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 For the fiscal year ended December 31, 1997 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 of (IRS employer incorporation or organization) identification number) 7601 Lewinsville Road, Suite 300 McLean, Virginia 22102 (703) 761-2000 - -------------------------------------------------------------------------------- (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 ----------------------------------------------------------- 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 February 24 1998 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 $323 million. As of February 24, 1998 there were 11,515,562 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, 1998 ARE INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT. Page 1 of 266 pages The Exhibit Index begins on page 24. 1
INDEX <TABLE> <CAPTION> PART I PAGE - ------ ---- <S> <C> <C> Item 1. Business.................................................................. 3 Item 2. Properties................................................................ 6 Item 3. Legal Proceedings......................................................... 7 Item 4. Submission of Matters to a Vote of Security Holders....................... 7 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............................... 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................................... 22 PART III - -------- Item 10. Directors and Executive Officers of the Registrant........................ 22 Item 11. Executive Compensation.................................................... 22 Item 12. Security Ownership of Certain Beneficial Owners and Management............ 22 Item 13. Certain Relationships and Related Transactions............................ 22 PART IV - ------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 23 </TABLE> 2
PART I ------ ITEM 1. BUSINESS - ------- -------- 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) mortgage banking. 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 an aggregate of approximately 66% and 72% of its 1997 and 1996 homebuilding revenues, respectively. NVR's homebuilding operations construct and sell single-family detached homes, townhomes and condominium buildings in three distinct product lines, through two divisions and one wholly owned subsidiary: Ryan Homes, NVHomes and Fox Ridge Homes, Inc. ("Fox Ridge"). 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. Fox Ridge, acquired by NVR on October 31, 1997, builds moderately priced homes in Nashville, Tennessee and markets its homes primarily to first-time buyers (see Item 7, Management's Discussion and Analysis, and Note 2 to the consolidated financial statements for further information related to the acquisition of Fox Ridge). In 1997, the average price of a unit settled by NVR was approximately $187,700. 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 15 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 43% of the aggregate dollar amount of loans closed in 1997. In 1997, NVR's mortgage banking business closed approximately 12,300 loans with an aggregate principal amount of approximately $1.49 billion. NVR's mortgage banking business sells all of the mortgage loans it closes into the secondary markets. During 1997, NVR sold the remaining portion of its core mortgage servicing portfolio, and intends to sell future originated mortgage servicing rights on a flow basis in order to concentrate its mortgage banking operations on the primary business of providing mortgage financing to NVR and other homebuyers. The total servicing portfolio balance at December 31, 1997 has been reduced to approximately $224 million. NVR's mortgage banking business generates revenues primarily from origination fees, gains on marketing of loans, title fees, and sales of servicing rights. Segment information for NVR's homebuilding and mortgage banking businesses is included in note 3 to NVR's consolidated financial statements. 3
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 5,410 square feet, with two to five bedrooms, and are priced from approximately $70,000 to $640,000. MARKETS The following table summarizes settlements and contracts for sales of homes for each of the last three years by region: <TABLE> <CAPTION> CONTRACTS FOR SALE SETTLEMENTS (NET OF CANCELLATIONS) YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, ------------------------------ ------------------------------- REGION 1997 1996 1995 1997 1996 1995 - ------ -------- -------- -------- --------- --------- ------- <S> <C> <C> <C> <C> <C> <C> Washington/Baltimore 3,774 3,834 3,375 4,084 3,751 3,842 Other (1) 2,333 1,861 1,482 2,602 1,939 1,764 ----- ----- ----- ----- ----- ----- Total 6,107 5,695 4,857 6,686 5,690 5,606 ===== ===== ===== ===== ===== ===== </TABLE> (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. 4
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 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. MORTGAGE BANKING 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 $224 million in principal amount of loans being serviced at the end of 1997, from $579 million at the end of 1996, due to the sale of its core mortgage servicing portfolio during 1997. NVR's mortgage banking operations intend to sell future originated mortgage servicing rights on a flow basis in order to concentrate its mortgage banking operations on the primary business of providing mortgage financing to NVR and other homebuyers. 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 15 states and have 23 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 5
of products offered, interest rates offered, prices of ancillary services and relative financing availability and costs. 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, 1997, NVR employed 2,013 full-time persons, of whom 630 were officers and management personnel, 145 were technical and construction personnel, 363 were sales personnel, 383 were administrative personnel and 492 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 - ------- ---------- 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; Clover, South Carolina 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 Clover and Darlington leases expire in 2002 and 2005, respectively, and also contain various options for extensions of the leases and for the purchase of the facilities. NVR also leases office space in 66 locations in 16 states for field offices, mortgage banking and title services branches and certain model homes under leases expiring at various times through 2007. NVR anticipates that, upon expiration of existing leases, it will be able to renew them or obtain comparable facilities on acceptable terms. 6
ITEM 3. LEGAL PROCEEDINGS - ------- ------------------ 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 or results of operations of NVR. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------- ---------------------------------------------------- NONE EXECUTIVE OFFICERS OF THE REGISTRANT The table below sets forth pertinent information with respect to the executive officers of NVR. <TABLE> <CAPTION> NAME AGE POSITIONS ---- --- --------- <S> <C> <C> Dwight C. Schar 56 Chairman of the Board, President and Chief Executive Officer of NVR William J. Inman 50 President of NVR Financial Services, Inc. James M. Sack 47 Vice President, Secretary and General Counsel of NVR Paul C. Saville 42 Senior Vice President Finance and Chief Financial Officer Dennis M. Seremet 42 Vice President and Controller of NVR </TABLE> Dwight C. Schar has been chairman of the board, president and chief executive officer of NVR since September 30, 1993. William J. Inman has been president of NVR Financial Services, Inc. ("NVRFS") since September 30, 1993 and NVR Mortgage Finance, Inc. since January 1992. James M. Sack has been vice president, secretary and general counsel of NVR since September 30, 1993. Mr. Sack is currently principal of the law firm Sack & Associates, P.C. in McLean, Virginia. Paul C. Saville has been senior vice president finance, chief financial officer and treasurer of NVR since September 30, 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 of NVR Homes, Inc., to which he was appointed on September 30, 1993. 7
PART II ------- 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 1997 and 1996 as reported by the AMEX. <TABLE> <CAPTION> HIGH LOW ---- ---- <S> <C> <C> PRICES PER SHARE: 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 1997: First Quarter......................... 15-5/8 12-1/4 Second Quarter........................ 16 12-1/4 Third Quarter......................... 27-3/4 15 Fourth Quarter........................ 25-7/16 20-3/4 </TABLE> As of the close of business on February 24, 1998, there were 1,128 shareholders of record. NVR has not paid any cash dividends on its shares of common stock during the years 1997 or 1996. 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 consolidated 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. <TABLE> <CAPTION> (SUCCESSOR) (1) (PREDECESSOR)(1) (POST-REORGANIZATION) (PRE-REORGANIZATION) ----------------------------------------------------------------------------------------- THREE MONTHS NINE MONTHS YEAR ENDED ENDED ENDED ------------------------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1997 1996 1995 1994 1993 1993(2) ------------ ------------ ------------ ------------- ------------- ------------ <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: HOMEBUILDING DATA: Revenues $1,154,022 $1,045,930 $869,119 $820,915 $209,466 $528,418 Gross profits (3) 158,167 139,675 118,084 104,827 19,083 62,064 MORTGAGE BANKING: Mortgage banking fees (4) 25,946 24,029 26,297 25,118 4,354 26,573 Interest income 6,415 5,351 4,744 5,288 2,256 1,919 Interest expense 3,544 2,249 2,090 2,364 1,557 2,296 CONSOLIDATED DATA: Income (loss) before discontinued operations and extraordinary gains $ 28,879 $ 25,781 $ 16,400 $ 9,018 $ (7,010) $(17,178) Income (loss) before discontinued operations and extraordinary gains per Share/Unit (5) $2.18 $1.70 $1.06 $0.53 $(0.40) $(0.57) </TABLE> <TABLE> <CAPTION> DECEMBER 31, ------------------------------------------------------------------ 1997 1996 1995 1994 1993 (2) ---------- ---------- ---------- --------- --------- <S> <C> <C> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Homebuilding inventory $ 224,041 $ 171,693 $ 154,713 $109,538 $116,389 Total assets (6) 564,621 501,165 513,598 446,942 558,091 Notes and loans payable (6) 248,138 201,592 221,295 184,414 297,208 Equity (7) 144,640 152,010 146,180 129,522 134,797 </TABLE> (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 mortgage banking operations in NVR Financial Services, Inc. ("NVRFS"), NVR's wholly owned mortgage banking 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. (2) Effective September 30, 1993, NVR Savings Bank, F.S.B. ("NVRSB") is presented on a discontinued operations basis. Statement of operations and balance sheet data for prior periods have been 9
reclassified to reflect this change. In March, 1994 NVR completed the sale of the assets and liabilities of NVRSB to a financial institution. (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, as superseded by SFAS No. 125, Accounting for the Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, requires 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, 1997, 1996 and 1995 are not directly comparable to prior periods. For the years ended December 31, 1997, 1996 and 1995, application of SFAS No. 122 increased (decreased) mortgage banking fees by $(928), $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, 1997, 1996, 1995 and 1994, and for the three months ended December 31, 1993, income (loss) from continuing operations per share was computed based on 13,244,677, 15,137,009, 15,405,263, 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 for the nine months ended September 30, 1993. The weighted average number of shares and share equivalents and the weighted average number of units and unit equivalents were calculated based upon the requirements of SFAS No. 128, Earnings per Share, for all periods presented and represent the shares/units and share/unit equivalents used to calculate diluted earnings per share before discontinued operations and extraordinary gains. Prior year earnings per share data has been restated to conform with the requirements of SFAS No. 128. (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) 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) -------------------------------------------- FORWARD-LOOKING STATEMENTS Some of the statements in this Form 10-K, as well as statements made by the Company in periodic press releases, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such risk factors include, but are not limited to, general economic and business conditions, interest rate changes, competition, the availability and cost of land and other raw materials used by the Company in its homebuilding operations, shortages of labor, weather related slow downs, building moratoria, governmental regulation, the ability of the Company to integrate any acquired business, certain conditions in financial markets, technological problems encountered with the Year 2000 Issue (defined below) and other factors over which the Company has little or no control. NVR, INC. CONSOLIDATED - ---------------------- RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 NVR, Inc. ("NVR" or the "Company") is a holding company that operates in two business segments: homebuilding and mortgage banking. The results of these two segments are discussed separately below. Holding company general and administrative expenses are fully allocated to the homebuilding and mortgage banking segments in the information presented below. HOMEBUILDING SEGMENT Homebuilding revenues for 1997 increased 10.3% to $1,154,022 from $1,045,930 in 1996. The increase in revenues was primarily due to a 7.2% increase in the number of homes settled from 5,695 in 1996 to 6,107 in 1997 and to a 2.7% increase in the average settlement price from $182.7 in 1996 to $187.7 in 1997. New orders for 1997 increased 17.5% to 6,686 compared with 5,690 in 1996. The increase in new orders is attributed to a more favorable interest rate environment in the current year compared to the prior year, and to sales associated with the Company's expansion markets. 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. Gross profit margins increased to 13.7% in 1997 compared to 13.4% in 1996. The increase in gross profit margins from that experienced in 1996 was primarily attributable to more favorable market conditions in certain of the Company's markets, fewer additional weather-related costs incurred in the construction of homes as a result of mild winter weather conditions in NVR's principal markets in the first quarter of 1997 as compared to the first quarter of 1996, and continued emphasis on controlling construction costs. Gross profit margins decreased to 13.4% in 1996 compared to 13.6% in 1995. The decrease in gross profit margins in 1996 from the 1995 year was primarily attributable to more competitive market conditions in certain of the Company's markets and, to a lesser extent, higher lumber costs. SG&A expenses for 1997 increased $16,047 to $87,231 from $71,184 in 1996, and as a percentage of revenues increased to 7.8% in 1997 from 6.8% in 1996. The dollar increase is partially due to increased costs that correspond to the aforementioned increase in revenues, and costs incurred to grow the Company's expansion markets to full operational levels. Further, the higher SG&A is also attributable to an increase of approximately $6,000 for a non-cash expense associated with an equity based 11
management incentive plan, and to a non-recurring $1,600 incentive payment earned by the Company's Board of Directors pursuant to the terms of the Company's Plan of Reorganization that became effective on September 30, 1993. SG&A expenses for 1996 increased $7,984 to $71,184 from $63,200 in 1995, but as a percentage of revenues decreased from 7.3% in 1995 to 6.8% in 1996. The dollar increase in SG&A expenses in 1996 was primarily due to increased costs that correspond to the aforementioned increase in revenues. Backlog units and dollars were 3,195 and $623,705, respectively, at December 31, 1997 compared to backlog units of 2,466 and dollars of $453,211 at December 31, 1996. The increase in backlog dollars and units was primarily due to a 33.5% increase in new orders for the six months ended December 31, 1997 as compared to the six months ended December 31, 1996. 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. 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. <TABLE> <CAPTION> CALCULATION OF HOMEBUILDING EBITDA: YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 -------- -------- -------- <S> <C> <C> <C> Operating income $65,533 $62,755 $49,413 Depreciation 3,588 2,863 2,211 Amortization of excess reorganization value/goodwill 6,635 7,048 7,048 Other non-cash items 7,986 2,239 1,740 ------- ------- ------- Homebuilding EBITDA $83,742 $74,905 $60,412 ======= ======= ======= % of Homebuilding revenues 7.3% 7.2% 7.0% </TABLE> Homebuilding EBITDA in 1997 was 11.8% higher than in 1996, and as a percentage of revenues increased from 7.2% in 1996 to 7.3% in 1997. Homebuilding EBITDA in 1996 was 24.0% higher than in 1995, and as a percentage of revenues increased from 7.0% to 7.2%. MORTGAGE BANKING SEGMENT The mortgage banking segment generated operating income of $4,767 for the year ended December 31, 1997 compared to operating income of $2,583 during the year ended December 31, 1996 and operating income of $1,162 during the year ended December 31, 1995. Mortgage loan closings were $1,485,763, $1,243,945 and $1,092,676 during the respective years ended December 31, 1997, 1996 and 1995. The increases in operating income and mortgage loan closings were achieved despite continued strong price competition. Mortgage banking fees increased $1,917 when comparing 1997 and 1996 and decreased $2,268 when comparing 1996 and 1995. A summary of mortgage banking fees is noted below: <TABLE> <CAPTION> MORTGAGE BANKING FEES: 1997 1996 1995 ------- ------- ------- <S> <C> <C> <C> Net gain on sale of loans $16,731 $14,401 $8,320 Servicing 1,733 4,894 7,128 Title services 6,413 5,928 5,315 Gain (loss) on sale of servicing 1,069 (1,194) 5,534 ------- ------- ------- $25,946 $24,029 $26,297 ======= ======= ======= </TABLE> 12
Effective during the second quarter of 1997, the mortgage banking operations sold the remaining portion of its core mortgage servicing portfolio. The sale of the core mortgage servicing portfolio and the ongoing sale of servicing rights on a flow basis are the result of the concentration of the mortgage banking operations on the primary business of providing mortgage financing and related services to NVR and other homebuyers. Mortgage banking fees in 1997 were higher in comparison to 1996, primarily as a result of higher gain on sale of loans. The higher gain on sale of loans can be attributed to increased loan closings and higher servicing values realized through the sale of mortgage servicing rights. These gains were partially offset by the lower servicing fee revenues resulting from the reduction in the mortgage servicing portfolio. Operating income was higher in 1997 in comparison to 1996 as a result of the increase in mortgage loan closings noted above and other income from a joint venture which effectively began operations during 1997. Mortgage banking fees in 1996 were lower in comparison to 1995, which was 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 Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights. Operating income was higher in 1996 in comparison to 1995 as a result of the cost cutting measures enacted by the mortgage banking group during 1996 and the increase in mortgage loan closings noted above. 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 mortgage banking operations generate part of their business from NVR's homebuilding operations and from other homebuilders affected by seasonality, to the extent that homebuilding is affected by seasonality, mortgage banking 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 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related information. Both statements are effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Based on the nature of the Company's operations, Management does not expect that, upon adoption of SFAS No. 130, future reported comprehensive income will differ materially from future reported net income. SFAS No. 131 establishes standards for the way that public enterprises report information about operating segments in annual and interim financial statements. Adoption of SFAS No. 131 will have no impact on the Company's results of operations or financial condition. YEAR 2000 ISSUE The Year 2000 Issue is the risk that computer programs using two-digit date fields will fail to properly recognize the year 2000, with the result being business interruptions due to computer system failures by the Company's software or hardware or that of government entities, service providers and 13
