<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-8951
M.D.C. HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 84-0622967
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3600 South Yosemite Street, Suite 900 80237
Denver, Colorado (Zip code)
(Address of principal executive offices)
(303) 773-1100
(Registrant's telephone number, including area code)
Not Applicable
(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
--- ---
As of July 21, 1994, 19,039,000 shares of M.D.C. Holdings, Inc.
common stock were outstanding.
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<PAGE>
M.D.C. HOLDINGS, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. Financial Information:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of June 30, 1994 (Unaudited) and
December 31, 1993 . . . . . . . . . . . . . . . . . . 1
Statements of Income for the three and six months ended
June 30, 1994 and 1993 (Unaudited). . . . . . . . . . 3
Statements of Cash Flows for the six months ended
June 30, 1994 and 1993 (Unaudited). . . . . . . . . . 4
Notes to Financial Statements (Unaudited) . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 21
Part II. Other Information:
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 39
Item 4. Submission of Matters to a Vote of Stockholders . . . . 40
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 40
-i-
<PAGE>
M.D.C. HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Corporate
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 27,782 $ 42,443
Investments and marketable securities, net . . . . . . . . . 983 765
Property and equipment, net. . . . . . . . . . . . . . . . . 10,181 10,432
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 10,648 8,100
Deferred issue costs, net. . . . . . . . . . . . . . . . . . 10,936 11,233
Other assets, net. . . . . . . . . . . . . . . . . . . . . . 1,453 3,200
--------- ---------
61,983 76,173
--------- ---------
Home Building
Cash and cash equivalents. . . . . . . . . . . . . . . . . . 13,868 18,479
Home sales and other accounts receivable . . . . . . . . . . 15,441 5,423
Investment in metropolitan district bonds. . . . . . . . . . 16,395 13,795
Inventories, net
Housing completed or under construction. . . . . . . . . . 275,887 201,023
Land and land under development. . . . . . . . . . . . . . 176,448 192,881
Prepaid expenses and other assets, net . . . . . . . . . . . 53,092 48,863
--------- ---------
551,131 480,464
--------- ---------
Mortgage Lending
Cash and cash equivalents. . . . . . . . . . . . . . . . . . 1,760 1,505
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . 3,400 3,400
Accrued interest and other assets, net . . . . . . . . . . . 1,655 2,571
Mortgage loans held in inventory, net. . . . . . . . . . . . 42,452 68,065
--------- ---------
49,267 75,541
--------- ---------
Asset Management
Cash and cash equivalents. . . . . . . . . . . . . . . . . . 563 576
Mortgage Collateral, net, and assets related to CMO bonds
and related liabilities. . . . . . . . . . . . . . . . . . 81,338 134,166
Equity CMO Interests, net. . . . . . . . . . . . . . . . . . 4,375 6,427
Other loans and assets, net. . . . . . . . . . . . . . . . . 2,861 3,519
--------- ---------
89,137 144,688
--------- ---------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . $751,518 $776,866
--------- ---------
--------- ---------
</TABLE>
(continued)
See notes to condensed consolidated financial statements.
-1-
<PAGE>
M.D.C. HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
----------- ------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES
Corporate
Accounts payable and accrued expenses. . . . . . . . . . . . $ 22,043 $ 20,846
Income taxes payable . . . . . . . . . . . . . . . . . . . . 19,668 28,711
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . 3,604 3,624
Senior Notes, net. . . . . . . . . . . . . . . . . . . . . . 187,284 187,199
Subordinated Notes, net. . . . . . . . . . . . . . . . . . . 38,204 38,213
--------- ---------
270,803 278,593
--------- ---------
Home Building
Accounts payable and accrued expenses. . . . . . . . . . . . 80,926 70,741
Lines of credit. . . . . . . . . . . . . . . . . . . . . . . 67,468 24,645
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . 49,053 62,495
--------- ---------
197,447 157,881
--------- ---------
Mortgage Lending
Accounts payable and accrued expenses. . . . . . . . . . . . 4,344 8,487
Line of credit . . . . . . . . . . . . . . . . . . . . . . . 16,685 29,500
--------- ---------
21,029 37,987
--------- ---------
Asset Management
Accounts payable and accrued expenses. . . . . . . . . . . . 1,740 3,051
CMO bonds, net, and related liabilities, recourse solely
to applicable subsidiary assets. . . . . . . . . . . . . . 76,651 123,500
--------- ---------
78,391 126,551
--------- ---------
Total Liabilities. . . . . . . . . . . . . . . . . . . . . 567,670 601,012
--------- ---------
COMMITMENTS AND CONTINGENCIES. . . . . . . . . . . . . . . . . . -- --
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 25,000,000 shares authorized;
none issued. . . . . . . . . . . . . . . . . . . . . . . . . -- --
Common Stock, $.01 par value; 100,000,000 shares authorized;
21,706,000 and 20,914,000 shares issued, respectively, at
June 30, 1994 and December 31, 1993. . . . . . . . . . . . . 217 209
Additional paid-in capital . . . . . . . . . . . . . . . . . . 133,664 133,455
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 65,672 57,879
--------- ---------
199,553 191,543
Less treasury stock, at cost; 2,667,000 and 2,664,000 shares,
respectively, at June 30, 1994 and December 31, 1993 . . . . (15,705) (15,689)
--------- ---------
Total Stockholders' Equity . . . . . . . . . . . . . . . . 183,848 175,854
--------- ---------
Total Liabilities and Stockholders' Equity . . . . . . . . . . . $ 751,518 $ 776,866
--------- ---------
--------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
-2-
<PAGE>
M.D.C. HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
1994 1993 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Home Building. . . . . . . . . . . . . . . . . . . . $ 190,257 $ 145,280 $ 348,835 $ 244,002
Mortgage Lending . . . . . . . . . . . . . . . . . . 3,903 6,042 9,390 9,478
Asset Management . . . . . . . . . . . . . . . . . . 3,336 7,877 7,6022 1,046
Corporate. . . . . . . . . . . . . . . . . . . . . . 275 458 637 1,016
--------- --------- --------- ---------
Total Revenues. . . . . . . . . . . . . . . . . . 197,771 159,657 366,464 275,542
--------- --------- --------- ---------
COSTS AND EXPENSES:
Home Building. . . . . . . . . . . . . . . . . . . . 177,931 139,453 327,196 236,316
Mortgage Lending . . . . . . . . . . . . . . . . . . 2,265 3,111 4,848 5,706
Asset Management . . . . . . . . . . . . . . . . . . 2,553 6,194 5,7971 4,695
Corporate general and administrative . . . . . . . . 3,966 3,809 7,899 7,383
Corporate and home building interest (Note E). . . . 2,051 2,671 5,007 5,888
--------- --------- --------- ---------
Total Expenses. . . . . . . . . . . . . . . . . . 188,766 155,238 350,747 269,988
--------- --------- --------- ---------
Income before income taxes . . . . . . . . . . . . . . 9,005 4,419 15,717 5,554
Provision for income taxes . . . . . . . . . . . . . . 3,301 1,405 6,207 1,625
--------- --------- --------- ---------
Net Income . . . . . . . . . . . . . . . . . . . . . . $ 5,704 $ 3,014 $ 9,510 $ 3,929
--------- --------- --------- ---------
--------- --------- --------- ---------
EARNINGS PER SHARE
Primary. . . . . . . . . . . . . . . . . . . . . . . $ .28 $ .14 $ .47 $ .18
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully-diluted. . . . . . . . . . . . . . . . . . . . $ .25 $ .14 $ .43 $ .18
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED-AVERAGE SHARES OUTSTANDING
Primary. . . . . . . . . . . . . . . . . . . . . . . 20,480 22,337 20,403 22,284
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully-diluted. . . . . . . . . . . . . . . . . . . . 24,094 22,399 24,045 22,399
--------- --------- --------- ---------
--------- --------- --------- ---------
DIVIDENDS DECLARED PER SHARE . . . . . . . . . . . . . $ .02 $ -- $ .02 $ --
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE>
M.D.C. HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1994 1993
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,510 $ 3,929
Adjustments To Reconcile Net Income To Net Cash Used In
Operating Activities:
Gains on sales of mortgage-related assets. . . . . . . . . . (358) (5,982)
Depreciation and amortization. . . . . . . . . . . . . . . . 4,411 3,435
Equity CMO Interest valuation adjustments. . . . . . . . . . -- 2,600
Net Changes In Assets and Liabilities
Mortgage loans held in inventory . . . . . . . . . . . . . . 25,839 (25,062)
Home building inventories. . . . . . . . . . . . . . . . . . (61,050) (49,358)
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . (9,526) (3,849)
Accounts payable and accrued expenses. . . . . . . . . . . . (2,912) 24,125
Deferred income taxes. . . . . . . . . . . . . . . . . . . . (2,548) 622
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (4,301) (7,913)
---------- ----------
Net Cash Used In Operating Activities. . . . . . . . . . . . . . (40,935) (57,453)
---------- ----------
INVESTING ACTIVITIES:
Mortgage Collateral and other loans
Principal payments and prepayments . . . . . . . . . . . . . 28,891 47,528
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,173 23,263
Distributions of capital from Equity CMO Interests. . . . . . 2,052 4,247
CMO Bond principal payments. . . . . . . . . . . . . . . . . . -- 2,576
Changes in investments and marketable securities, net. . . . . -- 12,000
Changes in restricted cash, net. . . . . . . . . . . . . . . . 5,522 (2,589)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . (505) (378)
---------- ----------
Net Cash Provided By Investing Activities. . . . . . . . . . . . 53,133 86,647
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
-4-
<PAGE>
M.D.C. HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1994 1993
---------- ----------
<S> <C> <C>
FINANCING ACTIVITIES:
CMO bonds - Principal payments . . . . . . . . . . . . . . . . $ (46,378) $ (60,858)
Lines of credit
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . 301,805 144,384
Principal payments . . . . . . . . . . . . . . . . . . . . . (271,797) (119,803)
Subordinated Note payments . . . . . . . . . . . . . . . . . . -- (1,690)
Notes payable
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . 11,070 44,768
Principal payments . . . . . . . . . . . . . . . . . . . . . (26,049) (35,485)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . 121 202
---------- ----------
Net Cash Used In Financing Activities. . . . . . . . . . . . . . (31,228) (28,482)
---------- ----------
Net Increase (Decrease) In Cash and Cash Equivalents . . . . . . (19,030) 712
Cash and Cash Equivalents
Beginning Of Period. . . . . . . . . . . . . . . . . . . . . . 63,003 61,028
---------- ----------
End Of Period. . . . . . . . . . . . . . . . . . . . . . . . . $43,973 $61,740
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest, net of amounts capitalized . . . . . . . . . . . . . $8,951 $15,121
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 16,864 3,237
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Home building inventory purchases financed by seller . . . . . $ 3,693 $ 4,407
Home building land inventory sales financed by MDC . . . . . . 848 1,385
Disposition of land inventories collateralized by notes payable
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 2,864 --
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . 2,176 --
Accrued interest and other liabilities . . . . . . . . . . . 688 --
</TABLE>
See notes to condensed consolidated financial statements.
-5-
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. PRESENTATION OF FINANCIAL STATEMENTS
The condensed consolidated financial statements of M.D.C. Holdings, Inc.
("MDC" or the "Company," which, unless otherwise indicated, refers to M.D.C.
Holdings, Inc. and its consolidated subsidiaries) have been prepared by MDC,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. These statements reflect all adjustments (including all
normal recurring accruals) which, in the opinion of management, are necessary to
present fairly the financial position, results of operations and cash flows of
MDC as of June 30, 1994 and for all of the periods presented. These statements
are condensed and do not include all of the information required by generally
accepted accounting principles in a full set of financial statements. These
statements should be read in conjunction with MDC's financial statements and
notes thereto included in MDC's Annual Report on Form 10-K for its fiscal year
ended December 31, 1993, as amended.
Price Waterhouse LLP has made a review, and not an audit, of the unaudited
condensed consolidated financial statements of the Company for the three-month
and six-month periods ended June 30, 1994 and 1993 (based on procedures adopted
by the American Institute of Certified Public Accountants) as set forth in their
separate report dated July 26, 1994, which is included as an exhibit to this
Form 10-Q. This report is not a "report" within the meaning of Sections 7 and
11 of the Securities Act of 1933 and the independent accountant's liability
under Section 11 does not extend to it.
