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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-8951
M.D.C. HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 84-0622967
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
3600 South Yosemite Street, Suite 900 80237
Denver, Colorado (Zip code)
(Address of principal executive offices)
(303) 773-1100
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of August 1, 1997, 17,591,000 shares of M.D.C. Holdings, Inc.
common stock were outstanding.
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<PAGE>
M.D.C. HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
Page
No.
Part I. Financial Information:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of June 30, 1997 (Unaudited)
and December 31, 1996......................... 1
Statements of Income (Unaudited) for the three
and six months ended June 30, 1997 and 1996... 3
Statements of Cash Flows (Unaudited) for the
six months ended June 30, 1997 and 1996....... 4
Notes to Financial Statements (Unaudited)...... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 15
Part II. Other Information:
Item 1. Legal Proceedings.............................. 26
Item 4. Submission of Matters to a Vote of Shareowners. 26
Item 5. Other Information.............................. 26
Item 6. Exhibits and Reports on Form 8-K............... 26
(i)
<PAGE>
<TABLE>
<CAPTION>
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands)
June 30, December 31,
1997 1996
----------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Corporate
Cash and cash equivalents...................... $ 6,892 $ 7,235
Property and equipment, net.................... 9,445 9,411
Deferred income taxes.......................... 9,762 10,804
Deferred debt issue costs, net................. 7,221 9,155
Other assets, net.............................. 2,799 3,557
---------- -----------
36,119 40,162
---------- -----------
Homebuilding
Cash and cash equivalents...................... 3,746 3,393
Home sales and other accounts receivable....... 18,567 10,218
Investments and marketable securities, net..... 4,020 5,159
Inventories, net
Housing completed or under construction...... 271,362 251,885
Land and land under development.............. 181,003 182,927
Prepaid expenses and other assets, net......... 56,642 57,722
---------- -----------
535,340 511,304
---------- -----------
Financial Services
Cash and cash equivalents...................... 825 676
Accrued interest and other assets, net......... 5,538 6,419
Mortgage loans held in inventory, net.......... 57,935 58,742
---------- -----------
64,298 65,837
---------- -----------
Total Assets............................. $ 635,757 $ 617,303
========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
-1-
<PAGE>
<TABLE>
<CAPTION>
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
June 30, December 31,
1997 1996
----------- ------------
LIABILITIES (Unaudited)
<S> <C> <C>
Corporate
Accounts payable and accrued expenses.......... $ 11,504 $ 13,519
Income taxes payable........................... 9,069 11,434
Note payable................................... 3,460 3,487
Senior Notes, net.............................. 150,262 187,721
Subordinated notes, net........................ 38,227 38,225
----------- -----------
212,522 254,386
---------- -----------
Homebuilding
Accounts payable and accrued expenses.......... 107,873 114,794
Line of credit................................. 70,576 11,832
Notes payable.................................. 2,926 3,063
----------- -----------
181,375 129,689
---------- -----------
Financial Services
Accounts payable and accrued expenses.......... 9,322 10,363
Line of credit................................. 18,404 9,018
----------- -----------
27,726 19,381
Total Liabilities........................ 421,623 403,456
----------- -----------
COMMITMENTS AND CONTINGENCIES..................... - - - -
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 25,000,000
shares authorized; none issued................ - - - -
Common Stock, $.01 par value; 100,000,000
shares authorized; 23,394,000 and 23,050,000
shares issued, respectively, at June 30, 1997
and December 31, 1996........................ 234 231
Additional paid-in capital..................... 141,218 138,705
Retained earnings.............................. 112,249 106,189
----------- -----------
253,701 245,125
Less treasury stock, at cost; 5,903,000 and
4,966,000 shares, respectively, at
June 30, 1997 and December 31, 1996.......... (39,567) (31,278)
----------- -----------
Total Stockholders' Equity............... 214,134 213,847
----------- -----------
Total Liabilities and Stockholders' Equity $ 635,757 $ 617,303
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
REVENUES
<S> <C> <C> <C> <C>
Homebuilding..................... $ 233,542 $ 230,329 $ 422,691 $ 421,605
Financial Services............... 3,449 6,950 7,680 14,688
Corporate........................ 294 497 733 729
----------- ----------- ----------- -----------
Total Revenues............... 237,285 237,776 431,104 437,022
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding...................... 223,704 223,286 405,398 408,528
Financial Services................ 2,045 3,348 4,396 6,090
Corporate general and
administrative................... 3,254 2,980 6,500 5,581
Corporate and homebuilding
interest......................... - - 1,027 761 2,878
----------- ----------- ----------- -----------
Total Expenses................ 229,003 230,641 417,055 423,077
----------- ----------- ----------- -----------
Income before income taxes and
extraordinary item................. 8,282 7,135 14,049 13,945
Provision for income taxes........... (3,148) (2,603) (5,329) (5,089)
----------- ----------- ----------- -----------
Income before extraordinary item..... 5,134 4,532 8,720 8,856
Extraordinary losses from early
extinguishments of debt, net of
income tax benefit of $1,336 for
1997 and $242 for 1996............. - - (421) (2,179) (421)
----------- ----------- ----------- -----------
Net Income........................... $ 5,134 $ 4,111 $ 6,541 $ 8,435
=========== =========== =========== ===========
EARNINGS PER SHARE
Primary
Income before extraordinary item. $ .29 $ .23 $ .48 $ .45
=========== =========== =========== ===========
Net Income....................... $ .29 $ .21 $ .36 $ .43
=========== =========== =========== ===========
Fully diluted
Income before extraordinary item. $ .26 $ .21 $ .44 $ .42
=========== =========== =========== ===========
Net Income....................... $ .26 $ .20 $ .34 $ .40
=========== =========== =========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING
Primary............................ 17,970 19,365 18,226 19,612
=========== =========== =========== ===========
Fully diluted...................... 21,614 22,978 21,850 23,225
=========== =========== =========== ===========
DIVIDENDS PER SHARE................... $ .03 $ .03 $ .06 $ .06
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six months
Ended June 30,
1997 1996
----------- -----------
OPERATING ACTIVITIES
<S> <C> <C>
Net Income................................... $ 6,541 $ 8,435
Adjustments To Reconcile Net Income To Net
Cash Provided By (Used In)
Operating Activities:
Depreciation and amortization.......... 6,536 5,744
Homebuilding asset impairment charges.. 2,350 2,870
Deferred income taxes.................. 1,042 4,779
Gains on sales of mortgage-related
assets............................... (55) (1,007)
Net changes in assets and liabilities
Home sales and other accounts
receivable....................... (8,349) 3,282
Homebuilding inventories........... (19,216) (13,723)
Mortgage loans held in inventory... 807 2,465
Other assets and liabilities, net.. (13,454) (4,631)
----------- -----------
Net Cash Provided By (Used In) Operating
Activities................................. (23,798) 8,214
----------- -----------
INVESTING ACTIVITIES
Net Proceeds From Mortgage-Related Assets
and Liabilities............................ 1,558 1,991
Other, net................................... (152) 1,843
----------- -----------
Net Cash Provided By Investing Activities.... 1,406 3,834
----------- -----------
FINANCING ACTIVITIES
Lines of Credit
Advances............................... 495,186 487,062
Principal payments..................... (427,056) (482,023)
Notes Payable
Borrowings............................. 98 480
Principal payments..................... (38,164) (10,071)
Stock Repurchases............................ (7,349) (5,016)
Dividend Payments............................ (1,072) (1,141)
Other, net................................... 908 1,434
----------- -----------
Net Cash Provided By (Used In) Financing
Activities................................. 22,551 (9,275)
----------- -----------
Net Increase In Cash and Cash Equivalents.... 159 2,773
Cash and Cash Equivalents
Beginning of Period..................... 11,304 20,795
----------- -----------
End of Period........................... $ 11,463 $ 23,568
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
M.D.C. HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A. Presentation of Financial Statements
The condensed consolidated financial statements of M.D.C. Holdings,
Inc. ("MDC" or the "Company," which, unless otherwise indicated, refers to
M.D.C. Holdings, Inc. and its subsidiaries) have been prepared, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
These statements reflect all adjustments (including all normal recurring
accruals) which, in the opinion of management, are necessary to present fairly
the financial position, results of operations and cash flows of MDC as of June
30, 1997 and for all of the periods presented. These statements are condensed
and do not include all of the information required by generally accepted
accounting principles in a full set of financial statements. These statements
should be read in conjunction with MDC's financial statements and notes thereto
included in MDC's Annual Report on Form 10-K for its fiscal year ended December
31, 1996.
