SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 7, 1996, 18,114,000 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 JUNE 30, 1996
INDEX
Page
No.
Part I. Financial Information:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of June 30, 1996 (Unaudited) and
December 31, 1995...................................... 1
Statements of Income (Unaudited) for the three and six
months ended June 30, 1996 and 1995.................... 3
Statements of Cash Flows (Unaudited) for the six months
ended June 30, 1996 and 1995........................... 4
Notes to Financial Statements (Unaudited)................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 18
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)
June 30, December 31,
1996 1995
----------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Corporate
Cash and cash equivalents................................................... $ 14,452 $ 10,290
Property and equipment, net................................................. 9,514 9,550
Deferred income taxes....................................................... 8,951 13,730
Deferred debt issue costs, net.............................................. 9,555 9,931
Other assets, net........................................................... 2,936 3,830
---------- -----------
45,408 47,331
Homebuilding
Cash and cash equivalents................................................... 5,158 5,096
Home sales and other accounts receivable.................................... 22,910 26,192
Investments and marketable securities, net.................................. 5,028 6,481
Inventories, net
Housing completed or under construction................................... 274,061 265,205
Land and land under development........................................... 184,609 176,960
Prepaid expenses and other assets, net...................................... 39,622 42,111
---------- -----------
531,388 522,045
Financial Services
Cash and cash equivalents................................................... 3,958 5,409
Accrued interest and other assets, net...................................... 5,934 3,129
Mortgage loans held in inventory, net....................................... 50,688 53,153
Mortgage Collateral, net of mortgage-backed bonds, and related assets
and liabilities........................................................... 2,584 3,744
---------- -----------
63,164 65,435
Total Assets.......................................................... $ 639,960 $ 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)
June 30, December 31,
1996 1995
----------- ------------
LIABILITIES (Unaudited)
<S> <C> <C>
Corporate
Accounts payable and accrued expenses....................................... $ 17,807 $ 18,258
Income taxes payable........................................................ 9,659 11,930
Notes payable............................................................... 3,512 3,537
Senior Notes, net........................................................... 187,620 187,525
Subordinated notes, net..................................................... 38,223 38,221
----------- -----------
256,821 259,471
Homebuilding
Accounts payable and accrued expenses....................................... 84,945 82,164
Lines of credit............................................................. 57,500 43,490
Notes payable............................................................... 6,864 10,571
----------- -----------
149,309 136,225
Financial Services
Accounts payable and accrued expenses....................................... 12,170 12,092
Line of credit.............................................................. 13,019 21,990
----------- -----------
25,189 34,082
Total Liabilities..................................................... 431,319 429,778
----------- -----------
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; 22,652,000
and 22,606,000 shares issued, respectively, at June 30, 1996 and
December 31, 1995......................................................... 227 226
Additional paid-in capital.................................................. 136,495 136,022
Retained earnings........................................................... 95,292 87,476
----------- -----------
232,014 223,724
Less treasury stock, at cost; 3,805,000 and 3,157,000 shares, respectively,
at June 30, 1996 and December 31, 1995.................................... (23,373) (18,691)
----------- -----------
Total Stockholders' Equity............................................ 208,641 205,033
----------- -----------
Total Liabilities and Stockholders' Equity............................ $ 639,960 $ 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 Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
REVENUES
<S> <C> <C> <C> <C>
Homebuilding........................................... $ 230,329 $ 207,339 $ 421,605 $391,868
Financial Services..................................... 6,950 6,356 14,688 12,506
Corporate.............................................. 497 424 729 837
----------- ----------- ----------- -----------
Total Revenues..................................... 237,776 214,119 437,022 405,211
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding........................................... 223,286 199,274 408,528 375,794
Financial Services..................................... 3,348 2,693 6,090 5,087
Corporate general and administrative................... 2,980 3,482 5,581 6,609
Corporate and homebuilding interest (Note C)........... 1,027 1,890 2,878 4,729
----------- ----------- ----------- -----------
Total Expenses..................................... 230,641 207,339 423,077 392,219
----------- ----------- ----------- -----------
Income before income taxes and extraordinary
item................................................... 7,135 6,780 13,945 12,992
Provision for income taxes................................ (2,603) (2,449) (5,089) (4,593)
----------- ----------- ----------- -----------
Income before extraordinary item.......................... 4,532 4,331 8,856 8,399
Extraordinary loss from early extinguishment of debt, net
of income tax benefit of $242.......................... (421) - - (421) - -
----------- ----------- ----------- -----------
Net Income......................................... $ 4,111 $ 4,331 $ 8,435 $ 8,399
=========== =========== =========== ===========
EARNINGS PER SHARE
Primary
Income before extraordinary item................... $ .23 $ .21 $ .45 $ .41
=========== =========== =========== ===========
Net Income......................................... $ .21 $ .21 $ .43 $ .41
=========== =========== =========== ===========
Fully diluted
Income before extraordinary item................... $ 21 $ .20 $ .42 $ .38
=========== =========== =========== ===========
Net Income......................................... $ .20 $ .20 $ .40 $ .38
=========== =========== =========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING
Primary................................................ 19,365 20,305 19,612 20,300
=========== =========== =========== ===========
Fully diluted.......................................... 22,978 24,006 23,225 24,043
=========== =========== =========== ===========
DIVIDENDS PER SHARE....................................... $ .03 $ .03 $ .06 $ .05
=========== =========== =========== ===========
</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)
Six months
Ended June 30,
1996 1995
----------- -----------
OPERATING ACTIVITIES
<S> <C> <C>
Net Income.......................................................... $ 8,435 $ 8,399
Adjustments To Reconcile Net Income To Net Cash Provided By
(Used In) Operating Activities:
Depreciation and amortization.................................. 5,744 4,531
Inventory valuation charges.................................... 2,870 900
Deferred income taxes.......................................... 4,779 509
Gains on sales of mortgage-related assets...................... (1,007) (270)
Net Changes In Assets and Liabilities
Mortgage loans held in inventory............................... 2,465 (6,674)
Homebuilding inventories....................................... (13,723) 1,192
Home sales and other accounts receivable....................... 3,282 (997)
Accounts payable and accrued expenses.......................... (294) (8,035)
Other, net..................................................... (4,337) (544)
----------- -----------
Net Cash Provided By (Used In) Operating Activities.................. 8,214 (989)
----------- -----------
INVESTING ACTIVITIES
Net Proceeds From Mortgage-Related Assets and Liabilities........... 1,991 686
Other, net.......................................................... 1,843 1,544
----------- -----------
Net Cash Provided By Investing Activities............................ 3,834 2,230
----------- -----------
FINANCING ACTIVITIES
Lines of Credit
Advances....................................................... 487,062 329,633
Principal Payments............................................. (482,023) (336,939)
Notes Payable
Borrowings..................................................... 480 1,075
Principal payments............................................. (10,071) (14,967)
Dividend Payments................................................... (1,141) (988)
Treasury Stock Repurchases.......................................... (5,016) (5,321)
Other, net.......................................................... 1,434 (89)
----------- -----------
Net Cash Used In Financing Activities............................... (9,275) (27,596)
----------- -----------
Net Increase (Decrease) In Cash and Cash Equivalents................ 2,773 (26,355)
Cash and Cash Equivalents
Beginning of Period............................................ 20,795 43,564
----------- -----------
End of Period.................................................. $ 23,568 $ 17,209
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
(continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<S> <C> <C>
Cash paid during the period for:
Interest, net of amounts capitalized.......................... $ 5,481 $ 6,199
Income taxes.................................................. 3,836 4,195
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Homebuilding land inventory sales financed by MDC.................. $ 206 $ 353
Homebuilding inventory purchases financed by seller................ 5,858 2,733
</TABLE>
See notes to condensed consolidated financial statements.
