UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 333-44515-01
NVR Financial Services, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1513427
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(State or other jurisdiction of (IRS employer identification
incorporation or organization) number)
7601 Lewinsville Road, Suite 300
McLean, Virginia 22102
(703) 761-2000
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(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
(Not Applicable)
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(Former name, former address, and former fiscal year if changed since last
report)
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
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As of August 13, 1998 there were 1,000 total shares of common stock outstanding.
APPLICABLE ONLY TO ISSUERS 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 Sections 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
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NVR FINANCIAL SERVICES, INC.
FORM 10-Q
INDEX
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Page
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PART I FINANCIAL INFORMATION
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Item 1. Consolidated Balance Sheets at June 30, 1998 (unaudited)
and December 31, 1997.................................... 3
Consolidated Statements of Income for the
Three Months Ended June 30, 1998 (unaudited)
and June 30, 1997 (unaudited) and the
Six Months Ended June 30, 1998 (unaudited)
and June 30, 1997 (unaudited)............................ 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 (unaudited) and
June 30, 1997 (unaudited)................................ 5
Notes to Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 8
PART II OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K......................... 10
Exhibit Index............................................ 11
Signature................................................ 12
2
PART I
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ITEM 1.
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NVR FINANCIAL SERVICES, INC.
Consolidated Balance Sheets
(dollars in thousands, except share data)
JUNE 30, DECEMBER 31,
1998 1997
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(unaudited)
ASSETS
MORTGAGE BANKING:
Cash and cash equivalents $ 12,096 $ 4,041
Receivables 4,504 3,308
Mortgage loans held for sale, net 181,740 115,744
Property and equipment, net 461 637
Real estate acquired through foreclosure 652 504
Mortgage servicing rights, net 3,234 2,220
Reorganization value in excess of amount
allocable to identifiable assets, net 11,155 11,700
Other assets 946 559
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214,788 138,713
LIMITED-PURPOSE FINANCING SUBSIDIARIES:
Mortgage-backed securities, net 17,226 20,010
Funds held by trustee 1,598 245
Receivables 619 799
Other assets 215 231
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19,658 21,285
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TOTAL ASSETS $234,446 $159,998
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LIABILITIES AND SHAREHOLDER'S EQUITY
MORTGAGE BANKING:
Accounts payable $ 11,345 $ 5,380
Accrued expenses and other liabilities 3,823 3,824
Due to affiliates 1,557 116
Notes payable 174,583 108,393
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191,308 117,713
LIMITED-PURPOSE FINANCING SUBSIDIARIES:
Accrued expenses and other liabilities 869 681
Bonds payable, net 18,779 20,595
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19,648 21,276
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TOTAL LIABILITIES 210,956 138,989
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 20,382
Retained earnings 3,108 627
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Total shareholder's equity 23,490 21,009
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TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $234,446 $159,998
======== ========
See notes to consolidated financial statements.
3
NVR FINANCIAL SERVICES, INC.
Consolidated Statements of Income
(dollars in thousands)
(unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- ---------------------------
1998 1997 1998 1997
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MORTGAGE BANKING:
Interest income $ 2,300 $1,280 $ 4,155 $ 2,363
Gain on sales of mortgage loans 7,679 3,415 13,380 6,507
Servicing fees 471 511 663 1,226
Gain on sale of servicing 244 1,143 244 1,143
Title fees 2,290 1,629 4,084 2,944
Other, net 124 107 348 157
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Total revenues 13,108 8,085 22,874 14,340
Interest expense-external 1,634 869 3,125 1,259
Interest expense-affiliates 291 84 387 412
General and administrative 6,603 5,621 12,109 10,493
Amortization of mortgage
servicing rights 78 116 155 273
Amortization of reorganization value
in excess of amounts allocable to
identifiable assets 272 272 544 544
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Total expenses 8,878 6,962 16,320 12,981
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Operating income 4,230 1,123 6,554 1,359
LIMITED-PURPOSE FINANCING SUBSIDIARIES:
Interest income 370 574 779 1,170
Interest expense (366) (625) (765) (1,170)
Other, net (6) 52 (18) 4
------- ------ ------- -------
Operating income (2) 1 (4) 4
TOTAL OPERATING INCOME 4,228 1,124 6,550 1,363
Income tax expense (1,981) (618) (3,069) (752)
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NET INCOME $ 2,247 $ 506 $ 3,481 $ 611
======= ====== ======= =======
See notes to consolidated financial statements.