Certain reclassifications have been made in the 1996 financial
statements to conform to the classifications used in the current year.
B. Information on Business Segments
The Company operates in two business segments: homebuilding
and financial services. A summary of the Company's segment information is
shown below (in thousands).
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Homebuilding
Home sales......................... $ 229,769 $ 229,006 $ 416,954 $ 415,029
Land sales......................... 3,555 1,087 5,245 6,246
Other revenues..................... 218 236 492 330
----------- ----------- ----------- -----------
233,542 230,329 422,691 421,605
----------- ----------- ----------- -----------
Home cost of sales................. 196,224 198,102 355,947 358,918
Land cost of sales................. 3,132 1,023 4,455 5,955
Asset impairment charges........... 1,100 2,870 2,350 2,870
Marketing.......................... 15,585 14,265 28,100 26,247
General and administrative......... 7,663 7,026 14,546 14,538
----------- ----------- ----------- -----------
223,704 223,286 405,398 408,528
----------- ----------- ----------- -----------
Homebuilding Operating Profit..
9,838 7,043 17,293 13,077
----------- ----------- ----------- -----------
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Services
Mortgage Lending Revenues
Interest revenues.................. $ 279 $ 869 $ 946 $ 1,674
Origination fees................... 1,554 1,570 3,016 2,959
Gains on sales of mortgage servicing
213 1,531 551 4,153
Gains on sales of mortgage loans,
net.............................. 1,177 1,151 2,492 1,693
Mortgage servicing and other....... 151 522 279 908
Asset Management Revenues
Management fees and other.......... 75 1,307 396 3,301
----------- ----------- ----------- -----------
3,449 6,950 7,680 14,688
----------- ----------- ----------- -----------
General and Administrative Expenses
Mortgage Lending................... 2,033 2,499 4,369 4,621
Asset Management................... 12 849 27 1,469
----------- ----------- ----------- -----------
2,045 3,348 4,396 6,090
----------- ----------- ----------- -----------
Financial Services Operating
Profit....................... 1,404 3,602 3,284 8,598
----------- ----------- ----------- -----------
Total Operating Profit................. 11,242 10,645 20,577 21,675
----------- ----------- ----------- -----------
Corporate
Interest and other revenues........ 294 497 733 729
Interest expense................... - - (1,027) (761) (2,878)
General and administrative......... (3,254) (2,980) (6,500) (5,581)
----------- ----------- ----------- -----------
Net Corporate Expenses......... (2,960) (3,510) (6,528) (7,730)
----------- ----------- ----------- -----------
Income Before Income Taxes and
Extraordinary Item................... $ 8,282 $ 7,135 $ 14,049 $ 13,945
=========== =========== =========== ===========
</TABLE>
C. Corporate and Homebuilding Interest Activity (in thousands)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest capitalized in homebuilding
inventory, beginning of period....... $ 41,162 $ 40,342 $ 40,745 $ 40,217
Interest incurred....................... 6,579 7,605 13,503 15,379
Interest expensed....................... - - (1,027) (761) (2,878)
Previously capitalized interest included
in cost of sales..................... (7,082) (7,081) (12,828) (12,879)
----------- ----------- ----------- -----------
Interest capitalized in homebuilding
inventory, end of period............. $ 40,659 $ 39,839 $ 40,659 $ 39,839
=========== =========== =========== ===========
</TABLE>
-6-
<PAGE>
D. Stockholders' Equity
On February 26, 1997, the Company repurchased 838,000 shares of MDC
Common Stock at $8.77 per share, including commissions, completing a program
authorized by the MDC Board of Directors in October 1996 to repurchase up to
1,000,000 shares of MDC Common Stock.
E. Extraordinary Item
On March 31, 1997, the Company repurchased $38,000,000 principal amount
of its 11 1/8% Senior Notes due 2003 (the "Senior Notes") for $39,520,000. The
Company recognized an extraordinary loss of $2,179,000, net of an income tax
benefit of $1,336,000, due to the repurchase of the Senior Notes at a price
which exceeded their carrying value and the write-off of related unamortized
issuance costs.
The Company recognized an extraordinary loss of $421,000, net of an
income tax benefit of $242,000, during the three and six months ended June 30,
1996, due to the write-off of unamortized discounts and deferred financing costs
in connection with the April 1996 retirement of certain secured bank lines of
credit and project loans with proceeds from the Company's unsecured revolving
line of credit.
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<PAGE>
F. Earnings Per Share
Primary earnings per share are based on the weighted-average number of
common and common equivalent shares outstanding during each period. The
computation of fully diluted earnings per share also assumes the conversion into
Common Stock of all of the $28,000,000 outstanding principal amount of the 8
3/4% Convertible Subordinated Notes due December 2005 (the "Convertible
Subordinated Notes") at a conversion price of $7.75 per share. The primary and
fully diluted earnings per share calculations are shown below (in thousands,
except per share amounts).
