================================================================================
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 September 30, 1996
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 October 31, 1996, 17,936,000 shares of M.D.C. Holdings, Inc.
Common Stock were outstanding.
================================================================================
<PAGE>
M.D.C. HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of September 30, 1996 (Unaudited)
and December 31, 1995............................... 1
Statements of Income (Unaudited) for the three and
nine months ended September 30, 1996 and 1995....... 3
Statements of Cash Flows (Unaudited) for the nine
months ended September 30, 1996 and 1995............ 4
Notes to Financial Statements (Unaudited)............ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 17
Part II. Other Information:
Item 1. Legal Proceedings.................................... 30
Item 4. Submission of Matters to a Vote of Shareowners....... 31
Item 6. Exhibits and Reports on Form 8-K..................... 31
(i)
<PAGE>
<TABLE>
<CAPTION>
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands)
September 30, December 31,
1996 1995
----------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Corporate
Cash and cash equivalents...................... $ 11,244 $ 10,290
Property and equipment, net.................... 9,505 9,550
Deferred income taxes.......................... 10,532 13,730
Deferred debt issue costs, net................. 9,358 9,931
Other assets, net.............................. 9,916 3,830
---------- -----------
50,555 47,331
Homebuilding
Cash and cash equivalents...................... 4,122 5,096
Home sales and other accounts receivable....... 16,228 26,192
Investments and marketable securities, net..... 5,076 6,481
Inventories, net
Housing completed or under construction...... 281,295 265,205
Land and land under development.............. 177,388 176,960
Prepaid expenses and other assets, net......... 37,119 42,111
---------- -----------
521,228 522,045
Financial Services
Cash and cash equivalents...................... 2,177 5,409
Accrued interest and other assets, net......... 5,212 3,129
Mortgage loans held in inventory, net.......... 46,269 53,153
Mortgage Collateral, net of mortgage-backed
bonds, and related assets and liabilities.... 1,934 3,744
---------- -----------
55,592 65,435
Total Assets............................. $ 627,375 $ 634,811
========== ===========
</TABLE>
See notes to condensed consolidated financial statements
-1-
<PAGE>
<TABLE>
<CAPTION>
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
September 30, December 31,
1996 1995
----------- -----------
LIABILITIES (Unaudited)
<S> <C> <C>
Corporate
Accounts payable and accrued expenses........... $ 21,580 $ 18,258
Income taxes payable............................ 14,059 11,930
Note payable.................................... 3,500 3,537
Senior Notes, net............................... 187,670 187,525
Subordinated notes, net......................... 38,224 38,221
----------- -----------
265,033 259,471
Homebuilding
Accounts payable and accrued expenses........... 92,756 82,164
Lines of credit................................. 28,431 43,490
Notes payable................................... 6,506 10,571
----------- -----------
127,693 136,225
Financial Services
Accounts payable and accrued expenses........... 11,675 12,092
Line of credit.................................. 14,150 21,990
----------- -----------
25,825 34,082
Total Liabilities......................... 418,551 429,778
----------- -----------
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; 22,660,000 and 22,606,000
shares issued, respectively, at September 30,
1996 and December 31, 1995..................... 227 226
Additional paid-in capital...................... 136,518 136,022
Retained earnings............................... 100,511 87,476
----------- -----------
237,256 223,724
Less treasury stock, at cost; 4,564,000 and
3,157,000 shares, respectively, at September 30,
1996 and December 31, 1995.................... (28,432) (18,691)
----------- -----------
Total Stockholders' Equity................ 208,824 205,033
----------- -----------
Total Liabilities and Stockholders' Equity. $ 627,375 $ 634,811
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements
-2-
<PAGE>
<TABLE>
<CAPTION>
M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
REVENUES
<S> <C> <C> <C> <C>
Homebuilding.......... $ 222,734 $ 226,815 $ 644,339 $ 618,683
Financial Services.... 10,346 6,297 25,034 18,803
Corporate............. 227 359 956 1,196
----------- ----------- ----------- -----------
Total Revenues... 233,307 233,471 670,329 638,682
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding......... 217,828 217,493 626,356 593,287
Financial Services... 3,245 2,778 9,335 7,865
Corporate general and
administrative..... 2,920 3,185 8,501 9,794
Corporate and
homebuilding
interest (Note C).. 486 1,584 3,364 6,313
----------- ----------- ----------- -----------
Total Expenses... 224,479 225,040 647,556 617,259
----------- ----------- ----------- -----------
Income before income
taxes and
extraordinary item.... 8,828 8,431 22,773 21,423
Provision for income
taxes................. (3,225) (2,886) (8,314) (7,479)
----------- ----------- ----------- -----------
Income before
extraordinary item.... 5,603 5,545 14,459 13,944
Extraordinary loss from
early extinguishment of
debt, net of income tax
benefit of $242....... - - - - (421) - -
----------- ----------- ----------- -----------
Net Income....... $ 5,603 $ 5,545 $ 14,038 $ 13,944
=========== =========== =========== ===========
EARNINGS PER SHARE
Primary
Income before
extraordinary item.. $ .30 $ .28 $ .75 $ .69
=========== =========== =========== ===========
Net Income.......... $ .30 $ .28 $ .73 $ .69
=========== =========== =========== ===========
Fully diluted
Income before
extraordinary item.. $ .27 $ .25 $ .68 $ .63
=========== =========== =========== ===========
Net Income.......... $ .27 $ .25 $ .66 $ .63
=========== =========== =========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING
Primary.............. 18,849 20,052 19,352 20,161
=========== =========== =========== ===========
Fully diluted........ 22,462 23,736 22,965 24,113
=========== =========== =========== ===========
DIVIDENDS PER SHARE..... $ .03 $ .03 $ .09 $ .08
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements
-3-
<PAGE>
<TABLE>
<CAPTION>
M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine months
Ended September 30,
-------------------------
1996 1995
----------- -----------
OPERATING ACTIVITIES
<S> <C> <C>
Net Income........................................ $ 14,038 $ 13,944
Adjustments To Reconcile Net Income To Net Cash
Provided By (Used In) Operating Activities:
Depreciation and amortization................ 8,770 7,237
Homebuilding asset impairment charges........ 7,208 2,100
Deferred income taxes........................ 3,198 (1,985)
Gain on sale of FAMC, net.................... (4,042) - -
Net Changes In Assets and Liabilities
Mortgage loans held in inventory............. 6,884 (3,954)
Homebuilding inventories..................... (18,073) 9,056
Home sales and other accounts receivable..... 9,964 (1,877)
Prepaid expenses and other assets............ (2,778) (7,648)
Accounts payable and accrued expenses........ 13,370 6,522
Other, net................................... (2,888) (888)
----------- -----------
Net Cash Provided By Operating Activities.......... 35,651 22,507
----------- -----------
INVESTING ACTIVITIES
Net Proceeds From Mortgage-Related Assets and
Liabilities..................................... 2,858 4,397
Other, net........................................ 1,826 3,963
----------- -----------
Net Cash Provided By Investing Activities.......... 4,684 8,360
----------- -----------
FINANCING ACTIVITIES
Lines of Credit
Advances...................................... 743,462 534,484
Principal payments............................ (766,361) (561,187)
Notes Payable
Borrowings.................................... 480 1,075
Principal payments............................ (10,441) (24,695)
Dividend Payments.................................. (1,684) (1,568)
Treasury Stock Repurchases......................... (10,075) (5,321)
Other, net......................................... 1,032 (54)
----------- -----------
Net Cash Used In Financing Activities.............. (43,587) (57,266)
----------- -----------
Net Decrease In Cash and Cash Equivalents.......... (3,252) (26,399)
Cash and Cash Equivalents
Beginning Of Period........................... 20,795 43,564
----------- -----------
End Of Period................................. $ 17,543 $ 17,165
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements
-4-
<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 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 September 30, 1996 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, 1995 and Legal Proceedings within Part II of MDC's Form
10-Q for the quarterly period ended September 30, 1996.
Certain reclassifications have been made in the 1995 financial
statements to conform to the classifications used in the current year.
B. Information on Business Segments
The Company operates in two business segments: homebuilding and financial
services (which consists of mortgage lending and asset management operations). A
summary of the Company's segment information is shown below (in thousands).
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
Homebuilding ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Home sales.................................. $ 220,443 $ 220,770 $ 635,472 $ 608,690
Land sales.................................. 2,099 4,954 8,345 7,778
Other revenues.............................. 192 1,091 522 2,215
----------- ----------- ----------- -----------
222,734 226,815 644,339 618,683
----------- ----------- ----------- -----------
Home cost of sales.......................... 190,056 191,164 548,974 527,080
Land cost of sales.......................... 1,830 5,034 7,785 7,445
Asset impairment charges.................... 4,338 1,200 7,208 2,100
Marketing................................... 14,420 13,108 40,667 36,735
General and administrative.................. 7,184 6,987 21,722 19,927
----------- ----------- ----------- -----------
217,828 217,493 626,356 593,287
----------- ----------- ----------- -----------
Homebuilding Operating Profit........... 4,906 9,322 17,983 25,396
----------- ----------- ----------- -----------
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Financial Services
<S> <C> <C> <C> <C>
Mortgage Lending Revenues
Interest revenues........................... 944 869 2,618 2,539
Origination fees............................ 1,528 1,501 4,487 3,831
Gains on sales of mortgage servicing........ 1,593 2,001 5,746 6,643
Gains (losses) on sale of mortgage loans, net
1,545 (405) 3,238 (845)
Mortgage servicing and other................ 288 441 1,196 1,456
Asset Management Revenues
Gain on sale of FAMC, net................... 4,042 - - 4,042 - -
Management fees and other................... 406 1,890 3,707 5,179
----------- ----------- ----------- -----------
10,346 6,297 25,034 18,803
----------- ----------- ----------- -----------
General and Administrative Expenses
Mortgage Lending............................ 2,518 2,140 7,139 6,066
Asset Management............................ 727 638 2,196 1,799
----------- ----------- ----------- -----------
3,245 2,778 9,335 7,865
----------- ----------- ----------- -----------
Financial Services Operating Profit 7,101 3,519 15,699 10,938
----------- ----------- ----------- -----------
Total Operating Profit........................... 12,007 12,841 33,682 36,334
----------- ----------- ----------- -----------
Corporate
Other revenues.............................. 227 359 956 1,196
Interest expense............................ (486) (1,584) (3,364) (6,313)
General and administrative expenses......... (2,920) (3,185) (8,501) (9,794)
----------- ----------- ----------- -----------
Net Corporate Expenses ................. (3,179) (4,410) (10,909) (14,911)
----------- ----------- ----------- -----------
Income Before Income Taxes and Extraordinary Item..
$ 8,828 $ 8,431 $ 22,773 $ 21,423
=========== =========== =========== ===========
</TABLE>
C. Corporate and Homebuilding Interest Activity (In thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest capitalized in homebuilding inventory,
beginning of period........................... $ 39,839 $ 41,559 $ 40,217 $ 42,478
Interest incurred................................ 7,582 8,337 22,961 25,809
Interest expensed................................ (486) (1,584) (3,364) (6,313)
Previously capitalized interest included in cost
of sales...................................... (6,066) (7,426) (18,945) (21,088)
----------- ----------- ----------- -----------
Interest capitalized in homebuilding inventory,
end of period................................. $ 40,869 $ 40,886 $ 40,869 $ 40,886
=========== =========== =========== ===========
</TABLE>
-6-
<PAGE>
D. Stockholders' Equity
During 1995, the Company repurchased 865,600 shares of MDC common stock
("Common Stock") pursuant to a program authorized by MDC's Board of Directors
(the "Directors") to repurchase up to 1,100,000 shares of Common Stock. In
January 1996, the Company substantially completed the program authorized in
1995. On July 25, 1996, and October 8, 1996, respectively, the Directors
authorized additional programs to repurchase up to 1,000,000 shares of Common
Stock under each program. As of November 1, 1996, the Company had completed the
program authorized on July 25 and had repurchased approximately 109,000 shares
of Common Stock pursuant to the program authorized on October 8. Repurchases
under the 1995 and 1996 programs have been made at per share prices ranging from
$5.88 to $7.13, with an average cost, including commissions, of $6.64 per share.
In April 1996, the Company repurchased 473,000 shares of Common Stock
for $7.13 per share from Spencer I. Browne (former President, Co-Chief Operating
Officer and a director of the Company) pursuant to an agreement between Mr.
Browne and the Company.
E. Gain on Sale of FAMC
In September 1996, the Company sold its 80% interest in Financial Asset
Management LLC ("FAMC"), the asset manager of two publicly traded real estate
investment trusts, for $11,450,000. The sales proceeds consisted of $6,000,000
cash, received on October 2, and $5,450,000 of subordinated notes which are
payable at specified dates during the next 10 years and are convertible, under
certain circumstances, into as much as a 47.6% ownership interest in FAMC. The
sale resulted in the recognition of a gain, net of related expenses, of
$4,042,000. A gain of $5,450,000 attributable to the notes has been deferred and
may be recognized, in whole or in part, in future periods based upon a number of
factors, including collection of the notes' principal and the expiration of the
conversion features.
F. Extraordinary Item
In April 1996, the Company entered into a $150,000,000 unsecured
revolving credit agreement and used proceeds therefrom to retire borrowings
under certain bank lines of credit and project loans collateralized by
homebuilding inventories that the Company cancelled after entering into the
unsecured revolving credit agreement. The Company recognized an extraordinary
loss of $421,000, net of an income tax benefit of $242,000, during the second
quarter and the nine months ended September 30, 1996, due to the write-off of
unamortized discounts and deferred financing costs in connection with the
cancellation of these secured lines of credit and project loans.
G. Earnings Per Share
Primary earnings per share are based on the weighted-average number of
common and common equivalent shares outstanding during each period. The
computation of fully diluted earnings per share also assumes the conversion into
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 Common Stock. The primary and fully
diluted earnings per share calculations are shown below (in thousands, except
per share amounts).
-7-
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Primary Calculation
<S> <C> <C> <C> <C>
Income before extraordinary item............................. $ 5,603 $ 5,545 $ 14,459 $ 13,944
Extraordinary loss, net of income tax benefit of $242........ - - - - (421) - -
----------- ----------- ----------- -----------
Net Income.............................................. $ 5,603 $ 5,545 $ 14,038 $ 13,944
=========== =========== =========== ===========
Weighted-average shares outstanding.......................... 18,358 19,310 18,821 19,345
Dilutive stock options....................................... 491 742 531 816
----------- ----------- ----------- -----------
Total Weighted-Average Shares........................... 18,849 20,052 19,352 20,161
=========== =========== =========== ===========
Primary Earnings Per Share
Income before extraordinary item........................ $ .30 $ .28 $ .75 $ .69
=========== ============= =========== ===========
Net Income.............................................. $ .30 $ .28 $ .73 $ .69
=========== =========== =========== ===========
Fully Diluted Calculation
Income before extraordinary item............................. $ 5,603 $ 5,545 $ 14,459 $ 13,944
Adjustment for interest on Convertible Notes, net of income
tax benefit; conversion assumed........................... 402 391 1,206 1,173
----------- ----------- ----------- -----------
Adjusted income before extraordinary item.................... 6,005 5,936 15,665 15,117
Extraordinary loss, net of income tax benefit of $242........ - - - - (421) - -
----------- ----------- ----------- -----------
Adjusted Net Income..................................... $ 6,005 $ 5,936 $ 15,244 $ 15,117
=========== =========== =========== ===========
Weighted-average shares outstanding.......................... 18,358 19,310 18,821 19,345
Dilutive stock options....................................... 491 813 531 1,155
Shares issuable upon conversion of Convertible Notes;
conversion assumed........................................ 3,613 3,613 3,613 3,613
----------- ----------- ----------- -----------
Total Weighted-Average Shares........................... 22,462 23,736 22,965 24,113
=========== =========== =========== ===========
Fully Diluted Earnings Per Share
Income before extraordinary item........................ $ .27 $ .25 $ .68 $ .63
=========== =========== =========== ===========
Net Income.............................................. $ .27 $ .25 $ .66 $ .63
=========== ========== =========== ===========
</TABLE>
H. Supplemental Cash Flow Information (In thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1996 1995
----------- ----------
<S> <C> <C>
Cash paid during the period for:
Interest, net of amounts capitalized.......................... $ 1,791 $ 2,486
Income taxes.................................................. $ 4,278 $ 7,130
Homebuilding inventory purchases financed by seller................ $ 5,858 $ 3,705
</TABLE>
I. Supplemental Guarantor Information
The $190,000,000 principal amount of 11 1/8% senior notes due 2003 (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).
Supplemental combining financial information follows.
