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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1997
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
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Commission file number 1-8951
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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/
The Pacific Stock Exchange
11 1/8% Senior Notes due December 2003
8 3/8% Senior Notes due February 2008 New York 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 5, 1998, 17,923,000 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 $212,090,000.
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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<PAGE>
M.D.C. HOLDINGS, INC.
FORM 10-K
For the Year Ended December 31, 1997
---------------
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............................ 7
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)
<PAGE>
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 Company also provides
mortgage loans primarily to its home buyers.
On January 28, 1998, the Company completed the issuance and sale of
$175,000,000 of 8 3/8% senior notes due February 2008 (the "8 3/8% Senior
Notes"). The Company used the proceeds of the sale of the 8 3/8% Senior Notes to
repurchase $61,181,000 principal amount of 11 1/8% Senior Notes due December
2003 (the "11 1/8% Senior Notes"), to defease the remaining $90,819,000
principal amount of the 11 1/8% Senior Notes outstanding and for general
corporate purposes. See "Subsequent Event" below.
(b) Financial Information About Industry Segments
Note B to the Consolidated Financial Statements contains information
regarding the Company's business segments for each of the three years ended
December 31, 1997, 1996 and 1995.
(c) Narrative Description of Business
MDC's business consists of two segments, homebuilding and financial
services. In its homebuilding segment, through separate subsidiaries, the
Company is engaged in the design, construction and sale of single-family 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. The
Company's financial services segment consists principally of HomeAmerican
Mortgage Corporation (a wholly owned subsidiary of M.D.C. Holdings, Inc.,
"HomeAmerican") which provides mortgage loans primarily to the Company's home
buyers (the "mortgage lending operations").
The Company's strategy is to build homes generally for the first-time
and move-up buyer, the largest segments of prospective home buyers. The base
prices for these homes range from approximately $75,000 to $500,000, although
the Company builds homes with prices as high as $965,000. The average sales
prices of the Company's homes closed in 1997 and 1996 were $179,800 and
$177,000, respectively.
As part of its land inventory policy, the Company generally limits new
projects to fewer than 150 lots to avoid overexposure to any single sub-market.
In this regard, the Company's priority is to acquire finished lots using rolling
options and finished lots in phases for cash. If potential returns justify the
risk, land is acquired for development. The Company's Asset Management
Committee, composed of four members of corporate senior management, meets weekly
to review all proposed land acquisitions and takedowns of lots under option.
Homes are designed and built to meet local customer preferences. The
Company, as the general contractor, supervises construction of all of its
projects and employs subcontractors for site development and home construction.
The Company generally builds single-family detached homes, except in the
Mid-Atlantic, where MDC also builds a significant number of townhomes.
HomeAmerican is a full service mortgage lender, originating mortgage
loans primarily for MDC's home buyers with offices located in each of MDC's
markets except Northern California. As the principal originator of mortgage
loans for MDC's home buyers, HomeAmerican is an integral part of MDC's
homebuilding business.
1
<PAGE>
Homebuilding Segment.
General. The Company's homebuilding business consists of the design,
construction and sale of single-family residential homes. The Company builds its
homes principally on finished lots acquired using rolling options, phased
acquisitions or bulk purchases. To a lesser extent, the Company acquires land
for development for use in its homebuilding activities. These operations are
financed primarily with publicly traded debt, bank lines of credit and
internally generated funds.
The Company is one of the largest homebuilders in the United States,
building and selling 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 metropolitan Denver;
the largest builder of detached homes in Riverside County, California; among the
top five builders in Northern Virginia, Tucson and Colorado Springs; among the
top ten builders in suburban Maryland and Phoenix; and has a growing presence in
Orange, Los Angeles, Ventura, San Bernardino and San Diego Counties, California
and Las Vegas. The Company also builds homes in the San Francisco 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 builds 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. Approximately 41% of its homes closed
in 1997 were in subdivisions targeted to the first-time buyer, compared with
approximately 38% and 30% in 1996 and 1995, respectively. Homes are constructed
according to basic designs that meet local customer preferences. The Company, as
the general contractor, supervises the construction of all of its projects and
employs subcontractors for site development and home construction.
In an effort to reduce the effects of volatile economic conditions in
any single market, the Company's operations are diversified 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. While intending to maintain its market share in the
Mid-Atlantic, the Company has been redeploying capital from Maryland to its
growing operations in California, Arizona and Nevada. The following table shows
the Company's geographic diversification in 1997, 1996 and 1995 as represented
by home sales revenues in each of its markets (dollars in thousands).
<TABLE>
<CAPTION>
Total Home Sales Revenues Percent of Total
----------------------------------- -----------------------------------
1997 1996 1995 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Colorado............................ $ 325,466 $ 327,256 $ 325,834 35% 37% 39%
Mid-Atlantic........................ 214,424 187,254 208,552 23% 21% 25%
California.......................... 188,893 182,131 146,947 20% 21% 18%
Arizona............................. 154,875 154,875 133,625 16% 18% 16%
Nevada.............................. 55,358 28,842 12,490 6% 3% 2%
---------- ---------- ---------- ---------- ---------- ----------
Total....................... $ 939,016 $ 880,358 $ 827,448 100% 100% 100%
========== ========== ========= ========== ========== ==========
</TABLE>
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 particular location is based on customer preference and the
area's demographics.
Through design centers in its Denver and Phoenix homebuilding
divisions, MDC provides home buyers the ability to "customize" their homes by
selecting options and upgrades on display at the design centers. Home buyers can
select finishes and upgrades within a short time from their decision to purchase
a Richmond American home. The Company plans to open design centers in Southern
California and Las Vegas in 1998. The design centers, which are also planned for
most of MDC's other divisions, not only provide MDC's customers with a
convenient way to select upgrades and options for their new homes, but also
provide the Company with an additional source of revenue.
2
<PAGE>
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
prospective 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
projected rates of return and sales prices of homes to be built on the lots,
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 after a contract for sale is executed. This is
intended to minimize the Company's investment in and risk of shortages of labor
and building materials.
MDC has the right to acquire a portion of the land it will require in
the future utilizing option contracts, normally on a "rolling" basis. Generally,
in a rolling option contract, the Company obtains the right to purchase lots in
consideration for an option deposit. In the event the Company elects not to
purchase the lots within a specified period of time, the Company relinquishes
the option deposit. This practice limits the Company's risk and avoids a greater
demand on its liquidity. At December 31, 1997, MDC had the right to acquire
approximately 5,730 lots under option agreements with approximately $7,545,000
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 has become significantly more expensive.
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
(fewer 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 the current intended use of 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 condition. See "Forward-Looking Statements" below.
The table below shows the carrying value of land and land under
development, by market (in thousands).