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Primary Calculation
Income before extraordinary item................... $ 5,134 $ 4,532 $ 8,720 $ 8,856
Extraordinary loss, net............................ - - (421) (2,179) (421)
----------- ----------- ----------- -----------
Net Income................................ $ 5,134 $ 4,111 $ 6,541 $ 8,435
=========== =========== =========== ===========
Weighted-average shares outstanding................ 17,463 18,831 17,671 19,055
Common Stock equivalents - stock options........... 507 534 555 557
----------- ----------- ----------- -----------
Total Weighted-Average Shares............. 17,970 19,365 18,226 19,612
=========== =========== =========== ===========
Primary Earnings Per Share
Income before extraordinary item.......... $ .29 $ .23 $ .48 $ .45
=========== =========== =========== ===========
Net Income................................ $ .29 $ .21 $ .36 $ .43
=========== =========== =========== ===========
Fully Diluted Calculation
Income before extraordinary item................... $ 5,134 $ 4,532 $ 8,720 $ 8,856
Adjustment for interest on Convertible
Subordinated Notes, net of income tax benefit;
conversion assumed............................... 394 402 787 804
----------- ----------- ----------- -----------
Adjusted income before extraordinary item. 5,528 4,934 9,507 9,660
Extraordinary loss, net............................ - - (421) (2,179) (421)
----------- ----------- ----------- -----------
Adjusted Net Income....................... $ 5,528 $ 4,513 $ 7,328 $ 9,239
=========== =========== =========== ===========
Weighted-average shares outstanding................ 17,463 18,831 17,671 19,055
Common Stock equivalents - stock options........... 538 534 566 557
Shares issuable upon conversion of Convertible
Subordinated Notes; conversion assumed........... 3,613 3,613 3,613 3,613
----------- ----------- ----------- -----------
Total Weighted-Average Shares............. 21,614 22,978 21,850 23,225
=========== =========== =========== ===========
Fully Diluted Earnings Per Share
Income before extraordinary item.......... $ .26 $ .21 $ .44 $ .42
=========== =========== =========== ===========
Net Income................................ $ .26 $ .20 $ .34 $ .40
=========== =========== =========== ===========
</TABLE>
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"). The Company's adoption of SFAS 128, which is required on December
31, 1997, will result in the restatement of the Company's primary earnings per
share calculations to "basic" earnings per share. Basic earnings per share,
based on income before extraordinary item, would have been $.29 and $.24 for the
second quarter of 1997 and 1996, respectively, and $.49 and $.46 for the first
half of 1997 and 1996, respectively. Basic earnings per share, based on net
income, would have been $.29 and $.22 for the second quarter of 1997 and 1996,
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<PAGE>
respectively, and $.37 and $.44 for the first half of 1997 and 1996,
respectively. SFAS 128 also will require the presentation of "diluted" earnings
per share, which is computed similarly to fully diluted earnings per share.
Diluted earnings per share would have been unchanged from fully diluted earnings
per share for the second quarter and first half of 1997 and 1996.
G. Supplemental Disclosure of Cash Flow Information (in thousands)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1997 1996
----------- -----------
<S> <C> <C>
Cash paid during the period for:
Interest, net of amounts capitalized...................... $ 3,159 $ 5,481
Income taxes.............................................. $ 4,656 $ 3,836
Non-cash transactions:
Homebuilding land inventory sales financed by MDC......... $ 538 $ 206
Homebuilding inventory purchases financed by seller....... $ - - $ 5,858
</TABLE>
H. Supplemental Guarantor Information
The Senior Notes are guaranteed unconditionally on an unsecured
subordinated basis, jointly and severally (the "Guaranties"), by Richmond
American Homes of California, Inc., Richmond American Homes of Maryland, Inc.,
Richmond American Homes of Nevada, Inc., Richmond American Homes of Virginia,
Inc., Richmond American Homes of Arizona, Inc. and Richmond American Homes of
Colorado, Inc. (collectively, the "Guarantors"). The Guaranties are subordinated
to all Guarantor Senior Indebtedness (as defined in the Senior Notes Indenture).
Supplemental combining financial information follows.
-9-
<PAGE>
<TABLE>
<CAPTION>
M.D.C. Holdings, Inc.
Supplemental Combining Balance Sheet
June 30, 1997
(In thousands)
Unconsolidated
Non-
Guarantor Guarantor Eliminating Consolidated
ASSETS MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Corporate
Cash and cash equivalents............... $ 6,892 $ - - $ - - $ - - $ 6,892
Investments in subsidiaries............. 183,581 - - 17,422 (201,003) - -
Advances and notes receivable - Parent
and subsidiaries...................... 207,280 35 6,895 (214,210) - -
Other assets............................ 29,091 - - 136 - - 29,227
----------- ----------- ----------- ----------- -----------
426,844 35 24,453 (415,213) 36,119
----------- ----------- ----------- ----------- -----------
Homebuilding
Cash and cash equivalents............... - - 3,713 33 - - 3,746
Inventories, net
Housing completed or under construction 73 271,289 - - - - 271,362
Land and land under development....... - - 160,477 21,317 (791) 181,003
Other assets............................ 6,310 66,127 21,602 (14,810) 79,229
----------- ----------- ----------- ----------- -----------
6,383 501,606 42,952 (15,601) 535,340
----------- ----------- ----------- ----------- -----------
Financial Services......................... - - - - 64,298 - - 64,298
----------- ----------- ----------- ----------- -----------
Total Assets...................... $ 433,227 $ 501,641 $ 131,703 $ (430,814) $ 635,757
=========== =========== =========== =========== ===========
LIABILITIES
Corporate
Accounts payable and accrued expenses... $ 11,123 $ - - $ 381 $ - - $ 11,504
Advances and notes payable - Parent and
subsidiaries.......................... 3,211 191,107 27,912 (222,230) - -
Income taxes payable.................... 9,069 - - - - - - 9,069
Note payable............................ 3,460 - - - - - - 3,460
Senior Notes, net....................... 150,262 - - - - - - 150,262
Subordinated notes, net................. 38,227 - - - - - - 38,227
----------- ----------- ----------- ------------ -----------
215,352 191,107 28,293 (222,230) 212,522
----------- ----------- ----------- ------------ -----------
Homebuilding
Accounts payable and accrued expenses... 3,741 82,442 21,690 - - 107,873
Line of credit and notes payable........ - - 73,502 - - - - 73,502
----------- ----------- ----------- ------------ -----------
3,741 155,944 21,690 - - 181,375
----------- ----------- ----------- ------------ -----------
Financial Services......................... - - - - 41,996 (14,270) 27,726
----------- ----------- ----------- ------------ -----------
Total Liabilities................. 219,093 347,051 91,979 (236,500) 421,623
----------- ----------- ----------- ------------ -----------
STOCKHOLDERS' EQUITY....................... 214,134 154,590 39,724 (194,314) 214,134
----------- ----------- ----------- ------------ -----------
Total Liabilities and
Stockholders' Equity............ $ 433,227 $ 501,641 $ 131,703 $ (430,814) $ 635,757
=========== =========== =========== ============ ===========
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
M.D.C. Holdings, Inc.