-5-
<PAGE>
M.D.C. HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A. Presentation of Financial Statements
The condensed consolidated financial statements of M.D.C. Holdings,
Inc. ("MDC" or the "Company," which, unless otherwise indicated, refers to
M.D.C. Holdings, Inc. and its subsidiaries) have been prepared by MDC, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. These statements reflect all adjustments (including all normal
recurring accruals) which, in the opinion of management, are necessary to
present fairly the financial position, results of operations and cash flows of
MDC as of June 30, 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.
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 Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Homebuilding
Home sales.................................. $ 229,006 $ 205,856 $ 415,029 $ 387,920
Land sales.................................. 1,087 511 6,246 2,824
Other revenues.............................. 236 972 330 1,124
----------- ----------- ----------- -----------
230,329 207,339 421,605 391,868
----------- ----------- ----------- -----------
Home cost of sales.......................... 198,102 178,901 358,918 335,916
Land cost of sales.......................... 1,023 418 5,955 2,411
Inventory valuation charges................. 2,870 900 2,870 900
Marketing................................... 14,265 12,510 26,247 23,627
General and administrative.................. 7,026 6,545 14,538 12,940
----------- ----------- ----------- -----------
223,286 199,274 408,528 375,794
----------- ----------- ----------- -----------
Homebuilding Operating Profit........... 7,043 8,065 13,077 16,074
----------- ----------- ----------- -----------
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Services
Mortgage Lending Revenues
Interest revenues........................... $ 869 $ 977 $ 1,674 $ 1,670
Origination fees............................ 1,570 1,256 2,959 2,330
Gains on sale of mortgage servicing......... 1,531 1,972 4,153 4,642
Gains (losses) on sale of mortgage loans,
net 1,151 (104) 1,693 (440)
Mortgage servicing and other................ 522 449 908 1,015
Asset Management Revenues
Management fees and other................... 1,235 1,536 2,294 3,019
Gains on sales of mortgage-related assets... 72 270 1,007 270
----------- ----------- ----------- -----------
6,950 6,356 14,688 12,506
----------- ----------- ----------- -----------
General and Administrative Expenses
Mortgage Lending............................ 2,499 2,142 4,621 3,926
Asset Management............................ 849 551 1,469 1,161
----------- ----------- ----------- -----------
3,348 2,693 6,090 5,087
----------- ----------- ----------- -----------
Financial Services Operating Profit..... 3,602 3,663 8,598 7,419
----------- ----------- ----------- -----------
Total Operating Profit.......................... 10,645 11,728 21,675 23,493
----------- ----------- ----------- -----------
Corporate
Other revenues.............................. 497 424 729 837
Interest expense............................ (1,027) (1,890) (2,878) (4,729)
General and administrative expense.......... (2,980) (3,482) (5,581) (6,609)
----------- ----------- ----------- -----------
Net Corporate Expenses.................. (3,510) (4,948) (7,730) (10,501)
----------- ----------- ----------- -----------
Income Before Income Taxes and Extraordinary Item $ 7,135 $ 6,780 $ 13,945 $ 12,992
=========== =========== =========== ===========
</TABLE>
-7-
<PAGE>
C. Corporate and Homebuilding Interest Activity
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
(In thousands) (In thousands)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest capitalized in homebuilding inventory,
beginning of period........................... $ 40,342 $ 42,038 $ 40,217 $ 42,478
Interest incurred................................ 7,605 8,483 15,379 17,472
Interest expensed................................ (1,027) (1,890) (2,878) (4,729)
Previously capitalized interest included in cost
of sales...................................... (7,081) (7,072) (12,879) (13,662)
----------- ----------- ----------- -----------
Interest capitalized in homebuilding inventory,
end of period................................. $ 39,839 $ 41,559 $ 39,839 $ 41,559
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
----------- ----------- ----------
<S> <C> <C> <C>
Interest capitalized in homebuilding
inventory as a percent of homebuilding
inventory................................... 8.7% 9.1% 9.0%
=========== =========== ===========
</TABLE>
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 to
repurchase up to 1,100,000 shares of Common Stock. These shares were purchased
at prices ranging from $5.88 to $6.50 per share ($6.32 per share average,
including commissions). In January 1996, the Company repurchased 230,000
additional shares of Common Stock at $7.13 per share, substantially completing
the program.
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.
On July 25, 1996, the MDC Board of Directors authorized a program to
repurchase up to 1,000,000 additional shares of Common Stock. As of August 1,
1996, the Company had repurchased approximately 734,000 shares of Common Stock
at $6.63 per share pursuant to this program.
E. 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 credit agreement. The Company recognized an extraordinary loss of
$421,000, net of an income tax benefit of $242,000, during the three and six
months ended June 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.
-8-
<PAGE>
F. Earnings Per Share
Primary earnings per share are based on the weighted-average number of
common and common equivalent shares outstanding during each period. 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).
