates through issuing bonds
collateralized by GNMA, FNMA and/or FHLMC mortgage-backed securities. NVR
Mortgage Finance, Inc. ("NVR Finance"), a subsidiary of NVRFS, acts as servicing
agent for mortgage loans backing certain of the mortgage-backed securities and
receives a normal servicing fee.
3. NATURE OF OPERATIONS AND CERTAIN CONCENTRATIONS
NVRFS is primarily a national mortgage banking operation that provides
financing to residential mortgage customers and also includes a limited-purpose
financing subsidiary as described in note 2 above. NVRFS sells all of the
mortgage loans it closes into the secondary markets, but it retains the
servicing rights associated with a portion of those loans. A significant
portion of the Company's mortgage operations are conducted in the Washington,
D.C. and Baltimore, Maryland metropolitan areas. Although NVR's mortgage
banking operations provide financing to a substantial portion of NVR's
homebuilding customers, NVR's homebuilding customers accounted for only 45% of
the dollar amount of loans closed in 1996.
4. DISCONTINUED OPERATIONS
On March 17, 1994, NVRFS closed the sale of the operations of NVRSB
pursuant to the terms of an agreement dated November 8, 1993. The purchaser
acquired approximately $463,000 of NVRSB's assets and assumed approximately
$426,000 of NVRSB's liabilities. NVRFS received net cash proceeds from sale of
approximately $40,300, representing the final book value of NVRSB at March 17,
1994, plus a premium of approximately $6,800, reduced by certain adjustments
including the withholding of certain assets not sold in the transaction. The
sale did not result in any after-tax gain or loss. The net cash proceeds were
forwarded to NVR by NVRFS in the form of a return of capital. From the period
January 1, 1994 to March 17, 1994, NVRSB's revenues, income before taxes and net
income were $6,963, $781 and $617, respectively.
51
NVR FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
5. RELATED PARTY TRANSACTIONS
NVRFS loan closing activity includes mortgage loans to buyers of homes
built by a homebuilding subsidiary of NVR; and in connection therewith, NVRFS
typically collects a 1% origination fee. The amount of such loans was $558,629,
$453,929 and $426,034, during the years ended December 31, 1996, 1995 and 1994,
respectively.
Certain selling, general, and administrative expenses incurred by NVR were
allocated to its subsidiaries, including NVRFS. NVRFS was allocated selling,
general and administrative expenses of $2,400 in each of the years ended
December 31, 1996, 1995 and 1994.
The Senior Notes, issued by NVR on September 30,1993, are secured by a
first priority pledge of the capital stock of NVRFS, NVR's homebuilding
subsidiary, NVR Homes, Inc. ("Homes") and RVN, Inc. ("RVN"), another NVR
subsidiary. The Senior Notes are also guaranteed on a senior unsecured basis by
NVRFS, RVN and Homes provided, however, that the guarantee by Homes is
subordinated up to $60,000 of senior bank indebtedness.
6. CASH AND CASH EQUIVALENTS
As of December 31, 1996 and 1995, NVRFS had restricted cash of $2,103 and
$3,066, respectively, which includes mortgagor tax, insurance, completion
escrows and other amounts collected at closing which relate to mortgage loans
held for sale.
7. MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale consist of first mortgage loans on residential
property which are in the process of being pooled into mortgage-backed
securities or sold to private investors. Premiums (discounts) adjusting the
principal balance of mortgage loans consist of the following items:
DECEMBER 31,
-----------------------------
1996 1995
---- -----
Premiums received at closing $ 134 $ 88
Deferred loan origination income (171) (363)
Valuation allowance (102) (406)
------- ------
$ (139) $ (681)
======= ======
52
NVR FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
8. NOTES PAYABLE
DECEMBER 31,
-------------------------
1996 1995
-------- --------
Mortgage Warehouse Revolving Credit: (a)
Outstanding $ 57,119 $ 65,553
In-transit 4,140 21,624
Repo Facility (b) 6,204 -
Subordinated note to NVR (c) - -
-------- --------
$ 67,463 $ 87,177
======== ========
(a) The mortgage warehouse facility (the "Mortgage Warehouse Revolving Credit")
currently has a borrowing limit of $105,000. The interest rate under the
Mortgage Warehouse Revolving Credit is either: (i) the federal funds rate plus
either 1.25% or 2.0% based upon the collateral or (ii) 1.25%, to the extent that
NVR Finance provides compensating balances. The weighted average interest rate
for amounts outstanding under the facility was 3.6% and 2.8% during 1996 and
1995, respectively. The Mortgage Warehouse Revolving Credit is collateralized
primarily by mortgage loans, gestation mortgage-backed securities and NVR
Finance's mortgage loan servicing portfolio. The Mortgage Warehouse Revolving
Credit is an annually renewable facility and currently expires in June 1997.
The Mortgage Warehouse Revolving Credit agreement includes, among other
items, restrictions on NVR Finance incurring additional borrowings and making
intercompany dividends and tax payments. In addition, NVR Finance is required to
maintain a minimum servicing portfolio, a minimum net worth and a minimum
tangible net worth.
In-transit items represent closed loans for which the related funding draft
has not yet been presented to the agent bank for payment which will result in
amounts outstanding under the Mortgage Warehouse Revolving Credit.
(b) NVR Finance currently has two annually renewable mortgage-backed security
repurchase agreements with broker/dealers (the "Repo Facility"), one of which is
an uncommitted credit facility. The maximum amount available under the Repo
Facility is $100,000, and amounts outstanding thereunder accrue interest at
various rates tied to the federal funds rate. Borrowings outstanding under the
Repo Facility are collateralized by gestation mortgage-backed securities. The
Repo Facility requires NVR Finance to, among other items, maintain a minimum net
worth and limit its level of liabilities in relation to its net worth.
Information related to the Repo Facility during 1996 and 1995 is as
follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ ------------------
Average amount outstanding
during the year $ 13,788 $ 7,808
Maximum amount outstanding $ 64,957 $ 37,890
Weighted average rate
during the year 6.1% 6.8%
Weighted average rate
at end of the year 5.9% -
53
NVR FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
(c) NVRFS entered into a subordinated demand revolving credit borrowing
facility with NVR. This indebtedness is subordinated in right of payment to the
Mortgage Warehouse Revolving Credit. The maximum amount available under this
facility is $30,000, and it accrues interest at the federal funds rate plus
1.25%.