Supplemental Combining Balance Sheet
December 31, 1996
(In thousands)
Unconsolidated
Non-
Guarantor Guarantor Eliminating Consolidated
ASSETS MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
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
Lines 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>
-11-
<PAGE>
<TABLE>
<CAPTION>
M.D.C. Holdings, Inc.
Supplemental Combining Statements of Income
(In thousands)
Three Months Ended June 30, 1997
Unconsolidated
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES
Homebuilding............................. $ 65 $ 233,098 $ 379 $ - - $ 233,542
Financial Services....................... - - - - 3,449 - - 3,449
Corporate................................ 278 3 13 - - 294
Equity in earnings of subsidiaries....... 6,137 - - - - (6,137) - -
----------- ----------- ----------- ----------- -----------
Total Revenues..................... 6,480 233,101 3,841 (6,137) 237,285
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................. 30 223,225 373 76 223,704
Financial Services....................... - - - - 2,045 - - 2,045
Corporate general and administrative..... 3,246 - - 8 - - 3,254
Corporate and homebuilding interest..... (5,037) 4,386 596 55 - -
----------- ----------- ----------- ----------- -----------
Total Expenses...................... (1,761) 227,611 3,022 131 229,003
----------- ----------- ----------- ----------- -----------
Income before income taxes............... 8,241 5,490 819 (6,268) 8,282
Provision for income taxes............... (3,109) (2,472) (295) 2,728 (3,148)
----------- ----------- ----------- ----------- -----------
NET INCOME.................................. $ 5,132 $ 3,018 $ 524 $ (3,540) $ 5,134
=========== =========== =========== =========== ===========
Three Months Ended June 30, 1996
REVENUES
Homebuilding............................. $ 64 $ 230,256 $ 9 $ - - $ 230,329
Financial Services....................... - - - - 6,950 - - 6,950
Corporate................................ 488 7 2 - - 497
Equity in earnings of subsidiaries....... 5,404 - - - - (5,404) - -
----------- ----------- ----------- ----------- -----------
Total Revenues..................... 5,956 230,263 6,961 (5,404) 237,776
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................. 30 223,085 96 75 223,286
Financial Services....................... - - - - 3,348 - - 3,348
Corporate general and administrative..... 2,972 - - 8 - - 2,980
Corporate and homebuilding interest..... (4,181) 4,527 642 39 1,027
----------- ----------- ----------- ----------- -----------
Total Expenses...................... (1,179) 227,612 4,094 114 230,641
----------- ----------- ----------- ----------- -----------
Income before income taxes and
extraordinary item..................... 7,135 2,651 2,867 (5,518) 7,135
Provision for income taxes............... (2,603) (968) (1,192) 2,160 (2,603)
----------- ----------- ----------- ----------- -----------
Income before extraordinary item......... 4,532 1,683 1,675 (3,358) 4,532
Extraordinary loss, net of income tax
benefit of $242....................... (421) - - - - - - (421)
----------- ----------- ----------- ----------- -----------
NET INCOME.................................. $ 4,111 $ 1,683 $ 1,675 $ (3,358) $ 4,111
=========== =========== =========== =========== ===========
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
M.D.C. Holdings, Inc.
Supplemental Combining Statements of Income
(In thousands)
Six Months Ended June 30, 1997
Unconsolidated
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES
Homebuilding.............................. $ 107 $ 422,065 $ 519 $ - - $ 422,691
Financial Services........................ - - - - 7,680 - - 7,680
Corporate................................. 519 3 211 - - 733
Equity in earnings of subsidiaries........ 10,021 - - - - (10,021) - -
----------- ----------- ----------- ----------- -----------
Total Revenues...................... 10,647 422,068 8,410 (10,021) 431,104
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding.............................. 87 404,523 637 151 405,398
Financial Services........................ - - - - 4,396 - - 4,396
Corporate general and administrative...... 6,492 - - 8 - - 6,500
Corporate and homebuilding interest....... (9,940) 9,339 1,242 120 761
----------- ----------- ----------- ----------- -----------
Total Expenses...................... (3,361) 413,862 6,283 271 417,055
----------- ----------- ----------- ----------- -----------
Income before income taxes and extraordinary
item.................................... 14,008 8,206 2,127 (10,292) 14,049
Provision for income taxes................ (5,290) (3,506) (751) 4,218 (5,329)
----------- ----------- ----------- ----------- -----------
Income before extraordinary item.......... 8,718 4,700 1,376 (6,074) 8,720
Extraordinary loss, net of income tax
benefit of $1,336....................... (2,179) - - - - - - (2,179)
----------- ----------- ----------- ----------- -----------
NET INCOME................................... $ 6,539 $ 4,700 $ 1,376 $ (6,074) $ 6,541
=========== =========== =========== =========== ===========
Six Months Ended June 30, 1996
REVENUES
Homebuilding.............................. $ 143 $ 421,450 $ 12 $ - - $ 421,605
Financial Services........................ - - - - 14,688 - - 14,688
Corporate................................. 705 13 11 - - 729
Equity in earnings of subsidiaries........ 10,995 - - - - (10,995) - -
----------- ----------- ----------- ----------- -----------
Total Revenues...................... 11,843 421,463 14,711 (10,995) 437,022
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding.............................. 448 407,666 264 150 408,528
Financial Services........................ - - - - 6,090 - - 6,090
Corporate general and administrative...... 5,566 - - 15 - - 5,581
Corporate and homebuilding interest....... (8,116) 9,575 1,345 74 2,878
----------- ----------- ----------- ----------- -----------
Total Expenses...................... (2,102) 417,241 7,714 224 423,077
----------- ----------- ----------- ----------- -----------
Income before income taxes and extraordinary
item.................................... 13,945 4,222 6,997 (11,219) 13,945
Provision for income taxes................ (5,089) (1,594) (2,870) 4,464 (5,089)
----------- ----------- ----------- ----------- -----------
Income before extraordinary item.......... 8,856 2,628 4,127 (6,755) 8,856
Extraordinary loss, net of income tax
benefit of $242......................... (421) - - - - - - (421)
----------- ----------- ----------- ----------- -----------
NET INCOME................................... $ 8,435 $ 2,628 $ 4,127 $ (6,755) $ 8,435
=========== =========== =========== =========== ===========
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
M.D.C. Holdings, Inc.