-8-
<PAGE>
<TABLE>
<CAPTION>
Supplemental Combining Balance Sheet
September 30, 1996
(In thousands)
Unconsolidated
---------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ----------- -----------
ASSETS
<S> <C> <C> <C> <C> <C>
Corporate
Cash and cash equivalents............... $ 11,244 $ - - $ - - $ - - $ 11,244
Investments in subsidiaries............. 215,940 - - 17,434 (233,374) - -
Advances and notes receivable - Parent
and subsidiaries...................... 232,952 1 26,877 (259,830) - -
Property and equipment, net............. 9,505 - - - - - - 9,505
Deferred income taxes................... 10,532 - - - - - - 10,532
Deferred debt issue costs, net.......... 9,358 - - - - - - 9,358
Other assets, net....................... 3,820 - - 6,096 - - 9,916
----------- ----------- ----------- ----------- -----------
493,351 1 50,407 (493,204) 50,555
----------- ----------- ----------- ----------- -----------
Homebuilding
Cash and cash equivalents............... - - 4,121 1 - - 4,122
Home sales and other accounts receivable - - 24,852 - - (8,624) 16,228
Investments and marketable securities,
net................................... 5,076 - - - - - - 5,076
Inventories, net
Housing completed or under construction - - 281,295 - - - - 281,295
Land and land under development....... - - 154,485 24,375 (1,472) 177,388
Prepaid expenses and other assets, net.. 2,416 34,703 - - - - 37,119
----------- ----------- ----------- ----------- -----------
7,492 499,456 24,376 (10,096) 521,228
----------- ----------- ----------- ----------- -----------
Financial Services
Cash and cash equivalents............... - - - - 2,177 - - 2,177
Accrued interest and other assets....... - - - - 5,212 - - 5,212
Mortgage loans held in inventory........ - - - - 46,269 - - 46,269
Mortgage Collateral, net of
mortgage-backed bonds, and related
assets and liabilities................ - - - - 1,934 - - 1,934
----------- ----------- ----------- ----------- -----------
- - - - 55,592 - - 55,592
----------- ----------- ----------- ----------- -----------
Total Assets...................... $ 500,843 $ 499,457 $ 130,375 $ (503,300) $ 627,375
=========== =========== =========== =========== ===========
</TABLE>
-9-
<PAGE>
Supplemental Combining Balance Sheet
September 30, 1996
(In thousands)
(continued)
<TABLE>
<CAPTION>
Unconsolidated
---------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ------------ -----------
LIABILITIES
<S> <C> <C> <C> <C> <C>
Corporate
Accounts payable and accrued expenses... $ 21,138 $ - - $ 442 $ - - $ 21,580
Advances and notes payable - Parent and
subsidiaries.......................... 22,652 217,344 28,464 (268,460) - -
Income taxes payable.................... 14,059 - - - - - - 14,059
Note payable............................ 3,500 - - - - - - 3,500
Senior Notes, net....................... 187,670 - - - - - - 187,670
Subordinated notes, net................. 38,224 - - - - - - 38,224
----------- ----------- ----------- ------------ -----------
287,243 217,344 28,906 (268,460) 265,033
----------- ----------- ----------- ------------ -----------
Homebuilding
Accounts payable and accrued expenses... 4,776 87,141 839 - - 92,756
Line of credit.......................... - - 28,431 - - - - 28,431
Notes payable........................... - - 6,506 - - - - 6,506
----------- ----------- ----------- ------------ -----------
4,776 122,078 839 - - 127,693
----------- ----------- ----------- ------------ -----------
Financial Services
Accounts payable and accrued expenses... - - - - 20,299 (8,624) 11,675
Line of credit.......................... - - - - 14,150 - - 14,150
----------- ----------- ----------- ------------ -----------
- - - - 34,449 (8,624) 25,825
----------- ----------- ----------- ------------ -----------
Total Liabilities................. 292,019 339,422 64,194 (277,084) 418,551
----------- ----------- ----------- ------------ -----------
STOCKHOLDERS' EQUITY
Preferred stock......................... - - - - 10 (10) - -
Common Stock............................ 227 19 81 (100) 227
Additional paid-in capital.............. 136,518 144,756 224,914 (369,670) 136,518
Retained earnings....................... 100,511 15,260 (158,815) 143,555 100,511
Less treasury stock..................... (28,432) - - (9) 9 (28,432)
----------- ----------- ----------- ------------ -----------
Total Stockholders' Equity........ 208,824 160,035 66,181 (226,216) 208,824
----------- ----------- ----------- ------------ -----------
Total Liabilities and
Stockholders' Equity............ $ 500,843 $ 499,457 $ 130,375 $ (503,300) $ 627,375
=========== =========== =========== ============ ===========
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
Supplemental Combining Balance Sheet
December 31, 1995
(In thousands)
Unconsolidated
---------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
ASSETS ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Corporate
Cash and cash equivalents.............. $ 10,290 $ - - $ - - $ - - $ 10,290
Investments in subsidiaries............ 303,694 - - 17,434 (321,128) - -
Advances and notes receivable - Parent
and subsidiaries..................... 210,656 33 21,550 (232,239) - -
Property and equipment, net............ 9,550 - - - - - - 9,550
Deferred income taxes.................. 13,730 - - - - - - 13,730
Deferred debt issue costs, net......... 9,931 - - - - - - 9,931
Other assets, net...................... 3,730 - - 100 - - 3,830
---------- ---------- ---------- ------------ ----------
561,581 33 39,084 (553,367) 47,331
---------- ---------- ---------- ------------ ----------
Homebuilding
Cash and cash equivalents.............. 6 5,054 36 - - 5,096
Home sales and other accounts
receivable........................... - - 37,726 - - (11,534) 26,192
Investments and marketable securities,
net.................................. 6,481 - - - - - - 6,481
Inventories, net
Housing completed or under
construction....................... - - 265,205 - - - - 265,205
Land and land under development...... - - 150,531 27,676 (1,247) 176,960
Prepaid expenses and other assets, net. 3,633 38,453 25 - - 42,111
---------- ---------- ---------- ------------ ----------
10,120 496,969 27,737 (12,781) 522,045
---------- ---------- ---------- ------------ ----------
Financial Services
Cash and cash equivalents.............. - - - - 5,409 - - 5,409
Accrued interest and other assets...... - - - - 3,129 - - 3,129
Mortgage loans held in inventory....... - - - - 53,153 - - 53,153
Mortgage Collateral, net of
mortgage-backed bonds, and related
assets and liabilities............... - - - - 3,744 - - 3,744
---------- ---------- ---------- ------------ ----------
- - - - 65,435 - - 65,435
---------- ---------- ---------- ------------ ----------
Total Assets..................... $ 571,701 $ 497,002 $ 132,256 $ (566,148) $ 634,811
========== ========== ========== ============ ==========
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
Supplemental Combining Balance Sheet
December 31, 1995
(In thousands)
(continued)
Unconsolidated
---------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ------------ -----------
LIABILITIES
<S> <C> <C> <C> <C> <C>
Corporate
Accounts payable and accrued expenses.... $ 17,897 $ - - $ 361 $ - - $ 18,258
Advances and notes payable - Parent and
subsidiaries........................... 98,525 210,754 20,434 (329,713) - -
Income taxes payable..................... 11,930 - - - - - - 11,930
Note payable............................. 3,537 - - - - - - 3,537
Senior Notes, net........................ 187,525 - - - - - - 187,525
Subordinated notes, net.................. 38,221 - - - - - - 38,221
----------- ----------- ----------- ------------ -----------
357,635 210,754 20,795 (329,713) 259,471
----------- ----------- ----------- ------------ -----------
Homebuilding
Accounts payable and accrued expenses.... 5,403 75,831 924 6 82,164
Lines of credit.......................... - - 43,490 - - - - 43,490
Notes payable............................ 3,630 3,192 3,749 - - 10,571
----------- ----------- ----------- ------------ -----------
9,033 122,513 4,673 6 136,225
----------- ----------- ----------- ------------ -----------
Financial Services
Accounts payable and accrued expenses.... - - - - 23,655 (11,563) 12,092
Line of credit........................... - - - - 21,990 - - 21,990
----------- ----------- ----------- ------------ -----------
- - - - 45,645 (11,563) 34,082
----------- ----------- ----------- ------------ -----------
Total Liabilities.................. 366,668 333,267 71,113 (341,270) 429,778
----------- ----------- ----------- ------------ -----------
STOCKHOLDERS' EQUITY
Preferred stock.......................... - - - - 10 (10) - -
Common Stock............................. 226 19 82 (101) 226
Additional paid-in capital............... 136,022 144,756 224,914 (369,670) 136,022
Retained earnings........................ 87,476 18,960 (163,854) 144,894 87,476
Less treasury stock...................... (18,691) - - (9) 9 (18,691)
----------- ----------- ----------- ------------ -----------
Total Stockholders' Equity......... 205,033 163,735 61,143 (224,878) 205,033
----------- ----------- ----------- ------------ -----------
Total Liabilities and
Stockholders' Equity............. $ 571,701 $ 497,002 $132,256 $ (566,148) $ 634,811
=========== =========== ======== ============ ===========
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
Supplemental Combining Statements of Income
(In thousands)
Unconsolidated
---------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1996
REVENUES
Homebuilding............................. $ 46 $ 222,596 $ 92 $ - - $ 222,734
Financial Services....................... - - - - 10,346 - - 10,346
Corporate................................ 227 - - - - - - 227
Equity in earnings of subsidiaries....... 7,181 - - - - (7,181) - -
----------- ----------- ----------- ----------- -----------
Total Revenues..................... 7,454 222,596 10,438 (7,181) 233,307
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................. 155 217,423 175 75 217,828
Financial Services....................... - - - - 3,245 - - 3,245
Corporate general and
administrative......................... 2,912 - - 8 - - 2,920
Corporate and homebuilding interest.....
(4,441) 4,159 726 42 486
----------- ----------- ----------- ----------- -----------
Total (1,374) 221,582 4,154 117 224,479
----------- ----------- ----------- ----------- -----------
Expenses..........................
Income before income taxes............... 8,828 1,014 6,284 (7,298) 8,828
Provision for income taxes............... (3,225) (385) (2,388) 2,773 (3,225)
----------- ----------- ----------- ----------- -----------
NET INCOME.................................. $ 5,603 $ 629 $ 3,896 $ (4,525) $ 5,603
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1995
<S> <C> <C> <C> <C> <C>
REVENUES
Homebuilding............................. $ 88 $ 226,688 $ 39 $ - - $ 226,815
Financial Services....................... - - - - 6,297 - - 6,297
Corporate................................ 359 - - - - - - 359
Equity in earnings of subsidiaries....... 7,629 - - - - (7,629) - -
----------- ----------- ----------- ----------- -----------
Total Revenues..................... 8,076 226,688 6,336 (7,629) 233,471
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................. 88 217,111 294 - - 217,493
Financial Services....................... - - - - 2,778 - - 2,778
Corporate general and administrative.....
3,172 - - 13 - - 3,185
Corporate and homebuilding interest.....
(3,615) 4,852 347 - - 1,584
----------- ----------- ----------- ----------- -----------
Total Expenses..................... (355) 221,963 3,432 - - 225,040
----------- ----------- ----------- ----------- -----------
Income before income taxes............... 8,431 4,725 2,904 (7,629) 8,431
Provision for income taxes............... (2,886) (1,796) (842) 2,638 (2,886)
----------- ----------- ----------- ----------- -----------
NET INCOME.................................. $ 5,545 $ 2,929 $ 2,062 $ (4,991) $ 5,545
=========== =========== =========== =========== ===========
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
Supplemental Combining Statements of Income
(In thousands)
Unconsolidated
---------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1996
REVENUES
Homebuilding............................ $ 189 $ 644,046 $ 104 $ - - $ 644,339
Financial Services...................... - - - - 25,034 - - 25,034
Corporate............................... 932 13 11 - - 956
Equity in earnings of subsidiaries...... 18,176 - - - - (18,176) - -
----------- ----------- ----------- ----------- -----------
Total Revenues.................... 19,297 644,059 25,149 (18,176) 670,329
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................ 603 625,089 439 225 626,356
Financial Services...................... - - - - 9,335 - - 9,335
Corporate general and administrative.... 8,478 - - 23 - - 8,501
Corporate and homebuilding interest....
(12,557) 13,734 2,071 116 3,364
----------- ----------- ----------- ----------- -----------
Total Expenses.................... (3,476) 638,823 11,868 341 647,556
----------- ----------- ----------- ----------- -----------
Income before income taxes and
extraordinary item.................... 22,773 5,236 13,281 (18,517) 22,773
Provision for income taxes.............. (8,314) (1,979) (5,258) 7,237 (8,314)
----------- ----------- ----------- ----------- -----------
Income before extraordinary item........ 14,459 3,257 8,023 (11,280) 14,459
Extraordinary loss, net of income tax
benefit of $242....................... (421) - - - - - - (421)
----------- ----------- ----------- ----------- -----------
NET INCOME................................. $ 14,038 $ 3,257 $ 8,023 $ (11,280) $ 14,038
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1995
<S> <C> <C> <C> <C> <C>
REVENUES
Homebuilding............................ $ 299 $ 618,221 $ 163 $ - - $ 618,683
Financial Services...................... - - - - 18,803 - - 18,803
Corporate............................... 1,196 - - - - - - 1,196
Equity in earnings of subsidiaries...... 19,303 - - - - (19,303) - -
----------- ----------- ----------- ----------- -----------
Total Revenues.................... 20,798 618,221 18,966 (19,303) 638,682
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................ 586 592,085 616 - - 593,287
Financial Services...................... - - - - 7,865 - - 7,865
Corporate general and administrative.... 9,740 - - 54 - - 9,794
Corporate and homebuilding interest..... (10,951) 15,500 1,764 - - 6,313
----------- ----------- ----------- ----------- -----------
Total Expenses.................... (625) 607,585 10,299 - - 617,259
----------- ----------- ----------- ----------- -----------
Income before income taxes.............. 21,423 10,636 8,667 (19,303) 21,423
Provision for income taxes.............. (7,479) (4,042) (2,821) 6,863 (7,479)
----------- ----------- ----------- ----------- -----------
NET INCOME................................. $ 13,944 $ 6,594 $ 5,846 $ (12,440) $ 13,944
=========== =========== =========== =========== ===========
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
Supplemental Combining Statement of Cash Flows
Nine Months Ended September 30, 1996
(In thousands)
Unconsolidated
---------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES... $ 112,289 $ 17,169 $ (4,963) $ (88,844) $ 35,651
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Net (Increase) Reduction in Notes and
Advances Receivable From Parent and
Subsidiaries............................. (22,296) 32 (5,327) 27,591 - -
Net Proceeds From Mortgage-Related Assets
and Liabilities.......................... - - - - 2,858 - - 2,858
Other, net.................................. 1,223 719 (116) - - 1,826
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Investing
Activities............................... (21,073) 751 (2,585) 27,591 4,684
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Net Increase (Reduction) in Borrowings From
Parent and Subsidiaries.................. (75,873) 6,590 8,030 61,253 - -
Lines of Credit
Advances............................... - - 743,462 - - - - 743,462
Principal payments..................... - - (766,361) - - (766,361)
Notes Payable
Borrowings............................. - - 480 - - - - 480
Principal payments..................... (3,668) (3,024) (3,749) - - (10,441)
Dividend Payments........................... (1,684) - - - - - - (1,684)
Treasury Stock Repurchases.................. (10,075) - - - - - - (10,075)
Other, net.................................. 1,032 - - - - - - 1,032
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Financing
Activities............................... (90,268) (18,853) 4,281 61,253 (43,587)
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) In Cash and Cash
Equivalents.............................. 948 (933) (3,267) - - (3,252)
Cash and Cash Equivalents
Beginning Of Period...................... 10,296 5,054 5,445 - - 20,795
----------- ----------- ----------- ----------- -----------
End Of Period............................ $ 11,244 $ 4,121 $ 2,178 $ - - $ 17,543
=========== =========== =========== =========== ===========
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
Supplemental Combining Statement of Cash Flows
Nine Months Ended September 30, 1995
(In thousands)
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............................... $ 39,856 $ (894) $ (10,095) $ (6,360) $ 22,507
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Net Increase in Notes and Advances
Receivable From Parent and Subsidiaries.. (72,138) (13) (8,202) 80,353 - -
Net Proceeds From Mortgage-Related Assets
and Liabilities.......................... - - - - 4,397 - - 4,397
Other, net.................................. (890) 1,241 3,612 - - 3,963
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Investing
Activities............................... (73,028) 1,228 (193) 80,353 8,360
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Net Increase in Borrowings From Parent and
Subsidiaries............................. 18,193 42,631 13,169 (73,993) - -
Lines of credit
Advances............................... - - 534,484 - - - - 534,484
Principal payments..................... - - (558,623) (2,564) - - (561,187)
Notes Payable
Borrowings............................. - - 1,075 - - - - 1,075
Principal payments..................... (34) (23,264) (1,397) - - (24,695)
Dividend Payments........................... (1,568) - - - - - - (1,568)
Treasury Stock Repurchases.................. (5,321) - - - - - - (5,321)
Other, net.................................. (54) - - - - - - (54)
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Financing
Activities............................... 11,216 (3,697) 9,208 (73,993) (57,266)
----------- ----------- ----------- ----------- -----------
Net Decrease In Cash and Cash Equivalents... (21,956) (3,363) (1,080) - - (26,399)
Cash and Cash Equivalents
Beginning Of Period...................... 31,210 9,656 2,698 - - 43,564
----------- ----------- ----------- ----------- -----------
End Of Period............................ $ 9,254 $ 6,293 $ 1,618 $ - - $ 17,165
=========== =========== =========== =========== ===========
</TABLE>
-16-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
MDC is a major regional homebuilder and ranks as the seventh largest
homebuilder in the United States, based on homebuilding revenues. The Company
operates in two segments: homebuilding and financial services. In its
homebuilding segment, MDC is engaged in the construction and sale of residential
housing in (i) metropolitan Denver and Colorado Springs, Colorado; (ii) northern
Virginia and suburban Maryland (the "Mid-Atlantic"); (iii) Northern and Southern
California; (iv) Phoenix and Tucson, Arizona; and (v) Las Vegas, Nevada. In its
financial services segment, (i) HomeAmerican Mortgage Corporation (a wholly
owned subsidiary of M.D.C. Holdings, Inc., "HomeAmerican") provides mortgage
loans primarily to the Company's home buyers and, to a lesser extent, to others
(the mortgage lending operations); and (ii) through September 30, 1996,
Financial Asset Management LLC (an indirect subsidiary of M.D.C. Holdings, Inc.,
"FAMC") managed, by contract, the operations of two publicly traded real estate
investment trusts (each, a "REIT") (the asset management operations).
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 Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues.......................................... $ 233,307 $ 233,471 $ 670,329 $ 638,682
Income before income taxes and extraordinary item. $ 8,828 $ 8,431 $ 22,773 $ 21,423
Net Income........................................ $ 5,603 $ 5,545 $ 14,038 $ 13,944
Earnings Per Share:
Primary........................................ $ .30 $ .28 $ .73 $ .69
Fully diluted.................................. $ .27 $ .25 $ .66 $ .63
</TABLE>
Revenues for the nine months ended September 30, 1996 were the highest
in the Company's history, representing a 5% increase from the same period in
1995. Increased revenues were primarily due to an increase in homes closed. The
Company closed 3,606 homes during the nine months ended September 30, 1996,
representing a 7% increase over the 3,364 homes closed in the same period in
1995. The revenue impact of increased unit closings was partially offset by a 3%
decrease in the average selling price per home closed.
Income before income taxes and extraordinary item was higher in the
third quarter and first nine months of 1996, compared with the same periods in
1995, primarily as a result of (i) higher operating profit from the Company's
financial services segment, primarily resulting from a $4,042,000 gain, net of
related expenses, recognized on the sale of FAMC and higher gains on sales of
mortgage loans; (ii) lower interest expense; and (iii) lower corporate general
and administrative expenses. These increases in income partially were offset by
decreases in operating profits from the Company's homebuilding operations in the
third quarter and first nine months of 1996, compared with the same periods for
1995. These decreases were caused by (i) increased homebuilding asset impairment
charges, primarily in the
-17-
<PAGE>
Mid-Atlantic region due to weakened conditions in that market; (ii) lower
average selling prices on homes closed; and (iii) increased marketing and
general and administrative expenses incurred in support of the Company's
expanding homebuilding operations, which more than offset the positive affects
of increased home closings and Home Gross Margins (as hereinafter defined).
Impact of Home Mortgage Interest Rates
The Company's homebuilding and mortgage lending operations are
dependent upon the availability and cost of mortgage financing. Increases in
home mortgage interest rates may reduce the demand for homes and home mortgages
and, generally, will reduce home mortgage refinancing activity.
In October 1993, home mortgage interest rates reached their lowest
levels in 25 years, dropping to an average of 6.7% on a 30-year, fixed-rate
mortgage. From October 1993 to December 1994, home mortgage interest rates
increased to a high of 9.25%. During this period of rising interest rates, the
Company experienced a general weakening in demand for new homes in most of its
markets, which adversely affected the Company's (i) home sales in the last three
quarters of 1994 and the first quarter of 1995; and (ii) Home Gross Margins
throughout most of 1995. From December 1994 through February 1996, home mortgage
interest rates generally declined to a low of 6.9% which, among other things,
led to improved home sales in the last three quarters of 1995 and the first four
months of 1996, compared with the same periods in 1994 and 1995. Since February
1996, home mortgage interest rates generally increased to a high of 8.4%,
although rates recently have declined to 7.8%. While current mortgage interest
rates are low compared with historical rates, increases in mortgage interest
rates, such as those occurring during the second and third quarters of 1996 when
rates generally were above 8.0%, have affected adversely and may continue to
affect adversely in the future, the Company's homebuilding and mortgage lending
operations.