vendors. In response to the Year 2000 Issue, the Company has developed a plan to assess the Company's exposure to Year 2000 Issues, and is currently in the process of performing its review. Based on a preliminary assessment, Management does not believe that the Company's exposure to Year 2000 Issues will have a material effect on its financial position or results of operations. 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 that expires in May 2000 to fund its working capital needs, under which no amounts were outstanding at December 31, 1997. NVR's mortgage banking 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 $125,000 mortgage warehouse facility to fund its mortgage origination activities, under which $77,765 was outstanding at December 31, 1997. NVR Finance from time to time enters into various gestation and repurchase agreements. NVR Finance currently has available an aggregate of $145,000 of borrowing capacity in such uncommitted and committed facilities. There was an aggregate of $30,628 outstanding under such gestation and repurchase agreements at December 31, 1997. On January 20, 1998, the Company filed a shelf registration statement with the Securities and Exchange Commission for the issuance of up to $400 million of the Company's debt securities. The shelf registration statement was declared effective on February 28, 1998 and provides that securities may be offered from time to time in one or more series, and in the form of senior or subordinated debt. To date, no debt securities have been issued under the shelf registration statement. 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 $261,806 as of December 31, 1997, that were so restricted. As shown in NVR's consolidated statement of cash flows for the year ended December 31, 1997, NVR's operating activities used cash of $15,025 for this period. The cash was used primarily to increase homebuilding inventory due to a general increase in the Company's business activity. Further, cash was also used due to an increase in mortgage loans held for sale which was related to a 19% increase in mortgage loan closings during 1997 compared to fiscal year 1996's loan closing volume. Net cash provided by investing activities was $19,165 for the year ended December 31, 1997. 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. The primary use of cash for investment activities involved the Company's acquisition of Fox Ridge Homes, Inc. on October 31, 1997. NVR Fox Ridge, Inc., ("Fox Ridge"), a wholly owned subsidiary of NVR Homes, Inc., itself wholly owned by NVR, purchased substantially all of the assets and assumed certain liabilities of Fox Ridge Homes, Inc. ("FRH"), a home builder in Nashville, Tennessee. In addition to Fox Ridge assuming approximately $11,000 of FRH's construction debt plus certain other liabilities, Fox Ridge paid FRH $14,250 in cash at settlement on October 31, 1997, and issued a note payable for the remaining $4,750 purchase price. The note bears interest at 200 basis points above the federal funds target rate, and will be paid in three annual installments on October 31, 1998, 1999, and 2000, including accrued interest. Net cash used for financing activities was $33,195 for the year ended December 31, 1997. Cash was primarily used for NVR's purchase of approximately 2.8 million shares of its common stock for an aggregate purchase price of $45,545 during the year ended December 31, 1997. The Company may, from 14
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. NVR had net borrowings under the mortgage banking credit lines of approximately $40,930 used to finance mortgage loan inventory. The Company also repaid the $11,000 construction loan assumed in the acquisition of Fox Ridge noted above. Cash was also used for the redemption of collateralized bonds using cash provided by the related mortgage backed securities as discussed above. The Company believes that internally generated cash and borrowings available under credit facilities will be sufficient to satisfy near and long term cash requirements for working capital and debt service in both its homebuilding and mortgage banking operations. NVR FINANCIAL SERVICES, INC. - ---------------------------- RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 NVR Financial Services, Inc. ("NVRFS" or the "Company") is a wholly owned subsidiary of NVR, Inc. ("NVR"), and through its subsidiaries, conducts all of NVR's mortgage banking operations. NVRFS generated operating income of $3,930 for the year ended December 31, 1997 compared to operating income of $1,785 during the year ended December 31, 1996 and operating income of $978 during the year ended December 31, 1995. Mortgage loan closings were $1,485,763, $1,243,945 and $1,092,676 during the respective years ended December 31, 1997, 1996 and 1995. The increases in operating income and mortgage loan closings were achieved despite continued strong price competition. Mortgage banking fees increased $1,917 when comparing 1997 and 1996 and decreased $2,268 when comparing 1996 and 1995. A summary of mortgage banking fees is noted below: <TABLE> <CAPTION> MORTGAGE BANKING FEES: 1997 1996 1995 ------- -------- ------- <S> <C> <C> <C> Net gain on sale of loans $16,731 $14,401 $ 8,320 Servicing 1,733 4,894 7,128 Title services 6,413 5,928 5,315 Gain (loss) on sale of servicing 1,069 (1,194) 5,534 ------- ------- ------- $25,946 $24,029 $26,297 ======= ======= ======= </TABLE> Effective during the second quarter of 1997, NVRFS sold the remaining portion of its core mortgage servicing portfolio. The sale of the core mortgage servicing portfolio and the ongoing sale of servicing rights on a flow basis are the result of the concentration of the mortgage banking operations on the primary business of providing mortgage financing and related services to NVR and other homebuyers. Mortgage banking fees in 1997 were higher in comparison to 1996, primarily as a result of higher gain on sale of loans. The higher gain on sale of loans can be attributed to increased loan closings and higher servicing values realized through the sale of mortgage servicing rights. These gains were partially offset by the lower servicing fee revenues resulting from the reduction in the mortgage servicing portfolio. Operating income was higher in 1997 in comparison to 1996 as a result of the increase in mortgage loan closings noted above and other income from a joint venture which effectively began operations during 1997. Mortgage banking fees in 1996 were lower in comparison to 1995, which was 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 Statement of Financial Accounting Standards ("SFAS") 15
No. 122, Accounting for Mortgage Servicing Rights. Operating income was higher in 1996 in comparison to 1995 as a result of the cost cutting measures enacted by the mortgage banking group during 1996 and the increase in mortgage loan closings noted above. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related information. Both statements are effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Based on the nature of the Company's operations, Management does not expect that, upon adoption of SFAS No. 130, future reported comprehensive income will differ materially from future reported net income. SFAS No. 131 establishes standards for the way that public enterprises report information about operating segments in annual and interim financial statements. Adoption of SFAS No. 131 will have no impact on the Company's results of operations or financial condition. SEASONALITY Because NVRFS's mortgage banking operations generate part of their business from NVR's homebuilding operations and from other homebuilders affected by seasonality, to the extent that homebuilding is affected by seasonality, mortgage banking 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 NVRFS's operations. YEAR 2000 ISSUE The Year 2000 Issue is the risk that computer programs using two-digit date fields will fail to properly recognize the year 2000, with the result being business interruptions due to computer system failures by the Company's software or hardware or that of government entities, service providers and vendors. In response to the Year 2000 Issue, the Company has developed a plan to assess the Company's exposure to Year 2000 Issues, and is currently in the process of performing its review. Based on a preliminary assessment, Management does not believe that the Company's exposure to Year 2000 Issues will have a material effect on its financial position or results of operations. LIQUIDITY AND CAPITAL RESOURCES NVRFS 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 $125,000 mortgage warehouse facility to fund its mortgage origination activities, under which $77,765 was outstanding at December 31, 1997. NVR Finance from time to time enters into various gestation and repurchase agreements. NVR Finance currently has available an aggregate of $145,000 of borrowing capacity in such uncommitted and committed facilities. There was an aggregate of $30,628 outstanding under such gestation and repurchase agreements at December 31, 1997. Various debt agreements limit the ability of NVRFS to transfer funds to NVR in the form of dividends, loans or advances. NVRFS had net assets (after intercompany eliminations) of $8,750 as of December 31, 1997, that were so restricted. As shown in NVRFS's consolidated statement of cash flows for the year ended December 31, 1997, operating activities used cash of $47,104 for this period. The cash was used primarily to increase mortgage loans held for sale which was related to a 19% increase in mortgage loan closings during 1997 compared to fiscal year 1996's loan closing volume. 16
Net cash provided by investing activities was $34,373 for the year ended December 31, 1997. 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 provided by financing activities was $13,525 for the year ended December 31, 1997. Cash was primarily used for the redemption of collateralized bonds using cash provided by the related mortgage backed securities as discussed above. NVRFS also issued dividends of $8,329 to NVR during the year ended December 31, 1997. Offsetting the cash outflows were net borrowings under the mortgage banking credit lines of approximately $40,930 used to finance mortgage loan inventory. The Company believes that internally generated cash and borrowings available under credit facilities will be sufficient to satisfy near and long term cash requirements for working capital and debt service. NVR HOMES, INC. CONSOLIDATED - ---------------------------- RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 NVR Homes, Inc. ("Homes") is a wholly owned subsidiary of NVR, Inc. ("NVR"), and conducts all of NVR's homebuilding operations. Homes' revenues for 1997 increased 10.3% to $1,154,022 from $1,045,930 in 1996. The increase in revenues was primarily due to a 7.2% increase in the number of homes settled from 5,695 in 1996 to 6,107 in 1997 and to a 2.7% increase in the average settlement price from $182.7 in 1996 to $187.7 in 1997. New orders for 1997 increased 17.5% to 6,686 compared with 5,690 in 1996. The increase in new orders is attributed to a more favorable interest rate environment in the current year compared to the prior year, and to sales associated with the Company's expansion markets. 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. Gross profit margins increased to 13.7% in 1997 compared to 13.4% in 1996. The increase in gross profit margins from that experienced in 1996 was primarily attributable to more favorable market conditions in certain of the Company's markets, fewer additional weather-related costs incurred in the construction of homes as a result of mild winter weather conditions in Homes' principal markets in the first quarter of 1997 as compared to the first quarter of 1996, and continued emphasis on controlling construction costs. Gross profit margins decreased to 13.4% in 1996 compared to 13.6% in 1995. The decrease in gross profit margins in 1996 from the 1995 year was primarily attributable to more competitive market conditions in certain of the Company's markets and, to a lesser extent, higher lumber costs. SG&A expenses for 1997 increased $33,141 to $108,236 from $75,095 in 1996, and as a percentage of revenues increased to 9.4% in 1997 from 7.2% in 1996. The dollar increase is partially due to increased costs that correspond to the aforementioned increase in revenues, and costs incurred to grow the Company's expansion markets to full operational levels. Further, beginning on October 1, 1996, Homes incurs royalty expenses for use of the Ryan Homes and NVHomes tradenames based on a percentage of settlement revenues. The tradenames are owned by RVN, Inc., a subsidiary of NVR. During the years ended December 31, 1997 and 1996, Homes incurred royalty expenses totaling $21,687 and $4,711, respectively. SG&A expenses for 1996 increased $13,204 to $75,095 from $61,891 in 1995, and as a percentage of revenues increased from 7.1% in 1995 to 7.2% in 1996. The dollar increase in SG&A expenses in 1996 was primarily due to increased costs that correspond to the aforementioned increase in revenues, and to the royalty expenses described above. 17
Backlog units and dollars were 3,195 and $623,705, respectively, at December 31, 1997 compared to backlog units of 2,466 and dollars of $453,211 at December 31, 1996. The increase in backlog dollars and units was primarily due to a 33.5% increase in new orders for the six months ended December 31, 1997 as compared to the six months ended December 31, 1996. 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. SEASONALITY The results of the Company's 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. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related information. Both statements are effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Based on the nature of the Company's operations, Management does not expect that, upon adoption of SFAS No. 130, future reported comprehensive income will differ materially from future reported net income. SFAS No. 131 establishes standards for the way that public enterprises report information about operating segments in annual and interim financial statements. Adoption of SFAS No. 131 will have no impact on the Company's results of operations or financial condition. YEAR 2000 ISSUE The Year 2000 Issue is the risk that computer programs using two-digit date fields will fail to properly recognize the year 2000, with the result being business interruptions due to computer system failures by the Company's software or hardware or that of government entities, service providers and vendors. In response to the Year 2000 Issue, the Company has developed a plan to assess the Company's exposure to Year 2000 Issues, and is currently in the process of performing its review. Based on a preliminary assessment, Management does not believe that the Company's exposure to Year 2000 Issues will have a material effect on its financial position or results of operations. LIQUIDITY AND CAPITAL RESOURCES Homes' generally provides for its working capital cash requirements using cash generated from operations and a credit facility. The Company has available a $60,000 unsecured Working Capital Revolving Credit Agreement that expires in May 2000 to fund its working capital needs, under which no amounts were outstanding at December 31, 1997. Various debt agreements limit the ability of Homes to transfer funds to NVR in the form of dividends, loans or advances. Homes had net assets (after intercompany eliminations) of $253,056 as of December 31, 1997, that were so restricted. As shown in Homes' consolidated statement of cash flows for the year ended December 31, 1997, operating activities provided cash of $3,350 for this period. Operating cash generated during the period was used to increase homebuilding inventory due to a general increase in the Company's business activity. 18
Net cash used by investing activities was $15,087 for the year ended December 31, 1997. The primary use of cash for investment activities involved the Company's acquisition of Fox Ridge Homes, Inc. on October 31, 1997. NVR Fox Ridge, Inc., ("Fox Ridge"), a wholly owned subsidiary of Homes, purchased substantially all of the assets and assumed certain liabilities of Fox Ridge Homes, Inc. ("FRH"), a home builder in Nashville, Tennessee. In addition to Fox Ridge assuming approximately $11,000 of FRH's construction debt plus certain other liabilities, Fox Ridge paid FRH $14,250 in cash at settlement on October 31, 1997, and issued a note payable for the remaining $4,750 purchase price. The note bears interest at 200 basis points above the federal funds target rate, and will be paid in three annual installments on October 31, 1998, 1999, and 2000, including accrued interest. Net cash used for financing activities was $18,061 for the year ended December 31, 1997. Cash was primarily used to repay the $11,000 construction loan assumed in the acquisition of Fox Ridge noted above. Cash was also used to repay non-interest bearing intercompany advances from NVR. The Company believes that internally generated cash and borrowings available under credit facilities will be sufficient to satisfy near and long term cash requirements for working capital and debt service in its homebuilding operations. RVN, INC. - --------- RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE THREE MONTHS ENDED DECEMBER 31, 1996 On October 1, 1996, NVR, Inc. ("NVR") capitalized RVN, Inc. ("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. RVN earned royalty revenues of $21,687 for the year ended December 31, 1997 compared to $4,711 for the three months ended December 31, 1996. The increase was attributable to earning royalty revenue on a full year of Homes' settlement revenues as compared to only three months of operation in the 1996 calendar year. RVN has no significant other income or general and administrative expenses. SEASONALITY AND CERTAIN CONCENTRATIONS RVN earns 100% of its revenue from Homes. As Homes' revenues are affected by seasonality, RVN is similarly affected. Homes' homebuilding operations generally reflect the seasonality of the housing market in the Middle Atlantic region of the United States. Homes 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. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related information. Both statements are effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Based on the nature of the Company's operations, Management does not expect that, upon adoption of SFAS No. 130, future reported comprehensive income will differ materially from future reported net income. SFAS No. 131 establishes standards for the way that public enterprises report information about operating segments in annual and interim financial statements. Adoption of SFAS No. 131 will have no impact on the Company's results of operations or financial condition. 19
