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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition period from _______ to _______
Commission file number 1-8951
__________________
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)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.01 par value New York Stock Exchange/
11 1/8% Senior Notes due December 2003 The Pacific Stock Exchange
8 3/4% Convertible Subordinated Notes due December 2005
6.64% Subordinated Fixed-Rate Notes due April 1998
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of February 11, 1997, 18,225,811 shares of M.D.C. Holdings, Inc. Common
Stock were outstanding, and the aggregate market value of the shares (based upon
the closing price on that date of the shares on the New York Stock Exchange,
Inc. as reported on the Composite Tape) held by non-affiliates was approximately
$78,550,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K is incorporated by reference from the Registrant's
1997 definitive proxy statement to be filed with the Securities and
Exchange Commission no later than 120 days after the end of
the Registrant's fiscal year.
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M.D.C. HOLDINGS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
_______________
TABLE OF CONTENTS
PAGE
NO.
----
PART I
ITEMS 1.
AND 2. BUSINESS AND PROPERTIES
(a) General Development of Business....................... 1
(b) Financial Information About Industry Segments......... 1
(c) Narrative Description of Business..................... 1
ITEM 3. LEGAL PROCEEDINGS........................................... 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 7
PART II
ITEM 5. MARKET PRICE OF COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS................................................... 7
ITEM 6. SELECTED FINANCIAL AND OTHER DATA........................... 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 10
ITEM 8. FINANCIAL STATEMENTS........................................ F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 21
ITEM 11. EXECUTIVE COMPENSATION....................................... 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................. 21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K................................................... 21
(i)
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M.D.C. HOLDINGS, INC.
FORM 10-K
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES.
(a) GENERAL DEVELOPMENT OF BUSINESS
M.D.C. Holdings, Inc. (the "Company" or "MDC", which, unless otherwise
indicated, collectively refers to M.D.C. Holdings, Inc., a Delaware corporation
originally incorporated in Colorado in 1972, and its subsidiaries) is engaged in
the construction and sale of residential housing (the "homebuilding segment") 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 (the mortgage lending operations);
and (ii) through September 30, 1996, Financial Asset Management LLC (an indirect
subsidiary of M.D.C. Holdings, Inc.; "FAMC") managed, by contract, the
operations of two publicly traded real estate investment trusts (each, a "REIT")
(the asset management operations).
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See Notes A and B to the Consolidated Financial Statements for information
regarding the Company's business segments for each of the three years ended
December 31, 1996, 1995 and 1994.
(c) NARRATIVE DESCRIPTION OF BUSINESS
HOMEBUILDING SEGMENT.
GENERAL. The Company (i) principally acquires finished lots and, to a
lesser extent, acquires land and develops it for use in its homebuilding
activities; and (ii) designs, constructs and sells single-family residential
homes. These operations are financed primarily with publicly traded debt, bank
lines of credit and internally generated funds.
The Company is one of the ten largest homebuilders in the United States,
building homes under the name "Richmond American Homes." MDC is a major
regional homebuilder, with a significant presence in a number of selected growth
markets. The Company is the largest homebuilder in Denver; among the top five
builders in Riverside County, California, Northern Virginia, suburban Maryland,
Tucson and Colorado Springs, Colorado; among the top ten builders in Phoenix;
and has a growing presence in Orange, Los Angeles and San Diego Counties,
California and Las Vegas. The Company also builds homes in Sacramento and the
San Francisco East Bay area. MDC believes a significant presence in its markets
enables it to compete effectively for home sales, land acquisition opportunities
and subcontractor labor.
The Company's strategy is to build quality homes at affordable prices,
generally for the first-time and move-up buyer. The Company has placed more
emphasis on the first-time buyer in most of its markets, with approximately 38%
of its homes closed in 1996 in subdivisions targeted to the first-time buyer,
compared with approximately 30% in 1995. Homes are constructed according to
basic designs based on local customer preferences. The Company, as the general
contractor, supervises the development and construction of all of its projects
and employs subcontractors for site development and home construction. The
Company primarily builds single-family detached homes, and, in its Mid-Atlantic
market, builds a significant number of townhomes.
Homes are built and sold by wholly owned subsidiaries of the Company.
The base prices for these homes generally range from approximately $80,000 to
$400,000, although the Company builds homes with prices as high as $700,000.
Sales prices averaged $177,000 for the year ended December 31, 1996.
1
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Both the national and regional housing markets are cyclical and are
sensitive to economic conditions, particularly the strength or weakness of local
economies, changes in interest rates, the number of qualified home purchasers in
the market and the ability of these purchasers to resell their existing homes.
Other factors affecting the demand for housing include changes in costs
associated with home ownership, such as property taxes and energy costs,
demographic trends, the availability of federally sponsored and other mortgage
loan financing programs and slow growth initiatives in certain markets.
In an effort to reduce the effects of volatility of economic conditions in
any single market, the Company's strategy is to diversify geographically into
markets with prospects for significant long-term economic, population and
employment growth. Additionally, the Company monitors each of its markets and
allocates capital based on its assessment of the current and anticipated
strength of these markets. The Company has continued to emphasize its Colorado
market. In addition, while intending to maintain its market share in the Mid-
Atlantic region, the Company has been redeploying capital from the Mid-Atlantic
to its growing operations in California, Arizona and Nevada. The following
table shows the Company's geographic diversification over the last three years,
as represented by home sales revenues in each of its markets (dollars in
thousands).
TOTAL HOME SALES REVENUES PERCENT OF TOTAL
-------------------------------- ----------------------
1996 1995 1994 1996 1995 1994
-------- -------- -------- ---- ---- ----
Colorado........ $327,256 $325,834 $333,908 37% 39% 43%
Mid-Atlantic.... 187,254 208,552 226,547 21% 25% 29%
California...... 182,131 146,947 119,559 21% 18% 15%
Arizona......... 154,875 133,625 84,588 18% 16% 11%
Nevada.......... 28,842 12,490 19,851 3% 2% 2%
-------- -------- -------- --- --- ---
Total........... $880,358 $827,448 $784,453 100% 100% 100%
-------- -------- -------- --- --- ---
-------- -------- -------- --- --- ---
HOUSING. MDC builds homes in a number of basic series, each designed to
appeal to a different segment of the home buyer market. Within each series, MDC
builds several models, each with a different floor plan, elevation and standard
and optional features. Differences in sales prices of similar models in any
series depend primarily upon location and design specifications. The series of
homes offered at a location is based on customer preference and the area's
demographics.
The Company maintains varying levels of inventories of unsold homes in each
of the markets in which it operates. Unsold homes in various stages of
completion aid the Company in meeting the immediate and near-term demands of its
home buyers.
LAND ACQUISITION AND DEVELOPMENT. MDC purchases finished lots using option
contracts, finished lots in phases or in bulk for cash and, when estimated
potential returns justify the risk, land for development into finished lots. In
making land purchases, MDC considers a number of factors, including population
and employment growth patterns, proximity to developed areas, estimated costs of
development and demographic trends. Generally, MDC acquires finished lots and
land for development only in areas which will have, among other things,
available building permits, utilities and suitable zoning. MDC attempts to
maintain a supply of finished lots sufficient to enable it to start homes as
soon as practical once a contract for sale is executed. This tends to minimize
the Company's risk with respect to cost increases in labor and building
materials.
MDC has the right to acquire a portion of the land it will require 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. In the event
the Company elects not to purchase the finished lots within a specified
period of time (generally, 5 to 25 lots per subdivision per calendar
quarter), the agreements limit the Company's loss to the option deposit,
thereby limiting the Company's risk while preserving its liquidity. At
December 31, 1996, MDC had the right to acquire approximately 6,700 lots
under option agreements with approximately $5,950,000 in total option
deposits. Because of increased demand for finished lots in certain of its
markets, the Company's ability to acquire lots using rolling options has been
reduced or become significantly more expensive.
2
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MDC owns various undeveloped parcels of real estate, most of which it
intends to develop into finished lots. MDC generally develops its land in
phases (less than 100 lots at a time for each home series in a subdivision)
to limit the Company's risk with regard to a particular project and to
maximize the efficient use of available liquidity. Building permits and
utilities are available and zoning is suitable for its current intended use
for substantially all of MDC's undeveloped land. When developed, these lots
generally will be used in the Company's homebuilding activities, although a
limited number of lots may be sold to others. Certain undeveloped lots also
may be sold to others in their present state.
The table below shows the carrying value of land and land under
development, by market (in thousands).
DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
Colorado.................. $ 66,529 $ 75,448 $ 90,619
Mid-Atlantic.............. 46,124 47,247 29,076
California................ 23,733 27,912 32,106
Arizona................... 32,129 21,794 25,271
Nevada.................... 14,412 4,559 6,766
-------- -------- --------
Total.................. $182,927 $176,960 $183,838
-------- -------- --------
-------- -------- --------
The table below shows the number of lots owned and under option, by market.
DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
Lots Owned
Colorado................ 5,849 8,628 11,299
Mid-Atlantic............ 1,919 1,105 675
California.............. 488 446 886
Arizona................. 1,651 1,242 1,400
Nevada.................. 616 135 248
-------- -------- --------
Total................ 10,523 11,556 14,508
-------- -------- --------
-------- -------- --------
Lots Under Option
Colorado................ 2,486 2,795 4,250
Mid-Atlantic............ 2,975 4,019 3,092
California.............. 538 675 110
Arizona................. 654 519 744
Nevada.................. 45 -- --
-------- -------- --------
Total................ 6,698 8,008 8,196
-------- -------- --------
-------- -------- --------
RAW MATERIALS. Generally, the building materials used in MDC's
homebuilding operations are standard items carried by major suppliers.
Increases in the costs of building materials, particularly lumber, and of
finished lots and subcontracted labor, may affect future Home Gross Margins
(as hereinafter defined) to the extent that market conditions prevent the
recovery of increased costs through higher sales prices. The Company
generally takes orders only for homes that already are under construction or
for which the Company can contract for materials and labor at a fixed price
during the anticipated construction period. This allows the Company to
minimize the risks associated with increases in building material and labor
costs between the time construction begins on a home and the time it is
closed. Although the Company did not experience any significant shortages in
the availability of building materials or labor in 1996, the Company may
experience shortages and delays in the future which may result in delays in
the delivery of homes under construction, reduced Home Gross Margins or both.
See "FORWARD-LOOKING STATEMENTS" below.
SEASONAL NATURE OF BUSINESS. MDC's business is seasonal to the extent
that its Colorado and Mid-Atlantic operations encounter weather-related
slowdowns during the winter months, and its Mid-Atlantic and California
operations encounter heavy seasonal rains. Delays in development and
construction activities resulting from these adverse weather conditions
increase the Company's risk of higher costs for interest, materials and labor.
3
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BACKLOG. As of December 31, 1996, homes under contract but not yet
delivered ("Backlog") totalled 1,486 with an estimated sales value of
$261,000,000. Based on its past experience, assuming no significant change in
market conditions and mortgage interest rates, MDC anticipates that
approximately 70% of its December 31, 1996 Backlog will close under existing
sales contracts during the first six months of 1997. The remaining 30% of the
homes in Backlog are not expected to close due to cancellations. See "FORWARD-
LOOKING STATEMENTS" below.
MARKETING AND SALES. MDC's homes are sold under various commission
arrangements by its own sales personnel and through the realtor community by
cooperative broker sales and referrals. In marketing homes, MDC primarily uses
on-site model homes, advertisements in local newspapers, radio, billboards and
other signage, magazines and illustrated brochures. All of MDC's homes are sold
with a ten-year limited warranty.
COMPETITION. The real estate industry is fragmented and highly
competitive. MDC competes with numerous homebuilders, including a number that
are substantially larger and have greater financial resources. The Company also
competes with subdivision developers and land development companies.
Homebuilders compete for customers, desirable financing, land, building
materials and subcontractor labor. Competition for home orders primarily is
based upon price, style, financing provided to prospective purchasers, location
of property, quality of homes built, warranty service and general reputation in
the community.
MORTGAGE INTEREST RATES. The 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. The
Company is unable to predict the extent to which recent or future changes in
home mortgage interest rates will affect operating activities and results of
operations. See "FORWARD-LOOKING STATEMENTS" below.
REGULATION. The Company is subject to continuing compliance requirements
mandated by applicable federal, state and local statutes, ordinances, rules and
regulations, including zoning and land use ordinances, building, plumbing and
electrical codes, contractors' licensing laws and health and safety regulations
and laws (including, but not limited to, those of the Occupational Safety and
Health Administration). Various localities in which the Company operates have
imposed (or may impose in the future) fees on developers to fund schools, road
improvements and low and moderate income housing.
From time to time, various municipalities in which the Company operates
restrict or place moratoriums on the availability of utilities, including water
and sewer taps. Additionally, certain jurisdictions in which the Company
operates have proposed or enacted growth initiatives which may restrict the
number of building permits available in any given year. Although no assurances
can be given as to future conditions or governmental actions, MDC believes that
it has, or can obtain, an adequate number of water and sewer taps and building
permits for its land inventory and land held for development. See "FORWARD-
LOOKING STATEMENTS" below.
The homebuilding operations also are affected by environmental
considerations pertaining to availability of water, municipal sewage treatment
capacity, land use, hazardous waste disposal, naturally occurring radioactive
materials, building materials, population density and preservation of the
natural terrain and vegetation (collectively, "Environmental Laws"). The
particular Environmental Laws which apply to any given homebuilding project vary
greatly according to the site's location, the site's environmental conditions
and the present and former uses of the site. These Environmental Laws may (i)
result in project delays; (ii) cause the Company to incur substantial compliance
and other costs; and/or (iii) prohibit or severely restrict homebuilding
activity in certain environmentally sensitive regions or areas. See "FORWARD-
LOOKING STATEMENTS" below.
FINANCIAL SERVICES SEGMENT.
Mortgage Lending Operations.
GENERAL. HomeAmerican is a full-service mortgage lender originating
mortgage loans primarily for MDC's home buyers and, to a lesser extent, for
others on a "spot" basis through offices located in each of MDC's markets. As
the principal originator of mortgage loans for MDC's home buyers, HomeAmerican
is an integral part of the homebuilding operations. MDC sells its homes to
customers who finance their purchases through Federal Housing Administration-
insured ("FHA") mortgage loans, Veterans Administration-guaranteed ("VA")
mortgage loans and conventional mortgage loans.
4
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HomeAmerican is a FHA, VA, Federal National Mortgage Association ("FNMA")
and Federal Home Loan Mortgage Corporation ("FHLMC") authorized mortgage loan
originator. HomeAmerican is also an authorized loan servicer for FNMA, FHLMC
and the Government National Mortgage Association ("GNMA") and, as such, is
subject to the rules and regulations of such organizations. HomeAmerican also
purchases loans and the related servicing rights from unaffiliated loan
correspondents; the origination fees for these loans are retained by the
correspondents.
Substantially all of the mortgage loans originated or purchased by
HomeAmerican are sold to private investors within 45 days of origination or
purchase. HomeAmerican uses its secured warehouse line of credit, other
collateralized borrowings and internally generated funds to finance these
mortgage loans until they are sold.
Mortgage loan origination volume is dependent on factors such as
competition, the economy and interest rates. Generally, lower interest rates
allow additional first-time home buyers to enter the market and existing home
owners to "move up" to larger new homes.
PORTFOLIO OF MORTGAGE LOAN SERVICING. HomeAmerican has sold, and intends
to sell in the future, mortgage loan servicing. Servicing involves the
collection of principal, interest, taxes and insurance premiums from the
borrower and the remittance of such funds to the mortgage loan investor, local
taxing authorities and insurance companies, for which the servicer is paid a
fee. HomeAmerican obtains the servicing rights related to the mortgage loans it
and its correspondents originate. Certain mortgage loan servicing rights are
sold "servicing released" (included with the sale of the corresponding mortgage
loans). The servicing rights on mortgage loans not sold servicing released
generally are sold in bulk at a later date.
As a mortgage loan servicer, HomeAmerican generally is required to advance
to the owner of the mortgage, mortgage payments on loans that are delinquent or
in foreclosure. To the extent that these and other advances by HomeAmerican are
not collected or reimbursed by the mortgage loan insurer or guarantor,
HomeAmerican incurs losses, which in the past have not been material.
HomeAmerican's portfolio of mortgage loan servicing at December 31, 1996
consisted of servicing rights with respect to approximately 3,150 single-family
loans, approximately 85% of which were less than two years old. These loans are
secured by mortgages on properties in eight states, with interest rates on the
loans ranging from approximately 5.3% to 11.5% and averaging 7.8%. The
underlying value of a servicing portfolio generally is determined based on (i)
the annual servicing fee rates applicable to the loans comprising the portfolio,
which currently are .44% for FHA/VA loans and .25% for conventional loans; and
(ii) the interest rates on the loans in the servicing portfolio.
PIPELINE. HomeAmerican's mortgage loans in process which had not closed
("Pipeline") at December 31, 1996 had aggregate principal balances of
$147,273,000. Approximately 70% of the Pipeline at December 31, 1996 is
anticipated to close during the first three months of 1997. If mortgage
interest rates fall, a smaller percentage of these loans would be expected to
close. See "FORWARD-LOOKING STATEMENTS" below.
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 in the Pipeline.
Such contracts are the only significant financial derivative instrument utilized
by MDC.
COMPETITION. The mortgage industry is fragmented and highly competitive.
In each of the areas in which it originates loans, HomeAmerican competes with
numerous banks, thrifts and other mortgage bankers, many of which are larger and
have greater financial resources. Competition primarily is based on pricing,
loan terms, underwriting criteria and customer service.
5
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ASSET MANAGEMENT OPERATIONS.
Through September 30, 1996, FAMC managed Asset Investors Corporation and
Commercial Assets, Inc., two publicly traded REITs. MDC also owns other
mortgage-related interests. On September 30, 1996, the Company sold its
interest in FAMC. Due to the sale of FAMC and the fact that the Company does
not intend to make additional mortgage-related investments, future operating
profits and cash flows from the asset management operations are expected to be
immaterial.
EMPLOYEES.
At December 31, 1996, MDC employed approximately 1,200 persons. MDC
considers its employee relations to be satisfactory.
ITEM 3. 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(1). 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(2) and by a homeowner in the Rock Creek development located in
Boulder County, Colorado(3). On September 12, 1995, the Company was served with
a similar complaint relating to homeowners in Douglas County, Colorado(4). The
complaints (the "Expansive Soils Cases"), each of which sought certification
of a class, alleged substantially identical claims relating to the construction
of homes on lots with expansive soils, including negligence, breach of express
and implied warranties, violation of the Colorado Consumer Protection Act and
non-disclosures. The homeowners in each complaint sought, individually and on
behalf of the alleged class, recovery in unspecified amounts, including actual
damages, statutory damages, exemplary damages and treble damages. The Company
filed a response to each of the complaints and to initial discovery requests in
the first filed case.
On June 11, 1996, the Company's Colorado homebuilding subsidiaries and
representative plaintiffs agreed to settle the Expansive Soils Cases. The
settlement was approved by the Douglas County District Court on October 11,
1996 and became final on November 26, 1996. The settlement provides for the
creation of a warranty program for eligible owners of homes constructed by
the Company's Colorado homebuilding subsidiaries since June 1986. Indemnity
payments in connection with the settlement have been received by the Company
from its participating insurance carriers, and management does not believe
the litigation or settlement will have a material adverse effect on the
financial condition, results of operations or cash flows of the Company.
OTHER.
The Company and certain of its subsidiaries and affiliates have been named
as defendants in various other claims, complaints and legal actions arising in
the normal course of business. In the opinion of management, the outcome of
these matters will not have a material adverse effect upon the financial
condition, results of operations or cash flows of the Company.
- - --------------------
(1) COLESCOTT, 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.
(2) MOORE VS. RICHMOND HOMES LIMITED, ET AL. in the District Court, Douglas
County, State of Colorado, Civil Action No. 95 CV 321, Division 2.