The Company is unable to predict the extent to which recent or future
changes in home mortgage interest rates will affect the Company's operating
activities and results of operations. See "Forward-Looking Statements" below.
-18-
<PAGE>
Homebuilding 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 Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Home sales revenues................................ $ 220,443 $ 220,770 $ 635,472 $ 608,690
Operating profits before asset impairment charges.. $ 9,244 $ 10,522 $ 25,191 $ 27,496
Operating profits.................................. $ 4,906 $ 9,322 $ 17,983 $ 25,396
Average selling price per housing unit............. $ 175.1 $ 178.8 $ 176.2 $ 180.9
Home Gross Margins................................. 13.8% 13.4% 13.6% 13.4%
Homes (units)
Sales contracted, net
Colorado.................................. 405 483 1,483 1,562
Mid-Atlantic.............................. 246 205 898 852
California................................ 185 231 634 609
Arizona................................... 237 231 843 606
Nevada.................................... 61 15 182 50
----------- ----------- ----------- -----------
Total................................ 1,134 1,165 4,040 3,679
=========== =========== =========== ===========
Closed and delivered
Colorado.................................. 465 493 1,400 1,453
Mid-Atlantic.............................. 262 288 657 734
California................................ 191 232 594 528
Arizona................................... 261 201 764 586
Nevada.................................... 80 21 191 63
----------- ----------- ----------- -----------
Total................................ 1,259 1,235 3,606 3,364
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1996 1995 1995
----------- ------------ --------
<S> <C> <C> <C>
Backlog (units)
Colorado.................................. 741 658 719
Mid-Atlantic.............................. 516 275 455
California................................ 215 175 237
Arizona................................... 313 234 277
Nevada.................................... 60 13 16
----------- ------------ -----------
Total................................. 1,845 1,355 1,704
=========== ============ ===========
Backlog (estimated sales value)............... $ 326,000 $ 243,000 $ 305,000
=========== =========== ===========
Active Subdivisions (units)
Colorado.................................. 50 49 53
Mid-Atlantic.............................. 51 48 45
California................................ 21 23 25
Arizona................................... 22 22 22
Nevada.................................... 5 2 2
----------- ------------ -----------
Total................................. 149 144 147
=========== ============ ===========
</TABLE>
-19-
<PAGE>
Home Sales Revenues and Homes Closed and Delivered. Home sales revenues
in the first nine months of 1996 exceeded all comparable periods in the
Company's history, increasing 4% from home sales revenues for the same period in
1995. The increase primarily resulted from increased home closings, partially
offset by an overall decrease in the average selling price per home closed as
discussed below. Home closings increased in the first nine months of 1996
compared with 1995 in (i) Arizona, due to a significant expansion of the
Company's operations in Phoenix, where the Company has increased the number of
active subdivisions from nine at December 31, 1994 to 14 at September 30, 1996;
(ii) California, due to the Company's acquisition and opening of several new
subdivisions in Southern California, including subdivisions in Riverside County
acquired from Mesa Homes in July 1995; and (iii) Nevada, due to the closing of
homes in subdivisions acquired from Longford Homes in February 1996. Home sales
revenues in the third quarter of 1996 were approximately the same as home sales
revenues for the third quarter of 1995, as the impact of slightly increased home
closings was offset by the decrease in the average selling price.
The Company's Mid-Atlantic operations closed fewer homes in the third
quarter and first nine months of 1996 than were closed during the same periods
in 1995, primarily as a result of adverse weather conditions throughout most of
the first nine months of 1996 which delayed construction and development
activities and the delivery of certain homes.
Average Selling Price Per Housing Unit. The decrease in the average
selling price per housing unit in the third quarter and first nine months of
1996, compared with the same periods in 1995, reflects the impact of the
Company's continuing emphasis on offering lower-priced, more affordable homes
primarily marketed to first-time and first-time move-up home buyers. This
strategy resulted in lower average sales prices in the first nine months of 1996
compared with 1995 in (i) Arizona; (ii) Las Vegas, as the Company closed
affordably priced homes in subdivisions acquired from Longford Homes; and (iii)
the Mid-Atlantic region, as the Company has opened a number of new affordable
townhome projects in this market.
Home Gross Margins. Gross margins (home sales revenues less cost of
goods sold, which primarily includes land and construction costs, capitalized
interest, a reserve for warranty expense and financing costs) as a percent of
home sales revenue ("Home Gross Margins") increased during the third quarter and
first nine months of 1996, compared with the same periods in 1995. These
increases largely were due to increased margins in (i) Colorado, as the
favorable impact of lower interest rates during late 1995 and early 1996
resulted in stronger market conditions which reduced the level of incentives
required for Company home buyers during such period; (ii) Las Vegas, due to
increased profits from homes sold in subdivisions acquired from Longford Homes;
and (iii) Northern California, due to the impact of increased home closings in
certain of the Company's more profitable subdivisions in that market. These
increases partially were offset by Home Gross Margin decreases in the
Mid-Atlantic, where the Company continues to offer incentives to reduce the
Company's inventory of older unsold homes under construction and in response to
weakened market conditions and strong competition. During the third quarter of
1996, Home Gross Margins increased compared with the third quarter of 1995 in
(i) Phoenix, due to the favorable impact of closings in successful projects
opened in late 1995 and early 1996; and (ii) Southern California, due to the
adverse impact on 1995 third quarter margins of closings from underperforming
projects which have since been substantially completed. For the nine-month
period ended September 30, 1996, Home Gross Margins decreased compared with the
comparable period in 1995 in Phoenix and Southern California as third quarter
1996 Home Gross Margins increases were more than offset by decreases during the
first six months of 1996. These six-month decreases were due to the adverse
affects in 1996 of increased incentives offered to home buyers and higher land
prices resulting from increased competition in these markets.
-20-
<PAGE>
The Company believes that future growth in Home Gross Margins will be
adversely impacted by the increased incentives offered to home buyers to
stimulate sales and counter increased competition in each of its markets. In
addition, increases in, among other things, the costs of subcontracted labor,
finished lots and building materials, particularly the recently announced
increases in lumber prices, may affect adversely future Home Gross Margins to
the extent that market conditions prevent the recovery of increased costs
through higher sales prices. See "Forward-Looking Statements" below.
Home Sales and Backlog. Although home sales in the third quarter of
1996 were consistent with the third quarter of 1995, home sales for the first
nine months of 1996 were 10% higher than home sales for the same period in 1995.
The increase in 1996 primarily was the result of increased home sales in
Arizona, Southern California and Las Vegas due to the Company's continued
expansion in these markets, as previously discussed. As a result of these
increased home sales, the Company's Backlog at September 30, 1996 increased to
1,845 units, a 36% increase from the 1,355 units at December 31, 1995, and an 8%
increase from the 1,704 units at September 30, 1995. The Company expects
approximately 70% of its September 30, 1996 Backlog to close under existing
sales contracts during the fourth quarter of 1996 and the first quarter of 1997,
assuming no significant change in mortgage interest rates. See "Forward-Looking
Statements" below.
The Company's home sales in October 1996 totalled 366 units, representing
an 8% increase from the 337 homes sold in October 1995.
Marketing. Marketing expenses (which include, among other things,
amortization of deferred marketing costs, model home expenses and sales
commissions) totalled $14,420,000 and $40,667,000, respectively, for the third
quarter and first nine months of 1996, compared with $13,108,000 and
$36,735,000, respectively, for the same periods in 1995. The 10% and 11%
increases during the third quarter and first nine months of 1996 compared with
1995, respectively, principally resulted from (i) variable cost increases due to
increased home sales revenues; and (ii) additional marketing-related salary,
sales commission and model home operating expenses incurred to support the
Company's expanded operations and to stimulate sales in response to increased
competition in its markets.
General and Administrative. General and administrative expenses
totalled $7,184,000 and $21,722,000, respectively, during the third quarter and
first nine months of 1996, compared with $6,987,000 and $19,927,000,
respectively, for the same periods in 1995. General and administrative expenses
increased in 1996 primarily due to additional costs incurred in support of the
Company's expanded operations in Southern California and Las Vegas.
-21-
<PAGE>
Land Inventory
The table below shows the carrying value of MDC's land and land under
development in each of its homebuilding markets (in thousands).
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1996 1995 1995
----------- ----------- ------------
<S> <C> <C> <C>
Finished or currently under development
Colorado................................ $ 32,116 $ 34,331 $ 38,717
Mid-Atlantic............................ 49,186 47,247 40,307
California.............................. 20,535 26,694 28,688
Arizona................................. 28,508 20,586 19,193
Nevada.................................. 15,675 4,559 5,238
----------- ----------- -----------
Total............................... 146,020 133,417 132,143
Held for future development or sale*......... 31,368 43,543 45,787
----------- ----------- -----------
Total............................... $ 177,388 $ 176,960 $ 177,930
=========== =========== ===========
</TABLE>
*A substantial majority of the land held for future development or
sale consists of unfinished lots located in Colorado which generally
are in close proximity to projects currently being developed.
In addition to its land inventory, the Company controls a portion of
the land it will require for its homebuilding operations in future periods
utilizing option contracts, normally on a "rolling" basis. Generally, in a
rolling option contract, the Company obtains the right to purchase finished lots
in consideration for an option deposit (generally $50,000 to $200,000 per
contract). In the event the Company elects not to purchase the finished lots
within a specified period of time (generally, 5 to 20 lots per project per
calendar quarter), the agreements normally limit the Company's loss to the
option deposit, thereby limiting the Company's risk while preserving its
liquidity. At September 30, 1996, approximately 6,800 lots were controlled under
option agreements with $5,450,000 in option deposits. Because of increased
demand for finished lots in certain of the markets where the Company builds
homes, the Company's ability to acquire lots using rolling options has been
reduced or has become more expensive.
Asset Impairment Charges
Operating results during the third quarter and first nine months of
1996 were impacted adversely by asset impairment charges totalling $4,338,000
and $7,208,000, respectively, primarily related to certain of the Company's
homebuilding assets in the Mid-Atlantic region as a result of continued weakened
conditions and strong competition in that market. The Mid-Atlantic asset
impairment charges resulted from (i) the write-down to fair market value of a
single-family detached home subdivision in which the Company currently intends
to sell the majority of the remaining lots in bulk; (ii) the recognition of
losses anticipated from the closing of certain homes in Backlog and from the
offering of increased incentives to stimulate sales of certain completed unsold
homes in inventory; (iii) the write-off of capitalized costs, primarily deferred
marketing and option deposits, related to certain low-margin projects which the
Company is considering closing out; and (iv) for the nine-month period, the
write-down to fair market value in the second quarter of 1996, pursuant to the
requirements of SFAS 121 (as hereinafter defined), of a single-family detached
home subdivision which began to experience extremely slow sales and negative
Home Gross Margins during such period. While intending to maintain its market
share in the Mid-Atlantic region, the Company is strategically eliminating
lower-margin projects
-22-
<PAGE>
in that market and redeploying capital to more profitable operations, including
Southern California, Phoenix and Las Vegas. See "Forward-Looking Statements"
below.
Asset impairment charges for the third quarter and first nine months of
1996 also included charges with respect to certain of the Company's homebuilding
assets in Northern California as a result of increased incentives and sales
price reductions offered to potential home buyers in connection with the
Company's efforts to exit certain underperforming subdivisions in the Sacramento
area.
Operating results during the three and nine months ended September 30,
1995 were impacted adversely by $1,200,000 and $2,100,000, respectively, in
asset impairment charges. These charges primarily were related to certain
underperforming projects in Arizona, Northern California and the Mid-Atlantic
region.
Financial Services Segment
Mortgage Lending Operations
The table below sets forth certain information with respect to
HomeAmerican's operations during each of the periods presented, as well as its
servicing portfolio at each date shown (in thousands).
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gains from sales of mortgage servicing:
Bulk........................................... $ 1,418 $ 1,528 $ 5,209 $ 5,262
Other.......................................... $ 175 $ 473 $ 537 $ 1,381
Gains (losses) on mortgage loan sales, net........ $ 1,545 $ (405) $ 3,238 $ (845)
Operating profit.................................. $ 3,380 $ 2,267 $ 10,146 $ 7,558
Principal amount of originations and purchases:
MDC home buyers.............................. $ 119,584 $ 114,642 $ 343,066 $ 295,121
Spot......................................... 8,280 12,423 34,056 26,254
Correspondent................................ 15,690 20,031 42,203 48,909
----------- ----------- ----------- -----------
Total.................................... $ 143,554 $ 147,096 $ 419,325 $ 370,284
=========== =========== =========== ===========
Capture Rate...................................... 65% 62% 66% 59%
=========== =========== =========== ===========
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1996 1995 1995
----------- ----------- -----------
<S> <C> <C> <C>
Composition of Servicing Portfolio
FHA insured/VA guaranteed.................... $ 81,054 $ 85,002 $ 141,589
Conventional................................. 259,803* 401,809 444,072
----------- ----------- -----------
Total servicing portfolio......................... $340,857 $ 486,811 $ 585,661
=========== =========== ===========
Salable portion of servicing portfolio............ $ 226,880** $ 429,328 $442,817
=========== =========== ===========
</TABLE>
*Includes servicing of $62,181 sold in August 1996, serviced by
HomeAmerican under a subservicing arrangement until transfer to the
purchaser in October and November 1996.
**Substantially all originated subsequent to the adoption of SFAS 122
(as hereinafter defined).
HomeAmerican's operating profits for the third quarter and first nine
months of 1996 exceeded the operating profits for the same periods in 1995
primarily because of gains on sales of mortgage loans totalling $1,545,000 and
$3,238,000, respectively, in the third quarter and first nine months of 1996,
compared with losses totalling $405,000 and $845,000, respectively, for the same
periods in 1995. These gains are in large measure attributable to the Company's
required adoption in 1996 of SFAS 122.
SFAS 122 requires the Company to allocate the cost of mortgage loans
originated by HomeAmerican after January 1, 1996 between the mortgage loans and
the right to service the mortgage loans, based on their relative values. Prior
to 1996, the cost of mortgage loans originated by HomeAmerican was assigned to
the mortgage loans, with no cost assigned to the servicing rights. Assuming that
all other factors remain unchanged, the net effect of the adoption of SFAS 122
will be higher gains (or lower losses) on sales of mortgage loans originated by
HomeAmerican after January 1, 1996 and lower gains on sales of the related
servicing rights, compared with gains on sales of mortgage loans and related
servicing rights originated by HomeAmerican prior to January 1, 1996.
The Company's adoption of SFAS 122 resulted in additional gains in the
third quarter and first nine months of 1996 of approximately $1,765,000 and
$4,382,000, respectively, on the sale of mortgage loans which were originated
and sold by HomeAmerican during such periods. Gains from the sale of mortgage
servicing rights in the third quarter and first nine months of 1996 were reduced
by $1,106,000 and $2,078,000, respectively, due to the allocation of mortgage
loan costs to the sold servicing rights which were originated in 1996 in
accordance with the requirements of SFAS 122.
During the nine months ended September 30, 1996, the Company recorded
gains of approximately $5,100,000 related to bulk sales of approximately
$400,000,000 principal amount of mortgage servicing rights held prior to the
adoption of SFAS 122 on January 1, 1996. The substantial majority of these
mortgage servicing rights were related to mortgage loans originated by the
Company and, as a result, had no costs assigned to such servicing rights. Gains
from sales of mortgage servicing in the fourth quarter of 1996 and thereafter
will be significantly lower than prior comparable periods as the Company sold
substantially all of its pre-1996 servicing portfolio prior to September 30,
1996. See "Forward-Looking Statements" below.
HomeAmerican's loan originations and purchases increased by 13% in the
first nine months of 1996, compared with the same periods in 1995, primarily due
to increases in (i) the Company's home closings; (ii) HomeAmerican's "Capture
Rate", or the number of mortgage loans originated for Company home buyers as a
percentage of total Company home closings; and (iii) the dollar amount of spot
-24-
<PAGE>
originations resulting from increased refinancing activity stimulated by lower
mortgage interest rates during the first four months of 1996 compared with the
same period in 1995. HomeAmerican opened origination facilities in Southern
California and Nevada in late 1995 and February 1996, respectively, which
favorably affected HomeAmerican's total originations and Capture Rate.
HomeAmerican continues to benefit from the Company's homebuilding growth as
Company home buyers were the source of more than 80% of the principal amount of
mortgage loans originated and purchased by HomeAmerican in 1996 and throughout
1995.
Forward Sales Commitments. HomeAmerican's operations are affected by,
among other things, changes in mortgage interest rates. HomeAmerican utilizes
forward mortgage securities contracts to manage the interest rate risk on its
fixed-rate mortgage loans owned and rate-locked mortgage loans which are subject
to processing and origination. Such contracts are the only significant financial
derivative instrument utilized by MDC.
Asset Management Operations
The following table sets forth certain information with respect to the
results of the asset management operations during each of the periods presented
(in thousands).
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gain on sale of FAMC, net.......................... $ 4,042 $ - - $ 4,042 $ - -
Management fees from REITs......................... $ 775 $ 778 $ 2,373 $ 2,143
Operating profit................................... $ 3,721 $ 1,252 $ 5,553 $ 3,380
</TABLE>
The increased operating profits in the third quarter and first nine
months of 1996 primarily were due to the $4,042,000 gain, net of related
expenses, on the September 1996 sale of FAMC. The sales proceeds of $11,450,000
included $6,000,000 of cash, received on October 2, 1996, and $5,450,000 of
subordinated convertible notes, which are payable at specified dates during the
next 10 years and are convertible, under certain circumstances, into as much as
a 47.6% ownership interest in FAMC. A gain of $5,450,000 attributable to the
notes has been deferred and may be recognized, in whole or in part, in future
periods based upon a number of factors, including collection of the notes'
principal and the expiration of the conversion features. This increase partially
was offset by a $533,000 charge to income to reduce the Company's collateralized
mortgage obligations to their net realizable value.
Due to the sale of FAMC and the fact that the Company does not
anticipate making additional mortgage-related investments, future operating
profit from the asset management operations will be immaterial.
See "Forward-Looking Statements" below.
Other Operating Results
Interest Expense. Corporate and homebuilding interest incurred
decreased by 9% and 11% to $7,582,000 and $22,961,000, respectively, for the
third quarter and first nine months of 1996, compared with $8,337,000 and
$25,809,000, respectively, for the same periods in 1995. The decreases in 1996
primarily were due to (i) lower effective interest rates with respect to the
Company's variable-rate debt in 1996; and (ii) lower average outstanding
borrowings, as the Company maintained lower average levels of cash and
homebuilding inventories in the first nine months of 1996.