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Primary Calculation
Income before extraordinary item............................. $ 4,532 $ 4,331 $ 8,856 $ 8,399
Extraordinary loss, net of income tax benefit of $242........ (421) - - (421) - -
----------- ----------- ----------- -----------
Net Income.............................................. $ 4,111 $ 4,331 $ 8,435 $ 8,399
=========== =========== =========== ===========
Weighted-average shares outstanding.......................... 18,831 19,698 19,055 19,407
Dilutive stock options....................................... 534 607 557 893
----------- ----------- ----------- -----------
Total Weighted-Average Shares........................... 19,365 20,305 19,612 20,300
=========== =========== =========== ===========
Primary Earnings Per Share
Income before extraordinary item........................ $ .23 $ .21 $ .45 $ .41
=========== ============= =========== ===========
Net Income.............................................. $ .21 $ .21 $ .43 $ .41
=========== =========== =========== ===========
Fully Diluted Calculation
Income before extraordinary item............................. $ 4,532 $ 4,331 $ 8,856 $ 8,399
Adjustment for interest on Convertible Notes, net of income
tax benefit; conversion assumed........................... 402 391 804 782
----------- ----------- ----------- -----------
Adjusted income before extraordinary item.................... 4,934 4,722 9,660 9,181
Extraordinary loss, net of income tax benefit of $242........ (421) - - (421) - -
----------- ----------- ----------- -----------
Adjusted Net Income..................................... $ 4,513 $ 4,722 $ 9,239 $ 9,181
=========== =========== =========== ===========
Weighted-average shares outstanding.......................... 18,831 19,698 19,055 19,407
Dilutive stock options....................................... 534 695 557 1,023
Shares issuable upon conversion of Convertible Notes;
conversion assumed........................................ 3,613 3,613 3,613 3,613
----------- ----------- ----------- -----------
Total Weighted-Average Shares........................... 22,978 24,006 23,225 24,043
=========== =========== =========== ===========
Fully Diluted Earnings Per Share
Income before extraordinary item........................ $ .21 $ .20 $ .42 $ .38
=========== =========== =========== ===========
Net Income.............................................. $ .20 $ .20 $ .40 $ .38
=========== ========== =========== ===========
</TABLE>
G. 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.
-9-
<PAGE>
<TABLE>
<CAPTION>
Supplemental Combining Balance Sheet
June 30, 1996
(In thousands)
Unconsolidated
----------------------------------------
Non-
ASSETS Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Corporate
Cash and cash equivalents............... $ 14,452 $ - - $ - - $ - - $ 14,452
Investments in subsidiaries............. 211,366 - - 17,434 (228,800) - -
Advances and notes receivable - Parent
and subsidiaries...................... 220,849 10 24,471 (245,330) - -
Property and equipment, net............. 9,514 - - - - - - 9,514
Deferred income taxes................... 8,951 - - - - - - 8,951
Deferred debt issue costs, net.......... 9,555 - - - - - - 9,555
Other assets, net....................... 2,679 - - 257 - - 2,936
----------- ----------- ----------- ----------- -----------
477,366 10 42,162 (474,130) 45,408
----------- ----------- ----------- ----------- -----------
Homebuilding
Cash and cash equivalents............... - - 5,157 1 - - 5,158
Home sales and other accounts receivable - - 36,213 - - (13,303) 22,910
Investments and marketable securities,
net................................... 5,028 - - - - - - 5,028
Inventories, net
Housing completed or under
construction........................ - - 274,061 - - - - 274,061
Land and land under
development......................... - - 161,325 24,681 (1,397) 184,609
Prepaid expenses and other assets....... 2,424 37,198 - - - - 39,622
----------- ----------- ----------- ----------- -----------
7,452 513,954 24,682 (14,700) 531,388
----------- ----------- ----------- ----------- -----------
Financial Services
Cash and cash equivalents............... - - - - 3,958 - - 3,958
Accrued interest and other assets....... - - - - 5,934 - - 5,934
Mortgage loans held in inventory........ - - - - 50,688 - - 50,688
Mortgage Collateral, net of
mortgage-backed bonds, and related
assets and liabilities................ - - - - 2,584 - - 2,584
----------- ----------- ----------- ----------- -----------
- - - - 63,164 - - 63,164
----------- ----------- ----------- ----------- -----------
Total Assets...................... $ 484,818 $ 513,964 $ 130,008 $ (488,830) $ 639,960
=========== =========== =========== =========== ===========
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
Supplemental Combining Balance Sheet
June 30, 1996
(In thousands)
(continued)
Unconsolidated
----------------------------------------
Non-
LIABILITIES Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Corporate
Accounts payable and accrued expenses... $ 17,355 $ - - $ 452 $ - - $ 17,807
Advances and notes payable - Parent and
subsidiaries.......................... 14,634 210,874 28,471 (253,979) - -
Income taxes payable.................... 9,659 - - - - - - 9,659
Notes payable........................... 3,512 - - - - - - 3,512
Senior Notes, net....................... 187,620 - - - - - - 187,620
Subordinated notes, net................. 38,223 - - - - - - 38,223
----------- ----------- ----------- ------------ -----------
271,003 210,874 28,923 (253,979) 256,821
----------- ----------- ----------- ------------ -----------
Homebuilding
Accounts payable and accrued expenses... 5,174 79,233 538 - - 84,945
Lines of credit......................... - - 57,500 - - - - 57,500
Notes payable........................... - - 6,864 - - - - 6,864
----------- ----------- ----------- ------------ -----------
5,174 143,597 538 - - 149,309
----------- ----------- ----------- ------------ -----------
Financial Services
Accounts payable and accrued expenses... - - - - 25,473 (13,303) 12,170
Line of credit.......................... - - - - 13,019 - - 13,019
----------- ----------- ----------- ------------ -----------
- - - - 38,492 (13,303) 25,189
----------- ----------- ----------- ------------ -----------
Total Liabilities................. 276,177 354,471 67,953 (267,282) 431,319
----------- ----------- ----------- ------------ -----------
STOCKHOLDERS' EQUITY
Preferred stock......................... - - - - 10 (10) - -
Common Stock............................ 227 19 81 (100) 227
Additional paid-in capital.............. 136,495 144,756 224,914 (369,670) 136,495
Retained earnings....................... 95,292 14,718 (162,941) 148,223 95,292
Less treasury stock..................... (23,373) - - (9) 9 (23,373)
----------- ----------- ----------- ------------ -----------
Total Stockholders' Equity........ 208,641 159,493 62,055 (221,548) 208,641
----------- ----------- ----------- ------------ -----------
Total Liabilities and
Stockholders' Equity............ $ 484,818 $ 513,964 $ 130,008 $ (488,830) $ 639,960
=========== =========== =========== ============ ===========
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
Supplemental Combining Balance Sheet
December 31, 1995
(In thousands)
Unconsolidated
---------------------------------------
Non-
ASSETS Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ----------- -----------
<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...... 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>
-12-
<PAGE>
<TABLE>
<CAPTION>
Supplemental Combining Balance Sheet
December 31, 1995
(In thousands)
(continued)
Unconsolidated
---------------------------------------
Non-
LIABILITIES Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ----------- -----------
<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
Notes 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>
-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>
THREE MONTHS ENDED JUNE 30, 1996
REVENUES
Homebuilding............................. $ 64 $ 230,256 $ 9 $ - - $ 230,329
Financial Services....................... - - - - 6,950 - - 6,950
Corporate................................ 488 7 2 - - 497