(3) CONSTANTINI VS. RICHMOND HOMES LIMITED, ET AL. in the District Court,
Boulder County, State of Colorado, Civil Action No. 95 CV 1052, Division 3.
(4) RODENBURG VS. RICHMOND HOMES LIMITED, ET AL. in the District Court, Douglas
County, State of Colorado, Civil Action No. 95 CV 298, Division 1.
6
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Because of the nature of the homebuilding business, and in the ordinary
course of its operations, the Company from time to time may be subject to
product liability claims, including claims similar to those discussed under the
description of the Expansive Soils Cases above.
The Company is not aware of any litigation, matter or pending claim against
the Company which would result in material contingent liabilities related to
environmental hazards or asbestos.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No meetings of the Company's shareowners were held during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET PRICE OF COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.
The shares of MDC Common Stock are traded on the New York and the Pacific
Stock Exchanges. The following table sets forth, for the periods indicated, the
high and low sale prices of the shares of MDC Common Stock as reported on the
Composite Tape.
HIGH LOW
------ ------
1995
First quarter.......................... $ 5.88 $ 4.88
Second quarter......................... 6.50 5.00
Third quarter.......................... 8.13 6.13
Fourth quarter......................... 8.13 6.13
1996
First quarter.......................... $ 7.38 $ 6.38
Second quarter......................... 7.50 6.38
Third quarter.......................... 7.25 6.25
Fourth quarter......................... 9.13 6.75
The Company has declared dividends of three cents per share for each
quarter in the two-year period ended December 31, 1996.
In connection with the declaration and payment of dividends, the Company
is required to comply with certain covenants contained in the Senior Notes
(as hereinafter defined) indenture (the "Senior Notes Indenture") and the
$150,000,000 unsecured revolving line of credit agreement entered into in
April 1996. The Senior Notes Indenture allows the Company to pay dividends
on its Common Stock in an amount, on a cumulative basis, not to exceed 50% of
its Consolidated Net Income, as defined, after December 31, 1993, subject to
certain other adjustments such as the value of MDC Common Stock issued after
such date. Pursuant to the $150,000,000 line of credit agreement, dividends
may be declared or paid if the Company is in compliance with certain
stockholders' equity and debt coverage tests, as defined. At December 31,
1996, the Company had a permitted dividend capacity of approximately
$18,400,000 pursuant to the most restrictive of these covenants.
On February 11, 1997, MDC had approximately 1,600 shareowners of record.
7
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ITEM 6. SELECTED FINANCIAL AND OTHER DATA.
The data in this table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and the notes thereto presented
elsewhere herein (dollars in thousands, except per share amounts).
SELECTED FINANCIAL DATA
<TABLE>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................................... $922,595 $865,856 $817,245 $634,323 $480,177
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Operating profit
Homebuilding......................................... $ 27,967 $ 33,018 $ 44,464 $ 22,496 $ 17,561
Financial services
Mortgage lending................................... 12,584 9,288 6,951 7,508 9,230
Asset management................................... 6,073 4,050 2,796 8,996 8,700
-------- -------- -------- -------- --------
Total financial services......................... 18,657 13,338 9,747 16,504 17,930
-------- -------- -------- -------- --------
Net corporate expenses(1).............................. (13,870) (19,705) (23,229) (23,968) (28,971)
-------- -------- -------- -------- --------
Income before income taxes and extraordinary item...... $ 32,754 $ 26,651 $ 30,982 $ 15,032 $ 6,520
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Income before extraordinary item....................... $ 20,799 $ 17,250 $ 19,255 $ 10,056 $ 4,765
Primary per common share............................. 1.09 .86 .94 .45 .22
Fully diluted per common share....................... .98 .79 .87 .45 .22
Net income(2).......................................... 20,378 17,250 19,255 25,879 3,852
Primary per common share............................. 1.06 .86 .94 1.16 .18
Fully diluted per common share....................... .96 .79 .87 1.16 .18
Weighted-average shares outstanding
Primary.............................................. 19,150 20,124 20,406 22,340 21,850
Fully diluted........................................ 22,924 23,918 24,021 22,340 21,850
Dividends paid per share............................... $ .12 $ .11 $ .06 $ -- $ --
</TABLE>
<TABLE>
DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
ASSETS:
Housing completed or under construction.............. $251,885 $265,205 $280,319 $201,023 $132,752
Land and land under development...................... 182,927 176,960 183,838 192,881 206,583
Total assets......................................... 617,303 634,811 664,571 653,366 602,597
DEBT:
Homebuilding:
Lines of credit.................................... 11,832 43,490 62,332 24,645 28,688
Notes payable...................................... 3,063 10,571 33,585 59,641 57,732
Restructured Notes Payable(3)...................... -- -- -- 2,854 131,681
Senior Notes(3)...................................... 187,721 187,525 187,352 187,199 --
Subordinated notes(3)................................ 38,225 38,221 38,217 38,213 62,958
Total debt........................................... 253,346 305,334 348,280 345,676 325,835
STOCKHOLDERS' EQUITY................................... 213,847 205,033 192,295 175,854 164,182
RATIO OF DEBT TO STOCKHOLDERS' EQUITY.................. 1.18 1.49 1.81 1.97 1.98
</TABLE>
8
<PAGE>
<TABLE>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
HOMEBUILDING:
Home sales revenues.................................. $880,358 $827,448 $784,453 $587,887 $417,190
Orders for homes, net (units)........................ 5,049 4,536 4,177 3,875 2,703
Homes closed (units)................................. 4,974 4,570 4,200 3,344 2,414
Backlog
Units(4)........................................... 1,486 1,355 1,334 1,357 826
Estimated sales value(4)........................... $261,000 $243,000 $241,900 $250,530 $142,800
Average selling price per home....................... $ 177.0 $ 181.1 $ 186.8 $ 175.8 $ 172.8
Home Gross Margins................................... 13.7% 13.4% 15.4% 14.2% 14.9%
Asset impairment charges............................. $ 9,191 $ 3,677 $ 4,000 $ -- $ --
CORPORATE AND HOMEBUILDING SG&A
AS A % OF HOME SALES REVENUES......................... 11.0% 10.9% 11.3% 13.1% 15.1%
EBITDA COMPUTATION:
Income before extraordinary item..................... $ 20,799 $ 17,250 $ 19,255 $ 10,056 $ 4,765
Add:
Income taxes..................................... 11,955 9,401 11,727 4,976 1,755
Corporate and homebuilding interest expense...... 3,773 7,773 9,454 11,454 13,359
Interest in cost of sales........................ 25,995 28,397 26,548 19,810 21,386
Other fixed charges.............................. 1,165 2,492 2,872 3,161 1,702
Depreciation and amortization.................... 12,067 10,280 10,134 8,038 8,161
Non-cash charges
Homebuilding asset impairment charges.......... 9,191 3,677 4,000 -- --
Other.......................................... 533 -- 800 4,120 (17)
-------- -------- -------- -------- --------
Total EBITDA......................................... $ 85,478 $ 79,270 $ 84,790 $ 61,615 $ 51,111
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
FIXED CHARGES INCURRED................................. $ 31,461 $ 36,401 $ 38,671 $ 28,930 $ 26,769
EBITDA/FIXED CHARGES................................... 2.72 2.18 2.19 2.13 1.91
EBITDA/INTEREST INCURRED............................... 2.82 2.34 2.37 2.42 2.06
</TABLE>
___________________
(1) Net corporate expenses represent: (i) net gains and losses on investments
and marketable securities; (ii) interest, dividend and other income;
(iii) corporate general and administrative expense; and (iv) corporate and
homebuilding interest expense.
(2) Includes the effects of extraordinary after-tax gains and losses on the
early extinguishment of debt resulting principally from: (i) in 1993, the
retirement and repurchase of debt with a portion of the net proceeds of an
offering of $190,000,000 principal amount of 11 1/8% senior notes due 2003
(the "Senior Notes") and $28,000,000 principal amount of 8 3/4% convertible
subordinated notes due 2005 (the "Convertible Subordinated Notes")
(collectively, the "1993 Offering"), which increased net income by
$15,823,000; and (ii) in 1996 and 1992, certain other debt extinguishments.
Also includes in 1992 the cumulative effect, to January 1, 1992, of the
adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
(3) In December 1989, the Company exchanged certain of its senior subordinated
and subordinated notes for new secured notes issued by the Company (the
"Restructured Notes Payable"). The Restructured Notes Payable outstanding
on the date of the 1993 Offering were retired for $100,701,000 with a
portion of the net proceeds from the 1993 Offering. A portion of the net
proceeds from the 1993 Offering also was used to redeem $51,816,000
principal amount of the Company's 11 1/4% senior subordinated notes at par.
(4) At end of period.
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS.
1996 COMPARED WITH 1995. Revenues for the year ended December 31, 1996
were $922,595,000, a 7% increase from 1995. The increase primarily resulted
from a 9% increase in home closings, the revenue impact of which was offset
partially by a $4,100 decrease in the average selling price per home closed.
Income before income taxes and extraordinary item in 1996 increased 23%
from 1995, primarily due to (i) higher operating profit from the financial
services segment, primarily resulting from a $4,042,000 gain recognized on the
sale of FAMC and record profits from the mortgage lending operations; (ii) lower
corporate and homebuilding interest expense; and (iii) lower corporate general
and administrative expenses. These income improvements partially were offset by
a decrease in homebuilding operating profits caused by (i) increased asset
impairment charges, primarily in the Mid-Atlantic region due to intense
competition and weakened conditions in that market; (ii) lower average selling
prices on homes closed; and (iii) higher marketing and general and
administrative expenses incurred in support of expanding homebuilding operations
in California, Arizona and Nevada, which more than offset the positive effects
of increased home closings and Home Gross Margins (as hereinafter defined).
During 1996, the Company strengthened its balance sheet in several areas.
The Company reduced its aggregate indebtedness at December 31, 1996 to
$253,346,000, a reduction of 17% from year-end 1995. In addition, the Company's
equity at December 31, 1996 increased to $213,847,000, or $11.83 per share, an
increase of 12% from $10.54 at December 31, 1995. These improvements
contributed to a reduction in the debt-to-equity ratio at December 31, 1996 to
1.18, a 20% improvement over the 1.49 ratio as of December 31, 1995.
1995 COMPARED WITH 1994. MDC's revenues increased 6% for 1995, compared
with 1994, primarily as a result of a 9% increase in home closings, which more
than offset a $5,700 decrease in the average selling price per home closed.
Income before income taxes was lower for 1995, compared with 1994,
primarily as a result of lower homebuilding operating profits, partially offset
by higher mortgage lending and asset management operating profits, lower
corporate and homebuilding interest expense and lower corporate general and
administrative expenses. The reduction in homebuilding operating profits
primarily resulted from a 13% decline in Home Gross Margins caused by increased
incentives offered to home buyers in order to counter weakening demand due to
higher mortgage interest rates, particularly during the second half of 1994 and
the first quarter of 1995, and increased competition.
10
<PAGE>
HOMEBUILDING SEGMENT.
The table below sets forth information relating to the Company's
homebuilding segment (dollars in thousands).
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
Home Sales Revenues...................... $880,358 $827,448 $784,453
Operating Profits Before Asset
Impairment Charges...................... 37,158 36,695 48,464
Operating Profits........................ 27,967 33,018 44,464
Average Selling Price Per Home Closed.... 177.0 181.1 186.8
Home Gross Margins....................... 13.7% 13.4% 15.4%
Orders For Homes, net (UNITS)
Colorado............................... 1,811 1,939 1,837
Mid-Atlantic........................... 1,115 996 1,048
California............................. 822 770 567
Arizona................................ 1,041 779 614
Nevada................................. 260 52 111
-------- -------- --------
Total................................ 5,049 4,536 4,177
-------- -------- --------
-------- -------- --------
Homes Closed (UNITS)
Colorado............................... 1,893 1,891 1,887
Mid-Atlantic........................... 969 1,058 1,136
California............................. 837 751 564
Arizona................................ 1,044 802 504
Nevada................................. 231 68 109
-------- -------- --------
Total................................ 4,974 4,570 4,200
-------- -------- --------
-------- -------- --------
DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
Backlog (UNITS)
Colorado............................... 576 658 610
Mid-Atlantic........................... 421 275 337
California............................. 160 175 101
Arizona................................ 231 234 257
Nevada................................. 98 13 29
-------- -------- --------
Total................................ 1,486 1,355 1,334
-------- -------- --------
-------- -------- --------
Estimated Sales Value.................. $261,000 $243,000 $241,900
-------- -------- --------
-------- -------- --------
Active Subdivisions
Colorado............................... 51 49 53
Mid-Atlantic........................... 53 48 41
California............................. 20 23 21
Arizona................................ 23 22 16
Nevada................................. 5 2 4
-------- -------- --------
Total................................ 152 144 135
-------- -------- --------
-------- -------- --------
11
<PAGE>
HOMEBUILDING ACTIVITIES - 1996 COMPARED WITH 1995.
HOME SALES REVENUES AND HOMES CLOSED. Home sales revenues in 1996
increased 6% from home sales revenues in 1995. The increase primarily resulted
from increased home closings, partially offset by an overall decrease in the
average selling price per home closed, as discussed below.
Home closings increased in 1996, compared with 1995, in (i) Arizona, due to
a significant expansion of operations in Phoenix, where the Company has
increased the number of active subdivisions from nine at December 31, 1994 to 15
at December 31, 1996; (ii) California, due to the acquisition and opening of
several new subdivisions in Southern California, including subdivisions in
Riverside County acquired from Mesa Homes in July 1995; and (iii) Nevada, due to
the closing of homes in subdivisions acquired from Longford Homes in February
1996. The Mid-Atlantic operations closed fewer homes in 1996 than were closed
during the same periods in 1995, primarily as a result of severe weather
conditions during most of 1996 which delayed construction and development
activities and the delivery of certain homes.
AVERAGE SELLING PRICE PER HOME CLOSED. The decrease in the average selling
price per home closed in 1996, compared with 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 1996, compared with 1995, in
(i) Arizona; (ii) Las Vegas, where the Company closed affordably priced homes in
subdivisions acquired from Longford Homes; and (iii) the Mid-Atlantic region,
where the Company has opened a number of new, affordable townhome projects.
HOME GROSS MARGINS. Gross margins (home sales revenues less cost of goods
sold, which primarily include 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 1996, compared with 1995. These
increases largely were due to increased margins in (i) Colorado, where stronger
market conditions during the first half of 1996 resulted in lower levels of
required incentives for home buyers and increased selling prices; (ii) Las
Vegas, due to increased profits from homes sold in subdivisions acquired from
Longford Homes; and (iii) Northern California, due to a greater percentage of
home closings coming from more profitable subdivisions in that market. These
increases partially were offset by Home Gross Margin decreases in the Mid-
Atlantic, where (i) increased costs associated with severe weather conditions
were incurred during most of the year; and (ii) the Company continues to offer
incentives to reduce its inventory of older unsold homes under construction, and
in response to weakened market conditions and strong competition.
ORDERS FOR HOMES AND BACKLOG. Orders for homes increased by 11% to 5,049
units in 1996, compared with 4,536 units in 1995, primarily as a result of
increased orders for homes in (i) Phoenix, Southern California and Las Vegas,
due to the Company's continued expansion in these markets, as previously
discussed; and (ii) the Mid-Atlantic, due to an increase in the number of active
subdivisions. As a result of these increased orders for homes, Backlog at
December 31, 1996 increased 10% to 1,486 units, compared with 1,355 units at
December 31, 1995. Assuming no significant change in market conditions or
mortgage interest rates, the Company expects approximately 70% of its December
31, 1996 Backlog to close under existing sales contracts during the first six
months of 1997. The remaining 30% of the homes in Backlog are not expected to
close due to cancellations. 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 $56,078,000 during 1996, compared with $49,938,000 in
1995. The increase during 1996, compared with 1995, principally resulted from
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 1996.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $29,122,000 during 1996, compared with $26,694,000 for 1995, primarily due to
additional costs incurred in support of expanded operations in Southern
California and Las Vegas.
ASSET IMPAIRMENT CHARGES. Operating results during 1996 were impacted
adversely by asset impairment charges totalling $9,191,000, primarily related to
certain homebuilding assets in the Mid-Atlantic region as a result of continued
weakened conditions and competitive pressures in that market. The Mid-Atlantic
asset impairment
12
<PAGE>
charges primarily resulted from (i) the write-down to fair market value of a
single-family detached home subdivision in which the Company intends to sell
the majority of the remaining lots in bulk; (ii) the recognition of losses
anticipated from closing certain homes in Backlog and from offering increased
incentives to stimulate sales of completed unsold homes in inventory; (iii)
the write-off of capitalized costs, primarily deferred marketing and option
deposits, related to several low-margin projects; and (iv) the write-down to
fair market value, pursuant to the requirements of SFAS 121 (as hereinafter
defined), of several single-family detached home subdivisions which began to
experience extremely slow sales and negative Home Gross Margins during 1996.
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 its expanding operations in Southern California,
Phoenix and Las Vegas. See "FORWARD-LOOKING STATEMENTS" below.
Asset impairment charges for 1996 also included charges with respect to
certain homebuilding assets in Northern California as a result of increased
incentives and sales price reductions offered to potential home buyers in
connection with the Company's efforts to exit several underperforming
subdivisions in the Sacramento area.
HOMEBUILDING ACTIVITIES - 1995 COMPARED WITH 1994.
HOME SALES REVENUES, ORDERS FOR HOMES AND HOMES CLOSED. Home sales
revenues increased in 1995, compared with 1994, primarily as a result of
increases in home closings, partially offset by an overall decrease in the
average selling price per home closed, as discussed below. Orders for homes
and home closings increased in 1995 in (i) Arizona, primarily due to a
significant expansion of the Company's operations in Phoenix; (ii)
California, primarily due to the acquisition and opening of several new
subdivisions in Southern California; and (iii) Colorado, due to, among other
things, efforts to reduce the level of unsold homes under construction and a
continuing emphasis on offering more affordable homes.
In its Mid-Atlantic market, the Company experienced lower orders for
homes and closings per active subdivision in 1995, compared with 1994. The
impact of lower orders for homes per active subdivision was partially offset
by an increase in the number of the Company's active subdivisions in that
market at December 31, 1995, compared with December 31, 1994. The lower
orders for homes and closing levels per active subdivision were primarily the
result of the entire Mid-Atlantic market experiencing (i) an increase in
active subdivisions due to aggressive competition; (ii) reduced consumer
confidence due to reductions in the number of federal employees and
government shutdowns, and the potential for further reductions in the number
of federal employees as a result of deficit reduction plans; and (iii) a
decline in total market home orders.
AVERAGE SELLING PRICE PER HOME CLOSED. The decrease in the average
selling price per home closed in 1995, compared with 1994, is the result of
the Company's emphasis on offering lower-priced, more affordable homes
primarily marketed to first-time and first-time move-up home buyers. This
strategic change in market mix resulted in lower average sales prices
compared with prices in 1994 (i) in Colorado, Maryland and Tucson; and (ii)
beginning in the third quarter of 1995, in Southern California as the Company
began offering homes ranging in price from $105,000 to $170,000 in the
Riverside County subdivisions acquired in July 1995.
HOME GROSS MARGINS. Home Gross Margins decreased to 13.4% in 1995 from
15.4% in 1994. This decline was due to (i) increased incentives offered to
home buyers in order to counter weakening demand due to higher mortgage
interest rates, particularly during the second half of 1994 and the first
quarter of 1995; (ii) increased incentives used to reduce the Company's
inventory of unsold homes under construction; and (iii) increased competition
in MDC's homebuilding markets.
MARKETING. Marketing expenses totalled $49,938,000 for 1995, compared
with $44,588,000 for 1994. The increases reflect the impact of significant
additional marketing-related salary, sales commission and model home
operating expenses incurred to support the Company's expanded operations.
Additionally, the Company increased its marketing efforts to stimulate sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
totalled $26,694,000 in 1995, compared with $29,215,000 for 1994. General
and administrative expenses as a percentage of home sales revenues decreased
to 3.2% in 1995, compared with 3.7% in 1994, as the Company was able to
deliver more homes in 1995 with a reduced level of overhead.