-25-
<PAGE>
The portion of corporate and homebuilding interest which was
capitalized (the Company capitalizes interest on its homebuilding inventories
during the period of active development and through the completion of
construction) totalled $7,096,000 and $19,597,000, respectively, in the third
quarter and first nine months of 1996, compared with $6,753,000 and $19,496,000,
respectively, for the same periods in 1995.
Corporate and homebuilding interest incurred but not capitalized is
reflected as interest expense and totalled $486,000 and $3,364,000,
respectively, for the third quarter and first nine months of 1996, compared with
$1,584,000 and $6,313,000, respectively, for the same periods of 1995.
For a reconciliation of interest incurred, capitalized and expensed,
see Note C to the Company's Condensed Consolidated Financial Statements.
Corporate General and Administrative Expenses. Corporate general and
administrative expenses totalled $2,920,000 and $8,501,000, respectively, during
the third quarter and first nine months of 1996, compared with $3,185,000 and
$9,794,000, respectively, for the same periods of 1995. The decreases in 1996
primarily resulted from (i) reduced commitment fees, appraisal costs and other
related costs as a result of the Company's replacement of its secured
homebuilding lines of credit and certain project loans with the $150,000,000
unsecured line of credit in April 1996; and (ii) for the nine-month period, an
insurance settlement of $1,250,000 received in the first quarter of 1996 related
to the recovery of certain homebuilding expenditures which were previously
expensed.
Income Taxes. M.D.C. Holdings, Inc. and its wholly owned subsidiaries file
a consolidated federal income tax return (an "MDC Consolidated Return").
Richmond Homes and its wholly owned subsidiaries filed a separate consolidated
federal income tax return (each a "Richmond Homes Consolidated Return") from its
inception (December 28, 1989) through February 2, 1994, the date Richmond Homes
became a wholly owned subsidiary of MDC.
MDC's overall effective income tax rate during the third quarter and
first nine months of 1996 was 36.5%, compared with 34.2% and 34.9%,
respectively, during the same periods in 1995. These effective income tax rates
differed from the federal statutory rate of 35% due to, among other things, (i)
the impact of state income taxes; and (ii) in 1995, the realization of
non-taxable income for financial reporting purposes for which no tax liability
was recorded.
The IRS has completed its examination of the MDC Consolidated Returns
for the years 1986 through 1990 and has proposed adjustments that 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.
In the opinion of management, adequate provision has been made for any
additional income taxes and interest which may result from the proposed
adjustments; however, it is reasonably possible that the ultimate resolution
could result in amounts which differ materially in the near-term from amounts
provided. See "Forward-Looking Statements" below.
The IRS currently is examining the MDC and Richmond Homes Consolidated
Returns for the years 1991, 1992 and 1993. No reports have been issued by the
IRS in connection with these examinations. In the opinion of management,
adequate provision has been made for additional income taxes and interest, if
any, which may result from these examinations; however, it is reasonably
possible that the ultimate resolution could result in amounts which differ
materially in the near term from amounts provided. See "Forward-Looking
Statements" below.
-26-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
MDC uses its liquidity and 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. Liquidity and capital resources are generated internally from
operations and from external sources.
Capital Resources
The Company's capital structure is a combination of (i) permanent
financing, represented by Stockholders' Equity; (ii) long-term financing,
represented by publicly traded Senior Notes and subordinated notes, the
substantial majority of which are due in 2003 and 2005, respectively; and (iii)
current financing, primarily lines of credit, as discussed below. The Company
believes that its current financial condition is both balanced to fit its
current operational structure and adequate to satisfy its current and near-term
capital requirements. See "Forward-Looking Statements" below.
The Company's debt-to-equity ratio improved to 1.33 to 1 at September
30, 1996, compared with 1.49 to 1 at December 31, 1995 and September 30, 1995.
The improvement resulted from (i) the earnings of the Company, which contributed
to the increase in the Company's Stockholders' Equity at September 30, 1996; and
(ii) the use of internally generated cash flow to reduce debt.
Based upon its current business plan, MDC anticipates the acquisition
of various parcels of land in various stages of completion and finished lots for
use in its future homebuilding operations during the remainder of 1996 and 1997.
The Company currently intends to acquire a 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" options. The use
of "rolling" options lessens the Company's land-related risk and preserves
liquidity. See "Forward-Looking Statements" below.
Based upon its current capital resources and additional liquidity
available under existing credit relationships, MDC anticipates that it has
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, meeting future debt payments and refinancing or paying off other
long-term debt as it becomes due) from operations and external financing
sources, assuming that no significant adverse changes in the Company's business
occur as a result of the various risk factors described elsewhere herein, in
particular, increases in interest rates. See "Forward-Looking Statements" below.
Lines of Credit
Homebuilding. In April 1996, the Company entered into an agreement with
a group of banks for a $150,000,000 unsecured revolving line of credit maturing
June 30, 2000, although a term-out may commence earlier under certain
circumstances. Some of the initial advances at closing of this credit agreement
were used to retire the borrowings under cancelled bank lines of credit and
project loans collateralized by homebuilding inventories. At September 30, 1996,
$28,431,000 was borrowed under this unsecured revolving line of credit.
Financial Services. To provide funds to originate and purchase mortgage
loans and to finance these mortgage loans on a short-term basis, HomeAmerican
utilizes its mortgage lending bank line of credit (the "Mortgage Line"). These
mortgage loans are normally sold within 25 to 60 days after origination or
purchase. During the first nine months of 1996 and 1995, HomeAmerican sold
-27-
<PAGE>
$426,265,000 and $366,455,000, respectively, principal amount of mortgage loans
and mortgage certificates.
The aggregate amount available under the Mortgage Line at September 30,
1996 was $51,000,000. 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 agreement). At September 30,
1996, $14,150,000 was borrowed and an additional $18,614,000 was collateralized
and available to be borrowed under the Mortgage Line. HomeAmerican also has
additional borrowing capability with available repurchase agreements.
General. The Company's lines of credit and notes payable require
compliance with certain covenants, representations and warranties. Currently,
the Company believes that it is in compliance with these covenants,
representations and warranties.
In the event that MDC's lines of credit are not renewed as they become
due or are renewed at substantially lower levels, the Company believes that it
could meet its financing requirements through a combination of internally
generated funds and new borrowings. See "Forward-Looking Statements" below.
Consolidated Cash Flow
During the first nine months of 1996, the Company generated $40,335,000
in cash from its operating and investing activities. The Company used this cash
and other internally generated funds to reduce outstanding lines of credit and
notes payable by $32,860,000 and to repurchase 1,463,000 shares of MDC Common
Stock for $10,075,000.
During the first nine months of 1995, the Company generated $30,867,000
in cash from its operating and investing activities. The Company used these
funds and $24,777,000 of existing cash balances to reduce outstanding lines of
credit and notes payable by $50,323,000 and to repurchase 843,600
shares of MDC Common Stock for $5,321,000.
ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"). The Company's adoption of SFAS 121 on January 1, 1996 did not have
a material impact on the results of operations or financial condition of the
Company.
In May 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing
Rights an Amendment of FASB Statement No. 65" ("SFAS 122"). As previously
discussed, the Company adopted this statement effective January 1, 1996.
In June 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125").
The Company's adoption of SFAS 125, beginning in 1997, is not anticipated to
have a material adverse impact on the results of operations or financial
condition of the Company. See "Forward-Looking Statements" below.
-28-
<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the statements in this Form 10-Q Quarterly Report, as well as
statements made by the Company in periodic press releases, oral statements made
by the Company's officials to analysts and shareowners in the course of
presentations about the Company and conference calls following quarterly
earnings releases, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. Such
factors include, among other things, (i) general economic and business
conditions; (ii) interest rate changes; (iii) competition; (iv) the availability
and cost of land and other raw materials used by the Company in its homebuilding
operations; (v) unanticipated demographic changes; (vi) shortages of labor;
(vii) weather related slowdowns; (viii) slow growth initiatives; (ix) building
moratoria; (x) governmental regulation including interpretations of income tax
and environmental laws; and (xi) other factors over which the Company has little
or no control.
-29-
<PAGE>
M.D.C. HOLDINGS, INC.
FORM 10-Q
PART II
ITEM 1. LEGAL PROCEEDINGS
Expansive Soils Cases
On October 21, 1994, a complaint was served on several of the Company's
subsidiaries in an action initiated by six homeowners in Highlands Ranch,
Colorado<F1>. On January 26, 1995, counsel for the Company accepted service of
two additional complaints by a homeowner in the Stonegate subdivision in Douglas
County, Colorado<F2> and by a homeowner in the Rock Creek development located in
Boulder County, Colorado<F3>. On September 12, 1995, the Company was served with
a similar complaint relating to homeowners in Douglas County, Colorado<F4>. The
complaints (the "Expansive Soils Cases"), each of which sought certification of
a class action, alleged substantially identical claims relating to the
construction of homes on lots with expansive soils, including negligence, breach
of express and implied warranties, violation of the Colorado Consumer Protection
Act and non-disclosures. The homeowners in each complaint sought, individually
and on behalf of the alleged class, recovery in unspecified amounts including
actual damages, statutory damages, exemplary damages and treble damages. The
Company filed a response to each of the complaints and to initial discovery
requests in the first filed case.
On June 11, 1996, representative plaintiffs and the Company's Colorado
homebuilding subsidiaries jointly filed with the Douglas County District Court
an agreement to settle the Expansive Soils Cases. On June 13, 1996, the Douglas
County District Court granted preliminary approval of the settlement. The
settlement provides for the creation of a warranty program for eligible owners
of homes located in Colorado which were built by the Company's homebuilding
subsidiaries since June 1986. The settlement provides for a settlement class,
including the purported classes in the Expansive Soils Cases, to be certified
and all pending claims to be dismissed. Indemnity payments for funding the
settlement are to be provided by participating insurance carriers. On October
11, 1996 the Court approved the settlement which, in the absence of the filing
of an appeal, will become final 45 days after the Court's approval of the
settlement. Management does not believe that these matters are likely to have a
material adverse effect on the financial condition, results of operations or
cash flows of the Company.
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 material adverse effect upon the
financial condition, results of operations or cash flows of the Company. Because
of the nature of the homebuilding business, and in the ordinary course of the
Company's operations, the Company from time
- --------
<F1> Colescott, et al vs. Richmond Homes Limited, et al (now entitled Morello
et al. vs. Richmond Homes Limited, et al) in the District Court, Douglas
County, State of Colorado, Civil Action No. 94 CV 352, Division 2.
<F2> Moore vs. Richmond Homes Limited, et al in the District Court, Douglas
County, State of Colorado, Civil Action No. 95 CV 321, Division 2.
<F3> Costantini vs. Richmond Homes Limited, et al in the District Court,
Boulder County, State of Colorado, Civil Action No. 95 CV 1052, Division 3.
<F4> Rodenburg vs. Richmond Homes Limited, et al in the District Court,
Douglas County, State of Colorado, Civil Action No. 95 CV 298, Division 1.
-30-
<PAGE>
to time may be subject to product liability claims, including claims similar to
those discussed under the description of the Expansive Soils Cases, above.
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 SHAREOWNERS
No matters were submitted to shareowners during the third quarter of
1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
10.1 Acquisition Agreement by and among
FAM Acquisitions LLC and M.D.C.
Holdings, Inc., Financial Asset
Management Corporation and M.D.C.
Residual Holdings, Inc. dated as of
September 6, 1996 (the "Acquisition
Agreement").
10.2 Amendment No. 1 to Acquisition
Agreement dated as of September 30, 1996.
10.3 Closing Agreement dated as of
September 30, 1996 between M.D.C.
Holdings, Inc. and Spencer I. Browne.
27 Financial Data Schedule.
(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: November 13, 1996 M.D.C. HOLDINGS, INC.
----------------- (Registrant)
By: /s/ Paris G. Reece III
----------------------------
Paris G. Reece III,
Senior Vice President,
Chief Financial Officer and
Principal Accounting Officer
-31-
ACQUISITION AGREEMENT
by and among
FAM ACQUISITION LLC
and
M.D.C. HOLDINGS, INC., FINANCIAL ASSET
MANAGEMENT CORPORATION and
M.D.C. RESIDUAL HOLDINGS, INC.
dated as of
September 6, 1996
<PAGE>
ACQUISITION AGREEMENT
AGREEMENT made as of the 6th day of September, 1996, by and among:
(i) FAM Acquisition LLC, a Colorado limited liability company, having its
principal place of business at 1873 South Bellaire, 17th Floor, Denver,
Colorado 80222 ("CLLC");
(ii) M.D.C. Holdings, Inc., a Delaware corporation, having its principal
place of business at 3600 South Yosemite, Suite 900, Denver, Colorado
80237 ("MDC");
(iii) Financial Asset Management Corporation, a Delaware corporation
("Old FAMC"); and
(iv) M.D.C. Residual Holdings, Inc., a Colorado corporation ("MDC Sub").
WITNESSETH:
WHEREAS, Old FAMC and MDC Sub respectively own 79% and 1% membership
interests (the "Interests") in Financial Asset Management LLC, a Colorado
limited liability company ("FAMC") and Spencer I. Browne ("Browne") owns a 20%
membership interest in FAMC which shall be purchased by FAMC at the Closing; and
WHEREAS, FAMC provides real estate and bond advisory services to
institutional clients (the "Business"); and
WHEREAS, based upon the representations, agreements and warranties
herein made by Old FAMC, MDC Sub and MDC and subject to the terms and conditions
contained in this Agreement, CLLC desires to acquire the Interests from Old FAMC
and MDC Sub; and
WHEREAS, based upon the representations, agreements and warranties
herein made by CLLC and subject to the terms and conditions contained in this
Agreement, Old FAMC and MDC Sub wish to transfer and sell the Interests to CLLC;
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties hereto, intending to be legally bound, do hereby agree as
follows:
- 2 -
<PAGE>
ARTICLE 1.
PURCHASE AND SALE
1.1 Sale of Interests. Subject to the terms and conditions set forth
herein, as of the Closing Date (as defined in Article 2) CLLC shall purchase
from Old FAMC and MDC Sub and Old FAMC and MDC Sub shall cause to be conveyed,
transferred, set over, assigned and delivered to CLLC, free and clear of all
liens, attachments, charges, lis pendens, and encumbrances of any nature (except
as may otherwise expressly be permitted by this Agreement), all of the
Interests.
1.2 Purchase Price. The purchase price for the Interests shall be Seven
Million Dollars ($7,000,000) in cash plus the amount of the Note, as defined
below (the "Purchase Price"). The cash portion of the Purchase Price shall be
payable on the Closing Date as follows:
(a) A credit by Old FAMC and MDC Sub of the Two Hundred Fifty
Thousand Dollars ($250,000) earnest money deposit (the "Deposit") entrusted to
Old FAMC and MDC Sub by CLLC pursuant to Section 7.7 and subject to Section 12.3
hereof, upon the execution of this Agreement.
(b) A credit by Old FAMC and MDC Sub of the Fifty Thousand
Dollars ($50,000) which represents the Expense Fund paid to Old FAMC and MDC Sub
by CLLC pursuant to Section 7.6.
(c) To Old FAMC and MDC Sub, cash in the amount of Six
Million Seven Hundred Thousand Dollars ($6,700,000).
The cash portion of the Purchase Price shall be paid by wire transfer pursuant
to instructions given to CLLC at least three (3) days prior to the Closing Date.
1.3 Note. At the Closing, CLLC shall cause FAMC to deliver to Old FAMC
and MDC Sub a Four Million Four Hundred Fifty Thousand Dollars ($4,450,000)
Senior Subordinated Convertible Note (the "Note") containing substantially the
terms set forth in Exhibit 1.3.
1.4 Working Capital Adjustment. CLLC shall cause FAMC to retain at its
expense independent public accountants acceptable to Old FAMC and MDC Sub to
determine, in accordance with generally accepted accounting principles ("GAAP"),
within sixty (60) days of the Closing Date, the current assets and current
liabilities of FAMC immediately prior to the Closing (the "Determination Time").
For purposes of this determination, current assets and current liabilities shall
not include the amount of cash that is paid or current assets or current
liabilities that are eliminated in connection with the transactions contemplated
by Section 1.6. The result obtained by subtracting current liabilities (as so
determined) from current assets (as so determined) is referred to herein as
"Working Capital". If Working Capital is a negative amount, Old FAMC and MDC Sub
shall pay such amount to FAMC in cash. If Working Capital is a positive amount,
CLLC shall
- 3 -
<PAGE>
cause FAMC to pay to Old FAMC and MDC Sub, such amount in cash. Such payment
shall be made on the earlier of (i) completion of the working capital audit and
receipt by FAMC of the management fees accrued as of September 30, 1996, or (ii)
sixty (60) days after the Closing Date.
1.5 Personal Property. At the Closing, MDC shall assign or otherwise
transfer to FAMC, all software and other personal property owned, leased or
licensed by MDC that is used by FAMC in connection with the Business as of the
date of this Agreement; provided, however, that after Closing FAMC shall not
have access to MDC's mainframe computer system or related network.
1.6 Browne Interests. At the Closing, Old FAMC and MDC Sub shall cause
FAMC to purchase all of the membership interests of FAMC owned by Browne in
accordance with Sections 4(c) and (d) of that certain Agreement dated as of
April 1, 1996 among MDC, MDC Sub, Old FAMC, FAMC and Browne.
ARTICLE 2.
THE CLOSING
The closing (the "Closing") of the transactions contemplated hereby
will take place at 10:00 a.m. at the offices of the CLLC's counsel on September
30, 1996, or at such other later time and place as the parties hereto may
mutually agree upon (the "Closing Date").
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF
MDC, OLD FAMC AND MDC SUB
As a material inducement to CLLC to enter into and perform this
Agreement, MDC, Old FAMC and MDC Sub jointly and severally represent, warrant,
covenant and agree that:
3.1 Organization and Authority. Each is a corporation duly organized,
validly existing and is in good standing under the laws of its respective
jurisdiction of incorporation, with full power and authority to own or lease and
use its properties and assets and to carry on its business as such business is
now conducted, to execute and deliver this Agreement, and to consummate the
transactions contemplated hereby. FAMC is a limited liability company duly
organized, validly existing and in good standing under the laws of the State of
Colorado with full power and authority to own or lease and use its properties
and assets, to carry on its business as such business is now conducted. At the
Closing, this Agreement will have been duly authorized, executed and delivered
by MDC, Old FAMC and MDC Sub and will constitute the valid and legally binding
obligation of each of them enforceable in accordance with their respective
terms. The copy of the Operating Agreement of FAMC and minutes of meetings of
members (or consents in lieu thereof) of FAMC
- 4 -
<PAGE>
certified by a member of FAMC and to be furnished to CLLC is true, correct and
complete and conforms to the original thereof.