9. BONDS PAYABLE AND MORTGAGE-BACKED SECURITIES
Bonds payable at December 31 consist of the following series of bonds
issued by the indicated Limited-Purpose Financing Subsidiary and collateralized
by mortgage-backed securities:
BOND PRINCIPAL MORTGAGE- BACKED
OUTSTANDING RANGE OF SECURITIES
----------------------------- ----------------------------
ISSUER 1996 1995 RANGE OF RATES (%) STATED MATURITY 1996 1995
------ -------- -------- ------------------ --------------- -------- --------
RYMAC IV $ 39,211 $ 100,337 8.0% to 9.4% 9/01/07 to $ 38,845 $ 97,644
5/01/17
Less discounts (747) (1,788) (1,551) (3,241)
-------- ---------- --------- ---------
$ 38,464 $ 98,549 $ 37,294 $ 94,403
======== ========== ========= =========
Principal and interest payments on the mortgage-backed securities are used
to make the monthly, quarterly and semi-annual payments on the bonds payable. In
addition, prepayments of the underlying mortgage-backed securities are passed
through as repayments of the bonds payable so that the bonds payable may be
fully paid prior to their stated maturities.
The Limited-Purpose Financing Subsidiary may also be required under certain
circumstances to pledge, as additional collateral, certain reserve amounts for
each series of bonds. These amounts may be used by the trustee for the payment
of interest on the bonds to the extent cash is not otherwise available. The
obligation of the Limited-Purpose Financing Subsidiary to establish reserve
amounts may be satisfied by either cash or letters of credit. There were no
such letters of credit or cash pledged as of December 31, 1996 and 1995. The
bonds payable are not guaranteed by NVRFS or any of its subsidiaries other than
the issuing Limited-Purpose Financing Subsidiary.
54
NVR FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
The mortgage-backed securities and the reserve amounts which constitute the
collateral for the bonds of a series are held by the trustee for the benefit of
the bondholders. The fair value of mortgage-backed securities at December 31,
1996 and 1995 was $40,044 and $102,845, respectively. Gross unrealized holding
gains related to the mortgage-backed securities were $2,750 and $8,442 at
December 31, 1996 and 1995, respectively. There were no gross unrealized holding
losses related to the mortgage-back securities at the same respective dates. The
specific collateral pledged to secure a particular series is not available as
collateral for any other series. Under certain circumstances, amounts of
collateral no longer needed to make required payments of principal and interest
on the bonds of a series may be withdrawn by the Limited-Purpose Financing
Subsidiary issuing the series. In addition, the Limited-Purpose Financing
Subsidiary may, under certain circumstances, redeem certain series of bonds.
The weighted average portfolio yield on mortgage-backed securities was 8.9%
at December 31, 1996 and 1995. The principal proceeds on sales of mortgage-
backed securities during 1995 was $1,069 and resulted in realized losses of $25
in 1995. During 1996, NVR sold, at a premium, MBS totaling $45,835, the proceeds
of which were used to redeem in full the related outstanding Bonds which totaled
$44,518. The sales of the MBS resulted in a pre-tax gain of $2,077, which was
partially offset by a pre-tax loss on the related redemptions of the Bonds of
$1,586.
Funds held by trustee represent cash deposited with the trustee for the
exclusive use of payment of principal and interest on the bonds payable.
10. GAIN (LOSS) ON SALES OF MORTGAGE LOANS
Gain (loss) on sales of mortgage loans is comprised of the following items:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ ------------------ ------------------
Cash gain (loss) on sales $ 201 $ (1,825) $ (2,316)
Servicing rights produced 16,916 13,418 -
Additions to excess servicing 1,903 2,284 22
Loan origination fees 11,156 10,568 11,636
Direct loan origination costs (16,029) (15,683) (15,202)
Change in market valuation
allowance 45 - 80
Effect of deferrals 209 (442) (179)
---------- ------------ -----------
$ 14,401 $ 8,320 $ (5,959)
========== ============ ===========
11. MORTGAGE LOAN SERVICING PORTFOLIO
At December 31, 1996 and 1995, NVRFS was servicing approximately 9,200 and
19,500 mortgage loans for various investors with aggregate balances of
approximately $579,000 and $1,434,000, respectively.
At December 31, 1996, NVRFS had capitalized mortgage servicing rights of
$6,309 (including $492 in capitalized excess servicing fees), which related to
approximately $514 million of the aggregate $579 million in loans serviced. The
mortgage servicing rights associated with the remaining $65 million in loans
serviced are not subject to capitalization because the loans were originated and
sold prior to
55
NVR FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
NVRFS's adoption of SFAS No. 122 on January 1, 1995 (see Note 1). At
December 31, 1995, NVRFS had capitalized purchased mortgage servicing rights of
$18,017.
NVRFS assesses the fair value of the capitalized mortgage servicing rights
by stratifying the underlying loans by interest rate. The fair value of the
mortgage servicing rights is then determined through the discounted present
value of estimated future net servicing cashflows using a risk based discount
rate, and assumptions based upon market estimates for future servicing revenues
and expenses (including prepayment expectations, servicing costs, default rates,
and interest earnings on escrows). The fair value of the capitalized mortgage
servicing rights was $7,563 and $19,501 at December 31, 1996 and 1995,
respectively. The fair value of the mortgage servicing rights not subject to
capitalization due to the loans being originated or sold prior to the adoption
of SFAS No. 122 was $650 and $528 at December 31, 1996 and 1995, respectively.
Based on management's estimate of the fair value of the designated strata, no
impairment valuation allowance is necessary.
NVRFS amortizes the capitalized mortgage servicing rights in proportion to,
and over the period of, the estimated net servicing income. The amortization
for the years ending December 31, 1996 and 1995 was $1,627 and $2,665,
respectively.
As of December 31, 1996, NVRFS had aggregate fidelity bond and errors and
omissions insurance coverage of $2,100.
12. INCOME TAXES
NVRFS is included in the consolidated federal income tax return of NVR and,
therefore, has entered into a tax allocation agreement with NVR. According to
this agreement, NVRFS will make federal income tax payments to NVR in an amount
equal to its share of the net federal income tax obligation of the entire NVR
consolidated tax group based on the amount of the tax obligation of NVRFS on a
"separate return" basis. In the event NVRFS incurs a tax loss on a "separate
return" basis for any year, NVRFS generally will be compensated for the tax
effects of such tax loss through a reimbursement of such loss from NVR.
The provision for income taxes consists of the following:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ------------------ ------------------
CURRENT:
Federal $ 708 $ 2,122 $ 316
State 215 387 146
DEFERRED:
Federal 252 (1,409) (812)
State 26 (241) 370
---------- ------------ ----------
$ 1,201 $ 859 $ 20
========== ============ ==========
Deferred income taxes on NVRFS' consolidated balance sheets are comprised
of the following:
56
NVR FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
DECEMBER 31
---------------
1996 1995
------ ------
Deferred tax assets $3,120 $2,979
Deferred tax liabilities 2,615 2,196
------ ------
Deferred tax assets, net $ 505 $ 783
====== ======
Deferred tax assets arise principally as a result of various reserves
required for financial reporting purposes which are not currently deductible for
tax return purposes. Deferred tax liabilities arise principally as a result of
the capitalization of mortgage servicing rights for financial reporting
purposes.