13
<PAGE>
ASSET IMPAIRMENT CHARGES. Operating results during the year ended
December 31, 1995 were impacted adversely by $3,677,000 in asset impairment
charges. These charges primarily were related to certain under-performing
projects in California, Arizona and the Mid-Atlantic region. Asset
impairment charges totalled $4,000,000 in 1994, primarily related to certain
projects in Northern California which experienced significant slowing in
sales and reduced selling prices due to softness in consumer demand which led
to a general decline in home order activity.
LAND SALES.
Revenue from land sales totalled $9,471,000, $10,396,000 and $8,296,000,
respectively, in 1996, 1995 and 1994, respectively. The land sales primarily
were in Colorado and, to a lesser extent, in California. Gross profits from
these land sales were $698,000, $220,000 and $319,000, respectively, for the
years 1996, 1995 and 1994.
FINANCIAL SERVICES SEGMENT.
MORTGAGE LENDING OPERATIONS.
The table below summarizes the results of HomeAmerican's operations
(dollars in thousands).
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
Gains from sales of mortgage servicing
Bulk............................. $ 5,291 $ 6,374 $ 5,785
Other............................ $ 729 $ 1,962 $ 985
Gains (losses) on sales of
mortgage loans..................... $ 4,905 $ (1,293) $ (585)
Operating profit.................... $ 12,584 $ 9,288 $ 6,951
Principal amount of originations
and purchases:
MDC home buyers.................. $482,106 $413,525 $323,079
Spot............................. 39,730 36,200 69,037
Correspondent.................... 60,373 63,051 64,365
-------- -------- --------
Total......................... $582,209 $512,776 $456,481
-------- -------- --------
-------- -------- --------
Capture Rate........................ 66% 61% 52%
-------- -------- --------
-------- -------- --------
14
<PAGE>
The table below sets forth certain information regarding HomeAmerican's
portfolio of mortgage loans serviced (dollars in thousands).
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Beginning Servicing Portfolio.......... $ 486,811 $ 569,063 $ 653,331
Servicing retained on loans
originated......................... 521,836 449,725 392,116
Purchases from correspondents....... 60,373 63,051 64,365
Bulk servicing sales................ (485,757) (417,075) (427,340)
Loan sales "servicing released"..... (158,802) (141,174) (80,884)
Loan principal payments and other... (29,563) (36,779) (32,525)
--------- --------- ---------
Ending Servicing Portfolio............. $ 394,898 $ 486,811 $ 569,063
--------- --------- ---------
--------- --------- ---------
DECEMBER 31,
---------------------------------
1996 1995 1994
------------ --------- ---------
Composition of Servicing Portfolio:
FHA insured/VA guaranteed........... $ 117,681 $ 85,002 $ 203,991
Conventional........................ 277,217 401,809 365,072
--------- --------- ---------
Total Servicing Portfolio.............. $ 394,898(1) $ 486,811 $ 569,063
--------- --------- ---------
--------- --------- ---------
Salable portion of servicing
portfolio............................. $ 292,428(2) $ 429,328 $ 506,098
--------- --------- ---------
--------- --------- ---------
(1) Includes servicing of $52,131 sold in November 1996, serviced by
HomeAmerican under a subservicing arrangement until transfer to the
purchaser in January and February 1997.
(2) Substantially all originated subsequent to the adoption of SFAS 122
(as hereinafter defined).
1996 COMPARED WITH 1995. HomeAmerican's operating profits for 1996 were
the highest in its history, and exceeded by 35% the operating profits for 1995
primarily because of gains on sales of mortgage loans totalling $4,905,000 in
1996, compared with losses totalling $1,293,000 in 1995. These gains are in
large measure attributable to the Company's required adoption in 1996 of SFAS
122.
SFAS 122 requires the Company to allocate the cost of mortgage loans
originated after January 1, 1996 between the mortgage loans and the rights 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 adoption of SFAS 122 results in higher gains (or
lower losses) on sales of mortgage loans originated by HomeAmerican after
January 1, 1996 and correspondingly lower gains on sales of the related
servicing rights, compared with gains or losses 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 net gains in 1996
of $3,082,000 from the sale of mortgage loans and servicing rights compared with
the net gains that would have been recorded under the accounting method
applicable in 1995 and prior years.
During the first, second and third quarters of 1996, respectively, the
Company recorded gains of approximately $2,435,000, $1,382,000 and $1,271,000
(or $5,088,000 in total) related to bulk sales of approximately $398,809,000
principal amount of mortgage servicing rights held prior to the adoption of SFAS
122 on January 1, 1996. The substantial majority of these mortgage servicing
rights were related to mortgage loans originated by the Company and, as a
result, had no costs assigned to such servicing rights. Future gains from sales
of mortgage servicing will be significantly lower than prior comparable periods
as the Company sold substantially all of its pre-1996 servicing portfolio prior
to December 31, 1996. See "FORWARD-LOOKING STATEMENTS" below.
HomeAmerican's loan originations and purchases increased by 14% in 1996,
compared with 1995, primarily due to increases in (i) the Company's home
closings; and (ii) HomeAmerican's "Capture Rate", or the number of mortgage
loans originated for Company home buyers as a percentage of total Company home
closings.
15
<PAGE>
HomeAmerican opened origination facilities in Southern California in late
1995 and Nevada in February 1996, which favorably affected HomeAmerican's
total originations and Capture Rate. HomeAmerican continues to benefit from
the Company's homebuilding growth as Company home buyers were the source of
more than 80% of the principal amount of mortgage loans originated and
purchased by HomeAmerican in 1996 and 1995.
1995 COMPARED WITH 1994. HomeAmerican's operating profit in 1995 was
higher than in 1994 principally due to gains from sales of mortgage servicing
totalling $8,336,000 in 1995, compared with gains totalling $6,770,000 in
1994. The Company sold approximately the same principal amount of servicing
in 1995 as in 1994, but generated higher revenues on the 1995 sales as
stronger market demand resulted in more favorable prices than in 1994. Gains
from mortgage servicing sales other than bulk sales also comprised a larger
percentage of total gains (24% for 1995, compared with 15% for 1994)
primarily due to increased originations and purchases of adjustable rate
mortgages, which generally are sold "servicing released."
HomeAmerican's loan originations and purchases increased by 12% in 1995,
compared with 1994, primarily due to an increase in the Company's home closings
and an increase in the percentage of mortgage originations for buyers of the
Company's homes, partially offset by a 48% decrease in the dollar amount of spot
originations, as increased mortgage interest rates during the second half of
1994 and first quarter of 1995 significantly decreased refinancing activity
market-wide.
ASSET MANAGEMENT OPERATIONS.
The following table sets forth certain information with respect to the
results of the asset management operations (in thousands).
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
Gain on sale of FAMC.............. $4,042 $ -- $ --
Management fees from REITs........ $2,373 $3,324 $2,780
Operating profit.................. $6,073 $4,050 $2,796
The increased operating profits in 1996 primarily were due to the
$4,042,000 gain, net of related expenses, on the sale of FAMC in September
1996. The sales proceeds of $11,450,000 included $6,000,000 of cash and
$5,450,000 of subordinated convertible notes, which are payable at specified
dates during the next 10 years and are convertible, under certain
circumstances, into as much as a 47.6% ownership interest in FAMC. A gain of
$5,450,000 attributable to the notes has been deferred and may be recognized,
in whole or in part, in future periods based upon a number of factors,
including collection of the principal on the notes and the expiration of the
conversion features. See "FORWARD-LOOKING STATEMENTS" below.
Due to the sale of FAMC and the fact that the Company does not anticipate
making additional mortgage-related investments, future operating results related
to the asset management operations are expected to be immaterial. See
"FORWARD-LOOKING STATEMENTS" below.
OTHER OPERATING RESULTS.
INTEREST EXPENSE. Corporate and homebuilding interest incurred decreased
to $30,296,000 in 1996, compared with $33,909,000 in 1995 and $35,799,000 in
1994, primarily due to (i) lower effective interest rates with respect to
variable-rate debt; and (ii) lower levels of borrowings resulting from the
reduction in homebuilding inventories and the increased use of internally
generated funds.
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)
during 1996 totalled $26,523,000, compared with $26,136,000 and $26,345,000,
respectively, during 1995 and 1994.
Corporate and homebuilding interest incurred but not capitalized is
reflected as interest expense and totalled $3,773,000 for 1996, compared with
$7,773,000 and $9,454,000, respectively, for 1995 and 1994.
16
<PAGE>
For a reconciliation of interest incurred, capitalized and expensed, see
Note I to the Company's Consolidated Financial Statements.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and
administrative expenses totalled $11,578,000 for 1996, compared with
$13,478,000 and $15,132,000, respectively, for 1995 and 1994. The 14%
decrease in 1996, compared with 1995, primarily was due to (i) reductions in
insurance costs and debt-related expenses; and (ii) an insurance recovery of
$1,250,000 received in the first quarter of 1996 related to the recovery of
certain homebuilding expenditures previously expensed. The 11% decrease in
1995, compared with 1994, primarily was due to reductions in insurance costs,
legal expenses and professional fees, partially offset by an increase in
salary expense and financing costs associated with the Company's expanded
operations in 1995.
INCOME TAXES. M.D.C. Holdings, Inc. and its wholly owned subsidiaries
file a consolidated federal income tax return (an "MDC Consolidated Return").
Richmond American Homes of Colorado, Inc. (formerly known as Richmond Homes,
Inc. I, a wholly owned subsidiary of M.D.C. Holdings, Inc.; "Richmond Homes")
and its wholly owned subsidiaries filed separate consolidated federal income
tax returns (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 rates of 36.5%, 35.3% and 37.9%,
respectively, for 1996, 1995, and 1994, differed from the federal statutory
rate of 35% primarily due to (i) the impact of state income taxes; (ii) in
1995 and 1994, the realization of non-taxable income for financial reporting
purposes for which no tax liability was recorded; and (iii) in 1994, the
adjustments of prior years' income taxes.
In April 1995, the Company and the Internal Revenue Service (the "IRS")
reached final agreement on the IRS examinations of (i) the MDC Consolidated
Returns for the years 1984 and 1985; and (ii) the Richmond Homes Consolidated
Returns for the years 1989 and 1990. These agreements had no material impact
upon the Company's financial position or results of operations.
The IRS has completed its examination of the MDC Consolidated Returns
for the years 1986 through 1990 and has proposed adjustments to taxable
income as originally reported. 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 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 from the 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 due
primarily 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 1.18 at December 31,
1996, compared with 1.49 at December 31, 1995 and 1.81 at December 31, 1994.
The improvement is primarily a result of (i) the earnings of
17
<PAGE>
the Company, which contributed to the increase in the Company's Stockholders'
Equity to $213,847,000 at December 31, 1996; and (ii) the use of internally
generated cash flow to reduce debt.
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, including the acquisition of land. 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 in this report. See
"FORWARD-LOOKING STATEMENTS" below.
LINES OF CREDIT.
HOMEBUILDING. In April 1996, the Company entered into an agreement with
a group of banks for a $150,000,000 unsecured revolving line of credit
maturing June 30, 2000, although a term-out of this credit 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 December 31, 1996, $11,832,000 was borrowed under this line
of credit.
MORTGAGE LENDING. 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 pooled into GNMA, FNMA and FHLMC pools, or retained
as whole loans, and subsequently are sold in the open market on a spot basis
or pursuant to mortgage loan sale commitments. During 1996, 1995 and 1994,
HomeAmerican sold $576,156,000, $504,109,000 and $480,485,000, respectively,
principal amount of mortgage loans and mortgage certificates to unaffiliated
purchasers.
Available 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. The aggregate amount available under the
Mortgage Line at December 31, 1996 was $51,000,000. At December 31, 1996,
$9,018,000 was borrowed and an additional $38,362,000 was collateralized and
available to be borrowed. The Mortgage Line is cancelable upon 90 days'
notice.
GENERAL. The agreements for the Company's bank lines of credit include
representations, warranties and covenants, the most restrictive of which
require that the Company maintain certain minimum defined stockholders'
equity. The Company believes that it is in compliance with these
representations, warranties and covenants.
CONSOLIDATED CASH FLOW.
During 1996, the Company generated $61,923,000 in cash from its
operating and investing activities. The Company used this cash and available
cash on hand to reduce outstanding lines of credit and notes payable by
$58,040,000 and to repurchase 1,865,000 shares of MDC Common Stock for
$12,921,000.
During 1995, the Company generated $31,281,000 in cash from operating
and investing activities. The Company used this cash and available cash on
hand to pay down lines of credit and notes payable by $46,639,000 and to
repurchase, for $5,466,000, 865,600 shares of MDC Common Stock.
18
<PAGE>
IMPACT OF INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS
Real estate and residential housing prices are affected by inflation,
which can cause increases in the price of land, raw materials and
subcontracted labor. Unless costs are recovered through higher sales prices,
Home Gross Margins can decrease. If interest rates increase, construction
and financing costs, as well as the cost of borrowings, also increase, which
can result in lower Home Gross Margins. Increases in home mortgage interest
rates make it more difficult for MDC's customers to qualify for home mortgage
loans, potentially decreasing home sales volume. Increases in interest rates
also may affect adversely the volume of mortgage loan originations.
The volatility of interest rates could have an adverse effect on MDC's
future operations and liquidity. Among other things, these conditions may
(i) affect adversely the demand for housing and the availability of mortgage
financing; and (ii) reduce the credit facilities offered to MDC by banks,
investment bankers and mortgage bankers.
MDC's business also is affected significantly by, among other things,
general economic conditions and, particularly, the demand for new homes in
the markets in which it builds.
ISSUANCE 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 October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", which establishes a fair value based method of accounting for
stock-based compensation plans. The statement allows companies to continue to
use the intrinsic value-based approach, supplemented by the footnote disclosure
of the pro forma net income and earnings per share of the fair value based
approach. The Company intends to follow this latter method and, as a result,
adoption of this pronouncement in 1996 had no effect on the Company's financial
condition or results of operations.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). The
Company's adoption of SFAS 125, beginning in 1997, is not anticipated to have a
material adverse impact on the results of operations or financial condition of
the Company. See "FORWARD-LOOKING STATEMENTS" below.
OTHER
FORWARD-LOOKING STATEMENTS.
Certain statements in this Form 10-K Annual Report, the Company's Annual
Report to Shareowners, 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) demographic changes; (vi)
shortages and the cost of labor; (vii) weather related slowdowns; (viii) slow
growth initiatives; (ix) building moratoria; (x) governmental regulation
19
<PAGE>
including interpretation of tax and environmental laws; and (xi) other factors
over which the Company has little or no control.
REORGANIZATION AND SALE OF FAMC.
In March 1996, M.D.C. Holdings, Inc. ("Holdings"), Mr. Spencer I. Browne
(previously President, Co-Chief Operating Officer and a director of Holdings),
M.D.C. Residual Holdings, Inc., a wholly owned subsidiary of Holdings
("Residual") and Financial Asset Management Corporation ("Management
Corporation") entered into an agreement (the "Agreement") effective as of April
1, 1996, pursuant to which Mr. Browne, Residual and Management Corporation
formed FAMC. From April 1, 1996 to September 30, 1996, Mr. Browne owned 20% of
FAMC, and Management Corporation and Residual owned the remaining 80% of FAMC.
Pursuant to the Agreement, (i) Mr. Browne resigned as President, Co-Chief
Operating Officer and director of Holdings; (ii) Mr. Browne and Holdings entered
into an employment agreement (the "Employment Agreement"); (iii) Mr. Browne was
appointed President and Chief Executive Officer of FAMC; and (iv) FAMC assumed
Management Corporation's business of managing two publicly traded REITs and
performing certain other asset management functions.
As previously described in this report, in September 1996, the Company sold
its 80% interest in FAMC to a third party. Concurrent with the sale, Mr. Browne
resigned his positions with FAMC and the Employment Agreement was terminated.
FORMATION OF AMERICAN HOME TITLE AND ESCROW COMPANY.
During 1996, the Company formed American Home Title and Escrow Company as a
wholly owned subsidiary ("American Home Title"). In January 1997, American Home
Title began providing title agency services to MDC home buyers in Virginia and
intends to pursue opportunities to provide title services in its other markets
during 1997. See "FORWARD-LOOKING STATEMENTS" below.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS.
M.D.C. HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Consolidated Financial Statements:
Report of Independent Accountants............................... F-2
Consolidated Balance Sheets as of December 31, 1996 and
December 31, 1995............................................. F-3
Consolidated Statements of Income for each of the Three Years
Ended December 31, 1996....................................... F-5
Consolidated Statements of Stockholders' Equity for each of
the Three Years Ended December 31, 1996....................... F-6
Consolidated Statements of Cash Flows for each of the Three
Years Ended December 31, 1996................................ F-7
Notes to Consolidated Financial Statements...................... F-8
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
M.D.C. HOLDINGS, INC.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of M.D.C.
Holdings, Inc. and its subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Denver, Colorado
February 3, 1997
F-2
<PAGE>
M.D.C. HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
--------------------
1996 1995
-------- --------
ASSETS
Corporate
Cash and cash equivalents......................... $ 7,235 $ 10,290
Property and equipment, net....................... 9,411 9,550
Deferred income taxes............................. 10,804 13,730
Deferred debt issue costs, net.................... 9,155 9,931
Other assets, net................................. 3,557 3,830
-------- --------
40,162 47,331
-------- --------
Homebuilding
Cash and cash equivalents.......................... 3,393 5,096
Home sales and other accounts receivable........... 10,218 26,192
Investments and marketable securities, net......... 5,159 6,481
Inventories, net
Housing completed or under construction.......... 251,885 265,205
Land and land under development.................. 182,927 176,960
Prepaid expenses and other assets, net............. 57,722 42,111
-------- --------
511,304 522,045
-------- --------
Financial Services
Cash and cash equivalents......................... 676 5,409
Accrued interest and other assets, net............ 5,006 3,129
Mortgage loans held in inventory, net............. 58,742 53,153
Mortgage Collateral, net of mortgage-backed
bonds, and related assets and liabilities....... 1,413 3,744
-------- --------
65,837 65,435
-------- --------
Total Assets.................................. $617,303 $634,811
-------- --------
-------- --------
See notes to consolidated financial statements.
F-3
<PAGE>
M.D.C. HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
--------------------
1996 1995
-------- --------
LIABILITIES
Corporate
Accounts payable and accrued expenses............. $ 13,519 $ 18,258
Income taxes payable.............................. 11,434 11,930
Note payable...................................... 3,487 3,537
Senior Notes, net................................. 187,721 187,525
Subordinated notes, net........................... 38,225 38,221
-------- --------
254,386 259,471
-------- --------
Homebuilding
Accounts payable and accrued expenses............. 114,794 82,164
Lines of credit................................... 11,832 43,490
Notes payable..................................... 3,063 10,571
-------- --------
129,689 136,225
-------- --------
Financial Services
Accounts payable and accrued expenses............. 10,363 12,092
Line of credit.................................... 9,018 21,990
-------- --------
19,381 34,082
-------- --------
Total Liabilities.............................. 403,456 429,778
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES J, N AND P)..... -- --
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 25,000,000
shares authorized; none issued.................. -- --
Common Stock, $.01 par value; 100,000,000 shares
authorized; 23,050,000 and 22,606,000 shares
issued, respectively, at December 31, 1996
and 1995........................................ 231 226
Additional paid-in capital........................ 138,705 136,022
Retained earnings................................. 106,189 87,476
-------- --------
245,125 223,724
-------- --------
Less treasury stock, at cost, 4,966,000 and
3,157,000 shares, respectively, at December 31,
1996 and 1995................................... (31,278) (18,691)
-------- --------
Total Stockholders' Equity..................... 213,847 205,033
-------- --------
Total Liabilities and Stockholders' Equity..... $617,303 $634,811
-------- --------
-------- --------
See notes to consolidated financial statements.