Certain reclassifications have been made in the 1993 financial statements
to conform to the classifications used in the current year.
-6-
<PAGE>
B. INFORMATION ON BUSINESS SEGMENTS
The Company operates in three business segments: home building, mortgage
lending and asset management. A summary of the Company's segment information is
shown below (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Home Building
Home sales. . . . . . . . . . . . . . . . . . . . . . . $184,878 $142,136 $341,613 $239,744
Land sales. . . . . . . . . . . . . . . . . . . . . . . 4,961 2,271 6,711 3,327
Other revenues. . . . . . . . . . . . . . . . . . . . . 418 873 511 931
-------- -------- -------- --------
190,257 145,280 348,835 244,002
-------- -------- -------- --------
Home cost of sales. . . . . . . . . . . . . . . . . . . 155,919 121,777 287,398 204,972
Land cost of sales. . . . . . . . . . . . . . . . . . . 4,118 2,623 6,155 3,719
Marketing . . . . . . . . . . . . . . . . . . . . . . . 10,925 8,796 19,927 15,152
General and administrative. . . . . . . . . . . . . . . 6,969 6,257 13,716 12,473
-------- -------- -------- --------
177,931 139,453 327,196 236,316
-------- -------- -------- --------
Operating Profit. . . . . . . . . . . . . . . . . . 12,326 5,827 21,639 7,686
-------- -------- -------- --------
Mortgage Lending
Interest revenues . . . . . . . . . . . . . . . . . . . $695 $1,329 $1,460 $2,227
Origination fees. . . . . . . . . . . . . . . . . . . . 1,145 1,557 2,381 2,642
Gains on sale of mortgage servicing . . . . . . . . . . 1,896 1,814 4,768 2,586
Gains (losses) on sales of mortgage loans, net. . . . . (280) 990 (181) 1,354
Mortgage servicing and other. . . . . . . . . . . . . . 447 352 962 669
-------- -------- -------- --------
3,903 6,042 9,390 9,478
-------- -------- -------- --------
Interest expense. . . . . . . . . . . . . . . . . . . . 56 505 250 760
General and administrative. . . . . . . . . . . . . . . 2,209 2,606 4,598 4,946
-------- -------- -------- --------
2,265 3,111 4,848 5,706
-------- -------- -------- --------
Operating Profit. . . . . . . . . . . . . . . . . . 1,638 2,931 4,542 3,772
-------- -------- -------- --------
Asset Management
Interest revenues . . . . . . . . . . . . . . . . . . . 2,416 6,071 5,343 12,999
Gains on sales of mortgage-related assets . . . . . . . 45 801 358 5,982
Management fees and other . . . . . . . . . . . . . . . 1,159 1,289 2,466 2,630
-------- -------- -------- --------
3,620 8,161 8,167 21,611
-------- -------- -------- --------
Interest expense. . . . . . . . . . . . . . . . . . . . 1,960 4,940 4,514 10,728
Equity in losses of Equity CMO Interests, net . . . . . -- 600 -- 2,600
General and administrative. . . . . . . . . . . . . . . 593 654 1,283 1,367
-------- -------- -------- --------
2,553 6,194 5,797 14,695
-------- -------- -------- --------
Operating Profit. . . . . . . . . . . . . . . . . . 1,067 1,967 2,370 6,916
-------- -------- -------- --------
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Corporate
Other revenues. . . . . . . . . . . . . . . . . . . . . 275 458 637 1,016
-------- -------- -------- --------
Interest expense. . . . . . . . . . . . . . . . . . . . 2,335 2,955 5,572 6,453
General and administrative. . . . . . . . . . . . . . . 3,966 3,809 7,899 7,383
-------- -------- -------- --------
6,301 6,764 13,471 13,836
-------- -------- -------- --------
Net Corporate Expenses . . . . . . . . . . . . . . . (6,026) (6,306) (12,834) (12,820)
-------- -------- -------- --------
Intersegment Eliminations
Asset management interest revenues. . . . . . . . . . . (284) (284) (565) (565)
-------- -------- -------- --------
Corporate interest expense. . . . . . . . . . . . . . . (284) (284) (565) (565)
-------- -------- -------- --------
-- -- -- --
-------- -------- -------- --------
Income Before Income Taxes . . . . . . . . . . . . . . . . $ 9,005 $ 4,419 $ 15,717 $ 5,554
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
C. ACQUISITION OF ADDITIONAL SHARES OF RICHMOND HOMES
Prior to February 2, 1994, Messrs. Larry A. Mizel (Chairman of the Board
and Chief Executive Officer of the Company) and David D. Mandarich (Executive
Vice President - Real Estate and a director of the Company) owned 35% of the
outstanding shares of Richmond Homes, Inc. I ("Richmond Homes") common stock.
Richmond Homes and its subsidiaries conduct the Company's Colorado home
building operations. In furtherance of the Company's desire to own all of the
outstanding shares of Richmond Homes common stock, in December 1993 a special
committee of the Board of Directors of the Company (the "Special Committee")
negotiated on behalf of the Company terms of an option agreement with Messrs.
Mizel and Mandarich to purchase the shares of Richmond Homes common stock owned
by them for a purchase price of up to $3,500,000 in the aggregate. The
purchase price for the shares of Richmond Homes common stock was to be paid in
additional shares of common stock of MDC ("MDC Common Stock") valued at $5.75
per share, which was the closing price of MDC Common Stock on the date of the
option agreement. The Special Committee engaged a financial advisor to perform
a business enterprise evaluation of Richmond Homes. In February 1994, based
on the results of the evaluation, the maximum of $3,500,000 was paid by issuing
an aggregate of 608,695 shares of MDC Common Stock to Messrs. Mizel and
Mandarich.
As the transaction was between related parties, the issuance of the MDC
Common Stock was recorded based on the net book value of Richmond Homes, which
had approximately zero common stockholders' equity at the date of the
acquisition. Accordingly, the value of the shares of MDC Common Stock issued
to Messrs. Mizel and Mandarich was recorded at zero.
D. ACCOUNTING CHANGE - ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES
Effective January 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which supersedes SFAS No. 12. The
adoption of SFAS No. 115 had no effect on Net Income and had an immaterial
effect on Stockholders' Equity.
-8-
<PAGE>
E. CORPORATE AND HOME BUILDING INTEREST ACTIVITY
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
1994 1993 1994 1993
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest capitalized in home building inventory,
beginning of period. . . . . . . . . . . . . . . . . . . $ 41,881 $ 47,518 $ 42,681 $ 48,440
Corporate and home building interest incurred. . . . . . . 8,883 6,230 17,247 12,286
Corporate and home building interest expensed. . . . . . . (2,051) (2,671) (5,007) (5,888)
Previously capitalized home building interest included in
cost of sales. . . . . . . . . . . . . . . . . . . . . . (6,191) (4,647) (12,399) (8,408)
-------- -------- -------- --------
Interest capitalized in home building inventory, end of
period . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,522 $ 46,430 $ 42,522 $ 46,430
-------- -------- -------- --------
-------- -------- -------- --------
Home building inventories, end of period . . . . . . . . . $452,335 $390,546 $452,335 $390,546
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
-9-
<PAGE>
F. EARNINGS PER SHARE
Primary earnings per share are based on the weighted-average number of
common and common equivalent shares outstanding during each period. In 1994,
the computation of fully-diluted earnings per share also assumes the conversion
into MDC Common Stock of all of the $28,000,000 outstanding principal amount of
the 8 3/4% convertible subordinated notes due December 2005 (the "Convertible
Notes") at a conversion price of $7.75 per share of MDC Common Stock. The
primary and fully-diluted earnings per share calculations are shown below (in
thousands except per share amounts).
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Primary Earnings Per Share Calculation:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 5,704 $ 3,014 $ 9,510 $ 3,929
-------- -------- -------- --------
-------- -------- -------- --------
Weighted-average shares outstanding. . . . . . . . . . . . 19,021 20,448 18,885 20,394
Dilutive stock options . . . . . . . . . . . . . . . . . . 1,459 1,889 1,518 1,890
-------- -------- -------- --------
Total Weighted-Average Shares. . . . . . . . . . . . . . 20,480 22,337 20,403 22,284
-------- -------- -------- --------
-------- -------- -------- --------
Primary Earnings Per Share . . . . . . . . . . . . . . . . $ .28 $ .14 $ .47 $ .18
-------- -------- -------- --------
-------- -------- -------- --------
Fully-Diluted Earnings Per Share Calculation:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 5,704 $ 3,014 $ 9,510 $ 3,929
Adjustment for interest on Convertible Notes, net of
income tax benefit; conversion assumed . . . . . . . . . 384 -- 768 --
-------- -------- -------- --------
Adjusted Net Income. . . . . . . . . . . . . . . . . . $ 6,088 $ 3,014 $ 10,278 $ 3,929
-------- -------- -------- --------
-------- -------- -------- --------
Weighted-average shares outstanding. . . . . . . . . . . . 19,021 20,448 18,885 20,394
Dilutive stock options . . . . . . . . . . . . . . . . . . 1,460 1,951 1,547 2,005
Shares issuable upon conversion of Convertible Notes;
conversion assumed . . . . . . . . . . . . . . . . . . . 3,613 -- 3,613 --
-------- -------- -------- --------
Total Weighted-Average Shares. . . . . . . . . . . . . 24,094 22,399 24,045 22,399
-------- -------- -------- --------
-------- -------- -------- --------
Fully-Diluted Earnings Per Share . . . . . . . . . . . . . $ .25 $ .14 $ .43 $ .18
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
-10-
<PAGE>
G. EQUITY CMO INTERESTS
MDC owns a 49.999% ownership interest in seven collateralized mortgage
obligation ("CMO") issuances which are accounted for on the equity method
(collectively, "Equity CMO Interests"). The unaudited condensed financial
information of the Equity CMO Interests is set forth below. The information
provided includes 100% of the gross assets and liabilities and operating
results comprising these interests (in thousands).
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
----------- ------------
<S> <C> <C>
Condensed Combined Summarized Financial Condition (100%)
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 305,622 $ 422,338
Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288,238 398,048
---------- ----------
Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,384 $ 24,290
---------- ----------
---------- ----------
MDC's Share of Net Assets (Net of Valuation Allowances of $4,317 and
$5,718, respectively, at June 30, 1994 and December 31, 1993). . . . $ 4,375 $ 6,427
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Condensed Combined Operating Results (100%)
Earnings before premium/discount amortization
Interest and other revenues. . . . . . . . . . . . . . $ 7,367 $ 13,134 $ 16,184 $ 28,662
Interest and other expenses. . . . . . . . . . . . . . 6,262 10,133 13,130 22,296
-------- -------- -------- --------
1,105 3,001 3,054 6,366
-------- -------- -------- --------
Premium/discount amortization. . . . . . . . . . . . . . (2,591) (4,425) (5,856) (12,046)
-------- -------- -------- --------
Net Loss (100%). . . . . . . . . . . . . . . . . . . . . . $ (1,486) $ (1,424) $ (2,802) $ (5,680)
-------- -------- -------- --------
-------- -------- -------- --------
Equity in losses of Equity CMO Interests before
valuation adjustments. . . . . . . . . . . . . . . . . . $ -- $ -- $ -- $ --
Valuation adjustments. . . . . . . . . . . . . . . . . . . -- (600) -- (2,600)
-------- -------- -------- --------
Equity in losses of Equity CMO Interests, net of
valuation adjustments. . . . . . . . . . . . . . . . . . $ -- $ (600) $ -- $ (2,600)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
MDC's share of net losses for the three and six months ended June 30, 1994
was $743,000 and $1,401,000, respectively, and for the three and six months
ended June 30, 1993 was $712,000 and $2,840,000, respectively, all of which was
charged against valuation allowances.
-11-
<PAGE>
H. SUBSEQUENT EVENT
On August 4, 1994, Superior Metropolitan District No. 1 ("District No. 1")
and Superior Metropolitan District No. 2 ("District No. 2") (collectively,
the "Districts") issued $35,730,000 principal amount of bonds (the "Bonds").
The Districts were organized and are operated to provide, among other things,
water and sanitary sewer services, street improvements and park and recreation
facilities for inhabitants of a master-planned community located northwest of
Denver (the "Project"). A significant portion of the Project served by such
Districts is owned and is being developed by the Company. Part of the proceeds
of the offering were utilized to redeem in full, at par value, all of the
outstanding bonds of the Districts, totaling $16,395,000, all of which were
owned by the Company. Additionally, proceeds totaling approximately $11,000,000
were paid to the Company by District No. 1 to purchase certain interests in a
water supply project (the "Water Project") and to reimburse the Company for
prepaid water taps and for certain other funds previously advanced to
District No. 1.