4
NVR FINANCIAL SERVICES, INC.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,481 $ 611
Adjustments to reconcile net income to net cash
used in operating activities:
Accretion of net discount on
mortgage-backed securities (32) (70)
Amortization 748 1,015
Gain on sales of loans (13,380) (6,507)
Mortgage loans closed (1,237,123) (646,951)
Proceeds from sales of mortgage loans 1,172,047 618,062
Gain on sales of mortgage
servicing rights (244) (1,143)
Other, net 6,630 1,243
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Net cash used in operating activities (67,873) (33,740)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in funds held by trustee (1,353) (347)
Principal payments on mortgage-
backed securities 2,981 1,896
Proceeds from sales of mortgage-
backed securities 474 14,419
Purchases of office facilities and equipment (213) (50)
Proceeds from sales of mortgage
servicing rights 8,570 9,184
Other, net 680 621
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Net cash provided by investing activities 11,139 25,723
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable 66,190 31,560
Redemption of bonds (1,842) (15,416)
Return of capital/dividend to parent (1,000) (7,029)
Change in due to affiliates 1,441 204
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Net cash provided by
financing activities 64,789 9,319
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Net increase in cash 8,055 1,302
Cash, beginning of period 4,041 3,247
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Cash, end of period $ 12,096 $ 4,549
=========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 3,947 $ 2,628
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Taxes paid during the period, net of refunds $ 2,550 $ 1,189
=========== =========
See notes to consolidated financial statements.
5
NVR FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
1. BASIS OF PRESENTATION
The accompanying unaudited, consolidated financial statements include
the accounts of NVR Financial Services, Inc. ("NVRFS" or the "Company") and its
subsidiaries. NVRFS is a wholly owned subsidiary of NVR, Inc. ("NVR"). NVRFS,
through its subsidiaries, conducts all of NVR's mortgage banking operations.
The statements are provided pursuant to NVRFS' status as a guarantor of NVR's
11% Senior Notes due 2003 (the "Senior Notes"). Intercompany accounts and
transactions have been eliminated in consolidation. The statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six-month period ended June 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
2. ADOPTION OF NEW ACCOUNTING PRINCIPLES
During the quarter ended March 31, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from non-
owner sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. For the three
and six month periods ended June 30, 1998 and 1997, comprehensive income equaled
net income; therefore, a separate statement of comprehensive income is not
included in the accompanying financial statements.
The Company will also implement SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information in 1998. SFAS No. 131 establishes
standards for the way that public enterprises report information about operating
segments in annual and interim financial statements. Because SFAS No. 131 has a
disclosure-only effect on the notes to the Company's financial statements,
adoption of SFAS No. 131 has no impact on the Company's results of operations or
financial condition. In the year of adoption, the disclosure requirements of
SFAS No. 131 need not be applied to interim financial statements. The Company
will implement SFAS No. 131 in its full year 1998 financial statements.
3. SHAREHOLDER'S EQUITY
A summary of changes in shareholder's equity is presented below:
ADDITIONAL
COMMON PAID-IN RETAINED TOTAL
STOCK CAPITAL EARNINGS EQUITY
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BALANCE, DECEMBER 31, 1997 $ - $20,382 $ 627 $21,009
Dividend - - (1,000) (1,000)
Net income - - 3,481 3,481
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BALANCE, JUNE 30, 1998 $ - $20,382 $ 3,108 $23,490
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6
NVR FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
(dollars in thousands)
4. DEBT
On July 10, 1998, NVR Mortgage Finance, Inc., a subsidiary of NVRFS,
amended its mortgage warehouse facility to increase the available borrowing
limit to $175,000, of which $150,000 is committed, and to ease certain
restrictive covenants. The other terms and conditions are substantially the
same as those in effect at December 31, 1997.