F-4
<PAGE>
M.D.C. HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
REVENUES
Homebuilding.............................. $890,536 $840,362 $793,793
Financial Services........................ 30,578 23,948 22,095
Corporate................................. 1,481 1,546 1,357
-------- -------- --------
Total Revenues......................... 922,595 865,856 817,245
-------- -------- --------
COSTS AND EXPENSES
Homebuilding.............................. 862,569 807,344 749,329
Financial Services........................ 11,921 10,610 12,348
Corporate general and administrative...... 11,578 13,478 15,132
Corporate and homebuilding interest....... 3,773 7,773 9,454
-------- -------- --------
Total Expenses......................... 889,841 839,205 786,263
-------- -------- --------
Income before income taxes and
extraordinary item......................... 32,754 26,651 30,982
Provision for income taxes................... 11,955 9,401 11,727
-------- -------- --------
Income before extraordinary item............. 20,799 17,250 19,255
Extraordinary loss from early
extinguishment of debt, net of income
tax benefit of $242........................ (421) -- --
-------- -------- --------
NET INCOME................................... $ 20,378 $ 17,250 $ 19,255
-------- -------- --------
-------- -------- --------
EARNINGS PER SHARE
Primary
Income before extraordinary item....... $ 1.09 $ .86 $ .94
-------- -------- --------
-------- -------- --------
Net Income............................. $ 1.06 $ .86 $ .94
-------- -------- --------
-------- -------- --------
Fully diluted
Income before extraordinary item....... $ .98 $ .79 $ .87
-------- -------- --------
-------- -------- --------
Net Income............................. $ .96 $ .79 $ .87
-------- -------- --------
-------- -------- --------
WEIGHTED-AVERAGE SHARES OUTSTANDING
Primary................................... 19,150 20,124 20,406
-------- -------- --------
-------- -------- --------
Fully diluted............................. 22,924 23,918 24,021
-------- -------- --------
-------- -------- --------
DIVIDENDS PAID PER SHARE..................... $ .12 $ .11 $ .06
-------- -------- --------
-------- -------- --------
See notes to consolidated financial statements.
F-5
<PAGE>
M.D.C. HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
------ ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCES-JANUARY 1, 1994.................... $209 $133,455 $ 57,879 $(15,689) $175,854
Shares issued............................ 3 265 (46) 256 478
Shares reacquired........................ -- -- -- (1,505) (1,505)
Shares issued to acquire Richmond
Homes common stock..................... -- -- (3,585) 3,585 --
Unrealized losses on available-for-sale
securities, net........................ -- -- (860) -- (860)
Non-qualified stock options exercised.... -- 214 -- -- 214
Dividends declared....................... -- -- (1,141) -- (1,141)
Net income............................... -- -- 19,255 -- 19,255
---- -------- -------- -------- --------
BALANCES-DECEMBER 31, 1994.................. 212 133,934 71,502 (13,353) 192,295
Shares issued............................ 14 1,168 (11) 128 1,299
Shares reacquired........................ -- -- -- (5,466) (5,466)
Unrealized gains on available-for-sale
securities, net........................ -- -- 888 -- 888
Non-qualified stock options exercised.... -- 2,281 -- -- 2,281
Notes receivable for stock purchases..... -- (1,361) -- -- (1,361)
Dividends declared....................... -- -- (2,153) -- (2,153)
Net income............................... -- -- 17,250 -- 17,250
---- -------- -------- -------- --------
BALANCES-DECEMBER 31, 1995.................. 226 136,022 87,476 (18,691) 205,033
Shares issued............................ 5 2,138 70 334 2,547
Shares reacquired........................ -- -- -- (12,921) (12,921)
Unrealized gains on available-for-sale
securities, net........................ -- -- 487 -- 487
Non-qualified stock options exercised.... -- 342 -- -- 342
Repayments of notes receivable for
stock purchases, net................... -- 203 -- -- 203
Dividends declared....................... -- -- (2,222) -- (2,222)
Net income............................... -- -- 20,378 -- 20,378
---- -------- -------- -------- --------
BALANCES-DECEMBER 31, 1996.................. $231 $138,705 $106,189 $(31,278) $213,847
---- -------- -------- -------- --------
---- -------- -------- -------- --------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
M.D.C. HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income.................................... $ 20,378 $ 17,250 $ 19,255
Adjustments To Reconcile Net Income
To Net Cash Provided By (Used In)
Operating Activities:
Amortization of deferred marketing cost..... 9,462 7,653 6,731
Depreciation and other amortization......... 2,605 2,627 3,403
Homebuilding asset impairment charges....... 9,191 3,677 4,000
Deferred income taxes....................... 2,926 (1,786) (3,844)
Gains on sales of mortgage related assets... (4,943) (734) (295)
Net Changes In Assets and Liabilities:
Home sales and other accounts receivable.... 15,973 (13,684) (5,462)
Homebuilding inventories.................... 4,288 21,005 (76,991)
Mortgage loans held in inventory............ (5,589) (8,785) 24,076
Other assets and liabilities, net........... (6,366) (4,670) (7,663)
----------- --------- ---------
Net Cash Provided By (Used In)
Operating Activities......................... 47,925 22,553 (36,790)
----------- --------- ---------
INVESTING ACTIVITIES:
Net Proceeds From Mortgage-Related
Assets and Liabilities....................... 3,849 4,596 (7,786)
Proceeds From the Sale of FAMC................ 6,000 -- --
Changes In Investments and Marketable
Securities................................... 3,016 (414) (6,377)
Changes In Restricted Cash.................... -- 2,650 16,159
Other, net.................................... 1,133 1,896 17,272
----------- --------- ---------
Net Cash Provided By Investing Activities..... 13,998 8,728 19,268
----------- --------- ---------
FINANCING ACTIVITIES:
Lines of Credit
Advances.................................... 1,008,531 741,053 641,874
Principal payments.......................... (1,053,161) (761,116) (612,449)
Notes Payable
Borrowings.................................. 487 1,114 15,870
Principal payments.......................... (13,897) (27,690) (44,835)
Stock Repurchases............................. (12,921) (5,466) (1,505)
Dividend Payments............................. (2,222) (2,153) (1,141)
Other, net.................................... 1,769 208 269
----------- --------- ---------
Net Cash Used In Financing Activities......... (71,414) (54,050) (1,917)
----------- --------- ---------
Net Decrease In Cash and Cash Equivalents..... (9,491) (22,769) (19,439)
Cash and Cash Equivalents
Beginning of Year........................... 20,795 43,564 63,003
----------- --------- ---------
End of Year................................. $ 11,304 $ 20,795 $ 43,564
----------- --------- ---------
----------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The 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) include the
accounts of MDC and its wholly owned and majority-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
GENERAL. In the homebuilding segment of its operations, the Company (i)
principally acquires finished lots and, to a lesser extent, acquires land and
develops it for use in its homebuilding activities; and (ii) designs, constructs
and sells single-family residential homes. These operations are financed
primarily with publicly traded debt, an unsecured revolving bank line of credit
and internally generated funds. The Company conducts its homebuilding
operations 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.
The Company's financial services segment principally consists of its
mortgage lending operations which are conducted by HomeAmerican Mortgage
Corporation ("HomeAmerican"). HomeAmerican primarily provides mortgage loans
for MDC home buyers. Substantially all of the mortgage loans originated by
HomeAmerican, as well as mortgage loans purchased from unaffiliated loan
correspondents, subsequently are sold to private investors. Additionally,
HomeAmerican sells mortgage loan servicing.
Through September 30, 1996, Financial Asset Management LLC (an indirect
subsidiary of M.D.C. Holdings, Inc., and the successor as of April 1, 1996 to
Financial Asset Management Corporation; "FAMC") managed two publicly traded
real estate investment trusts (each a "REIT"). MDC also owns other
mortgage-related interests. The results of FAMC and these mortgage-related
interests are included in the asset management operations of the financial
services segment.
HOMEBUILDING.
INVENTORIES - Inventories are stated at cost, as adjusted in accordance
with SFAS 121 (as hereinafter defined), and include interest capitalized during
the period of active development through the completion of construction.
Construction-related overhead and salaries are capitalized and allocated
proportionately to projects actively being developed. Land and related costs
are transferred to housing inventory when construction commences.
Effective January 1, 1996, the Company adopted 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"). In accordance
with SFAS 121, whenever events or circumstances indicate that the carrying value
of the homebuilding inventories may not be recoverable, impairment losses are
recorded and the related assets are adjusted to their estimated fair market
value, less selling costs.
PREPAID EXPENSES AND OTHER ASSETS - Homebuilding prepaid expenses and other
assets include restricted investments of $20,775,000 at December 31, 1996, which
are held for the payment of eligible claims made under the warranties created
pursuant to the settlement of the Expansive Soils Cases. See Note N.
REVENUE RECOGNITION - Revenues from real estate sales are recognized when a
sufficient down payment has been received, financing has been arranged, title,
possession and other attributes of ownership have been transferred to the buyer
and the Company is not obligated to perform significant additional activities
after sale and delivery.
WARRANTY COSTS - The Company's homes are sold with limited warranties
issued by an independent warranty company. Reserves are established by the
Company to cover estimated costs of repairs for which the Company is
responsible. During 1996, the Company recorded additional warranty reserves of
$23,086,000, net of
F-8
<PAGE>
warranty expenditures, which included an amount arising from the settlement of
the Expansive Soils Cases. See Note N. Warranty reserves are included in
homebuilding accounts payable and accrued expenses and totalled $35,507,000
and $12,421,000, respectively, at December 31, 1996 and 1995.
MORTGAGE LENDING.
MORTGAGE LOANS HELD IN INVENTORY - The Company generally purchases forward
commitments to deliver mortgage loans held for sale. Mortgage loans held in
inventory are stated at the lower of aggregate cost or market based upon such
commitments for loans to be delivered into such commitments or prevailing market
for uncommitted loans. Substantially all of the loans originated or purchased
by the Company are sold to private investors within 45 days of origination or
purchase. Gains or losses on mortgage loans held in inventory are realized when
the loans are sold.
REVENUE RECOGNITION - Loan origination fees in excess of origination costs
incurred and loan commitment fees are deferred until the related loans are sold.
Loan servicing fees are recorded as revenue when the mortgage loan payments are
received. Loan servicing costs are recognized as incurred. Revenues from the
sale of mortgage loan servicing are recognized when title and all risks and
rewards of ownership have irrevocably passed to the buyer and there are no
significant unresolved contingencies.
The mortgage lending operations are affected by, among other things,
changes in mortgage interest rates. The Company utilizes forward mortgage
securities contracts to manage the interest rate risk on its fixed-rate mortgage
loans owned and rate-locked mortgage loans in process which have not closed.
Such contracts are the only significant financial derivative instrument utilized
by MDC. Hedging gains or losses are recognized when the hedged mortgage loans
are sold.
MORTGAGE SERVICING RIGHTS - Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights an Amendment of FASB Statement No. 65" ("SFAS 122"). SFAS 122
requires the Company to allocate the cost of mortgage loans originated by
HomeAmerican after January 1, 1996 between the mortgage loans and the right to
service the mortgage loans, based on their relative values. Prior to 1996, the
cost of mortgage loans originated by HomeAmerican was assigned to the mortgage
loans, with no cost assigned to the servicing rights. The Company's adoption of
SFAS 122 resulted in additional net gains in 1996 of $3,082,000 from the sale of
mortgage loans and servicing rights, compared with the gains that would have
been recorded under the accounting method applicable in 1995 and prior years.
ASSET MANAGEMENT.
MORTGAGE COLLATERAL AND MORTGAGE-BACKED BONDS - The Company's remaining
mortgage-backed bonds were issued by limited-purpose subsidiaries and other non-
related entities. Periodic payments are made on the bonds as a result of, and
in amounts related to, corresponding payments received on the underlying
mortgage collateral (the "Mortgage Collateral"). Substantially all of the
Company's ownership interests in Mortgage Collateral and the related mortgage-
backed bonds are nearing the ends of their economic lives. Accordingly, the
Company does not anticipate that such net assets will generate significant
amounts of income or cash flow in the future. The Company reflects its
ownership interests in Mortgage Collateral net of the related mortgage-backed
bonds and its earnings from such interests net of the related interest expense.
GENERAL.
CASH AND CASH EQUIVALENTS - The Company periodically invests funds not
immediately required for operating purposes in highly liquid, short-term
investments with an original maturity of 90 days or less such as commercial
paper and repurchase agreements which are included in cash and cash equivalents
in the Consolidated Balance Sheet and Consolidated Statement of Cash Flows.
F-9
<PAGE>
PROPERTY AND EQUIPMENT - Property and equipment is carried at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
related assets.
EARNINGS PER SHARE - Primary earnings per share are based on the weighted-
average number of common and common equivalent shares outstanding during each
period. Fully diluted earnings per share also assumes the conversion into MDC
Common Stock of all of the outstanding Convertible Subordinated Notes (as
hereinafter defined) at the stated conversion price.
ESTIMATES IN FINANCIAL STATEMENTS - The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Such estimates include warranty, other accrued expenses and estimates related to
potential asset impairment charges.
RECLASSIFICATIONS - Certain amounts in the 1995 and 1994 consolidated
financial statements have been reclassified to conform to the 1996 presentation.
F-10
<PAGE>
B. INFORMATION ON BUSINESS SEGMENTS
The Company operates in two business segments: homebuilding and financial
services. A summary of the Company's segment information is shown below (in
thousands).
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
HOMEBUILDING
Home sales................................ $880,358 $827,448 $784,453
Land sales................................ 9,471 10,396 8,296
Other revenues............................ 707 2,518 1,044
-------- -------- --------
890,536 840,362 793,793
-------- -------- --------
Home cost of sales........................ 759,405 716,859 663,549
Land cost of sales........................ 8,773 10,176 7,977
Asset impairment charges.................. 9,191 3,677 4,000
Marketing................................. 56,078 49,938 44,588
General and administrative................ 29,122 26,694 29,215
-------- -------- --------
862,569 807,344 749,329
-------- -------- --------
HOMEBUILDING OPERATING PROFIT......... 27,967 33,018 44,464
-------- -------- --------
FINANCIAL SERVICES
Mortgage Lending Revenues
Interest revenues....................... 3,543 3,412 2,897
Origination fees........................ 6,209 5,258 4,671
Gains on sales of mortgage servicing.... 6,020 8,336 6,770
Gains (losses) on sale of mortgage
loans, net............................ 4,905 (1,293) (585)
Mortgage servicing and other............ 1,545 1,846 2,097
-------- -------- --------
22,222 17,559 15,850
-------- -------- --------
Asset Management Revenues
Management fees and other............... 4,314 6,389 6,245
Gain on sale of FAMC.................... 4,042 -- --
-------- -------- --------
8,356 6,389 6,245
-------- -------- --------
30,578 23,948 22,095
-------- -------- --------
General and Administrative Expenses
Mortgage Lending........................ 9,638 8,271 8,899
Asset Management........................ 2,283 2,339 3,449
-------- -------- --------
11,921 10,610 12,348
-------- -------- --------
FINANCIAL SERVICES OPERATING PROFIT... 18,657 13,338 9,747
-------- -------- --------
TOTAL OPERATING PROFIT....................... 46,624 46,356 54,211
-------- -------- --------
CORPORATE
Other revenues............................ 1,481 1,546 1,357
-------- -------- --------
Interest expense.......................... 3,773 7,773 9,454
General and administrative................ 11,578 13,478 15,132
-------- -------- --------
15,351 21,251 24,586
-------- -------- --------
Net Corporate Expenses.................. (13,870) (19,705) (23,229)
-------- -------- --------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM......................... $ 32,754 $ 26,651 $ 30,982
-------- -------- --------
-------- -------- --------
Corporate general and administrative expenses consist principally of
salaries and other administrative expenses which are not identifiable to a
specific segment. Transfers between segments are recorded at cost. Capital
expenditures and related depreciation and amortization for the years ended
December 31, 1996, 1995 and 1994 were not material. Identifiable segment assets
are shown on the face of the Consolidated Balance Sheet.
F-11
<PAGE>
C. MORTGAGE LOANS HELD IN INVENTORY
Mortgage loans held in inventory consist of (in thousands):
DECEMBER 31,
----------------------
1996 1995
------- -------
First mortgage loans
Conventional.................... $33,865 $33,451
FHA and VA...................... 27,261 21,272
------- -------
61,126 54,723
Less
Unamortized discounts............ (1,218)(1) (469)
Deferred fees.................... (322) (300)
Allowance for loan losses........ (844) (801)
------- -------
Total.......................... $58,742 $53,153
------- -------
------- -------
(1) Includes $751,000 of discounts pursuant to the allocation of costs
to mortgage servicing rights as required by SFAS 122.
Mortgage loans held in inventory consist primarily of loans collateralized
by first mortgages and deeds of trust due over periods of up to 30 years. The
weighted-average effective yield on mortgage loans held in inventory was
approximately 7.5% and 7.4%, respectively, at December 31, 1996 and 1995.
D. MORTGAGE COLLATERAL, NET OF MORTGAGE-BACKED BONDS, AND RELATED ASSETS
AND LIABILITIES
Mortgage Collateral and related net assets of $18,570,000 and $45,979,000,
respectively, as well as mortgage-backed bonds and other liabilities of
$17,157,000 and $42,235,000, respectively, were held by a trustee at December
31, 1996 and 1995. The Company has not guaranteed, nor is it otherwise obligated
with respect to, these mortgage-backed bond issues.
In 1996, 1995 and 1994, MDC sold, at a premium, Mortgage Collateral
totalling $17,842,000, $9,618,000 and $19,088,000, respectively. The proceeds
from these sales were utilized to redeem in full the related outstanding
mortgage-backed bonds which totalled $17,554,000, $8,547,000 and $19,109,000,
respectively. These sales, net of redemptions, resulted in gains totalling
$127,000, $305,000 and $295,000, respectively, in 1996, 1995 and 1994. During
1996, the Company recorded a $533,000 charge to income to reduce a portion of
the Company's Mortgage Collateral to its net realizable value.
E. LINES OF CREDIT
HOMEBUILDING - In April 1996, the Company entered into an agreement with a
group of banks for a $150,000,000 unsecured revolving line of credit maturing
June 30, 2000, although a term-out may commence earlier under certain
circumstances. Some of the initial advances at closing of this credit agreement
were used to retire the borrowings under cancelled bank lines of credit and
project loans collateralized by homebuilding inventories. At December 31, 1996,
$11,832,000 was borrowed under this unsecured revolving line of credit. At
December 31, 1996, the weighted-average interest rate of the line of credit was
7.5%.
MORTGAGE LENDING - The aggregate amount available under MDC's mortgage
lending bank line of credit at December 31, 1996 was $51,000,000. Available
borrowings under this bank line of credit 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 December 31, 1996,
$9,018,000 was borrowed and an additional $38,362,000 was collateralized and
available to be borrowed. The mortgage lending line of credit is cancellable
upon 90 days' notice. At December 31, 1996, the interest rate of the line was
6.7%.
GENERAL - The agreements for the bank lines of credit include
representations, warranties and covenants, the most restrictive of which
requires that the Company maintain a minimum level of stockholders' equity, as
defined. At December 31, 1996, the Company was in compliance with these
covenants, representations and warranties.
F-12
<PAGE>
F. NOTES PAYABLE
SENIOR NOTES AND SUBORDINATED NOTES - The Senior Notes (as hereinafter
defined) and the subordinated notes consist of (in thousands):
DECEMBER 31,
-------------------
1996 1995
-------- --------
Senior Notes
11 1/8% Senior Notes due December
2003 (effective rate 12.3%)................ $187,721 $187,525
-------- --------
-------- --------
Subordinated notes
8 3/4% Convertible Subordinated Notes due
December 2005, convertible into Common
Stock at $7.75 per common share
(effective rate 9.5%)...................... $ 28,000 $ 28,000
6.64% Subordinated Fixed-Rate Notes due
April 1998 (effective rate 6.7%)........... 10,225 10,221
-------- --------
$ 38,225 $ 38,221
-------- --------
-------- --------
In December 1993, the Company completed an offering of $190,000,000
principal amount of 11 1/8% senior notes due 2003 (the "Senior Notes") and
$28,000,000 principal amount of 8 3/4% convertible subordinated notes due
2005 (the "Convertible Subordinated Notes"). The Convertible Subordinated
Notes are convertible into MDC Common Stock at an initial conversion price of
$7.75 per share, subject to adjustment upon certain events. The $10,230,000
principal amount of subordinated fixed-rate notes was issued in April 1993 in
exchange for certain previously outstanding subordinated variable-rate notes.