YEAR 2000 ISSUE The Year 2000 Issue is the risk that computer programs using two-digit date fields will fail to properly recognize the year 2000, with the result being business interruptions due to computer system failures by the Company's software or hardware or that of government entities, service providers and vendors. In response to the Year 2000 Issue, the Company has developed a plan to assess the Company's exposure to Year 2000 Issues, and is currently in the process of performing its review. Based on a preliminary assessment, Management does not believe that the Company's exposure to Year 2000 Issues will have a material effect on its financial position or results of operations. LIQUIDITY AND CAPITAL RESOURCES RVN provides for its working capital cash requirements using cash generated solely from operations. As shown in RVN's statement of cash flows for the year ended December 31, 1997, operating activities provided cash of $13,659 for this period, and was derived substantially by net income. Net cash used for financing activities was $13,710, which reflects aggregate dividend payments issued to NVR during 1997. Insofar as Homes' ability to make royalty payments is not impaired, the Company believes that internally generated cash will be sufficient to satisfy its near and long term cash requirements. FOX RIDGE HOMES, INC. - --------------------- RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 NVR Fox Ridge, Inc., a wholly owned subsidiary of NVR Homes Inc. ("Homes"), itself wholly owned by NVR, Inc. ("NVR"), was formed during 1997 to purchase substantially all of the assets and assume certain liabilities (the "Purchase Transaction") of Fox Ridge Homes, Inc. ("FRH" or the "Predecessor"), a home builder in Nashville, Tennessee. NVR Fox Ridge, Inc. was renamed Fox Ridge Homes, Inc. ("Fox Ridge" or the "Successor") in November, 1997. To consummate the purchase on October 31, 1997 (the "Purchase Date"), Fox Ridge assumed approximately $15,160 of FRH's liabilities, paid FRH $14,250 in cash at settlement on October 31, 1997, and issued a note payable for the remaining $4,750 purchase price. The note bears interest at 200 basis points above the federal funds target rate, and will be paid in three annual installments on October 31, 1998, 1999 and 2000, including accrued interest. Fox Ridge accounted for this acquisition using the purchase method, which resulted in a new basis of accounting for the assets and liabilities assumed at the Purchase Date. Excess of amounts paid for the business acquisition over the net fair value of the assets acquired and the liabilities assumed ("Goodwill") generated pursuant to the Purchase Transaction is being amortized using the straight line method over 10 years. The below analysis of the results of operations includes combined results of the Predecessor and the Successor for the year ended December 31, 1997. Fox Ridge revenues for 1997 decreased 13.3% to $47,617 from $54,891 in 1996. The decrease in revenues was primarily due to a 21.8% decrease in the number of homes settled from 436 in 1996 to 341 in 1997, which was partially offset by a 10.9% increase in average settlement price from $125.9 in 1996 to $139.6 in 1997. New orders for 1997 increased 11.1% to 360 compared with 324 in 1996 due to a more favorable interest rate environment in the current year compared to the prior year. Revenues for 1996 increased 42.1% to $54,891 from $38,622 in 1995. The increase in revenues was primarily due to a 36.3% increase in the number of homes settled from 320 in 1995 to 436 in 1996 and to a 4.3% increase in the average settlement price from $120.7 in 1995 to $125.9 in 1996. New orders for 1996 decreased 20
23.0% to 324 compared with 421 in 1995. The large number of new orders in 1995 were the result of extremely favorable overall market conditions in the Nashville, Tennessee market. Market conditions returned to more normal sustainable levels during 1996. Gross profit margins decreased to 19.0% in 1997 compared to 21.5% in 1996. The decrease in gross profit margins is primarily attributable to more competitive market conditions and to a lessor extent an increase in finished lot costs. Gross profit margins decreased to 21.5% in 1996 compared to 22.2% in 1995 primarily due to an increase in finished lot costs. SG&A expenses for 1997 increased $208 to $5,694 from $5,486 in 1996. The dollar increase is primarily due to the amortization of goodwill for the two months ended December 31, 1997 as described above. SG&A expenses for 1996 increased $927 to $5,486 from $4,559 in 1995, and as a percentage of revenues decreased to 10.0% in 1996 from 11.8% in 1995. The dollar increase is primarily due to increased costs that correspond to the aforementioned increase in revenues. Backlog units and dollars were 135 and $20,029, respectively, at December 31, 1997 compared to backlog units of 116 and dollars of $16,147 at December 31, 1996. Backlog units and dollars were 228 and $27,357, respectively, at December 31, 1995. The decrease in backlog units and dollars at December 31, 1996 was due to the aforementioned decrease in new orders for 1996. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related information. Both statements are effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Based on the nature of the Company's operations, Management does not expect that, upon adoption of SFAS No. 130, future reported comprehensive income will differ materially from future reported net income. SFAS No. 131 establishes standards for the way that public enterprises report information about operating segments in annual and interim financial statements. Adoption of SFAS No. 131 will have no impact on the Company's results of operations or financial condition. YEAR 2000 ISSUE The Year 2000 Issue is the risk that computer programs using two-digit date fields will fail to properly recognize the year 2000, with the result being business interruptions due to computer system failures by the Company's software or hardware or that of government entities, service providers and vendors. In response to the Year 2000 Issue, the Company has developed a plan to assess the Company's exposure to Year 2000 Issues, and is currently in the process of performing its review. Based on a preliminary assessment, Management does not believe that the Company's exposure to Year 2000 Issues will have a material effect on its financial position or results of operations. LIQUIDITY AND CAPITAL RESOURCES Fox Ridge generally provides for its working capital cash requirements using cash generated from operations and working capital intercompany advances from Homes. As shown in Fox Ridge's statement of cash flows for the two months ended December 31, 1997, operating activities provided cash of $1,580 for this period, and was primarily provided by the reduction of homebuilding inventory. Net cash used by investing activities was $16 representing fixed asset purchases for the two months ended December 31, 1997. Net cash used for financing activities was $3,281 for the two months ended December 31, 1997 and was used primarily to repay intercompany working capital borrowings with Homes. 21
Insofar as Homes' ability to make working capital intercompany advances is not impaired, the Company believes that internally generated cash and borrowings available from Homes will be sufficient to satisfy near and long term cash requirements. 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, 1998. 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, 1998. 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, 1998. 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, 1998. 22
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 FOX RIDGE HOMES, INC. - FINANCIAL STATEMENTS Report of Independent Auditors Balance Sheets Statements of Income Statements of Shareholder's Equity Statements of Cash Flows Notes to Financial Statements RVN, INC. - FINANCIAL STATEMENTS Report of Independent Auditors Balance Sheets Statements of Income Statements of Shareholder's Equity Statements of Cash Flows Notes to Financial Statements FINANCIAL STATEMENT SCHEDULES Schedule I - Condensed Financial Information of Registrant 23
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. 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. 3.9 Charter of Fox Ridge Homes, Inc. Incorporated by reference to Exhibit 3.9 in NVR's Form S-3 filed with the Securities and Exchange Commission on January 20, 1998. 3.10 Bylaws of Fox Ridge Homes, Inc. Incorporated by reference to Exhibit 3.10 in NVR's Form S-3 filed with the Securities and Exchange Commission on January 20, 1998. 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). 4.4 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. *4.5 Form of Second Supplemental Trust Indenture between NVR, Inc., as issuer, NVR Homes, Inc., NVR Financial Services, Inc., RVN, Inc. and Fox Ridge Homes, 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. 10.3 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. 24
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. 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. 10.14 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. 25
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. *10.32 Whole Loan Purchase and Sale Agreement between NVR Mortgage Finance, Inc., as seller, and Prudential Securities Realty Funding Corporation, as Purchaser, dated as of August 11, 1997. *10.33 Mortgage Loan Purchase and Sale Agreement dated as of January 15, 1997 between Prudential Securities Realty Funding Corporation and NVR Mortgage Finance, Inc. *10.34 Gestation Financing Agreement between NVR Mortgage Finance, Inc. and Bank One Investment Advisors Corporation dated as of August 15, 1997. *10.35 Standby Gestation Financing Agreement between NVR Mortgage Finance and Bank One, Texas N.A. dated as of August 15, 1997. *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) 26
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 9, 1998 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 9, 1998 /s/ C. Scott Bartlett, Jr. Director - ----------------------------- C. Scott Bartlett, Jr. March 9, 1998 /s/ Manuel H. Johnson Director - ----------------------------- Manuel H. Johnson March 9, 1998 /s/ William A. Moran Director - ----------------------------- William A. Moran March 9, 1998 /s/ Richard H. Norair, Sr. Director - ----------------------------- Richard H. Norair, Sr. March 9, 1998 /s/ David A. Preiser Director - ----------------------------- David A. Preiser March 9, 1998 /s/ George E. Slye Director - ----------------------------- George E. Slye March 9, 1998 /s/ John M. Toups Director - ----------------------------- John M. Toups March 9, 1998 Senior Vice President, Chief Financial Officer /s/ Paul C. Saville and Treasurer - ----------------------------- Paul C. Saville March 9, 1998 27
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, 1997 and 1996 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, 1997. 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, 1997 and 1996 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Pittsburgh, Pennsylvania January 28, 1998 28
NVR, INC. Consolidated Balance Sheets (dollars in thousands, except share data) <TABLE> <CAPTION> DECEMBER 31, ------------------ 1997 1996 -------- -------- <S> <C> <C> ASSETS HOMEBUILDING: Cash and cash equivalents $ 41,684 $ 71,533 Receivables 3,398 2,927 Inventory: Lots and housing units, covered under sales agreements with customers 165,132 126,456 Unsold lots and housing units 51,434 37,940 Manufacturing materials and other 7,475 7,297 -------- -------- 224,041 171,693 Property, plant and equipment, net 17,241 17,916 Reorganization value in excess of amounts allocable to identifiable assets, net 69,366 75,818 Goodwill, net 10,753 - Contract land deposits 36,992 36,383 Other assets 22,424 21,008 -------- -------- 425,899 397,278 -------- -------- MORTGAGE BANKING: Cash and cash equivalents 4,041 3,247 Mortgage loans held for sale, net 115,744 75,735 Mortgage servicing rights, net 2,220 6,309 Property and equipment, net 637 917 Reorganization value in excess of amounts allocable to identifiable assets, net 11,700 12,788 Other assets 4,380 4,891 -------- -------- 138,722 103,887 -------- -------- TOTAL ASSETS $564,621 $501,165 ======== ======== </TABLE> See notes to consolidated financial statements. 29
NVR, INC. Consolidated Balance Sheets (dollars in thousands, except share data) <TABLE> <CAPTION> DECEMBER 31, -------------------- 1997 1996 --------- --------- <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY HOMEBUILDING: Accounts payable $ 67,987 $ 54,894 Accrued expenses and other liabilities 94,931 85,260 Notes payable 5,728 86 Other term debt 14,017 14,043 Senior notes 120,000 120,000 -------- -------- 302,663 274,283 -------- -------- MORTGAGE BANKING: Accounts payable and other liabilities 8,925 7,409 Notes payable 108,393 67,463 -------- -------- 117,318 74,872 -------- -------- Total liabilities 419,981 349,155 -------- -------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock, $0.01 par value; 60,000,000 shares authorized; 19,995,494 and 19,881,515 shares issued for 1997 and 1996, respectively 200 199 Additional paid-in-capital 164,731 157,842 Retained earnings 75,977 47,098 Less treasury stock at cost - 8,900,972 and 6,307,108 shares at December 31, 1997 and 1996, respectively (96,268) (53,129) -------- -------- Total shareholders' equity 144,640 152,010 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $564,621 $501,165 ======== ======== </TABLE> See notes to consolidated financial statements. 30
NVR, INC. Consolidated Statements of Income (dollars in thousands, except share data) <TABLE> <CAPTION> YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------ ------------------ ------------------ <S> <C> <C> <C> HOMEBUILDING: Revenues $1,154,022 $1,045,930 $ 869,119 Other income 1,232 1,312 1,577 Cost of sales (995,855) (906,255) (751,035) Selling, general and administrative (87,231) (71,184) (63,200) Amortization of reorganization value in excess of amounts allocable to identifiable assets/goodwill (6,635) (7,048) (7,048) ---------- ---------- --------- Operating income 65,533 62,755 49,413 Interest expense (16,410) (16,611) (17,166) ---------- ---------- --------- Homebuilding income 49,123 46,144 32,247 MORTGAGE BANKING: Mortgage banking fees 25,946 24,029 26,297 Interest income 6,415 5,351 4,744 Other income 674 47 46 General and administrative (23,636) (23,507) (26,747) Amortization of reorganization value in excess of amounts allocable to identifiable assets (1,088) (1,088) (1,088) Interest expense (3,544) (2,249) (2,090) ---------- ---------- --------- Operating income 4,767 2,583 1,162 TOTAL SEGMENT INCOME 53,890 48,727 33,409 Income tax expense (25,011) (22,946) (17,009) ---------- ---------- --------- Income before extraordinary gains 28,879 25,781 16,400 Extraordinary gain-repurchase of debt (net of tax expense of $645 for the year ended December 31, 1995) - - 927 ---------- ---------- --------- NET INCOME $ 28,879 $ 25,781 $ 17,327 ========== ========== ========= BASIC EARNINGS PER SHARE: Income before extraordinary gain $ 2.44 $ 1.76 $ 1.07 Extraordinary gain - - 0.06 ---------- ---------- --------- Basic earnings per share $ 2.44 $ 1.76 $ 1.13 ========== ========== ========= DILUTED EARNINGS PER SHARE: Income before extraordinary gain $ 2.18 $ 1.70 $ 1.06 Extraordinary gain - - 0.06 ---------- ---------- --------- Diluted earnings per share $ 2.18 $ 1.70 $ 1.12 ========== ========== ========= </TABLE> See notes to consolidated financial statements. 31
NVR, INC. Consolidated Statements of Shareholders' Equity (dollars in thousands) <TABLE> <CAPTION> ADDITIONAL COMMON PAID-IN RETAINED TREASURY STOCK CAPITAL EARNINGS STOCK ------ -------- ----------- --------- <S> <C> <C> <C> <C> 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) Net income - - 28,879 - Purchase of common stock for treasury - - - (45,545) Performance share activity - 5,580 - 2,406 Tax benefit from stock options exercised - 464 - - Option activity 1 845 - - ---- -------- ------- -------- BALANCE, DECEMBER 31, 1997 $200 $164,731 $75,977 $(96,268) ==== ======== ======= ======== </TABLE> See notes to consolidated financial statements. 32
NVR, INC. Consolidated Statements of Cash Flows (dollars in thousands) <TABLE> <CAPTION> YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------ ------------------ ------------------ <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 28,879 $ 25,781 $ 17,327 Adjustments to reconcile net income to net cash provided (used) by operating activities: Extraordinary gain - extinguishment of debt - - (1,572) Depreciation and amortization 13,338 15,417 14,814 Gain on sales of loans (16,731) (14,401) (8,320) Deferred tax provision (629) (322) (3,596) Interest accrued and added to bond principal - 1,180 2,749 Mortgage loans closed (1,485,763) (1,243,945) (1,092,676) Proceeds from sales of mortgage loans 1,450,618 1,268,254 1,052,550 (Gain) loss on sales of mortgage servicing rights (1,069) 1,194 (5,534) Net change in assets and liabilities: Increase in inventories (31,354) (16,980) (45,175) Decrease (increase) in receivables 693 5,084 (2,191) Increase (decrease) in accounts payable and accrued expenses 20,556 (611) 20,720 Other, net 6,437 (1,869) (7,184) ----------- ----------- ----------- Net cash provided (used) by operating activities (15,025) 38,782 (58,088) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Sale of marketable securities - - 5,000 Proceeds from sales of mortgage-backed securities 15,126 45,835 1,069 Business acquisition, net of cash acquired (12,533) - - Purchase of property, plant and equipment (3,053) (4,267) (3,590) Principal payments on mortgage-backed securities 4,190 15,511 16,932 Purchase of mortgage servicing rights - (193) (10,664) Proceeds from sales of mortgage servicing rights 14,199 23,518 16,050 Other, net 1,236 4,458 1,242 ----------- ----------- ----------- Net cash provided by investing activities 19,165 84,862 26,039 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemption of bonds (18,019) (62,306) (20,104) Repurchase of senior notes - - (12,962) Purchases of treasury stock (45,545) (35,137) (2,581) Net borrowings (repayments) under notes payable and credit lines 29,523 (19,935) 51,663 Other, net 846 12,947 124 ----------- ----------- ----------- Net cash provided (used) by financing activities (33,195) (104,431) 16,140 ----------- ----------- ----------- Net increase (decrease) in cash (29,055) 19,213 (15,909) Cash, beginning of year 74,780 55,567 71,476 ----------- ----------- ----------- Cash, end of year $ 45,725 $ 74,780 $ 55,567 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid during the year $ 21,255 $ 22,160 $ 25,214 =========== =========== =========== Income taxes paid during the year, net of refunds $ 23,018 $ 26,492 $ 16,745 =========== =========== =========== </TABLE> See notes to consolidated financial statements. 33
NVR, INC. Notes to Consolidated Financial Statements (dollars in thousands, except per share data) 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. All significant intercompany transactions have been eliminated in consolidation. USE OF ESTIMATES IN THE 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, 1997 and 1996 was $34,489 and $26,948, respectively. Determination of any impairment losses related to this intangible asset is based on consideration of projected undiscounted cash flows. GOODWILL The excess of amounts paid for business acquisitions over the net fair value of the assets acquired and the liabilities assumed ("Goodwill") is amortized using the straight line method over ten years, and originated from the October 31, 1997 acquisition of Fox Ridge Homes, Inc. See Note 2. Accumulated amortization was $182 at December 31, 1997. Determination of any impairment losses related to this intangible asset is based on consideration of projected undiscounted cash flows. 34
NVR, INC. Notes to Consolidated Financial Statements (dollars in thousands, except per share data) 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 AND MORTGAGE-BACKED BONDS Prior to 1996, 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. 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 mortgage banking 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 mortgage banking segment. ADOPTION OF NEW ACCOUNTING PRINCIPLES In February 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share. SFAS No. 128 supersedes APB Opinion No. 15, Earnings per Share ("Opinion No. 15") and requires the calculation and dual the measures of primary is effective for prior period EPS data presentation of Basic and fully-diluted EPS as financial statements to conform with SFAS and Diluted earnings per reported under Opinion issued for periods No. 128 is required. share ("EPS"), replacing No. 15. SFAS No. 128 ending December 31, 1997. Restatement of prior period EPS data to conform with SFAS No. 128 is required. The following weighted average shares and share equivalents are used to calculate Basic and Diluted EPS for the years ended December 31, 1997, 1996 and 1995: <TABLE> <CAPTION> YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- ------------------ <S> <C> <C> <C> Weighted average number of shares outstanding used to calculate Basic EPS 11,838,743 14,620,593 15,334,148 Dilutive securities: Warrants - 211,502 - Stock Options 1,405,934 304,914 71,115 -------------- --------------- ---------------- Weighted average number of shares and share equivalents outstanding used to calculate Diluted EPS 13,244,677 15,137,009 15,405,263 ============== =============== ================ </TABLE> 35