In connection with the issuance of the Bonds, MDC has guaranteed payment
of principal and interest on $27,500,000 principal amount of District No. 1
Bonds and has entered into certain agreements with District No. 1 to purchase
certain water and sewer tap fees and storm drainage fees (collectively, the
"Fees") in connection with the Companys home building operations within the
Project. In connection with the guarantee, MDC was required to deposit
$10,000,000 into a trust account. Of the funds in the trust account,
$6,000,000 will be released in $1,000,000 increments as certain levels of
completed homes are achieved in the Project, provided that if the Water Project
is not completed by January 1, 1997 or if the Water Project is enjoined and
such injunction is not lifted, no withdrawals may occur. The $4,000,000
balance will be released upon the earlier of (i) the completion of the Water
Project; or (ii) the resolution (to the extent provided in the Indenture
executed in connection with the issuance of the Bonds) of certain litigation
seeking, among other things, to delay the Water Project's completion. In
addition, MDC has guaranteed payment of principal and interest on $2,580,000
principal amount of District No. 2 Bonds.
I. SUPPLEMENTAL GUARANTOR INFORMATION
The Senior Notes are guaranteed unconditionally on an unsecured
subordinated basis, jointly and severally, (the "Guaranties") by Richmond
American Homes of California, Inc., Richmond American Homes of Maryland, Inc.,
Richmond American Homes of Nevada, Inc., Richmond American Homes of Virginia,
Inc., Richmond American Homes, Inc., Richmond Homes, Inc. I and Richmond Homes,
Inc. II (collectively, the "Guarantors"). The Guaranties are subordinated to
all Guarantor Senior Indebtedness (as defined in the Senior Notes Indenture).
In June 1994, MDC (Parent Company) exchanged three notes receivable from a
Guarantor subsidiary with a principal amount of $104,350,000 for a new note
receivable from the same Guarantor subsidiary with a principal amount of
$69,731,000. Because the exchange was between parties under common control, the
difference between the principal amounts of the notes exchanged, net of taxes,
was recorded as an additional investment in the Guarantor subsidiary by the
Parent and as additional paid-in-capital by the Guarantor subsidiary.
Supplemental combining financial information follows.
-12-
<PAGE>
SUPPLEMENTAL COMBINING BALANCE SHEET
JUNE 30, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Corporate
Cash and cash equivalents. . . . . . . . . . . . $ 27,779 $ -- $ 3 $ -- $ 27,782
Investments and marketable securities, net . . . 979 -- 4 -- 983
Investments in subsidiaries. . . . . . . . . . . 234,942 24,365 -- (259,307) --
Advances and notes receivable -
Parent and subsidiaries. . . . . . . . . . . . 234,945 -- 77,307 (312,252) --
Property and equipment, net. . . . . . . . . . . 10,181 -- -- -- 10,181
Deferred income taxes. . . . . . . . . . . . . . 10,648 -- -- -- 10,648
Deferred issue costs, net. . . . . . . . . . . . 10,936 -- -- -- 10,936
Other assets, net. . . . . . . . . . . . . . . . 1,274 -- 179 -- 1,453
--------- --------- --------- --------- ---------
531,684 24,365 77,493 (571,559) 61,983
--------- --------- --------- --------- ---------
Home Building
Cash and cash equivalents. . . . . . . . . . . . -- 12,939 929 -- 13,868
Trade and other accounts receivable. . . . . . . 500 23,803 301 (9,163) 15,441
Investment in metropolitan district bonds. . . . 14,000 2,395 -- -- 16,395
Inventories, net
Housing completed or under construction. . . . -- 258,080 17,807 -- 275,887
Land and land under development. . . . . . . . (1,530) 143,501 33,500 977 176,448
Prepaid expenses and other assets, net . . . . . 3,499 41,200 8,393 -- 53,092
--------- --------- --------- --------- ---------
16,469 481,918 60,930 (8,186) 551,131
--------- --------- --------- --------- ---------
Mortgage Lending
Cash and cash equivalents. . . . . . . . . . . . -- -- 1,760 -- 1,760
Restricted cash. . . . . . . . . . . . . . . . . -- -- 3,400 -- 3,400
Other assets, net. . . . . . . . . . . . . . . . -- -- 42,452 -- 42,452
Mortgage loans held in inventory, net. . . . . . -- -- 1,655 -- 1,655
--------- --------- --------- --------- ---------
-- -- 49,267 -- 49,267
--------- --------- --------- --------- ---------
Asset Management
Cash and cash equivalents. . . . . . . . . . . . -- -- 563 -- 563
Mortgage Collateral, net, and assets related
to CMO bonds and related liabilities . . . . . -- -- 81,338 -- 81,338
Equity CMO Interests, net. . . . . . . . . . . . -- -- 4,375 -- 4,375
Other loans and assets, net. . . . . . . . . . . -- -- 2,861 -- 2,861
--------- --------- --------- --------- ---------
-- -- 89,137 -- 89,137
--------- --------- --------- --------- ---------
Total Assets . . . . . . . . . . . . . . . $ 548,153 $ 506,283 $ 276,827 $(579,745) $ 751,518
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
-13-
<PAGE>
SUPPLEMENTAL COMBINING BALANCE SHEET
JUNE 30, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
LIABILITIES
Corporate
Accounts payable and accrued expenses. . . . . . $ 21,874 $ -- $ 185 $ (16) $ 22,043
Advances and notes payable -
Parent and subsidiaries. . . . . . . . . . . . 86,770 167,661 69,149 (323,580) --
Income taxes payable . . . . . . . . . . . . . . 19,668 -- -- -- 19,668
Notes payable. . . . . . . . . . . . . . . . . . 3,604 -- -- -- 3,604
Senior Notes, net. . . . . . . . . . . . . . . . 187,284 -- -- -- 187,284
Subordinated Notes, net. . . . . . . . . . . . . 38,204 -- -- -- 38,204
--------- --------- --------- --------- ---------
357,404 167,661 69,334 (323,596) 270,803
--------- --------- --------- --------- ---------
Home Building
Accounts payable and accrued expenses. . . . . . 1,029 71,534 8,106 257 80,926
Lines of credit. . . . . . . . . . . . . . . . . -- 67,468 -- -- 67,468
Notes payable. . . . . . . . . . . . . . . . . . 5,888 32,325 10,840 -- 49,053
--------- --------- --------- --------- ---------
6,917 171,327 18,946 257 197,447
--------- --------- --------- --------- ---------
Mortgage Lending
Accounts payable and accrued expenses. . . . . . -- -- 13,507 (9,163) 4,344
Line of credit . . . . . . . . . . . . . . . . . -- -- 16,685 -- 16,685
--------- --------- --------- --------- ---------
-- -- 30,192 (9,163) 21,029
--------- --------- --------- --------- ---------
Asset Management
Accounts payable and accrued expenses. . . . . . -- -- 1,740 -- 1,740
CMO bonds, net, and related liabilities,
recourse solely to applicable subsidiary
assets . . . . . . . . . . . . . . . . . . . . -- -- 76,651 -- 76,651
--------- --------- --------- --------- ---------
-- -- 78,391 -- 78,391
--------- --------- --------- --------- ---------
Total Liabilities. . . . . . . . . . . . . 364,321 338,988 196,863 (332,502) 567,670
--------- --------- --------- --------- ---------
STOCKHOLDERS' EQUITY
Preferred stock. . . . . . . . . . . . . . . . . -- -- 10 (10) --
Common Stock . . . . . . . . . . . . . . . . . . 225 18 124 (150) 217
Additional paid-in capital . . . . . . . . . . . 133,656 144,257 116,610 (260,859) 133,664
Retained earnings. . . . . . . . . . . . . . . . 65,656 23,020 (36,771) 13,767 65,672
Less treasury stock. . . . . . . . . . . . . . . (15,705) -- (9) 9 (15,705)
--------- --------- --------- --------- ---------
Total Stockholders' Equity . . . . . . . . 183,832 167,295 79,964 (247,243) 183,848
--------- --------- --------- --------- ---------
Total Liabilities and
Stockholders' Equity . . . . . . . . . . $ 548,153 $ 506,283 $ 276,827 $(579,745) $ 751,518
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
-14-
<PAGE>
SUPPLEMENTAL COMBINING BALANCE SHEET
DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Corporate
Cash and cash equivalents. . . . . . . . . . . . $ 42,443 $ -- $ -- $ -- $ 42,443
Investments and marketable securities, net . . . 761 -- 4 -- 765
Investments in subsidiaries. . . . . . . . . . . 191,462 23,009 15,030 (229,501) --
Advances receivable - Parent and
subsidiaries . . . . . . . . . . . . . . . . . 260,931 37 91,348 (352,316) --
Property and equipment, net. . . . . . . . . . . 10,432 -- -- -- 10,432
Deferred income taxes. . . . . . . . . . . . . . -- 8,100 -- -- 8,100
Deferred issue costs, net. . . . . . . . . . . . 11,233 -- -- -- 11,233
Other assets, net. . . . . . . . . . . . . . . . 2,715 -- 485 -- 3,200
--------- --------- --------- --------- ---------
519,977 31,146 106,867 (581,817) 76,173
--------- --------- --------- --------- ---------
Home Building
Cash and cash equivalents. . . . . . . . . . . . -- 17,792 687 -- 18,479
Trade and other accounts receivable. . . . . . . 41 9,059 213 (3,890) 5,423
Investment in metropolitan district bonds. . . . 11,400 2,395 -- -- 13,795
Inventories, net
Housing completed or under construction. . . . -- 187,796 13,227 -- 201,023
Land and land under development. . . . . . . . (1,530) 153,068 40,252 1,091 192,881
Prepaid expenses and other assets, net . . . . . 1,312 39,728 5,400 2,423 48,863
--------- --------- --------- --------- ---------
11,223 409,838 59,779 (376) 480,464
--------- --------- --------- --------- ---------
Mortgage Lending
Cash and cash equivalents. . . . . . . . . . . . -- -- 1,505 -- 1,505
Restricted cash. . . . . . . . . . . . . . . . . -- -- 3,400 -- 3,400
Accrued interest and other assets, net . . . . . -- -- 2,571 -- 2,571
Mortgage loans held in inventory, net. . . . . . -- -- 68,065 -- 68,065
--------- --------- --------- --------- ---------
-- -- 75,541 -- 75,541
--------- --------- --------- --------- ---------
Asset Management
Cash and cash equivalents. . . . . . . . . . . . -- -- 576 -- 576
Mortgage Collateral, net, and assets related to
CMO bonds and related liabilities. . . . . . . -- -- 134,166 -- 134,166
Equity CMO Interests, net. . . . . . . . . . . . -- -- 6,427 -- 6,427
Other loans and assets, net. . . . . . . . . . . -- -- 3,519 -- 3,519
--------- --------- --------- --------- ---------
-- -- 144,688 -- 144,688
--------- --------- --------- --------- ---------
Total Assets . . . . . . . . . . . . . . $ 531,200 $ 440,984 $ 386,875 $(582,193) $ 776,866
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
-15-
<PAGE>
SUPPLEMENTAL COMBINING BALANCE SHEET
DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
LIABILITIES
Corporate
Accounts payable and accrued expenses. . . . . . $ 20,564 $ -- $ 282 $ -- $ 20,846
Advances payable - Parent and subsidiaries . . . 68,342 176,576 120,800 (365,718) --
Income taxes payable . . . . . . . . . . . . . . 26,635 2,076 -- -- 28,711
Notes payable. . . . . . . . . . . . . . . . . . 3,624 -- -- -- 3,624
Senior Notes, net. . . . . . . . . . . . . . . . 187,199 -- -- -- 187,199
Subordinated Notes, net. . . . . . . . . . . . . 38,213 -- -- -- 38,213
--------- --------- --------- --------- ---------
344,577 178,652 121,082 (365,718) 278,593
--------- --------- --------- --------- ---------
Home Building
Accounts payable and accrued expenses. . . . . . 864 62,768 6,800 309 70,741
Lines of credit. . . . . . . . . . . . . . . . . -- 24,645 -- -- 24,645
Notes payable. . . . . . . . . . . . . . . . . . 9,905 40,548 12,042 -- 62,495
--------- --------- --------- --------- ---------
10,769 127,961 18,842 309 157,881
--------- --------- --------- --------- ---------
Mortgage Lending
Accounts payable and accrued expenses. . . . . . -- -- 12,375 (3,888) 8,487
Line of credit . . . . . . . . . . . . . . . . . -- -- 29,500 -- 29,500
--------- --------- --------- --------- ---------
-- -- 41,875 (3,888) 37,987
--------- --------- --------- --------- ---------
Asset Management
Accounts payable and accrued expenses. . . . . . -- -- 3,051 -- 3,051
CMO bonds, net, and related liabilities,
recourse solely to applicable subsidiary
assets . . . . . . . . . . . . . . . . . . . . -- -- 123,500 -- 123,500
--------- --------- --------- --------- ---------
-- -- 126,551 -- 126,551
--------- --------- --------- --------- ---------
Total Liabilities. . . . . . . . . . . . . 355,346 306,613 308,350 (369,297) 601,012
--------- --------- --------- --------- ---------
STOCKHOLDERS' EQUITY
Preferred stock. . . . . . . . . . . . . . . . . -- 20,475 10 (20,485) --