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Colorado............................... $ 62,093 $ 66,529 $ 75,448
Mid-Atlantic........................... 37,087 46,124 47,247
California............................. 44,423 23,733 27,912
Arizona................................ 32,067 32,129 21,794
Nevada................................. 17,342 14,412 4,559
----------- ----------- -----------
Total.............................. $ 193,012 $ 182,927 $ 176,960
=========== =========== ===========
</TABLE>
3
<PAGE>
The table below shows the number of lots owned and under option, by
market.
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Lots Owned
Colorado................................ 4,948 5,849 8,628
Mid-Atlantic............................ 1,747 1,919 1,105
California.............................. 654 488 446
Arizona................................. 1,531 1,651 1,242
Nevada.................................. 586 616 135
---------- ---------- ----------
Total............................... 9,466 10,523 11,556
========== ========== ==========
Lots Under Option
Colorado................................ 2,925 2,486 2,795
Mid-Atlantic............................ 1,583 2,975 4,019
California.............................. 787 538 675
Arizona................................. 435 654 519
Nevada.................................. - - 45 - -
---------- ---------- ----------
Total............................... 5,730 6,698 8,008
========== ========== ==========
</TABLE>
Labor and Raw Materials. Generally, the 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
1997, 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, California and Mid-Atlantic operations encounter
weather-related slowdowns. Delays in development and construction activities
resulting from adverse weather conditions increase the Company's risk of higher
costs for interest, materials and labor. In addition, home buyer preferences and
demographics influence the seasonal nature of MDC's business.
Backlog. As of December 31, 1997 and 1996, homes under contract but not
yet delivered ("Backlog") totalled 2,032 and 1,486, respectively, with an
estimated sales value of $380,000,000 and $261,000,000, respectively. 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, 1997 Backlog will close under existing sales contracts during the first nine
months of 1998. 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
cooperating brokers 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 issued by an independent warranty company.
Title Operations. In 1997, the Company provided title agency
services to MDC home buyers in the Mid-Atlantic. The Company intends to evaluate
opportunities to provide title services in its other markets. See
"Forward-Looking Statements" below.
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.
4
<PAGE>
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. The Company also competes with subdivision developers and land
development companies.
Mortgage Interest Rates. The Company's homebuilding and mortgage
lending operations are dependent upon the availability and cost of mortgage
financing. Increases in home mortgage interest rates may reduce the demand for
homes and home mortgages and, generally, will reduce home mortgage refinancing
activity. 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 Company's 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 endangered species, 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.
HomeAmerican is the principal originator of mortgage loans for MDC's home
buyers.
HomeAmerican is authorized to originate Federal Housing
Administration-insured ("FHA"), Veterans Administration-guaranteed ("VA"),
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation ("FHLMC") and conventional mortgage loans. 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 40 days of origination or
purchase. The Company uses HomeAmerican's secured warehouse line of credit,
other borrowings and internally generated Company funds to finance these
mortgage loans until they are sold.
5
<PAGE>
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 loans are sold "servicing
released" (the servicing rights are 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. See "Forward-Looking
Statements" below.
As a mortgage loan servicer, HomeAmerican generally is required to
advance to the mortgage loan owner, 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. In the past, these amounts have not been
material.
HomeAmerican's portfolio of mortgage loan servicing at December 31,
1997 consisted of servicing rights with respect to approximately 3,902
single-family loans, approximately 89% 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 5.5% to 11.5% and
averaging 7.6%. 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. Significant changes in mortgage interest rates may impact the value
of the Company's servicing portfolio.
Pipeline. HomeAmerican's mortgage loans in process which had not closed
("Pipeline") at December 31, 1997 had aggregate principal balances of
$220,092,000. Approximately 70% of the Pipeline at December 31, 1997 is
anticipated to close during the first three months of 1998. 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.
Asset Management Operations.
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. In September 1996, the
Company sold its 80% interest in FAMC. Due to the sale of FAMC, the Company does
not expect to engage in significant asset management activities in the future.
See "Forward-Looking Statements" below.
Employees.
At December 31, 1997, MDC employed approximately 1,200 persons. MDC
considers its employee relations to be satisfactory.
6
<PAGE>
Item 3. 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.
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 stockholders were held during the fourth
quarter of 1997.
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.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
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
1997
First quarter.................. $ 10.00 $ 8.13
Second quarter................. $ 9.25 $ 7.75
Third quarter.................. $ 11.00 $ 9.06
Fourth quarter................. $ 15.31 $ 9.69
</TABLE>
The Company has declared dividends of three cents per share for each
quarter in the two-year period ended December 31, 1997.
In connection with the declaration and payment of dividends, the
Company is required to comply with certain covenants contained in (i) the
$175,000,000 unsecured revolving line of credit agreement entered into in April
1996 and revised on March 31, 1997; and (ii) the 8 3/8% Senior Notes indenture
entered into in January 1998. Pursuant to the $175,000,000 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, 1997, the Company had a permitted dividend capacity of
approximately $29,100,000 pursuant to the most restrictive of these covenants.
Covenants included in the 8 3/8% Senior Notes indenture are less restrictive
than those in the $175,000,000 line of credit agreement.
On February 5, 1998, MDC had approximately 1,503 shareowners of record.
7
<PAGE>
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 (in thousands, except per share amounts).