NVR, INC. Notes to Consolidated Financial Statements (dollars in thousands, except per share data) The Company also adopted SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities during the year ended December 31, 1997. Such adoption did not have a material impact on the Company's financial condition or results of operations. 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 Mortgage servicing rights are recorded by allocating 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. 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. 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. 36
NVR, INC. Notes to Consolidated Financial Statements (dollars in thousands, except per share data) 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 4 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, 1997 and 1996 was $130,776 and $127,044, respectively, with a carrying value of $120,000 at both respective dates. The estimated fair values are based on quoted market prices for these instruments. STOCK-BASED COMPENSATION As permitted 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. The pro forma financial information required by SFAS No. 123 is included in footnote 10. 2. ACQUISITION NVR Fox Ridge, Inc., a wholly owned subsidiary of Homes, was formed during 1997 to purchase substantially all of the assets and assume certain liabilities of Fox Ridge Homes, Inc. ("FRH"), a leading homebuilder in Nashville, Tennessee. NVR Fox Ridge, Inc. was renamed Fox Ridge Homes, Inc. ("Fox Ridge") in November, 1997. To consummate the purchase on October 31, 1997, Fox Ridge assumed approximately $15,160 of FRH's liabilities, paid FRH $14,250 in cash at settlement on October 31, 1997, and issued a note payable for the remaining $4,750 purchase price. The note bears interest at 200 basis points above the federal funds target rate, and will be paid in three annual installments on October 31, 1998, 1999 and 2000, including accrued interest. Fox Ridge accounted for this acquisition using the purchase method, and the operations of the acquired business have been included in NVR's consolidated statements of income since its acquisition. Goodwill that was generated pursuant to the purchase transaction is being amortized using the straight line method over 10 years. The following unaudited pro forma summary of combined operations was prepared to illustrate the estimated effects of the 1997 acquisition of FRH as if such acquisition had occurred on the first day of the respective periods presented. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 ----------- ---------- <S> <C> <C> Homebuilding revenues $1,192,684 $1,100,821 Net income 29,343 28,209 Diluted earnings per share 2.22 1.86 </TABLE> 37
NVR, INC. Notes to Consolidated Financial Statements (dollars in thousands, except per share data) 3. SEGMENT INFORMATION, NATURE OF OPERATIONS, AND CERTAIN CONCENTRATIONS NVR is a holding company that operates in two business segments: homebuilding and mortgage banking. 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 66% of its 1997 homebuilding revenues. NVR's homebuilding segment primarily constructs and sells single-family detached homes, townhomes and condominium buildings in three distinct product lines, through two divisions and one wholly owned subsidiary: Ryan Homes, NVHomes and Fox Ridge. 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. Fox Ridge Homes, Inc. builds moderately priced homes in Nashville, TN and also markets its homes primarily to first-time homebuyers. The mortgage banking 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 and sells its originated mortgage servicing rights on a flow basis. 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 43% of the dollar amount of loans closed in 1997. Because there are no significant holding company revenues, unallocable selling, general and administrative expense and assets other than its investment in the homebuilding and mortgage banking 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: <TABLE> <CAPTION> YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- ----------------- <S> <C> <C> <C> REVENUES: Homebuilding $1,155,254 $1,047,242 $870,696 Mortgage Banking 33,035 29,427 31,087 ---------- ---------- -------- $1,188,289 $1,076,669 $901,783 ========== ========== ======== YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- ----------------- OPERATING INCOME: Homebuilding $ 65,533 $ 62,755 $ 49,413 Mortgage Banking 3,932 1,804 1,005 Intersegment transactions* 835 779 157 ---------- ---------- -------- $ 70,300 $ 65,338 $ 50,575 ========== ========== ======== </TABLE> 38
NVR, INC. Notes to Consolidated Financial Statements (dollars in thousands, except per share data) <TABLE> <CAPTION> DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- <S> <C> <C> IDENTIFIABLE ASSETS: Homebuilding $425,899 $397,278 Mortgage Banking 138,722 103,887 -------- -------- $564,621 $501,165 ======== ======== YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- ----------------- DEPRECIATION AND AMORTIZATION: Homebuilding $ 11,019 $ 10,899 $10,322 Mortgage Banking 2,319 4,518 4,492 -------- -------- ------- Total $ 13,338 $ 15,417 $14,814 ======== ======== ======= CAPITAL EXPENDITURES: Homebuilding $ 2,708 $ 4,019 $ 2,448 Mortgage Banking 345 248 1,142 -------- -------- ------- Total $ 3,053 $ 4,267 $ 3,590 ======== ======== ======= </TABLE> *Intersegment transactions primarily represent intercompany advances and related interest income/expense of the mortgage banking segment. 4. RELATED PARTY TRANSACTIONS During 1997, 1996, and 1995, NVR purchased, at market prices, developed lots from a company that is controlled by a member of the board of directors. Those purchases totaled $8,066, $6,612, and $8,877 during 1997, 1996 and 1995, respectively. NVR expects to purchase the remaining lots under contract as of December 31, 1997 over the next 18 to 24 months for an aggregate purchase price of approximately $32,000. During the years ended December 31, 1997, 1996 and 1995, one of the executive officers of NVR was a partner in a law firm which billed NVR approximately $375, $344 and $324, respectively, in fees and expenses for legal services. During the year ended December 31, 1995, NVR paid $181 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. 39
NVR, INC. Notes to Consolidated Financial Statements (dollars in thousands, except per share data) 5. LOAN SERVICING PORTFOLIO, MORTGAGE LOAN COMMITMENTS AND OFF-BALANCE SHEET RISK At December 31, 1997 and 1996, NVRFS was servicing approximately 2,947 and 9,200 mortgage loans for various investors with aggregate balances of approximately $224,000 and $579,000, respectively. At December 31, 1997, NVRFS had capitalized mortgage servicing rights of $2,220 which related to approximately $175 million of the aggregate $224 million in loans serviced. The mortgage servicing rights associated with the remaining $49 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. At December 31, 1996, NVRFS had capitalized purchased mortgage servicing rights of $6,309. 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 $2,471 and $7,563 at December 31, 1997 and 1996, respectively. The fair value of the mortgage servicing rights not subject to capitalization was $490 and $650 at December 31, 1997 and 1996, 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 periods ending December 31, 1997, 1996 and 1995 was $506, $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 $129,949 and $94,901 outstanding at December 31, 1997 and 1996, respectively. There were open forward delivery contracts aggregating approximately $195,719 and $130,891 at December 31, 1997 and 1996, 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. This market risk is managed by entering into forward contracts as discussed below. 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 40
NVR, INC. Notes to Consolidated Financial Statements (dollars in thousands, except per share data) 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, 1997 and 1996 there were no such positions. There were no counterparty default losses on forward contracts in 1997, 1996 or 1995. 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 the total of commitments to customers and loans held for sale 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. 6. PROPERTY, PLANT AND EQUIPMENT, NET <TABLE> <CAPTION> DECEMBER 31, -------------------- 1997 1996 --------- --------- <S> <C> <C> HOMEBUILDING: Office facilities and other $ 7,926 $ 7,460 Model home furniture and fixtures 5,947 4,255 Manufacturing facilities 7,199 7,964 Property under capital leases 14,177 14,177 -------- -------- 35,249 33,856 Less accumulated depreciation and amortization (18,008) (15,940) -------- -------- $ 17,241 $ 17,916 ======== ======== MORTGAGE BANKING: Office facilities and other $ 3,965 $ 4,284 Less accumulated depreciation and amortization (3,328) (3,367) -------- -------- $ 637 $ 917 ======== ======== </TABLE> Included in Homebuilding property, plant and equipment are amounts for land totaling $1,732 at December 31, 1997 and 1996. 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. 41
NVR, INC. Notes to Consolidated Financial Statements (dollars in thousands, except per share data) 7. DEBT <TABLE> <CAPTION> DECEMBER 31, ------------------ 1997 1996 ------- --------- <S> <C> <C> HOMEBUILDING: Notes payable: Working capital revolving credit (a) $ - $ - Other (b) 5,728 86 -------- -------- $ 5,728 $ 86 ======== ======== Other term debt: Capital lease and financing obligations and mortgages due in monthly installments through 2014 (c) $ 14,017 $ 14,043 ======== ======== Senior notes (d) $120,000 $120,000 ======== ======== MORTGAGE BANKING: Mortgage warehouse revolving credit (e) $ 77,765 $ 61,259 Mortgage repurchase facility (f) 30,628 6,204 -------- -------- $108,393 $ 67,463 ======== ======== </TABLE> (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 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 certain 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 $6,059 and $5,345 were outstanding at December 31, 1997 and 1996, respectively. The Working Capital Revolving Credit is for a three year period ending May 31, 2000 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 rates for the amounts outstanding under the facility were 8.1% and 8.0% for 1997 and 1996, 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, 1997 is principally comprised of a $4,750 note payable issued in connection with the acquisition of Fox Ridge (see Note 2). The weighted average interest rate was 7.5% during 1997. (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 $11,602 and $12,181 at December 31, 1997 and 1996, respectively. 42
NVR, INC. Notes to Consolidated Financial Statements (dollars in thousands, except per share data) The following schedule provides future minimum lease payments under all financing and capital leases together with the present value as of December 31, 1997: <TABLE> <CAPTION> YEARS ENDING DECEMBER 31: -------------------------------------- <S> <C> 1998 $ 1,783 1999 1,851 2000 1,851 2001 1,870 2002 1,929 Thereafter 34,748 -------- 44,032 Amount representing interest (30,015) -------- $ 14,017 ======== </TABLE> (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, Fox Ridge, NVRFS and RVN, Inc. ("RVN") (Homes, Fox Ridge, 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 year ended 1995, the Company purchased $15,000 in principal amount of its Senior Notes in the open market. These transactions resulted in a pre-tax gain of $1,572 for the year ended 1995, and is included in the accompanying financial statements as an extraordinary item, net of applicable taxes. Through December 31, 1997, the Company has repurchased $40,000 in the aggregate of its Senior Notes in the open market. 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 either 1.35% or 1.5% depending on the type of collateral, or (ii) 1.5% to the extent that NVR Finance provides compensating balances. The weighted average interest rates for amounts outstanding under the Mortgage Warehouse Revolving Credit line were 5.4% and 3.6% during 1997 and 1996, respectively. The Mortgage Warehouse Revolving Credit is collateralized primarily by mortgage loans and gestation mortgage-backed securities. The Mortgage Warehouse Revolving Credit Agreement is an annually renewable facility and currently expires in June 1998. 43
NVR, INC. Notes to Consolidated Financial Statements (dollars in thousands, except per share data) 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 net worth. (f) NVR Finance from time to time enters into various gestation and repurchase agreements. NVR Finance currently has available an aggregate of $145,000 of borrowing capacity in such uncommitted and committed facilities. Amounts outstanding thereunder accrue interest at various rates tied to the federal funds rate and are collateralized by gestation mortgage-backed securities and whole loans. The uncommitted and committed facilities generally require 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 rates for amounts outstanding under the uncommitted and committed facilities were 6.8% and 6.1% during 1997 and 1996, respectively. Maturities with respect to the other notes payable, other term debt, and the Senior Notes as of December 31, 1997 are as follows: <TABLE> <CAPTION> YEARS ENDING DECEMBER 31: --------------------------------------- <S> <C> 1998 $ 2,056 1999 2,160 2000 2,107 2001 331 2002 323 Thereafter 136,078 </TABLE> The $136,078 maturing after 2002 includes $120,000 in Senior Notes which mature in April 2003. 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 $261,806 as of December 31, 1997 that were so restricted. At December 31, 1997, the homebuilding and mortgage banking segments had restricted cash of $1,272 and $3,723, 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 11,094,522 and 13,574,402 common shares outstanding at December 31, 1997 and 1996, respectively. As of December 31, 1997, NVR had reacquired a total of 9,247,255 shares of NVR common shares at an aggregate cost of $100,383. In February 1997 and 1996, 172,247 and 174,036 common shares, respectively, were issued from the treasury in satisfaction of employee benefit liabilities accrued at December 31, 1996 and 1995. The average cost basis for the shares reissued from the treasury in 1997 was $13.97 per share, and the average cost basis for those reissued in 1996 was $9.82 per share. In addition, 117,472 stock options were exercised during 1997 with NVR realizing $846 in equity proceeds. 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 44
NVR, INC. Notes to Consolidated Financial Statements (dollars in thousands, except per share data) 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: <TABLE> <CAPTION> YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------ ------------------ ------------------ <S> <C> <C> <C> CURRENT: Federal $22,539 $19,070 $16,383 State 3,101 4,198 4,222 DEFERRED: Federal (1,030) (539) (3,071) State 401 217 (525) ------- ------- ------- $25,011 $22,946 $17,009 ======= ======= ======= </TABLE> In addition to amounts applicable to income before taxes, the following income tax expense (benefit) amounts were recorded in shareholders' equity: <TABLE> <CAPTION> YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------ ----------------- ----------------- <S> <C> <C> <C> Compensation expense for tax purposes in excess of amounts recognized for financial statement purposes $ (464) $ - $ - ================= ================= ================= </TABLE> Deferred income taxes on NVR's consolidated balance sheets are comprised of the following: <TABLE> <CAPTION> DECEMBER 31, ---------------- 1997 1996 ------- ------- <S> <C> <C> Total deferred tax assets 23,561 $23,830 Less: valuation allowance 2,852 2,852 ------- ------- 20,709 20,978 Less: deferred tax liabilities 9,158 10,056 ------- ------- $11,551 $10,922 ======= ======= </TABLE> 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 $66,833, $56,159 and $43,454 for the years ended December 31, 1997, 1996 and 1995. 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, 1997, 1996 and 1995, $0, $7,000 and $0, respectively, of such benefits were realized. Unrecognized deferred tax assets which arose as of September 30, 1993 amounted to $2,852 as of December 31, 1997 and 1996, respectively. 45
NVR, INC. Notes to Consolidated Financial Statements (dollars in thousands, except per share data) 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: <TABLE> <CAPTION> YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- ----------------- <S> <C> <C> <C> Income taxes computed at the Federal statutory rate $18,862 $17,054 $11,693 State income taxes, net of Federal income tax benefit 2,276 2,870 2,403 Non-deductible amortization 2,639 2,848 2,848 Non-deductible expense 1,093 - - Other, net 141 174 65 ------- ------- ------- $25,011 $22,946 $17,009 ======= ======= ======= </TABLE> 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 "Board"). The combined retirement plan expense for the years ended December 31, 1997, 1996 and 1995 was $3,081, $4,627 and $3,993, respectively. During 1997 and 1996, the ESOP purchased in the open market 110,569 and 150,000 shares respectively of NVR common stock using cash contributions provided by NVR. As of December 31, 1997, all shares held by the ESOP have been allocated to participant accounts. Management Incentive Plans--Management long-term incentive plans provide several types of equity incentives to NVR's executives and managers. The equity incentives take the form of stock options and performance share awards as described below. Stock options issued under the management long-term incentive plans are issued with an exercise price equal to the market value of the underlying shares on the date of grant. Under the Management Incentive Plan adopted by the Board in 1993, participants received options to purchase a total of 1,117,949 NVR shares (the "1993 NVR Share Options"). The 1993 NVR Share Options issued under the Management Incentive Plan were fully vested as of December 31, 1996, and generally expire 10 years after the dates upon which they were granted. <TABLE> <CAPTION> 1997 1996 1995 -------------------- ------------------ ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise MANAGEMENT INCENTIVE PLAN Options Prices Options Prices Options Prices - ------------------------- ---------- ------ ---------- ------ ---------- ------ <S> <C> <C> <C> <C> <C> <C> Options outstanding at the beginning of the year 1,076,424 $7.60 1,085,450 $7.59 1,130,213 $7.58 Granted - - 6,503 8.21 24,528 7.96 Canceled (5,000) 7.62 (800) 7.62 (46,965) 7.62 Exercised (117,472) 7.64 (14,729) 7.16 (22,326) 7.62 --------- ----- --------- ----- --------- ----- Outstanding at end of year 953,952 $7.60 1,076,424 $7.60 1,085,450 $7.59 ========= ===== ========= ===== ========= ===== Exercisable at end of year 953,952 $7.60 1,076,424 $7.60 868,360 $7.59 ========= ===== ========= ===== ========= ===== </TABLE> 46
NVR, INC. Notes to Consolidated Financial Statements (dollars in thousands, except per share data) Exercise prices for Management Incentive Plan options outstanding at December 31, 1997 range from $5.06 to $9.11 per share, and their weighted average remaining contractual life equals 5.75 years. Under the 1994 Management Incentive Plan (the "1994 Incentive Plan"), executive officers and other key employees of the Company are 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. The 1994 NVR Share Options generally expire 10 years after the dates upon which they were granted, and vest in one-third increments on each of December 31, 1997, 1998 and 1999, with vesting based upon continued employment. <TABLE> <CAPTION> 1997 1996 1995 ---------------- ------------------ ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise 1994 INCENTIVE PLAN Options Prices Options Prices Options Prices - ------------------- -------- -------- -------- ------- -------- ------- <S> <C> <C> <C> <C> <C> <C> Options outstanding at the beginning of the year - $ - - $ - - $ - Granted 35,000 14.00 - - - - Canceled - - - - - - Exercised - - - - - - ------ ------ ------- ------ ------- ------ Outstanding at end of year 35,000 $14.00 - - $ - $ - ====== ====== ======= ====== ======= ====== Exercisable at end of year 11,667 $14.00 - - $ - $ - ====== ====== ======= ====== ======= ====== </TABLE> All 1994 Incentive Plan options outstanding at December 31, 1997 have an exercise price of $14.00 per share, and their weighted average remaining contractual life equals 9.2 years. A total of 1,105,200 1994 Performance Shares have been granted to employees as of December 31, 1997 and one-third of the 1994 Performance Shares have vested. Up to one-third of the total 1994 Performance Shares authorized may vest on each of December 31, 1998 and 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. During 1996, the Company's Shareholders approved the Board of Directors' adoption of the Management Long-Term Stock Option Plan (the "Management Long Term Stock Option Plan"). There are 2,000,000 non-qualified stock options ("Options") authorized under the Management Long Term Stock Option Plan. The Options generally expire 10 years after the dates upon which they were granted, and vest in one-third increments on each of December 31, 2000, 2001 and 2002, with vesting based upon continued employment. <TABLE> <CAPTION> 1997 1996 1995 -------------------- ------------------- ------------------- Weighted Weighted Weighted Average Average Average MANAGEMENT LONG-TERM Exercise Exercise Exercise STOCK OPTION PLAN Options Prices Options Prices Options Prices - ----------------- --------- ------- ------- ------- -------- ------- <S> <C> <C> <C> <C> <C> <C> Options outstanding at the beginning of the year 1,554,000 $10.58 - $ - - $ - Granted 216,000 16.51 1,554,000 10.58 - - Canceled - - - - - - Exercised - - - - - - --------- ------ --------- ------ -------- ------ Outstanding at end of year 1,770,000 $11.30 1,554,000 $10.58 - $ - ========= ====== ========= ====== ======== ====== Exercisable at end of year - $ - - $ - - $ - ========= ====== ========= ====== ======== ====== </TABLE> 47