A reconciliation of income tax expense in the accompanying statement of
income to the amount computed by applying the statutory Federal income tax rate
to income before income taxes and discontinued operations is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- ------------------
Income taxes computed at the
Federal statutory rate $ 631 $ 352 $ (207)
State income taxes, net of
Federal income tax benefit 157 95 388
Non-deductible amortization 381 381 381
Other, net 32 31 (542)
------------ ------------ ------------
$ 1,201 $ 859 $ 20
============ ============ ============
13. COMMITMENTS AND CONTINGENCIES
NVRFS is committed under several non-cancelable operating leases involving
office space and equipment. Future minimum lease payments under these operating
leases as of December 31, 1996, are as follows:
YEARS ENDED DECEMBER 31:
--------------------------------------
1997 $1,572
1998 1,135
1999 485
2000 145
2001 83
Thereafter 7
------
$3,427
======
Total rent expense incurred under operating leases was $1,353, $1,579 and
$2,247, for the years ended December 31, 1996, 1995 and 1994, respectively.
During the ordinary course of business, NVRFS is required to enter into
letter of credit arrangements with purchasers of its servicing portfolio to
collateralize its obligation under the sales contracts. NVRFS has approximately
$500 of contingent obligations under such agreements as of December 31, 1996. In
addition, during 1996, NVRFS entered into a $1,000 letter of credit arrangement
with the purchaser of NVRSB to replace cash deposits returned to the Company
pursuant to the November 8, 1993 sale agreement. NVRFS believes it will fulfill
its obligation under the contracts noted above and does not anticipate any
losses under these letters of credit.
57
NVR FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, NVRFS enters into contractual commitments
involving financial instruments with off-balance-sheet risk. These financial
instruments include commitments to extend mortgage loans to customers and
forward contracts to sell mortgage-backed securities to broker/dealers. These
instruments involve, to varying degrees, elements of credit and market rate risk
in excess of the amount recognized in the accompanying balance sheets.
NVRFS's exposure to credit loss, in the event of nonperformance by the
customers, is represented by the contractual amount of the commitment for the
mortgage loans. NVRFS uses the same credit policies in making commitments as it
does for on-balance-sheet mortgage loans.
A summary of off-balance-sheet financial instruments is as follows:
CONTRACT AMOUNTS DECEMBER 31,
------------------------------
1996 1995
-------- ---------
FINANCIAL INSTRUMENTS WHOSE CONTRACT AMOUNTS
REPRESENT CREDIT RISK:
Commitments to extend credit $ 94,901 $ 54,358
======== =========
FINANCIAL INSTRUMENTS WHOSE NOTIONAL OR CONTRACT
AMOUNTS EXCEED THE AMOUNT OF CREDIT RISK:
Forward contracts $130,891 $ 134,366
======== =========
NVRFS enters into contractual commitments to extend credit to buyers of
single family homes with fixed expiration dates. The commitments become
effective when the borrowers "lock-in" a specified interest rate within
timeframes established by NVRFS. All mortgagors are evaluated for credit
worthiness prior to the extension of the commitment. Market risk arises if
interest rates move adversely between the time of the "lock-in" of rates by the
borrower and sale date to a broker/dealer and is managed by entering into
forward contracts.
Since certain of the commitments are expected to expire without a loan
closing, the total contractual amounts do not necessarily represent future cash
requirements. Collateral for loans granted is obtained by a first mortgage
security interest in real estate whose appraised values exceed the contractual
amount of the commitment.
NVRFS enters into optional and mandatory forward delivery contracts to sell
mortgage-backed securities at specified prices and dates to broker/dealers.
NVRFS has established policies governing which broker/dealers can be used to
conduct these activities. Credit risk associated with forward contracts is
limited to the replacement cost of those forward contracts in a gain position,
and at December 31, 1996, there were no such positions. There were no
counterparty default losses on forward contracts in 1996, 1995, or 1994. Market
risk with respect to forward contracts arises from changes in the value of
contractual positions due to fluctuations in interest rates. NVRFS limits its
exposure to market risk by monitoring differences between commitments to
customers and forward contracts with broker/dealers. In the event NVRFS has
forward delivery contract commitments in excess of available mortgage-backed
securities, NVRFS completes the transaction by either paying or receiving a fee
to/from the broker/dealer equal to the increase/decrease in the market value of
the forward contract. NVRFS has no market risk associated with optional delivery
contracts because NVRFS has the right but not the obligation to deliver mortgage
backed securities to broker/dealers under these contracts.
58
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Shareholder
NVR Homes, Inc.:
We have audited the accompanying consolidated balance sheets of NVR Homes, Inc.
and subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, shareholder's equity, and cash flows for each of the years
in the three-year period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NVR Homes, Inc. and
subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
January 30, 1997
59
NVR HOMES, INC.
Consolidated Balance Sheets
(dollars in thousands, except share data)
DECEMBER 31,
------------------
1996 1995
-------- --------
ASSETS
Cash and cash equivalents $ 71,471 $ 51,911
Receivables 3,247 8,420
Inventory:
Lots and housing units, covered under
sales agreements with customers 126,456 116,140
Unsold lots and housing units 37,940 33,399
Manufacturing materials and other 7,297 5,174
-------- --------
171,693 154,713
Property, plant & equipment, net 10,272 8,853
Reorganization value in excess of amounts
allocable to identifiable assets, net 75,818 89,867
Contract land deposits 36,383 31,315
Other assets 18,058 11,654
-------- --------
TOTAL ASSETS $386,942 $356,733
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable $ 54,325 $ 48,781
Accrued expenses and other liabilities 75,451 72,769
Advances from affiliates, net 107,896 107,965
Other term debt 5,859 6,073
-------- --------
TOTAL LIABILITIES 243,531 235,588
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, $0.01 par value; 100 shares
authorized; 100 shares issued and outstanding - -
Additional paid-in capital 94,688 94,688
Retained earnings 48,723 26,457
-------- --------
Total shareholder's equity 143,411 121,145
-------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $386,942 $356,733
======== ========
See notes to consolidated financial statements
60
NVR HOMES, INC.
Consolidated Statements of Income
(dollars in thousands)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ ------------------ ------------------
REVENUES:
Homebuilding revenues $1,045,930 $869,119 $820,915
Other income 1,311 1,499 2,005
---------- -------- --------
Total revenues 1,047,241 870,618 822,920
EXPENSES:
Cost of sales 906,451 751,035 716,088
Interest expense-external 1,729 1,992 1,836
Interest expense-affiliates 14,676 14,676 14,674
Selling, general and administrative 75,095 61,891 58,756
Amortization of reorganization value
in excess of amounts allocable to
identifiable assets 7,048 7,048 7,404
---------- -------- --------
Total expenses 1,004,999 836,642 798,758
Income before income tax expense 42,242 33,976 24,162
Income tax expense (19,976) (16,805) (13,647)
----------- --------- ---------
NET INCOME $ 22,266 $ 17,171 $ 10,515
=========== ========= =========
NVR HOMES, INC.