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................................ $ 969,562 $ 922,595 $ 865,856 $ 817,245 $ 634,323
=========== =========== =========== =========== ===========
Operating profit
Homebuilding......................... $ 41,543 $ 27,967 $ 33,018 $ 44,464 $ 22,496
Financial services
Mortgage lending................... 7,745 12,584 9,288 6,951 7,508
Asset management................... 1,434 6,073 4,050 2,796 8,996
----------- ----------- ----------- ----------- -----------
Total financial services....... 9,179 18,657 13,338 9,747 16,504
----------- ----------- ----------- ----------- -----------
Net corporate expenses<F1>.............. (11,395) (13,870) (19,705) (23,229) (23,968)
----------- ----------- ----------- ----------- -----------
Income before income taxes and
extraordinary item................... $ 39,327 $ 32,754 $ 26,651 $ 30,982 $ 15,032
=========== =========== =========== =========== ===========
Income before extraordinary item........ $ 24,205 $ 20,799 $ 17,250 $ 19,255 $ 10,056
Basic per common share<F2>........... $ 1.37 $ 1.12 $ .89 $ 1.02 $ .49
Diluted per common share<F2>......... $ 1.18 $ .98 $ .79 $ .87 $ .45
Net income<F3>.......................... $ 22,026 $ 20,378 $ 17,250 $ 19,255 $ 25,879
Basic per common share<F2>........... $ 1.25 $ 1.09 $ .89 $ 1.02 $ 1.26
Diluted per common share<F2>......... $ 1.08 $ .97 $ .79 $ .87 $ 1.16
Weighted-average shares outstanding<F2>
Basic................................ 17,673 18,623 19,362 18,951 20,501
Diluted.............................. 21,899 22,763 23,737 24,019 22,340
Dividends paid per share................ $ .12 $ .12 $ .11 $ .06 $ - -
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets:
Housing completed or under
construction....................... $ 249,928 $ 251,885 $ 265,205 $ 280,319 $ 201,023
Land and land under development...... $ 193,012 $ 182,927 $ 176,960 $ 183,838 $ 192,881
Total assets......................... $ 621,770 $ 617,303 $ 634,811 $ 664,571 $ 653,366
Debt:
Homebuilding
Lines of credit.................... $ 20,766 $ 11,832 $ 43,490 $ 62,332 $ 24,645
Notes payable...................... $ 9,676 $ 3,063 $ 10,571 $ 33,585 $ 62,495
Senior notes......................... $ 150,354 $ 187,721 $ 187,525 $ 187,352 $ 187,199
Subordinated notes................... $ 38,229 $ 38,225 $ 38,221 $ 38,217 $ 38,213
Total debt........................... $ 248,551 $ 253,346 $ 305,334 $ 348,280 $ 345,676
Stockholders' Equity.................... $ 229,593 $ 213,847 $ 205,033 $ 192,295 $ 175,854
Ratio of Homebuilding and Corporate
Debt to Stockholders' Equity......... .97 1.14 1.38 1.69 1.80
Ratio of Homebuilding and Corporate
Debt to Capital (excluding Mortgage
Lending
Debt)................................ .49 .53 .58 .63 .64
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Homebuilding:
Home sales revenues.................. $ 939,016 $ 880,358 $ 827,448 $ 784,453 $ 587,887
Orders for homes, net (units)........ 5,769 5,049 4,536 4,177 3,875
Homes closed (units)................. 5,223 4,974 4,570 4,200 3,344
Backlog
Units<F4>.......................... 2,032 1,486 1,355 1,334 1,357
Estimated sales value<F4>.......... $ 380,000 $ 261,000 $ 243,000 $ 241,900 $ 250,530
Average selling price per home ...... $ 179.8 $ 177.0 $ 181.1 $ 186.8 $ 175.8
Home Gross Margins................... 14.5% 13.7% 13.4% 15.4% 14.2%
Asset impairment charges............. $ 5,850 $ 9,191 $ 3,677 $ 4,000 $ - -
Corporate and Homebuilding SG&A as a %
of Home Sales Revenues............... 11.0% 11.0% 10.9% 11.3% 13.1%
EBITDA Computations<F5>:
Income before extraordinary item..... $ 24,205 $ 20,799 $ 17,250 $ 19,255 $ 10,056
Add:
Income taxes..................... 15,122 11,955 9,401 11,727 4,976
Corporate and homebuilding
interest expense............... 761 3,773 7,773 9,454 11,454
Interest in cost of sales........ 28,361 25,995 28,397 26,548 19,810
Other fixed charges.............. 797 1,165 2,492 2,872 3,161
Depreciation and amortization.... 15,050 12,067 10,280 10,134 8,038
Non-cash charges
Homebuilding asset
impairment charges........ 5,850 9,191 3,677 4,000 - -
Other........................ - - 533 - - 800 4,120
----------- ----------- ----------- ----------- -----------
Total EBITDA......................... $ 90,146 $ 85,478 $ 79,270 $ 84,790 $ 61,615
=========== =========== =========== =========== ===========
Fixed Charges Incurred<F6>.............. $ 27,165 $ 31,461 $ 36,401 $ 38,671 $ 28,930
EBITDA/Fixed Charges.................... 3.3 2.7 2.2 2.2 2.1
EBITDA/Interest Incurred................ 3.4 2.8 2.3 2.4 2.4
- ----------
<F1> 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.
<F2> Based upon the adoption of Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128").
<F3> Includes the effects of extraordinary after-tax gains and losses on the
early extinguishment of debt resulting principally from: (i) in 1997, the
repurchase of $38,000,000 principal amount of the 11 1/8% Senior Notes;
and (ii) in 1996, certain other debt extinguishments; and (iii) 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
and $28,000,000 principal amount of 8 3/4% convertible subordinated notes
due 2005 (the "Convertible Subordinated Notes"), which increased net
income by $15,823,000.
<F4> At end of period.
<F5> "EBITDA" has been computed in accordance with the definition of
"Consolidated EBITDA" set forth under the 11 1/8% Senior Notes indenture.
EBITDA should not be considered an alternative to operating income
determined in accordance with generally accepted accounting principles
("GAAP") as an indicator of operating performance or to cash flows from
operating activities determined in accordance with GAAP as a measure of
liquidity.
<F6> Fixed charges consist of homebuilding and corporate interest expense plus
(i) amortization of deferred debt issue costs; (ii) amortization of
discount or premium relating to indebtedness; and (iii) interest
capitalized during the period.
</TABLE>
9
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Consolidated Results.
1997 Compared With 1996. Revenues for the year ended December 31, 1997
were $969,562,000, the highest in the Company's history and a 5% increase from
1996. The increase primarily resulted from a 5% increase in home closings and a
$2,800 increase in the average selling price per home closed, partially offset
by a reduction in financial services segment revenues, principally due to the
sale of FAMC in September 1996.
Income before income taxes and extraordinary item increased 20% in
1997. The increase primarily was due to the increased profitability of the
homebuilding segment and lower corporate and homebuilding interest expense,
partially offset by decreased profits from the Company's financial services
segment. The homebuilding segment increase principally was a result of (i) the
home closing and average selling price increases described above; (ii) an
increase of 80 basis points in Home Gross Margins; and (iii) reduced asset
impairment charges. The Company's financial services segment experienced lower
operating profits in 1997 primarily due to (i) a $4,042,000 gain recognized in
1996 on the sale of FAMC; and (ii) additional profits recognized in 1996 as a
result of a required change in accounting principle regarding mortgage loans and
mortgage loan servicing rights.
Net income for 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 principal amount of its 11 1/8% Senior
Notes. Net income for 1996 included an extraordinary loss of $421,000, net of an
income tax benefit of $242,000, recognized in connection with the retirement of
borrowings under certain secured lines of credit and project loans.
During 1997, the Company continued to strengthen its balance sheet and
improve the efficiency of its operations. By December 31, 1997, the Company had
reduced its investment in unsold homes under construction by 34% to $53,000,000,
decreased homebuilding and corporate indebtedness by $22,000,000 to
$222,000,000, and increased its equity by 7% to $230,000,000, or $12.91 per
outstanding share. These improvements contributed to a reduction in the
Company's ratio of homebuilding and corporate debt to capital (excluding
mortgage lending debt) to 49% at December 31, 1997. The Company's lower debt
levels in 1997, combined with lower effective interest rates on the Company's
variable-rate debt, contributed to a 13% reduction in the Company's corporate
and homebuilding interest incurred for 1997. These reductions, combined with a
$4,700,000 increase in the Company's EBITDA for 1997, resulted in a ratio of
EBITDA to interest incurred of 3.4, 21% higher than the comparable ratio of 2.8
for 1996.