3.2 No Violation. At the Closing, neither the execution and delivery by
MDC, Old FAMC or MDC Sub of this Agreement nor consummation of the transactions
herein or therein contemplated, nor compliance with the terms, conditions and
provisions hereof or thereof will conflict with or violate any provision of law
or the charter documents, or By-Laws of MDC, Old FAMC, MDC Sub or FAMC, as the
case may be, or result in a violation or default in any provision of any
regulation, order, writ, injunction or decree of any court or governmental
agency or authority or of any agreement or instrument to which MDC, Old FAMC,
MDC Sub or FAMC is a party or by which MDC, Old FAMC, MDC Sub or FAMC is bound
or to which MDC, Old FAMC, MDC Sub or FAMC is subject, or constitute a default
thereunder or result in the imposition of any lien, charge, encumbrance or
security interest of any nature whatsoever upon any of the Interests pursuant to
the terms of any such agreement or instrument.
3.3 Ownership of Interests. Old FAMC or MDC Sub have good and valid
title to all of the Interests, free and clear of all claims, liens, pledges,
mortgages, security interests, encumbrances, charges, options, defaults,
equities or restrictions or other matters, if any, affecting their title to or
ownership of the Interests (collectively, "Encumbrances").
3.4 Financial Statements. FAMC has delivered to CLLC the unaudited
balance sheets of the Business as of the end of the two most recent fiscal years
of the Business, together with related unaudited statements of income, equity
and cash flow for each of the three most recent fiscal years of the Business are
collectively called the "Annual Financials."
FAMC has delivered to CLLC the unaudited balance sheets of the Business
as of March 31, 1996 and June 30, 1996, together with related statements of
income, equity and cash flow for the periods then ended, all of which balance
sheets and financial statements are referred to collectively as the "Unaudited
Financials." The Annual Financials and the Unaudited Financials are hereinafter
sometimes collectively referred to as the "Financial Statements."
The Financial Statements, when delivered in accordance with this
Section, will fairly present the financial position and results of operations of
the Business on the dates and for the fiscal periods then ended and are in
accordance with GAAP except as disclosed in Schedule 3.4. The Financial
Statements reflect or provide for all claims against and all debts and
liabilities of the Business.
Schedule 3.4 hereto lists all material claims against and all material
debts and material liabilities of FAMC, absolute, accrued, contingent or
otherwise, whether or not required by GAAP to be disclosed, including all
material bonuses payable, or paid since June 30, 1996, otherwise not reflected
in the Financial Statements, and Taxes (as defined in Section 3.6) due as at the
date hereof, and as of the Closing Date. Neither the Business nor FAMC has any
material liability of any nature, whether accrued, absolute, contingent or
otherwise, which is not fully reflected or reserved against
- 5 -
<PAGE>
in the Unaudited Financials or, if not required to be disclosed on such
Financial Statements, listed in Schedule 3.4.
3.5 No Adverse Change. Except as set forth in Schedule 3.5, since June
30, 1996, there has been no change in the financial condition, results of
operation, assets, liabilities or business of the Business which has had or may
be reasonably probable of having, together with all other such changes a
material adverse effect on the financial condition, results of operations,
assets, liabilities or business of the Business.
3.6 Taxes. Within the times and in the manner prescribed by law, FAMC
has correctly and completely prepared in all material respects and filed or
caused to be filed all tax returns, declarations reports, schedules, claims for
refund, or information returns, including any attachments and/or amendments
thereof (collectively, "Tax Returns"), for income, sales, use, real property,
personal property, payroll, and other taxes, including, without limitation,
those relating to the Business, required to be filed by it with any Governmental
Authority (as hereinafter defined), and has paid in full all taxes (and any
other associated assessments, judgments, costs, interest and penalties) owing to
or assessed by each such governmental Authority, whether or not reported on such
Tax Returns (collectively, "Taxes"). Except as set forth in Schedule 3.6, (a)
FAMC is not currently the beneficiary of any extension of time within which to
file any Tax Returns, (b) to the knowledge of MDC, Old FAMC and MDC Sub, no
claim has been made by any Governmental Authority in any jurisdiction in which
FAMC does not file Tax Returns claiming that FAMC is or may be subject to any
Taxes within that jurisdiction, (c) no ongoing audits are being conducted
against FAMC or any members of FAMC with respect to FAMC by any Governmental
Authority, nor has FAMC received any notice from any Governmental Authority that
any such audit will be conducted, (d) FAMC has not waived any statute of
limitations or agreed to any extension of time with respect to the review of any
Tax Returns or Taxes thereby imposed, (e) no security interests have been filed,
perfected or otherwise claimed on any of the assets of FAMC in connection with
the failure to pay any Taxes, (f) FAMC has withheld and paid all Taxes required
to have been withheld and paid in connection with amounts paid for or owing to
any member, employee, independent contractor, creditor, stockholder or other
third party, and (g) FAMC is not a party to any tax allocation or sharing
agreement with any third party and has not assumed the liability of any other
person under contract with respect to Taxes. The term "Governmental Authority"
shall mean any United States, state or local governmental entity or municipality
of subdivision thereof or any authority, department, commission, board, bureau,
agency, court or instrumentality.
3.7 Real Property Interests. The Business is conducted in space rented
from MDC described in Schedule 3.7 pursuant to that certain Service Agreement
dated as of April 1, 1996 between MDC and FAMC (the "Service Agreement"), a copy
of which has been provided to CLLC.
FAMC does not own or lease any other interests in real estate.
3.8 Personal Property. Set forth on Schedule 3.8 is a list or
description of all material personal property and tangible assets (including,
without limitation, office equipment, computer equipment and software, leasehold
improvements, fixtures, furniture, furnishings, other equipment
- 6 -
<PAGE>
and supplies) leased by FAMC and used in connection with the Business, together
with all encumbrances thereon. The personal property is fit to be used for its
intended purposes (except for ordinary wear and tear), and FAMC has available to
it by ownership, lease or otherwise (including, without limitation, under the
Service Agreement) all assets that are reasonably necessary in order to conduct
the Business as it is now being conducted.
3.9 Accounts Receivable. The accounts receivable reflected in the
Unaudited Financials arose in the ordinary course of business and have been
collected in full or, to the knowledge of MDC, Old FAMC and MDC Sub, are fully
collectible or, if not fully collectible, have been written off or have had
adequate reserves established therefor in accordance with generally accepted
accounting principles. Set forth on Schedule 3.9 hereto is a list of all
accounts receivable of the Business which were billed as of June 30, 1996,
showing the name of each debtor, the amount due on each account, any write-off
or reserve against each account, and the date when the account became due. Such
accounts receivable are likewise fully collectible, unless otherwise indicated.
Except as disclosed on Schedule 3.9 hereto, no agreements have been in effect
during the past year or are now proposed which would require any delay in
payment of any fees payable under the institutional real estate advisory
agreements of the Business ("Advisory Agreements").
3.10 Advisory and Management Agreements. Schedule 3.10 contains a true,
complete and accurate list of all the Advisory Agreements and bond
administration contracts (collectively, the "Management Agreements") and the
other advisory and bond administration clients of the Business as of the date
hereof. Except as provided in Schedule 3.10, the Management Agreements do not
require any consent or other approval in connection with the transactions
contemplated hereby.
Each client listed on Schedule 3.10 is being served by the Business and
neither MDC, Old FAMC nor MDC Sub has any knowledge of any prospective
termination by any such client of its Management Agreement or withdrawal of
assets from management by the Business or proposed reduction in any fee rate
under any such contract except as set forth in such Schedule.
True, correct and complete copies of all Management Agreements have
been provided to CLLC. Each of the Management Agreements is a legal, valid and
binding obligation of FAMC enforceable against FAMC in accordance with its terms
and, to the knowledge of MDC, Old FAMC and MDC Sub, each of such agreements is a
legal, valid and binding obligation of the other parties hereto and is
enforceable against such party in accordance with its terms. FAMC is not in
breach, violation or default under any such agreement and has not collected fees
under such agreements in excess of the amounts called for in such agreements.
3.11 Other Contracts. All written contracts (other than Management
Agreements) (i) to which FAMC is a party or by which it is bound and which
relate to the Business and (ii) which are not identified on any other Schedule
hereto, are listed on Schedule 3.11 hereto. FAMC is not in default under (nor is
FAMC aware of any fact or event which with the lapse of time or the giving of
notice or both would constitute a default under) any contract or obligation
which would result in a liability that would materially adversely affect the
Business.
- 7 -
<PAGE>
3.12 Bank Accounts and Money Market Funds. Set forth on Schedule 3.12
hereto is the name and location of each bank, brokerage and money market fund in
which FAMC has an account or accounts or safe deposit boxes or that FAMC has
with respect to the Business, the name and number of each account or box, the
names of persons authorized to draw thereon or having access thereto, and the
balance of each account and the contents of each box as of a date within ten
(10) days of the date hereof. Also set forth on Schedule 3.12 is a list of bank
and brokerage accounts which the Business maintains on behalf of its clients,
which includes each bank and brokerage house and the name and number of each
account. Schedule 3.12 shall be up-dated as of the Closing Date.
3.13 Litigation. Except as set forth in Schedule 3.13 hereto, there are
no actions, suits, proceedings or investigations of any kind ("Actions")
pending, or, to the knowledge of MDC, Old FAMC or MDC Sub, threatened before any
court, commission, agency or other administrative authority relating to the
Business, FAMC or any of the properties which are the subject of any Management
Agreement. FAMC is not the subject of any order or decree of a Governmental
Authority.
3.14 Finder's Fee. None of MDC, Old FAMC, MDC Sub or FAMC has incurred
any obligation of any kind whatsoever to any party for a finder's, investment
banking or other similar fee in connection with the transactions contemplated by
this Agreement.
3.15 Disclosure. The representations and warranties made by MDC, Old
FAMC and MDC Sub in this Agreement and any statements by any of them made in any
of the Exhibits or Schedules hereto do not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make any
such representation, warranty or statement, in the light of the circumstances
under which they were made, not misleading. Except as set forth in Schedule 3.15
hereto and except for matters generally known in the real estate industry, there
is no fact or condition particularly related to the Business which is known to
MDC, Old FAMC or MDC Sub which it reasonably believes might adversely affect in
a material fashion the business, property, condition (financial or otherwise),
or results of operations of the Business, AIC or CAI and which has not been set
forth in this Agreement or in an Exhibit or Schedule hereto.
3.16 Approvals. No approval, authorization, order, license or consent
of or registration, qualification or filing with any Governmental Authority and
no approval or consent by any other person or entity is required in connection
with the execution, delivery or performance by MDC, Old FAMC and MDC Sub of this
Agreement other than as set forth in Schedule 3.16 hereto.
3.17 Government Regulation. FAMC has all governmental licenses and
permits, the absence of which would have a material adverse effect on the
Business. FAMC is in compliance with all federal and state laws requiring (i)
registration, (ii) licensing or (iii) qualification as an investment adviser.
- 8 -
<PAGE>
FAMC is not an "investment adviser" requiring registration as such
under the Investment Advisers Act of 1940. FAMC is not an "investment company,"
within the meaning of the Investment Company Act of 1940, which is required to
be registered under the Act, or is controlled by an "investment company"
required to be so registered. FAMC is not a "broker" or "dealer" within the
meaning of the Securities Exchange Act of 1934. FAMC is not required to disclose
any information to clients under SEC Rule 206(4)-4 promulgated under the
Investment Advisers Act of 1940.
3.18 No Violation of Law. Neither Old FAMC nor FAMC has engaged in or
is now engaging in any act, conspiracy or course of conduct in violation of any
applicable federal, state or local laws, regulations, rules or orders
(including, without limitation, federal and state securities laws) which would
result in a materially adverse change in the financial condition, results of
operation, assets, liabilities or business of the Business, AIC or CAI and has
not received any notice, claim or protest that it is now or has heretofore been
so engaged.
3.19 Transfer of Interests. Except as set forth on Schedule 3.19
attached hereto, the instruments of transfer and assignment delivered by MDC,
Old FAMC and MDC Sub on the Closing Date will be adequate to convey all rights
(direct and indirect) of Old FAMC and MDC Sub in the Interests to CLLC, free and
clear in each case of all Encumbrances.
3.20 Conduct of Business. Except as set forth in Schedule 3.20 attached
hereto, no part of the Business is conducted through any entity other than FAMC,
and FAMC conducts no other business other than the Business.
3.21 SEC Reports. FAMC has heretofore delivered to CLLC, in the form
filed with the SEC (including any amendments thereto), (i) the reports on Forms
10-Q and 10-K of AIC and CAI for each of the fiscal years ended December 31,
1994 and 1995, (ii) all definitive proxy statements relating to the meetings of
shareholders of AIC and CAI (whether annual or special) held since January 1,
1994, (iii) all reports on Form 8-K filed by AIC or CAI with the SEC since
January 1, 1994 and (iv) all registration statements in the form declared
effective by the SEC that have been filed by AIC and CAI with the SEC since
January 1, 1994 (collectively, the "SEC Reports"). To the knowledge of MDC, Old
FAMC and MDC Sub, none of the SEC Reports, including, without limitation, any
financial statements or schedules included or incorporated by reference therein,
contained, when filed, any untrue statement of a material fact or omitted to
state a material fact required to be stated or incorporated by reference therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
3.22 REIT Status. To the knowledge of MDC, Old FAMC and MDC Sub, each
of AIC and CAI (i) has made a valid election in its federal income tax return to
be taxed as a real estate investment trust ("REIT") within the meaning of
Section 856 of the Internal Revenue Code of 1986, as amended (the "Code"), and
such election is still in effect; and (ii) has at all times since the beginning
of the taxable year for which its REIT election was first effective operated
(and MDC, Old FAMC and MDC Sub know of no reason why each of AIC and CAI will
not continue to
- 9 -
<PAGE>
operate) in accordance with all applicable provisions of the Code regarding
qualification of AIC or CAI, as the case may be, as a REIT, including, without
limitation, the organizational requirements that determine an entity's
eligibility for REIT status, the requirements regarding the nature of a REIT's
assets and sources of its income, the shareholder demand and all other record
keeping requirements of Treasury Regulation Section 1.857-8, and the
distribution requirements necessary to maintain REIT qualification. No challenge
to AIC's or CAI's, as the case may be, status as a REIT is pending or, to the
knowledge of MDC, Old FAMC and MDC Sub, threatened.
3.23 Employees. FAMC has never had employees.
3.24 Responsibility for SEC Reports. MDC, Old FAMC, MDC Sub and FAMC
have had no role or responsibility with respect to AIC and CAI except that FAMC
and Old FAMC have acted as the manager of AIC and CAI under the Advisory
Agreements. MDC, Old FAMC and MDC Sub shall have the same responsibility to CLLC
for the SEC Reports as Old FAMC or FAMC, as manager of AIC or CAI, would have to
a purchaser or seller of AIC or CAI securities.
ARTICLE 4.
INDEMNIFICATION
4.1 Indemnification by MDC, Old FAMC and MDC Sub. Subject to all of the
limitations and provisions of this Article 4, MDC, Old FAMC and MDC Sub, jointly
and severally (together, the "Indemnitors" and individually, an "Indemnitor")
agree to indemnify, defend with counsel reasonably satisfactory to CLLC, save
and hold CLLC, its affiliates and its directors, officers, members and employees
harmless from and against and compensate them for any and all demands, claims,
actions, causes of action, assessments, damages, liabilities, losses, expenses,
fees, judgments or deficiencies of any nature whatsoever (including, without
limitation, any unpaid taxes due from FAMC and reasonable attorneys' fees and
other costs and expenses incident to any suit, action or proceeding including
those incurred in connection with the enforcement of this Agreement) ("Losses")
received, incurred or sustained by them, or any of them, or to be received,
incurred or sustained by them, or any of them, to the extent to which they arise
out of or result from (i) any breach of any representation, warranty (including
without limitation those set forth in Article 3 hereof) or non-fulfillment of
any covenant of MDC, Old FAMC, or MDC Sub hereunder or under any Schedule or
Exhibit or (ii) any liability from acts or omissions of FAMC or Old FAMC (solely
with respect to the Business) prior to Closing that either were unknown or were
not disclosed as required by this Agreement.
Notwithstanding the foregoing, the Indemnitors shall have no liability
under this Article 4 to indemnify CLLC for any Loss unless and until the
aggregate amount of all Losses to CLLC exceeds One Hundred Thousand Dollars
($100,000), in which event CLLC shall be entitled to indemnification with
respect to the full amounts of such Losses determined without reference to such
limitation. Notwithstanding anything contained in this Article 4, the
Indemnitors' aggregate liability
- 10 -
<PAGE>
under this Article 4 shall not exceed the total amount of the Purchase Price
paid pursuant to this Agreement.
4.2 Survival of Representations and Warranties. The representations and
warranties of MDC, Old FAMC and MDC Sub set forth in this Agreement and the
indemnification referred to in Section 4.1 above shall survive the Closing until
April 1, 1998 (except that the representations and warranties set forth in
Section 3.6 (Taxes) of this Agreement and any indemnification therefor shall
survive the closing for seven years) notwithstanding the establishment of a
short period by any applicable statute of limitations, the provisions of which
are hereby waived, provided that liability with respect to any representation or
warranty as to which a claim is made within such periods, as applicable, shall
continue until finally determined and paid.
The representations and warranties of CLLC set forth in this Agreement
and the Indemnification referred to in Section 4.4 shall survive the Closing
until April 1, 1998 notwithstanding the establishment of a shorter period by any
applicable statute of limitations, the provisions of which are hereby waived,
provided that liability with respect to any representation, warranty, covenant
or obligation as to which a claim is made within such period shall continue
until finally determined and paid.
4.3 Third-Party Claims. Should any claim be made or suit or proceeding
be instituted against a party entitled to indemnification hereunder (an
"Indemnified Party") which, if valid or prosecuted successfully, would be a
matter for which they are entitled to be defended, saved harmless or indemnified
under this Agreement (a "Third-Party Claim"), the Indemnified Party shall notify
the parties responsible for such indemnification (the "Indemnifying Party") in
writing concerning the same promptly after the assertion or commencement
thereof.
The Indemnifying Parties shall control the defense of any Third-Party
Claim, with counsel reasonably satisfactory to the Indemnified Parties, and the
Indemnifying Parties shall use their best efforts to defeat or minimize any loss
resulting from such Third-Party Claim. The Indemnified Parties shall use their
best efforts to minimize any Loss resulting from any such Third Party Claim,
provided, however, that the provisions of this sentence shall not require any
Indemnified Party to take any action which might interfere with its relationship
with a client. The Indemnifying Parties shall provide the Indemnified Parties
with such information and opportunity for consultation as may reasonably be
requested by the Indemnified Parties, and either they or any of them shall be
entitled to participate in the defense of a Third-Party Claim and to engage
counsel for such purpose at the expense of such Indemnified Party. The
Indemnifying Parties shall have the right to settle Third- Party Claims against
the Indemnified Parties on terms which are judged reasonable by the Indemnified
Parties and such settlements shall be binding upon the Indemnified Parties and
the Indemnifying Parties have been held harmless against or indemnified for
amounts agreed to be paid or amounts paid in such settlement. No Indemnified
Party shall have the right to settle any Third-Party Claim against it except
with the consent of the Indemnifying Parties, which consent shall not be
unreasonably withheld where the settlement of such claim does not involve the
payment of money damages or the admission of any liability or guilt on the party
of the Indemnifying Party.