Consolidated Statements of Shareholder's Equity
(dollars in thousands)
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT)
----- ------- ---------
BALANCE, DECEMBER 31, 1993 $ - $ 90,276 $(1,229)
Net income - - 10,515
Capital contribution - 22,020 -
Dividend to parent - (17,608) -
----------- --------- ----------
BALANCE, DECEMBER 31, 1994 - 94,688 9,286
Net income - - 17,171
------------ ---------- ------------
BALANCE, DECEMBER 31, 1995 - 94,688 26,457
Net income - - 22,266
------------ ----------- -------------
BALANCE, DECEMBER 31, 1996 $ $ 94,688 $48,723
============ =========== =============
See notes to consolidated financial statements.
61
NVR HOMES, INC.
Consolidated Statements of Cash Flows
(dollars in thousands)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ ------------------ ------------------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 22,266 $ 17,171 $ 10,515
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization 9,586 9,011 9,056
Deferred tax provision 165 (2,020) 4,154
Net change in assets and liabilities:
Decrease (increase) in inventories (16,980) (45,175) 6,851
Decrease (increase) in receivables 5,173 (3,331) (2,031)
Increase in accounts payable
and accrued liabilities 8,226 26,945 10,202
Other, net (4,984) (9,934) (7,510)
-------- -------- --------
Net cash provided (used) by
operating activities 23,452 (7,333) 31,237
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale/(purchase) of marketable securities - 5,000 (5,000)
Purchase of property, plant & equipment (3,764) (2,129) (1,471)
Proceeds from sale of property,
plant & equipment 155 12 646
-------- -------- --------
Net cash provided (used) by investing
activities (3,609) 2,883 (5,825)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in advances from affiliates (69) (10,059) (11,315)
Principal repayments of term
debt and land acquisition borrowings (214) (200) (1,688)
Net borrowings (repayments) under credit
lines and other notes payable - - (1,950)
Dividend to parent - - (17,608)
Capital contribution - - 22,020
-------- -------- --------
Net cash used by financing activities (283) (10,259) (10,541)
-------- -------- --------
Net increase (decrease) in cash 19,560 (14,709) 14,871
Cash, beginning of the year 51,911 66,620 51,749
-------- -------- --------
Cash, end of year $ 71,471 $ 51,911 $ 66,620
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the year $ 16,210 $ 16,253 $ 16,181
======== ======== ========
Taxes paid during the year
(net of refunds) $ 2,226 $ 2,291 $ 775
======== ======== ========
See notes to consolidated financial statements.
62
NVR HOMES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
1. Basis of Presentation
The accompanying consolidated financial statements include consolidated
financial information for NVR Homes, Inc. ("Homes" or the "Company") and its
subsidiaries as of December 31, 1996 and 1995 and for the years ended December
31, 1996, 1995 and 1994. Homes is a wholly-owned subsidiary of NVR, Inc.
("NVR"). All significant intercompany transactions have been eliminated in
consolidation.
2. NATURE OF OPERATIONS, AND CERTAIN CONCENTRATIONS
Homes is one of the largest homebuilders in the United States and in the
Washington, D.C. and Baltimore, Maryland metropolitan area, where Homes derived
approximately 72% of its 1996 homebuilding revenues. The Company primarily
constructs and sells single-family detached homes, townhomes and condominium
buildings in two distinct product lines, through two divisions: Ryan Homes and
NVHomes. Ryan Homes builds moderately priced homes in sixteen metropolitan
areas located in Maryland, Virginia, Pennsylvania, New York, North Carolina,
South Carolina, Ohio, New Jersey, Delaware and Tennessee, and markets its homes
primarily to first-time buyers. NVHomes builds homes largely in the Washington,
D.C. metropolitan area, and markets its homes primarily to move-up buyers.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes short-term investments with
original maturities of three months or less.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
HOMEBUILDING INVENTORY
Inventory is stated at the lower of cost or market value. Cost of lots
and completed and uncompleted housing units represent the accumulated
actual cost thereof. Field construction supervisors' salaries and related
direct overhead expenses are included in inventory costs. Interest costs
are not capitalized into inventory. Upon settlement, the cost of the units
is expensed on a specific identification basis. Cost of manufacturing
materials is determined on a first-in, first-out basis.
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS
Reorganization value in excess of amounts allocable to identifiable
assets is being amortized on a straight-line basis over 15 years.
Accumulated amortization as of December 31, 1996 and 1995 was $23,378 and
$16,330, respectively. Determination of any impairment losses related to
this intangible asset is based on consideration of projected undiscounted
cash flows.
63
NVR HOMES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
HOMEBUILDING REVENUES
Homes builds light-frame, low-rise residences which generally are
produced on a pre-sold basis for the ultimate customer. Revenues are
recognized at the time units are completed and title passes to the
customer. Additionally, to a significantly lesser degree, Homes sells house
packages to builder-dealers and other homebuilders and recognizes revenue
at the time the product is delivered to the builder-dealer or homebuilder.
DEPRECIATION
Depreciation is based on the estimated useful lives of the assets
using the straight-line method. Amortization of capital lease assets is
included in depreciation expense.
INCOME TAXES
Homes is included in the consolidated federal income tax return of NVR
and therefore has entered into a tax allocation agreement with NVR.
According to this agreement, Homes will generally make federal income tax
payments to NVR in an amount equal to its share of the net federal income
tax obligation of the entire NVR consolidated tax group based upon the
amount of the tax obligation of Homes on a "separate return" basis. Also,
in the event Homes incurs a tax loss on a "separate return" basis for any
year, Homes will generally be compensated for the tax effects of such tax
loss through payments received from others in the consolidated group.
Deferred income taxes reflect the impact of "temporary differences"
between the amount of assets and liabilities for financial reporting
purposes and such amounts as measured by enacted tax rules and regulations.
FINANCIAL INSTRUMENTS
Management believes that insignificant differences exist between the
carrying value and fair value of Homes' financial instruments. Homes has
guaranteed the 11% Senior Notes due 2003 ("Senior Notes") of NVR.
Management believes that it is not practical to estimate the fair value of
such guarantee.
IMPAIRMENT OF LONG-LIVED ASSETS
During 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be disposed of. SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Such adoption did not have a
material impact on the Company's financial condition or results of
operations.
ROYALTY FEES
Beginning in the fourth quarter of 1996, Homes incurs royalty expenses
for use of the Ryan Homes and NVHomes tradenames based upon a percentage of
settlement revenues. The royalty expenses are included on the consolidated
statement of income as a component of selling, general and administrative
expenses.
64
NVR HOMES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
4. RELATED PARTY TRANSACTIONS
During 1996, 1995, and 1994, Homes purchased, at market prices, developed
lots from a company that is controlled by a member of the board of directors.