Supplemental Combining Statement of Cash Flows
(In thousands)
Six Months Ended June 30, 1997
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............................... $ 42,874 $ (51,427) $ 3,650 $ (18,895) $ (23,798)
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Investing
Activities............................... 1,097 (484) (4,680) 5,473 1,406
----------- ----------- ----------- ----------- -----------
Financing Activities
Net Increase (Reduction) in Borrowings From
Parent and Subsidiaries.................. 1,126 (6,341) (8,207) 13,422 - -
Lines of Credit
Advances............................... - - 485,800 9,386 - - 495,186
Principal payments..................... - - (427,056) - - - - (427,056)
Notes Payable............................... (37,929) (137) - - - - (38,066)
Other, net.................................. (7,513) - - - - - - (7,513)
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Financing
Activities............................... (44,316) 52,266 1,179 13,422 22,551
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) In Cash And Cash
Equivalents.............................. (345) 355 149 - - 159
Cash And Cash Equivalents
Beginning Of Period...................... 7,236 3,391 677 - - 11,304
----------- ----------- ----------- ----------- -----------
End Of Period............................ $ 6,891 $ 3,746 $ 826 $ - - $ 11,463
=========== =========== =========== =========== ===========
Six Months Ended June 30, 1996
Net Cash Provided By (Used In) Operating
Activities............................... $ 105,651 $ (12,791) $ 4,214 $ (88,860) $ 8,214
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Investing
Activities............................... (9,198) 958 (1,017) 13,091 3,834
----------- ----------- ----------- ----------- -----------
Financing Activities
Net Increase (Reduction) in Borrowings From
Parent and Subsidiaries.................. (84,016) 210 8,037 75,769 - -
Lines of Credit
Advances............................... - - 487,062 - - - - 487,062
Principal payments..................... - - (473,052) (8,971) - - (482,023)
Other, net.................................. (8,281) (2,284) (3,749) - - (14,314)
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Financing
Activities............................... (92,297) 11,936 (4,683) 75,769 (9,275)
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) In Cash And Cash
Equivalents.............................. 4,156 103 (1,486) - - 2,773
Cash And Cash Equivalents
Beginning Of Period...................... 10,296 5,054 5,445 - - 20,795
----------- ----------- ----------- ----------- -----------
End Of Period............................ $ 14,452 $ 5,157 $ 3,959 $ - - $ 23,568
=========== =========== =========== =========== ===========
</TABLE>
-14-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
MDC is a major regional homebuilder and is the ninth largest
homebuilder in the United States. The Company operates in two segments:
homebuilding and financial services. In its homebuilding segment, MDC builds and
sells homes under the name "Richmond American Homes" 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 (a former indirect subsidiary
of M.D.C. Holdings, Inc., "FAMC") managed, by contract, the operations of two
publicly traded real estate investment trusts (each, a "REIT") (the asset
management operations).
RESULTS OF OPERATIONS
The table below summarizes MDC's results of operations (in thousands,
except per share amounts).
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................ $ 237,285 $ 237,776 $ 431,104 $ 437,022
Income before income
taxes and extraordinary
item.................. $ 8,282 $ 7,135 $ 14,049 $ 13,945
Net Income.............. $ 5,134 $ 4,111 $ 6,541 $ 8,435
Earnings Per Share:
Primary
Income before
extraordinary item. $ .29 $ .23 $ .48 $ .45
Net Income.......... $ .29 $ .21 $ .36 $ .43
Fully Diluted
Income before
extraordinary item. $ .26 $ .21 $ .44 $ .42
Net Income.......... $ .26 $ .20 $ .34 $ .40
</TABLE>
Income before income taxes and extraordinary item increased in the
second quarter and first half of 1997, compared with the same periods in 1996.
These increases resulted from (i) higher operating profits from the Company's
homebuilding operations in the second quarter and first half of 1997, primarily
due to a 110 basis point increase in the Company's Home Gross Margins (as
hereinafter defined); and (ii) decreased interest expense. These improvements to
income in 1997 partially were offset by lower operating profits from the
Company's financial services segment, primarily due to (i) net increases to
income in the second quarter and first half of 1996 totalling approximately
$1,600,000 and $3,400,000, respectively, which will not recur as a result of the
September 1996 sale of FAMC and a
-15-
<PAGE>
required change in accounting principle regarding mortgage loans and mortgage
loan servicing rights; and (ii) lower gains from sales of mortgage-related
assets in the second quarter and first half of 1997.
Net income for the first half of 1997 included an extraordinary loss of
$2,179,000, net of an income tax benefit of $1,336,000, recognized in connection
with the Company's repurchase of $38,000,000 face value (20% of the outstanding
amount) of its Senior Notes. The loss resulted from the repurchase of the Senior
Notes above their carrying value and the write-off of related unamortized
issuance costs. Net income for the three and six months ended June 30, 1996
included an extraordinary loss of $421,000, net of an income tax benefit of
$242,000, due to the write-off of unamortized discounts and deferred financing
costs in connection with the cancellation of secured lines of credit and project
loans.
-16-
<PAGE>
Homebuilding Segment
The tables below set forth information relating to the Company's
homebuilding segment (dollars in thousands).
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Home Sales Revenues......................... $ 229,769 $ 229,006 $ 416,954 $ 415,029
Operating Profits Before Asset Impairment
Charges................................... $ 10,938 $ 9,913 $ 19,643 $ 15,947
Operating Profits........................... $ 9,838 $ 7,043 $ 17,293 $ 13,077
Average Selling Price Per Home Closed..... $ 178.9 $ 176.7 $ 177.0 $ 176.8
Home Gross Margins.......................... 14.6% 13.5% 14.6% 13.5%
Orders For Homes, net (units)
Colorado............................. 502 410 1,075 1,078
Mid-Atlantic......................... 289 225 616 652
California........................... 259 200 493 449
Arizona.............................. 300 280 615 606
Nevada............................... 151 70 230 121
----------- ----------- ----------- -----------
Total........................... 1,501 1,185 3,029 2,906
=========== =========== =========== ===========
Homes Closed (units)
Colorado............................. 399 498 790 935
Mid-Atlantic......................... 307 238 504 395
California........................... 198 208 373 403
Arizona.............................. 283 287 510 503
Nevada............................... 97 65 179 111
----------- ----------- ----------- -----------
Total........................... 1,284 1,296 2,356 2,347
=========== =========== =========== ===========
June 30, December 31, June 30,
1997 1996 1996
----------- ------------ --------
Backlog (units)
Colorado............................. 861 576 801
Mid-Atlantic......................... 533 421 532
California........................... 280 160 221
Arizona.............................. 336 231 337
Nevada............................... 149 98 79
----------- ----------- -----------
Total........................... 2,159 1,486 1,970
=========== =========== ===========
Estimated Sales Value........... $ 392,000 $ 261,000 $ 349,000
=========== =========== ===========
Active Subdivisions
Colorado............................. 53 51 48
Mid-Atlantic......................... 51 53 49
California........................... 14 20 20
Arizona.............................. 23 23 24
Nevada............................... 9 5 3
----------- ----------- -----------
Total........................... 150 152 144
=========== =========== ===========
</TABLE>
-17-
<PAGE>
Home Sales Revenues and Homes Closed - Home sales revenues in the
second quarter and first half of 1997 were (i) higher than home sales revenues
for the same periods in 1996, notwithstanding approximately the same levels of
total home closings, primarily due to increases in the average selling price per
home closed (as discussed below); and (ii) the highest for all comparable
periods in the Company's history, marking the fourth consecutive year of record
first half home sales revenues.