- 11 -
<PAGE>
The Indemnified Parties shall in any event render all such assistance as the
Indemnifying Parties shall reasonably request in the defense of any Third-Party
Claim. All costs and expenses incurred by the Indemnifying Parties and the
Indemnified Parties in connection with the defense of a Third-Party Claim shall
upon demand be paid by the Indemnifying Parties.
4.4 Indemnification by CLLC. CLLC agrees to indemnify, defend with
counsel reasonably satisfactory to MDC, Old FAMC and MDC Sub, save and hold MDC,
Old FAMC, MDC Sub and their respective directors, officers, employees, agents,
affiliates and controlling persons harmless from and against and compensate them
for all Losses received, incurred or sustained by any of them or to be received,
incurred or sustained by them, or any of them, to the extent that they shall
arise out of or result from (i) any breach of any representation, warranty or
covenant (including without limitation those set forth in Article 5 hereof), or
non-fulfillment of any obligation of CLLC under this Agreement or any exhibit,
schedule or certificate or other document furnished in connection herewith or
(ii) any liability from acts or omissions of FAMC after the Closing.
Notwithstanding the foregoing, CLLC shall have no liability under this
Article 4 to indemnify any of MDC, Old FAMC and MDC Sub for any Loss unless and
until the aggregate amount of all Losses exceeds One Hundred Thousand Dollars
($100,000), in which event MDC, Old FAMC and MDC Sub shall be entitled to
indemnification with respect to the full amounts of such Losses determined
without reference to such limitation.
4.5 Claims. Each claim for indemnification pursuant to this Article 4
shall be made in writing and shall set forth specifically the facts claimed to
give rise to indemnification and the representations, warranties, covenants or
agreements claimed to be inaccurate or to have been breached, and the damages
claimed as result of such breach.
ARTICLE 5.
REPRESENTATIONS OF CLLC
As a material inducement to MDC, Old FAMC and MDC Sub to enter into and
perform this Agreement, CLLC represents, warrants, covenants and agrees, that:
5.1 Organization of CLLC and Corporate Authority. CLLC is a limited
liability company duly organized, validly existing and in good standing under
the laws of the State of Colorado, with full power and authority to own or lease
and use its properties and assets, to carry on its business as such business is
now conducted, to execute and deliver this Agreement and to consummate the
transactions contemplated hereby.
5.2 No Violation. Neither the execution and delivery by CLLC of
this Agreement to which CLLC may be a party, nor consummation of the
transactions herein or therein contemplated, nor compliance with the terms,
conditions and provisions hereof or thereof will conflict with or
- 12 -
<PAGE>
violate any provision of law or the Operating Agreement of CLLC, or result in a
violation or default in any provision of any regulation, order, writ, injunction
or decree of any court or governmental agency or authority or of any agreement
or instrument to which CLLC is a party or by which CLLC is bound or to which
CLLC is subject, or constitute a default thereunder or result in the imposition
of any lien, charge, encumbrance or security interest of any nature whatsoever
upon any of CLLC's assets pursuant to the terms of any such agreement or
instrument.
5.3 Finder's Fee. CLLC has not incurred any obligation of any kind
whatsoever to any party for a finder's, investment banking or similar fee in
connection with the transactions contemplated by this Agreement.
5.4 Operating Agreement and Resolutions. The copies of the Operating
Agreement of CLLC, and resolutions of CLLC's members relating to the
transactions contemplated by this Agreement, in each case certified by CLLC and
to be furnished by CLLC to MDC, Old FAMC and MDC Sub, are true, correct and
complete and conform to the originals thereof.
5.5 Disclosure. The representations and warranties made by CLLC in this
Agreement and any statements made by it in any of the Exhibits or Schedules
hereto do not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make such representation, warranty or
statement, in light of the circumstances under which it was made, not
misleading. There is no fact or condition particularly related to the business
of CLLC which is known to CLLC and which CLLC reasonably believes might
adversely affect in a material fashion the business, property, condition
(financial or otherwise) or results of operations of CLLC and which has not been
set forth in this Agreement or an Exhibit or Schedule hereto.
5.6 CLLC's Authority. CLLC has full right, power and authority to
execute, deliver and perform this Agreement, all proper actions authorizing the
execution, delivery and performance hereof and thereof having been taken. This
Agreement has been duly executed and delivered by CLLC and constitutes, and,
when executed and delivered, will constitute, valid and legally binding
obligations of CLLC, enforceable in accordance with their respective terms.
5.7 Approvals. No approval, authorization, order, license or consent of
or registration, qualification or filing with any governmental authority and no
approval or consent by any other person or entity is required in connection with
the execution, delivery or performance by CLLC of this Agreement.
5.8 Ownership of AIC and CAI. CLLC and its affiliates own, beneficially
or of record, the shares of Common Stock or other securities of AIC and CAI set
forth on Schedule 5.8 hereto.
5.9 Representations re AIC and CAI. Except as otherwise set forth
herein, neither MDC, Old FAMC nor MDC Sub has made any representation or
warranty regarding AIC or CAI and CLLC is relying solely on public information
relating to AIC and CAI in connection with the transactions contemplated hereby.
- 13 -
<PAGE>
ARTICLE 6.
TAX MATTERS
6.1 Tax Returns. CLLC, on the one hand, and MDC, Old FAMC and MDC Sub,
on the other hand, shall cooperate with one another to prepare and file, or to
cause to be prepared and filed, all requisite federal, state and local Tax
Returns disclosing the consummation of the transactions contemplated hereunder,
in a manner consistent with appropriate law, as a taxable transaction under the
Code.
6.2 Transfer Taxes on Sale. All transfer, excise or other
transfer taxes payable by reason of the purchase and sale of the Interests
hereunder shall be borne by MDC, Old FAMC and MDC Sub.
6.3 Old FAMC and MDC Sub Responsibility for Tax Liabilities. Old FAMC
and MDC Sub shall pay all Taxes of the Business for all periods prior to and
including the Closing Date and CLLC shall be responsible for all Taxes of the
Business for all periods after the Closing Date.
ARTICLE 7.
AGREEMENTS AND PRE-CLOSING COVENANTS
7.1 Confidentiality. CLLC will cause all information obtained from MDC,
Old FAMC and MDC Sub in connection with the transactions contemplated by this
Agreement which is not in the public domain to be held confidential. CLLC will
cause all documents obtained from MDC, Old FAMC and MDC Sub to be returned
promptly to MDC, Old FAMC and MDC Sub in the event of the termination of this
Agreement. CLLC will use such information only for the purpose of analyzing the
transactions contemplated by this Agreement.
7.2 Non-Disclosure. CLLC, on the one hand, and MDC, Old FAMC and MDC
Sub, on the other hand, agree that no public disclosure of the negotiation or
execution of this Agreement or the transactions contemplated hereby shall be
made in advance of the publication of a joint release on such matters, except in
order to comply with federal securities laws and the rules of any applicable
stock exchange.
7.3 Filings. Prior to or on the Closing Date, MDC, Old FAMC and MDC Sub
shall prepare and file all documents and forms and amendments to forms which are
or will be required to be filed under applicable federal and state laws and
regulations promulgated thereunder, including, without limitation, Forms 8-K to
be filed by CAI and AIC, as a result of the consummation of the transaction
contemplated by this Agreement.
- 14 -
<PAGE>
7.4 Closing Conditions. MDC, Old FAMC and MDC Sub shall use their
reasonable best efforts to cause the satisfaction of all conditions precedent to
CLLC's obligations hereunder set forth in Article 9. CLLC shall use its
reasonable best efforts to cause the satisfaction of all conditions precedent to
obligations of MDC, Old FAMC and MDC Sub hereunder set forth in Article 10.
7.5 Third Party Discussions. MDC, Old FAMC and MDC Sub each covenant
and agree that, following the execution and delivery of this Agreement and at
all times prior to the Closing or termination of this Agreement, it shall not
provide any material non-public information concerning the Interests or FAMC to
anyone other than in the ordinary course of business and other than to CLLC's
lending banks or the equity investors in CLLC, nor meet, discuss or negotiate
with anyone other than CLLC with respect to the acquisition of all or any part
of the Interests or FAMC whether by purchase or business combination.
7.6 Expense Fund. Upon the execution of this Agreement, CLLC shall
deliver to Old FAMC and MDC Sub by wire transfer pursuant to instructions given
to CLLC Fifty Thousand Dollars ($50,000) (the "Expense Fund") to pay
out-of-pocket expenses of MDC, Old FAMC and MDC Sub (including, without
limitation, lawyers' fees of outside counsel billed at their normal hourly
rates) incurred in connection with the drafting and negotiation of this
Agreement and the consummation of the transactions contemplated herein.
7.7 Deposit. Upon the execution of this Agreement, CLLC will deposit
with MDC by wire transfer pursuant to instructions given to CLLC Two Hundred
Fifty Thousand Dollars ($250,000) representing an earnest money deposit to be
credited toward the Purchase Price on the Closing Date as provided in Section
1.2 hereof or returned to CLLC as described in Section 12.3 hereof.
7.8 Employees. Following satisfaction of the conditions in Sections
9.12 and 10.6, MDC, Old FAMC and MDC Sub shall cooperate with CLLC and give it
reasonable access to employee information and assistance with employee
communications in connection with CLLC's possible employment of the current
employees of the Business at such times prior to the Closing as MDC, Old FAMC
and MDC Sub may determine.
7.9 Sale or Acquisition of MDC, AIC and CAI Securities. CLLC agrees
that, from the date hereof to the Closing Date or, if this Agreement is
terminated for six (6) months from the date of termination, neither it nor its
affiliates will sell or otherwise dispose, agree to sell or dispose, acquire or
agree to acquire, directly or indirectly, any securities of MDC, AIC or CAI
except pursuant to dividend reinvestment plans in existence on the date hereof.
- 15 -
<PAGE>
ARTICLE 8.
CONDUCT OF THE BUSINESS PRIOR TO THE CLOSING DATE
MDC, Old FAMC and MDC Sub agree that, from the date hereof to the
Closing Date, except as set forth on Schedule 8 or as otherwise consented to or
approved by CLLC in writing or required by this Agreement:
(a) No change shall be made in the Articles of
Organization or the Operating Agreement of FAMC.
(b) The Business shall be conducted in the ordinary course.
MDC, Old FAMC and MDC Sub shall cause the Business to meet all of its
obligations as they become due, including but not limited to, closing bond
acquisitions that have been agreed to, and to offer advisory services in the
ordinary course of business subject to obligations imposed upon FAMC by this
Agreement, to maintain its corporate records, to keep the receivables current
consistent with past practice, to use their best efforts to (i) preserve the
business organization and properties of the Business intact, and (ii) to
preserve the goodwill of the Business's clients, suppliers, and others with whom
business relationships exist.
(c) Following satisfaction of the conditions in Sections 9.12
and 10.6, MDC, Old FAMC and MDC Sub shall afford to CLLC and its representatives
free access to the properties and records of the Business during normal business
hours and upon reasonable notice in order that CLLC may have full opportunity to
make such investigation as they shall desire of the Business's affairs for
purposes consistent with this Agreement. CLLC will cause all documents obtained
from MDC, Old FAMC and MDC Sub to be returned promptly to MDC, Old FAMC and MDC
Sub in the event of the termination of this Agreement.
(d) MDC, Old FAMC and MDC Sub shall cause FAMC not to
amend, assign or modify the Management Agreements.
(e) MDC, Old FAMC and MDC Sub shall cause FAMC to operate the
Business so that the Business will not violate any federal, state, local or
foreign laws, regulations or orders.
(f) MDC, Old FAMC and MDC Sub shall not take any action or
permit FAMC to take any action which would require any of FAMC, AIC or CAI to
register under the Investment Company Act of 1940 or the Investment Advisers Act
of 1940.
- 16 -
<PAGE>
ARTICLE 9.
CONDITIONS PRECEDENT TO CLLC'S OBLIGATIONS
All obligations of CLLC under this Agreement are subject to the
fulfillment and satisfaction, prior to or at the Closing, of each of the
following conditions, any one or more of which may be waived by CLLC.
9.1 Delivery of Documents of Transfer. MDC, Old FAMC and MDC Sub shall
have delivered to CLLC all such documents of transfer, assignment or assumption
as CLLC or its counsel may reasonably require in order to consummate the
purchase and sale of the Interests hereunder.
9.2 Representations and Warranties True At the Closing Date. The
representations and warranties of MDC, Old FAMC and MDC Sub contained in this
Agreement shall be true and correct at and as of the Closing Date as though
newly made at and as of that time. MDC, Old FAMC and MDC Sub shall have
delivered to CLLC a certificate, dated as of the Closing Date and signed by each
of their President and Chief Financial Officer (unless any of such entities has
no Chief Financial Officer in which case only the President shall so certify)
certifying as to the truth and accuracy of the representations and warranties
and the performance of the obligations in all material respects required to be
performed by each of them, under this Agreement.
9.3 Bring Down Certificate. MDC, Old FAMC and MDC Sub shall have
delivered a certificate, dated as of the date of the Closing, certifying that
since the delivery of FAMC's Articles of Organization and Operating Agreement
pursuant hereto, there have been no amendments or other modifications thereof,
that true, complete and accurate copies of the minutes of meetings of the Board
of Directors (or consents in lieu thereof) of Old FAMC and of the members of
FAMC have been delivered to CLLC; that attached to the certificate are true and
complete copies of a resolution of the Board of Directors of MDC, Old FAMC and
MDC Sub authorizing the transactions contemplated hereby; and that the officers
of MDC, Old FAMC and MDC Sub are those persons named in the certificate.
9.4 Approvals. Any consent, approval, authorization or order of any
court, governmental agency, administrative body or other person or entity
(including without limitation consents of lessors of any property leased by the
Business) required for the consummation of the transactions contemplated by this
Agreement shall have been obtained and shall be in effect on the Closing Date.
9.5 Opinion of Counsel for MDC, Old FAMC and MDC Sub. MDC, Old FAMC and
MDC Sub shall have delivered to CLLC an opinion from Parcel, Mauro, Hultin &
Spaanstra, P.C., counsel for MDC, Old FAMC and MDC Sub, in substantially the
form attached hereto as Exhibit 9.5.
- 17 -
<PAGE>
9.6 Performance of MDC, Old FAMC and MDC Sub. Each of the obligations
of MDC, Old FAMC and MDC Sub to be performed on or before the Closing Date
pursuant to the terms of this Agreement shall have been duly performed on or
before the Closing Date.
9.7 Conduct of the Business Prior to the Closing Date. The Business
shall have been conducted in all material respects in accordance with the
provisions of Article 8.
9.8 Approval of Documentation. The form and substance of all opinions,
certificates, and other documents hereunder shall be reasonably satisfactory in
all respects to CLLC and its counsel.
9.9 Examination of Books and Records. For purposes of compliance with
and performance of this Agreement, CLLC, acting through its own management and
personnel or through counsel, accountants, or other representatives designated
by them, shall have been afforded during normal business hours and upon
reasonable notice full and complete opportunity to examine and investigate all
aspects of the Business's affairs, assets and liabilities, including without
limitation, financial books and records, the workpapers of the Business'
independent public accountants, the Management Contracts, titles and leases to
properties, the condition of its facilities and equipment, and the
collectibility of accounts receivable. Following satisfaction of the conditions
in Sections 9.12 and 10.6, CLLC shall also have been afforded the opportunity to
confer with the Business's advisory clients, if deemed necessary by CLLC,
provided, however, that a representative of the Business shall be permitted on
reasonable notice to participate in such discussions or conferences.
9.10 Financing. CLLC shall have entered into definitive agreements with
financing sources satisfactory to CLLC, and pursuant thereto shall have obtained
such debt and/or equity capitalization as is necessary to consummate the
transaction contemplated hereby.
9.11 Resignations of Directors and Officers. FAMC shall have obtained
and delivered to CLLC the resignations (to be effective simultaneous with the
Closing) of each person affiliated with MDC who is serving as a Director or
Officer of AIC or CAI (including, without limitation, Messrs. Larry Mizel and
Spencer Browne) from such positions with AIC and CAI. Mr. Terry Considine and
Mr. Thomas Rhodes shall have been duly appointed by the Directors of AIC and
CAI, simultaneously with the consummation of the Closing, to fill the vacancies
as Directors and Officers created by the resignations of Messrs. Mizel and
Browne which will become effective upon the Closing.
9.12 Management Agreements. The majority of the Unaffiliated Directors
(as that term is defined in the applicable Advisory Agreement) of the Boards of
Directors of AIC and CAI and the majority of all the Directors of each such
entity shall have duly and validly consented to in writing or approved the sale
of the Interests and the change of control of FAMC.
9.13 Purchase of Browne Interests. Simultaneously with Closing,
the membership interests of FAMC owned by Browne shall have been purchased
pursuant to Section 1.6.
- 18 -
<PAGE>
9.14 Accountants' Letter. CLLC shall have received a letter
reasonably satisfactory to CLLC with respect to the financial statements
contained in the SEC Reports.
ARTICLE 10.
CONDITIONS PRECEDENT TO THE OBLIGATION OF
MDC, OLD FAMC AND MDC SUB
All obligations of MDC, Old FAMC and MDC Sub under this Agreement are
subject to the fulfillment and satisfaction, prior to or on the Closing Date, of
each of the following conditions, any one or more of which may be waived by MDC,
Old FAMC and MDC Sub.
10.1 Opinion of CLLC's Counsel. CLLC shall have furnished to MDC, Old
FAMC and MDC Sub an opinion dated as of the Closing Date of Gibson, Dunn &
Crutcher LLP, counsel to CLLC, in substantially the form attached hereto as
Exhibit 10.1.
10.2 Representations and Warranties True at the Closing Date. Except as
expressly contemplated by this Agreement, the representations and warranties of
CLLC contained in this Agreement shall be true and correct in all respects at
and as of the Closing Date as though newly made at and as of that time. CLLC
shall have delivered to MDC, Old FAMC and MDC Sub a certificate, dated as of the
Closing Date and signed by Terry Considine, certifying as to the truth and
accuracy of the representations and warranties and the performance of all of the
obligations required to be performed by CLLC, under this Agreement.
10.3 Performance of CLLC. All of the obligations of CLLC to be
performed on or before the Closing Date pursuant to the terms of this Agreement
shall have been duly performed in all material respects on or before the Closing
Date.
10.4 Authority of CLLC. All corporate action required to be taken by or
on the part of CLLC to authorize the execution, delivery and performance of this
Agreement by CLLC and the consummation of the transactions contemplated
hereunder shall have been duly and validly taken and CLLC shall have provided to
MDC, Old FAMC and MDC Sub copies of resolutions and consents of its Board of
Directors evidencing such action, certified by its secretary or assistant
secretary.
10.5 Approval of Documentation. The form and substance of all opinions,
certificates and other documents hereunder shall be reasonably satisfactory in
all respects to FAMC and its counsel.