Those purchases totaled $6,612, $8,877 and $8,738 during 1996, 1995 and 1994,
respectively, and Homes expects to purchase the remaining lots under contract at
December 31, 1996 over the next 18 to 24 months for an aggregate purchase price
of $26,000.
During 1996, Homes incurred $4,711 of royalty expenses for the use of the
Ryan Homes and NVHomes tradenames (the "Tradenames"). The Tradenames are owned
by RVN, Inc. ("RVN"), a subsidiary of NVR. At December 31, 1996, Homes had a
$1,441 royalty expense payable due to RVN.
As of December 31, 1996 and 1995, Homes had $26,946 and $25,546,
respectively, of non-interest bearing intercompany advances to NVR due on
demand, offset by a $133,460 note payable to NVR due in 2003 which accrues
interest at a rate of 11%. Also, at December 31, 1996 and 1995, Homes had $(59)
and $51, respectively, of non-interest bearing intercompany advances due to
(from) NVR Financial Services, Inc. ("NVRFS"), a subsidiary of NVR.
Certain selling, general and administrative expenses incurred by NVR were
allocated to its subsidiaries, including Homes. Homes was allocated $7,625,
$8,308 and $9,485 in selling, general and administrative expenses during the
years ended December 31, 1996, 1995 and 1994, respectively.
The Senior Notes, issued by NVR on September 30, 1993, are secured by a
first priority pledge of the capital stock of Homes, NVR's mortgage banking
subsidiary, NVR Financial Services, Inc. ("NVRFS"), and RVN. The Senior Notes
are also guaranteed on a senior unsecured basis by Homes, RVN and NVRFS
provided, however, that the guarantee by Homes is subordinated to up to $60,000
of Senior Bank Indebtedness.
5. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, which are stated at cost, consist of the
following:
DECEMBER 31,
----------------------------
1996 1995
---------- ---------
Office facilities and other $ 3,176 $ 3,866
Model home furniture and fixtures 4,255 2,410
Manufacturing facilities 7,964 7,620
Property under capital leases excluding
manufacturing facilities 4,033 4,033
---------- ---------
19,428 17,929
Less accumulated depreciation
and amortization (9,156) (9,076)
---------- ---------
$ 10,272 $ 8,853
========== =========
The property, plant and equipment listed above is collateral for various
debt of Homes as more fully discussed in note 6.
65
NVR HOMES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
6. DEBT
Debt consists of the following:
DECEMBER 31,
--------------------------
1996 1995
---------- ----------
Notes payable:
Working capital revolving credit (a) $ - $ -
========== ==========
Other term debt:
Capital lease and financing obligations
and mortgages due in monthly
installments through 2014 (b) $ 5,859 $ 6,073
========== ==========
(a) On September 30,1993, Homes as borrower and NVR as guarantor entered into a
working capital revolving credit agreement (the "Working Capital Revolving
Credit" or "Senior Bank Indebtedness"). This facility was amended and restated
during December 1996 and currently provides for unsecured borrowings up to
$60,000, subject to certain borrowing base limitations, and is generally
available to fund working capital needs of Homes and for overhead, taxes and
certain interest payments of NVR. Up to approximately $24,000 of this facility
is currently available for issuance in the form of letters of credit of which
$5,345 and $5,360 were issued at December 31, 1996 and 1995, respectively. The
Working Capital Revolving Credit is for a three year period ending May 31, 1999
and outstanding amounts bear interest, at the election of the Company, at (i)
the base rate of interest announced by the facility agent or (ii) 2.0% above the
Eurodollar rate. The weighted average interest rate for amounts outstanding
under the facility was 8.0% and $9.6% during 1996 and 1995, respectively. NVR's
guarantee is a guarantee of collection only and is unsecured.
The Working Capital Revolving Credit agreement contains numerous operating
and financial covenants, including required levels of net worth, fixed charge
coverage ratios, and several other covenants related to the construction
operations of Homes. In addition, the Working Capital Revolving Credit agreement
contains restrictions on the ability of Homes and, in certain cases, NVR to,
among other things, incur debt and make investments.
The Working Capital Revolving Credit agreement restricts substantially all
dividends and intercompany loans from Homes to NVR. Dividends and intercompany
loans from Homes to NVR are permitted by the Working Capital Revolving Credit
agreement up to the amount of any capital contributions made by NVR subsequent
to the Effective Date, as long as NVR is in compliance with certain covenants in
the agreement. During 1994, NVR made a $22,020 capital contribution to Homes and
received from Homes an allowable dividend of $17,608. The agreement also
prohibits NVR from paying dividends to shareholders.
(b) The capital lease and financing obligations and mortgages have either fixed
or variable interest rates ranging from 3.0% to 13.0% and are collateralized by
land, buildings and equipment with a net book value of $5,470 and $5,807 at
December 31, 1996 and 1995, respectively.
66
NVR HOMES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
The following schedule provides future minimum lease payments under all
financing and capital leases together with the present value as of December 31,
1996:
YEARS ENDING DECEMBER 31:
---------------------------------------
1997 $ 886
1998 830
1999 846
2000 853
2001 853
Thereafter 9,055
-------
13,323
Amount representing interest (7,464)
-------
$ 5,859
=======
Maturities with respect to notes payable and other term debt as of December
31, 1996 are as follows:
YEARS ENDING DECEMBER 31:
---------------------------------------
1997 $ 230
1998 193
1999 225
2000 261
2001 285
Thereafter 4,665
7. PROFIT SHARING AND INCENTIVE PLANS
Employees of Homes participate in various employee incentive and option
plans of NVR, summarized as follows:
Profit Sharing Plans -- Employees of Homes participate in NVR's trustee
administered profit sharing retirement plan (the "Profit Sharing Plan") and
Employee Stock Ownership Plan ("ESOP"). The Profit Sharing Plan and ESOP
provide for contributions in amounts as determined by the NVR board of
directors. NVR's combined retirement plan expense (a portion of which has been
recognized by Homes) for the years ended December 31, 1996, 1995 and 1994 was
$4,627, $3,993 and $4,023, respectively.
The Management Incentive Plan provides several types of equity incentives
to NVR's and Homes' executives and managers. As of December 31, 1996,
participants in the Management Incentive Plan hold options to purchase a total
of 1,076,424 NVR shares (the "1993 NVR Share Options") with exercise prices
ranging from $5.06 to $9.11 per share. Each 1993 NVR Share Option entitles the
holder to buy a share of NVR common stock during a ten-year exercise period.
All of the 1993 NVR Share Options have vested as of December 31, 1996. The
options expire in September 2003.
Certain participants in the Management Incentive Plan also received a total
of 836,551 NVR shares subject to achievement of certain performance goals (the
"1993 Performance Shares"). As of December 31, 1996, all of the 1993
Performance Shares have vested.