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, principally 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 due to intense competition and
weakened economic 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.
10
<PAGE>
Homebuilding Segment.
The table below sets forth information relating to the Company's
homebuilding segment (dollars in thousands).
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Home Sales Revenues......................... $ 939,016 $ 880,358 $ 827,448
Operating Profits Before Asset Impairment
Charges.................................. $ 47,393 $ 37,158 $ 36,695
Operating Profits........................... $ 41,543 $ 27,967 $ 33,018
Average Selling Price Per Home Closed....... $ 179.8 $ 177.0 $ 181.1
Home Gross Margins.......................... 14.5% 13.7% 13.4%
Orders For Homes, net (units)
Colorado............................... 2,039 1,811 1,939
Mid-Atlantic........................... 1,061 1,115 996
California............................. 938 822 770
Arizona................................ 1,297 1,041 779
Nevada................................. 434 260 52
----------- ----------- -----------
Total................................ 5,769 5,049 4,536
=========== =========== ===========
Homes Closed (units)
Colorado............................... 1,735 1,893 1,891
Mid-Atlantic........................... 1,088 969 1,058
California............................. 828 837 751
Arizona................................ 1,135 1,044 802
Nevada................................. 437 231 68
----------- ----------- -----------
Total................................ 5,223 4,974 4,570
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Backlog (units)
Colorado............................... 880 576 658
Mid-Atlantic........................... 394 421 275
California............................. 270 160 175
Arizona................................ 393 231 234
Nevada................................. 95 98 13
----------- ----------- -----------
Total................................ 2,032 1,486 1,355
=========== =========== ===========
Estimated Sales Value................ $ 380,000 $ 261,000 $ 243,000
=========== =========== ===========
Active Subdivisions
Colorado............................... 48 51 49
Mid-Atlantic........................... 42 53 48
California............................. 12 20 23
Arizona................................ 29 23 22
Nevada................................. 6 5 2
----------- ----------- -----------
Total................................ 137 152 144
=========== =========== ===========
11
</TABLE>
<PAGE>
Homebuilding Activities - 1997 Compared With 1996.
Home Sales Revenues and Homes Closed. Home sales revenues in 1997 were
the highest in the Company's history and increased 7% from home sales revenues
in 1996. The increase resulted from an increase in both home closings and
average selling price per home closed, as further discussed below.
Home closings increased in 1997 (i) by 89% in Nevada, where the Company
increased the number of active subdivisions and improved by almost 50% the
number of home closings per active subdivision; (ii) by 20% in Southern
California, resulting from the Company's expanded operations and improved
economic conditions in that market; (iii) by 12% in the Mid-Atlantic, primarily
due to weather-related delays in the completion and delivery of homes during
much of 1996; and (iv) by 9% in Arizona, due to a 10% increase in the number of
active subdivisions and a higher level of home closings per active subdivision
resulting from the Company's increasing emphasis in this market on offering
lower-priced, more affordable homes primarily marketed to the first-time and
first-time move-up home buyer.
In Colorado, home closings decreased in 1997 primarily due to a lower
Backlog throughout most of the first half of 1997. In addition, the Company
built fewer unsold homes in the last half of 1997, which had the effect of
lengthening the time between the sale of a home and the time it is closed while,
at the same time, reducing the Company's risk of holding unsold homes inventory.
Home closings also decreased in Northern California in 1997, because the Company
has exited the Sacramento market and presently has only one active subdivision
in the San Francisco Bay Area.
The Company currently anticipates closing more homes in the first and
second quarters of 1998 than for the same periods in 1997. However, the
percentage increase in home closings in 1998 will not be as great as the
relative increase in beginning Backlog, as discussed below, because of a number
of factors. These factors include (i) severe weather conditions in California
and the Mid-Atlantic, which have delayed the construction of homes; (ii)
shortages of subcontractor labor for certain trades in California and, to a
lesser extent, in Nevada, which have lengthened construction times in these
markets; and (iii) more homes in Backlog not started and fewer unsold homes
under construction at December 31, 1997, than at December 31, 1996. See
"Forward-Looking Statements" below.
Average Selling Price Per Home Closed. The average selling price per
home closed increased to $179,800 in 1997, compared with $177,000 in 1996. This
increase primarily resulted from higher average selling prices in Colorado and
California, principally due to the impact of closing a greater number of homes
in higher-priced subdivisions in 1997, partially offset by decreased average
selling prices in Arizona, reflecting the impact of the Company's emphasis on
offering lower-priced, more affordable homes in this market, as discussed
above..
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 80 basis points in 1997.
The increase largely was due to (i) the favorable impact of a large number of
home closings in certain highly profitable subdivisions, particularly in Arizona
and Southern California; (ii) in Nevada, the completion of several
under-performing subdivisions during 1996 and the closing of homes in four new
higher-margin subdivisions in 1997; and (iii) initiatives implemented in each of
the Company's markets designed to improve operating efficiency, control costs
and increase rates of return.
Orders for Homes and Backlog. Orders for homes increased 14% to 5,769
in 1997, compared with 5,049 home orders in 1996, representing the highest
number of orders in the Company's history. The increase primarily was due to
comparatively strong home orders experienced in all of the Company's markets
except the Mid-Atlantic and Northern California in response to an improving
national economy stimulated by decreasing mortgage interest rates, low
unemployment and high levels of consumer confidence.
In January 1998, the Company received 724 orders for homes, an increase
of 80% over the relatively easy comparison of 403 home orders received in
January 1997 (which was down 7% from January 1996). Home orders increased in
January 1998 in each of MDC's markets except Northern California, with
particular strength in Southern California (up 134%), Colorado (up 73%), Phoenix
(up 68%) and the Mid-Atlantic (up 58%). Relatively easier year-over-year home
order comparisons should continue for the balance of the first quarter of 1998
because
12
<PAGE>
the Company's home orders in the first quarter of 1997 were 11% lower
than in the first quarter of 1996. Comparisons will become more difficult in the
second quarter of 1998 because double-digit year-over-year order increases were
realized in each of the remaining months of 1997 beginning in April. See
"Forward-Looking Statements" below.
As a result of the increased orders for homes during 1997, the
Company's homes under contract but not yet delivered ("Backlog") at December 31,
1997 increased 37% from December 31, 1996 to 2,032 units with an estimated sales
value of $380,000,000, the highest year-end Backlog in the Company's history.
Assuming no significant change in market conditions or mortgage interest rates,
the Company expects approximately 70% of its December 31, 1997 Backlog to close
under existing sales contracts during the first nine months of 1998. 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 advertising expenses and
sales commissions) totalled $61,139,000 in 1997, compared with $56,078,000 in
1996. The 9% increase in 1997 was due to (i) higher variable costs incurred as a
result of increased home closings; (ii) cost increases incurred in connection
with the Company's expanded operations in Southern California, Arizona and
Nevada; and (iii) additional advertising and model home expenses incurred to
stimulate sales in response to increased competition in Colorado, Arizona and
the Mid-Atlantic.