10.6 Approvals. Any consents, approval, authorization or order of any
court, governmental agency, administrative body or other person or entity
(including without limitation consents of the Asset Management Committee of MDC
and the Boards of Directors of MDC, AIC
- 19 -
<PAGE>
and CAI) required for the consummation of the transactions contemplated by this
Agreement shall have been obtained and shall be in effect on the Closing Date.
10.7 Management Agreements. The majority of the Unaffiliated Directors
(as that term is defined in the applicable Advisory Agreement) of the Boards of
Directors of AIC and CAI and the majority of all the Directors of each such
entity shall have duly and validly consented to in writing or approved the sale
of the Interests and the change of control of FAMC.
ARTICLE 11.
POST-CLOSING COVENANTS
11.1 Confidentiality. From and after the Closing and for a period of
five (5) years thereafter, the parties shall cause all information obtained from
each other in connection with the transactions contemplated by this Agreement
which is not in the public domain to be held confidential unless (a) such
information becomes publicly available through no fault of such party, (b) the
use of such information is necessary in making any filing or obtaining any
consent or approval required for the consummation of the transactions
contemplated by this Agreement, or (c) the furnishing or use of such information
is required by legal proceedings and the other party or parties are notified of
the requirement to make such disclosure at least five (5) business days in
advance of such disclosure.
11.2 Further Assurances. From time to time after the Closing at the
request of CLLC and without further consideration, MDC, Old FAMC and MDC Sub
shall execute and deliver or cause to be executed and delivered any further
instruments and take such other action as CLLC may reasonably require to
consummate the transactions contemplated hereby. Nothing in this section shall
be deemed a waiver by CLLC of its rights under Article 9 of this Agreement or a
waiver by MDC, Old FAMC and MDC Sub of their rights under Article 10 of this
Agreement. In addition, from time to time after the Closing at the reasonable
request of MDC, Old FAMC and MDC Sub, CLLC shall execute and deliver, or cause
to be executed and delivered, any further instruments and take such other action
as MDC, Old FAMC and MDC Sub may reasonably require to consummate the
transactions contemplated hereby.
11.3 Additional Covenants. For 10 years after Closing, CLLC shall
maintain in good condition all presently existing files, books, records and
documents of the Business, and shall make the same available to MDC, Old FAMC
and MDC Sub or its designee upon their reasonable request.
11.4 Payments With Respect to Residual Fee Calculations. The parties
hereby acknowledge that the Management Agreements contain provisions calling for
adjustment of the fees previously paid under such agreements. To the extent (i)
there has been, in addition to such adjustment provisions, an error in the
amount paid to FAMC, Old FAMC and MDC Sub pursuant
- 20 -
<PAGE>
to the Management Agreements, and (ii) any such provisions result in liability
to a client of the Business attributable to any period prior to and including
the Closing Date or payment by any such client of additional fees attributable
to any period prior to and including the Closing Date, the parties agree that
the annual net amount of any such errors, liabilities or fees shall be payable
by Old FAMC and MDC Sub to CLLC (if liabilities exceed fees) within 10 days of
receipt of notice from CLLC, or by CLLC to Old FAMC and MDC Sub (if fees exceed
liabilities) in cash within 10 days after receipt by FAMC or CLLC. For purposes
of this Section 11.4, unless any such fee adjustment can be attributed to a
period prior to or after the Closing Date, such adjustment shall be prorated
based on the number of days prior to and after the Closing Date that apply to
such adjustment. CLLC covenants that it will pay to the appropriate client the
amount of any liability arising from the contractual provisions described above
which is actually paid by Old FAMC and MDC Sub to CLLC. CLLC agrees that any
error identified and paid pursuant to this Section 11.4 shall not constitute a
breach of any other provision of this Agreement.
11.5 Covenant Not to Compete. For a period of five (5) years from
Closing, so long as no Event of Default (as defined in the Note) has occurred,
none of MDC, Old FAMC, MDC Sub or any of their respective affiliates shall,
directly or indirectly, (i) seek to manage AIC or CAI, (ii) manage or otherwise
interfere with FAMC's bond administration business or (iii) solicit any
employees of the Business who are retained by FAMC or CLLC after the Closing;
provided, however that MDC may engage in the ownership, servicing, management
and sale of collateralized mortgage obligations and related obligations owned by
it as of the date hereof.
11.6 Space Lease. MDC shall make available to FAMC, on a month-to-month
basis for a period of six (6) months from the Closing Date and on the same terms
as are in effect on the date of this Agreement, the space that is used by FAMC
in connection with the Business as of the date of this Agreement.
ARTICLE 12.
TERMINATION
12.1 Termination. This Agreement may be terminated at any time on
or prior to the Closing Date:
(a) With the mutual written consent of CLLC, MDC, Old
FAMC and MDC Sub;
(b) By written notice from MDC, Old FAMC, MDC Sub or CLLC to
the other, if the Closing shall not have taken place on or before September 30,
1996;
(c) By written notice from MDC, Old FAMC, MDC Sub or CLLC to
the other, if any court of competent jurisdiction or other governmental body
shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the
- 21 -
<PAGE>
transactions contemplated hereby and such order, decree, ruling or other action
shall have become final and nonappealable;
(d) By written notice from CLLC to MDC, Old FAMC and MDC Sub
if any of the conditions set forth in Article 9 hereof shall have become
incapable of fulfillment; or
(e) By written notice from MDC, Old FAMC and MDC Sub to CLLC
if any of the conditions set forth in Article 10 hereof shall have become
incapable of fulfillment;
provided, however, that the party seeking termination pursuant to clause (b),
(d) or (e) is not in breach of any of its representations, warrants, covenants
or agreements contained in this Agreement.
12.2 Effect of Termination. If this Agreement is terminated pursuant to
Section 12.1, all obligations of the parties hereunder, except for the
obligations set forth in Sections 7.1, 11.1, 12.3 and 13.5, which shall survive
the termination of this Agreement, shall terminate without liability of any
party (or any stockholder, partner, affiliate, director, officer, employee,
agent, consultant or representative of such party) to any other party, except as
specifically provided in Section 12.3.
12.3 Termination Remedies. In the event of termination by MDC, Old
FAMC, MDC Sub or CLLC pursuant to this Section 12, written notice thereof shall
forthwith be given to the other party and the transactions contemplated by this
Agreement shall be terminated, without further action by either party. If the
transactions contemplated by this Agreement are not consummated as provided
herein, Old FAMC and MDC Sub shall return the Deposit and the unused balance of
the Expense Fund; provided, however, that Old FAMC and MDC Sub shall not be
required to return the Deposit or the unused balance of the Expense Fund if MDC
is ready, willing and able to close the transactions contemplated by this
Agreement and CLLC fails to close the transactions contemplated by this
Agreement notwithstanding that the conditions set forth in Article 9 have been
satisfied or waived. Such termination shall not result in any liability to or by
CLLC, MDC, Old FAMC and MDC Sub, and CLLC, MDC, Old FAMC and MDC Sub shall have
no other rights or remedies against each other with respect to this Agreement or
the transactions contemplated herein.
ARTICLE 13.
GENERAL
13.1 Entire Agreement. All Exhibits and Schedules hereto shall be
deemed to be incorporated into and made part of this Agreement. This Agreement,
together with the Exhibits and Schedules hereto, contains the entire agreement
among the parties and there are no agreements, representations, or warranties by
any of the parties hereto which are not set forth herein. This Agreement may not
be amended or revised except by a writing signed by all parties hereto.
- 22 -
<PAGE>
13.2 Binding Effect; Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns; provided, however, this Agreement and all rights hereunder may not
be assigned by MDC, Old FAMC or MDC Sub except by prior written consent of CLLC,
or by CLLC, except to an affiliate of CLLC or by prior written consent of MDC,
Old FAMC or MDC Sub.
13.3 Separate Counterparts. This Agreement may be executed in several
identical counterparts, all of which when taken together shall constitute but
one instrument, and it shall not be necessary in any court of law to introduce
more than one fully executed counterpart in proving this Agreement.
13.4 Representations and Warranties. The parties hereto acknowledge
that MDC, Old FAMC or MDC Sub may have no actual knowledge as to the
representations and warranties contained in Article 3 of this Agreement. The
parties hereto agree that such representations and warranties, together with the
indemnification provisions contained in Article 4, are intended to allocate risk
and economic cost as between CLLC, on the one hand, and MDC, Old FAMC and MDC
Sub, on the other hand, in the event such representations and warranties are
breached. In no event, however, has either of MDC, Old FAMC or MDC Sub given any
representation or warranty which it actually knows to be inaccurate.
13.5 Transaction Costs. Except as may be otherwise expressly set forth
herein, each party to this Agreement shall be responsible for its own legal,
accounting and other expenses, if any, attendant to the negotiation and drafting
of this Agreement and to the transactions contemplated by this Agreement.
13.6 Notices. All notices hereunder shall be in writing and shall be
delivered or mailed by registered or certified mail, postage and fees prepaid,
to the party to be notified at the party's address shown below. Notices which
are hand delivered shall be effective on delivery. Notices which are mailed
shall be effective on the third day after mailing.
(i) If to CLLC:
FAM Acquisition LLC
1873 South Bellaire, Suite 1700
Denver, Colorado 80222
Attention: Terry Considine
with a copy to (which shall not constitute notice):
Gibson, Dunn & Crutcher LLP
1801 California Street, Suite 4100
Denver, Colorado 80202
Attention: Richard M. Russo, Esq.
- 23 -
<PAGE>
(ii) If to MDC, OLD FAMC OR MDC SUB:
M.D.C. Holdings, Inc.
3600 South Yosemite, Suite 900
Denver, Colorado 80237
Attention: General Counsel
with a copy to (which shall not constitute notice):
Parcel, Mauro, Hultin & Spaanstra, P.C.
1801 California Street, Suite 3600
Denver, Colorado 80202
Attention: Douglas R. Wright, Esq.
unless and until notice of another or different address shall be given
as provided herein.
13.7 Severability. The provisions of this Agreement are severable
and the invalidity of any provision shall not affect the validity of any other
provision.
13.8 Captions. The captions herein have been inserted solely for
convenience of reference and in no way define, limit or describe the scope or
substance of any provision of this Agreement.
13.9 Gender. All pronouns used herein shall include the masculine,
feminine and neuter gender, as the context requires.
13.10 Governing Law. The execution, interpretation, and performance of
this Agreement shall be governed by the laws of the State of Colorado which
apply to contracts executed and performed solely in Colorado. The parties hereto
hereby consent to the non-exclusive jurisdiction of any state or federal court
located within the City and County of Denver.
- 24 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
FAM ACQUISITION LLC
By:
-------------------------------
Name:
-------------------------------
Title:
-------------------------------
M.D.C. HOLDINGS, INC.
By:
-------------------------------
Name: Paris G. Reece III
-------------------------------
Title: Senior Vice President
-------------------------------
FINANCIAL ASSET MANAGEMENT CORPORATION
By:
-------------------------------
Name: Paris G. Reece III
-------------------------------
Title: President
-------------------------------
M.D.C. RESIDUAL HOLDINGS, INC.
By:
-------------------------------
Name: Paris G. Reece III
-------------------------------
Title: President
-------------------------------
- 25 -
AMENDMENT NO. 1 TO ACQUISITION AGREEMENT
AMENDMENT NO. 1, dated as of September 30, 1996 (this "Amendment No.
1"), to the Acquisition Agreement, dated as of September 6, 1996 (the
"Acquisition Agreement"), among FAM Acquisition LLC, FAMAQH BETA HOLDINGS LLC,
M.D.C. Holdings, Inc., Financial Asset Management Corporation, and M.D.C.
Residual Holdings, Inc.
WHEREAS, the parties to the Acquisition Agreement desire to effect an
amendment to the Acquisition Agreement as provided in this Amendment No. 1.
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties hereto, intending to be legally bound, do hereby agree as
follows:
1. Capitalized terms used in this Amendment No. 1 and not
otherwise defined shall have the meanings ascribed in the Acquisition Agreement,
as amended by this Amendment No. 1.
2. The Acquisition Agreement is amended by adding FAMAQH BETA
HOLDINGS LLC, a Colorado limited liability company, as a party thereto.
3. Clause (i) of the Preamble to the Acquisition Agreement is
amended by deleting such clause in its entirety and replacing in its stead the
following:
(i) FAM Acquisition LLC, a Colorado limited liability company,
and FAMAQH BETA HOLDINGS LLC, a Colorado limited liability
company, having their principal place of business at 1873
South Bellaire, 17th Floor, Denver, Colorado 80222 (together,
"CLLC");.
4. Section 1.1 to the Acquisition Agreement is amended by adding
the following parenthetical to the end of Section 1.1:
(with 99.5% of the Interests conveyed to FAM Acquisition LLC and
0.5% of the Interests conveyed to FAMAQH BETA HOLDINGS LLC).
5. Section 1.2 of the Acquisition Agreement is amended by
deleting the following sentence:
The purchase price for the Interests shall be Seven Million Dollars
($7,000,000) in cash plus the amount of the Note, as defined below
(the "Purchase Price").
and replacing in its stead the following sentence:
<PAGE>
The purchase price for the Interests shall be Six Million Dollars
($6,000,000) in cash, plus the amount of the Notes, as defined below
(the "Purchase Price").
6. Section 1.2(c) of the Acquisition Agreement is further amended
by deleting Subsection 1.2(c) in its entirety and replacing in its stead the
following:
(c) To Old FAMC and MDC Sub, cash in the amount of Five
Million Seven Hundred Thousand Dollars ($5,700,000).
7. Section 1.3 of the Acquisition Agreement is amended by
deleting such Section in its entirety and replacing in its stead the following:
1.3 Notes. At the Closing, FAM Acquisition LLC shall deliver to
Old FAMC and MDC Sub the following:
(a) one or more Secured, Senior-Subordinated,
Convertible Promissory Notes in the aggregate principal amount of Four
Million Four Hundred Fifty Thousand Dollars ($4,450,000) in the form
attached hereto as Exhibit 1.3(a) (collectively, the "$4.45 Million
Notes"), and
(b) a Secured, Senior-Subordinated Promissory Note in
the principal amount of One Million Dollars ($1,000,000), personally
guaranteed by Mr. Terry Considine, in the form attached hereto as
Exhibit 1.3(b) (the "$1.0 Million Note," and together with the $4.45
Million Notes, the "Notes").
8. Section 7.4 of the Acquisition Agreement is amended by deleting the
term "CLLC" from the second sentence thereof and replacing in its stead the term
"FAM Acquisition LLC".
9. With respect to Section 9.4 of the Acquisition Agreement, CLLC
hereby waives as a condition to Closing under Article 9 of the Acquisition
Agreement receipt of the consents of (a) bond administration clients to the
assignment of the bond administration contracts to FAMC and (b) licensors to the
assignment of certain software licenses to FAMC; provided, however, (i) MDC, Old
FAMC and MDC Sub agree to use their best efforts to obtain such consents as soon
as practicable following Closing, (ii) MDC, Old FAMC and MDC Sub agree to pay to
FAMC all amounts received with respect to services rendered under such contracts
and amounts received with respect to such licenses after the Closing Date, and
(iii) any Loss incurred by CLLC as a result of the failure to obtain such
consents shall be subject to indemnification pursuant to Section 4.1; provided,
however, that the One Hundred Thousand Dollar ($100,000.00) limitation on
liability set forth in Section 4.1 shall not apply.
- 2 -
<PAGE>
10. Section 10.4 of the Acquisition Agreement is amended by
deleting such Section in its entirety and replacing in its stead the following:
10.4 Authority of CLLC. All action required to be taken
by or on the part of CLLC to authorize the execution, delivery
and performance of this Agreement by CLLC and the consummation
of the transactions contemplated hereunder shall have been duly and
validly taken, and FAM Acquisition LLC shall have provided to MDC,
Old FAMC, and MDC Sub copies of resolutions and consents of its
General Manager evidencing such action, certified by a duly authorized
member or manager of FAM Acquisition LLC.
11. Section 10.6 of the Acquisition Agreement is amended by deleting
the phrase "the Asset Management Committee of" from the third line thereof.
12. Section 11.5 of the Acquisition Agreement is amended by deleting
clause (i) thereof and replacing in its stead the following clause: "(i) seek to
manage AIC or CAI or compete, directly or indirectly, with the businesses of AIC
or CAI as they exist on the Closing Date,".
13. Section 11.6 of the Acquisition Agreement is amended by adding
the following sentence at the end thereof:
The lease shall be for Suite 350, 3600 South Yosemite, Denver,
Colorado 80237, comprising approximately 5,199 square feet, at
a rate of $12.75 per square foot.
14. Article 11 of the Acquisition Agreement is amended by adding
the following Sections immediately after Section 11.6:
11.7 Transition Cooperation. For a period not to exceed the
period of time MDC leases space to FAMC pursuant to Section
11.6, MDC, FAMC and CLLC shall cooperate with each other and
provide to each other certain transition services (other
than tax and legal services) as are reasonably acceptable
to such parties, at rates and fees for such services as are
reasonably acceptable to the parties. No party shall be
liable to any other party in connection with the provision
of such transition services. MDC, Old FAMC, MDC Sub and
FAMC shall terminate the Services Agreement dated as of
April 1, 1996.
11.8 Merger of FAMC. Immediately after the Closing, in
accordance with the Colorado Limited Liability Company Act
(and any other applicable state law), FAM Acquisition LLC
shall be merged with and into FAMC, with FAMC as the
surviving entity. As of the effective time of such
- 3 -
<PAGE>
merger, the identity, existence, organization, purposes,
powers, objects, franchises, privileges, rights, and
immunities of FAM Acquisition LLC shall be merged with and
into FAMC, and FAMC shall, as the surviving entity, (a) be
fully vested therewith and (b) assume all of the liabilities
and obligations of FAM Acquisition LLC. The separate
existence and the organization of FAM Acquisition LLC,
except insofar as they may continue by statute, shall cease as
of the effective time of such merger.
Notwithstanding any other provision of this Agreement
to the contrary, such merger shall not constitute a breach
of any representation, warranty, covenant, or agreement
contained in this Agreement, or an Event of Default under
any of the Notes.
15. The Acquisition Agreement is amended by deleting all other
references to "Note" in the Acquisition Agreement, including the reference in
Section 11.5, but excluding any references in Exhibit 1.3(a) and Exhibit 1.3(b)
hereto, and replacing in its stead the term "Notes".
16. Exhibit 1.3 to the Acquisition Agreement is amended by deleting
such Exhibit in its entirety and replacing in its stead Exhibit 1.3(a) and
Exhibit 1.3(b) hereto.
17. Exhibit 3.5, Exhibit 3.8, and Exhibit 3.12 to the Acquisition
Agreement are amended by deleting such Exhibits in their entirety and replacing
in their stead Exhibit 3.5, Exhibit 3.8, and Exhibit 3.12 hereto.
18. Except as expressly set forth above, the provisions of the
Acquisition Agreement shall remain in full force and effect.