7
ITEM 2.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands, except per share and share data)
NVR Financial Services, Inc. ("NVRFS" or the "Company") is a wholly owned
subsidiary of NVR, Inc. ("NVR"). NVRFS, through its subsidiaries, conducts all
of NVR's mortgage banking operations.
FORWARD-LOOKING STATEMENTS
Some of the statements in this Form 10-Q, 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.
Certain, but not necessarily all, of such forward-looking statements can be
identified by the use of forward-looking terminology, such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereof or comparable terminology, or by discussion of
strategies, each of which involves risks and uncertainties. All statements
other than of historical facts included herein, including those regarding market
trends, the Company's financial position, business strategy, projected plans and
objectives of management for future operations, are forward-looking statements.
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 NVR, Inc. 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,
technological problems encountered with year 2000 issues, certain conditions in
financial markets and other factors over which the Company has little or no
control.
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
NVRFS generated operating income of $4,228 for the three months ended
June 30, 1998 compared to operating income of $1,124 during the same period in
1997. Loan closings were $658,789 and $349,253 during the respective quarters
ended June 30, 1998 and 1997, representing an increase of 89%.
Mortgage banking fees had a net increase of $3,986, representing a 60%
increase when comparing the respective quarters of June 30, 1998 and 1997. This
increase can be attributed to the higher gain on sale of loans resulting from
the higher volume of loan closings, partially offset by the lower gain on sale
of mortgage servicing rights. The 1997 period was favorably impacted by a one-
time gain from the sale of the Company's core mortgage servicing portfolio.
Increases in the current period for both interest expense and general and
administrative costs are also attributable to the higher loan closing volume
experienced in the current quarter as compared to the prior year quarter.
8
A summary of mortgage banking fees is noted below:
MORTGAGE BANKING FEES: 1998 1997
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Net gain on sale of loans $ 7,679 $3,415
Servicing 471 511
Title services 2,290 1,629
Gain on sale of servicing rights 244 1,143
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$10,684 $6,698
======= ======
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
NVRFS generated operating income of $6,550 for the six months ended
June 30, 1998 compared to operating income of $1,363 during the same period in
1997. Loan closings were $1,237,123 and $646,951 during the respective first
halves of 1998 and 1997, representing an increase of 91%.
Mortgage banking fees had a net increase of $6,551 representing a 55%
increase when comparing the respective first halves of 1998 and 1997. This
increase can be attributed to the higher gain on sale of loans resulting from
the higher volume of loan closings, partially offset by the lower servicing fee
income resulting from the decrease in the servicing portfolio and the lower gain
on sale of mortgage servicing rights. The 1997 period was favorably impacted by
a one-time gain from the sale of the Company's core mortgage servicing
portfolio. Increases in the current period for both interest expense and
general and administrative costs are also attributable to the higher loan
closing volume experienced in the current quarter as compared to the prior year
quarter.
A summary of mortgage banking fees is noted below:
MORTGAGE BANKING FEES: 1998 1997
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Net gain on sale of loans $13,380 $ 6,507
Servicing 663 1,226
Title services 4,084 2,944
Gain on sale of servicing rights 244 1,143
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$18,371 $11,820
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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 completed its initial review to
assess the Company's exposure to Year 2000 Issues, and has developed a detailed
plan to remediate areas of exposure. Implementation of the remediation plan has
commenced, and the Company expects that remediation will be completed prior to
January 1, 2000. Based on the Company's continuing 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. On July 10, 1998, NVR Mortgage Finance,
9
Inc., a subsidiary of NVRFS, amended its mortgage warehouse facility to increase
the available borrowing limit to $175,000, of which $150,000 is committed, and
to ease certain restrictive covenants. The other terms and conditions are
substantially the same as those in effect at December 31, 1997. 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 in its mortgage banking operations.
PART II
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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A. The Company did not file any reports on Form 8-K during the
quarter ended June 30, 1998.
B. Financial Data Schedule
10
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
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27 Financial Data Schedule 13
11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 13, 1998 NVR Financial Services, Inc.
By: /s/ Peter J. Fitzsimmons
-------------------------
Peter J. Fitzsimmons
Vice President, Chief Financial
Officer and Treasurer
12