General and Administrative. General and administrative expenses
totalled $30,557,000 in 1997, compared with $29,122,000 in 1996. The increase
primarily was due to additional costs incurred in support of expanded operations
in Southern California and Arizona.
Asset Impairment Charges. Operating results during 1997 were reduced by
asset impairment charges totalling $5,850,000 related to certain of the
Company's homebuilding assets in the Mid-Atlantic, primarily in suburban
Maryland, as a result of continued weakened market conditions and competitive
pressure in that market. The asset impairment charges primarily 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; (ii) the write-off of certain
capitalized costs, primarily deferred marketing and option deposits, related to
a number of lower-margin subdivisions which are being closed out; and (iii)
pricing, product and incentive changes initiated by new management in the third
quarter of 1997 in the Mid-Atlantic to further the Company's strategy of
accelerating the close-out of under-performing subdivisions in that market.
While intending to maintain its market share in the Mid-Atlantic, the Company
continues to eliminate lower-margin subdivisions and redeploy capital to more
profitable operations within and outside that market, including California,
Arizona and Nevada. See "Forward-Looking Statements" below.
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 in (i) Arizona, due to a significant
expansion of operations in Phoenix, where the Company 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 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 reflected 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 in (i) Arizona; (ii) Nevada,
where the Company closed affordably priced homes in subdivisions acquired from
Longford Homes; and (iii) the Mid-Atlantic, where the Company opened a number of
new, affordable townhome projects.
13
<PAGE>
Home Gross Margins. Home Gross Margins increased 30 basis points during
1996. 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)
Nevada, 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 the San Francisco Bay
Area. 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 continued
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 Nevada, 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.
Marketing. Marketing expenses totalled $56,078,000 during 1996,
compared with $49,938,000 in 1995. The increase during 1996 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 as a result of continued
weakened conditions and competitive pressures in that market. The Mid-Atlantic
asset impairment charges primarily resulted from (i) 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; (ii) the
write-off of capitalized costs, primarily deferred marketing and option
deposits, related to several low-margin projects; and (iii) 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 under-performing
subdivisions in the Sacramento area.
Land Sales.
Revenue from land sales totalled $9,978,000, $9,471,000 and
$10,396,000, respectively, in 1997, 1996 and 1995. The land sales primarily were
in Colorado and, to a lesser extent, in Virginia, Nevada and California. Gross
profits from these sales were $2,238,000, $698,000 and $220,000, respectively,
for the years 1997, 1996 and 1995.
14
<PAGE>
Financial Services Segment.
Mortgage Lending Operations.
The table below sets forth information relating to HomeAmerican's
operations (dollars in thousands).
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Gains on Sales of Mortgage Servicing................... $ 1,739 $ 6,020 $ 8,336
Gains (Losses) on Sales of Mortgage Loans.............. $ 6,182 $ 4,905 $ (1,293)
Operating Profits...................................... $ 7,745 $ 12,584 $ 9,288
Principal Amount of Loan Originations and Purchases
MDC home buyers................................... $ 525,687 $ 482,106 $ 413,525
Spot.............................................. 31,841 39,730 36,200
Correspondent..................................... 74,654 60,373 63,051
---------- ---------- ----------
Total......................................... $ 632,182 $ 582,209 $ 512,776
========== ========== ==========
Capture Rate.......................................... 68% 66% 61%
========== ========== ==========
Composition of Servicing Portfolio
FHA insured/VA guaranteed......................... $ 109,651 $ 117,681 $ 85,002
Conventional...................................... 397,858 277,217 401,809
---------- ---------- ----------
Total Servicing Portfolio.............................. $ 507,509 $ 394,898<F1>$ 486,811
========== ========== ==========
Salable Portion of Servicing Portfolio................. $ 458,940<F2>$ 292,428<F2>$ 429,328
========== ========== ==========
</TABLE>
<F1>Includes servicing of $52,131,000 sold in November 1996, serviced
by HomeAmerican under a subservicing arrangement until transfer to
the purchaser in January and February 1997.
<F2>Substantially all originated subsequent to the adoption of
SFAS 122 (as hereinafter defined).
1997 Compared With 1996. HomeAmerican's operating profits were lower in
1997, primarily due to decreases in gains from sales of mortgage servicing which
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 1996 which were originated prior to the Company's required
adoption, on January 1, 1996, of Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights an Amendment of FASB Statement
No. 65" ("SFAS 122"), which was superseded by Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 125") 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.
Because the Company sold substantially all of its pre-1996 mortgage
loans and mortgage loan servicing during the first nine months of 1996, the
year-over-year comparability of gains (or losses) on sales of mortgage loans and
mortgage loan servicing in years after 1997 will not be impacted by the
application of SFAS 125. See "Forward-Looking Statements" below.
15
<PAGE>
HomeAmerican continues to benefit from the Company's homebuilding
growth. Company home buyers were the source of more than 80% of the principal
amount of mortgage loans originated and purchased by HomeAmerican in 1997, 1996
and 1995.
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.
These increased profits primarily resulted from gains on sales of mortgage loans
totalling $4,905,000 in 1996, compared with losses totalling $1,293,000 in 1995,
attributable in large measure to the Company's required adoption of SFAS 122 on
January 1, 1996.
During 1996, the Company recorded gains of $5,088,000 related to bulk
sales of approximately $398,809,000 principal amount of mortgage servicing
rights held prior to the adoption of SFAS 122. 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.
HomeAmerican's loan originations and purchases increased by 14% in
1996, 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. 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.
Asset Management Operations.
The following table sets forth certain information with respect to the
results of the asset management operations (in thousands).
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Gain on Sale of FAMC............................. $ 1,000 $ 4,042 $ - -
Management Fees from REITs....................... $ - - $ 2,373 $ 3,324
Operating Profits................................ $ 1,434 $ 6,073 $ 4,050
</TABLE>
The decreased operating profits in 1997 primarily were due to the
$4,042,000 gain, net of related expenses, on the sale of FAMC in September 1996.
The sales proceeds consisted of $6,000,000 cash and $5,450,000 of promissory
notes which were payable at specified dates during the 10 years following the
sale and were convertible, under certain circumstances, into an equity interest
in FAMC. An additional gain of $5,450,000 attributable to the promissory notes
was deferred. In 1997, the Company received principal payments of $1,000,000 on
the promissory notes, resulting in the recognition of a gain in the same amount.
At December 31, 1997, a gain of $4,450,000 attributable to the remaining
promissory notes continued to be deferred and may be recognized, in whole or in
part, in future periods based upon a number of factors, including collection of
the promissory notes' principal and the expiration of the conversion features.
The fair value of the promissory notes is not readily determinable. The Company
has the right to convert the remaining $4,450,000 of promissory notes into as
much as a 30% equity interest in FAMC and to call the promissory notes at any
time.