Common Stock . . . . . . . . . . . . . . . . . . 209 19 124 (143) 209
Additional paid-in capital . . . . . . . . . . . 133,455 99,725 116,590 (216,315) 133,455
Retained earnings. . . . . . . . . . . . . . . . 57,879 14,152 (38,190) 24,038 57,879
Less treasury stock. . . . . . . . . . . . . . . (15,689) -- (9) 9 (15,689)
--------- --------- --------- --------- ---------
Total Stockholders' Equity . . . . . . . . 175,854 134,371 78,525 (212,896) 175,854
--------- --------- --------- --------- ---------
Total Liabilities and
Stockholders' Equity . . . . . . . . . . $ 531,200 $ 440,984 $ 386,875 $(582,193) $ 776,866
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
-16-
<PAGE>
SUPPLEMENTAL COMBINING STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1994
REVENUES:
Home Building. . . . . . . . . . . . . . . . . . $ -- $ 177,586 $ 13,436 $ (765) $ 190,257
Mortgage Lending . . . . . . . . . . . . . . . . -- -- 3,903 -- 3,903
Asset Management . . . . . . . . . . . . . . . . -- -- 3,620 (284) 3,336
Corporate other revenues . . . . . . . . . . . . 258 -- 17 -- 275
Equity in earnings of subsidiaries . . . . . . . 10,603 1,513 -- (12,116) --
--------- --------- --------- --------- ---------
Total Revenues . . . . . . . . . . . . . . 10,861 179,099 20,976 (13,165) 197,771
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Home Building. . . . . . . . . . . . . . . . . . 367 166,246 11,622 (304) 177,931
Mortgage Lending . . . . . . . . . . . . . . . . -- -- 2,265 -- 2,265
Asset Management . . . . . . . . . . . . . . . . -- -- 2,553 -- 2,553
Corporate general and administrative . . . . . . 3,946 -- 20 -- 3,966
Corporate and home building interest . . . . . . (2,457) 4,308 945 (745) 2,051
--------- --------- --------- --------- ---------
Total Expenses . . . . . . . . . . . . . . 1,856 170,554 17,405 (1,049) 188,766
--------- --------- --------- --------- ---------
Income before income taxes . . . . . . . . . . . . 9,005 8,545 3,571 (12,116) 9,005
Provision for income taxes . . . . . . . . . . . . 3,301 3,341 1,175 (4,516) 3,301
--------- --------- --------- --------- ---------
NET INCOME . . . . . . . . . . . . . . . . . . . . $5,704 $5,204 $2,396 $(7,600) $5,704
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
THREE MONTHS ENDED JUNE 30, 1993
REVENUES:
Home Building. . . . . . . . . . . . . . . . . . $ 108 $ 139,308 $ 8,072 $ (2,208) $ 145,280
Mortgage Lending . . . . . . . . . . . . . . . . -- -- 6,042 -- 6,042
Asset Management . . . . . . . . . . . . . . . . -- -- 8,161 (284) 7,877
Corporate other revenues . . . . . . . . . . . . 453 -- (40) 45 458
Equity in earnings of subsidiaries . . . . . . . 6,473 1,408 -- (7,881) --
--------- --------- --------- --------- ---------
Total Revenues . . . . . . . . . . . . . . 7,034 140,716 22,235 (10,328) 159,657
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Home Building. . . . . . . . . . . . . . . . . . (1,033) 135,583 6,138 (1,235) 139,453
Mortgage Lending . . . . . . . . . . . . . . . . -- -- 3,111 -- 3,111
Asset Management . . . . . . . . . . . . . . . . -- -- 6,194 -- 6,194
Corporate general and administrative . . . . . . 3,562 -- 28 219 3,809
Corporate and home building interest . . . . . . 86 2,306 999 (720) 2,671
--------- --------- --------- --------- ---------
Total Expenses . . . . . . . . . . . . . . 2,615 137,889 16,470 (1,736) 155,238
--------- --------- --------- --------- ---------
Income before income taxes . . . . . . . . . . . 4,419 2,827 5,765 (8,592) 4,419
Provision for income taxes . . . . . . . . . . . 1,405 1,067 1,714 (2,781) 1,405
--------- --------- --------- --------- ---------
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 3,014 $ 1,760 $ 4,051 $ (5,811) $ 3,014
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
-17-
<PAGE>
SUPPLEMENTAL COMBINING STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1994
REVENUES:
Home Building. . . . . . . . . . . . . . . . . . $ -- $ 325,267 $ 25,092 $ (1,524) $ 348,835
Mortgage Lending . . . . . . . . . . . . . . . . -- -- 9,390 -- 9,390
Asset Management . . . . . . . . . . . . . . . . -- -- 8,167 (565) 7,602
Corporate other revenues . . . . . . . . . . . . 600 -- 37 -- 637
Equity in earnings of subsidiaries . . . . . . . 19,772 2,512 -- (22,284) --
--------- --------- --------- --------- ---------
Total Revenues . . . . . . . . . . . . . . 20,372 327,779 42,686 (24,373) 366,464
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Home Building. . . . . . . . . . . . . . . . . . 731 304,789 22,185 (509) 327,196
Mortgage Lending . . . . . . . . . . . . . . . . -- -- 4,848 -- 4,848
Asset Management . . . . . . . . . . . . . . . . -- -- 5,797 -- 5,797
Corporate general and administrative . . . . . . 7,848 -- 51 -- 7,899
Corporate and home building interest . . . . . . (3,924) 8,435 1,977 (1,481) 5,007
--------- --------- --------- --------- ---------
Total Expenses . . . . . . . . . . . . . . 4,655 313,224 34,858 (1,990) 350,747
--------- --------- --------- --------- ---------
Income before income taxes . . . . . . . . . . . . 15,717 14,555 7,828 (22,383) 15,717
Provision for income taxes . . . . . . . . . . . . 6,207 5,689 2,620 (8,309) 6,207
--------- --------- --------- --------- ---------
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 9,510 $ 8,866 $ 5,208 $ (14,074) $ 9,510
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SIX MONTHS ENDED JUNE 30, 1993
REVENUES:
Home Building. . . . . . . . . . . . . . . . . . $ 122 $ 232,654 $ 16,813 $ (5,587) $ 244,002
Mortgage Lending . . . . . . . . . . . . . . . . -- -- 9,478 -- 9,478
Asset Management . . . . . . . . . . . . . . . . -- -- 21,611 (565) 21,046
Corporate other revenues . . . . . . . . . . . . 1,043 -- (44) 17 1,016
Equity in earnings of subsidiaries . . . . . . . 11,243 2,549 -- (13,792) --
--------- --------- --------- --------- ---------
Total Revenues . . . . . . . . . . . . . . 12,408 235,203 47,858 (19,927) 275,542
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Home Building. . . . . . . . . . . . . . . . . . (1,032) 225,850 14,226 (2,728) 236,316
Mortgage Lending . . . . . . . . . . . . . . . . -- -- 5,706 -- 5,706
Asset Management . . . . . . . . . . . . . . . . -- -- 14,695 -- 14,695
Corporate general and administrative . . . . . . 7,153 -- 31 199 7,383
Corporate and home building interest . . . . . . 733 4,546 2,091 (1,482) 5,888
--------- --------- --------- --------- ---------
Total Expenses . . . . . . . . . . . . . . 6,854 230,396 36,749 (4,011) 269,988
--------- --------- --------- --------- ---------
Income before income taxes . . . . . . . . . . . . 5,554 4,807 11,109 (15,916) 5,554
Provision for income taxes . . . . . . . . . . . . 1,625 1,800 3,881 (5,681) 1,625
--------- --------- --------- --------- ---------
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 3,929 $ 3,007 $ 7,228 $ (10,235) $ 3,929
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
-18-
<PAGE>
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES . . . . . . . . . . . . . . . . . . . $ (18,479) $ (36,360) $ 5,599 $ 8,305 $ (40,935)
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Mortgage Collateral
Principal payments and prepayments . . . . . . -- 615 28,276 -- 28,891
Sales. . . . . . . . . . . . . . . . . . . . . -- -- 17,173 -- 17,173
Distributions of capital from Equity CMO
Interests. . . . . . . . . . . . . . . . . . . -- -- 2,052 -- 2,052
Changes in restricted cash . . . . . . . . . . . -- -- 5,522 -- 5,522
Affiliate notes receivable . . . . . . . . . . . 13,282 -- 4,053 (17,335) --
Other, net . . . . . . . . . . . . . . . . . . . (65) (215) (225) -- (505)
--------- --------- --------- --------- ---------
Net Cash Provided By (Used In) Investing
Activities . . . . . . . . . . . . . . . . . . . 13,217 400 56,851 (17,335) 53,133
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Net increase (reduction) in borrowings from
Parent and subsidiaries. . . . . . . . . . . . (5,486) 15,359 (1,568) (8,305) --
CMO bonds - principal payments . . . . . . . . . -- -- (46,378) -- (46,378)
Lines of Credit
Advances . . . . . . . . . . . . . . . . . . . -- 301,805 -- -- 301,805
Principal payments . . . . . . . . . . . . . . -- (258,982) (12,815) -- (271,797)
Notes payable
Borrowings . . . . . . . . . . . . . . . . . . -- 11,070 -- -- 11,070
Principal payments . . . . . . . . . . . . . . (4,037) (20,810) (1,202) -- (26,049)
Affiliate notes payable. . . . . . . . . . . . . -- (17,335) -- 17,335 --
Other, net . . . . . . . . . . . . . . . . . . . 121 -- -- -- 121
--------- --------- --------- --------- ---------
Net Cash Provided By (Used In) Financing
Activities . . . . . . . . . . . . . . . . . . . (9,402) 31,107 (61,963) 9,030 (31,228)
--------- --------- --------- --------- ---------
Net Increase (Decrease) In Cash And Cash
Equivalents. . . . . . . . . . . . . . . . . . . (14,664) (4,853) 487 -- (19,030)
Cash And Cash Equivalents
Beginning Of Period. . . . . . . . . . . . . . . 42,443 17,792 2,768 -- 63,003
--------- --------- --------- --------- ---------
End Of Period. . . . . . . . . . . . . . . . . . $ 27,779 $ 12,939 $ 3,255 $ -- $ 43,973
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
-19-
<PAGE>
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES . . . . . . . . . . . . . . . . . . . $ 3,626 $ (39,438) $ (15,440) $ (6,201) $ (57,453)
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Mortgage Collateral
Principal payments and prepayments . . . . . . -- 2,001 45,527 -- 47,528
Sales. . . . . . . . . . . . . . . . . . . . . -- -- 23,263 -- 23,263
Distributions of capital from Equity CMO
Interests. . . . . . . . . . . . . . . . . . . -- -- 4,247 -- 4,247
CMO Bond principal payments. . . . . . . . . . . -- -- 2,576 -- 2,576
Changes in investments and marketable
securities, net. . . . . . . . . . . . . . . . 12,000 -- -- -- 12,000
Changes in restricted cash . . . . . . . . . . . -- -- (2,589) -- (2,589)
Proceeds from affiliate debt maturity. . . . . . -- 20 1,750 (1,770) --
Affiliate notes receivable . . . . . . . . . . . 801 -- 2,303 (3,104) --
Other, net . . . . . . . . . . . . . . . . . . . (287) (421) 330 -- (378)
--------- --------- --------- --------- ---------
Net Cash Provided By Investing Activities. . . . . 12,514 1,600 77,407 (4,874) 86,647
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Net increase (reduction) in borrowings from
Parent and subsidiaries. . . . . . . . . . . . (1,023) 13,275 (18,453) 6,201 --
CMO bonds - principal payments . . . . . . . . . -- -- (60,858) -- (60,858)
Lines of Credit
Advances . . . . . . . . . . . . . . . . . . . 2,571 122,730 19,083 -- 144,384
Principal payments . . . . . . . . . . . . . . (3,653) (116,150) -- -- (119,803)
Subordinated Notes - payments. . . . . . . . . . (1,690) -- -- -- (1,690)
Notes payable
Borrowings . . . . . . . . . . . . . . . . . . -- 43,836 932 -- 44,768
Principal payments . . . . . . . . . . . . . . (3,814) (30,048) (1,623) -- (35,485)
Maturity of affiliate-owned debt . . . . . . . . (1,770) -- -- 1,770 --
Affiliate notes payable. . . . . . . . . . . . . -- (3,104) -- 3,104 --
Other, net . . . . . . . . . . . . . . . . . . . 202 -- -- -- 202
--------- --------- --------- --------- ---------
Net Cash Provided By (Used In) Financing
Activities . . . . . . . . . . . . . . . . . . . (9,177) 30,539 (60,919) 11,075 (28,482)
--------- --------- --------- --------- ---------
Net Decrease In Cash And Cash Equivalents. . . . . 6,963 (7,299) 1,048 -- 712
Cash And Cash Equivalents
Beginning Of Period. . . . . . . . . . . . . . . 35,993 22,502 2,533 -- 61,028
--------- --------- --------- --------- ---------
End Of Period. . . . . . . . . . . . . . . . . . $ 42,956 $ 15,203 $ 3,581 $ -- $ 61,740
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
-20-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
MDC is a national home builder with operations in (i) metropolitan Denver
and, to a lesser extent, Colorado Springs, Colorado (collectively, "Colorado");
(ii) northern Virginia and suburban Maryland (collectively, "Mid-Atlantic");
(iii) northern and southern California (collectively, "California"); (iv)
Phoenix and Tucson, Arizona (collectively, "Arizona"); and (v) Las Vegas, Nevada
("Nevada").