Equity in earnings of subsidiaries....... 5,404 - - - - (5,404) - -
----------- ----------- ----------- ----------- -----------
Total Revenues..................... 5,956 230,263 6,961 (5,404) 237,776
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................. 30 223,085 96 75 223,286
Financial Services....................... - - - - 3,348 - - 3,348
Corporate general and administrative..... 2,972 - - 8 - - 2,980
Corporate and homebuilding interest..... (4,181) 4,527 642 39 1,027
----------- ----------- ----------- ----------- -----------
Total Expenses...................... (1,179) 227,612 4,094 114 230,641
----------- ----------- ----------- ----------- -----------
Income before income taxes and
extraordinary item..................... 7,135 2,651 2,867 (5,518) 7,135
Provision for income taxes............... (2,603) (968) (1,192) 2,160 (2,603)
----------- ----------- ----------- ----------- -----------
Income before extraordinary item......... 4,532 1,683 1,675 (3,358) 4,532
Extraordinary loss, net of income tax
benefit of $242........................ (421) - - - - - - (421)
----------- ----------- ----------- ----------- -----------
NET INCOME.................................. $ 4,111 $ 1,683 $ 1,675 $ (3,358) $ 4,111
=========== =========== =========== =========== ===========
THREE MONTHS ENDED JUNE 30, 1995
REVENUES
Homebuilding............................. $ 95 $ 207,212 $ 32 $ - - $ 207,339
Financial Services....................... - - - - 6,356 - - 6,356
Corporate................................ 424 - - - - - - 424
Equity in earnings of subsidiaries....... 5,733 - - - - (5,733) - -
----------- ----------- ----------- ----------- -----------
Total Revenues..................... 6,252 207,212 6,388 (5,733) 214,119
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................. (48) 199,124 198 - - 199,274
Financial Services....................... - - - - 2,693 - - 2,693
Corporate general and administrative..... 3,476 - - 6 - - 3,482
Corporate and homebuilding interest..... (3,956) 5,169 677 - - 1,890
----------- ----------- ----------- ----------- -----------
Total Expenses..................... (528) 204,293 3,574 - - 207,339
----------- ----------- ----------- ----------- -----------
Income before income taxes............... 6,780 2,919 2,814 (5,733) 6,780
Provision for income taxes............... (2,449) (1,109) (1,069) 2,178 (2,449)
----------- ----------- ----------- ----------- -----------
NET INCOME.................................. $ 4,331 $ 1,810 $ 1,745 $ (3,555) $ 4,331
=========== =========== =========== =========== ===========
</TABLE>
-14-
<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>
SIX MONTHS ENDED JUNE 30, 1996
REVENUES:
Homebuilding............................ $ 143 $ 421,450 $ 12 $ - - $ 421,605
Financial Services...................... - - - - 14,688 - - 14,688
Corporate............................... 705 13 11 - - 729
Equity in earnings of subsidiaries...... 10,995 - - - - (10,995) - -
----------- ----------- ----------- ----------- -----------
Total Revenues.................... 11,843 421,463 14,711 (10,995) 437,022
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................ 448 407,666 264 150 408,528
Financial Services...................... - - - - 6,090 - - 6,090
Corporate general and administrative.... 5,566 - - 15 - - 5,581
Corporate and homebuilding interest.... (8,116) 9,575 1,345 74 2,878
----------- ----------- ----------- ----------- -----------
Total Expenses.................... (2,102) 417,241 7,714 224 423,077
----------- ----------- ----------- ----------- -----------
Income before income taxes and
extraordinary item.................... 13,945 4,222 6,997 (11,219) 13,945
Provision for income taxes.............. (5,089) (1,594) (2,870) 4,464 (5,089)
----------- ----------- ----------- ----------- -----------
Income before extraordinary item........ 8,856 2,628 4,127 (6,755) 8,856
Extraordinary loss, net of income tax
benefit of $242....................... (421) - - - - - - (421)
----------- ----------- ----------- ----------- -----------
NET INCOME................................. $ 8,435 $ 2,628 $ 4,127 $ (6,755) $ 8,435
=========== =========== =========== =========== ===========
SIX MONTHS ENDED JUNE 30, 1995
REVENUES
Homebuilding............................ $ 211 $ 391,533 $ 124 $ - - $ 391,868
Financial Services...................... - - - - 12,506 - - 12,506
Corporate............................... 837 - - - - - - 837
Equity in earnings of subsidiaries...... 11,674 - - - - (11,674) - -
----------- ----------- ----------- ----------- -----------
Total Revenues.................... 12,722 391,533 12,630 (11,674) 405,211
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................ 498 374,974 322 - - 375,794
Financial Services...................... - - - - 5,087 - - 5,087
Corporate general and administrative.... 6,568 - - 41 - - 6,609
Corporate and homebuilding interest.... (7,336) 10,648 1,417 - - 4,729
----------- ----------- ----------- ----------- -----------
Total Expenses.................... (270) 385,622 6,867 - - 392,219
----------- ----------- ----------- ----------- -----------
Income before income taxes.............. 12,992 5,911 5,763 (11,674) 12,992
Provision for income taxes.............. (4,593) (2,246) (1,979) 4,225 (4,593)
----------- ----------- ----------- ----------- -----------
NET INCOME................................. $ 8,399 $ 3,665 $ 3,784 $ (7,449) $ 8,399
=========== =========== =========== =========== ===========
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
Supplemental Combining Statement of Cash Flows
Six Months Ended June 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 (USED IN) OPERATING
ACTIVITIES............................... $ 105,651 $ (12,791) $ 4,214 $ (88,860) $ 8,214
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Net (Increase) Reduction in Notes and
Advances Receivable From Parent and
Subsidiaries............................. (10,193) 23 (2,921) 13,091 - -
Net Proceeds From Mortgage-Related Assets
and Liabilities.......................... - - - - 1,991 - - 1,991
Other, net.................................. 995 935 (87) - - 1,843
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Investing
Activities............................... (9,198) 958 (1,017) 13,091 3,834
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Net Increase (Reduction) in Borrowings From
Parent and Subsidiaries.................. (84,016) 210 8,037 75,769 - -
Lines of Credit
Advances............................... - - 487,062 - - - - 487,062
Principal payments..................... - - (473,052) (8,971) - - (482,023)
Notes Payable
Borrowings............................. - - 480 - - - - 480
Principal payments..................... (3,558) (2,764) (3,749) - - (10,071)
Dividend Payments........................... (1,141) - - - - - - (1,141)
Treasury Stock Repurchases.................. (5,016) - - - - - - (5,016)
Other, net.................................. 1,434 - - - - - - 1,434
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Financing
Activities............................... (92,297) 11,936 (4,683) 75,769 (9,275)
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) In Cash And Cash
Equivalents.............................. 4,156 103 (1,486) - - 2,773
Cash And Cash Equivalents
Beginning Of Period...................... 10,296 5,054 5,445 - - 20,795
----------- ----------- ----------- ----------- -----------
End Of Period............................ $ 14,452 $ 5,157 $ 3,959 $ - - $ 23,568
=========== =========== =========== =========== ===========
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
Supplemental Combining Statement of Cash Flows
Six Months Ended June 30, 1995
(In thousands)
Unconsolidated
----------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES....... $ (88,126) $ (16,698) $ (16,719) $ 120,554 $ (989)
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Net Proceeds From Mortgage-Related Assets
and Liabilities.......................... - - - - 686 - - 686
Net Reduction in Notes and Advances
Receivable - Parent and Subsidiaries..... 62,779 31 1,739 (64,549) - -
Other, net.................................. (267) 408 1,403 - - 1,544
----------- ----------- ----------- ----------- -----------
Net Cash Provided By Investing