Home closings increased in the second quarter and first half of 1997,
compared with the same periods in 1996, (i) by 49% and 61%, respectively, in
Nevada, where the Company has increased the number of active subdivisions to
nine from two at the beginning of 1996; (ii) by 29% and 28%, respectively, in
the Mid-Atlantic market, due to a Backlog (as hereinafter defined) level at the
beginning of 1997 that was more than 50% greater than Backlog at the beginning
of 1996, as well as weather-related delays in the completion and delivery of
homes during the first half of 1996; and (iii) by 14% in Southern California,
resulting from the Company's increased operations in that market. Home closings
decreased in the second quarter and first half of 1997, compared with the same
periods in 1996, (i) in Colorado, due to lower levels of Backlog at the
beginning of each of the 1997 periods compared with Backlog at comparable dates
in 1996; and (ii) in Northern California, where the Company has reduced the
number of active subdivisions to two from 13 at the beginning of 1996 in
connection with the Company's continued reduction of its presence in the
Sacramento market.
Average Selling Price Per Home Closed - The higher average selling
prices per home closed in the second quarter and first half of 1997, compared
with the same periods in 1996, resulted from increases in average selling prices
in Colorado and California, principally due to the impact of closing a greater
number of homes in higher-priced subdivisions during the 1997 periods. These
increases partially were offset by lower average selling prices in the second
quarter and first half of 1997 in the Mid-Atlantic region, Arizona and Nevada,
reflecting the impact of the Company's continuing emphasis on offering
lower-priced, more affordable homes primarily marketed to the first-time move-up
home buyers in these markets.
Home Gross Margins - Gross margins (home sales revenues less cost of
goods sold, which primarily includes land and construction costs, capitalized
interest, a reserve for warranty expense and financing costs) as a percent of
home sales revenues ("Home Gross Margins") increased by 110 basis points during
the second quarter and first half of 1997, compared with the second quarter and
first half of 1996. The increases largely were due to (i) initiatives
implemented in each of the Company's markets designed to improve operating
efficiency, control costs and increase rates of return; (ii) the favorable
impact of a large number of home closings in certain highly profitable
subdivisions, particularly in Phoenix and Southern California; (iii) in Nevada,
the completion of several underperforming subdivisions during the second half of
1996, the closing of homes in four new higher-margin subdivisions in the first
half of 1997; and (iv) the receipt of a $783,000 refund of school impact fees in
Colorado that were previously included in cost of sales.
Orders for Homes and Backlog - Orders for homes in the second quarter
and first half of 1997 reached ten-year highs, increasing 27% and 4%,
respectively, over the comparable periods in 1996. These increases primarily
were due to comparatively strong home orders experienced in the second quarter
of 1997 in all of the Company's regions except Northern California in response
to an improving national economy stimulated by decreasing mortgage interest
rates, low unemployment and high levels of consumer confidence. Second quarter
1997 home orders particularly were strong in (i) Nevada and Southern California,
which increased 116% and 52%, respectively, as a result of the Company's
continuing expansion in those markets; (ii) the Mid-Atlantic region, which
increased 28%, primarily due
-18-
<PAGE>
to the Company's efforts to reduce the level of unsold homes under construction
in that market; and (iii) Colorado, which increased 22%.
The Company's home orders in July 1997 increased 25% to 447 units,
compared with 357 home orders in July 1996. The Company is unable to predict if
higher year-over-year home orders in 1997, compared with 1996, will continue in
the future. See "Forward-Looking Statements" below.
As a result of the increased orders for homes in the second quarter of
1997, the Company's homes under contract but not yet delivered ("Backlog") at
June 30, 1997 increased 10% from June 30, 1996, to the highest June 30 level in
more than ten years. Assuming no significant change in market conditions or
mortgage interest rates, the Company expects approximately 70% of its June 30,
1997 Backlog to close under existing sales contracts during the remainder 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 and advertising expenses
and sales commissions) totalled $15,585,000 and $28,100,000, respectively, for
the second quarter and first half of 1997, compared with $14,265,000 and
$26,247,000, respectively, for the same periods in 1996. The increases in 1997
primarily resulted from (i) additional advertising and model home expenses
incurred to stimulate sales in response to market conditions and increased
competition in Colorado, Arizona and the Mid-Atlantic; and (ii) cost increases
incurred in connection with the Company's expanded operations in Southern
California and Nevada.
General and Administrative - General and administrative expenses
totalled $7,663,000 and $14,546,000, respectively, during the second quarter and
first half of 1997, compared with $7,026,000 and $14,538,000, respectively, for
the same periods in 1996. The 9% increase in the second quarter of 1997,
compared with the same period in 1996, primarily was due to increased
administrative costs incurred in support of the Company's expanded operations in
Southern California and Phoenix.
Asset Impairment Charges
Operating results during the second quarter and first half of 1997 were
reduced by asset impairment charges totalling $1,100,000 and $2,350,000,
respectively, related to certain of the Company's homebuilding assets in the
Mid-Atlantic region, primarily in suburban Maryland, as a result of continued
weakened market conditions and competitive pressures in that market. The asset
impairment charges resulted from (i) the recognition of losses anticipated from
the closing of certain homes in Backlog and from the offering of increased
incentives to stimulate sales of certain completed unsold homes in inventory;
and (ii) the write-off of certain capitalized costs, primarily deferred
marketing and option deposits, related to a number of underperforming projects
which are being closed out. While intending to maintain its market share in the
Mid-Atlantic region, the Company has continued to eliminate lower-margin
projects and redeploy capital to more profitable operations within and outside
that market, including California, Arizona and Nevada.
-19-
<PAGE>
Land Inventory
The table below shows the carrying value of land and land under
development, by market, as well as the total number of lots owned, lots
controlled under option agreements and total option deposits (dollars in
thousands).
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1997 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
Colorado................................ $ 61,683 $ 66,529 $ 61,725
Mid-Atlantic............................ 45,805 46,124 49,377
California.............................. 22,255 23,733 34,767
Arizona................................. 36,323 32,129 28,176
Nevada.................................. 14,937 14,412 10,564
----------- ----------- -----------
Total.............................. $ 181,003 $ 182,927 $ 184,609
=========== =========== ===========
Total Lots Owned........................ 10,043 10,523 9,833
=========== =========== ===========
Total Lots Controlled Under Option...... 5,642 6,698 8,388
=========== =========== ===========
Total Option Deposits................... $ 5,538 $ 5,951 $ 7,382
=========== =========== ===========
</TABLE>
Financial Services Segment
Mortgage Lending Operations
The tables below set forth information relating to HomeAmerican's
operations (dollars in thousands).