67
NVR HOMES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
In addition, during 1994, the Board of Directors adopted the 1994 Incentive
Plan (the "1994 Incentive Plan") under which executive officers and other key
employees of the Company will be eligible to receive stock options (the "1994
NVR Share Options") and performance shares (the "1994 Performance Shares").
There are 48,195 1994 NVR Share Options and 1,124,929 1994 Performance Shares
authorized for grant under the 1994 Incentive Plan. A total of 1,040,000 1994
Performance Shares have been granted to employees as of December 31, 1996. There
have been no grants of 1994 Share Options.
Each 1994 NVR Share Option entitles the holder to buy a share of NVR common
stock during a ten year exercise period. Thirty-three and one third percent of
the 1994 NVR Share Options vest on each of December 31, 1997 and 1998 and 33.4%
vest on December 31, 1999 with vesting based upon continued employment. The
1994 NVR Share Options expire in November 2004. Up to 33.3% of the 1994
Performance Shares vest on each of December 31, 1997 and 1998 and up to 33.4%
vest on December 31, 1999 if certain earnings targets are met or exceeded. All
1994 Performance Shares that do not vest are forfeited back to NVR on December
31, 1999.
Under the Management Long-Term Stock Option Plan (the "Stock Option Plan"),
awards of non-qualified stock options ("Options") to purchase 2,000,000 Shares
of the Company's common stock ("Shares") may be granted to executive officers
and other key management personnel. Each Option is granted for a period of ten
(10) years from the date of grant. During 1996, 1,554,000 Options were granted
under the Stock Option Plan at exercise prices ranging from $9.13 to $10.63 per
share, the prices of which were equal to the market price of the Company's
Shares on the date of grant. The weighted average exercise price and the
weighted average grant-date fair value of the options granted during the year
were $10.58 and $6.14 per share, respectively. The Options granted will vest
as to thirty-three and one-third percent (33 1/3 %) of the underlying Shares on
each of December 31, 2000, 2001, and 2002, with vesting based upon continued
employment.
8. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ ------------------ -----------------
Current:
Federal $ 15,978 $ 14,832 $ 7,963
State 3,833 3,993 1,530
Deferred:
Federal (149) (1,725) 3,335
State 314 (295) 819
------------------ ------------------ -----------------
$ 19,976 $ 16,805 $ 13,647
================== ================== =================
68
NVR HOMES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
Deferred income taxes on Homes' consolidated balance sheets are comprised
of the following:
DECEMBER 31,
--------------------------
1996 1995
----------- ----------
Deferred tax assets $ 13,807 $ 13,996
Less: valuation allowance 4,078 11,078
----------- ----------
9,729 2,918
Less: deferred tax liabilities 2 26
----------- ----------
Deferred tax assets, net $ 9,727 $ 2,892
=========== ==========
Deferred tax assets arise principally as a result of various reserves
required for financial reporting purposes which are not currently deductible for
tax return purposes in addition to higher tax basis inventory resulting from
uniform capitalization and interest capitalization required for tax purposes but
not for financial reporting.
Management believes the Company will have sufficient available carry-backs
and future taxable income to make it more likely than not that the net deferred
tax asset will be realized. Taxable income was $51,937, $37,197, and $24,009 for
the years ended December 31, 1996, 1995 and 1994.
Tax benefits realized in subsequent periods related to unrecognized
deferred tax assets as of September 30, 1993 will be recorded as a reduction of
reorganization value in excess of amounts allocable to identifiable assets. For
the years ended December 31, 1996, 1995 and 1994, $7,000, $0 and $4,803,
respectively, of such benefits were realized. Unrecognized deferred tax assets
which arose as of September 30, 1993 amounted to $4,078 and $11,078 as of
December 31, 1996 and 1995, respectively.
A reconciliation of income tax expense in the accompanying consolidated
statements of income to the amount computed by applying the statutory Federal
income tax rate to income before income taxes is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
Income taxes computed at the
Federal statutory rate $ 14,785 $ 11,892 $ 8,457
State income taxes, net of
Federal income tax benefit 2,696 2,404 1,489
Non-deductible amortization 2,467 2,467 2,591
Other, net 28 42 1,110
----------------- ----------------- -----------------
$ 19,976 $ 16,805 $ 13,647
================== ================= ==================
69
NVR HOMES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
9. COMMITMENTS AND CONTINGENT LIABILITIES
Homes is committed under several non-cancelable operating leases involving
office space, manufacturing facilities and equipment. Future minimum lease
payments under these operating leases as of December 31, 1996 are as follows:
YEARS ENDED DECEMBER 31:
-------------------------------------
1997 $ 1,532
1998 1,201
1999 696
2000 439
2001 285
Thereafter 1,942
---------
$ 6,095
=========
Total rent expense incurred under operating leases was approximately
$1,493, $1,518 and $1,541 for the years ended December 31, 1996, 1995 and 1994,
respectively.
During the ordinary course of operating its business, Homes is required to
enter into bond or letter of credit arrangements with local municipalities,
government agencies, or land developers to collateralize its obligations under
various contracts. Homes had approximately $10,093 of contingent obligations
under such agreements as of December 31, 1996. Homes believes it will fulfill
its obligations under the related contracts and does not anticipate any losses
under these bonds or letters of credit.
Homes is also involved in litigation arising from the normal course of
business. In the opinion of management, and based on advice of legal counsel,
this litigation will not have any material adverse effect on the financial
position of Homes.
At December 31, 1996, Homes has restricted cash of $2,934, representing
deposits on homes under sales contracts in certain markets where the Company
operates.
70
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Shareholder
RVN, Inc.:
We have audited the accompanying balance sheet of RVN, Inc. as of December 31,
1996 and the related statements of income, shareholder's equity, and cash flows
for the three months then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of RVN Inc. as of December 31,
1996 and the results of its operations and its cash flows for the three months
then ended, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
January 30, 1997
71
RVN, INC.
Balance Sheet
(dollars in thousands, except share data)
DECEMBER 31,
1996
------------
ASSETS
Cash and cash equivalents $ 62
Royalty receivable 1,441
------------
TOTAL ASSETS $ 1,503
============
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable and accrued expenses $ 530
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, $1 par value; 3,000 shares
authorized; 1,000 shares issued and outstanding 1
Additional paid-in capital 64
Retained earnings 908
------------
Total shareholder's equity 973
------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 1,503
============
RVN, INC.
Statement of Income
(dollars in thousands)
THREE MONTHS ENDED
DECEMBER 31, 1996
------------------
REVENUES:
Royalty Revenue $ 4,711
EXPENSES:
Selling, general and administrative (30)
----------
Income before income tax expense 4,681
Income tax expense (1,638)
----------
NET INCOME $ 3,043
==========
See notes to financial statements
72
RVN, INC.
Statement of Shareholder's Equity
(dollars in thousands)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
----- ------- --------
BALANCE, OCTOBER 1, 1996 $ - $ - $ -
Capital contribution 1 64 -
Net income - - 3,043
Dividend to parent - - (2,135)
--------- --------- ---------
BALANCE, DECEMBER 31, 1996 $ 1 $ 64 $ 908
========= ========= =========
RVN, INC.