In its home building operations, the Company is engaged in the construction
and sale of residential housing (collectively, the "home building segment") and
mortgage origination, purchase and sale activities (collectively, the "mortgage
lending segment"). MDC's mortgage lending segment enables MDC to provide
mortgage loans to its home buyers and to others.
The Company's asset management operations (collectively, the "asset
management segment") primarily enable MDC to (i) manage, by contract, the
operations of two publicly-traded real estate investment trusts (each a "REIT");
and (ii) own interests ("CMO Ownership Interests") in issuances of
collateralized mortgage obligations ("CMO bonds").
RESULTS OF OPERATIONS
The table below summarizes MDC's results of operations during each of the
periods presented (in thousands, except per share amounts).
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ------------------
1994 1993 1994 1993
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . $197,771 $159,657 $366,464 $275,542
Income before income taxes . . . . 9,00 54,419 15,717 5,554
Net Income . . . . . . . . . . . . 5,704 3,014 9,510 3,929
Primary Earnings Per Share . . . . .28 .14 .47 .18
</TABLE>
-21-
<PAGE>
MDC's revenues increased during the three and six months ended
June 30, 1994 compared with the same periods in 1993 primarily as a result of
20% and 30% increases, respectively, in home closings and $15,200 and $16,200
increases, respectively, in the average selling price per housing unit. These
increases partially were offset by reductions in revenues of the asset
management segment of $4,541,000 and $13,444,000, respectively, principally due
to continued high levels of prepayments on, and sales of, mortgage loans,
including the mortgage loans underlying the Company's mortgage pass-through
certificates which are the collateral for the Company's CMO bonds (mortgage
loans or mortgage certificate collateral for CMO bonds hereafter is referred to
as "Mortgage Collateral"). Prepayments on, and sales of, Mortgage Collateral
have reduced the amount of the Company's Mortgage Collateral and mortgage-
related assets, the asset management segment's principal interest earning
assets, by more than $194,000,000 from January 1, 1993 through June 30, 1994.
The Company's net income increased for the three and six months ended
June 30, 1994 compared with the same periods in 1993 due principally to (i)
increased home building operating profit from significantly higher home
closings, primarily due to the opening of new subdivisions in each of the
Company's markets, and higher Home Gross Margins (as hereafter defined); and
(ii) in the six months ended June 30, 1994, increased mortgage lending operating
profit primarily due to increased gains from sales of mortgage loan servicing.
These increases partially were offset by (i) lower operating profit from the
asset management segment as operating income in the first six months of 1993 was
impacted positively by $5,982,000 in one-time gains resulting from sales of
Mortgage Collateral, which was partially offset by $2,600,000 in valuation
adjustments with respect to the Company's Equity CMO Interests (defined below)
during the same period; and (ii) in the three months ended June 30, 1994, by
lower operating profit from the mortgage lending segment primarily due to lower
gains from sales of mortgage loans.
IMPACT OF HOME MORTGAGE INTEREST RATES.
Beginning in 1992 through October 1993, home mortgage interest rates
declined to their lowest levels in 25 years to an average of 6.7% on a 30-year,
fixed-rate mortgage. From October 1993 through July 1994, these interest rates
have increased to as high as 9%.
Increases in mortgage interest rates adversely affect the Company's home
building and mortgage lending segments. Higher mortgage interest rates (i) may
reduce the demand for homes and home mortgages; and (ii) generally will reduce
home mortgage refinancing activity. With the recent increases in mortgage
interest rates relative to levels in 1993, the Company's mortgage lending
operations, consistent with the rest of the industry in general, have
experienced a major decline in refinancing activity. These events have affected
adversely the spot mortgage loan originations and the amount of mortgage loans
purchased through correspondents by the Company's mortgage lending segment,
although increased originations from the Company's home building operations have
offset to some degree these declines. The Company is unable to predict the
extent to which current or future increases in mortgage interest rates will
adversely affect the Company's operating activities and results of operations.
-22-
<PAGE>
HOME BUILDING SEGMENT.
The table below sets forth certain information with respect to the
Company's homes sold, closed and delivered during each of the periods presented
as well as units sold under a contract but not delivered ("Backlog") at each
date shown (dollars in thousands).
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ------------------
1994 1993 1994 1993
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Home sales revenues. . . . . . . . $184,878 $142,136 $341,613 $239,744
-------- -------- -------- --------
Average selling price per housing
unit . . . . . . . . . . . . . . $189.0 $173.8 $186.5 $170.3
Home Gross Margins . . . . . . . . 15.7% 14.3% 15.9% 14.5%
Homes - units
Sales contracted, net
Colorado . . . . . . . . . 441 466 1,191 1,072
Mid-Atlantic . . . . . . . 274 345 686 715
California . . . . . . . . 164 103 310 210
Arizona. . . . . . . . . . 133 81 287 134
Nevada . . . . . . . . . . 32 30 62 81
-------- -------- -------- --------
Total. . . . . . . . . 1,044 1,025 2,536 2,212
-------- -------- -------- --------
-------- -------- -------- --------
Closed and delivered
Colorado . . . . . . . . . 473 444 865 782
Mid-Atlantic . . . . . . . 254 202 506 365
California . . . . . . . . 127 75 234 98
Arizona. . . . . . . . . . 102 48 188 91
Nevada . . . . . . . . . . 22 49 39 72
-------- -------- -------- --------
Total. . . . . . . . . 978 818 1,832 1,408
-------- -------- -------- --------
-------- -------- -------- --------
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
1994 1993 1993
-------- ------------ --------
<S> <C> <C> <C>
Backlog
Units
Colorado . . . . . . . . . 986 660 763
Mid-Atlantic . . . . . . . 605 425 547
California . . . . . . . . 174 98 160
Arizona. . . . . . . . . . 246 147 91
Nevada . . . . . . . . . . 50 27 69
-------- -------- --------
Total. . . . . . . . . 2,061 1,357 1,630
-------- -------- --------
-------- -------- --------
Sales value. . . . . . . . $390,500 $250,530 $283,200
-------- -------- --------
-------- -------- --------
</TABLE>
Home sales revenues increased 30% and 42%, respectively, for the three and
six month periods ended June 30, 1994 compared with the same periods in 1993
primarily as a result of (i) significant increases in home closings in all of
the Company's markets, except Nevada, due to improved market conditions and the
expansion of the
-23-
<PAGE>
Company's operations in each of its markets; and (ii) an increase in the average
selling price per housing unit.
The increase in the average selling price per housing unit for the three
and six months ended June 30, 1994 compared with the same periods in 1993
primarily was due to increases in average selling prices in all of the Company's
markets except northern California. The increases in selling prices were due
principally to (i) the mix of homes closed; (ii) general price increases in most
of the Company's markets to, among other things, offset increases in costs; and
(iii) improved market conditions. These increases partially were offset by
lower average selling prices in northern California primarily due to the
introduction of more affordable homes in response to consumer demand for lower-
priced housing.
Overall, gross profits (which have been reduced for, among other things,
capitalized interest, a reserve for warranty expenses on a per home basis and
financing costs) as a percent of home sales ("Home Gross Margins") increased
substantially during the three and six months ended June 30, 1994 compared with
the same periods in 1993. The Company achieved higher Home Gross Margins in the
first six months of 1994 in its Colorado, Mid-Atlantic and Arizona markets
primarily due to improved market conditions. These increases partially were
offset by lower Home Gross Margins in northern California as the Company's
profitability in this area continues to be affected adversely by softness in
consumer demand for new homes. To a lesser extent, Home Gross Margins also were
impacted negatively by builder competition and product shifts in Nevada.
Increases in, among other things, the costs of subcontracted labor, finished
lots and building materials, particularly lumber, have affected adversely, and
may affect adversely in the future, Home Gross Margins to the extent that market
conditions prevent the recovery of increased costs through higher sales prices.
In addition, increased home building activities in several of the Company's
markets, particularly Colorado, the Mid-Atlantic area and Arizona, have caused
shortages of labor that have increased the period of time required for
completing construction and delivery of homes. Such increased time periods have
increased interest costs capitalized during the construction period which have
affected adversely, and may affect adversely in the future, Home Gross Margins.
Overall, year-to-date home sales at June 30, 1994 reached their highest
second quarter and six month levels since 1988 and Backlog reached its highest
quarter-end level since 1987. "Sales contracted, net" increased 2% and 15%,
respectively, during the three and six months ended June 30, 1994 compared with
the same periods in 1993. Backlog at June 30, 1994 increased 52% from December
31, 1993 and 26% from June 30, 1993. While sales in Colorado increased by 24%
in the first quarter of 1994 compared with the first quarter of 1993, sales
declined by 5% in the second quarter of 1994 compared with the same period in
1993 as, among other things, the increase in mortgage interest rates affected
adversely the demand for homes. In the Mid-Atlantic market, sales increased by
11% in the first quarter of 1994 compared with the same period in 1993 but
declined 21% in the second quarter of 1994 compared with the same period in 1993
due to, among
-24-
<PAGE>
other things, (i) increases in mortgage interest rates; (ii) a slight decline in
new home sales in this market; and (iii) extended delivery times for new homes
and delays in bringing certain start-up communities to an active sales status
caused by delays in construction and land development resulting from unusually
harsh weather in the Mid-Atlantic region during the first quarter of 1994.
Sales increased in the three and six months ended June 30, 1994 compared with
the same periods in 1993 in (i) Arizona (increases of 64% and 114%,
respectively) due to improved market conditions and an expansion of the
Company's operations in the Phoenix and Tucson markets; and (ii) California
(increases of 59% and 48%, respectively) due to an expansion of the Company's
operations in northern California and the Company's re-entry into the southern
California market on a selective basis which began in the second half of 1993
and has continued in the first half of 1994.