Activities............................... 62,512 439 3,828 (64,549) 2,230
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Net Increase In Borrowings From Parent and
Subsidiaries............................. 10,089 32,454 13,462 (56,005) - -
Lines of Credit
Advances............................... - - 329,633 - - - - 329,633
Principal payments..................... - - (336,859) (80) - - (336,939)
Notes Payable
Borrowings............................. - - 1,075 - - - - 1,075
Principal payments..................... (48) (13,803) (1,116) - - (14,967)
Dividend Payments........................... (988) - - - - - - (988)
Treasury Stock Repurchases.................. (5,321) - - - - - - (5,321)
Other, net.................................. (89) - - - - - - (89)
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Financing
Activities............................... 3,643 12,500 12,266 (56,005) (27,596)
----------- ----------- ----------- ----------- -----------
Net Decrease In Cash And Cash Equivalents... (21,971) (3,759) (625) - - (26,355)
Cash And Cash Equivalents
Beginning Of Period...................... 31,210 9,656 2,698 - - 43,564
----------- ----------- ----------- ----------- -----------
End Of Period............................ $ 9,239 $ 5,897 $ 2,073 $ - - $ 17,209
=========== =========== =========== =========== ===========
</TABLE>
-17-
<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) Financial Asset Management LLC (an
indirect subsidiary of M.D.C. Holdings, Inc.,) manages, 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 (in thousands,
except per share amounts).
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues.......................................... $ 237,776 $ 214,119 $ 437,022 $ 405,211
Income before inventory valuation charges, income
taxes and extraordinary item................... 10,005 7,680 16,815 13,892
Income before income taxes and extraordinary item. 7,135 6,780 13,945 12,992
Income before extraordinary item.................. 4,532 4,331 8,856 8,399
Net Income........................................ 4,111 4,331 8,435 8,399
Earnings Per Share:
Primary
Income before extraordinary item............ .23 .21 .45 .41
Net Income.................................. .21 .21 .43 .41
Fully Diluted
Income before extraordinary item............ .21 .20 .42 .38
Net Income.................................. .20 .20 .40 .38
</TABLE>
Revenues for the three and six months ended June 30, 1996 increased 11%
and 8%, respectively, compared with revenues during the same periods in 1995,
and exceeded revenues for all comparable periods in the Company's history. The
revenue increases primarily resulted from increases in homes closed. The Company
closed 1,296 and 2,347 homes, respectively, during the second quarter and first
half of 1996, increases of 16% and 10%, respectively, over the 1,121 and 2,129
homes closed in the comparable periods in 1995.
-18-
<PAGE>
Income before income taxes and extraordinary item was higher in the
second quarter and first half of 1996, compared with the same periods in 1995,
primarily as a result of (i) lower interest expense; (ii) lower corporate
general and administrative expenses; and (iii) higher operating profit from the
Company's financial services segment, primarily resulting from larger gains on
sales of mortgage loans and mortgage-related assets. These increases to income
partially were offset by decreases in operating profits from the Company's
homebuilding operations in the second quarter and first six months of 1996,
compared with the same periods for 1995. These decreases, which more than offset
the positive affects of increases in homes closed, were caused by (i) non-cash
inventory valuation charges of $2,870,000 for the impairment of certain
homebuilding assets, primarily in the 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.
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 (as
hereinafter defined) 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 levels 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
have increased to a high of 8.4%, and currently are approximately 8.2%. While
current mortgage interest rates are low compared with historical rates, the
recent increases in mortgage interest rates, particularly since May 1996 when
rates moved above 8.0%, have affected adversely and may continue to affect
adversely in the future, the Company's homebuilding operations.
The Company is unable to predict the extent to which recent or future
increases in home mortgage interest rates will affect adversely the Company's
operating activities and results of operations. See "Forward-Looking Statements"
below.
-19-
<PAGE>
Homebuilding Segment.
The table below sets forth certain information with respect to the
Company's homes sold, closed and delivered, units sold under a contract
but not delivered ("Backlog") and active subdivisions (dollars in thousands).
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Home sales revenues................................ $ 229,006 $ 205,856 $ 415,029 $ 387,920
Operating profits before inventory valuation
charges.......................................... 9,913 8,965 15,947 16,974
Operating profits.................................. 7,043 8,065 13,077 16,074
Average selling price per housing unit............. 176.7 183.6 176.8 182.2
Home Gross Margins................................. 13.5% 13.1% 13.5% 13.4%
Homes (units)
Sales contracted, net
Colorado.................................. 410 539 1,078 1,079
Mid-Atlantic.............................. 225 317 652 647
California................................ 200 218 449 378
Arizona................................... 280 197 606 375
Nevada.................................... 70 10 121 35
----------- ----------- ----------- ----------
Total................................ 1,185 1,281 2,906 2,514
=========== =========== =========== ==========
Closed and delivered
Colorado.................................. 498 480 935 960
Mid-Atlantic.............................. 238 255 395 446
California................................ 208 170 403 296
Arizona................................... 287 201 503 385
Nevada.................................... 65 15 111 42
----------- ----------- ----------- ----------
Total................................ 1,296 1,121 2,347 2,129
=========== =========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
----------- ----------- -----------
<S> <C> <C> <C>
Backlog (units)
Colorado.................................. 801 658 729
Mid-Atlantic.............................. 532 275 538
California................................ 221 175 183
Arizona................................... 337 234 247
Nevada.................................... 79 13 22
----------- ----------- -----------
Total................................ 1,970 1,355 1,719
=========== =========== ===========
Backlog (estimated sales value)............... $ 349,000 $ 243,000 $ 321,000
=========== =========== ===========
Active Subdivisions (units)
Colorado.................................. 48 49 55
Mid-Atlantic.............................. 49 48 43
California................................ 20 23 18
Arizona................................... 24 22 21
Nevada.................................... 3 2 2
----------- ----------- -----------
Total................................ 144 144 139
=========== =========== ===========
</TABLE>
-20-
<PAGE>
Home Sales Revenues and Homes Closed and Delivered. Home sales revenues
in the second quarter and first half of 1996 exceeded all comparable periods in
the Company's history, increasing 11% and 7%, respectively, from home sales
revenues for the same periods in 1995. The increases 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
1996 from 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 9 at December 31, 1994 to 16 at June 30, 1996; (ii)
California, due to the Company's acquisition and opening of several new
subdivisions in Southern California, including five active subdivisions in
Paloma del Sol, a master planned community in Temecula, Riverside County,
acquired from Mesa Homes in July 1995; (iii) Nevada, due to the closing of homes
in subdivisions acquired from Longford Homes in February 1996; and (iv) for the
second quarter, Colorado, due to a strong Backlog at March 31, 1996.