Statement of Cash Flows
(dollars in thousands)
THREE MONTHS ENDED
DECEMBER 31, 1996
------------------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 3,043
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Net change in assets and liabilities:
Increase in receivables (1,441)
Increase in accounts payable
and accrued liabilities 530
-----------
Net cash provided by operating activities 2,132
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend to parent (2,135)
Capital contribution 65
-----------
Net cash used by financing activities (2,070)
-----------
Net increase in cash 62
Cash, beginning of the period -
-----------
Cash, end of period $ 62
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ -
===========
Taxes paid during the Period
(net of refunds) $ -
===========
See notes to financial statements.
73
RVN, INC.
Notes to Financial Statements
(dollars in thousands)
1. BASIS OF PRESENTATION
The accompanying financial statements include financial information for
RVN, Inc. ("RVN" or the "Company") as of December 31, 1996 and for the three
months ended December 31, 1996. RVN is a wholly-owned subsidiary of NVR, Inc.
("NVR").
2. NATURE OF OPERATIONS AND CERTAIN CONCENTRATIONS
On October 1, 1996, NVR capitalized RVN, a Delaware holding company, with
$65 in cash and the Ryan Homes and NVHomes tradenames (the "Tradenames"). Under
a royalty agreement entered into on October 1, 1996 with NVR Homes, Inc.
(Homes), NVR's homebuilding subsidiary, RVN earns royalty fees based on a
percentage of settlement revenue for allowing Homes to use the Tradenames to
market homes. RVN earns 100% of its revenue from Homes.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes short-term investments with
original maturities of three months or less.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
INCOME TAXES
RVN is included in the consolidated federal income tax return of NVR
and therefore has entered into a tax allocation agreement with NVR.
According to this agreement, RVN will generally make federal income tax
payments to NVR in an amount equal to its share of the net federal income
tax obligation of the entire NVR consolidated tax group based upon the
amount of the tax obligation of RVN on a "separate return" basis. Also, in
the event RVN incurs a tax loss on a "separate return" basis for any year,
RVN will generally be compensated for the tax effects of such tax loss
through payments received from others in the consolidated group.
FINANCIAL INSTRUMENTS
Management believes that insignificant differences exist between the
carrying value and fair value of RVN's financial instruments. RVN has
guaranteed the 11% Senior Notes due 2003 ("Senior Notes") of NVR.
Management believes that it is not practical to estimate the fair value of
such guarantee.
74
RVN, INC.
Notes to Financial Statements
(dollars in thousands)
ROYALTY FEES
Royalty fees are recorded in the same period that the associated
settlement revenue is recognized by Homes. Homes recognizes settlement
revenue in the period when the construction process is complete and title
passes to its customer.
4. RELATED PARTY TRANSACTIONS
During 1996, RVN earned $4,711 in royalty fees for allowing Homes to use
the Tradenames to market its homes. At December 31, 1996, RVN had a $1,441
royalty receivable due from Homes.
The Senior Notes, issued by NVR on September 30, 1993, are secured by a
first priority pledge of the capital stock of RVN, Homes and NVR Financial
Services, Inc. ("NVRFS"). The Senior Notes are also guaranteed on a senior
unsecured basis by RVN, Homes and NVRFS provided, however, that the guarantee by
Homes is subordinated to up to $60,000 of Senior Bank Indebtedness.
5. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED
DECEMBER 31, 1996
-----------------
Current:
Federal $ 1,638,000
State -
Deferred:
Federal -
State -
-
-----------------
$ 1,638,000
=================
75
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Shareholders
NVR, Inc.:
Under date of January 30, 1997, we reported on the consolidated balance sheets
of NVR, Inc. and subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1996 which are included
in the NVR, Inc. annual report on Form 10-K for the year 1996. In connection
with our audits of the aforementioned consolidated financial statements, we have
also audited the related financial statement schedule included in the annual
report on Form 10-K. The financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits.
In our opinion, the schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
The audit report on the consolidated financial statements of NVR, Inc. and
subsidiaries referred to above contains an explanatory paragraph as to the
adoption, effective January 1, 1995, of the provisions of Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights."
/s/ KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
January 30, 1997
76
SCHEDULE I
NVR, INC.
(Parent Company)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(dollars in thousands, except share data)
DECEMBER 31,
------------------------------
1996 1995
---------- ----------
ASSETS
Cash and cash equivalents $ - $ -
Property and equipment, net 7,644 8,029
Investment in and advances to
homebuilding subsidiaries 250,897 229,059
Investment in and advances to
financial services subsidiaries 28,599 49,850
Other assets 2,987 4,359
---------- ----------
TOTAL ASSETS $ 290,127 $ 291,297
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 9,847 $ 17,072
Note payable 86 93
Other term debt 8,184 7,952
Senior notes 120,000 120,000
---------- ----------
TOTAL LIABILITIES 138,117 145,117
---------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $0.01 par value; 60,000,000
shares authorized; 19,881,515 and
18,384,083 shares issued for 1996
and 1995, respectively 199 184
Additional paid-in-capital 157,842 144,072
Retained earnings 47,098 21,626
Less treasury stock at cost- 6,307,108 and
3,170,721 shares at December 31, 1996
and 1995, respectively (53,129) (19,702)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 152,010 146,180
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 290,127 $ 291,297
========== ==========
See notes to financial statement schedule.
77
SCHEDULE I
(continued)
NVR, INC.
(Parent Company)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
(dollars in thousands)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
REVENUES
Interest and other income $ 197 $ 78 $ 901
Interest income-affiliates, net 15,461 14,837 15,155
----------------- ----------------- -----------------
Total revenues 15,658 14,915 16,056
EXPENSES
Interest expense (14,888) (15,178) (18,354)
General and administrative, net of
allocations to subsidiaries (770) (1,309) 888
Equity in earnings
of homebuilding subsidiaries 25,309 17,171 10,515
Equity in earnings
of financial services subsidiaries 603 146 6
----------------- ----------------- -----------------
Total expenses 10,254 830 (6,945)
----------------- ----------------- -----------------
Income before income taxes
and extraordinary gain 25,912 15,745 9,111
Income tax (expense) benefit (131) 655 524
Extraordinary gain-repurchase of
debt (net of tax expense of $645
and $580 for the years ended December
31, 1995 and 1994, respectively) - 927 834
----------------- ----------------- ----------------
NET INCOME $ 25,781 $ 17,327 $ 10,469
================= ================= ================
See notes to financial statement schedule.
78
SCHEDULE I
(continued)
NVR, INC.