The Senior Notes are guaranteed, fully and unconditionally, and jointly
and severally on an unsecured subordinated basis (the "Guaranties"), by most
of the Company's homebuilding segment subsidiaries (the "Guarantors"). The
Guaranties are subordinated to all Guarantor Senior Indebtedness as defined
in the indenture pursuant to which the Senior Notes are issued (the "Senior
Notes Indenture"). In addition, the Senior Notes are secured by a first
priority pledge of the capital stock of the Guarantors plus the capital stock
of HomeAmerican. The Senior Notes Indenture contains certain covenants
which, among other things, limit (i) the incurrence of additional
Indebtedness (as defined) by the Company and Restricted Subsidiaries (as
defined); (ii) the payment of dividends; (iii) the repurchase of capital
stock or subordinated indebtedness; and (iv) the ability to enter into
certain transactions with Affiliates (as defined) or merge, consolidate or
transfer substantially all of the Company's or a Guarantor's assets. At
December 31, 1996, the Company was in compliance with these covenants.
OTHER NOTES PAYABLE - Notes payable, other than the notes discussed
above, of $6,550,000, consist principally of loans collateralized by real
estate. These notes bear interest at rates ranging from 8.0% to 9.25%. The
aggregate net carrying value of the assets collateralizing the other notes
payable totalled approximately $13,000,000 at December 31, 1996.
GENERAL - The following table sets forth the scheduled principal payments
on the Senior Notes, subordinated notes and notes payable at December 31, 1996
(in thousands).
1997.................. $ 3,118
1998.................. 10,290
1999.................. 66
2000.................. 72
2001.................. 79
Thereafter............ 221,155
F-13
<PAGE>
G. STOCKHOLDERS' EQUITY
STOCK OPTION PLANS - A summary of the Company's stock option incentive
plans follows.
Employee Equity Incentive Plan - The Employee Equity Incentive Plan (the
"Employee Plan") provides for an initial authorization of 2,100,000 shares of
MDC Common Stock for issuance thereunder, plus an additional annual
authorization equal to 10% of the then authorized shares of MDC Common Stock
under the Employee Plan as of each succeeding annual anniversary of the
effective date of the Employee Plan. Under the Employee Plan, the Company
may grant awards of restricted stock, incentive and non-statutory stock
options and dividend equivalents, or any combination thereof, to officers and
employees of the Company or any of its subsidiaries. The incentive stock
options granted under the Employee Plan are exercisable at prices greater
than or equal to the market value on the date of grant over periods of up to
six years.
Pursuant to the terms of the Executive Option Purchase Program (the
"Option Purchase Program"), which was authorized by the MDC Board of
Directors, the Company is authorized to lend eligible executives of the
Company up to two-thirds of the aggregate exercise price and state and
federal taxes payable in connection with their exercise of stock options
under the Employee Plan, subject to certain maximum amounts as set forth
under the Option Purchase Program. Notes receivable under the Option
Purchase Program are recourse and secured by 100% of the shares of MDC Common
Stock issued in connection with options exercised. During 1996 and 1995,
certain eligible executives of the Company exercised options to purchase
100,000 and 824,414 shares of MDC Common Stock, respectively, and borrowed
$203,000 and $1,361,000, respectively, in the aggregate under the Option
Purchase Program. Notes receivable under the Option Purchase Program of
$1,158,000 and $1,361,000, respectively, at December 31, 1996 and 1995 are
deducted from stockholders' equity.
Director Equity Incentive Plan - Under the Director Equity Incentive Plan
(the "Director Plan"), non-employee directors of the Company are granted stock
options. The Director Plan provides for an initial authorization of 300,000
shares of MDC Common Stock for issuance thereunder plus an additional annual
authorization of shares equal to 10% of the then authorized shares of MDC Common
Stock under the Director Plan. Pursuant to the Director Plan, on December 1 of
each year, each non-employee director of the Company is granted options to
purchase 25,000 shares of MDC Common Stock. Each option granted under the
Director Plan expires five years from the date of grant. The option exercise
price must be equal to 100% of the fair market value of the MDC Common Stock on
the date of grant of the option.
F-14
<PAGE>
A summary of the changes in stock options during each of the three years
ended December 31, 1996 is as follows (in shares of MDC Common Stock):
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
Outstanding - January 1, 1994................ 3,201,374 $2.93
Exercised.................................. (271,974) .99
Granted.................................... 635,000 .81
Cancelled.................................. (3,000) 1.88
----------
Outstanding - December 31, 1994.............. 3,561,400 3.42
Exercised.................................. (1,418,900) .83
Granted.................................... 105,000 6.74
Cancelled.................................. (100,000) 5.62
----------
Outstanding - December 31, 1995.............. 2,147,500 5.18
----------
Exercised.................................. (404,500)(1) 4.56
Granted.................................... 815,000 7.15
Cancelled.................................. (510,000) 6.01
----------
Outstanding - December 31, 1996.............. 2,048,000 5.88
----------
----------
Exercisable - December 31,
1996....................................... 1,217,500 5.04
----------
----------
1995....................................... 888,327 6.65
----------
----------
1994....................................... 1,953,888 1.79
----------
----------
Reserved for issuance at December 31, 1996... 504,400
----------
----------
(1) Includes 250,000 previously restricted options that became
exercisable during 1996.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), issued in October 1995, established financial
accounting and reporting standards for stock-based employee compensation plans.
As permitted by SFAS 123, the Company elected to continue to use Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations, in accounting for its stock option incentive plans.
If the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date and the vesting provisions under the
plans in accordance with SFAS 123, net income in 1996 would have been reduced by
approximately $505,000, or $.02 per primary and fully diluted share. Earnings
per share for 1995 would have been reduced by $156,000 or $.01 per primary and
fully diluted share. The average fair value of each option granted during 1996
and 1995 is estimated at $2.61 and $2.42, respectively, on the date of grant
using the Black-Scholes option pricing model with the following assumptions: (i)
volatility of 30.80% and 36.70%, respectively, in 1996 and 1995; (ii) risk free
interest rates of 6.0% and 5.5%, respectively, for 1996 and 1995; (iii) expected
lives of five years with no defaults; and (iv) the Company's present dividend
yield rate.
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1996:
<TABLE>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACT LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- - -------------- ----------- ------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$3.00 - $4.25 484,000 2.02 $3.78 484,000 $3.78
$5.00 - $6.00 634,000 2.13 $5.69 621,500 $5.71
$6.38 - $7.50 930,000 4.68 $7.09 112,000 $6.71
--------- ---------
2,048,000 1,217,500
--------- ---------
--------- ---------
</TABLE>
F-15
<PAGE>
MDC COMMON STOCK REPURCHASE PROGRAM - During 1995, the Company repurchased
865,600 shares of MDC Common Stock pursuant to a program authorized by the MDC
Board of Directors to repurchase up to 1,100,000 shares of MDC Common Stock. In
January 1996, the Company substantially completed the program authorized in
1995. On July 25, 1996 and October 8, 1996, the MDC Board of Directors
authorized additional programs to repurchase up to 1,000,000 shares of MDC
Common Stock under each program. At December 31, 1996, 838,200 shares remain
authorized for repurchase under the latest program. Repurchases under the 1995
and 1996 programs have been made at per share prices ranging from $5.88 to
$7.38, with an average cost, including commissions, of $6.73.
REPURCHASE OF STOCK - In April 1996, the Company repurchased 473,000 shares
of MDC Common Stock, priced at $7.13 per share, originally held by Spencer I.
Browne (former President, Co-Chief Operating Officer and director of the
Company) in connection with the Agreement (as hereinafter defined) between Mr.
Browne and the Company. See Note K.
EXCHANGE OF COMMON STOCK - Prior to February 2, 1994, Larry A. Mizel
(Chairman of the Board, President and Chief Executive Officer of the Company)
and David D. Mandarich (Executive Vice President-Real Estate, Chief Operating
Officer and director of the Company) owned 35% of the outstanding shares of
Richmond American Homes of Colorado, Inc. (formerly known as Richmond Homes,
Inc. I, a wholly owned subsidiary of M.D.C. Holdings, Inc.; "Richmond Homes")
common stock. In furtherance of the Company's desire to own all of the
outstanding shares of Richmond Homes common stock, in December 1993, a special
committee of the MDC Board of Directors negotiated on behalf of the Company
terms of an option agreement with Messrs. Mizel and Mandarich to acquire the
shares of Richmond Homes common stock owned by them in exchange for MDC Common
Stock with a value of up to $3,500,000 in the aggregate. For purposes of the
exchange, the shares of MDC Common Stock were valued at $5.75 per share, the
closing price of MDC Common Stock on the date of the option agreement. The
special committee engaged a financial advisor to perform a business enterprise
valuation of Richmond Homes. In February 1994, based on the results of the
valuation, the maximum value of $3,500,000 of MDC Common Stock (an aggregate of
608,695 shares) was issued to Messrs. Mizel and Mandarich in exchange for their
shares of Richmond Homes common stock. Since February 2, 1994, MDC has owned
100% of the equity of Richmond Homes.
As the transaction with Messrs. Mizel and Mandarich was between related
parties, the issuance of the MDC Common Stock was recorded based on the net book
value of Richmond Homes, which had approximately zero common stockholders'
equity at the date of the acquisition. Accordingly, the value of the shares of
MDC Common Stock issued to Messrs. Mizel and Mandarich was recorded at zero.
H. HOMEBUILDING ASSET IMPAIRMENT CHARGES
During 1996, the Company recorded asset impairment charges totalling
$9,191,000, primarily related to certain homebuilding assets in the Mid-Atlantic
region as a result of continued weakened conditions and competitive pressures in
that market. The Mid-Atlantic asset impairment charges primarily resulted from
(i) the write-down to fair market value of a single-family detached home
subdivision in which the Company intends to sell the majority of the remaining
lots in bulk; (ii) the recognition of losses anticipated from the closing of
certain homes in Backlog and from the offering of increased incentives to
stimulate sales of completed unsold homes in inventory; (iii) the write-off of
capitalized costs, primarily deferred marketing and option deposits, related to
several low-margin projects; and (iv) the write-down to fair market value of
several single-family detached home subdivisions which began to experience
extremely slow sales and negative Home Gross Margins during 1996.
Asset impairment charges for 1996 also included charges with respect to
certain homebuilding assets in Northern California as a result of increased
incentives and sales price reductions offered to potential home buyers in
connection with the Company's efforts to exit several underperforming
subdivisions in the Sacramento area.
During 1995, the Company recorded asset impairment charges totalling
$3,677,000. These charges primarily were related to certain under-performing
projects in California, Arizona and the Mid-Atlantic region.
F-16
<PAGE>
Asset impairment charges totalled $4,000,000 in 1994, primarily related to
certain projects in Northern California which experienced significant slowing
in sales and reduced selling prices due to softness in consumer demand which
led to a general decline in home sales activity.
I. CORPORATE AND HOMEBUILDING INTEREST ACTIVITY (in thousands)
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
Interest capitalized in homebuilding
inventory, beginning of year................ $ 40,217 $ 42,478 $ 42,681
Interest incurred............................ 30,296 33,909 35,799
Interest expensed............................ (3,773) (7,773) (9,454)
Previously capitalized interest
included in cost of sales................... (25,995) (28,397) (26,548)
-------- -------- --------
Interest capitalized in homebuilding
inventory, end of year...................... $ 40,745 $ 40,217 $ 42,478
-------- -------- --------
-------- -------- --------
J. INCOME TAXES
Total income taxes has been allocated as follows (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
Tax expense on income before income
taxes and extraordinary item................ $ 11,955 $ 9,401 $ 11,727
Extraordinary loss........................... (242) -- --
Stockholders' equity, related to
exercise of stock options................... (342) (2,281) (214)
-------- -------- --------
Total income taxes........................... $ 11,371 $ 7,120 $ 11,513
-------- -------- --------
-------- -------- --------
The significant components of income tax expense on income before income
taxes and extraordinary item consist of the following (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
Current Tax Expense
Federal.................................... $ 8,612 $ 9,980 $ 13,970
State...................................... 417 1,207 1,603
-------- -------- --------
Total Current............................ 9,029 11,187 15,573
-------- -------- --------
Deferred Tax Expense (Benefit)
Federal.................................... 2,458 (2,402) (2,540)
State...................................... 468 616 (1,306)
-------- -------- --------
Total Deferred........................... 2,926 (1,786) (3,846)
-------- -------- --------
Total Income Tax Expense..................... $ 11,955 $ 9,401 $ 11,727
-------- -------- --------
-------- -------- --------
F-17
<PAGE>
The provision for income tax expense differs from the amount which would
be computed by applying the statutory federal income tax rate of 35% to
income before income taxes and extraordinary item as a result of the
following (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
Tax expense computed at statutory rate....... $11,464 $ 9,330 $10,844
Increase (reduction) due to:
Permanent differences between financial
statement income and taxable income...... 54 (513) (1,089)
State income tax, net of federal benefit.. 791 584 933
Adjustments to prior years' income taxes.. (297) -- 978
Other..................................... (57) -- 61
------- ------- -------
Total Income Tax Expense..................... $11,955 $ 9,401 $11,727
------- ------- -------
------- ------- -------
Effective Tax Rate........................... 36.5% 35.3% 37.9%
------- ------- -------
------- ------- -------
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities
are presented below (in thousands).
DECEMBER 31,
-----------------
1996 1995
------- -------
Deferred Tax Assets:
Reserve for losses......................... $ 9,996 $12,335
Inventory impairment charges............... 8,243 5,947
Accrued liabilities........................ 2,263 3,811
Inventory, additional costs capitalized
for tax purposes.......................... 4,692 2,562
Property, equipment and other assets, net.. 753 1,252
------- -------
Total gross deferred tax assets......... 25,947 25,907
Less valuation allowance................... -- (3,000)
------- -------
Deferred tax assets..................... 25,947 22,907
------- -------
Deferred Tax Liabilities:
Discount on notes receivable............... 6,827 9,086
Deferred revenue........................... 3,288 91
Inventory, additional costs capitalized
for financial statement purposes.......... 5,028 --
------- -------
Total gross deferred tax liabilities.... 15,143 9,177
------- -------
Net Deferred Tax Asset..................... $10,804 $13,730
------- -------
------- -------
During 1996, the Company eliminated the valuation allowance for deferred
tax assets as uncertainties related to the recovery of certain deferred tax
assets were eliminated.
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.
In April 1995, the Company and the Internal Revenue Service (the "IRS")
reached final agreement on the IRS examinations of (i) the MDC Consolidated
Returns for the years 1984 and 1985; and (ii) the Richmond Homes Consolidated
Returns for the years 1989 and 1990. These agreements had no material impact
upon the Company's financial position or results of operations.
F-18
<PAGE>
The IRS has completed its examination of the MDC Consolidated Returns for
the years 1986 through 1990 and has proposed adjustments to taxable income as
originally reported. 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 the 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 from amounts provided.
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 from amounts provided.
K. REORGANIZATION AND SALE OF FAMC
In March 1996, M.D.C. Holdings, Inc. ("Holdings"), Mr. Spencer I. Browne
(previously President, Co-Chief Operating Officer and director of Holdings),
M.D.C. Residual Holdings, Inc., a wholly owned subsidiary of Holdings
("Residual") and Financial Asset Management Corporation ("Management
Corporation") entered into an agreement (the "Agreement") effective as of
April 1, 1996, pursuant to which Mr. Browne, Residual and Management Corporation
formed FAMC. From April 1, 1996 to September 30, 1996, Mr. Browne owned 20% of
FAMC, and Management Corporation and Residual owned the remaining 80% of FAMC.
Pursuant to the Agreement, (i) Mr. Browne resigned as President, Co-Chief
Operating Officer and director of Holdings; (ii) Mr. Browne and Holdings entered
into an employment agreement (the "Employment Agreement"); (iii) Mr. Browne was
appointed President and Chief Executive Officer of FAMC; and (iv) FAMC assumed
Management Corporation's business of managing two publicly traded REITs and
performing certain other asset management functions.
In September 1996, the Company sold its 80% interest in FAMC for
$11,450,000, Mr. Browne resigned his positions with FAMC and the Employment
Agreement was terminated. The sales proceeds consisted of $6,000,000 cash and
$5,450,000 of subordinated notes which are payable at specified dates during the
next 10 years and are convertible, under certain circumstances, into as much as
a 47.6% ownership interest in FAMC. The sale resulted in the recognition of a
gain of $4,042,000. An additional gain of $5,450,000 attributable to the notes
has been deferred and may be recognized, in whole or in part, in future periods
based upon a number of factors, including collection of the notes' principal and
the expiration of the conversion features. The fair value of the subordinated
notes are not readily determinable.
L. EXTRAORDINARY ITEM
In April 1996, the Company entered into a $150,000,000 unsecured revolving
credit agreement and used proceeds therefrom to retire borrowings under certain
bank lines of credit and project loans collateralized by homebuilding
inventories that the Company cancelled after entering into the unsecured
revolving credit agreement. The Company recognized an extraordinary loss of
$421,000, net of an income tax benefit of $242,000, during 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.
F-19
<PAGE>
M. 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
MDC Common Stock of all of the $28,000,000 outstanding principal amount of the
8 3/4% Convertible Subordinated Notes at a conversion price of $7.75 per share
of MDC Common Stock. The primary and fully diluted earnings per share
calculations are shown below (in thousands, except per share amounts).
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
PRIMARY CALCULATION
Income before extraordinary item....... $20,799 $17,250 $19,255
Extraordinary loss, net of income
tax benefit of $242.................. (421) -- --
------- ------- -------
Net Income............................. $20,378 $17,250 $19,255
------- ------- -------
------- ------- -------
Weighted-average shares outstanding.... 18,527 19,362 18,951
Common Stock equivalents - stock
options............................... 623 762 1,455
------- ------- -------
Total Weighted-Average Shares....... 19,150 20,124 20,406
------- ------- -------
------- ------- -------
Primary Earnings Per Share
Income before extraordinary item....... $ 1.09 $ .86 $ .94
------- ------- -------
------- ------- -------
Net Income............................. $ 1.06 $ .86 $ .94
------- ------- -------
------- ------- -------
FULLY DILUTED CALCULATION
Income before extraordinary item....... $20,799 $17,250 $19,255
Adjustment for interest on Convertible
Subordinated Notes, net of income tax
benefit; conversion assumed........... 1,608 1,565 1,536
------- ------- -------
Adjusted income before extraordinary
item.................................. 22,407 18,815 20,791
Extraordinary loss, net of $242 income
tax benefit........................... (421) -- --
------- ------- -------
Adjusted Net Income................. $21,986 $18,815 $20,791
------- ------- -------
------- ------- -------
Weighted-average shares outstanding.... 18,527 19,362 18,951
Common Stock equivalents - stock
options............................... 784 943 1,457
Shares issuable upon conversion of
Convertible Subordinated Notes;
conversion assumed.................... 3,613 3,613 3,613
------- ------- -------
Total Weighted-Average Shares....... 22,924 23,918 24,021
------- ------- -------
------- ------- -------
Fully Diluted Earnings Per Share
Income before extraordinary item....... $ .98 $ .79 $ .87
------- ------- -------
------- ------- -------
Net Income............................. $ .96 $ .79 $ .87
------- ------- -------
------- ------- -------
N. 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. 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 and by a homeowner in the Rock Creek development located in
Boulder County, Colorado. On September 12, 1995, the Company was served with a
similar complaint relating to homeowners in Douglas County, Colorado. The
complaints (the "Expansive Soils Cases"), each of which sought certification of
a class, alleged substantially identical claims relating to the construction of
homes on lots with expansive soils, including negligence, breach of express and
implied warranties, violation of the Colorado Consumer Protection Act and non-
disclosures. The homeowners in each complaint sought, individually and on
behalf of the alleged class, recovery in unspecified amounts, including actual
damages, statutory damages, exemplary damages and treble
F-20
<PAGE>
damages. The Company filed a response to each of the complaints and to
initial discovery requests in the first filed case.