The Company's Mid-Atlantic operations closed fewer homes in the second
quarter and first half of 1996 than were closed during the same periods in
1995 primarily as a result of adverse weather conditions throughout most of the
first half of 1996 which delayed construction and development activities and the
delivery of certain homes. These delays, combined with a high level of homes
sold but not started at June 30, 1996 in the Mid-Atlantic region, Colorado and
Arizona, as well as the accelerated June 1996 closing of a number of homes which
had been scheduled for closing in July 1996 may reduce total Company home
closings in the third quarter of 1996 to levels comparable to the third quarter
of 1995. See "Forward-Looking Statements" below.
Average Selling Price Per Housing Unit. The decrease in the average
selling price per housing unit in the second quarter and first half 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 half of 1996,
compared with prices in 1995, in (i) Colorado and Arizona; (ii) Southern
California and Las Vegas, as the Company closed affordably priced homes in
subdivisions acquired from Mesa Homes and Longford Homes, respectively; and
(iii) the Mid-Atlantic region as the Company has opened a number of new
affordable townhome projects in this market. The Company believes that its
average selling price on homes closed during the remainder of 1996 will
be lower than in comparable periods in 1995 and could decline an additional
two to three percent from the second quarter 1996 level. See "Forward-Looking
Statements" below.
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 second quarter
and first half 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 the first quarter of 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 margins
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 (i) Southern California and
Phoenix, as the Company experienced the affects of increased incentives offered
to home buyers and higher land prices resulting from increased competition in
these markets, and because certain highly profitable subdivisions in each of
these markets were substantially completed in 1995; and (ii) the Mid-Atlantic,
where the Company continues to offer incentives in response to weakened market
-21-
<PAGE>
conditions and strong competition and to reduce the Company's inventory of older
unsold homes under construction.
The Company believes that growth in Home Gross Margins over the next
two quarters will be limited because of the continued impact of 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
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. Home sales for the first half of 1996 increased
16% from the same period in 1995 as a result of increased home sales in Phoenix,
Southern California and Las Vegas due to the Company's continued expansion in
these markets as previously discussed. Home sales for the second quarter of 1996
decreased by 7% from the same period in 1995, as the Company began to experience
a general decline in demand for new homes primarily resulting from the increase
in mortgage interest rates since February 1996.
The Company's home sales in July 1996 totalled 357 units, compared with
unseasonably strong sales of 473 homes in July 1995 (which reflected the
positive effect on the demand for new homes of the lowest mortgage interest
rates in more than 15 months during July 1995). The Company is unable to predict
if the lower comparable monthly sales, which began in May 1996, will continue in
the future.
Primarily as a result of higher first half 1996 home sales, the
Company's Backlog at June 30, 1996 increased to 1,970 units, a 45% increase from
the 1,355 units at December 31, 1995 and a 15% increase from the 1,719 units at
June 30, 1995. The Company expects approximately 70% of its June 30, 1996
Backlog to close under existing sales contracts during the third and fourth
quarters of 1996, assuming no significant change in mortgage interest rates. See
"Forward-Looking Statements" below.
Marketing. Marketing expenses (which include, among other things,
amortization of deferred marketing costs, model home expenses and sales
commissions) totalled $14,265,000 and $26,247,000, respectively, for the second
quarter and first half of 1996, compared with $12,510,000 and $23,627,000,
respectively, for the same periods in 1995. The 14% and 11% increases during the
second quarter and first half of 1996 compared with 1995 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 $7,026,000 and $14,538,000, respectively, during the second quarter and
first half of 1996, compared with $6,545,000 and $12,940,000, respectively, for
the same periods in 1995. General and administrative expenses increased
primarily due to additional costs incurred in support of the Company's expanded
operations in Southern California and Las Vegas.
Land Sales.
Revenues from land sales totalled $1,087,000 and $6,246,000,
respectively, for the second quarter and first half of 1996, compared with
$511,000 and $2,824,000 for the same periods in 1995. Gross profits from these
land sales were $64,000 and $291,000, respectively, for the second quarter and
first half of 1996, compared with $93,000 and $413,000 for the same periods in
1995.
-22-
<PAGE>
First half 1996 land sales include a sale of approximately 54 acres of
land held for future development or sale in the Company's Rock Creek Ranch
development in Colorado for approximately $4,800,000, which generated gross
profit of $234,000.
Land Inventory.
The table below shows (in thousands) the carrying value of MDC's land
and land under development in each of its homebuilding markets:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
----------- ----------- -----------
<S> <C> <C> <C>
Finished or currently under development
Colorado............................... $ 29,287 $ 34,331 $ 43,300
Mid-Atlantic........................... 49,377 47,247 39,440
California............................. 33,411 26,694 36,139
Arizona................................ 26,956 20,586 23,743
Nevada................................. 10,564 4,559 6,246
----------- ----------- -----------
Total.............................. 149,595 133,417 148,868
Held for future development or sale*........ 35,014 43,543 48,555
----------- ----------- -----------
Total.............................. $ 184,609 $ 176,960 $ 197,423
=========== =========== ===========
*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.
</TABLE>
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 generally limit the Company's loss to the
option deposit, thereby limiting the Company's risk while preserving its
liquidity. At June 30, 1996, approximately 8,400 lots were controlled under
option agreements with $7,400,000 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.
Inventory Valuation Charges.