NVR, INC. Notes to Consolidated Financial Statements (dollars in thousands, except per share data) Exercise prices for Management Long-Term Incentive Plan options outstanding at December 31, 1997 range from $10.625 to $22.625 per share, and their weighted average remaining contractual life equals 9.6 years. The weighted average fair values of grants made in 1997 and 1996 for management incentive plans were $10.13 and $6.14, respectively. The fair values of the options granted were estimated on the grant date using the Black-Scholes option pricing model based on the following weighted average assumptions: <TABLE> <CAPTION> 1997 1996 --------- --------- <S> <C> <C> Estimated option life 10 years 10 years Risk free interest rate 6.79% 7.10% Expected volatility 35.16% 28.9% Expected dividend yield 0.0% 0.0% </TABLE> Directors' Incentive Plans -- 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. There were 182,000 Directors' Options granted to eligible directors on September 30, 1993, leaving 182,000 options available for future grants as of December 31, 1997. The option exercise price for those options granted on September 30, 1993 was $16.60 per share, which exceeded the fair value of the underlying shares on the date of grant. None of the Directors' Options granted have been canceled or exercised since the grant date. The options became exercisable six months after the date of grant and expire in September 2003. Pursuant to the plan, each outside director also received a one-time cash payment of $200 during 1997 for the achievement of certain performance goals under a five-year measurement period beginning September 30, 1993. In addition, there were 192,000 NVR share options authorized and granted in 1996 to the Company's outside directors under the Directors' Long Term Stock Option Plan (the "Directors' Long Term Plan"). There are no additional options available for grant under this plan. The option exercise price for the options granted was $10.25 per share, which was equal to the fair market value of the Company's Shares on the date of grant. The Options were granted for a 10 year period beginning from the date of grant, and vest in one-third increments on each of December 31, 1999, 2000, and 2001. The weighted average grant-date fair value of the options granted during 1996 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 was 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 equaled 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 $27,637 ($2.09 per diluted share), $24,849 ($1.64 per diluted share), and $17,327 ($1.12 per diluted share) for the years ended December 31, 1997, 1996 and 1995, respectively, if the Company had accounted for its stock based employee compensation arrangements using the fair value method. The 1997, 1996 and 1995 effects of applying SFAS No. 123 for providing pro forma disclosures are 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. 48
NVR, INC. Notes to Consolidated Financial Statements (dollars in thousands, except per share data) 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, 1997 are as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ----------------------------------------- <S> <C> 1998 $ 4,418 1999 2,559 2000 1,626 2001 1,031 2002 831 Thereafter 3,558 ------- $14,023 ======= </TABLE> Total rent expense incurred under operating leases was approximately $3,425, $3,180 and $3,363 for the years ended December 31, 1997, 1996 and 1995, respectively. During the ordinary course of operating the mortgage banking 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 $13,364 of contingent obligations under such agreements as of December 31, 1997. 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 or results of operations 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 quarterly 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. 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. 49
NVR, INC. Notes to Consolidated Financial Statements (dollars in thousands, except per share data) During 1997, NVR sold, at a premium, MBS totaling $15,126, the proceeds of which were used to redeem in full the related outstanding Bonds which totaled $14,074. The sales of the MBS resulted in a pre-tax gain of $590, which was substantially offset by a pre-tax loss on the related Bonds of $552. 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: <TABLE> <CAPTION> DECEMBER 31, ------------------ 1997 1996 -------- -------- <S> <C> <C> ASSETS: Mortgage-backed securities, net $20,010 $37,294 Funds held by trustee 245 557 Other assets 1,030 1,388 ------- ------- TOTAL ASSETS 21,285 39,239 ------- ------- LIABILITIES: Accrued expenses and other liabilities 681 771 Mortgage-backed bonds 21,243 39,211 Unamortized discounts (648) (747) ------- ------- TOTAL LIABILITIES 21,276 39,235 ------- ------- Mortgage-backed securities, net of mortgage- backed bonds, and related assets and liabilities $ 9 $ 4 ======= ======= </TABLE> The weighted average portfolio yield on the MBS was 9.1% and 8.9% at December 31, 1997 and 1996, respectively. The Bonds mature through May 1, 2017 and bear interest ranging from 8.0% to 9.0%. 50
NVR, INC. Notes to Consolidated Financial Statements (dollars in thousands, except per share data) 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, 1997 and 1996. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 1997 --------------------------------------- 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER -------- -------- --------- -------- <S> <C> <C> <C> <C> Revenues-homebuilding operations $238,987 $281,437 $316,874 $316,724 Gross profit - homebuilding operations $ 31,518 $ 38,628 $ 44,566 $ 43,455 Mortgage banking fees $ 5,122 $ 6,698 $ 6,407 $ 7,719 Income before discontinued operations and extraordinary gain $ 5,763 $ 9,043 $ 9,006 $ 5,067 Earnings per share before discontinued operations and extraordinary gain (1) $0.42 $0.71 $0.68 $0.39 Contracts for sale, net of cancellations (homes) 1,445 2,041 1,366 1,834 Settlements (homes) 1,315 1,494 1,639 1,659 Backlog, end of period (homes) (2) 2,596 3,143 2,870 3,195 Loans closed $297,698 $349,253 $396,117 $442,695 </TABLE> <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 1997 --------------------------------------- 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER -------- -------- --------- -------- <S> <C> <C> <C> <C> 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 (1) $0.23 $0.56 $0.58 $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 </TABLE> (1) Earnings per share before discontinued operations and extraordinary gains represent diluted earnings per share as defined in SFAS No. 128. Quarterly data for the year ended December 31, 1996 and for the first three quarters of 1997 have been restated from earnings per share data previously published in the Company's Form 10-Q's for the respective quarters pursuant to the requirements of SFAS No. 128. (2) As discussed in Note 2, Homes acquired Fox Ridge on October 31, 1997. The acquisition of Fox Ridge increased the Company's backlog by 150 units on the date of the acquisition. 51
INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors and Shareholder NVR Financial Services, Inc.: We have audited the accompanying consolidated balance sheets of NVR Financial Services, Inc. and subsidiaries, a wholly owned subsidiary of NVR, Inc., as of December 31, 1997 and 1996 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, 1997. 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, 1997 and 1996 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Pittsburgh, Pennsylvania January 28, 1998 52
NVR FINANCIAL SERVICES, INC. Consolidated Balance Sheets (dollars in thousands, except share data) <TABLE> <CAPTION> DECEMBER 31, ------------------- 1997 1996 -------- --------- <S> <C> <C> ASSETS MORTGAGE BANKING: Cash and cash equivalents $ 4,041 $ 3,247 Receivables 3,308 3,596 Mortgage loans held for sale, net 115,744 75,735 Property and equipment, net 637 917 Real estate acquired through foreclosure 504 538 Mortgage servicing rights, net 2,220 6,309 Reorganization value in excess of amount allocable to identifiable assets, net 11,700 12,788 Other assets 559 753 -------- -------- 138,713 103,883 LIMITED-PURPOSE FINANCING SUBSIDIARIES: Mortgage-backed securities, net 20,010 37,294 Funds held by trustee 245 557 Receivables 799 548 Other assets 231 840 -------- -------- 21,285 39,239 -------- -------- TOTAL ASSETS $159,998 $143,122 ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY MORTGAGE BANKING: Accounts payable $ 5,380 $ 3,480 Accrued expenses and other liabilities 3,824 4,286 Due to affiliates 116 1,173 Notes payable 108,393 67,463 -------- -------- 117,713 76,402 LIMITED-PURPOSE FINANCING SUBSIDIARIES: Accrued expenses and other liabilities 681 771 Bonds payable, net 20,595 38,464 -------- -------- 21,276 39,235 -------- -------- TOTAL LIABILITIES 138,989 115,637 COMMITMENTS AND CONTINGENCIES SHAREHOLDER'S EQUITY: Common stock, $1 par value, 1,000 shares authorized; 100 shares issued and outstanding - - Additional paid-in capital 20,382 28,711 Retained earnings (deficit) 627 (1,226) -------- -------- Total shareholder's equity 21,009 27,485 -------- -------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $159,998 $143,122 ======== ======== </TABLE> See notes to consolidated financial statements. 53
NVR FINANCIAL SERVICES, INC. Consolidated Statements of Income (dollars in thousands) <TABLE> <CAPTION> YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------ ------------------ ------------------ <S> <C> <C> <C> MORTGAGE BANKING: Interest income $ 6,415 $ 5,351 $ 4,744 Gain on sales of mortgage loans 16,731 14,401 8,320 Servicing fees 1,733 4,894 7,128 Gain (loss) on sales of servicing 1,069 (1,194) 5,534 Title fees 6,413 5,928 5,315 Other, net 672 28 - -------- -------- -------- Total revenues 33,033 29,408 31,041 -------- -------- -------- Interest expense (3,544) (2,249) (2,090) Interest on advances from affiliates (835) (779) (138) General and administrative (23,130) (21,880) (24,082) Amortization of mortgage servicing rights (506) (1,627) (2,665) Amortization of reorganization value in excess of amounts allocable to identifiable assets (1,088) (1,088) (1,088) -------- -------- -------- Total expenses (29,103) (27,623) (30,063) -------- -------- -------- Operating income 3,930 1,785 978 LIMITED-PURPOSE FINANCING SUBSIDIARIES: Interest income 2,212 6,260 8,309 Interest expense (2,217) (6,398) (8,143) Other, net 7 157 (139) -------- -------- -------- Operating income 2 19 27 -------- -------- -------- TOTAL OPERATING INCOME 3,932 1,804 1,005 Income tax expense (2,079) (1,201) (859) -------- -------- -------- NET INCOME $ 1,853 $ 603 $ 146 ======== ======== ======== </TABLE> See notes to consolidated financial statements. 54
NVR FINANCIAL SERVICES, INC. Consolidated Statements of Shareholder's Equity (dollars in thousands) <TABLE> <CAPTION> ADDITIONAL RETAINED COMMON PAID-IN EARNINGS TOTAL STOCK CAPITAL (DEFICIT) EQUITY --------- ----------- --------- ------ <S> <C> <C> <C> <C> 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 Return of capital - (8,329) - (8,329) Net income - - 1,853 1,853 ------- -------- ------- -------- BALANCE, DECEMBER 31, 1997 $ - $ 20,382 $ 627 $ 21,009 ======= ======== ======= ======== </TABLE> See notes to consolidated financial statements. 55
NVR FINANCIAL SERVICES, INC. Consolidated Statements of Cash Flows (dollars in thousands) <TABLE> <CAPTION> YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------ ----------------- ----------------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,853 $ 603 $ 146 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Accretion of net discount on mortgage-backed securities (95) (237) 1,469 Amortization 1,840 4,083 2,320 Gain on sales of loans (16,731) (14,401) (8,320) Mortgage loans closed (1,485,763) (1,243,945) (1,092,676) Proceeds from sales of mortgage loans 1,450,618 1,268,254 1,052,550 (Gain) loss on sales of mortgage servicing rights (1,069) 1,194 (5,534) Interest accrued and added to bond principal - 1,180 2,749 Deferred tax provision (987) 278 (1,650) Other, net 3,230 (2,380) 5,844 ------------------ ----------------- ----------------- Net cash provided by (used in) operating activities (47,104) 14,629 (43,102) ------------------ ----------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Decrease in funds held by trustee 312 1,977 141 Principal payments on mortgage- backed securities 4,190 15,511 16,932 Proceeds from sales of mortgage- backed securities 15,126 45,835 1,069 Purchases of office facilities and equipment (345) (248) (1,142) Proceeds from sales of mortgage servicing rights 14,199 23,518 16,050 Purchases of mortgage servicing rights - (193) (10,664) Other, net 891 2,326 1,215 ------------------ ----------------- ----------------- Net cash provided by investing activities 34,373 88,726 23,601 ------------------ ----------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in notes payable 40,930 (19,714) 51,936 Redemption of bonds (18,019) (62,306) (20,104) Return of capital/dividend to parent (8,329) (22,793) (3,000) Payment of financing fees - - (48) Change in due to affiliates (1,057) 1,049 (10,483) ------------------ ----------------- ----------------- Net cash provided by (used in) financing activities 13,525 (103,764) 18,301 ------------------ ----------------- ----------------- Net increase (decrease) in cash 794 (409) (1,200) Cash, beginning of year 3,247 3,656 4,856 ------------------ ----------------- ----------------- Cash, end of year $ 4,041 $ 3,247 $ 3,656 ================== ================= ================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid during the year $ 6,502 $ 7,211 $ 9,166 ================== ================= ================= Taxes paid during the year, net of refunds $ 2,913 $ 1,013 $ (278) ================== ================= ================= </TABLE> See notes to consolidated financial statements. 56
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"). All significant intercompany transactions have been eliminated in consolidation. USE OF ESTIMATES IN THE 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, including effects of forward contracts. 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 $3,328 and $3,367 at December 31, 1997 and 1996, respectively. Depreciation is based on the estimated useful lives of the assets using the straight-line method. ADOPTION OF ACCOUNTING PRINCIPLE The Company adopted SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities during the year ended December 31, 1997. SFAS No. 125 superseded SFAS No. 122, Accounting for Mortgage Servicing Rights. Such adoption did not have a material impact on the Company's financial condition or results of operations. 57
NVR FINANCIAL SERVICES, INC. Notes to Consolidated Financial Statements (dollars in thousands) MORTGAGE SERVICING RIGHTS Mortgage servicing rights are recorded by allocating 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. 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. 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, 1997 and 1996 was $4,658 and $3,570, 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, 1997 and 1996 was $4,899 and $6,859, respectively. Servicing fees are recognized upon receipt of cash payments. 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 relative fair value of the mortgage servicing rights related to 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. 58
NVR FINANCIAL SERVICES, INC. Notes to Consolidated Financial Statements (dollars in thousands) 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 note 10 to the financial statements. As discussed in Note 4, NVRFS has guaranteed the 11% Senior Notes due 2003 of NVR. Management believes that it is not practical to estimate the fair value of such guarantee. 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. There have been no bonds issued since 1988. 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. During 1997, NVR sold the remaining portion of its core mortgage servicing portfolio, and intends to sell future originated mortgage servicing rights on a flow basis. 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 43% of the dollar amount of loans closed in 1997. 4. 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 $634,346, $558,629 and $453,929 during the years ended December 31, 1997, 1996 and 1995, respectively. Certain general and administrative expenses incurred by NVR were allocated to its subsidiaries, including NVRFS. NVRFS was allocated general and administrative expenses of $2,400 in each of the years ended December 31, 1997, 1996 and 1995. The Senior Notes, issued by NVR on September 30,1993, are secured by a first priority pledge of the capital stock of NVRFS; NVR Homes, Inc. ("Homes"); Fox Ridge Homes, Inc. ("Fox Ridge"); and RVN, Inc. ("RVN"). The Senior Notes are also guaranteed on a senior unsecured basis by NVRFS, RVN, Homes and Fox Ridge provided, however, that the guarantee by Homes is subordinated up to $60,000 of senior bank indebtedness. 59
NVR FINANCIAL SERVICES, INC. Notes to Consolidated Financial Statements (dollars in thousands) 5. CASH AND CASH EQUIVALENTS As of December 31, 1997 and 1996, NVRFS had restricted cash of $3,723 and $2,103, respectively, which includes mortgagor tax, insurance, completion escrows and other amounts collected at closing which relate to mortgage loans held for sale. 6. 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: <TABLE> <CAPTION> DECEMBER 31, ------------------------ 1997 1996 -------------- -------- <S> <C> <C> Premiums received at closing $ 532 $ 134 Deferred loan origination income (118) (171) Valuation allowance (215) (102) -------- ------- $ 199 $ (139) ======== ======= </TABLE> 7. NOTES PAYABLE <TABLE> <CAPTION> DECEMBER 31, ------------------ 1997 1996 -------- ------- <S> <C> <C> Mortgage Warehouse Revolving Credit: (a) Outstanding $ 69,484 $57,119 In-transit 8,281 4,140 Repo Facility (b) 30,628 6,204 Subordinated note to NVR (c) - - -------- ------- $108,393 $67,463 ======== ======= </TABLE> (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 1.35% or 1.5% depending on the type of collateral, or (ii) 1.5% to the extent that NVR Finance provides compensating balances. The weighted average interest rates for amounts outstanding under the facility were 5.4% and 3.6% during 1997 and 1996, respectively. The Mortgage Warehouse Revolving Credit is collateralized primarily by mortgage loans and gestation mortgage-backed securities. The Mortgage Warehouse Revolving Credit agreement is an annually renewable facility and currently expires in June 1999. 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 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. 60