On June 11, 1996, the Company's Colorado homebuilding subsidiaries and
representative plaintiffs agreed to settle the Expansive Soils Cases. The
settlement was approved by the Douglas County District Court on October 11, 1996
and became final on November 26, 1996. The settlement provides for the creation
of a warranty program for eligible owners of homes constructed by the Company's
Colorado homebuilding subsidiaries since June 1986. Indemnity payments in
connection with the settlement have been received by the Company from its
participating insurance carriers, and management does not believe the settlement
will have a material adverse effect on the financial condition, results of
operations or cash flows of the Company.
OTHER.
The Company and certain of its subsidiaries and affiliates have been named
as defendants in various other claims, complaints and legal actions arising in
the normal course of business. In the opinion of management, the outcome of
these matters will not have a material adverse effect upon the financial
condition, results of operations or cash flows of the Company.
Because of the nature of the homebuilding business, and in the ordinary
course of the Company's operations, the Company from time to time may be subject
to product liability claims, including claims similar to those discussed under
the description of the Expansive Soils Cases, above.
The Company is not aware of any litigation, matter or pending claim against
the Company which would result in material contingent liabilities related to
environmental hazards or asbestos.
O. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
such value.
CASH AND CASH EQUIVALENTS - For cash and cash equivalents, the carrying
value is a reasonable estimate of fair value.
INVESTMENTS AND MARKETABLE SECURITIES, NET - Investments in marketable
equity securities are carried on the balance sheet at cost, which approximates
market value. Accordingly, the carrying value of the investments is a
reasonable estimate of the fair value.
RESTRICTED INVESTMENT - Restricted investments in marketable securities are
carried on the balance sheet at cost, which approximates market value.
Accordingly, the carrying value of the investments is a reasonable estimate of
the fair value.
MORTGAGE LOANS HELD IN INVENTORY - The Company generally purchases forward
commitments to deliver mortgage loans held for sale. For loans which have no
forward commitments, loans in inventory are stated at the lower of cost or
market. Accordingly, the carrying value is a reasonable estimate of fair value.
NOTES PAYABLE AND LINES OF CREDIT - The Company's notes payable and lines
of credit are at floating rates or at fixed rates which approximate current
market rates and have relatively short-term maturities. Accordingly, the
carrying value is a reasonable estimate of fair value.
SENIOR NOTES AND SUBORDINATED NOTES - Senior Notes and subordinated notes
are valued based on dealer quotes.
F-21
<PAGE>
The estimated fair values of the Company's financial instruments for which
the carrying amount does not approximate the estimated fair value are as follows
(in thousands):
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
Senior Notes.......... $187,721 $190,475 $187,525 $183,350
Subordinated notes.... 38,225 44,616 38,221 38,220
P. COMMITMENTS AND CONTINGENCIES
The Company believes that it is subject to risks and uncertainties common
to the homebuilding industry as follows: (i) cyclical markets sensitive to
changes in general and local economic conditions; (ii) volatility of interest
rates, which affects homebuilding demand and may affect credit availability;
(iii) seasonal nature of the business due to weather-related factors; (iv)
significant fluctuations in the price of building materials, particularly
lumber, and of finished lots and subcontract labor; (v) counterparty non-
performance risk associated with performance bonds; and (vi) environmental
regulations which vary significantly according to a site's condition, location
and former uses. The Company's operations are concentrated in the geographic
regions of Colorado, the Mid-Atlantic, California and Arizona.
To reduce exposure to fluctuations in interest rates, HomeAmerican makes
commitments to originate (buy) and sell loans and mortgage-backed securities.
At December 31, 1996, commitments by HomeAmerican to originate mortgage loans
totalled $22,929,000, at market rates of interest. At December 31, 1996,
unexpired short-term forward commitments to sell loans totalled $65,980,000 at
market rates of interest.
MDC leases office space, equipment and certain of its model show homes
under noncancellable operating leases. Future minimum rental payments for
leases with initial terms in excess of one year total $1,490,000 in 1997,
$1,381,000 in 1998, $972,000 in 1999, $438,000 in 2000 and $281,000 in 2001.
Rent expense under cancellable and noncancellable leases totalled $2,877,000,
$2,662,000 and $3,250,000 in 1996, 1995 and 1994, respectively.
MDC has entered into agreements to guarantee payment of principal and
interest on $26,980,000 principal amount of bonds issued by municipal agencies
to fund the development of project infrastructure for a master-planned community
in Colorado.
Q. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31
-------------------------
1996 1995 1994
------ ------ -------
Cash Paid During the Year For:
Interest, net of amounts capitalized... $7,892 $8,923 $15,313
Income taxes........................... $8,941 $7,155 $32,529
Land purchases financed by seller......... $5,852 $4,787 $ 4,164
Land sales financed by MDC................ $ 205 $1,609 $ 1,438
Disposition of land inventories
collateralized by notes payable
Inventories............................ -- $1,270 $ 2,864
Notes payable.......................... -- $1,270 $ 2,176
Accrued interest and other liabilities. -- -- $ 688
F-22
<PAGE>
R. RELATED PARTY TRANSACTIONS
MDC has transacted business with related or affiliated companies and with
certain officers and directors of the Company.
FAMC had agreements through September 30, 1996 with Asset Investors
Corporation and Commercial Assets, Inc., each a publicly traded REIT, to advise
them on various facets of their business and to manage their day-to-day
operations subject to the supervision of their respective boards of directors.
FAMC earned fees from management and administration, including from acquisitions
and incentives from these agreements which are included in asset management
revenues of $2,373,000, $3,324,000 and $2,780,000 during 1996, 1995 and 1994,
respectively.
The Company acquired certain assets from Messrs. Mizel and Mandarich in
February 1994. See Note G.
On December 28, 1989, MDC granted loans to Messrs. Mizel and Mandarich for
purposes of purchasing shares of common stock of Richmond Homes. On February 2,
1994, in conjunction with MDC's acquisition of Richmond Homes common stock from
Messrs. Mizel and Mandarich as discussed in Note G, MDC exchanged these loans
for new loans of equal amount. Each of the notes evidencing the new loans now
provides that, upon sale of any of the MDC Common Stock acquired by
Messrs. Mizel and Mandarich in exchange for their respective Richmond Homes
common stock, the cash proceeds shall be remitted to the Company in payment of
accrued interest and principal under the notes. The new loans, which mature in
1999, bear interest at 8.0% and are unsecured. At both December 31, 1996 and
1995, $840,000 of such loans were outstanding. Interest income of $67,200 was
recognized on these loans in each of 1996, 1995 and 1994.
The Company utilizes the services of companies owned by two former
employees of the Company, one of whom is the brother-in-law of a current officer
and director of the Company. During 1996, 1995 and 1994, the Company paid
$11,489,000, $7,372,000 and $11,880,000, respectively, for plumbing, door and
millwork services provided by these companies.
The Company leases office space and furniture to certain organizations in
which certain officers and/or directors of the Company have an ownership
interest. The rental revenue from those leases totalled $96,000, $320,000 and
$250,000, respectively, in 1996, 1995 and 1994.
The Company utilizes in the ordinary course of business the services of a
marketing and communications firm which is owned by the brother-in-law of an
officer and director of the Company. Total fees paid for advertising and
marketing design services were $305,000, $188,000 and $275,000, respectively, in
1996, 1995 and 1994.
During 1996, the Company purchased, for $1,089,000, a parcel of land from a
partnership in which an officer and director of the Company had an indirect
ownership interest.
F-23
<PAGE>
S. SUMMARIZED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
Unaudited summarized quarterly consolidated financial information for the
two years ended December 31, 1996 is as follows (in thousands, except per share
amounts):
<TABLE>
QUARTER
--------------------------------------------------
FOURTH THIRD SECOND FIRST
-------- -------- -------- --------
<S> <C>
1996
Revenues........................... $252,266 $233,307 $237,776 $199,246
-------- -------- -------- --------
-------- -------- -------- --------
Income before extraordinary item... $ 6,340 $ 5,603 $ 4,532 $ 4,324
Extraordinary Loss................. -- -- (421) --
-------- -------- -------- --------
Net Income...................... $ 6,340 $ 5,603 $ 4,111 $ 4,324
-------- -------- -------- --------
-------- -------- -------- --------
Earnings Per Share
Primary
Income before extraordinary
item........................... $ .34 $ .30 $ .23 $ .22
-------- -------- -------- --------
-------- -------- -------- --------
Net Income...................... $ .34 $ .30 $ .21 $ .22
-------- -------- -------- --------
-------- -------- -------- --------
Fully Diluted
Income before extraordinary
item........................... $ .30 $ .27 $ .21 $ .20
-------- -------- -------- --------
-------- -------- -------- --------
Net Income...................... $ .30 $ .27 $ .20 $ .20
-------- -------- -------- --------
-------- -------- -------- --------
Weighted-Average Shares Outstanding
Primary......................... 18,544 18,849 19,365 19,863
-------- -------- -------- --------
-------- -------- -------- --------
Fully Diluted................... 22,296 22,462 22,978 23,510
-------- -------- -------- --------
-------- -------- -------- --------
1995
Revenues........................... $227,174 $233,471 $214,119 $191,092
-------- -------- -------- --------
-------- -------- -------- --------
Net Income...................... $ 3,306 $ 5,545 $ 4,331 $ 4,068
-------- -------- -------- --------
-------- -------- -------- --------
Earnings Per Share
Primary......................... $ .17 $ .28 $ .21 $ .20
-------- -------- -------- --------
-------- -------- -------- --------
Fully Diluted................... $ .16 $ .25 $ .20 $ .19
-------- -------- -------- --------
-------- -------- -------- --------
Weighted-Average Shares Outstanding
Primary......................... 20,021 20,052 20,305 20,323
-------- -------- -------- --------
-------- -------- -------- --------
Fully Diluted................... 23,649 23,736 24,006 23,936
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
T. SUPPLEMENTAL GUARANTOR INFORMATION
The Senior Notes are unconditionally guaranteed on an unsecured
subordinated basis, jointly and severally, 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 of Arizona, Inc. (formerly known as Richmond American
Homes, Inc.) and Richmond Homes (collectively, the "Guarantors"). The
Guaranties are subordinated to all Guarantor Senior Indebtedness (as defined
in the Senior Notes Indenture).
Supplemental combining financial information follows.
F-24
<PAGE>
M.D.C. HOLDINGS, INC.
SUPPLEMENTAL COMBINING BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
UNCONSOLIDATED
-----------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
-------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Corporate
Cash and cash equivalents.................. $ 7,235 $ -- $ -- $ -- $ 7,235
Investments in subsidiaries................ 219,387 -- 17,434 (236,821) --
Advances and notes receivable -
Parent and subsidiaries................... 207,946 4 787 (208,737) --
Other assets............................... 32,780 -- 147 -- 32,927
-------- -------- -------- --------- --------
467,348 4 18,368 (445,558) 40,162
-------- -------- -------- --------- --------
Homebuilding
Cash and cash equivalents.................. 1 3,391 1 -- 3,393
Inventories, net
Housing completed or under construction.. -- 251,885 -- -- 251,885
Land and land under development.......... -- 159,871 24,031 (975) 182,927
Other assets............................... 7,582 48,737 20,775 (3,995) 73,099
-------- -------- -------- --------- --------
7,583 463,884 44,807 (4,970) 511,304
-------- -------- -------- --------- --------
Financial Services........................... -- -- 65,837 -- 65,837
-------- -------- -------- --------- --------
Total Assets........................... $474,931 $463,888 $129,012 $(450,528) $617,303
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
LIABILITIES
Corporate
Accounts payable and accrued expenses...... $ 13,086 $ -- $ 433 $ -- $ 13,519
Advances and notes payable -
Parent and subsidiaries................... 2,085 197,448 36,119 (235,652) --
Income taxes payable....................... 11,434 -- -- -- 11,434
Note payable............................... 3,487 -- -- -- 3,487
Senior Notes, net.......................... 187,721 -- -- -- 187,721
Subordinated notes, net.................... 38,225 -- -- -- 38,225
-------- -------- -------- --------- --------
256,038 197,448 36,552 (235,652) 254,386
-------- -------- -------- --------- --------
Homebuilding
Accounts payable and accrued expenses...... 5,046 88,240 21,508 -- 114,794
Line of credit and notes payable........... -- 14,895 -- -- 14,895
-------- -------- -------- --------- --------
5,046 103,135 21,508 -- 129,689
-------- -------- -------- --------- --------
Financial Services........................... -- -- 23,376 (3,995) 19,381
-------- -------- -------- --------- --------
Total Liabilities...................... 261,084 300,583 81,436 (239,647) 403,456
-------- -------- -------- --------- --------
STOCKHOLDERS' EQUITY......................... 213,847 163,305 47,576 (210,881) 213,847
-------- -------- -------- --------- --------
Total Liabilities and Stockholders'
Equity................................ $474,931 $463,888 $129,012 $(450,528) $617,303
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
</TABLE>
F-25
<PAGE>
M.D.C. HOLDINGS, INC.
SUPPLEMENTAL COMBINING BALANCE SHEET
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
UNCONSOLIDATED
-----------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
-------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Corporate
Cash and cash equivalents.................. $ 10,290 $ -- $ -- $ -- $ 10,290
Investments in and advances to
parent and subsidiaries................... 514,350 33 38,984 (553,367) --
Other assets............................... 36,941 -- 100 -- 37,041
-------- -------- -------- --------- --------
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
Inventories, net
Housing completed or under construction.. -- 265,205 -- -- 265,205
Land and land under development.......... -- 150,531 27,676 (1,247) 176,960
Other assets............................... 10,114 38,453 25 -- 48,592
-------- -------- -------- --------- --------
10,120 496,969 27,737 (12,781) 522,045
-------- -------- -------- --------- --------
Financial Services........................... -- -- 65,435 -- 65,435
-------- -------- -------- --------- --------
Total Assets........................... $571,701 $497,002 $132,256 $(566,148) $634,811
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
LIABILITIES
Corporate
Accounts payable and accrued expenses...... $ 17,897 $ -- $ 995 $ -- $ 18,892
Advances and notes payable -
Parent and subsidiaries................... 98,525 210,754 20,434 (329,713) --
Income taxes payable....................... 11,930 -- -- -- 11,930
Note payable............................... 3,537 -- -- -- 3,537
Senior Notes, net.......................... 187,525 -- -- -- 187,525
Subordinated notes, net.................... 38,221 -- -- -- 38,221
-------- -------- -------- --------- --------
357,635 210,754 21,429 (329,713) 260,105
-------- -------- -------- --------- --------
Homebuilding
Accounts payable and accrued expenses...... 5,403 75,831 924 6 82,164
Lines of credit and notes payable.......... 3,630 46,682 3,749 -- 54,061
-------- -------- -------- --------- --------
9,033 122,513 4,673 6 136,225
-------- -------- -------- --------- --------
Financial Services -- -- 45,011 (11,563) 33,448
-------- -------- -------- --------- --------
Total Liabilities...................... 366,668 333,267 71,113 (341,270) 429,778
-------- -------- -------- --------- --------
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>
F-26
<PAGE>
M.D.C. HOLDINGS, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF INCOME
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1996
<TABLE>
UNCONSOLIDATED
-------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Homebuilding.......................... $ 275 $890,059 $ 202 $ -- $890,536
Financial Services.................... -- -- 30,578 -- 30,578
Corporate............................. 1,429 23 29 -- 1,481
Equity in earnings of subsidiaries.... 25,582 -- -- (25,582) --
------- -------- ------- -------- --------
Total Revenues..................... 27,286 890,082 30,809 (25,582) 922,595
------- -------- ------- -------- --------
COSTS AND EXPENSES
Homebuilding.......................... 482 861,156 631 300 862,569
Financial Services.................... -- -- 11,921 -- 11,921
Corporate general and administrative.. 11,555 -- 23 -- 11,578
Corporate and homebuilding interest... (17,505) 18,534 2,581 163 3,773
------- -------- ------- -------- --------
Total Expenses..................... (5,468) 879,690 15,156 463 889,841
------- -------- ------- -------- --------
Income before income taxes and
extraordinary item................... 32,754 10,392 15,653 (26,045) 32,754
Provision for income taxes............ 11,955 3,950 6,175 (10,125) 11,955
Extraordinary item, net............... (421) -- -- -- (421)
------- -------- ------- -------- --------
NET INCOME............................... $20,378 $ 6,442 $ 9,478 $(15,920) $ 20,378
------- -------- ------- -------- --------
------- -------- ------- -------- --------
</TABLE>
YEAR ENDED DECEMBER 31, 1995
<TABLE>
UNCONSOLIDATED
-------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Homebuilding.......................... $ 393 $839,913 $ 56 $ -- $840,362
Financial Services.................... -- -- 23,948 -- 23,948
Corporate............................. 1,546 -- -- -- 1,546
Equity in earnings of subsidiaries.... 24,353 -- -- (24,353) --
------- -------- ------- -------- --------
Total Revenues..................... 26,292 839,913 24,004 (24,353) 865,856
------- -------- ------- -------- --------
COSTS AND EXPENSES
Homebuilding.......................... 555 805,804 685 300 807,344
Financial Services.................... -- -- 10,610 -- 10,610
Corporate general and administrative.. 13,416 -- 62 -- 13,478
Corporate and homebuilding interest... (14,330) 20,477 1,512 114 7,773
------- -------- ------- -------- --------
Total Expenses..................... (359) 826,281 12,869 414 839,205
------- -------- ------- -------- --------
Income before income taxes............ 26,651 13,632 11,135 (24,767) 26,651
Provision for income taxes............ 9,401 5,180 3,127 (8,307) 9,401
------- -------- ------- -------- --------
NET INCOME............................... $17,250 $ 8,452 $ 8,008 $(16,460) $ 17,250
------- -------- ------- -------- --------
------- -------- ------- -------- --------
</TABLE>
F-27
<PAGE>
M.D.C. HOLDINGS, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF INCOME
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1994
<TABLE>
UNCONSOLIDATED
-------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Homebuilding.......................... $ 131 $794,542 $ 3,400 $ (4,280) $793,793
Financial Services.................... -- -- 22,095 -- 22,095
Corporate............................. 1,294 -- 63 -- 1,357
Equity in earnings of subsidiaries.... 36,187 4,351 2,230 (42,768) --
------- -------- ------- -------- --------
Total Revenues..................... 37,612 798,893 27,788 (47,048) 817,245
------- -------- ------- -------- --------
COSTS AND EXPENSES
Homebuilding.......................... 2,432 746,278 3,122 (2,503) 749,329
Financial Services.................... -- -- 12,348 -- 12,348
Corporate general and administrative.. 14,876 -- 256 -- 15,132
Corporate and homebuilding interest... (10,678) 18,144 3,836 (1,848) 9,454
------- -------- ------- -------- --------
Total Expenses..................... 6,630 764,422 19,562 (4,351) 786,263
------- -------- ------- -------- --------
Income before income taxes............ 30,982 34,471 8,226 (42,697) 30,982
Provision for income taxes............ 11,727 13,444 3,208 (16,652) 11,727
------- -------- ------- -------- --------
NET INCOME............................... $19,255 $ 21,027 $ 5,018 $(26,045) $ 19,255
------- -------- ------- -------- --------
------- -------- ------- -------- --------
</TABLE>
F-28
<PAGE>
M.D.C. HOLDINGS, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1996
<TABLE>
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........................ $ 105,475 $ 47,212 $ (34,203) $(70,559) $ 47,925
--------- ----------- --------- -------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES.... 4,947 2,082 30,471 (23,502) 13,998
--------- ----------- --------- -------- -----------
FINANCING ACTIVITIES
Net Increase (Reduction) in Borrowings
From Parent and Subsidiaries................ (96,440) (13,306) 15,685 94,061 --
Lines of Credit
Advances................................... -- 1,008,531 -- -- 1,008,531
Principal payments......................... -- (1,040,189) (12,972) -- (1,053,161)
Other, net................................... (17,042) (5,993) (3,749) -- (26,784)
--------- ----------- --------- -------- -----------
Net Cash Used In Financing Activities........ (113,482) (50,957) (1,036) 94,061 (71,414)
--------- ----------- --------- -------- -----------
Net Decrease In Cash and Cash Equivalents.... (3,060) (1,663) (4,768) -- (9,491)
Cash and Cash Equivalents
Beginning Of Year.......................... 10,296 5,054 5,445 -- 20,795
--------- ----------- --------- -------- -----------
End Of Year................................ $ 7,236 $ 3,391 $ 677 $ -- $ 11,304
--------- ----------- --------- -------- -----------
--------- ----------- --------- -------- -----------
</TABLE>
YEAR ENDED DECEMBER 31, 1995
<TABLE>
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........................ $ 33,423 $ 921 $(100,404) $ 88,613 $ 22,553
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES........................ (65,794) 1,482 92,870 (19,830) 8,728
--------- ----------- --------- -------- -----------
FINANCING ACTIVITIES
Net Increase in Borrowings From
Parent and Subsidiaries..................... 19,860 35,874 13,049 (68,783) --
Lines of Credit
Advances................................... -- 741,053 -- -- 741,053
Principal payments......................... -- (759,895) (1,221) -- (761,116)
Principal Payments on Notes Payable.......... (992) (25,151) (1,547) -- (27,690)
Other, net................................... (7,411) 1,114 -- -- (6,297)
--------- ----------- --------- -------- -----------
Net Cash Provided By (Used In)
Financing Activities........................ 11,457 (7,005) 10,281 (68,783) (54,050)
--------- ----------- --------- -------- -----------
Net Increase (Decrease) In Cash
and Cash Equivalents........................ (20,914) (4,602) 2,747 -- (22,769)
Cash and Cash Equivalents
Beginning Of Year.......................... 31,210 9,656 2,698 -- 43,564
--------- ----------- --------- -------- -----------
End Of Year................................ $ 10,296 $ 5,054 $ 5,445 $ -- $ 20,795
--------- ----------- --------- -------- -----------
--------- ----------- --------- -------- -----------
</TABLE>
F-29
<PAGE>
M.D.C. HOLDINGS, INC.