Operating results during the second quarter and first half of 1996 were
impacted adversely by inventory valuation charges totalling $2,870,000,
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. These valuation charges resulted from (i) the write
down to fair market value of a single-family detached home subdivision in
Maryland which began to experience extremely slow sales and negative Home Gross
Margins during the second quarter of 1996; (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; and (iii) the write-off of capitalized costs, primarily deferred
marketing and option deposits, related to certain low-margin projects which the
-23-
<PAGE>
Company is considering closing out. While intending to maintain its market share
in the Mid-Atlantic region, the Company is strategically eliminating
lower-margin projects in that market and redeploying capital to more profitable
operations, including Southern California where the Company recently acquired
five new projects. See "Forward-Looking Statements" below.
The Company recognized a $900,000 inventory valuation charge in the
second quarter of 1995, primarily in relation to several projects in Northern
California which experienced slowed sales and reduced selling prices due to the
continued decline in home sales activity in the Sacramento market.
Financial Services Segment.
Mortgage Lending Operations.
The table below summarizes the results of HomeAmerican (in
thousands).
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gains from sales of mortgage servicing:
Bulk........................................... $ 1,389 $ 1,516 $ 3,791 $ 3,734
Other.......................................... 142 456 362 908
Net interest income............................... 793 902 1,598 1,595
Origination fees.................................. 1,570 1,256 2,959 2,330
Gains (losses) on sales of mortgage loans......... 1,151 (104) 1,693 (440)
Mortgage servicing and other...................... 522 449 908 1,015
General and administrative expenses............... (2,423) (2,067) (4,545) (3,851)
----------- ----------- ----------- -----------
Operating profit......................... $ 3,144 $ 2,408 $ 6,766 $ 5,291
=========== =========== =========== ===========
Principal amount of originations and purchases:
MDC home buyers.............................. $ 124,082 $ 102,736 $ 223,483 $ 180,479
Spot......................................... 12,443 7,814 25,776 13,831
Correspondent................................ 15,545 19,748 26,512 28,878
----------- ----------- ----------- -----------
Total.................................... $ 152,070 $130,298 $ 275,771 $ 223,188
=========== ======== =========== ===========
Capture Rate...................................... 66% 61% 66% 58%
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
----------- ------------ ----------
<S> <C> <C> <C>
Composition of Servicing Portfolio at End of
Period:
FHA insured/VA guaranteed..................... $ 129,066 $ 85,002 $ 113,275
Conventional.................................. 338,656* 401,809 378,968
----------- ------------ -----------
Total Servicing Portfolio......................... $ 467,722 $ 486,811 $ 492,243
=========== ============ ===========
Salable Portion of Servicing Portfolio............ $ 260,925** $ 429,328 $ 431,394
=========== ============ ===========
*Includes servicing of $154,000,000 which was sold in May 1996 but was
being serviced by HomeAmerican under a subservicing arrangement until
the ultimate transfer to the purchaser in July 1996.
**Includes servicing originated prior to 1996 of approximately
$65,000,000.
</TABLE>
-24-
<PAGE>
HomeAmerican's operating profits for the second quarter and first half
of 1996 exceeded the operating profits for the same periods in 1995 primarily
because of gains on sales of mortgage loans totalling $1,151,000 and $1,693,000,
respectively, in the second quarter and first half of 1996, compared with losses
totalling $104,000 and $440,000, respectively, for the same periods in 1995.
These gains are in large measure attributable to the Company's adoption in 1996
of SFAS 122 (as hereinafter defined).
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
second quarter and first half of 1996 of approximately $1,784,000 and
$2,617,000, respectively, on the sale of mortgage loans which were originated
and sold by HomeAmerican during such period. Gains from the sale of mortgage
servicing rights in the second quarter and first half of 1996 were reduced by
$762,000 and $974,000, 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.
HomeAmerican's loan originations and purchases increased by 17% and
24%, respectively, in the second quarter and first half 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 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 or
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.
-25-
<PAGE>
Asset Management Segment.
The following table summarizes the results of the asset management
operations (in thousands).
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Management fees from REITs......................... $ 802 $ 500 $ 1,598 $ 1,632
Gains on sales of mortgage-related assets.......... 72 270 1,007 270
Other revenues, net................................ 433 1,036 696 1,387
General and administrative expenses................ (849) (551) (1,469) (1,161)
----------- ----------- ----------- -----------
Operating profit........................ $ 458 $ 1,255 $ 1,832 $ 2,128
=========== =========== =========== ===========
</TABLE>
The Company does not anticipate making additional mortgage-related
investments. As a result, future income from the asset management segment will
be substantially dependent on management fees earned from two publicly traded
REITs. At June 30, 1996, the REITs had approximately $158,000,000 in assets
under management by the Company. See "Forward-Looking Statements" below.
Other Operating Results.
Interest Expense. Corporate and homebuilding interest incurred
decreased by 10% and 12% to $7,605,000 and $15,379,000, respectively, for the
second quarter and first half of 1996, compared with $8,483,000 and $17,472,000,
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 half of 1996.
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 $6,578,000 and $12,501,000, respectively, in the second
quarter and first half of 1996, compared with $6,593,000 and $12,743,000,
respectively, for the same periods in 1995.
Corporate and homebuilding interest incurred but not capitalized is
reflected as interest expense and totalled $1,027,000 and $2,878,000,
respectively, for the second quarter and first half of 1996, compared with
$1,890,000 and $4,729,000, 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 $2,980,000 and $5,581,000, respectively, during
the second quarter and first half of 1996, compared with $3,482,000 and
$6,609,000, respectively, for the same periods of 1995. The decreases in 1996
primarily resulted from (i) reduced commitment fees, appraisal costs and other
related costs in the second quarter of 1996 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) 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.
-26-
<PAGE>
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 second quarter and
first half of 1996 was 36.5%, compared with 36.1% and 35.4%, 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.
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 1.47 to 1 at June 30,
1996 compared with 1.49 to 1 at December 31, 1995. The improvement resulted from
(i) the earnings of the Company, which
-27-
<PAGE>
contributed to the increase in the Company's Stockholders' Equity at June 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 finished lots and partially developed land for use in its
future homebuilding operations during the remainder of 1996. 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 improves 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 and Notes Payable.
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 June 30, 1996,
$57,500,000 was borrowed under this unsecured bank 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.
During the first half of 1996 and 1995, HomeAmerican sold $277,788,000 and
$216,927,000, respectively, principal amount of mortgage loans and mortgage
certificates.
The aggregate amount available under the Mortgage Line at June 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 June 30, 1996,
$13,019,000 was borrowed and an additional $30,416,000 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.
-28-
<PAGE>
Consolidated Cash Flow.
During the first half of 1996, the Company generated $8,214,000 in cash
from its operating activities. The Company used this cash and other internally
generated funds to (i) pay down lines of credit and notes payable by $4,552,000;
and (ii) repurchase 703,000 shares of MDC Common Stock for $5,016,000.
During the first half of 1995, MDC used $26,355,000 of cash and other
internally generated funds to pay down lines of credit and notes payable by
$21,198,000 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 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.