NVR FINANCIAL SERVICES, INC. Notes to Consolidated Financial Statements (dollars in thousands) (b) NVR Finance from time to time enters into various gestation and repurchase agreements. NVR Finance currently has available an aggregate of $145,000 of borrowing capacity in such uncommitted and committed facilities. Amounts outstanding thereunder accrue interest at various rates tied to the federal funds rate and are collateralized by gestation mortgage-backed securities and whole loans. The uncommitted and committed facilities generally require 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 rates for amounts outstanding under the uncommitted and committed facilities were 6.8% and 6.1% during 1997 and 1996, respectively. Information related to the uncommitted and committed facilities during 1997 and 1996 is as follows: <TABLE> <CAPTION> YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------ ------------------ <S> <C> <C> Average amount outstanding during the year $ 9,583 $ 13,788 Maximum amount outstanding $ 43,123 $ 64,957 Weighted average rate during the year 6.8% 6.1% Rate at end of the year 6.5% 5.9% </TABLE> (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 $75,000, and it accrues interest at the monthly short-term applicable Federal Rate published monthly by the Internal Revenue Service. 8. 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: <TABLE> <CAPTION> BOND PRINCIPAL MORTGAGE-BACKED OUTSTANDING RANGE OF SECURITIES -------------------- -------------------- ISSUER 1997 1996 RANGE OF RATES (%) STATED MATURITY 1997 1996 ------ --------- -------- ------------------ --------------- --------- --------- <S> <C> <C> <C> <C> <C> <C> RYMAC IV $ 21,243 $ 39,211 8.0% to 9.0% 4/1/15 to $ 20,597 $ 38,845 5/1/16 Less discounts (648) (747) (587) (1,551) --------- -------- --------- --------- $ 20,595 $ 38,464 $ 20,010 $ 37,294 ========= ========= ========== ========= </TABLE> Principal and interest payments on the mortgage-backed securities are used tr make the quarterly 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. 61
NVR FINANCIAL SERVICES, INC. Notes to Consolidated Financial Statements (dollars in thousands) 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, 1997 and 1996. The bonds payable are not guaranteed by NVRFS or any of its subsidiaries other than the issuing Limited-Purpose Financing Subsidiary. 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, 1997 and 1996 was $21,546 and $40,044, respectively. Gross unrealized holding gains related to the mortgage-backed securities were $1,536 and $2,750 at December 31, 1997 and 1996, 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. 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 9.1% and 8.9% at December 31, 1997 and 1996, respectively. During 1997, NVR sold, at a premium, MBS totaling $15,126, the proceeds of which were used to redeem in full the related outstanding Bonds, which totaled $14,074. The sales of the MBS resulted in a pre-tax gain of $590, which was substantially offset by a pre-tax loss on the related Bonds of $552. 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. 9. GAIN ON SALES OF MORTGAGE LOANS Gain on sales of mortgage loans is comprised of the following items: <TABLE> <CAPTION> YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------ ------------------ ------------------ <S> <C> <C> <C> Cash gain (loss) on sales $ 1,096 $ 201 $ (1,825) Servicing rights produced 23,226 18,819 15,702 Loan origination fees 12,437 11,156 10,568 Direct loan origination costs (19,373) (16,029) (15,683) Change in market valuation allowance - 45 - Effect of deferrals (655) 209 (442) -------- -------- -------- $ 16,731 $ 14,401 $ 8,320 ======== ======== ======== </TABLE> 62
NVR FINANCIAL SERVICES, INC. Notes to Consolidated Financial Statements (dollars in thousands) 10. MORTGAGE LOAN SERVICING PORTFOLIO At December 31, 1997 and 1996, NVRFS was servicing approximately 2,947 and 9,200 mortgage loans for various investors with aggregate balances of approximately $224,000 and $579,000, respectively. At December 31, 1997, NVRFS had capitalized mortgage servicing rights of $2,220 which related to approximately $175 million of the aggregate $224 million in loans serviced. The mortgage servicing rights associated with the remaining $49 million in loans serviced are not subject to capitalization because the loans were originated and sold prior to NVRFS's adoption of SFAS No. 122 on January 1, 1995. At December 31, 1996, NVRFS had capitalized purchased mortgage servicing rights of $6,309. 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 $2,471 and $7,563 at December 31, 1997 and 1996, respectively. The fair value of the mortgage servicing rights not subject to capitalization was $490 and $650 at December 31, 1997 and 1996, 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, 1997, 1996 and 1995 was $506, $1,627 and $2,665, respectively. As of December 31, 1997, NVRFS had aggregate fidelity bond and errors and omissions insurance coverage of $1,275. 11. 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. 63
NVR FINANCIAL SERVICES, INC. Notes to Consolidated Financial Statements (dollars in thousands) The provision for income taxes consists of the following: <TABLE> <CAPTION> DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------ ----------------- ------------------ <S> <C> <C> <C> CURRENT: Federal $ 2,527 $ 708 $ 2,122 State 539 215 387 DEFERRED: Federal (903) 252 (1,409) State (84) 26 (241) ------------------ ----------------- ------------------ $ 2,079 $ 1,201 $ 859 ================== ================= ================== </TABLE> Deferred income taxes on NVRFS' consolidated balance sheets are comprised of the following: <TABLE> <CAPTION> DECEMBER 31 -------------------------- 1997 1996 -------- ------- <S> <C> <C> Deferred tax assets $ 2,778 $ 3,120 Deferred tax liabilities 1,286 2,615 -------- ------- Deferred tax assets, net $ 1,492 $ 505 ======== ======= </TABLE> 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: <TABLE> <CAPTION> YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- ----------------- <S> <C> <C> <C> Income taxes computed at the Federal statutory rate $ 1,377 $ 631 $ 352 State income taxes, net of Federal income tax benefit 296 157 95 Non-deductible amortization 381 381 381 Other, net 25 32 31 ----------------- ----------------- ----------------- $ 2,079 $ 1,201 $ 859 ================= ================= ================== </TABLE> 64
NVR FINANCIAL SERVICES, INC. Notes to Consolidated Financial Statements (dollars in thousands) 12. 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, 1997, are as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31: -------------------------------------- <S> <C> 1998 $1,673 1999 1,047 2000 504 2001 120 2002 21 Thereafter - ------ $3,365 ====== </TABLE> Total rent expense incurred under operating leases was $1,383, $1,353 and $1,579 for the years ended December 31, 1997, 1996 and 1995, respectively. NVRFS is required to enter into collateral arrangements with various state regulatory agencies in order to conduct its mortgage lending operations. NVRFS has approximately $1,621 of contingent obligations under such agreements as of December 31, 1997. NVRFS believes it will fulfill its obligation under the contracts and does not anticipate any losses under these bond arrangements. 13. 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: <TABLE> <CAPTION> CONTRACT AMOUNTS DECEMBER 31, ------------------------------- 1997 1996 ------------ ------------ <S> <C> <C> FINANCIAL INSTRUMENTS WHOSE CONTRACT AMOUNTS REPRESENT CREDIT RISK: Commitments to extend credit $129,949 94,901 ============ ============ FINANCIAL INSTRUMENTS WHOSE NOTIONAL OR CONTRACT AMOUNTS EXCEED THE AMOUNT OF CREDIT RISK: Forward contracts $195,719 $130,891 ============ ============ </TABLE> 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 65
NVR FINANCIAL SERVICES, INC. Notes to Consolidated Financial Statements (dollars in thousands) time of the "lock-in" of rates by the borrower and sale date to a broker/dealer. This market risk is managed by entering into forward contracts as discussed below. 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, 1997 and 1996, there were no such positions. There were no counterparty default losses on forward contracts in 1997, 1996, or 1995. 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 the total of commitments to customers and loans held for sale 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. 66
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, 1997 and 1996 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, 1997. 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, 1997 and 1996 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Pittsburgh, Pennsylvania January 28, 1998 67
NVR HOMES, INC. Consolidated Balance Sheets (dollars in thousands, except share data) <TABLE> <CAPTION> DECEMBER 31, ------------------ 1997 1996 -------- -------- <S> <C> <C> ASSETS Cash and cash equivalents $ 41,673 $ 71,471 Receivables 3,671 3,247 Inventory: Lots and housing units, covered under sales agreements with customers 165,132 126,456 Unsold lots and housing units 51,434 37,940 Manufacturing materials and other 7,475 7,297 -------- -------- 224,041 171,693 Property, plant & equipment, net 10,147 10,272 Reorganization value in excess of amounts allocable to identifiable assets, net 69,366 75,818 Goodwill, net 10,753 - Contract land deposits 36,992 36,383 Other assets 19,869 18,058 -------- -------- TOTAL ASSETS $416,512 $386,942 ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY Accounts payable $ 67,534 $ 54,325 Accrued expenses and other liabilities 77,453 75,451 Advances from affiliates, net 102,461 107,896 Notes payable 5,650 - Other term debt 5,627 5,859 -------- -------- TOTAL LIABILITIES 258,725 243,531 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 63,099 48,723 -------- -------- Total shareholder's equity 157,787 143,411 -------- -------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $416,512 $386,942 ======== ======== </TABLE> See notes to consolidated financial statements 68
NVR HOMES, INC. Consolidated Statements of Income (dollars in thousands) <TABLE> <CAPTION> YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------ ------------------ ------------------ <S> <C> <C> <C> REVENUES: Homebuilding revenues $1,154,022 $1,045,930 $869,119 Other income 1,203 1,311 1,499 ---------- ---------- -------- Total revenues 1,155,225 1,047,241 870,618 EXPENSES: Cost of sales 995,855 906,451 751,035 Interest expense-external 1,507 1,729 1,992 Interest expense-affiliates 14,675 14,676 14,676 Selling, general and administrative 108,236 75,095 61,891 Amortization of reorganization value in excess of amounts allocable to identifiable assets/goodwill 6,635 7,048 7,048 ---------- ---------- -------- Total expenses 1,126,908 1,004,999 836,642 Income before income tax expense 28,317 42,242 33,976 Income tax expense (13,941) (19,976) (16,805) ---------- ---------- -------- NET INCOME $ 14,376 $ 22,266 $ 17,171 ========== ========== ======== </TABLE> NVR HOMES, INC. Consolidated Statements of Shareholder's Equity (dollars in thousands) <TABLE> <CAPTION> ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS ----- ------- -------- <S> <C> <C> <C> 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 Net income - - 14,376 ------- ------- ------- BALANCE, DECEMBER 31, 1997 $ - $94,688 $63,099 ======= ======= ======= </TABLE> See notes to consolidated financial statements. 69
NVR HOMES, INC. Consolidated Statements of Cash Flows (dollars in thousands) <TABLE> <CAPTION> YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------ ------------------ ------------------ <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 14,376 $ 22,266 $ 17,171 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 9,686 9,586 9,011 Deferred tax provision 482 165 (2,020) Net change in assets and liabilities: Increase in inventories (31,354) (16,980) (45,175) Decrease (increase) in receivables (282) 5,173 (3,331) Increase in accounts payable and accrued liabilities 12,068 8,226 26,945 Other, net (1,626) (4,984) (9,934) -------- -------- -------- Net cash provided (used) by operating activities 3,350 23,452 (7,333) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Sale of marketable securities - - 5,000 Purchase of property, plant & equipment (2,587) (3,764) (2,129) Business acquisition, net of cash acquired (12,533) - - Proceeds from sale of property, plant & equipment 33 155 12 -------- -------- -------- Net cash provided (used) by investing activities (15,087) (3,609) 2,883 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in advances from affiliates (6,662) (69) (10,059) Principal repayments of term debt (232) (214) (200) Net borrowings (repayments) under credit lines and other notes payable (11,167) - - -------- -------- -------- Net cash used by financing activities (18,061) (283) (10,259) -------- -------- -------- Net increase (decrease) in cash (29,798) 19,560 (14,709) Cash, beginning of the year 71,471 51,911 66,620 -------- -------- -------- Cash, end of year $ 41,673 $ 71,471 $ 51,911 ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid during the year $ 16,022 $ 16,210 $ 16,253 ======== ======== ======== Taxes paid during the year (net of refunds) $ 18,279 $ 17,707 $ 8,090 ======== ======== ======== </TABLE> See notes to consolidated financial statements. 70
NVR Homes, Inc. Notes to Consolidated Financial Statements (dollars in thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995. Homes is a wholly-owned subsidiary of NVR, Inc. ("NVR"). All significant intercompany transactions have been eliminated in consolidation. USE OF ESTIMATES IN THE 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 is being amortized on a straight-line basis over 15 years. Accumulated amortization as of December 31, 1997 and 1996 was $29,831 and $23,378, respectively. Determination of any impairment losses related to this intangible asset is based on consideration of projected undiscounted cash flows. GOODWILL The excess of amounts paid for business acquisitions over the net fair value of the assets acquired and the liabilities assumed ("Goodwill") is amortized using the straight line method over ten years, and originated from the October 31, 1997 acquisition of Fox Ridge Homes, Inc. (See Note 2.) Accumulated amortization was $182 at December 31, 1997. Determination of any impairment losses related to this intangible asset is based on consideration of projected undiscounted cash flows. 71
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 and Fox Ridge have 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. ROYALTY FEES 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. ADOPTION OF ACCOUNTING PRINCIPLE During 1997, the Company adopted Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Such adoption did not have a material impact on the Company's financial condition or results of operations. 72
NVR Homes, Inc. Notes to Consolidated Financial Statements (dollars in thousands) 2. ACQUISITION NVR Fox Ridge, Inc., a wholly owned subsidiary of Homes, was formed during 1997 to purchase substantially all of the assets and assume certain liabilities of Fox Ridge Homes, Inc. ("FRH"), a leading homebuilder in Nashville, Tennessee. NVR Fox Ridge, Inc. was renamed Fox Ridge Homes, Inc. ("Fox Ridge") in November, 1997. To consummate the purchase on October 31, 1997, Fox Ridge assumed approximately $15,160 of FRH's liabilities, paid FRH $14,250 in cash at settlement on October 31, 1997, and issued a note payable for the remaining $4,750 purchase price. The note bears interest at 200 basis points above the federal funds target rate, and will be paid in three annual installments on October 31, 1998, 1999 and 2000, including accrued interest. Fox Ridge accounted for this acquisition under the purchase method, and the operations of the acquired business have been included in Home's consolidated statements of income since its acquisition. Goodwill that was generated pursuant to the purchase transaction is being amortized using the straight line method over 10 years. The following unaudited pro forma summary of combined operations was prepared to illustrate the estimated effects of the 1997 acquisition of FRH as if such acquisition had occurred on the first day of the respective periods presented. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 ----------- ---------- <S> <C> <C> Revenues $1,192,684 $1,100,821 Net income 14,840 24,694 </TABLE> 3. 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 66% of its 1997 homebuilding revenues. The Company primarily constructs and sells single-family detached homes, townhomes and condominium buildings in three distinct product lines, through two divisions and one wholly owned subsidiary: Ryan Homes, NVHomes and Fox Ridge. 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. Fox Ridge builds moderately priced homes in Tennessee and also markets its homes primarily to first-time buyers. 4. RELATED PARTY TRANSACTIONS During 1997, 1996, and 1995, Homes purchased, at market prices, developed lots from a company that is controlled by a member of the board of directors. Those purchases totaled $8,066, $6,612, and $8,877 during 1997, 1996 and 1995, respectively, and Homes expects to purchase the remaining lots under contract at December 31, 1997 over the next 18 to 24 months for an aggregate purchase price of approximately $32,000. 73
NVR Homes, Inc. Notes to Consolidated Financial Statements (dollars in thousands) During the years ended December 31, 1997 and 1996, Homes incurred $21,687 and $4,711, respectively, 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. Homes had a $1,880 and $1,441 royalty expense payable due to RVN at December 31, 1997 and 1996, respectively. As of December 31, 1997 and 1996, Homes had $32,948 and $26,946, 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, 1997 and 1996, Homes had $69 and $(59), 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 $17,158, $7,625 and $8,308 in selling, general and administrative expenses during the years ended December 31, 1997, 1996 and 1995, respectively. The Senior Notes, issued by NVR on September 30, 1993, are secured by a first priority pledge of the capital stock of Homes; Fox Ridge; NVR Financial Services, Inc. ("NVRFS"); and RVN. The Senior Notes are also guaranteed on a senior unsecured basis by Homes, Fox Ridge, 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: <TABLE> <CAPTION> DECEMBER 31, ------------------- 1997 1996 --------- -------- <S> <C> <C> Office facilities and other $ 3,727 $ 3,176 Model home furniture and fixtures 5,947 4,255 Manufacturing facilities 7,199 7,964 Property under capital leases excluding manufacturing facilities 4,033 4,033 -------- ------- 20,906 19,428 Less accumulated depreciation and amortization (10,759) (9,156) -------- ------- $ 10,147 $10,272 ======== ======= </TABLE> The property, plant and equipment listed above is collateral for various debt of Homes as more fully discussed in note 6. 74
NVR Homes, Inc. Notes to Consolidated Financial Statements (dollars in thousands) 6. DEBT Debt consists of the following: <TABLE> <CAPTION> DECEMBER 31, -------------------- 1997 1996 ------- -------- <S> <C> <C> Notes payable: Working capital revolving credit (a) $ - $ - ======= ======== Other (b) $ 5,650 $ - ======= ======== Other term debt: Capital lease and financing obligations and mortgages due in monthly installments through 2014 (c) $ 5,627 $ 5,859 ======= ======== </TABLE> (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 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 certain 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 $6,059 and $5,345 were issued at December 31, 1997 and 1996, respectively. The Working Capital Revolving Credit is for a three year period ending May 31, 2000 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 rates for amounts outstanding under the facility were 8.1% and 8.0% during 1997 and 1996, 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. (b) Other notes payable as of December 31, 1997 is principally comprised of a $4,750 note payable issued in connection with the acquisition of Fox Ridge (see Note 2). The weighted average interest rate was 7.5% during 1997. (c) 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 $5,169 and $5,470 at December 31, 1997 and 1996, respectively. The following schedule provides future minimum lease payments under all financing and capital leases together with the present value as of December 31, 1997: 75
NVR Homes, Inc. Notes to Consolidated Financial Statements (dollars in thousands) <TABLE> <CAPTION> YEARS ENDING DECEMBER 31: ----------------------------------------------- <S> <C> 1998 $ 830 1999 853 2000 853 2001 853 2002 853 Thereafter 8,202 ------- 12,444 Amount representing interest (6,817) ------- $ 5,627 ======= </TABLE> Maturities with respect to notes payable and other term debt as of December 31, 1997 are as follows: <TABLE> <CAPTION> YEARS ENDING DECEMBER 31: ----------------------------------------------- <S> <C> 1998 $ 2,046 1999 2,150 2000 2,097 2001 321 2002 313 Thereafter 4,350 </TABLE> 7. INCOME TAXES The provision for income taxes consists of the following: <TABLE> <CAPTION> YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- ----------------- <S> <C> <C> <C> Current: Federal $11,312 $15,978 $14,832 State 2,147 3,833 3,993 Deferred: Federal (33) (149) (1,725) State 515 314 (295) ------- ------- ------- $13,941 $19,976 $16,805 ======= ======= ======= </TABLE> Deferred income taxes on Homes' consolidated balance sheets are comprised of the following: <TABLE> <CAPTION> DECEMBER 31, ---------------------------- 1997 1996 ---------- --------- <S> <C> <C> Deferred tax assets $14,239 $13,807 Less: valuation allowance 2,852 4,078 ------- --------- 11,387 9,729 Less: deferred tax liabilities 915 2 ------- --------- Deferred tax assets, net $10,472 $ 9,727 ======= ========= </TABLE> 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 76