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, except to the extent any gains are recognized with respect to the
$4,450,000 remaining principal amount of FAMC's promissory notes discussed
above. 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 but not
capitalized is reflected as interest expense and totalled $761,000 for 1997,
compared with $3,773,000 and $7,773,000, respectively, for 1996 and 1995.
Corporate and homebuilding interest incurred decreased to $26,368,000 in 1997,
compared with $30,296,000 in 1996 and $33,909,000 in 1995, primarily due to (i)
lower
16
<PAGE>
average outstanding borrowings, as a result of reduced homebuilding
inventories and the increased use of internally generated funds; and (ii) lower
effective interest rates with respect to the Company's outstanding debt.
For a reconciliation of interest incurred, capitalized and expensed,
see Note J to the Company's Consolidated Financial Statements.
Corporate General and Administrative Expenses. Corporate general and
administrative expenses totalled $11,849,000 for 1997, compared with $11,578,000
and $13,478,000, respectively, for 1996 and 1995. The slight increase in 1997,
compared with 1996, primarily was due to higher compensation expenses and costs
associated with the Year 2000 Project (as hereinafter defined), partially offset
by the favorable impact in 1997 of insurance recoveries and a reversal of
reserves no longer required, totalling $2,458,000, as well as reduced
debt-related fixed charges and insurance costs. 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 Company is modifying its computer systems to accurately process
information which includes the year 2000 date and beyond (the "Year 2000
Project"). Management believes that the Year 2000 Project will be successfully
completed on a timely basis and that future costs of the Year 2000 Project will
not have a material adverse effect on the Company's results of operations,
financial position or cash flows. Pursuant to current accounting rules, the cost
of the Year 2000 Project is expensed as incurred. See "Forward-Looking
Statements" below.
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.
MDC's overall effective income tax rates of 38.5%, 36.5% and 35.3%,
respectively, for 1997, 1996, and 1995, differed from the federal statutory rate
of 35% primarily due to (i) the impact of state income taxes; and (ii) in 1995,
the realization of non-taxable income for financial reporting purposes for which
no tax liability was recorded.
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 on 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 and subordinated notes; and (iii) current
financing, primarily lines of credit, as discussed below. The Company believes
that its current financial condition is
17
<PAGE>
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 Convertible Subordinated Notes are convertible into
shares of MDC common stock at an initial conversion price of $7.75 per share,
subject to adjustment upon certain events. The Convertible Subordinated Notes
may be called by the Company beginning in December 1998 at a price of 105. If
the Company calls the Convertible Subordinated Notes, holders may elect to
convert their notes, depending on market conditions for the Company's common
stock at the time the Convertible Subordinated Notes are called. See
"Forward-Looking Statements" below.
Based upon its current capital resources and additional liquidity
available under existing credit relationships, MDC anticipates that it has
adequate financial resources to satisfy its current and near-term capital
requirements, 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 "Subsequent Event" and "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 December 31, 1997, $20,766,000 was borrowed and
$4,180,000 of letters of credit were outstanding 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, generally within 40 days after origination.
During 1997, 1996 and 1995, HomeAmerican sold $626,174,000, $576,156,000 and
$504,109,000, 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. At December 31, 1997, $51,000,000 was available
under the Mortgage Line, $26,094,000 was borrowed and an additional $24,906,000
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 1997, the Company generated $22,029,000 in cash from its
operating and investing activities. The Company used this cash to reduce
outstanding lines of credit and notes payable by a net $11,990,000 (including
the repurchase of $38,000,000 principal amount of 11 1/8% Senior Notes) and to
repurchase 838,000 shares of MDC common stock for $7,349,000.
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.
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 these increased costs are recovered through higher sales prices,
Home Gross Margins would 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 June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") was issued. SFAS 130 establishes
standards for the reporting of comprehensive income and its components. It
requires all items that are required to be recognized as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other income statement information. SFAS 130 is effective
for financial statements for periods beginning after December 15, 1997.
Reclassification of financial statements for earlier periods presented for
comparative purposes is required upon adoption.
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ("SFAS
131") was issued. SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in annual financial statements and in
interim financial reports issued to shareholders. SFAS 131 is effective for
financial statements for periods beginning after December 15, 1997.
The Company anticipates that the adoption of SFAS 130 and SFAS 131
will not have a significant affect on its 1998 financial statements.
See "Forward-Looking Statements" below.
OTHER
Subsequent Event
On January 28, 1998, the Company sold $175,000,000 principal amount of
8 3/8% Senior Notes, at an issue price of 99.598%. The Company used the proceeds
of the sale of the 8 3/8% Senior Notes to repurchase $61,181,000 principal
amount of MDC's 11 1/8% Senior Notes, to defease the remaining $90,819,000
principal amount of 11 1/8% Senior Notes outstanding and for general corporate
purposes. The repurchase and subsequent cancellation and defeasance of the 11
1/8% Senior Notes for $169,592,000 resulted in an extraordinary charge to income
in January 1998 (including the recognition of unamortized debt discount and
write-off of deferred debt issue costs) of $15,314,000, net of an income tax
benefit of $9,587,000.
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. 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
19
<PAGE>
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.
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, 1997 and
December 31, 1996............................................... F-3
Consolidated Statements of Income for each of the Three Years
Ended December 31, 1997......................................... F-5
Consolidated Statements of Stockholders' Equity for each of the
Three Years Ended December 31, 1997............................. F-6
Consolidated Statements of Cash Flows for each of the Three Years
Ended December 31, 1997......................................... 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, 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.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Denver, Colorado
February 5, 1998
F-2
<PAGE>
M.D.C. HOLDINGS, INC.
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Corporate
Cash and cash equivalents........................................... $ 7,110 $ 7,235
Property and equipment, net......................................... 9,709 9,411
Deferred income taxes............................................... 12,276 10,804
Deferred debt issue costs, net...................................... 6,851 9,155
Other assets, net................................................... 2,944 3,557
----------- -----------
38,890 40,162
Homebuilding
Cash and cash equivalents........................................... 3,867 3,393
Home sales and other accounts receivable............................ 7,559 10,218
Investments and marketable securities, net.......................... 1,392 5,159
Inventories, net
Housing completed or under construction........................... 249,928 251,885
Land and land under development................................... 193,012 182,927
Prepaid expenses and other assets, net.............................. 55,788 57,722
----------- -----------
511,546 511,304
Financial Services
Cash and cash equivalents........................................... 701 676
Mortgage loans held in inventory.................................... 65,256 58,742
Other assets, net................................................... 5,377 6,419
----------- -----------
71,334 65,837
Total Assets.................................................. $ 621,770 $ 617,303
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
M.D.C. HOLDINGS, INC.