Marketing expenses (which include, among other things, deferred marketing,
model home expenses and commissions) totaled $10,925,000 and $19,927,000,
respectively, during the three and six months ended June 30, 1994 compared with
$8,796,000 and $15,152,000, respectively, during the same periods in 1993. The
24% and 32% increases, respectively, during 1994 principally were due to the 20%
and 30% increases, respectively, in home closings and expanded operations in
many of the regions in which the Company operates. As a result of these
increased operations, significant additional marketing-related salary,
commission and model home operation expenses were incurred. However, marketing
expenses as a percentage of home sales revenues decreased by 4% and 8%,
respectively, in the three and six months ended June 30, 1994, relative to 1993,
primarily due to increased efficiencies in the Company's marketing activities
relative to the level of expansion in its existing markets.
General and administrative expenses totaled $6,969,000 and $13,716,000,
respectively, during the three and six months ended June 30, 1994 compared with
$6,257,000 and $12,473,000, respectively, during the same periods in 1993. The
increases during 1994 partially were due to increased salary, office and other
expenses in response to increased operations. General and administrative
expenses during the first six months of 1993 also were affected adversely by
non-recurring charges totaling approximately $1,100,000. General and
administrative expenses as a percentage of home sales revenues during the three
and six months ended June 30, 1994 decreased compared with the same periods in
1993 due to the Company's ability to build more homes without adding
substantially to existing administrative staffing and overhead.
LAND INVENTORY. Since 1988, MDC has implemented a program to reduce its
inventory of land and land under development in order to, among other things,
maximize and preserve liquidity and reduce the risks inherent in holding, at any
point in time, substantially greater amounts of land than are necessary to meet
the projected requirements of MDC's home building operations over the succeeding
24 months. As a result, MDC has reduced its land inventory from $411,460,000 at
December 31, 1988 to $176,448,000 at June 30, 1994, while increasing
significantly the number of lots it controls under
-25-
<PAGE>
rolling options. The Company continues to pursue opportunities to reduce its
land inventories.
The following table shows the total carrying value of the land and land
under development owned by MDC in each of its home building markets at June 30,
1994, segregated by the years in which such property was acquired or optioned
(in thousands).
<TABLE>
<CAPTION>
DIVISION 1994 1993 1992 1991 PRE-1991 TOTAL
- -------- ------ ------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Colorado . . . . . . $1,640 $3,372 $3,378 $7,545 $74,484 $90,419
Mid-Atlantic . . . . 6,711 9,572 1,146 -- 15,677 33,106
California . . . . . 14,733 10,342 1,482 -- 5,956 32,513
Arizona. . . . . . . 9,143 2,336 -- -- 4,465 15,944
Nevada . . . . . . . -- 4,466 -- -- -- 4,466
------- ------- ------ ------ -------- --------
Totals. . . . . . $32,227 $30,088 $6,006 $7,545 $100,582 $176,448
------- ------- ------ ------ -------- --------
------- ------- ------ ------ -------- --------
</TABLE>
Although the Company has been able to reduce significantly its inventory of
land, the Company's net income and cash flow continue to be affected adversely
by the carrying costs (e.g., property taxes and interest) associated with
inactive land inventories, which were approximately 35% of the Company's total
land and land under development at June 30, 1994. Most of the inactive land was
acquired prior to 1991 and is held principally in Colorado. Carrying costs on
inactive land inventories are expensed, not capitalized.
The following table shows the total carrying value of the amounts of
inactive land inventories included in the table above owned by MDC in each of
its home building markets at June 30, 1994, segregated by the years each such
property was acquired (in thousands).
<TABLE>
<CAPTION>
DIVISION 1992 1991 PRE-1991 TOTAL
-------- ------ ------ -------- ---------
<S> <C> <C> <C> <C>
Colorado. . . . . . . . . . . $1,868 $2,164 $48,082 $52,114
Mid-Atlantic. . . . . . . . . -- -- 5,189 5,189
California. . . . . . . . . . -- -- 2,880 2,880
Arizona . . . . . . . . . . . -- -- 628 628
------ ------ ------- -------
Totals . . . . . . . . . . $1,868 $2,164 $56,779 $60,811
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
MORTGAGE LENDING SEGMENT.
OVERVIEW. HomeAmerican Mortgage Corporation ("HomeAmerican") is a full-
service mortgage lender originating mortgage loans for MDC's home buyers and for
others on a "spot" basis through offices located in each of MDC's markets
(except southern California). As HomeAmerican is the principal originator of
mortgage loans for MDC's home buyers, it is an integral part of MDC's home
building operations. MDC sells its homes to customers who generally finance
their purchases through Federal Housing Administration ("FHA") insured mortgage
loans, Veterans Administration ("VA") guaranteed mortgage loans and conventional
mortgage loans.
HomeAmerican is an FHA, VA, Federal National Mortgage Association ("FNMA")
and Federal Home Loan Mortgage Corporation ("FHLMC")
-26-
<PAGE>
authorized mortgage loan originator. HomeAmerican also is an authorized loan
servicer for FNMA, FHLMC and the Government National Mortgage Association
("GNMA") and, as such, is subject to the rules and regulations of such
organizations. Through correspondents, HomeAmerican purchases loans. The
origination fees are retained by the correspondents; HomeAmerican acquires the
servicing rights.
HomeAmerican's operations are affected by, among other things, changes in
mortgage interest rates. HomeAmerican attempts to reduce its exposure to
mortgage interest rate changes by (i) offering mortgage loans at market rates;
(ii) purchasing forward commitments to deliver closed loans held for sale; and
(iii) to a substantially lesser extent, using other hedging techniques in
connection with its pipeline of mortgage loan applications.
The table below summarizes the results of HomeAmerican's operations during
each of the periods presented (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ------------------
1994 1993 1994 1993
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Gains from sales of mortgage
servicing:
Bulk . . . . . . . . . . . . . . $ 1,729 $ 1,683 $ 4,314 $ 2,268
Other. . . . . . . . . . . . . . 167 131 454 318
Net interest income. . . . . . . . 639 824 1,210 1,467
Origination fees . . . . . . . . . 1,145 1,557 2,381 2,642
Gains (losses) on sales of
mortgage loans . . . . . . . . . (280) 990 (181) 1,354
Mortgage servicing and other
income . . . . . . . . . . . . . 447 352 962 669
General and administrative
expenses . . . . . . . . . . . . (2,209) (2,606) (4,598) (4,946)
-------- -------- -------- --------
Operating profit . . . . . . . . . $ 1,638 $ 2,931 $ 4,542 $ 3,772
-------- -------- -------- --------
-------- -------- -------- --------
Principal amount of originations
and purchases:
Company home buyers. . . . . . $ 75,270 $ 74,773 $151,530 $127,875
Spot . . . . . . . . . . . . . 17,121 66,879 48,409 120,851
Correspondent. . . . . . . . . 17,645 48,010 43,897 77,908
-------- -------- -------- --------
Total . . . . . . . . . . . $110,036 $189,662 $243,836 $326,634
-------- -------- -------- --------
-------- -------- -------- --------
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
1994 1993 1993
-------- ------------ --------
<S> <C> <C> <C>
Composition of Servicing Portfolio at
End of Period:
FHA insured/VA guaranteed. . . . . $240,868 $373,716 $224,378
Conventional . . . . . . . . . . . 252,527 279,615 260,140
-------- -------- --------
Total Servicing Portfolio. . . $493,395 $653,331 $484,518
-------- -------- --------
-------- -------- --------
Portion of Servicing Portfolio
Available for Sale . . . . . . . . . $425,363 $574,088 $384,361
-------- -------- --------
-------- -------- --------
</TABLE>
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<PAGE>
HomeAmerican's loan originations decreased by 42% and 25%, respectively,
for the three and six month periods ended June 30, 1994 compared with the same
periods in 1993 primarily as a result of lower spot originations and purchases
of loans from correspondents primarily due to increased mortgage interest rates
which resulted in lower mortgage loan refinancings. These decreases partially
were offset by higher originations for MDC home buyers, despite a lower
percentage of mortgages originated for MDC home buyers in 1994 compared with the
same period in 1993, principally due to increased closings by MDC's home
building segment. HomeAmerican originated mortgages for 52% and 55%,
respectively, of MDC's total homes closed during the three and six months ended
June 30, 1994, compared with 65% during each of the same periods in 1993. The
decline in the percentage of mortgages originated for MDC home buyers was the
result of increased competition for mortgage loan originations.
HomeAmerican's operating profit of $1,638,000 during the three months ended
June 30, 1994 was lower than the operating profit of $2,931,000 for the same
period in 1993 principally due to losses from sales of mortgage loans totaling
$280,000 in the three months ended June 30, 1994 compared with gains totaling
$990,000 in the same period in 1993. HomeAmerican's operating profit of
$4,542,000 during the six months ended June 30, 1994 was higher than the
operating profit of $3,772,000 for the same period in 1993 principally due to
higher gains from sales of mortgage servicing partially offset by losses from
sales of mortgage loans totaling $181,000 in the six months ended June 30, 1994
compared with gains from sale of mortgage loans totaling $1,354,000 in the six
months ended June 30, 1993. While loan origination fees were lower for the three
and six month periods ended June 30, 1994 compared with the same periods in
1993, general and administrative costs were lower by approximately the same
amounts as HomeAmerican has reduced its general and administrative costs as
originations of loans have declined.
During the three and six months ended June 30, 1994, HomeAmerican sold bulk
mortgage loan servicing on approximately $153,407,000 and $349,237,000,
respectively, of mortgage loans which resulted in pre-tax gains of $1,729,000
and $4,314,000, respectively. During the second quarter of 1993, HomeAmerican
sold mortgage loan servicing on approximately $120,400,000 of mortgage loans
which resulted in pre-tax gains of $1,377,000. Additionally, during the three
and six months ended June 30, 1993, $306,000 and $891,000, respectively, of
income relating to a December 1992 bulk servicing sale were recognized as the
related mortgage loans totaling approximately $19,200,000 and $59,600,000,
respectively, were certified for sale in such periods.
At June 30, 1994, approximately $425,363,000 of conforming mortgage loan
(i.e., loans that meet the securitization standards of GNMA, FNMA or FHLMC)
servicing was available for sale, which represents a 26% decrease compared with
the $574,088,000 in conforming mortgage loan servicing available for sale at
December 31, 1993 and a 11% increase above the $384,361,000 in
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<PAGE>
conforming mortgage loan servicing available for sale at June 30, 1993.
ASSET MANAGEMENT SEGMENT.
The following table summarizes the results of the asset management segment
operations during each of the periods presented (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ------------------
1994 1993 1994 1993
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Management fees from Asset
Investors and Commercial Assets. $ 597 $ 603 $ 1,351 $ 1,238
Equity in losses of Equity CMO
Interests, net of valuation
adjustments. . . . . . . . . . . -- (600) -- (2,600)
Gains on sales of Mortgage
Collateral . . . . . . . . . . . 45 801 358 5,982
Interest income from CMO Bond and
other, net . . . . . . . . . . . 425 1,163 661 2,296
------- ------- ------- -------
Operating profit . . . . . . . . . $ 1,067 $ 1,967 $ 2,370 $ 6,916
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The decrease in the Company's asset management segment operating profit for
the three and six month periods ended June 30, 1994 compared with the same
periods in 1993 is due principally to lower gains on sales of Mortgage
Collateral, partially offset by valuation adjustments recorded in 1993 related
to the Equity CMO Interests (as hereafter defined) which were not required in
1994.
MANAGEMENT OF ASSET INVESTORS. The Company advises Asset Investors
Corporation ("Asset Investors"), a New York Stock Exchange-listed REIT, on
various facets of Asset Investors' business. Asset Investors generates
substantially all of its income through a portfolio of CMO Ownership Interests
in residential mortgage loan securitizations and unrated subordinated interests
in residential mortgage loan securitizations collateralized by pools of non-
conforming (non-agency guaranteed) single family mortgage loans.
MDC has a management agreement (the "Asset Investors Management Agreement")
with Asset Investors which is currently in the process of being extended through
1994, subject to the possible amendment of certain of the terms on a prospective
basis. The current Asset Investors Management Agreement may be terminated by
the Company or by Asset Investors with or without cause at any time upon 60
days' written notice. Pursuant to the Asset Investors Management
Agreement, MDC receives compensation for CMO administration and other
management services. MDC also is entitled to receive an incentive fee (the
"Asset Investors Incentive Fee") which is based primarily on the level of Asset
Investors dividend distributions.
The high level of prepayments on Asset Investors' portfolio of home-
mortgage related assets in 1992 and 1993 affected adversely the CMO Ownership
Interests owned by Asset Investors and its income,
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<PAGE>
which reduced substantially, relative to prior years, the management fees earned
by the Company from Asset Investors in 1993 and the first six months of 1994.