NVR Homes, Inc. Notes to Consolidated Financial Statements (dollars in thousands) for financial reporting. Deferred tax liabilities arise principally as a result of the goodwill that originated from the acquisition of Fox Ridge having a higher basis for financial reporting 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 $34,300, $49,457, and $37,197 for the years ended December 31, 1997, 1996 and 1995. 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, 1997, 1996 and 1995, $0, $7,000 and $0, respectively, of such benefits were realized. Unrecognized deferred tax assets which arose as of September 30, 1993 amounted to $2,852 as of December 31, 1997 and 1996. 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: <TABLE> <CAPTION> YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- ----------------- <S> <C> <C> <C> Income taxes computed at the Federal statutory rate $ 9,911 $14,785 $11,892 State income taxes, net of Federal income tax benefit 1,730 2,696 2,404 Non-deductible amortization 2,259 2,467 2,467 Other, net 41 28 42 ------- ------- ------- $13,941 $19,976 $16,805 ======= ======= ======= </TABLE> 77
NVR Homes, Inc. Notes to Consolidated Financial Statements (dollars in thousands) 8. 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, 1997 are as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31: -------------------------------------- <S> <C> 1998 $2,437 1999 1,195 2000 797 2001 578 2002 469 Thereafter 2,760 ------ $8,236 ====== </TABLE> Total rent expense incurred under operating leases was approximately $1,703, $1,493 and $1,518 for the years ended December 31, 1997, 1996 and 1995, 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 $11,434 of contingent obligations under such agreements as of December 31, 1997. 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 or results of operations of Homes. At December 31, 1997, Homes has restricted cash of $1,272, representing deposits on homes under sales contracts in certain markets where the Company operates. 78
INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors and Shareholder Fox Ridge Homes, Inc.: We have audited the accompanying balance sheets of Fox Ridge Homes, Inc. as of December 31, 1997 and 1996 and the related statements of income, shareholder's equity, and cash flows for the two months ended December 31, 1997, the ten months ended October 31, 1997 and the years ended December 31, 1996 and 1995. 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 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 financial statements referred to above present fairly, in all material respects, the financial position of Fox Ridge Homes, Inc. as of December 31, 1997 and 1996 and the results of its operations and its cash flows for the two months ended December 31, 1997, the ten months ended October 31, 1997, and the years ended December 31, 1996 and 1995, in conformity with generally accepted accounting principles. As discussed in note 1 to the financial statements, certain assets of the Predecessor were acquired and certain liabilities of the Predecessor were assumed by Fox Ridge Homes, Inc. on October 31, 1997. Accordingly, Fox Ridge Homes, Inc. accounted for the transaction as a purchase pursuant to the requirements of Accounting Principles Board Opinion No. 16, "Business Combinations". As a result, the financial statements for periods subsequent to October 31, 1997 are not comparable to the financial statements for periods prior to this date. KPMG Peat Marwick LLP Pittsburgh, Pennsylvania January 28, 1998 79
FOX RIDGE HOMES, INC. Balance Sheets (dollars in thousands) <TABLE> <CAPTION> SUCCESSOR *PREDECESSOR --------- ------------ DECEMBER 31, ----------------------- 1997 1996 --------- ------------ <S> <C> <C> ASSETS Cash and cash equivalents $ - $ 657 Restricted cash - 3 Accounts receivable 302 142 Inventory, net 19,879 17,232 Prepaid expenses 12 18 Investment in FRP, LP 179 298 Note receivable-Valley Brooke, LLC - 475 Property and equipment, net 228 191 Goodwill, net 10,753 - Non-compete agreement, less accumulated amortization of $404 - 179 ------- ------- TOTAL ASSETS $31,353 $19,195 ======= ======= LIABILITIES AND SHAREHOLDER'S EQUITY Notes payable - lot acquisitions $ 900 $ - Notes payable - construction loans - 6,205 Notes payable - acquisition note 4,750 - Accounts payable 2,281 1,850 Due to affiliate 8,012 - Accrued expenses 637 1,242 Deferred taxes 281 - Dividends payable - 999 Negative goodwill, less accumulated amortization of $132 - 373 ------- ------- TOTAL LIABILITIES 16,861 10,669 ------- ------- COMMITMENTS AND CONTINGENCIES SHAREHOLDER'S EQUITY: Common stock, 100,000 ($.01 par) and 4,000,000 (no par) shares authorized at December 31, 1997 and 1996, respectively; 100 and 1,798,206 shares issued and outstanding for 1997 and 1996, respectively - - Additional paid in capital 14,250 2,000 Retained earnings 242 6,526 ------- ------- Total shareholder's equity 14,492 8,526 ------- ------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $31,353 $19,195 ======= ======= </TABLE> *Period is prior to the date that the Company was acquired by NVR, Inc. (see note 1). See notes to financial statements. 80
FOX RIDGE HOMES, INC. STATEMENTS OF INCOME (dollars in thousands) <TABLE> <CAPTION> [SUCCESSOR] [PREDECESSOR]* ----------------- --------------------------------------------------------- TWO MONTHS ENDED TEN MONTHS ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 OCTOBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ---------------- ----------------- ------------------ <S> <C> <C> <C> <C> Sales $8,955 $38,662 $54,891 $38,622 Cost of sales 7,138 31,455 43,062 30,051 ------ ------- ------- ------- Gross profit 1,817 7,207 11,829 8,571 Selling, general and administrative 1,261 4,433 5,486 4,559 ------- ------- ------- ------- Income from operations 556 2,774 6,343 4,012 Other income (expense): Interest income 3 36 34 35 Interest expense (186) (676) (847) (702) Gain on condemnation of inventory - - - 209 Equity in earnings of FRP, LP 17 51 77 120 Other, net 10 257 46 38 ------ ------- ------- ------- Net other expense (156) (332) (690) (300) Income before income taxes 400 2,442 5,653 3,712 Income tax expense 158 197 338 227 ------ ------- ------- ------- Net income $ 242 $ 2,245 $ 5,315 $ 3,485 ====== ======= ======= ======= </TABLE> *Periods are prior to the date that the Company was acquired by NVR, Inc. (see note 1). See notes to financial statements. 81
FOX RIDGE HOMES, INC. Statements of Shareholder's Equity (dollars in thousands) <TABLE> <CAPTION> (SUCCESSOR) *(PREDECESSOR) --------------------------------------------- --------------------------------------------- COMMON PAID IN RETAINED COMMON PAID IN RETAINED STOCK CAPITAL EARNINGS TOTAL STOCK CAPITAL EARNINGS TOTAL ------- --------- ---------- ------- ------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> *Balance, December 31, 1994 $ - $ - $ - $ - $ - $ 2,000 $ 786 $ 2,786 Net income - - - - - - 3,485 3,485 Dividends declared - - - - - - (1,038) (1,038) ------- -------- ------ ------- -------- -------- ------- ------- *Balance, December 31, 1995 - - - - - 2,000 3,233 5,233 Net income - - - - - - 5,315 5,315 Dividends declared - - - - - - (2,022) (2,022) ------- -------- ------ ------- -------- -------- ------- ------- *Balance, December 31, 1996 - - - - - 2,000 6,526 8,526 Net income - - - - - - 2,245 2,245 Dividends declared - - - - - - (1,072) (1,072) ------- -------- ------ ------- -------- -------- ------- ------- *Balance, October 31, 1997 - - - - - 2,000 7,699 9,699 Effect of acquisition - 14,250 - 14,250 - (2,000) (7,699) (9,699) Net income - - 242 242 - - - - ------- -------- ------ ------- -------- -------- ------- ------- Balance, December 31, 1997 $ - $ 14,250 $ 242 $14,492 $ - $ - $ - $ - ======= ======== ====== ======= ======== ======== ======= ======= </TABLE> *Periods are prior to the date that the Company was acquired by NVR, Inc. (see note 1). See notes to financial statements. 82
FOX RIDGE HOMES, INC. Statements of Cash Flows (dollars in thousands) <TABLE> <CAPTION> [SUCCESSOR] [PREDECESSOR]* ------------------ -------------------------------------------------------------- TWO MONTHS ENDED TEN MONTHS ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 OCTOBER 31, 1996 DECEMBER 31, 1996 DECEMBER 31 1995 ------------------ ------------------ ------------------- ------------------- <S> <C> <C> <C> <C> Cash flows from operating activities Net income $ 242 $ 2,245 $ 5,315 $ 3,485 Adjustments to reconcile net income to net cash and cash equivalents provided (used) by operating activities: Depreciation 36 95 91 51 Amortization, net 182 56 67 141 Equity in earnings of FRP (17) (51) (77) (120) Gain on condemnation of inventory - - - (209) Decrease in restricted cash - 2 19 105 Increase in accounts receivable (160) (53) (41) (158) Decrease (increase) in inventories 1,115 (4,738) (1,908) (2,500) Deferred tax expense 281 - - - (Increase) decrease in prepaid expenses - 4 (1) 3 (Decrease) increase in accounts payable and accrued expenses (99) 19 (34) 955 -------- ------- ------- ------- Net cash and cash equivalents provided (used) by operating activities 1,580 (2,421) 3,431 1,753 Cash flows from investing activities: Notes receivable from Valley Brook, LLC - - (475) - Notes receivable from Turnberr Homes, LLC - (507) - - Repayments of note receivable from FRP, LP - 78 24 - Repayments of notes receivable from Valley Brooke, LLC - 153 - - Dividends received from FRP, LP - 117 93 - Purchase of property and equipment (16) (152) (136) (100) -------- ------- ------- ------- Net cash and cash equivalents used by investing activities (16) (311) (494) (100) Cash flows from financing activities: Decrease in due to affiliates (3,270) - - - Dividends paid - (2,071) (1,634) (944) Net borrowings from construction loans (11) 4,963 (728) 35 Net borrowings under development loans - - (103) (251) Repayment of principal on 1993 acquisition debt - - - (380) Proceeds from notes payable - 900 - - -------- ------- ------- ------- Net cash and cash equivalents provided (used) by financing activities (3,281) 3,792 (2,465) (1,540) Net increase (decrease) in cash and cash equivalents (1,717) 1,060 472 113 Cash and cash equivalents at beginning of period 1,717 657 185 72 -------- ------- ------- ------- Cash and cash equivalents at end of period $ - $ 1,717 $ 657 $ 185 ======== ======= ======= ======= Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 143 $ 624 $ 894 $ 703 ======= ======= ======= ======= Income taxes $ - $ 133 $ 286 $ 149 ======= ======= ======= ======= </TABLE> * Periods are prior to the date that the Company was acquired by NVR, Inc. (see note 1). See notes to financial statements. 83
FOX RIDGE HOMES, INC. NOTES TO FINANCIAL STATEMENTS (dollars in thousands) 1. ACQUISITION NVR Fox Ridge, Inc., a wholly owned subsidiary of NVR Homes Inc. ("Homes"), itself wholly owned by NVR, Inc. ("NVR"), was formed during 1997 to purchase substantially all of the assets and assume certain liabilities (the "Purchase Transaction") of Fox Ridge Homes, Inc. ("FRH" or the "Predecessor"), a home builder in Nashville, Tennessee. NVR Fox Ridge, Inc. was renamed Fox Ridge Homes, Inc. ("Fox Ridge" or the "Successor") in November, 1997. To consummate the purchase on October 31, 1997 (the "Purchase Date"), Fox Ridge assumed approximately $15,160 of FRH's liabilities, paid FRH $14,250 in cash at settlement on October 31, 1997, and issued a note payable for the remaining $4,750 purchase price. The note bears interest at 200 basis points above the federal funds target rate, and will be paid in three annual installments on October 31, 1998, 1999 and 2000, including accrued interest. Fox Ridge accounted for this acquisition using the purchase method, which resulted in a new basis of accounting for the assets acquired and liabilities assumed at the Purchase Date. As a result, the financial statements for periods subsequent to the Purchase Date are not comparable to the financial statements for periods prior to this date. Excess of amounts paid for the business acquisition over the net fair value of the assets acquired and the liabilities assumed ("Goodwill") generated pursuant to the Purchase Transaction is being amortized using the straight line method over 10 years. The following unaudited pro forma summary of combined operations was prepared to illustrate the estimated effects of the 1997 acquisition of FRH as if such acquisition had occurred on the first day of the respective periods presented. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------- 1997 1996 ---- ---- <S> <C> <C> Revenues $47,617 $54,891 Net income 1,270 2,864 </TABLE> 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements include the accounts of the Successor for the two months ended December 31, 1997, and the accounts of the Predecessor for the ten months ended October 31, 1997 and the years ended December 31, 1996 and 1995. Reference to the "Company" refers to the Predecessor prior to the Purchase Date and to the Successor subsequent to the Purchase date unless the context otherwise specifies. Certain prior year amounts have been reclassified to conform to the current period presentation. USE OF ESTIMATES IN THE 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. 84
FOX RIDGE HOMES, INC. NOTES TO FINANCIAL STATEMENTS (dollars in thousands) CASH AND CASH EQUIVALENTS Cash and cash equivalents includes short-term investments with original maturities of three months or less. RESTRICTED CASH Restricted cash consists of the compensating balances the Company is required to maintain with municipalities or county authorities for bond arrangements. GOODWILL Goodwill is amortized using the straight line method over ten years, and originated from the Purchase Transaction (see Note 1). Accumulated amortization was $182 at December 31, 1997. Determination of any impairment loss related to this intangible asset is based on consideration of projected undiscounted cash flows. NEGATIVE GOODWILL Negative goodwill recorded at December 31, 1996 represents the excess of net assets acquired over the purchase price in connection with a 1993 stock purchase. The negative goodwill was being amortized on a straight-line basis over a period of 15 years. Amortization for the ten months ended October 31, 1997 and for the years ended December 31, 1996 and 1995 was $28, $33 and $33, respectively. ADOPTION OF NEW ACCOUNTING PRINCIPLE Fox Ridge adopted SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities during the year ended December 31, 1997. Such adoption did not have a material impact on the Company's financial condition or results of operations. FINANCIAL INSTRUMENTS Management believes that insignificant differences exist between the carrying value and fair value of Fox Ridge's financial instruments. As discussed in Note 8, Fox Ridge has guaranteed the 11% Senior Notes ("Senior Notes") due 2003 of NVR. Management believes that it is not practical to estimate the fair value of such guarantee. NON-COMPETE AGREEMENT The non-compete agreement was being amortized on a straight-line basis over a period of five years, the length of the agreement. Amortization expense for the ten months ended October 31, 1997 and for the years ended December 31, 1996 and 1995 was $84, $100 and $100, respectively. 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. Such costs include land, land improvements, property taxes and direct construction costs. Prior to the Purchase Date, interest costs were 85
FOX RIDGE HOMES, INC. NOTES TO FINANCIAL STATEMENTS (dollars in thousands) capitalized into inventory. Subsequent to the Purchase Date, interest costs are not capitalized into inventory. Upon settlement, the cost of the units is expensed on a specific identification basis. REVENUES Fox Ridge 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. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of 5 years for furniture and equipment, 3 years for motor vehicles, and 2 years for model house furnishings, or the lease term if shorter. INCOME TAXES Subsequent to the Purchase Date, Fox Ridge 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, Fox Ridge 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 Fox Ridge on a "separate return" basis. Also, in the event Fox Ridge incurs a tax loss on a "separate return" basis for any year, Fox Ridge will generally be compensated for the tax effects of such tax loss through payments received from others in the consolidated group. Prior to the Purchase Date, the Company elected to be taxed as an S Corporation under the provisions of the Internal Revenue Code. As an S Corporation, any federal tax liability or refund receivable related to income or loss generated during the year is the responsibility of the individual shareholders of the Company. State income taxes are payable directly by the Company. 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. 3. NATURE OF OPERATIONS AND CERTAIN CONCENTRATIONS The Company is one of the largest homebuilders in the Nashville, Tennessee metropolitan area, where the Company derived all of its 1997 homebuilding revenues. The Company primarily constructs and sells moderately priced, single- family detached homes and townhomes, and markets its homes primarily to first- time buyers. 86
FOX RIDGE HOMES, INC. NOTES TO FINANCIAL STATEMENTS (dollars in thousands) 4. PROPERTY AND EQUIPMENT, NET Property and equipment, which are stated at cost, consist of the following: <TABLE> <CAPTION> DECEMBER 31, ------------------------- 1997 1996 ---------- -------- <S> <C> <C> Furniture and equipment $ 159 $ 116 Motor vehicles 208 131 Model home furnishings 137 89 Leasehold improvements 6 6 ------- ------- 510 342 Less accumulated depreciation (282) (151) ------- ------- $ 228 $ 191 ======= ======= </TABLE> 5. INVENTORY Inventory consists of the following: <TABLE> <CAPTION> DECEMBER 31, ------------------------- 1997 1996 ---------- -------- <S> <C> <C> Undeveloped land $ 365 $ 1,247 Finished lots 8,802 4,984 Direct construction costs 10,362 10,337 Land development costs 350 664 ------- ------- $19,879 $17,232 ======= ======= </TABLE> During 1995, a portion of the Company's inventory with a book value of $41 was condemned. The Company received $250 as proceeds resulting in a gain of $209 included in the accompanying 1995 statement of income. As of December 31, 1996, there was $228 of interest capitalized as inventory. 6. INVESTMENT IN FRP, LP On May 17, 1994, the Company invested $140 for a 66 2/3% interest in a limited partnership, FRP, LP (the Partnership). The Partnership purchased a residential development consisting of 122 lots from an unrelated party. At December 31, 1997, the Company has an option to buy the remaining 17 lots from the Partnership at $22 per lot. During the two months ended December 31, 1997, the ten months ended October 31, 1997 and the years ended December 31, 1996 and 1995, the Company purchased 3 lots for approximately $66; 21 lots for approximately $327; 37 lots for approximately $564; and 30 lots for approximately $507, respectively. The Company, as a limited partner, does not have control of the business due to the general partner (FRP, Inc.) having control of the management of the partnership and the only authority to bind the partnership. Profits are allocated according to the partners' capital contribution ratios: the Company: 66 2/3% and FRP, Inc.: 33 1/3%. The Company accounts for the investment using the equity method of accounting. The net income for the Partnership for the two months ended December 31, 1997, the ten months ended October 31, 1997 and for the years ended December 31, 1996 and 1995 was $25, $76, $116 and $180, respectively. The Company's portion of that income was $17, $51, $77 and $120, respectively. The Partnership paid dividends of $175 in 1997. The Company's portion of those 87