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gains on Sales of Mortgage Servicing........ $ 213 $ 1,531 $ 551 $ 4,153
Gains on Sales of Mortgage Loans, net....... $ 1,177 $ 1,151 $ 2,492 $ 1,693
Operating Profits........................... $ 1,341 $ 3,144 $ 2,915 $ 6,766
Principal Amount of Originations and
Purchases
MDC home buyers.......................... $ 124,916 $ 124,082 $ 232,250 $ 223,483
Spot..................................... 7,643 12,443 14,563 25,776
Correspondent............................ 15,164 15,545 30,607 26,512
----------- ----------- ----------- -----------
Total.............................. $ 147,723 $ 152,070 $ 277,420 $ 275,771
=========== =========== =========== ===========
Capture Rate................................ 66% 66% 67% 66%
=========== =========== =========== ===========
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1997 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Composition of Servicing Portfolio
FHA insured/VA guaranteed...................... $ 147,204 $ 117,681 $ 129,066
Conventional................................... 317,742 277,217 338,656
------------ ------------ ------------
Total Servicing Portfolio......................... $ 464,946 $ 394,898 $ 467,722
============ ============ ============
Salable Portion of Servicing Portfolio............ $ 368,132(1) $ 292,428<F1>$ 260,925<F2>
============ ============ ============
<F1> Substantially all originated subsequent to the adoption of
SFAS 122 (as hereinafter defined).
<F2> Included servicing originated prior to 1996 of approximately
$65,000,000.
</TABLE>
HomeAmerican's operating profits for the second quarter and first half
of 1997 decreased, compared with the same periods in 1996, primarily due to
decreases in gains from sales of mortgage servicing which, for the first half of
1997, partially were offset by an increase in gains from sales of mortgage
loans. These differences principally resulted from sales of mortgage loans and
mortgage loan servicing in the second quarter and first half of 1996 which were
originated prior to the Company's required adoption, on January 1, 1996, of
Statement of Accounting Standards No. 122 "Accounting for Mortgage Servicing
Rights an Amendment of FASB Statement No. 65" ("SFAS 122"), which was superseded
by SFAS 125 (as hereinafter defined) on January 1, 1997.
SFAS 125 requires the Company to allocate the costs of mortgage loans
originated by HomeAmerican between the mortgage loans and the right to service
the mortgage loans, based on their relative values. For mortgage loans
originated by HomeAmerican prior to 1996, the costs of such loans were assigned
to the mortgage loans, with no costs assigned to the servicing rights. Assuming
that all other factors remain unchanged, SFAS 125 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.
Similar to the first two quarters of 1997, gains from sales of mortgage
servicing in the third quarter of 1997 will be significantly lower than during
the comparable period in 1996, as the Company sold its pre-1996 servicing
portfolio throughout the first three quarters of 1996. Because the Company sold
substantially all of its remaining pre-1996 mortgage loans during the first
quarter of 1996, the comparability of gains (or losses) on mortgage loan sales
in the second quarter of 1997 was not, and in future quarters will not be,
impacted by the application of SFAS 125. 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.
-21-
<PAGE>
Asset Management Operations
The following table summarizes the results of the asset management
operations (in thousands).
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gains (Losses) on Sales of Mortgage-Related
Assets...................................... $ (43) $ 72 $ 55 $ 1,007
Management Fees from REITs.................... $ - - $ 802 $ - - $ 1,598
Operating Profits............................. $ 63 $ 458 $ 369 $ 1,832
</TABLE>
Due to the sale of FAMC in September 1996 and the fact that the Company
does not anticipate making additional mortgage-related investments, future
operating results of the asset management operations are expected to be
immaterial. See "Forward-Looking Statements" below.
Other Operating Results
Interest Expense - The Company capitalizes interest on its homebuilding
inventories during the period of active development and through the completion
of construction. Corporate and homebuilding interest incurred which is not
capitalized is reflected as interest expense and totalled $761,000 for the first
half of 1997, compared with $2,878,000 for the same period in 1996. During the
second quarter of 1997, the Company capitalized all interest incurred, thereby
resulting in no interest expense for such period, compared with $1,027,000 of
interest expense in the second quarter of 1996.
Corporate and homebuilding interest incurred decreased by more than 12%
to $6,579,000 and $13,503,000, respectively, for the second quarter and first
half of 1997, compared with $7,605,000 and $15,379,000, respectively, for the
same periods in 1996, primarily due to (i) lower average outstanding borrowings
during the first half of 1997, compared with the first half of 1996, as a result
of reduced homebuilding inventories and the increased use of internally
generated funds; and (ii) lower average effective interest rates with respect to
the Company's variable-rate debt in 1997.
For a reconciliation of interest incurred, capitalized and expensed,
see Note C to the Company's Condensed Consolidated Financial Statements.
Corporate General and Administrative Expenses - Corporate general and
administrative expenses totalled $3,254,000 and $6,500,000, respectively, during
the second quarter and first half of 1997, compared with $2,980,000 and
$5,581,000, respectively, for the same periods of 1996. The increase in the
first half of 1997 primarily resulted from an insurance settlement of $1,250,000
received in the first half of 1996 related to the recovery of certain
homebuilding expenditures that were previously expensed, which more than offset
the favorable impact of reduced debt-related fixed charges, insurance costs and
legal expenses in the first half of 1997.
The Company is modifying its computer systems to accurately process
information including the year 2000 date and beyond (the "Year 2000 Project").
Pursuant to current accounting rules, the cost of the Year 2000 Project must be
expensed as incurred. Management believes that these costs, expected to be
incurred over the next 18 months, will not have a material adverse effect to the
Company's results of operations or financial position. See "Forward-Looking
Statements" below.
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<PAGE>
Income Taxes - M.D.C. Holdings, Inc. and its wholly owned
subsidiaries file a consolidated federal income tax return (an "MDC Consolidated
Return"). Richmond American Homes of Colorado, Inc. (formerly Richmond Homes,
Inc. I) 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
American Homes of Colorado, Inc. became a wholly owned subsidiary of MDC.
In June 1997, the Company and the Internal Revenue Service (the "IRS")
reached final agreement on the examinations of the MDC Consolidated Returns for
the years 1986 through 1990. In July 1997, the Company and the IRS reached final
agreement on the examinations of the Richmond Homes Consolidated Returns for the
years 1991 through 1993. These agreements resulted in no material impact to the
Company's financial position or results of operations.
The IRS currently is examining the MDC Consolidated Returns for the
years 1991 through 1995 and the Richmond Homes Consolidated Return for the
period ended February 2, 1994. No audit reports have been issued by the IRS in
connection with these examinations. In the opinion of management, adequate
provision has been made for additional income taxes and interest, if any, which
may result from these examinations; however, it is reasonably possible that the
ultimate resolution could result in amounts which differ materially in the near
term from amounts provided. See "Forward-Looking Statements" below.
LIQUIDITY AND CAPITAL RESOURCES
MDC uses its liquidity and capital resources to, among other things,
(i) support its operations, including its inventories of homes, home sites and
land; (ii) provide working capital; and (iii) provide mortgage loans for its
home buyers. Liquidity and capital resources are generated internally from
operations and from external sources.