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
LIABILITIES
Corporate
Accounts payable and accrued expenses............................... $ 14,288 $ 13,519
Income taxes payable................................................ 11,806 11,434
Note payable........................................................ 3,432 3,487
Senior notes, net................................................... 150,354 187,721
Subordinated notes, net............................................. 38,229 38,225
----------- -----------
218,109 254,386
Homebuilding
Accounts payable and accrued expenses............................... 105,485 114,794
Line of credit...................................................... 20,766 11,832
Notes payable....................................................... 9,676 3,063
----------- -----------
135,927 129,689
Financial Services
Accounts payable and accrued expenses............................... 12,047 10,363
Line of credit...................................................... 26,094 9,018
----------- -----------
38,141 19,381
Total Liabilities............................................. 392,177 403,456
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTES K, O
AND Q).............................................................. - - - -
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 25,000,000 shares authorized; none
issued............................................................ - - - -
Common stock, $.01 par value; 100,000,000 shares authorized;
23,691,000 and 23,050,000 shares issued, respectively, at
December 31, 1997 and 1996........................................ 237 231
Additional paid-in capital.......................................... 142,429 138,705
Retained earnings................................................... 126,494 106,189
----------- -----------
269,160 245,125
Less treasury stock, at cost, 5,903,000 and 4,966,000 shares,
respectively, at December 31, 1997 and 1996....................... (39,567) (31,278)
----------- -----------
Total Stockholders' Equity.................................... 229,593 213,847
----------- -----------
Total Liabilities and Stockholders' Equity.................... $ 621,770 $ 617,303
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
M.D.C. HOLDINGS, INC.
Consolidated Statements of Income
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Homebuilding............................................... $ 949,790 $ 890,536 $ 840,362
Financial Services......................................... 18,557 30,578 23,948
Corporate.................................................. 1,215 1,481 1,546
----------- ----------- -----------
Total Revenues....................................... 969,562 922,595 865,856
----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................................... 908,247 862,569 807,344
Financial Services......................................... 9,378 11,921 10,610
Corporate general and administrative....................... 11,849 11,578 13,478
Corporate and homebuilding interest........................ 761 3,773 7,773
----------- ----------- -----------
Total Expenses....................................... 930,235 889,841 839,205
----------- ----------- -----------
Income before income taxes and extraordinary item............. 39,327 32,754 26,651
Provision for income taxes.................................... (15,122) (11,955) (9,401)
----------- ----------- -----------
Income before extraordinary item.............................. 24,205 20,799 17,250
Extraordinary loss from early extinguishments of debt, net of
income tax benefit of $1,336 for 1997 and $242 for 1996.... (2,179) (421) - -
----------- ----------- -----------
NET INCOME.................................................... $ 22,026 $ 20,378 $ 17,250
=========== =========== ===========
EARNINGS PER SHARE (NOTES A and N)
Basic
Income before extraordinary item...................... $ 1.37 $ 1.12 $ .89
=========== =========== ===========
Net Income............................................ $ 1.25 $ 1.09 $ .89
=========== =========== ===========
Diluted
Income before extraordinary item...................... $ 1.18 $ .98 $ .79
=========== =========== ===========
Net Income............................................ $ 1.08 $ .97 $ .79
=========== =========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic....................................................... 17,673 18,623 19,362
=========== =========== ===========
Diluted..................................................... 21,899 22,763 23,737
=========== =========== ===========
DIVIDENDS PAID PER SHARE...................................... $ .12 $ .12 $ .11
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
M.D.C. HOLDINGS, INC.
Consolidated Statements of Stockholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained Treasury
Stock Capital Earnings Stock Total
------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES-JANUARY 1, 1995........................ $ 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
Shares issued................................ 6 3,153 45 (940) 2,264
Shares reacquired............................ - - - - - - (7,349) (7,349)
Unrealized gains on available-for-sale
securities, net............................ - - - - 366 - - 366
Non-qualified stock options exercised........ - - 1,012 - - - - 1,012
Notes receivable for stock purchases, net of
repayments................................. - - (441) - - - - (441)
Dividends declared........................... - - - - (2,132) - - (2,132)
Net income................................... - - - - 22,026 - - 22,026
------ ----------- ----------- ----------- -----------
BALANCES-DECEMBER 31, 1997...................... $ 237 $ 142,429 $ 126,494 $ (39,567) $ 229,593
====== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
M.D.C. HOLDINGS, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income.......................................... $ 22,026 $ 20,378 $ 17,250
Adjustments To Reconcile Net Income To Net Cash
Provided By Operating Activities:
Loss from the early extinguishments of debt.... 3,515 663 - -
Depreciation and amortization.................. 15,050 12,067 10,280
Homebuilding asset impairment charges.......... 5,850 9,191 3,677
Deferred income taxes.......................... (1,472) 2,926 (1,786)
Gains on sales of mortgage related assets...... (986) (4,943) (734)
Net changes in assets and liabilities:
Home sales and other accounts receivable.... 2,659 15,973 (13,684)
Homebuilding inventories.................... (7,077) 4,288 21,005
Mortgage loans held in inventory............ (6,514) (5,589) (8,785)
Accounts payable and accrued expenses....... (5,695) 4,925 2,458
Prepaid expenses and other assets........... (9,215) (6,682) (9,211)
Other, net..................................... 375 (5,272) 2,083
----------- ----------- ----------
Net Cash Provided By Operating Activities........... 18,516 47,925 22,553
----------- ----------- ----------
INVESTING ACTIVITIES:
Net Proceeds From Mortgage-Related Assets and
Liabilities...................................... 1,632 3,849 4,596
Proceeds From the Sale of FAMC...................... 1,000 6,000 - -
Changes In Investments and Marketable Securities.... 3,586 3,016 (414)
Changes In Restricted Cash.......................... - - - - 2,650
Other, net.......................................... (2,705) 1,133 1,896
----------- ----------- ----------
Net Cash Provided By Investing Activities........... 3,513 13,998 8,728
----------- ----------- ----------
FINANCING ACTIVITIES:
Lines of Credit
Advances........................................ 1,045,276 1,008,531 741,053
Principal payments.............................. (1,019,266) (1,053,161) (761,116)
Notes Payable
Borrowings...................................... 192 487 1,114
Principal payments.............................. (38,192) (13,897) (27,690)
Stock Repurchases.................................. (7,349) (12,921) (5,466)
Dividend Payments.................................. (2,132) (2,222) (2,153)
Other, net......................................... (184) 1,769 208
----------- ----------- ----------
Net Cash Used In Financing Activities.............. (21,655) (71,414) (54,050)
----------- ----------- ----------
Net Increase (Decrease) In Cash and Cash
Equivalents...................................... 374 (9,491) (22,769)
Cash and Cash Equivalents
Beginning of Year............................... 11,304 20,795 43,564
----------- ----------- ----------
End of Year..................................... $ 11,678 $ 11,304 $ 20,795
=========== =========== ==========
</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.