19. All Exhibits hereto shall be deemed to be incorporated into and
made part of this Amendment No. 1. This Amendment No. 1, together with the
Acquisition Agreement and Exhibits and Schedules hereto and thereto, contains
the entire agreement among the parties and there are no agreements,
representations, or warranties by any of the parties hereto which are not
set forth herein.
20. This Amendment No. 1 may be executed in several identical
counterparts, all of which when taken together shall constitute but one
instrument, and it shall not be necessary in any court of law to introduce more
than one fully executed counterpart in proving this Amendment No. 1.
21. The provisions of this Amendment No. 1 are severable and the
invalidity of any provision shall not affect the validity of any other
provision.
- 4 -
<PAGE>
22. The execution, interpretation, and performance of this Amendment
No. 1 shall be governed by the laws of the State of Colorado which apply to
contracts executed and performed solely in Colorado.
The remainder of this page is blank.
- 5 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment No. 1 as of the date first above written.
FAM ACQUISITION LLC
By:
Name: Terry Considine
Title: General Manager
FAMAQH BETA HOLDINGS LLC
By:
-------------------------
Name: Terry Considine
Title: General Manager
M.D.C. HOLDINGS, INC.
By:
-------------------------
Name:
Title:
FINANCIAL ASSET MANAGEMENT
CORPORATION
By:
-------------------------
Name:
Title:
M.D.C. RESIDUAL HOLDINGS, INC.
By:
-------------------------
Name:
Title:
CLOSING AGREEMENT
This Closing Agreement is entered into as of the 30th day of September,
1996, between M.D.C. Holdings, Inc., a Delaware corporation (the "Company"),
and Spencer I. Browne ("Browne").
RECITALS
1. The Company, MDC Sub, Old FAMC, FAMC and Browne entered into an
Agreement dated as of April 1, 1996 (the "Agreement") pertaining to the
formation of FAMC and the contribution of property and cash to FAMC in exchange
for membership interests therein, the purchase by the Company from Browne of
certain shares of Common Stock of the Company, and certain other matters. Unless
otherwise defined or specified herein, capitalized terms have the meanings
ascribed to such terms in the Agreement.
2. In connection with the Agreement, Browne entered into an Employment
Agreement dated as of April 1, 1996 with the Company (the "Employment
Agreement") pursuant to which Browne agreed to serve as President and Chief
Executive Officer of FAMC.
3. Under the Agreement, the Company holds an option to purchase from
Browne all of the FAMC Interest at the Put/Call Price upon a Change in Control
(as defined in the Employment Agreement).
4. Effective as of September 6, 1996, FAM Acquisition LLC ("CLLC"),
MDC, Old FAMC and MDC Sub entered into an Acquisition Agreement (the
"Acquisition Agreement"). Pursuant to the Acquisition Agreement, Old FAMC and
MDC Sub agreed, among other things, to convey to CLLC all of their equity
interest in FAMC, and to cause FAMC to acquire Browne's 20% equity interest in
FAMC pursuant to certain put/call provisions of the Agreement.
5. As of the date of this Agreement, a Change in Control of FAMC has
occurred. As a result of the Change in Control, the Employment Agreement is
terminated effective as of the date hereof (the "Termination Date"), and the
parties desire to confirm the obligations of the Company to Browne and the
rights of Browne under the Employment Agreement in connection with such
termination.
6. The Company, in connection with the termination of Browne's
employment under the Employment Agreement, has agreed to afford Browne the right
to cause the Company to purchase from Browne 147,500 shares of the Company's
common stock, $.01 par value ("Common Stock"), owned by Browne and, if permitted
by the terms of the MDC Employees' 401(k) Plan (the "401(k) Plan") and
applicable law, 5,681 shares of Common Stock held by or for the account of
Browne in the 401(k) Plan (collectively, the "MDC Shares").
7. The Company has agreed to afford Browne the right to cause the
Company to acquire all of the options which, upon a Change in Control of FAMC,
may be exercised into
<PAGE>
500,000 shares of Common Stock to the extent not previously exercised by Browne
(the "Options") held by him under the Company's Non-Qualified Stock Option Plan
and Employee Equity Incentive Plan (the "Plans"), subject to the terms and
conditions set forth herein.
8. The parties further desire to enter into certain additional
agreements and to enter into mutual releases.
AGREEMENT
NOW, THEREFORE, the parties hereto agree as follows:
1. Closing. The closing of the transactions contemplated by thi
Closing Agreement (the "Closing") shall take place on September 30, 1996 at 9:00
a.m. at the office of the Company on 3600 South Yosemite Street, Suite 900,
Denver, Colorado 80237 (the "Closing Date"), or at such other date and time as
may be agreed to by the parties.
At the Closing:
(a) Browne, at his option, may elect, by notice given to the
Company at the Closing, to sell and the Company shall purchase, the MDC Shares
at a purchase price per share equal to the average closing sale price of the
Common Stock during the ten trading days ending on the trading day immediately
preceding the Closing Date less $.25 per share (the "MDC Stock Purchase Price").
Payment for the MDC Shares shall be made against delivery of such shares on or
before the close of business on the third business day following the Closing
Date;
(b) The Company shall pay Browne his Base Salary (as defined
in Section 3(b) of the Employment Agreement) through the Termination Date;
(c) The Company shall pay Browne a lump sum payment of
$1,220,000 pursuant to Section 4(f)(i) of the Employment Agreement;
(d) The Company shall pay Browne $5,000 in connection with tax
planning and/or tax preparation services pursuant to Section 3(h)(ii) of the
Employment Agreement;
(e) The Company shall pay Browne $1,000 for an annual physical
exam pursuant to Section 3(h)(iii) of the Employment Agreement;
(f) The Company shall pay Browne $25,000, representing four
weeks' vacation pay, in lieu of the four weeks' vacation allotted to Browne
pursuant to Section 3(h)(vii) of the Employment Agreement;
(g) The Company shall pay Browne all expense reimbursements
through Termination to which Browne is entitled under Section 3(f) of the
Employment Agreement net of unpaid expenses owed by Browne to the Company. If
such amounts cannot be determined
- 2 -
<PAGE>
finally by September 30, 1996, the expense reimbursement shall be paid to
Browne within ten days after they are so determined; and
(h) Browne will sell and MDC will cause FAMC to purchase
Browne's 20% equity interest in FAMC in accordance with the terms of Sections
4(c) and 4(d) of the Agreement. The Note and Pledge Agreement shall be canceled
and returned to Browne, FAMC will pay Browne $400,000 less accrued interest on
the Note plus the estimated balance on the Put/Call Price, and final adjustments
to the Put/Call Price will be paid to Browne by FAMC or paid by Browne to FAMC
on or before November 30, 1996.
2. Continuation of Medical Insurance Benefits. From the Termination
Date through September 30, 1998, the Company shall pay for and make available to
Browne and his dependents medical insurance which provides coverage and benefits
that are comparable to coverage that the Company provides as of the Termination
Date; provided that such coverage is available and the cost of such coverage
does not exceed the cost currently paid by the Company plus 20%.
3. Executive Officer Performance Based Compensation Plan Bonus. The
Company shall pay Browne twenty-five percent (25%) of the amount of the bonus
determined to be payable to a Covered Employee (as defined in the Company's
Executive Officer Performance Based Compensation Plan) in accordance with such
plan for the 1996 calendar year at such time as such bonus is paid to other
Covered Employees, not later than April 1, 1997.
4. Annual Incentive Compensation. The Company shall pay Browne at the
Closing an estimate of an amount equal to 15% of the Pre-Tax Net Income (as
defined in Section 3(c) of the Employment Agreement) of FAMC for the period
beginning on April 1, 1996 and ending on the Termination Date, with final
adjustment of such amount to be paid to Browne by the Company, or paid by Browne
to the Company, on or prior to November 30, 1996.
5. Pre-Tax Net Income. The Company shall pay Browne, as soon as
practicable after the Closing and prior to October 31, 1996, an amount equal to
ten percent (10%) of the Pre-Tax Net Income from the remaining CMO subsidiaries
of the Company, earned from April 1, 1996 through the Termination Date.
6. Acquisition of Options. On or before October 31, 1996, Browne shall
have the right to cause the Company to acquire all, but not less than all, of
the Options. The acquisition price for such Options shall be equal to the
difference between the MDC Stock Purchase Price and the exercise price of each
Option. The Company shall pay the aggregate acquisition price to Browne on or
before the close of business on the third business day following receipt by the
Company of notice of Browne's election to cause the Company to acquire his
Options pursuant to this paragraph, and Browne shall deliver to the Company an
assignment or such other documents as the Company may require to evidence
assignment and surrender of the Options. If Browne does not elect to exercise
his right under this paragraph, the Options shall be deemed to be vested and his
rights with respect to the Options shall continue to be governed by the plans
and agreements with respect thereto.
- 3 -
<PAGE>
7. Withholding Requirements. All of the payments to Browne hereunder
shall be net of applicable withholding taxes that are required by law to be
withheld.
8. Indemnification.
(a) The Company has indemnified and shall continue to
indemnify Browne for and hold him harmless from any action, demand, claims,
liabilities or damages and associated expenses (including attorneys' fees)
arising out of or in connection with his conduct, acts or omissions in his
capacity as an officer, director and/or employee of the Company, including its
subsidiaries and affiliates, and any other entity for which Browne serves or has
served in such capacity for the benefit of or at the request of the Company
through the Termination Date, and shall advance or pay on a current basis
defense expenses (including attorneys' fees and costs) reasonably incurred by
Browne in connection with any such action, demand, claims, liabilities or
damages, all to the fullest extent permitted by applicable law.
(b) The Company shall continue to procure insurance policies
which continue executive liability and indemnification insurance coverage for
Browne to the same extent and providing limited liability, deductibles and
exclusions as are provided for the Company's principal executive officers and
outside directors. The covenants contained in this clause (b) shall continue in
effect through September 30, 2003.
9. Turnover of Records. On or before October 31, 1996, Browne shall
deliver to the Company all Company records, materials and information in his
possession, custody or control (or which he has provided to his
representatives), including all copies thereof, which relate to the business of
the Company, FAMC, AIC or CAI, except copies of Forms 10-K, 10-Q, proxies,
annual and quarterly reports to stockholders and other publicly available
documents and reports filed with public agencies. In the event Browne locates or
otherwise comes into possession of Company information on property after the
date of this Agreement, he shall promptly deliver such information promptly.
10. Employment Agreement Covenants. The covenants of Browne contained
in Section 5 of the Employment Agreement are incorporated herein by reference
verbatim and shall survive termination of the Employment Agreement in accordance
with the terms of this Closing Agreement.
11. Mutual Releases. At the Closing, the Company and Browne shall
execute mutual releases in the forms attached to this Closing Agreement (the
"Releases").
12. Conditions to Post-Termination Payments. Payments to Browne of any
amounts due him after the Closing Date in accordance with this Closing Agreement
(including without limitation payments under Sections 3, 4 and 5 hereof) shall
be subject to the condition that Browne is not in breach of (i) any of the
provisions of this Closing Agreement or his Release.
- 4 -
<PAGE>
13. Representations and Warranties of the Company. The Company
represents and warrants to Browne as follows:
(a) The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite corporate power to execute, carry out and perform the provisions
of the transactions set forth in this Agreement and the Release;
(b) The execution, delivery and performance by the Company of
this Agreement and the Release have been duly authorized by the Company as
evidenced by the execution of this Agreement and the Release by an officer of
the Company;
(c) Neither the execution, delivery, performance of, or
compliance with, this Agreement and the Release will result in any breach or
violation of, or be in conflict with or constitute a default under, any
mortgage, indenture, contract, agreement, lease, instrument, judgment, decree,
order, statute, rule, regulation or restriction by which the Company is bound or
affected;
(d) No consent, authorization, approval, permit, order of, or
registration or filing by, the Company with any governmental or regulatory
authority or any other person will be required in connection with the execution
and delivery of this Agreement and the performance of the transactions
contemplated hereby, except for routine filings or notifications with the United
States Securities and Exchange Commission (the "Commission") and/or the New York
Stock Exchange, Inc. and The Pacific Stock Exchange Incorporated;
(e) No person, as a result of any action by the Company in
connection with the transactions set forth in this Agreement, has or will have,
to the best of the Company's knowledge, any right, interest or claim against or
upon the Company or Browne for any commission, fee or any other compensation as
a finder or broker or for acting in any similar capacity;
(f) The Company, as the issuer of the MDC Shares and the
Options, has available to it all information which it deems necessary and
advisable in connection with its decision to purchase the MDC Shares and the
Options and has no intention of disposing of the MDC Shares or the Options
except in accordance with applicable law;
(g) The Company has not omitted to disclose to Browne or
misrepresented to Browne any material fact known to its senior management
relating to its purchase of the MDC Shares or the Options or the transactions
contemplated by this Agreement; and
(h) The Company has no reason to believe that any of the
representations and warranties of Browne herein are inaccurate.
- 5 -
<PAGE>
14. Representations and Warranties of Browne. Browne represents
and warrants to the Company as follows:
(a) Browne has all requisite power and authority to enter
into this Agreement and the Release to sell the MDC Shares and the Options;
(b) This Agreement and the Release have been duly executed and
delivered by Browne;
(c) Neither the execution, delivery, performance of, or
compliance with, this Agreement or the Release will result in any breach or
violation of, or be in conflict with or constitute a default under, any
mortgage, indenture, contract, agreement, lease, instrument, judgment, decree,
order, statute, rule, regulation or restriction by which Browne is bound or
affected;
(d) No consent, authorization, approval, permit, order of, or
registration or filing by Browne with any governmental regulatory authority or
any other person who is or will be required in connection with the execution and
delivery of this Agreement or the Release, or the sale to the Company of the MDC
Shares or the Options except for routine filings with the commission and/or the
New York Stock Exchange, Inc. and the Pacific Stock Exchange Incorporated;
(e) At the time of sale to the Company of the MDC Shares and
the Options, Browne will have good and marketable title to the MDC Shares and
the Options which are sold, free and clear of any liens, charges, encumbrances
or claims of any nature whatsoever, and upon consummation of the transactions
referenced in Section 1(a) or 6, the Company shall receive good and marketable
title to the MDC Shares or Options, as the case may be, free and clear of any
liens, charges, encumbrances or claims of any nature whatsoever;
(f) No person, as a result of any action by Browne, in
connection with the transactions set forth in this Agreement, has or will have,
to the best of Browne's knowledge, any right, interest or claim against or upon
the Company for any commission, fee or other compensation as a finder or broker,
or for acting in any similar capacity;
(g) By reason of Browne's employment relationship with the
Company and its affiliates and his experience in financial and business matters
in general, he is capable of evaluating the transactions regarding the MDC
Shares and the Options contemplated hereby;
(h) If Browne elects to sell the MDC Shares or the Options,
Browne acknowledges that he has been furnished with all information relating to
the Company and its prospects as he has requested, and has had the opportunity
to ask all questions and receive all answers as he has requested;
(i) If Browne elects to sell the MDC Shares or the Options,
Browne acknowledges that he has been afforded access to all documents, books,
accounts and records
- 6 -
<PAGE>
relating to the Company and has performed all investigations, which he has
deemed necessary and advisable in connection with his decision to elect whether
to sell to the Company the MDC Shares and the Options;
(j) Browne has not omitted to disclose or misrepresented
any material fact known to him relating to his sale of the MDC Shares and the
Options; and
(k) Browne has no reason to believe that any of the
representations and warranties of the Company herein are inaccurate.
15. Survival. The respective representations, warranties and agreements
of the parties contained in this Closing Agreement shall survive the Closing and
shall remain in full force and effect until September 30, 1998; provided that
(a) the agreements of the Company contained in Section 8(a) shall survive
indefinitely and (b) the agreements of the Company contained in Section 8(b)
shall survive until September 30, 2003.
16. Miscellaneous.
(a) This Closing Agreement and the attached Releases supersede
all prior agreements and understandings between the parties with respect to the
subject matter hereof, including the Employment Agreement, except as otherwise
specifically set forth herein and except for Browne's notes and pledge
agreements delivered to the Company in connection with the Company's Executive
Option Purchase Program, which notes and pledge agreements shall remain in full
force and effect; and
(b) No modification, termination or attempted waiver shall be
valid unless in writing signed by the party against whom the same is sought to
be enforced.
17. Notices. Any notice, consent or other communication made given in
connection with this Closing Agreement shall be in writing and shall be deemed
to have been duly given when delivery by hand or by United States registered or
certified mail, return receipt requested, to the parties at the following
addresses or at such other address as a party may specify by notice to the
other.
TO BROWNE:
Spencer I. Browne
1660 Holly Street
Denver, CO 80220
TO THE COMPANY:
M.D.C. Holdings, Inc.
3600 South Yosemite Street, Suite 900
- 7 -
<PAGE>
Denver, Colorado 80237
Attention: General Counsel
18. Governing Law. This Closing Agreement shall be governed by and
construed according to the laws of the State of Colorado. Any controversy or
claim arising out of or relating to this Agreement or the breach thereof, shall
be settled by arbitration administered by the American Arbitration Association
in accordance with the Commercial Arbitration Rules, and judgment on the award
rendered by the Arbitrator may be entered in any court having jurisdiction
thereof. All parties expressly agree that costs and attorneys' fees related to
any such arbitration shall be awarded to the prevailing party. Any arbitration
commenced pursuant to this paragraph shall be conducted in the Denver
metropolitan area, State of Colorado.
19. Captions and Paragraph Headings. Captions and paragraph headings
used herein are for the convenience of the parties, are not a part of this
Closing Agreement and shall not be used in construing it.
20. Gender; Plural. Where necessary or appropriate the meaning
thereof, the use of the singular and plural shall be deemed to include each
other, and the use of any gender shall be deemed to include any other gender
where appropriate to the meaning hereof.
IN WITNESS WHEREOF the parties have executed this Closing Agreement on
the day and year first set forth above.
M.D.C. HOLDINGS, INC.
By:
-------------------------------
Michael Touff, Vice President
-------------------------------
Spencer I. Browne
- 8 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from MDC
Holdings, Inc. consolidated financial statements included in its Form 10-Q for
the quarter ended September 30, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 17,543
<SECURITIES> 5,076
<RECEIVABLES> 16,228
<ALLOWANCES> 0
<INVENTORY> 458,683
<CURRENT-ASSETS> 0
<PP&E> 9,505
<DEPRECIATION> 0
<TOTAL-ASSETS> 627,375
<CURRENT-LIABILITIES> 0
<BONDS> 278,481
0
0
<COMMON> 227
<OTHER-SE> 208,597
<TOTAL-LIABILITY-AND-EQUITY> 627,375
<SALES> 644,339
<TOTAL-REVENUES> 670,329
<CGS> (626,356)
<TOTAL-COSTS> (647,556)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,364)
<INCOME-PRETAX> 22,773
<INCOME-TAX> (8,314)
<INCOME-CONTINUING> 14,459
<DISCONTINUED> 0
<EXTRAORDINARY> (421)
<CHANGES> 0
<NET-INCOME> 14,038
<EPS-PRIMARY> .73
<EPS-DILUTED> .66
</TABLE>