Capital Resources
The Company's capital structure is a combination of (i) permanent
financing, represented by Stockholders' Equity; (ii) long-term financing,
represented by publicly traded Senior Notes and subordinated notes 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 operating structure and adequate
to satisfy its current and near-term capital requirements. See "Forward-Looking
Statements" below.
MDC anticipates acquiring finished lots and partially developed land
for use in its future homebuilding operations during the remainder of 1997. The
Company currently intends to acquire a portion of the land inventories required
in future periods through takedowns of lots subject to option contracts entered
into in prior periods and under new option contracts. The use of option
contracts lessens the Company's land-related risk and improves liquidity.
Because of increased demand for partially developed and finished lots in certain
of the markets where the Company builds homes, the Company's ability to acquire
lots using option contracts has been reduced or has become more expensive. See
"Forward-Looking Statements" below.
The Company anticipates that it has adequate financial resources to
satisfy its current and near-term capital requirements based on its current
capital resources and additional liquidity available under existing credit
agreements. The Company believes that it can meet its long-term capital needs
-23-
<PAGE>
(including, among other things, meeting future debt payments and refinancing or
paying off other long-term debt as it becomes due) from operations and external
financing sources, assuming that no significant adverse changes in the Company's
business occur as a result of the various risk factors described elsewhere
herein, in particular, increases in interest rates. See "Forward-Looking
Statements" below.
Lines of Credit and Notes Payable
Homebuilding - In March 1997, the Company modified its agreement with a
group of banks for its unsecured revolving line of credit. Under the modified
terms, the available borrowings have been increased to $175,000,000 from
$150,000,000, and the maturity date of the agreement has been extended for one
year to June 30, 2001, although a term-out of this credit may commence earlier
under certain circumstances. At June 30, 1997, $70,576,000 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 normally sold within 25 to 60 days after origination. During
the first half of 1997 and 1996, HomeAmerican sold $279,000,000 and
$277,788,000, respectively, principal amount of mortgage loans and mortgage
certificates.
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 June 30, 1997 was $51,000,000. At June 30, 1997, $18,404,000
was borrowed and an additional $17,533,000 was collateralized and available to
be borrowed. The Mortgage Line is cancelable upon 90 days notice.
General - The agreements for the Company's Senior Notes, subordinated
notes and bank lines of credit require compliance with certain representations,
warranties and covenants. The Company believes that it is in compliance with
these representations, warranties and covenants.
Consolidated Cash Flow
During the first six months of 1997, the Company used $7,349,000 and
$39,520,000 of cash to repurchase 838,000 shares of MDC Common Stock and
$38,000,000 of Senior Notes, respectively. The Company also used $23,798,000 of
cash in its operating activities. The Company financed these activities
primarily with internally generated funds and line of credit borrowings.
During the first half of 1996, the Company generated $8,214,000 in cash
from its operating activities. The Company used this cash and other internally
generated funds to (i) pay down lines of credit and notes payable by $4,552,000;
and (ii) repurchase 703,000 shares of MDC Common Stock for $5,016,000.
ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS
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<PAGE>
125"). The Company's adoption of SFAS 125 on January 1, 1997 did not have a
material adverse impact on the results of operations or financial condition of
the Company.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). The Company's adoption of
SFAS 128, which is required on December 31, 1997, will result in the restatement
of the Company's primary earnings per share calculations to "basic" earnings per
share. Basic earnings per share, based on income before extraordinary item,
would have been $.29 and $.24 for the second quarter of 1997 and 1996,
respectively, and $.49 and $.46 for the first half of 1997 and 1996,
respectively. Basic earnings per share, based on net income, would have been
$.29 and $.22 for the second quarter of 1997 and 1996, respectively, and $.37
and $.44 for the first half of 1997 and 1996, respectively. SFAS 128 also will
require the presentation of "diluted" earnings per share, which is computed
similarly to fully diluted earnings per share. Diluted earnings per share would
have been unchanged from fully diluted earnings per share for the second quarter
and first half of 1997 and 1996.
OTHER
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, 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. 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, including the interpretation of tax, labor and
environmental laws; (xi) changes in consumer confidence; (xii) required
accounting changes; and (xiii) other factors over which the Company has little
or no control.
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<PAGE>
M.D.C. HOLDINGS, INC.
FORM 10-Q
PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company and certain of its subsidiaries and affiliates have been
named as defendants in various claims, complaints and other 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 its operations, the Company from time to time may be subject to
product liability claims, including claims for damages as a result of expansive
soils.
The Company is not aware of any litigation, matter or pending claim
against the Company which would result in material contingent liabilities
related to environmental hazards or asbestos.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREOWNERS.
No matters were submitted to shareowners during the second quarter of
1997.
ITEM 5. OTHER INFORMATION.
The Company's 1997 Proxy Statement and notes to the financial
statements in its Annual Report on Form 10-K for the fiscal year ended December
31, 1996 disclosed that, during 1996, the Company paid $11,489,000 for plumbing,
door and millwork services provided by 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. The actual amount paid in 1996 to these companies for
these services was $3,586,000. In addition, it was disclosed that total fees in
1996 for advertising and marketing design services paid to a marketing and
communications firm owned by the brother-in-law of an officer and director of
the Company were $305,000. The actual amount paid to this firm in 1996 was
$499,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit:
27 Financial Data Schedule.
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<PAGE>
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the
Registrant during the period covered by this
Quarterly Report on Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 7, 1997 M.D.C. HOLDINGS, INC.
--------------
(Registrant)
By: /s/ Paris G. Reece III
--------------------------
Paris G. Reece III,
Senior Vice President,
Chief Financial Officer and
Principal Accounting Officer
-27-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from MDC
Holdings, Inc. consolidated financial statements included in its Form 10-Q for
the quarter ended June 30, 1997 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 11,463
<SECURITIES> 4,020
<RECEIVABLES> 18,567
<ALLOWANCES> 0
<INVENTORY> 452,365
<CURRENT-ASSETS> 0
<PP&E> 9,445
<DEPRECIATION> 0
<TOTAL-ASSETS> 635,757
<CURRENT-LIABILITIES> 0
<BONDS> 283,855
0
0
<COMMON> 234
<OTHER-SE> 213,900
<TOTAL-LIABILITY-AND-EQUITY> 635,757
<SALES> 422,691
<TOTAL-REVENUES> 431,104
<CGS> 405,398
<TOTAL-COSTS> 417,055
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (761)
<INCOME-PRETAX> 14,049
<INCOME-TAX> (5,329)
<INCOME-CONTINUING> 8,720
<DISCONTINUED> 0
<EXTRAORDINARY> (2,179)
<CHANGES> 0
<NET-INCOME> 6,541
<EPS-PRIMARY> .36
<EPS-DILUTED> .34
</TABLE>