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1994
<TABLE>
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........................ $(22,467) $ (29,215) $ 3,239 $ 11,653 $ (36,790)
-------- --------- -------- -------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES.... 20,604 5,498 17,545 (24,379) 19,268
-------- --------- -------- -------- ---------
FINANCING ACTIVITIES
Net Increase (Reduction) in Borrowings
From Parent and Subsidiaries................ (1,623) 18,905 (12,675) (4,607) --
Lines of Credit
Advances................................... -- 641,874 -- -- 641,874
Principal payments......................... -- (606,160) (6,289) -- (612,449)
Notes Payable
Borrowings................................. -- 15,870 -- -- 15,870
Principal payments......................... (5,370) (37,575) (1,890) -- (44,835)
Maturity of Affiliate-Owned Debt............. -- (17,333) -- 17,333 --
Other, net................................... (2,377) -- -- -- (2,377)
-------- --------- -------- -------- ---------
Net Cash Provided By (Used In)
Financing Activities........................ (9,370) 15,581 (20,854) 12,726 (1,917)
-------- --------- -------- -------- ---------
Net Decrease In Cash and Cash Equivalents.... (11,233) (8,136) (70) -- (19,439)
Cash and Cash Equivalents
Beginning Of Year.......................... 42,443 17,792 2,768 -- 63,003
-------- --------- -------- -------- ---------
End Of Year................................ $ 31,210 $ 9,656 $ 2,698 $ -- $ 43,564
-------- --------- -------- -------- ---------
-------- --------- -------- -------- ---------
</TABLE>
F-30
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Investments in subsidiaries are accounted for on the equity method for
purposes of the supplemental information. The Guarantors follow the accounting
policies set forth in Note A.
RELATED PARTIES. The Guarantors are members of a group of affiliated
companies and have transactions and relationships with members of the group.
MDC charges the Guarantors for a share of its general and administrative
expenses, which amounted to $4,721,000, $4,332,000 and $3,926,000, respectively,
in 1996, 1995 and 1994.
MDC pays costs associated with certain litigation and other significant
claims against the Guarantors which it considers to be general corporate
expenses. Amounts paid by MDC on behalf of the Guarantors amounted to
approximately $282,000, $270,000 and $769,000, respectively, in 1996, 1995 and
1994. In 1996 and 1995, MDC recovered a portion of such payments.
Advances and notes receivable/payable - Parent (M.D.C. Holdings, Inc.) and
subsidiaries consists of ongoing activities relating to the Guarantors'
participation in MDC's cash management system and current and deferred income
taxes.
INCOME TAXES. The Guarantors report their results of operations as if they
were separate taxpayers. The current tax liabilities and deferred income tax
assets and liabilities of the Guarantors are reported in the financial
statements in the Advances and notes receivable/payable - Parent and
subsidiaries accounts.
F-31
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required to be set forth hereunder has been omitted and will be
incorporated by reference, when filed, from the Company's Proxy Statement for
its 1997 Annual Meeting of Shareowners to be held on or about April 25, 1997.
ITEM 11. EXECUTIVE COMPENSATION.
Information required to be set forth hereunder has been omitted and will be
incorporated by reference, when filed, from the Company's Proxy Statement for
its 1997 Annual Meeting of Shareowners to be held on or about April 25, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required to be set forth hereunder has been omitted and will be
incorporated by reference, when filed, from the Company's Proxy Statement for
its 1997 Annual Meeting of Shareowners to be held on or about April 25, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required to be set forth hereunder has been omitted and will be
incorporated by reference, when filed, from the Company's Proxy Statement for
its 1997 Annual Meeting of Shareowners to be held on or about April 25, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS.
The following consolidated financial statements of the Company and its
subsidiaries are included in Part II, Item 8:
PAGE
----
M.D.C. Holdings, Inc. and Subsidiaries
Report of Independent Accountants..................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995.......... F-3
Consolidated Statements of Income for each of the Three Years
Ended December 31, 1996............................................. F-5
Consolidated Statements of Stockholders' Equity for each of the
Three Years Ended December 31, 1996................................. F-6
Consolidated Statements of Cash Flows for each of the Three Years
Ended December 31, 1996............................................. F-7
Notes to Consolidated Financial Statements............................ F-8
All schedules are omitted because they are not applicable, not material,
not required or the required information is included in the applicable financial
statements or notes thereto.
21
<PAGE>
Financial statements for certain unconsolidated partnerships and joint
ventures owned 50% or less by the Company or its subsidiaries, which are
accounted for on the equity method, have been omitted because they do not,
individually, or in the aggregate, constitute a significant subsidiary.
(a) 3. EXHIBITS.
3.1(a) Form of Amendment to the Certificate of Incorporation of M.D.C.
Holdings, Inc. (hereinafter sometimes referred to as "MDC", the
"Company" or the "Registrant") regarding director liability, filed
with the Delaware Secretary of State on July 1, 1987 (incorporated
by reference to Exhibit 3.1(a) of the Company's Quarterly Report
on Form 10-Q dated June 30, 1987).*
3.1(b) Form of Certificate of Incorporation of MDC, as amended
(incorporated herein by reference to Exhibit 3.1(b) of the
Company's Quarterly Report on Form 10-Q dated June 30, 1987).*
3.2(a) Form of Amendment to the Bylaws of MDC regarding indemnification
adopted by its Board of Directors and effective as of March 20,
1987 (incorporated herein by reference to Exhibit 3.2(a) of the
Company's Quarterly Report on Form 10-Q dated June 30, 1987).*
3.2(b) Form of Bylaws of MDC, as amended (incorporated herein by
reference to Exhibit 3.2(b) of the Company's Quarterly Report on
Form 10-Q dated June 30, 1987).*
4.1 Form of Certificate for shares of the Company's common stock
(incorporated herein by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-3, Registration No. 33-426).*
4.2(a) Form of Indenture, dated as of June 15, 1984, between the Company
and The Royal Bank and Trust Company, with respect to the
Company's Subordinated Exchangeable Variable Rate Notes (the "1984
RBTC Indenture") (incorporated herein by reference to Exhibit 4.3
of the Company's Registration Statement on Form S-2, Registration
No. 2-90744).*
4.2(b) First Supplemental Indenture, dated as of June 20, 1985, to the
1984 RBTC Indenture (incorporated herein by reference to Exhibit
4.13(a) of the Company's Registration Statement on Form S-3,
Registration No. 33-426).*
4.2(c) Form of the Company's Subordinated Exchangeable Variable Rate
Notes (filed as Exhibits A and B to Exhibit 4.13 and incorporated
herein by reference to Exhibit 4.3 of the Company's Registration
Statement on Form S-2, Registration No. 2-90744).*
4.3(a) Form of Senior Notes Indenture, dated as of December 15, 1993, by
and among the Company, the Guarantors and Pledgors named therein
and First Bank National Association, a National Association, as
Trustee, with respect to the Company's 11 1/8% Senior Notes due
2003, including form of Senior Note (the "Senior Notes Indenture")
(incorporated herein by reference to Exhibit 4.1 of the Company's
Form 8-K dated January 11, 1994).*
4.3(b) First Supplemental Indenture, dated as of February 2, 1994, to
the Senior Notes Indenture (incorporated herein by reference to
Exhibit 4.4(b) of the Company's Annual Report on Form 10-K for the
year ended December 31, 1993).*
4.4 Form of Convertible Notes Indenture, dated as of December 15,
1993, by and between the Company and First Bank National
Association, a National Association, as Trustee, with respect to
the Company's 8 3/4% Convertible Subordinated Notes due 2005,
including form of Convertible Note (incorporated herein by
reference to Exhibit 4.2 of the Company's Form 8-K dated January
11, 1994).*
22
<PAGE>
4.5 Guaranty Agreement between the Company as guarantor and Bank One,
Denver, N.A., as Trustee under Indenture of Trust dated as of June
1, 1994 between it and Superior Metropolitan District No. 1 dated
as of June 1, 1994 (incorporated herein by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-Q dated
September 30, 1994).*
4.6 Guaranty Agreement between the Company as guarantor and Bank One,
Denver, N.A., as Trustee under Indenture of Trust dated as of June
1, 1994 between it and Superior Metropolitan District No. 2, dated
as of June 1, 1994 (incorporated herein by reference to Exhibit
10.2 of the Company's Quarterly Report on Form 10-Q dated
September 30, 1994).*
4.7 Credit Agreement dated as of April 10, 1996 among 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 as Borrowers
and the Banks Named Herein as Banks and Bank One, Arizona, NA as
Agent (the "Credit Agreement") (incorporated herein by reference
to Exhibit 4.1 of the Company's Quarterly Report on Form 10-Q
dated March 31, 1996).*
4.8 Schedule "2.21" to Credit Agreement--Terms Relating to Last 24
Months of Term/No Extension (incorporated herein by reference to
Exhibit 4.2 of the Company's Quarterly Report on Form 10-Q dated
March 31, 1996).*
4.9 Schedule "2.22" to Credit Agreement--Terms Relating to Conversion
Period (incorporated herein by reference to Exhibit 4.3 of the
Company's Quarterly Report on Form 10-Q dated March 31, 1996).*
4.10 Guaranty of Credit Agreement dated as of April 10, 1996 by M.D.C.
Holdings, Inc. (incorporated herein by reference to Exhibit 4.4
of the Company's Quarterly Report on Form 10-Q dated March 31,
1996).*
4.11 Form of Promissory Note of 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 as Makers dated April __, 1996 (incorporated herein
by reference to Exhibit 4.5 of the Company's Quarterly Report on
Form 10-Q dated March 31, 1996).*
10.1(a) The Company's 1983 Incentive Stock Option Plan (incorporated
herein by reference to Exhibit 10.4 of the Company's Annual Report
on Form 10-K for the year ended December 31, 1982).*
10.1(b) 1987 Amendments to the Incentive Stock Option Plan of MDC
(incorporated herein by reference to Exhibit 10.1(a) of the
Company's Annual Report on Form 10-K for the year ended December
31, 1986).*
10.1(c) 1988 Amendment to the 1983 Incentive Stock Option Plan of MDC
(incorporated herein by reference to Exhibit 19.3(a) of the
Company's Quarterly Report on Form 10-Q dated June 30, 1988).*
10.2(a) The Company's 1983 Non-Qualified Stock Option Plan (incorporated
herein by reference to Exhibit 10.5 of the Company's Annual Report
on Form 10-K for the year ended December 31, 1983).*
10.2(b) 1988 Amendment to the 1983 Non-Qualified Stock Option Plan of MDC
(incorporated herein by reference to Exhibit 10.2(b) of the
Company's Quarterly Report on Form 10-Q dated June 30, 1988).*
23
<PAGE>
10.3 The Company's Employee Equity Incentive Plan (incorporated herein
by reference to Exhibit A of the Company's Proxy Statement dated
May 14, 1993 relating to the 1993 Annual Meeting of
Stockholders).*
10.4 The Company's Director Equity Incentive Plan (incorporated herein
by reference to Exhibit B of the Company's Proxy Statement dated
May 14, 1993 relating to the 1993 Annual Meeting of
Stockholders).*
10.5 CMO Participation Agreement among the Company, M.D.C. Asset
Investors, Inc. and Yosemite Financial, Inc. (incorporated herein
by reference to Exhibit 10.6 of M.D.C. Asset Investors, Inc.'s
Registration Statement on Form S-11, Registration No. 33-9557).*
10.6(a) Form of Indemnity Agreement entered into between the Registrant
and each member of its Board of Directors as of March 20, 1987
(incorporated herein by reference to Exhibit 19.1 of the Company's
Quarterly Report on Form 10-Q dated June 30, 1987).*
10.6(b) Form of Indemnity Agreement entered into between the Registrant
and certain officers of the Registrant on various dates during
1988 and early 1989 (incorporated herein by reference to Exhibit
10.18(b) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1988).*
10.7 Indemnification Agreement by and among the Company and Larry A.
Mizel ("Mizel") and David D. Mandarich ("Mandarich") dated
December 21, 1989 (incorporated herein by reference to Exhibit 9
of the Company's Form 8-K dated December 28, 1989).*
10.8 Promissory Note in the amount of $559,920 from Mizel to the
Company dated February 2, 1994 (incorporated herein by reference
to Exhibit 10.9 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1993).*
10.9 Promissory Note in the amount of $280,080 from Mandarich to the
Company dated February 2, 1994 (incorporated herein by reference
to Exhibit 10.10 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1993).*
10.10 Fifth Amendment to Piney Creek Development Co. Joint Venture
Agreement dated June 13, 1991 by and between Commercial Federal
Bank and Land (incorporated herein by reference to Exhibit 10.25
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1991).*
10.11 Letter Agreement effective October 1, 1994 by and between Gilbert
Goldstein, P.C. and the Company (incorporated herein by reference
to Exhibit 10.12 of the Company's Quarterly Report on Form 10-Q
dated June 30, 1996).*
10.12 MDC 401(k) Savings Plan (incorporated herein by reference to
Exhibit 10.31(a) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992).*
10.13 M.D.C. Holdings, Inc. Executive Officer Performance-Based
Compensation Plan (incorporated herein by reference to Exhibit A
to the Company's Proxy Statement dated May 25, 1994 related to the
1994 Meeting of Shareowners).*
10.14 Employment Agreement between the Company and Michael Touff dated
December 31, 1994 (incorporated herein by reference to Exhibit
10.17 of the Company's Form 10-K for the year-ended December 31,
1994).*
24
<PAGE>
10.15 M.D.C. Holdings, Inc. Executive Option Purchase Program, including
form of Promissory Note and Pledge Agreement (incorporated herein
by reference to Exhibit 10.1 of the Company's Quarterly Report on
Form 10-Q dated March 31, 1995).*
10.16 Acquisition Agreement by and among FAM Acquisitions LLC and
M.D.C. Holdings, Inc., Financial Asset Management Corporation and
M.D.C. Residual Holdings, Inc. dated as of September 6, 1996 (the
"Acquisition Agreement") (incorporated herein by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q dated
September 30, 1996).*
10.17 Amendment No. 1 to Acquisition Agreement dated as of September
30, 1996 (incorporated herein by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-Q dated September 30,
1996).*
10.18 Closing Agreement dated as of September 30, 1996 between M.D.C.
Holdings, Inc. and Spencer I. Browne (incorporated herein by
reference to Exhibit 10.3 of the Company's Quarterly Report on
Form 10-Q dated September 30, 1996).*
10.19 Forms of Promissory Note and Pledge Agreement dated December 9,
1996 between M.D.C. Holdings, Inc. and Michael Touff and Paris G.
Reece III related to amounts advanced to such persons in
connection with income taxes due on the portion of their 1996
performance bonuses paid in the form of the Company's Common
Stock.
21 Subsidiaries of the Company.
23 Consent of Price Waterhouse LLP.
27 Financial Data Schedule.
- - -------------------
* Incorporated herein by reference.
25
<PAGE>
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of the year ended
December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
this 18th day of February, 1997 on its behalf by the undersigned, thereunto duly
authorized.
M.D.C. HOLDINGS, INC.
(Registrant)
By: /s/ LARRY A. MIZEL
----------------------------------
Larry A. Mizel
CHIEF EXECUTIVE OFFICER
By: /s/ PARIS G. REECE III
----------------------------------
Paris G. Reece III
SENIOR VICE PRESIDENT, CHIEF
FINANCIAL OFFICER AND PRINCIPAL
ACCOUNTING OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and/or
directors of the Registrant, by virtue of their signatures to this report,
appearing below, hereby constitute and appoint Larry A. Mizel, David D.
Mandarich and Paris G. Reece III, or any one of them, with full power of
substitution, as attorneys-in-fact in their names, places and steads to
execute any and all amendments to this report in the capacities set forth
opposite their names and hereby ratify all that said attorneys-in-fact do by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LARRY A. MIZEL Chairman of the Board of
- - --------------------------- Directors, President and February 18, 1997
Larry A. Mizel Chief Executive Officer
/s/ DAVID D. MANDARICH Director, Executive Vice
- - --------------------------- President - Real Estate and February 18, 1997
David D. Mandarich Chief Operating Officer
/s/ STEVEN J. BORICK Director
- - --------------------------- February 18, 1997
Steven J. Borick
/s/ GILBERT GOLDSTEIN Director
- - --------------------------- February 18, 1997
Gilbert Goldstein
/s/ WILLIAM B. KEMPER Director
- - --------------------------- February 18, 1997
William B. Kemper
/s/ HERBERT T. BUCHWALD Director
- - --------------------------- February 18, 1997
Herbert T. Buchwald
(A Majority of the Board of Directors)
26
<PAGE>
Exhibit 10.19
PLEDGE AGREEMENT
THIS AGREEMENT is entered into as of the ___ day of December 1996, by
and between M.D.C. Holdings, Inc., a Delaware corporation ("MDC")
and_______________ ("Pledgor").
WHEREAS, MDC has made a loan to Pledgor in connection with the receipt
by Pledgor of shares of MDC stock as part of Pledgor's compensation; and
WHEREAS, the loan to Pledgor is secured by certain shares of MDC stock
delivered to Pledgor;
NOW, THEREFORE, in consideration of the premises and the mutual
promises contained herein, MDC and Pledgor agree as follows:
1. PLEDGE.
1.1 SECURITY INTEREST. As security for the promissory note of Pledgor of
even date herewith in the original principal amount of $________ (the "Note"),
including any renewals or extensions thereof, Pledgor hereby pledges and assigns
to MDC and creates in MDC a security interest in all of his right, title and
interest in and to the shares of common stock of MDC represented by the stock
certificates listed on Schedule 1 to this Agreement (the "Pledged Shares")
together with all rights and privileges of Pledgor with respect thereto, all
proceeds, income and profits thereof and all property received in addition
thereto, in exchange thereof or in substitution therefor (the "Collateral").