The Company earned $405,000 and $839,000, respectively, in management fees in
the three and six months ended June 30, 1994 compared with $603,000 and
$1,238,000, respectively, in the same periods in 1993. No Asset Investors
Incentive Fees were earned by the Company in the three and six months ended June
30, 1994 or in the same periods in 1993.
MANAGEMENT OF COMMERCIAL ASSETS. In August 1993, Asset Investors formed
Commercial Assets, Inc. ("Commercial Assets"), an American Stock Exchange-listed
REIT, to acquire and manage a portfolio of ownership interests in commercial
mortgage loan securitizations. In October 1993, Asset Investors distributed
approximately 70% of the shares of Commercial Assets to its stockholders as a
dividend.
MDC has a management agreement (the "Commercial Assets Management
Agreement") with Commercial Assets which is currently in the process of being
extended through 1994, subject to the possible amendment of certain of the terms
on a prospective basis. Pursuant to the Commercial Assets Management Agreement,
MDC receives (i) compensation based on the level of Commercial Assets income, as
determined under applicable provisions of the Internal Revenue Code of 1986, as
amended; (ii) acquisition fees; (iii) administration fees; and (iv) fees for
other management services. The Commercial Assets Management Agreement may be
terminated by the Company or by Commercial Assets with or without cause at any
time upon 60 days' written notice.
During the three and six months ended June 30, 1994, MDC earned fees
totaling $192,000 and $512,000, respectively, from Commercial Assets.
EQUITY CMO INTERESTS. During the three and six months ended June 30, 1993,
MDC recorded $600,000 and $2,600,000, respectively, in valuation adjustments
related to its 49.999% ownership interest in seven CMO Ownership Interests
(these seven interests are referred to herein as "Equity CMO Interests") related
to permanent declines in the value of the undiscounted projected cash flow of
such Equity CMO Interests resulting from higher actual and projected prepayments
caused by low interest rates. During the three and six months ended June 30,
1994, higher mortgage interest rates have slowed both the actual and expected
prepayment speeds and, accordingly, no valuation adjustments were necessary.
If the Mortgage Collateral underlying the Equity CMO Interests prepays or
is projected to prepay at higher than current expected rates and/or if short-
term interest rates increase significantly from their present rates, the
Company, in the future, may recognize additional valuation adjustments.
INVESTMENT IN A CMO BOND. On July 31, 1992, MDC purchased a $7,823,000
principal amount CMO bond (the "CMO Bond") for $7,367,000. For the three and
six months ended June 30, 1993, the CMO Bond earned interest totaling $511,000
and $1,094,000, respectively. The CMO Bond was fully paid at December 31, 1993.
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<PAGE>
SALES OF MORTGAGE-RELATED ASSETS. MDC completed various sales of mortgage-
related assets which resulted in net gains totaling $45,000 and $358,000,
respectively, for the three and six months ended June 30, 1994 compared with
$801,000 and $5,982,000, respectively, during the same periods in 1993.
GENERAL. Higher short-term interest rates and/or continued high or higher
levels of mortgage loan prepayments would affect adversely in future periods (i)
the management fees earned from Asset Investors and Commercial Assets; and (ii)
the current value of, and income from, the Company's CMO Ownership Interests.
The Company currently does not expect to acquire additional CMO Ownership
Interests in the future except to the extent attractive opportunities may be
identified. As a result, future income from the asset management segment
primarily will be dependent on management fees.
OTHER OPERATING RESULTS.
CORPORATE AND HOME BUILDING INTEREST. Corporate and home building interest
incurred increased by 43% and 40%, respectively, to $8,883,000 and $17,247,000,
respectively, in the three and six months ended June 30, 1994 compared with
$6,230,000 and $12,286,000, respectively, during the same periods in 1993 due to
(i) higher interest rates associated with the 11 1/8% Senior Notes due 2003
compared with the debt outstanding for the six months ended June 30, 1993; and
(ii) higher levels of borrowings resulting from the Company's expanded home
building operations. The portion of this corporate and home building interest
capitalized (the Company capitalizes interest on its home building inventories
during the period of active development and through the completion of
construction) during the three and six months ended June 30, 1994 totaled
$6,832,000 and $12,240,000, respectively, compared with $3,559,000 and
$6,398,000, respectively, during the same periods in 1993. The increase in
interest capitalized for the three and six months ended June 30, 1994 was due
primarily to (i) increased levels of active home building inventories resulting
from increased operations; (ii) higher capitalization rates related to the
higher average effective interest rates on applicable debt, particularly with
respect to Colorado; and (iii) the extended period of time for completing homes
under construction in certain of the Company's markets, which increased the
period of time over which interest on related construction and land costs is
capitalized. The corporate and home building interest incurred which was not
capitalized was reflected as interest expense and totaled $2,051,000 and
$5,007,000, respectively, for the three and six months ended June 30, 1994
compared with $2,671,000 and $5,888,000, respectively, for the same periods in
1993. For a reconciliation of interest incurred, capitalized, expensed and
previously capitalized included in cost of sales, see Note E to the Company's
Condensed Consolidated Financial Statements.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and
administrative expenses totaled $3,966,000 and $7,899,000,
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<PAGE>
respectively, during the three and six months ended June 30, 1994 compared with
$3,809,000 and $7,383,000, respectively, during the same periods in 1993. The
increase in the first six months of 1994 primarily was due to an increase in
salaries, professional fees and insurance expense resulting from the Company's
expanded operations.
INCOME TAXES. M.D.C. Holdings, Inc. and its wholly-owned subsidiaries file
a consolidated federal income tax return (the "MDC Consolidated Return").
Richmond Homes and its wholly-owned subsidiaries filed (or will file) a separate
consolidated federal income tax return (each, a "Richmond Homes Consolidated
Return") from its inception (December 28, 1989) through the date Richmond Homes
became a wholly-owned subsidiary of MDC (February 2, 1994).
MDC's overall effective income tax rate during the three and six month
periods ended June 30, 1994 was 37% and 39%, respectively, compared with 32% and
29%, respectively, during the same periods in 1993. The effective income tax
rates differed from the 35% federal statutory rate primarily due to, among other
things, (i) the impact of state income taxes; (ii) the realization of non-
taxable income for financial reporting purposes for which no tax liability was
recorded; and (iii) in 1994, adjustments to prior years' income taxes. The
Company has recorded a net deferred income tax asset of $10,648,000, net of a
valuation allowance of $3,000,000, at June 30, 1994. The valuation allowance
has been provided to offset the related deferred income tax assets due to the
uncertainty of realizing the benefit of future tax deductions.
The Internal Revenue Service (the "IRS") has completed its examination of
the MDC Consolidated Returns for the years 1984 through 1987 and has proposed
certain adjustments to the taxable income reflected in such returns. A
substantial portion of the proposed adjustments relate to the characterization
of $22,000,000 in gains on sales of property held for investment, which were
reported as capital gains. Certain of the other proposed adjustments would
shift the recognition of certain items of income and expense from one year to
another ("Timing Adjustments"). To the extent taxable income in a prior year is
increased by proposed Timing Adjustments, taxable income may be reduced by a
corresponding amount in other years; however, the Company would incur an
interest charge as a result of such adjustment. The Company currently is
protesting many of these proposed adjustments through the IRS appeals process
and believes that the amount of these adjustments will be reduced as a result.
In the opinion of management, adequate provision has been made for the
additional income taxes and interest which may arise as a result of the proposed
adjustments.
The IRS currently is examining the MDC Consolidated Returns for the years
1988 through 1990 and the Richmond Homes Consolidated Returns for the years 1989
and 1990. No reports have been issued by the IRS in connection with these
examinations. In the opinion of management, adequate provision has been made
for any additional income taxes and interest which may arise as a result of
these examinations.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
MDC uses its capital resources to, among other things, (i) support its
operations, including its inventories of homes, home sites and land; (ii)
provide working capital; and (iii) provide mortgage loans for its home buyers.
Capital resources are generated internally from operations and from external
sources.
Based upon its current financial condition and credit relationships, MDC
believes that it has, or can obtain, adequate financial resources to satisfy its
current and near-term capital requirements. The Company believes that it can
meet its long-term capital needs (including, among other things, meeting future
debt payments and refinancing or paying off other long-term debt as it becomes
due) from operations and external financing sources.
CONSOLIDATED CASH FLOW.
For the six months ended June 30, 1994, MDC used $19,030,000 in cash. At
June 30, 1994, the Company had $43,973,000 available in cash and cash
equivalents.
MDC's Operating Activities during the first six months of 1994 used net
cash of $40,935,000 compared with net cash used of $57,453,000 during the same
period in 1993. The net cash used in Operating Activities during the first six
months of 1994 principally was due to increases in home building inventories as
a result of significantly increased levels of home building activity, offset
partially by a reduction in mortgage loans held in inventory. The net cash used
by Operating Activities during the first six months of 1993 principally was due
to increases in mortgage loans held in inventory and housing inventories
resulting from increased mortgage lending and home building activities in such
period.
Net cash provided by Investing Activities during the first six months of
1994 and 1993 totaled $53,133,000 and $86,647,000, respectively, and primarily
was generated by (i) principal payments and prepayments on, and sales of,
Mortgage Collateral; and (ii) in 1993, sales of marketable preferred shares used
by the Company in its cash management activities. A substantial portion of the
cash flow generated by these reductions was used to make required principal
payments on the CMO bonds collateralized by these assets, which principally
resulted in the net use of cash in Financing Activities in the first six months
of 1994 and 1993 of $31,228,000 and $28,482,000, respectively. Also increasing
the use of cash for the six months ended June 30, 1994 were net payments of
$14,979,000 on notes payable as the Company has begun shifting away from higher-
cost project loans and other notes payable to the use of its increased lines of
credit to finance a larger portion of its expanding home building operations.
In the first six months of 1994 and 1993, cash used in Financing Activities was
decreased by net advances pursuant to lines of credit totaling $30,008,000 and
$24,581,000, respectively, and in the first six months of 1993 was decreased by
net borrowings on notes payable totaling $9,283,000. The resulting
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<PAGE>
net increases in debt were necessary to finance the substantial increases in
home building activities in the first six months of both 1994 and 1993 and,
in the first six months of 1993, to finance the substantial increase in
mortgage lending activities.
LINES OF CREDIT AND NOTES PAYABLE.
HOME BUILDING. The aggregate amount of MDC's home building bank lines of
credit at June 30, 1994 was $105,000,000. Borrowings under the bank lines of
credit are collateralized by home building inventories and are limited to the
value of "eligible collateral" (as defined in the credit agreements). At June
30, 1994, $67,468,000 was borrowed and an additional $33,472,000 was
collateralized and available to be borrowed under the bank lines of credit.
In June 1994, MDC consummated a $75,000,000 line of credit (the
"$75,000,000 Line") with a bank which replaced four separate divisional lines of
credit with the same bank which totaled $40,000,000. The $75,000,000 Line is
available for acquisition and development of land and for the construction of
homes. The term of the line of credit agreement is 12 months with a 36-month
term-out period or, under certain circumstances, a 24-month term-out period. A
36-month term-out period could commence at any time at the option of the bank.
As discussed above, the Company, during 1993 and the first six months of
1994, significantly expanded its home building operations and is planning to
continue to expand its home building activities during the remainder of 1994
depending on economic conditions and the availability of attractive business
opportunities. The Company intends to finance this expansion primarily with
increased bank lines of credit and through internal sources. However, when
necessary, as has been the case in prior years, MDC may replace or supplement
its bank lines of credit with secured project financing. The cost of secured
project financing generally is higher than the cost of the Company's bank lines
of credit.
MORTGAGE LENDING. The aggregate amount available under MDC's mortgage
lending bank line of credit (the "Mortgage Line") at June 30, 1994 was
$75,000,000. In August 1994, due to the lower level of mortgage lending
activity, the Company has reduced its Mortgage Line to $51,000,000 to, among
other things, lower its related cost. Borrowings under the Mortgage Line are
collateralized by mortgage loans and mortgage-backed certificates and are
limited to the value of "eligible collateral" (as defined in the credit
agreements). At June 30, 1994, $16,685,000 was borrowed and an additional
$11,488,000 was collateralized and available to be borrowed under the Mortgage
Line.