(Parent Company)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousands)
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS TREASURY
STOCK CAPITAL (DEFICIT) STOCK
-------- ----------- ---------- --------
BALANCE, DECEMBER 31, 1993 $ 179 $ 140,788 $ (6,170) $ -
Net income - - 10,469 -
Purchase of common stock
for Treasury - - - (17,121)
Performance share activity 2 1,341 - -
Option activity - 34 - -
--------- ---------- --------- ---------
BALANCE, DECEMBER 31, 1994 181 142,163 4,299 (17,121)
Net income - - 17,327 -
Purchase of common stock
for treasury - - - (2,581)
Performance share activity 1 1,739 - -
Warrant Activity - 1 - -
Option activity 2 169 - -
--------- ---------- --------- ---------
BALANCE, DECEMBER 31, 1995 184 144,072 21,626 (19,702)
Net income - - 25,781 -
Purchase of common stock
for treasury - - - (35,137)
Performance share activity - 529 - 1,710
Warrant Activity 15 13,146 (309) -
Option activity - 95 - -
--------- ---------- --------- ---------
BALANCE, DECEMBER 31, 1996 $ 199 $ 157,842 $ 47,098 $ (53,129)
========= ========== ========= =========
See notes to financial statement schedule.
79
SCHEDULE I
(continued)
NVR, INC.
(Parent Company)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(dollars in thousands)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------- ------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25,781 $ 17,327 $ 10,469
Adjustments to reconcile net
income to net cash
used by operating activities:
Depreciation and amortization 1,313 1,311 1,624
Extraordinary gain - extinguishment of debt - (1,572) (1,414)
Equity in income of subsidiaries (25,912) (17,317) (10,521)
Net change in assets and liabilities:
Decrease in accounts payable and
accrued expenses (7,225) (9,912) (6,158)
Other 3,370 2,510 956
----------------- -------------------- -----------------
Net cash used
by operating activities (2,673) (7,653) (5,044)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (455) (445) (698)
Investments in and advances to/from
homebuilding and financial
services subsidiaries, net 25,325 23,542 39,101
----------------- -------------------- -----------------
Net cash provided by investing
activities 24,870 23,097 38,403
----------------- -------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of senior debt - (12,962) (22,760)
Purchase of treasury stock and warrants (35,446) (2,581) (17,121)
Other, net 13,249 99 (24)
----------------- -------------------- -----------------
Net cash used by financing activities (22,197) (15,444) (39,905)
----------------- -------------------- -----------------
Net decrease in cash - - (6,546)
Cash, beginning of year - - 6,546
----------------- -------------------- -----------------
Cash, end of year $ - $ - $ -
================= ==================== =================
See notes to financial statement schedule.
80
NVR, INC.
(Parent Company)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(dollars in thousands)
1. DEBT AND GUARANTEES
DECEMBER 31,
-------------------------------
1996 1995
-------- --------
Note payable $ 86 $ 93
Other term debt 8,184 7,952
Senior notes (a) 120,000 120,000
-------- --------
$128,270 $128,045
======== ========
(a) On September 30, 1993, NVR, Inc. ("NVR" or the "Company") received gross
proceeds of $160,000 from the sale of its Senior Notes. The Senior Notes bear
interest at a rate of 11% per annum, payable semi-annually on June 1 and
December 1 of each year and are due in 2003. The Senior Notes will be redeemable
at the option of NVR, in whole or in part, at any time on or after December 1,
1998 at redemption prices ranging from 105.5% of par in 1998 to par beginning in
2001.
The Senior Notes are senior obligations of NVR and rank pari passu in right
of payment to all existing and future senior indebtedness of NVR and senior in
right of payment to all existing and future subordinated indebtedness of NVR.
The Senior Notes are secured by a first priority pledge of the capital stock of
NVR Homes, Inc. ("Homes"), NVR Financial Services, Inc. ("NVRFS") and RVN, Inc.
("RVN"), (Homes, NVRFS, and RVN collectively, the "Guarantors"). The Senior
Notes also are guaranteed on a senior, unsecured basis by the Guarantors;
provided, however, that the guarantee by Homes is subordinated to up to $60,000
of Senior Bank Indebtedness. During the years ended December 31, 1995 and 1994,
NVR purchased in the open market $15,000 and $25,000 in principal amount,
respectively, of its Senior Notes. These transactions resulted in pre-tax gains
of $1,572 and $1,414 for the years ended December 31, 1995 and 1994,
respectively, and are included in the accompanying financial statements as
extraordinary items, net of the applicable taxes.
The indenture governing the Senior Notes has, among other items,
limitations on asset sales by NVR and the Guarantors and requires that NVR, on a
consolidated basis, maintain net worth of at least $80,000. In addition, the
indenture limits dividends, certain investments and NVR's and the Guarantors'
ability to incur additional debt if NVR is in default under the indenture or if
NVR does not meet certain fixed charge coverage ratios.
Also on September 30, 1993, Homes as borrower and NVR as guarantor entered
into a working capital revolving credit agreement (the "Working Capital
Revolving Credit" or "Senior Bank Indebtedness"). This facility was amended and
restated in December 1996 and currently provides for unsecured borrowings up to
$60,000, subject to certain borrowing base limitations, and is generally
available to fund working capital needs of Homes and for overhead, taxes and
certain interest payments of NVR. Up to approximately $24,000 of this facility
is currently available for issuance in the form of letters of credit of which
$5,345 and $5,360 was outstanding at December 31, 1996 and 1995, respectively.
The Working Capital Revolving Credit is for a three year period ending May 31,
1999 and outstanding amounts bear interest, at the election of the Company, at
(i) the base rate of interest announced by the facility agent or (ii) 2.0% above
the Eurodollar Rate. The weighted average interest rate for amounts outstanding
under the facility was 8.0% and 9.6% during 1996 and 1995, respectively. NVR's
guarantee is a guarantee of collection only and is unsecured.
81
NVR, INC.
(Parent Company)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(dollars in thousands)
The Working Capital Revolving Credit agreement contains numerous operating
and financial covenants, including required levels of net worth, fixed charge
coverage ratios, and several other covenants related to the construction
operations of Homes. In addition, the Working Capital Revolving Credit agreement
contains restrictions on the ability of Homes and, in certain cases, NVR to,
among other things, incur debt and make investments. Also, the Working Capital
Revolving Credit agreement prohibits NVR from paying dividends to shareholders.
Maturities with respect to the notes payable, other term debt and the
Senior Notes as of December 31, 1996 are as follows:
YEARS ENDING DECEMBER 31:
---------------------------------------
1997 $ 10
1998 10
1999 10
2000 10
2001 10
Thereafter 131,736
The $131,736 maturing after 2001 includes $120,000 in Senior Notes which
mature in April 2003.
2. DIVIDENDS PAID TO THE REGISTRANT
NVR received returns of capital of $24,928 and $3,000 from its consolidated
subsidiaries during the years ended December 31, 1996 and 1995, respectively.
During 1994, the Company received total dividends of $17,608 and returns of
capital of $40,496 from its consolidated subsidiaries.
82