The initial number of Pledged Shares shall be no less than the principal amount
of the Note plus 25%, divided by $7.375
1.2 STOCK DIVIDENDS, OPTIONS, OR OTHER ADJUSTMENTS. If the Pledged Shares
or any additional shares of capital stock, instruments, or other property
distributable on or by reason of the Collateral, shall come into the possession
or control of Pledgor, and such property is such that a security interest
therein can be perfected only by possession by MDC, Pledgor shall hold the same
in trust and forthwith transfer and deliver the same to MDC subject to the
provisions hereof. Notwithstanding the above, absent an Event of Default,
Pledgor shall retain the right to vote all shares of the Collateral and receive
all dividends declared on all shares of the Collateral.
1.3 DELIVERY OF SHARE CERTIFICATES; STOCK POWERS. The stock certificates
representing the Pledged Shares have been delivered to MDC. Pledgor shall
promptly deliver to MDC share certificates or other documents representing
Collateral acquired or received after the date of this Agreement with stock
powers duly executed by Pledgor. If at any time MDC notifies Pledgor that
additional stock powers endorsed in blank held by MDC with respect to the
Collateral are required, Pledgor shall promptly execute in blank and deliver
such stock powers as MDC may request.
<PAGE>
1.4 POWER OF ATTORNEY. Pledgor hereby constitutes and irrevocably
appoints MDC, with full power of substitution and revocation by MDC, as
Pledgor's true and lawful attorney-in-fact, to the full extent permitted by law,
at any time or times when an Event of Default (as defined below) has occurred
and is continuing, to affix to certificates and documents representing the
Collateral the stock powers delivered with respect thereto, to transfer or cause
the transfer of the Collateral or any part thereof on the books of MDC to the
name of MDC or MDC's nominee and thereafter exercise as to such Collateral all
the rights, powers and remedies of an owner. The power of attorney granted
pursuant to this Agreement and all authority hereby conferred are granted and
conferred solely to protect MDC's interest in the Collateral and shall not
impose any duty upon MDC to exercise any power. This power of attorney shall be
irrevocable as one coupled with an interest.
2. REPRESENTATIONS OF PLEDGOR.
Pledgor represents and warrants to MDC that:
2.1 OWNERSHIP. Pledgor is the sole legal and beneficial owner of, and has
good and marketable title to, the Pledged Shares listed as being owned by him on
Schedule 1, free and clear of all pledges, liens, security interests and other
encumbrances other than the security interest created by this Agreement, and
Pledgor has the unqualified right and authority to execute this Agreement and to
pledge the Collateral to MDC as provided for herein.
2.2 OTHER RIGHTS. There are no outstanding options, warrants or other
agreements with respect to the Pledged Shares, other than this Agreement.
2.3 COMPLIANCE. The execution and delivery of this Agreement by Pledgor,
and the performance by Pledgor of his obligations hereunder, will not result in
a violation of any contract, agreement or other obligation to which Pledgor is a
party or, to the best knowledge of Pledgor, any law or governmental regulation
to which Pledgor is subject.
3. COVENANTS.
Pledgor covenants to MDC that:
3.1 SALE OR TRANSFER. Unless Pledgor and MDC have made arrangements for
the release of all or any part of the Collateral in accordance with Section 3.2
below, Pledgor will not sell, transfer or convey any interest in, or suffer or
permit any lien or encumbrance to be created upon or with respect to, any of the
Collateral (other than as created under this Agreement) during the term of this
Agreement.
-2-
<PAGE>
3.2 RELEASE OF COLLATERAL. At any time on or after Pledgor makes a
principal payment on the Note, the Pledgor may require MDC to release a pro-rata
portion of the Collateral, with the number of shares to be released determined
by multiplying the total number of shares of Collateral then held by MDC by a
fraction, the numerator of which being the amount of any such principal payment
and the denominator of which being the original principal amount of the Note;
provided, however, that releases of Collateral shall be permitted by this
Section 3.2 only if the fair market value of the Collateral retained by MDC
after giving effect to a release equals or exceeds the unpaid principal amount
of the Note after giving effect to the principal payment. For this purpose,
"fair market value" shall mean the closing price of each share of the Collateral
on the New York Stock Exchange on the date of the principal payment (or, if no
shares were traded on that day, on the next preceding day on which shares were
traded), multiplied by the number of shares of Collateral retained by MDC.
3.3 FURTHER ACTIONS. Pledgor will, at his own expense, at any time and
from time to time at MDC's request, do, make, procure, execute and deliver all
acts, things, writings, assurances and other documents as may be reasonably
proposed by MDC further to enhance, preserve, establish, demonstrate or enforce
MDC's rights, interests and remedies created by, provided in or arising from
this Agreement.
4. REMEDIES.
4.1 EVENTS OF DEFAULT. "Event of Default" means any one of the following
events:
(A) the occurrence of any event of default under the Note which has
not been cured within the applicable cure period, or
(B) default in the performance, or breach, of any covenant,
representation or warranty of Pledgor in this Agreement, and continuance of such
default or breach for a period of 30 days after MDC has given such Pledgor
written notice specifying such default or breach and requiring it to be
remedied.
4.2 ACTIONS BY MDC. If an Event of Default occurs and is continuing, then
and in every such case MDC may take any one or more of the following actions:
(A) MDC may upon two business days' notice cause the Collateral to be
transferred to its name or to the name of its nominee or nominees and thereafter
exercise as to such Collateral all of the rights, powers and remedies of an
owner;
(B) MDC may upon two business days' notice collect by legal
proceedings or otherwise all dividends, interest, principal payments, capital
distributions and other sums now or hereafter payable on account of said
Collateral, and hold the same as part of the Collateral, or
-3-
<PAGE>
apply the same to the Note in such manner as MDC may decide in its sole and
absolute discretion;
(C) MDC may upon two business days' notice enter into any extension,
subordination, reorganization, deposit, merger, or consolidation agreement, or
any other agreement relating to or affecting the Collateral, and in connection
therewith deposit or surrender control of such Collateral thereunder, and accept
other property in exchange therefor and hold and apply such property or money so
received in accordance with the provisions hereof;
(D) At any time upon two business days' notice, after Pledgor's
failure to pay the same, MDC may discharge any taxes, liens, security interests
or other encumbrances levied or placed on the Collateral, pay for the
maintenance and preservation of the Collateral, or pay for insurance on the
Collateral; the amount of such payments, plus any and all fees, costs and
expenses of MDC (including reasonable attorneys' fees and disbursements) in
connection therewith, shall, at MDC's option, be reimbursed by Pledgor on
demand, with interest thereon to be calculated pursuant to the Note from the
date paid by MDC.
(E) MDC shall have all the rights and remedies of a secured party
under the Uniform Commercial Code of Colorado.
4.3 REMEDIES CUMULATIVE AND NONEXCLUSIVE. All of MDC's rights and
remedies, including, but not limited to the foregoing, shall be cumulative and
not exclusive and shall be enforceable alternatively, successively or
concurrently as MDC may deem expedient.
4.4 CONSENTS AND APPROVALS. If any consent, approval or authorization of
any state, municipal or other governmental department, agency or authority
should be necessary to effectuate any sale or other disposition of the
Collateral, or any partial disposition of the Collateral, Pledgor will execute
all such applications and other instruments as may be required in connection
with securing any such consent, approval or authorization and will otherwise use
his best efforts to secure the same. Pledgor further agrees to use his best
efforts to secure such sale or other disposition of the Collateral as MDC may
deem necessary pursuant to the terms of this Agreement.
4.5 ASSIGNMENT AND TRANSFER. Upon any sale or other disposition of the
Collateral, MDC shall have the right to deliver, assign and transfer to the
purchaser thereof the Collateral so sold or disposed of. Each purchaser at any
such sale or other disposition (including MDC) shall hold the Collateral free
from any claim or right of whatever kind, including any equity or right of
redemption of Pledgor. Pledgor specifically waives, to the extent permitted by
applicable law, all rights of redemption, stay or appraisal that he had or may
have under any rule of law or statute now existing or hereafter adopted.
-4-
<PAGE>
4.6 NO OBLIGATION. MDC shall not be obligated to make any sale or other
disposition, unless the terms thereof shall be satisfactory to it. MDC may,
without notice or publication, adjourn any private or public sale, and, upon
five days' prior notice to Pledgor, hold such sale at any time or place to which
the same may be so adjourned. In case of any sale of all or any part of the
Collateral, on credit or for future delivery, the Collateral so sold may be
retained by MDC until the selling price is paid by the purchaser thereof, but
MDC shall incur no liability in case of the failure of such purchaser to take up
and pay for the property so sold and, in case of any such failure, such property
may again be sold as herein provided.
4.7 DISPOSITION OF PROCEEDS. The proceeds of any sale or disposition of
all or any part of the Collateral shall be applied by MDC in the following
order:
(A) to the payment in full of the costs and expenses of such sale or
sales, collections, and the protection, declaration and enforcement of any
security interest granted hereunder including the reasonable compensation of
MDC's agents and attorneys;
(B) to the payment of Note in such manner as MDC may elect; and
(C) to the payment to Pledgor of any surplus.
4.8 INSUFFICIENCY. In the event that the proceeds of any sale or other
disposition are insufficient to cover the principal of, and interest on, the
Note plus the costs and expenses of the sale or other disposition, Pledgor shall
be liable for such deficiency.
5. TERMINATION.
This Agreement shall continue in full force and effect as long as any
amount remains outstanding under the Note. Subject to any sale or other
disposition by MDC of the Collateral or any part thereof pursuant to this
Agreement, the Collateral shall be returned to Pledgor upon full indefeasible
payment, satisfaction and termination of the Note. A portion of the Collateral
shall also be returned to Pledgor as provided in Section 3.2.
6. EXPENSES OF MDC.
All expenses (including reasonable fees and disbursements of counsel)
incurred by MDC in connection with any actual or attempted sale or exchange of,
or any enforcement, collection, compromise or settlement respecting, the
Collateral, or any other proceeding or action taken by MDC hereunder whether
directly or as attorney-in-fact pursuant to a power of attorney or other
authorization herein conferred, and regardless of whether any litigation or
proceeding is commenced for the purpose of satisfaction of the liability of
Pledgor for failure to pay his or her
-5-
<PAGE>
obligations or as additional amounts owing by Pledgor to cover MDC's costs of
acting against the Collateral, shall be deemed an obligation of Pledgor for
all purposes of this Agreement, and MDC may apply the Collateral to payment
of or reimbursement of itself for such liability.
7. MISCELLANEOUS.
7.1 ASSIGNABILITY OF RIGHTS. Pledgor may not assign any of his rights
under this Agreement, and any attempted assignment shall be void and considered
a default under this Agreement. The provisions of this Agreement which are for
MDC's benefit as a holder of the Collateral are also for the benefit of, and
enforceable by any subsequent holder of the Note or the Collateral.
7.2 NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by telecopy
or by registered or certified mail (postage prepaid, return receipt requested)
to the respective parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(A) if to MDC:
MDC Holdings, Inc.
3600 South Yosemite, Suite 900
Denver, Colorado 80237
Attention: Michael Touff, Esq.
(B) if to Pledgor:
----------------------
----------------------
----------------------
7.3 ENTIRE AGREEMENT. Except as expressly set forth herein, this
Agreement constitutes the entire agreement between the parties with respect to
the subject matter hereof and supersedes all prior agreements and undertakings,
both written and oral, between the parties with respect to the subject matter
hereof.
7.4 GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Colorado regardless of the laws
that might otherwise govern under applicable principles of conflicts of laws
thereof. No provision of this Agreement shall be construed against any party
by reason of that party having drafted the same.
-6-
<PAGE>
7.5 HEADINGS. The descriptive headings contained in this Agreement are
included for convenience of reference only and shall not affect in any way the
meaning or interpretation of this Agreement.
7.6 SEVERABILITY; ENFORCEABILITY. If any term or provision of this
Agreement or any application thereof shall be invalid or enforceable, the
remainder of this Agreement and any other application of such term or provision
shall not be affected thereby.
7.7 ATTORNEYS' FEES. In the event of any dispute among the parties hereto
relating to the subject matter of this Agreement, the out-of-pocket costs and
reasonable attorneys' fees of the prevailing party shall be paid by the other
party in addition to any other relief.
7.8 AMENDMENT. This Agreement may not be supplemented, modified or
amended except by an instrument in writing signed by the parties hereto.
7.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.10 NO OBLIGATION. MDC and its assigns shall use reasonable care in
holding the Collateral and shall hold and dispose of the same in accordance with
the terms of this Agreement.
-7-
<PAGE>
IN WITNESS WHEREOF, MDC has caused this Agreement to be executed, and
Pledgor has executed this Agreement, as of the date first written above.
M.D.C. HOLDINGS, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
PLEDGOR
-----------------------------------
Name:
------------------------------
-8-
<PAGE>
SCHEDULE 1 TO PLEDGE AGREEMENT
PLEDGED SHARES
Stock Cert. Number of
Number Shares
- - ---------- ---------
-- ------------
-- ------------
-9-
<PAGE>
PROMISSORY NOTE
December __, 1996
Borrower: __________________ Lender: M.D.C. Holdings, Inc.,
a Delaware corporation
Amount: $__________ Maturity Date: December __, 2001
For value received, Borrower promises to pay to the order of Lender at
Lender's corporate office in Denver, Colorado, the sum of $_________ in lawful
money of the United States with simple interest thereon from the date hereof
until paid, both before and after judgment, computed on the basis of a 365 day
year, at a variable rate per annum, adjusted as of the first day of each
calendar month during the term of this Promissory Note, equal to (a) the average
one month London Inter-Bank Offered Rate as of the last business day immediately
preceding the date of such adjustment (or, in the case of the initial rate, the
date hereof) as reported in THE WALL STREET JOURNAL, plus (b) 1%. Upon default
in payment of any principal or interest when due, whether due at stated
maturity, by acceleration, or otherwise, all outstanding principal shall bear
interest at a default rate of 18% per annum from the date when due until paid,
both before and after judgment.
Payments of principal and accrued interest shall be made on December 30 of
each year during the term of this Promissory Note commencing December 30, 1997
based upon a ten year amortization. The remaining principal and accrued interest
shall be payable in full on the earlier of: (a) December 30, 2001; (b) 90 days
after Borrower's employment with Lender has been terminated for cause; or (c)
one year after Borrower's employment with Lender has been terminated other than
for cause.
All payments shall be applied first to accrued interest and the remainder,
if any, to principal.
This Promissory Note is secured by shares of the Lender's common stock
pursuant to a Pledge Agreement.
If default occurs in the payment of any principal or interest when due and
remains uncured five days after Borrower's receipt of notice thereof, or if any
Event of Default (as defined in the Pledge Agreement) occurs under the Pledge
Agreement, time being the essence, then the entire unpaid balance, with interest
as aforesaid, shall, at the election of the holder hereof and without notice of
such election, become immediately due and payable in full and in any such event,
Borrower agrees to pay to the holder hereof all collection costs, including
reasonable attorney fees and legal expenses, in addition to all other sums due
hereunder.
Borrower:
-----------------------------
(Name)
-----------------------------
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF M.D.C. HOLDINGS, INC.
AMERICAN HOME TITLE AND ESCROW COMPANY
ASFC-W, INC.
ASFC-38, INC.
ASSET INVESTORS EQUITY, INC.
ASW FINANCE COMPANY
COPPER RIDGE CORPORATION
DESIGNER DOOR & MILLWORK OF CALIFORNIA, INC.
ECM HOLDINGS
ENERWEST, INC.
FINANCIAL ASSET MANAGEMENT CORPORATION
F.V.S. ENTITY, INC.
GREENWAY FARMS DEVELOPMENT CORPORATION
HOMEAMERICAN MORTGAGE CORPORATION
LION INSURANCE COMPANY
LION WARRANTY CORPORATION
MDC/WOOD, INC.
MDC DEVELOPMENT AND PIPELINE COMPANY (f/k/a/ RAH/CO)
M.D.C. ACCEPTANCE CORPORATION
M.D.C. CONSTRUCTION CO.
M.D.C. EQUITIES, INC.
M.D.C. FINANCIAL CORPORATION
M.D.C. HOME FINANCE CORPORATION
M.D.C. HOME MORTGAGE FINANCE CORPORATION
M.D.C. INSTITUTIONAL RESIDUALS, INC.
M.D.C. LAND CORPORATION
M.D.C. MORTGAGE FINANCE, INC.
M.D.C. MORTGAGE FUNDING CORPORATION II
M.D.C. RESIDUAL HOLDINGS, INC.
PETRO RESOURCES, INC.
RICHMOND AMERICAN CONSTRUCTION, INC.
RICHMOND AMERICAN HOMES OF ARIZONA, INC.
RICHMOND AMERICAN HOMES OF CALIFORNIA, INC.
RICHMOND AMERICAN HOMES OF COLORADO, INC.
RICHMOND AMERICAN HOMES OF MARYLAND, INC.
RICHMOND AMERICAN HOMES OF NEVADA, INC.
RICHMOND AMERICAN HOMES OF POTOMAC KNOLLS NO. 1, INC.
RICHMOND AMERICAN HOMES OF POTOMAC KNOLLS NO. 2, INC.
RICHMOND AMERICAN HOMES OF POTOMAC KNOLLS NO. 3, INC.
RICHMOND AMERICAN HOMES OF POTOMAC KNOLLS NO. 4, INC.
RICHMOND AMERICAN HOMES OF POTOMAC KNOLLS NO. 5, INC.
RICHMOND AMERICAN HOMES OF POTOMAC KNOLLS NO. 6, INC.
<PAGE>
RICHMOND AMERICAN HOMES OF TEXAS, INC.
RICHMOND AMERICAN HOMES OF VIRGINIA, INC.
RICHMOND AMERICAN HOMES, INC. (a Florida corporation)
RICHMOND HOMES LIMITED
RICHMOND SHELF, INC.
T.C.V., INC.
THE YEONAS COMPANY
YOSEMITE AMERICAN MORTGAGE CORPORATION
YOSEMITE FINANCIAL, INC.
995 CORPORATION
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in each Prospectus
constituting part of the Registration Statements on Forms S-3 (nos. 33-52241,
33-54007, 33-59703 and 333-17035), Form S-4 (no. 33-52245), and in the
Registration Statements on Form S-8 (nos. 2-96464 and 33-54429) of M.D.C.
Holdings, Inc. of our report dated February 3, 1997 appearing on page F-2 of
this Form 10-K.
/s/ Price Waterhouse
- - -------------------------------------
PRICE WATERHOUSE LLP
Denver, Colorado
February 3, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MDC
HOLDINGS, INC. CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITS FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,304
<SECURITIES> 5,159
<RECEIVABLES> 10,218
<ALLOWANCES> 0
<INVENTORY> 434,812
<CURRENT-ASSETS> 0
<PP&E> 9,411
<DEPRECIATION> 0
<TOTAL-ASSETS> 617,303
<CURRENT-LIABILITIES> 0
<BONDS> 253,346
0
0
<COMMON> 231
<OTHER-SE> 213,616
<TOTAL-LIABILITY-AND-EQUITY> 617,303
<SALES> 890,536
<TOTAL-REVENUES> 922,595
<CGS> (862,569)
<TOTAL-COSTS> (889,841)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,773)
<INCOME-PRETAX> 32,754
<INCOME-TAX> (11,995)
<INCOME-CONTINUING> 20,799
<DISCONTINUED> 0
<EXTRAORDINARY> (421)
<CHANGES> 0
<NET-INCOME> 20,378
<EPS-PRIMARY> 1.06
<EPS-DILUTED> .96
</TABLE>