FOX RIDGE HOMES, INC. NOTES TO FINANCIAL STATEMENTS (dollars in thousands) dividends was $117. Also, at December 31, 1996, the Company had a receivable from FRP, LP in the amount of $78. Unaudited condensed balance sheets of the Partnership at December 31, 1997 and 1996 and the respective statements of income for the two months ended December 31, 1997, the ten months ended October 31, 1997 and the years ended December 31, 1996 and 1995 follow: <TABLE> <CAPTION> DECEMBER 31, ------------------------ 1997 1996 -------- -------- <S> <C> <C> ASSETS: Cash $ 138 $ 42 Finished lots 180 450 ----- ---- TOTAL ASSETS $ 318 $492 ===== ==== LIABILITIES: Accounts payable - Fox Ridge Homes, Inc. - 78 Notes payable - 34 Other liabilities 51 45 Partners' equity 267 335 ----- ---- TOTAL LIABILITIES AND PARTNERS' EQUITY $ 318 $492 ===== ==== </TABLE> <TABLE> <CAPTION> TWO MONTHS ENDED TEN MONTHS ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 OCTOBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- ----------------- ----------------- <S> <C> <C> <C> <C> Net sales $ 66 $ 327 $ 564 $ 507 Cost of sales 34 236 416 363 ------- ------- ------ ------ Gross profit 32 91 148 144 Interest expense - 1 27 61 Property taxes 1 13 3 13 Other operating expenses 7 1 2 16 ------- ------- ------ ------ 15 32 90 Income before extraordinary item 25 76 116 54 ------- ------- ------ ------ Extraordinary gain-refinancing of notes payable - - - 126 ------- ------- ------ ------ Net income $ 25 $ 76 $ 116 $ 180 ======= ======= ====== ====== </TABLE> 7. BENEFIT PLAN The Company sponsors a 401(K) plan for all employees with at least one year of service. Contributions to the plan by the Company are discretionary. Participants vest in the Company's contributions at 25% for each year of service with 100% vesting after four years. The Company contributed $30, $131, $199 and $182 for the two months ended December 31, 1997, the ten months ended October 31, 1997 and the years ended December 31, 1996 and 1995, respectively. 88
FOX RIDGE HOMES, INC. NOTES TO FINANCIAL STATEMENTS (dollars in thousands) 8. RELATED PARTY TRANSACTIONS During the ten months ended October 31, 1997, the Predecessor purchased, at market prices, developed lots from companies controlled by a member of the Predecessor's board of directors. Those purchases totaled $1,260. Of the total, 50 lots were obtained by issuing a $900 note payable (see note 10); the remaining 20 lots were purchased with $360 in cash. In addition, certain lots were acquired during the ten months ended October 31, 1997 and the years ended December 31, 1996 and 1995 from FRP, LP (see note 6). Certain of the Predecessor's board of directors and employees hold controlling equity interests in FRP, LP. As of December 31, 1997, Fox Ridge had $8,012 of interest bearing intercompany advances to Homes due on demand to fund its working capital needs. The advances bear interest at 2.0% above the Eurodollar rate. The Senior Notes, issued by NVR on September 30, 1993, are secured by a first priority pledge of the capital stock of Fox Ridge; Homes; NVR Financial Services, Inc. ("NVRFS"); and RVN, Inc. ("RVN"). The Senior Notes are also guaranteed on a senior unsecured basis by Fox Ridge, Homes, RVN and NVRFS provided, however, that the guarantee by Homes is subordinated to up to $60,000 of Senior Bank Indebtedness. In 1996 the Company loaned $475 to a limited liability corporation, Valley Brooke, LLC (the Corporation), an entity in whom certain members of the Predecessor's board of directors and certain employees of the Predecessor had a financial interest. The Corporation purchased approximately 194 acres of undeveloped land and an option on an adjoining 30 acres of land from an unrelated party for approximately $2 million. This receivable was not part of the Purchase Transaction. 9. INCOME TAXES Prior to the Purchase Date, the Predecessor elected to be taxed as an S Corporation under the provisions of the Internal Revenue Code. As an S Corporation, any federal tax liability or refund receivable related to income or loss generated during the year was the responsibility of the individual shareholders of the Predecessor. Income tax expense incurred prior to the Purchase Date was comprised solely of state income taxes and were payable directly by the Predecessor. For the two months ended December 31, 1997, the Successor's income tax expense (benefit) consists of the following: <TABLE> <CAPTION> TWO MONTHS ENDED DECEMBER 31, 1997 ----------------- <S> <C> Current: Federal $ (121) State (2) Deferred: Federal 255 State 26 ------- $ 158 ======= </TABLE> 89
FOX RIDGE HOMES, INC. NOTES TO FINANCIAL STATEMENTS (dollars in thousands) Deferred income taxes on the Successor's December 31, 1997 balance sheet is comprised of the following: <TABLE> <CAPTION> DECEMBER 31, 1997 ----------------- <S> <C> Deferred tax assets $ 632 Less: deferred tax liabilities 913 ----- Deferred tax liability $ 281 ===== </TABLE> Deferred tax assets arise principally as a result of inventory acquired in the Purchase Transaction having a higher basis for tax return purposes than for financial reporting purposes. Similarly, deferred tax liabilities arise principally as a result of goodwill originated from the Purchase Transaction having a higher basis for financial reporting purposes than for tax return purposes. A reconciliation of income tax expense in the accompanying statement of income for the two months ended December 31, 1997 to the amount computed by applying the statutory Federal income tax rate to income before income taxes is as follows: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 1997 ----------------- <S> <C> Income taxes computed at the Federal statutory rate $ 140 State income taxes, net of Federal income tax benefit 16 Other, net 2 ------ $ 158 ====== </TABLE> 10. DEBT Debt consists of the following: <TABLE> <CAPTION> DECEMBER 31, ---------------------------- 1997 1996 -------- -------- <S> <C> <C> Notes payable: Lot acquisition (a) $ 900 $ - ====== ====== Acquisition Note (b) $4,750 $ - ====== ====== Construction loans (c) $ - $6,205 ====== ====== </TABLE> (a) The lot acquisition notes consist of two lot acquisition notes with an aggregate face value of $900. Of the total, $270 bears interest at the prime rate and is due in full in October 1998. The remaining $630 of principal outstanding is interest free until October 1998 and then bears interest at the current prime rate, adjusted every six months, and is due in various amounts through 2001. The weighted average interest rate for the two months ended December 31, 1997 for the interest-bearing portion of the debt was 7.5%. (b) The acquisition note was issued in connection with the Purchase Transaction (see note 1). The acquisition note bears interest at 200 basis points above the federal funds target rate, and will be paid in three annual installments on October 31, 1998, 1999 and 2000, including accrued interest. 90
FOX RIDGE HOMES, INC. NOTES TO FINANCIAL STATEMENTS (dollars in thousands) (c) The construction loans were repaid on October 31, 1997 in connection with the Purchase Transaction (note 1). 11. COMMITMENTS AND CONTINGENT LIABILITIES Fox Ridge is committed under a non-cancelable operating lease involving office space that expires in 1999. Total rent expense incurred under the operating lease was approximately $14, $75, $84, and $74 for the two months ended December 31, 1997, the ten months ended October 31, 1997, and the years ended December 31, 1996 and 1995, respectively. Future minimum lease payments under these operating leases as of December 31, 1997 are as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31: --------------------------------- <S> <C> 1998 $ 73 1999 36 ---- $109 ==== </TABLE> During the ordinary course of operating its business, Fox Ridge 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. Fox Ridge had approximately $1,540 of such contingent obligations under such agreements as of December 31, 1997. Fox Ridge believes it will fulfill its obligations under the related contracts and does not anticipate any losses under these bonds or letters of credit. Fox Ridge 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 or results of operations of Fox Ridge. 91
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, 1997 and 1996 and the related statements of income, shareholder's equity, and cash flows for the year ended December 31, 1997 and the three months ended December 31, 1996. 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 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 financial statements referred to above present fairly, in all material respects, the financial position of RVN Inc. as of December 31, 1997 and 1996 and the results of its operations and its cash flows for the year ended December 31, 1997 and the three months ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Pittsburgh, Pennsylvania January 28, 1998 92
RVN, INC. Balance Sheets (dollars in thousands, except share data) <TABLE> <CAPTION> DECEMBER 31, ---------------------- 1997 1996 -------- -------- <S> <C> <C> ASSETS Cash and cash equivalents $ 11 $ 62 Royalty receivable 1,880 1,441 ------ ------ TOTAL ASSETS $1,891 $1,503 ====== ====== LIABILITIES AND SHAREHOLDER'S EQUITY Accounts payable and accrued expenses $ 643 $ 530 COMMITMENTS AND CONTINGENCIES SHAREHOLDER'S EQUITY: Common stock, $1 par value; 3,000 shares authorized; 1,000 shares issued and outstanding 1 1 Additional paid-in capital 64 64 Retained earnings 1,183 908 ------ ------ Total shareholder's equity 1,248 973 ------ ------ TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $1,891 $1,503 ====== ====== </TABLE> RVN, INC. Statements of Income (dollars in thousands) <TABLE> <CAPTION> THREE YEAR MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ <S> <C> <C> REVENUES: Royalty revenue $ 21,687 $ 4,711 Other income 8 - ---------- --------- 21,695 4,711 EXPENSES: General and administrative (54) (30) ---------- --------- Income before income tax expense 21,641 4,681 Income tax expense (7,656) (1,638) ---------- --------- NET INCOME $ 13,985 $ 3,043 ========== ========= </TABLE> See notes to financial statements 93
RVN, INC. Statements of Shareholder's Equity (dollars in thousands) <TABLE> <CAPTION> ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS ----- ------- -------- <S> <C> <C> <C> BALANCE, OCTOBER 1, 1996 $ - $ - $ - Capital contribution 1 64 - Net income - - 3,043 Dividend to parent - - (2,135) ------ -------- --------- BALANCE, DECEMBER 31, 1996 1 64 908 Net income - - 13,985 Dividend to parent - - (13,710) ------ -------- --------- BALANCE, DECEMBER 31, 1997 $ 1 $ 64 $ 1,183 ====== ======== ========= </TABLE> RVN, INC. Statements of Cash Flows (dollars in thousands) <TABLE> <CAPTION> YEAR ENDED THREE MONTHS ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 13,985 $ 3,043 Adjustments to reconcile net income to net cash provided (used) by operating activities: Net change in assets and liabilities: Increase in receivables (439) (1,441) Increase in accounts payable and accrued liabilities 113 530 ----------- ---------- Net cash provided by operating 13,659 2,132 activities ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividend to parent (13,710) (2,135) Capital contribution - 65 ----------- ---------- Net cash used by financing activities (13,710) (2,070) ----------- ---------- Net (decrease) increase in cash (51) 62 Cash, beginning of the period 62 - ----------- ---------- Cash, end of period $ 11 $ 62 =========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid during the period $ - $ - =========== ========== Taxes paid during the period (net of refunds) $ 7,517 $ 1,134 =========== ========== </TABLE> See notes to financial statements. 94
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, 1997 and 1996 and for the year ended December 31, 1997 and 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 USE OF ESTIMATES IN THE 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. 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. 95
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 the year ended December 31, 1997 and the three months ended December 31, 1996, RVN earned $21,687 and $4,711, respectively, in royalty fees for allowing Homes to use the Tradenames to market its homes. RVN had a $1,880 and $1,441 royalty receivable due from Homes at December 31, 1997 and 1996, respectively. The Senior Notes, issued by NVR on September 30, 1993, are secured by a first priority pledge of the capital stock of RVN, Homes, Fox Ridge Homes, Inc. ("Fox Ridge") and NVR Financial Services, Inc. ("NVRFS"). The Senior Notes are also guaranteed on a senior unsecured basis by RVN, Homes, Fox Ridge 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: <TABLE> <CAPTION> YEAR ENDED THREE MONTHS ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- <S> <C> <C> Current: Federal $ 7,531 $ 1,638 State 125 - Deferred: Federal - - State - - ---------- ---------- $ 7,656 $ 1,638 ========== ========== </TABLE> 96
INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors and Shareholders NVR, Inc.: Under date of January 28, 1998, we reported on the consolidated balance sheets of NVR, Inc. and subsidiaries as of December 31, 1997 and 1996 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, 1997 which are included in the NVR, Inc. annual report on Form 10-K for the year 1997. 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. KPMG Peat Marwick LLP Pittsburgh, Pennsylvania January 28, 1998 97
SCHEDULE I NVR, INC. (Parent Company) CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS (dollars in thousands, except share data) <TABLE> <CAPTION> DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- <S> <C> <C> ASSETS Cash and cash equivalents $ - $ - Property and equipment, net 7,094 7,644 Investment in and advances to homebuilding subsidiaries 259,546 250,897 Investment in and advances to mortgage banking subsidiaries 21,194 28,599 Other assets 2,561 2,987 ----------- --------- TOTAL ASSETS $ 290,395 $ 290,127 =========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 17,287 $ 9,847 Note payable 78 86 Other term debt 8,390 8,184 Senior notes 120,000 120,000 ----------- --------- TOTAL LIABILITIES 145,755 138,117 ----------- --------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock, $0.01 par value; 60,000,000 shares authorized; 19,995,494 and 19,881,515 shares issued for 1997 and 1996, respectively 200 199 Additional paid-in-capital 164,731 157,842 Retained earnings 75,977 47,098 Less treasury stock at cost - 8,900,972 and 6,307,108 shares at December 31, 1997 and 1996, respectively (96,268) (53,129) ----------- --------- TOTAL SHAREHOLDERS' EQUITY 144,640 152,010 ----------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 290,395 $ 290,127 =========== ========= </TABLE> See notes to financial statement schedule. 98
SCHEDULE I (continued) NVR, INC. (Parent Company) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME (dollars in thousands) <TABLE> <CAPTION> YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- ----------------- <S> <C> <C> <C> REVENUES Interest and other income $ 29 $ 197 $ 78 Interest income-affiliates, net 15,515 15,461 14,837 ----------------- ----------------- ----------------- Total revenues 15,544 15,658 14,915 EXPENSES Interest expense (14,908) (14,888) (15,178) General and administrative, net of allocations to subsidiaries (636) (770) (1,309) Equity in earnings of homebuilding subsidiaries 28,361 25,309 17,171 Equity in earnings of mortgage banking subsidiaries 1,853 603 146 ----------------- ----------------- ----------------- Total expenses 14,670 10,254 830 ----------------- ----------------- ----------------- Income before income taxes and extraordinary gain 30,214 25,912 15,745 Income tax (expense) benefit (1,335) (131) 655 Extraordinary gain-repurchase of debt (net of tax expense of $645 for the year ended December 31, 1995 - - 927 ----------------- ----------------- ----------------- NET INCOME $ 28,879 $ 25,781 $ 17,327 ================= ================= ================= </TABLE> See notes to financial statement schedule. 99
SCHEDULE I (continued) NVR, INC. (Parent Company) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF SHAREHOLDERS' EQUITY (dollars in thousands) <TABLE> <CAPTION> ADDITIONAL COMMON PAID-IN RETAINED TREASURY STOCK CAPITAL EARNINGS STOCK ------ ---------- -------- -------- <S> <C> <C> <C> <C> 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) Net income - - 28,879 - Purchase of common stock for treasury - - - (45,545) Performance share activity - 5,580 - 2,406 Tax benefit from stock option exercises - 464 - - Option activity 1 845 - - ------ ---------- -------- --------- BALANCE, DECEMBER 31, 1997 $ 200 $ 164,731 $ 75,977 $ (96,268) ====== ========== ======== ========= </TABLE> See notes to financial statement schedule. 100
SCHEDULE I (continued) NVR, INC. (Parent Company) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS (dollars in thousands) <TABLE> <CAPTION> YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- ----------------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 28,879 $ 25,781 $ 17,327 Adjustments to reconcile net income to net cash provided/ (used) by operating activities: Depreciation and amortization 1,333 1,313 1,311 Extraordinary gain - extinguishment of debt - - (1,572) Equity in income of subsidiaries (30,214) (25,912) (17,317) Net change in assets and liabilities: Increase (decrease) in accounts payable and accrued expenses 7,904 (7,225) (9,912) Other 7,956 3,370 2,510 ----------------- ----------------- ----------------- Net cash provided/(used) by operating activities 15,858 (2,673) (7,653) ----------------- ----------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (121) (455) (445) Investments in and advances to/from homebuilding and mortgage banking subsidiaries, net 28,970 25,325 23,542 ----------------- ----------------- ----------------- Net cash provided by investing activities 28,849 24,870 23,097 ----------------- ----------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repurchase of senior debt - - (12,962) Purchase of treasury stock and warrants (45,545) (35,446) (2,581) Other, net 838 13,249 99 ----------------- ----------------- ----------------- Net cash used by financing activities (44,707) (22,197) (15,444) ----------------- ----------------- ----------------- Net decrease in cash - - - Cash, beginning of year - - - ----------------- ----------------- ----------------- Cash, end of year $ - $ - $ - ================= ================= ================= </TABLE> See notes to financial statement schedule. 101
NVR, INC. (Parent Company) NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT (dollars in thousands) 1. DEBT AND GUARANTEES <TABLE> <CAPTION> DECEMBER 31, ----------------------------- 1997 1996 --------- --------- <S> <C> <C> Note payable $ 78 $ 86 Other term debt 8,390 8,184 Senior notes (a) 120,000 120,000 --------- --------- $ 128,468 $ 128,270 ========= ========= </TABLE> (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"), Fox Ridge Homes, Inc. ("Fox Ridge"), NVR Financial Services, Inc. ("NVRFS") and RVN, Inc. ("RVN"), (Homes, Fox Ridge, 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 year ended December 31, 1995, NVR purchased $15,000 in principal amount of its Senior Notes in the open market. These transactions resulted in a pre-tax gain of $1,572 for the year ended December 31, 1995 and is included in the accompanying financial statements as an extraordinary item, net of the applicable taxes. Through December 31, 1997, the Company has repurchased $40,000 in the aggregate of its Senior Notes in the open market. 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 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 certain 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 $6,059 and $5,345 was outstanding at December 31, 1997 and 1996, respectively. The Working Capital Revolving Credit is for a three year period ending May 31, 2000 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 rates for amounts outstanding under the facility were 8.1% and 8.0% during 1997 and 1996, 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 102
NVR, INC. (Parent Company) NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT (dollars in thousands) 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, 1997 are as follows: <TABLE> <CAPTION> YEARS ENDING DECEMBER 31: ----------------------------- <S> <C> 1998 $ 10 1999 10 2000 10 2001 10 2002 10 Thereafter 131,728 </TABLE> The $131,728 maturing after 2002 includes $120,000 in Senior Notes which mature in April 2003. 2. DIVIDENDS PAID TO THE REGISTRANT NVR received returns of capital of $22,039, $24,928 and $3,000 from its consolidated subsidiaries during the years ended December 31, 1997, 1996 and 1995, respectively. 103