To provide funds for mortgage loan financing for MDC's home buyers and
others on a spot basis, HomeAmerican utilizes its Mortgage Line to finance these
mortgage loans on a short-term basis. These mortgage loans are pooled into
GNMA, FNMA and FHLMC pools or retained
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<PAGE>
as whole loans and subsequently are sold in the open market on a "spot" basis
and pursuant to mortgage loan sale commitments. During the six months ended
June 30, 1994 and 1993, HomeAmerican sold $269,439,000 and $298,190,000,
respectively, principal amount of mortgage loans and mortgage certificates to
unaffiliated purchasers.
GENERAL. The Company's lines of credit and notes payable contain certain
covenants, representations and warranties. The Company currently is in
compliance with such covenants, representations and warranties.
In the event that MDC's lines of credit are not renewed, or are renewed as
they become due at substantially lower levels, the Company believes that it
could meet its business plan through a combination of internally-generated funds
and new borrowings. Required repayments of its lines of credit have in the
past, and in the future could be, repaid with, among other things, (i) available
cash and/or the proceeds from the liquidation of available short-term
investments; and/or (ii) the proceeds from the sale or liquidation of certain
other of the Company's home building, mortgage and other assets. The sale or
liquidation of assets could be at prices that are less than the carrying value
of such assets and may affect adversely the Company's future financial condition
and results of operations.
ASSET MANAGEMENT SEGMENT ASSETS AND LIABILITIES.
Throughout 1993 and the first six months of 1994, the asset management
segment continued to experience a net liquidation of assets and related
reduction of liabilities. Mortgage Collateral, net, and related assets, have
declined from $275,467,000 at January 1, 1993 to $134,166,000 at December 31,
1993 and to $81,338,000 at June 30, 1994. The proceeds from these reductions
were used primarily to reduce the related CMO bonds, net, and related
liabilities from $256,347,000 at January 1, 1993 to $123,500,000 at
December 31, 1993 and to $76,651,000 at June 30, 1994. These asset and
liability reductions substantially were the result of (i) the high rate of
prepayments on the Mortgage Collateral; and (ii) sales of Mortgage Collateral
and related assets and related redemptions of CMO bonds. The Company's Mortgage
Collateral and related CMO bonds will continue to decrease as payments and
prepayments are received or Mortgage Collateral is sold.
The Company's Equity CMO Interests also have declined from $16,930,000 at
January 1, 1993 to $6,427,000 at December 31, 1993 and to $4,375,000 at June 30,
1994 due to the receipt of distributions of capital and, in 1993, valuation
adjustments.
MATERIAL CHANGES IN OTHER ASSETS AND LIABILITIES.
HOME BUILDING RECEIVABLES. Home building receivables consist principally
of receivables from home sales (representing the proceeds from home closings not
yet disbursed by unrelated settlement agents), which usually are collected
within seven days after the sale is
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<PAGE>
closed, and certain other receivables. Such receivables totaled $15,441,000 at
June 30, 1994 compared with $5,423,000 at December 31, 1993. The increase at
June 30, 1994 is due to increased closings and the timing of such closings.
HOUSING COMPLETED OR UNDER CONSTRUCTION. Housing completed or under
construction increased to $275,887,000 at June 30, 1994 compared with
$201,023,000 at December 31, 1993 principally due to an increase in Backlog and
spec homes under construction.
LAND AND LAND UNDER DEVELOPMENT. Land and land under development totaled
$176,448,000 at June 30, 1994 compared with $192,881,000 at December 31, 1993.
The decline in land inventories is due principally to (i) increased home
construction activity; (ii) the continued use of "rolling" options, with
periodic takedowns of lots, to acquire new land inventories for use in the
Company's home building activities; and (iii) sales and other dispositions of
land.
Based upon its current business plan, MDC anticipates the acquisition,
during the balance of 1994, of various parcels of finished lots and partially-
developed land for use in its future home building operations. The Company
currently intends to acquire a significant portion of the land inventories
required in future periods through takedowns of lots subject to rolling options
entered into in prior periods and under new rolling option agreements. The use
of rolling options lessens the Company's risk and improves liquidity.
MORTGAGE LOANS HELD IN INVENTORY. Mortgage loans held in inventory
decreased to $42,452,000 at June 30, 1994 compared with $68,065,000 at December
31, 1993, due to the decreased mortgage loan originations in the second quarter
of 1994 compared with the fourth quarter of 1993.
OTHER
1994 RICHMOND COMMON STOCK ACQUISITION. In December 1993 the Company sold
$190,000,000 principal amount of Senior Notes and $28,000,000 principal amount
of Convertible Subordinated Notes (the "1993 Offering"). Based on advice of
the Company's financial advisor, the Company believes that the success of the
1993 Offering was dependent on MDC's ability to acquire the 54.9% of the common
stock of Richmond Homes (the "Richmond Common Stock") that it did not
own. A portion of the net proceeds of the 1993 Offering was used to acquire
19.9% of the Richmond Common Stock from an unrelated institutional investor.
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<PAGE>
In connection with an agreement entered into as part of the 1993 Offering
and in furtherance of the Company's desire to own all of the outstanding shares
of Richmond Common Stock, in December 1993 a special committee of the Board of
Directors of the Company (the "Special Committee") negotiated on behalf of the
Company terms of an option agreement with Messrs. Mizel and Mandarich to
purchase the shares of Richmond Common Stock owned by them for a purchase
price of up to $3,500,000 in the aggregate. The purchase price for the
Richmond Common Stock was to be paid in shares of MDC common stock (the "MDC
Common Stock") valued at $5.75 per share, which was the closing price of the
MDC Common Stock on the date of the option agreement. The Special Committee
engaged a financial advisor to perform a business enterprise evaluation of
Richmond Homes. In February 1994, based on the results of the evaluation, the
maximum of $3,500,000 was paid by issuing an aggregate of 608,695 shares of
MDC Common Stock to Messrs. Mizel and Mandarich.
The Company believes that increasing to 100% its ownership of Richmond
Homes (which, among other things, generated 46% of MDC's revenues on a
consolidated basis in 1993), will increase MDC's financial flexibility and has
simplified greatly MDC's corporate structure.
SUBSEQUENT EVENT. On August 4, 1994, Superior Metropolitan District No. 1
("District No. 1") and Superior Metropolitan District No. 2 ("District No. 2")
(collectively, the Districts) issued $35,730,000 principal amount of bonds (the
"Bonds"). The Districts were organized and are operated to provide, among other
things, water and sanitary sewer services, street improvements and park and
recreation facilities for inhabitants of a master-planned community located
northwest of Denver (the "Project"). A significant portion of the Project
served by such Districts is owned and is being developed by the Company. Part
of the proceeds of the offering were utilized to redeem in full, at par
value, all of the outstanding bonds of the Districts, totaling $16,395,000,
all of which were owned by the Company. Additionally, proceeds totaling
approximately $11,000,000 were paid to the Company by District No. 1 to
purchase certain interests in a water supply project (the "Water Project")
and to reimburse the Company for prepaid water taps and for certain other
funds previously advanced to District No. 1.
In connection with the issuance of the Bonds, MDC has guaranteed payment
of principal and interest on $27,500,000 principal amount of District No. 1
Bonds and has entered into certain agreements with District No. 1 to purchase
certain water and sewer tap fees and storm drainage fees (collectively, the
"Fees") in connection with the Companys home building operations within the
Project. In connection with the guarantee, MDC was required to deposit
$10,000,000 into a trust account. Of the funds in the trust account,
$6,000,000 will be released in $1,000,000 increments as certain levels of
completed homes are achieved in the Project, provided that if the Water
Project is not completed by January 1, 1997 or if the Water Project is
enjoined and such injunction is not lifted, no withdrawals may occur. The
$4,000,000 balance will be released upon the earlier of (i) the completion
of the Water Project; or (ii) the resolution (to the extent provided in the
Indenture executed in connection with the issuance of the Bonds) of certain
litigation seeking, among other things, to delay the Water Project's
completion. In addition, MDC has guaranteed payment of principal and
interest on $2,580,000 principal amount of District No. 2 Bonds.
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<PAGE>
M.D.C. HOLDINGS, INC.
FORM 10-Q
PART II
ITEM 1. LEGAL PROCEEDINGS.
SETTLEMENT OF WESTERN SAVINGS CIVIL MATTERS.
In December 1993, the Resolution Trust Corporation (the "RTC"), acting in
its corporate capacity and as receiver for Western Savings and Loan Association
("Western"), gave its final administrative approval to an agreement-in-principle
executed between MDC and the RTC in February 1993 which provides for a
settlement and mutual release of all potential claims between the parties and
related persons relating to any of the Company's past transactions with Western.
Under the terms of the approved agreement-in-principle, MDC would (i) pay
to the RTC approximately $3,700,000 in cash plus certain interest thereon; and
(ii) release its related potential claims against the RTC and Western. MDC had
fully reserved for this settlement as of December 31, 1992 and does not
anticipate any adverse effect on the Company's operations or financial position.
The settlement remains subject to the negotiation of formal settlement documents
acceptable to both MDC and the RTC and a court order determining that the
settlement precludes the filing of cross-claims against MDC by various third
parties.
THRIFT INDUSTRY INVESTIGATIONS.
The Company understands that investigations are being conducted by Federal
grand juries and other government agencies in various states with regard to the
failures of a number of thrifts with which MDC had business transactions during
the period 1983 through mid-1988. The Company and its affiliates have received
and responded to subpoenas requesting documents and information in connection
with certain investigations and may in the future receive additional inquiries
or subpoenas. No indictments or charges have been brought against the Company
or any of its officials by any grand jury investigating the failure of any
savings and loan institutions. Although the Company believes there is no basis
for the imposition against the Company or its officials of criminal or civil
liability in connection therewith, were any indictment or charge to be brought
against the Company, there could be a material adverse effect upon the Company's
financial position and liquidity.
OTHER.
The Company and certain of its subsidiaries and affiliates have been named
as defendants in various other claims, complaints and legal actions arising in
the normal course of business. In the opinion of management, the outcome of
these matters will not have a
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material adverse effect upon the financial condition or results of operations of
the Company.
The Company is not aware of any litigation matter or pending claim against
the Company which would result in material contingent liabilities related to
environmental hazards or asbestos.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS.
MDC held its Annual Meeting of Stockholders (the "Meeting") on
June 24, 1994. At the Meeting, three nominees, Messrs. Steven J. Borick, David
D. Mandarich and Larry A. Mizel were elected as Class III Directors to three-
year terms expiring in 1997.
In addition, the Executive Officer Performance-Based Compensation Plan was
approved and the selection of Price Waterhouse LLP as the Company's independent
accountants for 1994 was ratified at the Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit:
15 Letter regarding unaudited interim financial information.
28 Form of Independent Accountants' Review Report dated
July 26, 1994.
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the Registrant
during the period covered by this Quarterly Report on Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 15, 1994 M.D.C. HOLDINGS, INC.
(Registrant)
By: /s/ Paris G. Reece III
----------------------
Paris G. Reece III,
Vice President,
Chief Financial Officer and
Principal Accounting Officer
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<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page #
- ----------- ----------- ------
15 Letter regarding unaudited interim financial
information. 42
28 Form of Independent Accountants' Review Report
dated July 26, 1994. 43
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<PAGE>
EXHIBIT NO. 15
July 26, 1994
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
We are aware that M.D.C. Holdings, Inc. has included our report dated July 26,
1994 (issued pursuant to the provisions of Statement on Auditing Standards
No. 71) in its Registration Statements on Forms S-8 filed on or about March 15,
1985 and July 1, 1994, Forms S-3 filed on or about May 19, 1994 and June 7,
1994, and Form S-4 filed on or about May 19, 1994. We are also aware of our
responsibilities under the Securities Act of 1933.
Yours very truly,
/s/ Price Waterhouse LLP
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Price Waterhouse LLP
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<PAGE>
EXHIBIT 28
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders of
M.D.C. Holdings, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of M.D.C.
Holdings, Inc. and subsidiaries (the "Company") as of June 30, 1994, and the
related condensed consolidated statements of income for the three-month and six-
month periods ended June 30, 1994 and 1993 and of cash flows for the six-month
periods ended June 30, 1994 and 1993. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1993, and the related
consolidated statements of income, of stockholders' equity, and of cash flows
for the year then ended (not presented herein), and in our report dated February
10, 1994 we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1993, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
/s/ Price Waterhouse LLP
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PRICE WATERHOUSE LLP
Los Angeles, California
July 26, 1994
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