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 seek certification of a
class action, allege 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 seek, individually and on
behalf of the alleged class, recovery in unspecified amounts including actual
damages, statutory damages, exemplary damages and treble damages. The Company
has 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 is subject to final court approval and 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. If approved by
the court, a settlement class, including the purported classes in the Expansive
Soils Cases, will be certified and all pending claims will be dismissed.
Indemnity payments for funding the settlement are expected to be provided by
participating insurance carriers. While there can be no assurance that the
proposed settlement will in fact be implemented, 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. Because of the nature of the
homebuilding business, and in the ordinary course of the Company's operations,
the Company from time to time may be subject to product liability claims,
including claims similar to those
- --------
<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>
discussed under the description of the Expansive Soils Cases, above. 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.
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.
MDC held its Annual Meeting of Shareowners (the "Meeting") on May 3,
1996. At the Meeting, two nominees, Messrs. Gilbert Goldstein and William B.
Kemper were elected as Class II Directors to three-year terms expiring in 1999.
The selection of Price Waterhouse LLP as the Company's independent
accountants for 1996 was ratified at the Meeting. A proposal submitted by a
shareowner to eliminate staggered terms for directors was not approved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit:
10.1 Letter Agreement effective October 1, 1996
by and between Gilbert Goldstein, P.C. and
the Company.
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: August 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-
GILBERT GOLDSTEIN, P.C.
Attorney and Counselor at Law
3600 South Yosemite Street, Suite 870
Denver, Colorado 80237
Gilbert Goldstein FAX (303) 220-8272 (303) 220-8200
July 26, 1996
Mr. Larry A. Mizel, President
M.D.C. Holdings, Inc.
3600 South Yosemite
Suite 900
Denver, Colorado 80237
Dear Larry:
The purpose of this letter agreement (the "Agreement") is to confirm
an understanding reached between us concerning the retention by M.D.C.
Holdings, Inc. ("MDC") of Gilbert Goldstein, P.C. ("GG, P.C.") as a
professional consultant on legal matters as follows:
A. GG, P.C. agrees to make Gilbert Goldstein available
to perform legal consultation services for MDC on a
day-to-day as-needed and directed basis for not less
than 40 hours per week commencing October 1, 1996.
B. MDC agrees to compensate GG, P.C. as follows:
(1) $252,000 per year payable in equal monthly
installments of $21,000 on the first day of
each month commencing October 1, 1996.
(2) $150.00 per hour for services performed in any
month in excess of 160 hours.
(3) Provide mutually agreed-upon office space at the
office building known as 3600 South Yosemite
Street, Denver, Colorado, or such other location
as may be mutually agreed upon by GG, P.C. and MDC.
<PAGE>
Mr. Larry A. Mizel
July 26, 1996
Page 2
(4) Reimburse actual expenses incurred that are
directly related to the services provided
hereunder.
(5) Provide full-time secretarial services of a
mutually agreed-upon secretary.
C. In the event Gilbert Goldstein retires from the practice
of law, becomes disabled or dies during the term
of this Agreement, MDC shall pay Mr. Goldstein or his
estate, as the case may be, in lieu of any payments
or other benefits or services to be provided by MDC
pursuant to this Agreement, $7,000 per month on the
first day of each month during the remaining term of
this Agreement following the date of his retirement,
disability or death.
D. This Agreement shall be in full force and effect
for a period of three years commencing October 1, 1996.
E. GG, P.C. is an independent contractor and will not
be an employee of MDC for any purpose. In that regard,
the method or performance of services, the services
rendered, and the exact time and hours, GG, P.C. is to
perform services on any given day will be entirely in the
control and discretion of GG, P.C. MDC will rely on
GG, P.C. to perform the services as reasonably
necessary to fulfill the spirit and purpose of this
Agreement. MDC is supplying office space and secretarial
services to GG, P.C. because it is economically more
efficient for it to do so because it has these available
and because it desires GG, P.C. to be located in
close proximity to MDC's headquarters for ease in the
consultation process. In consideration thereof,
GG, P.C. has substantially lowered the going rate for
its services ($300.00 per hour) in order to facilitate
the Agreement.
F. GG, P.C. will have the right to continue to perform
legal services for other persons and entities so long
as such services are not in conflict with the
consultations with MDC.
We have discussed the fact that Gilbert Goldstein is an "outside member
of the Board of Directors" of MDC. Each party desires that Gilbert Goldstein
continue in that capacity. The consulting Agreement will be performed in such
fashion as not to interfere with or change that relationship. In the capacity of
a consultant to MDC, GG, P.C. may provide legal counsel and advice to the Audit
and Compensation Committees of the MDC Board of Directors. Those services will
be provided by Gilbert Goldstein in his capacity as a consultant to MDC, and not
in his capacity as a member of the MDC Board of Directors, and shall be included
in the calculation of hours spent providing consulting services pursuant to this
Agreement.
Effective October 1, 1996, this Agreement will supersede all prior
Agreements among GG, P.C., MDC and Gilbert Goldstein related to the subject
matter hereof, including
<PAGE>
Mr. Larry A. Mizel
July 26, 1996
Page 3
without limitation, the letter agreement between GG, P.C. and MDC dated
September 22, 1994.
This entire Agreement has been approved by resolution of the Board of
Directors of MDC.
If you have any questions, please call me.
Yours truly,
GILBERT GOLDSTEIN, P.C.
By: /s/Gilbert Goldstein
----------------------
Gilbert Goldstein
Approved and agreed to this
26th day of July 1996.
M.D.C. HOLDINGS, INC.
By: /s/Larry A. Mizel
--------------------------
Larry A. Mizel, President
<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 June 30, 1996 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 23,568
<SECURITIES> 5,028
<RECEIVABLES> 22,910
<ALLOWANCES> 0
<INVENTORY> 458,670
<CURRENT-ASSETS> 0
<PP&E> 9,514
<DEPRECIATION> 0
<TOTAL-ASSETS> 639,960
<CURRENT-LIABILITIES> 0
<BONDS> 306,738
0
0
<COMMON> 227
<OTHER-SE> 208,414
<TOTAL-LIABILITY-AND-EQUITY> 639,960
<SALES> 421,605
<TOTAL-REVENUES> 437,022
<CGS> (408,528)
<TOTAL-COSTS> (423,077)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,878)
<INCOME-PRETAX> 13,945
<INCOME-TAX> (5,089)
<INCOME-CONTINUING> 8,856
<DISCONTINUED> 0
<EXTRAORDINARY> (421)
<CHANGES> 0
<NET-INCOME> 8,435
<EPS-PRIMARY> .43
<EPS-DILUTED> .40
</TABLE>