Nature of Operations - MDC's business consists of two segments,
homebuilding and financial services. In its homebuilding segment, through
separate subsidiaries, the Company is engaged in the design, construction and
sale of single-family 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, 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). 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 (the asset
management operations). In September 1996, the Company sold its 80% interest in
FAMC.
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 $21,182,000 and $20,775,000 at
December 31, 1997 and 1996, respectively, which are held for the processing and
disposition of eligible claims made under the warranties created pursuant to the
settlement of litigation commenced in 1994 and settled in November 1996. See
Note O. These investments are recorded on the Consolidated Balance Sheet at
market value, with the related unrealized gain included in retained earnings.
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 warranty expenditures, which included an amount arising from
the settlement of litigation commenced in 1994 and settled in November 1996.
Warranty reserves are included in homebuilding accounts payable and accrued
expenses and totalled $35,865,000 and $35,507,000, respectively, at December 31,
1997 and 1996.
F-8
<PAGE>
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 or prevailing market for uncommitted
loans. Substantially all of the loans originated or purchased by the Company are
sold to private investors within 40 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, 1997, the Company
adopted Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
("SFAS 125"), which superseded SFAS 122 (as hereinafter defined). SFAS 125
requires the Company to allocate the cost of mortgage loans originated and
purchased between the mortgage loans and the right to service those mortgage
loans, based on relative fair value, on the date the loan is sold. The adoption
of SFAS 125 did not have a material impact on the financial statements.
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 required the Company
to allocate the cost of mortgage loans originated and purchased between the
mortgage loans and the right to service those mortgage loans, based on relative
fair value, on the date that the loans are funded. Prior to 1996, the cost of
mortgage loans originated by the Company 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 recognized under the accounting method applicable in 1995 and prior years.
Mortgage servicing rights ("MSR") of $4,895,000 and $7,390,000 were
capitalized during 1997 and 1996, respectively, pursuant to SFAS 125 and SFAS
122, respectively. The cost of the MSR is amortized over the estimated period of
net servicing revenues. The cost attributed to the servicing rights sold and the
amortization of servicing rights was $3,903,000 and $3,969,000 for 1997 and
1996, respectively. MSR are evaluated for impairment by stratifying the
portfolio based on loan type and interest rate. No impairments were recorded
during 1997 and 1996.
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.
F-9
<PAGE>
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.
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 - 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, on
December 31, 1997, resulted in the restatement of the Company's "primary"
earnings per share calculations to "basic" earnings per share and "fully
diluted" earnings per share calculations to "diluted" earnings per share for all
periods presented. Basic earnings per share excludes any dilution from common
stock equivalents and is based on the weighted average common shares
outstanding. Diluted earnings per share is computed similarly to fully diluted
earnings per share.
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.
Additional Statements of Financial Accounting Standards - In June 1997,
the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), and Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), which are effective for financial statements for
periods beginning after December 15, 1997. The Company anticipates that the
adoption of SFAS 130 and SFAS 131 will not have a significant affect on its 1998
financial statements.
Reclassifications - Certain amounts in the 1996 and 1995 consolidated
financial statements have been reclassified to conform to the 1997 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 business segments is shown
below (in thousands).
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Homebuilding
Home sales............................................... $ 939,016 $ 880,358 $ 827,448
Land sales............................................... 9,978 9,471 10,396
Other revenues........................................... 796 707 2,518
----------- ----------- -----------
949,790 890,536 840,362
----------- ----------- -----------
Home cost of sales....................................... 802,961 759,405 716,859
Land cost of sales....................................... 7,740 8,773 10,176
Asset impairment charges................................. 5,850 9,191 3,677
Marketing................................................ 61,139 56,078 49,938
General and administrative............................... 30,557 29,122 26,694
----------- ----------- -----------
908,247 862,569 807,344
----------- ----------- -----------
Homebuilding Operating Profit........................ 41,543 27,967 33,018
----------- ----------- -----------
Financial Services
Mortgage Lending Revenues
Origination fees......................................... 6,751 6,209 5,258
Interest revenues........................................ 1,918 3,543 3,412
Gains on sales of mortgage servicing..................... 1,739 6,020 8,336
Gains (losses) on sales of mortgage loans, net........... 6,182 4,905 (1,293)
Mortgage servicing and other............................. 490 1,545 1,846
Asset Management Revenues
Management fees and other................................ 477 4,314 6,389
Gain on sale of FAMC..................................... 1,000 4,042 - -
----------- ----------- -----------
18,557 30,578 23,948
----------- ----------- -----------
General and Administrative Expenses
Mortgage Lending......................................... 9,335 9,638 8,271
Asset Management......................................... 43 2,283 2,339
----------- ----------- -----------
9,378 11,921 10,610
----------- ----------- -----------
Financial Services Operating Profit.................. 9,179 18,657 13,338
----------- ----------- -----------
Total Operating Profit.......................................... 50,722 46,624 46,356
----------- ----------- -----------
Corporate
Interest and other revenues.............................. 1,215 1,481 1,546
----------- ----------- -----------
Interest expense......................................... 761 3,773 7,773
General and administrative............................... 11,849 11,578 13,478
----------- ----------- -----------
12,610 15,351 21,251
----------- ----------- -----------
Net Corporate Expenses............................... (11,395) (13,870) (19,705)
----------- ----------- -----------
Income Before Income Taxes and Extraordinary Item............... $ 39,327 $ 32,754 $ 26,651
=========== =========== ===========
</TABLE>
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, 1997, 1996 and 1995 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):
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
--------- ----------
<S> <C> <C>
First mortgage loans
Conventional...................................... $ 40,689 $ 33,865
FHA and VA........................................ 26,191 27,261
--------- ---------
66,880 61,126
Less
Unamortized discounts............................. (324) (1,218)<F1>
Deferred fees..................................... (365) (322)
Allowance for loan losses......................... (935) (844)
--------- ---------
Total........................................... $ 65,256 $ 58,742
========= =========
<F1>Includes $751,000 of discounts pursuant to the allocation of costs to
mortgage servicing rights as required by SFAS 122. Under SFAS 125, this
allocation will no longer show as a discount.
</TABLE>
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 7.2% at December 31, 1997.
D. Mortgage Collateral, net of Mortgage-Backed Bonds, and Related Assets and
Liabilities
Mortgage Collateral and related net assets of $5,266,000 and
$18,570,000, respectively, as well as mortgage-backed bonds and other
liabilities of $5,133,000 and $17,157,000, respectively, were held by a trustee
at December 31, 1997 and 1996. The Company has not guaranteed, nor is it
otherwise obligated with respect to, these mortgage-backed bond issues.
In 1997, 1996 and 1995, MDC sold, at a premium, Mortgage Collateral
totalling $10,801,000, $17,842,000 and $9,618,000, respectively. The proceeds
from these sales were utilized to redeem in full the related outstanding
mortgage-backed bonds which totalled $9,867,000, $17,554,000 and $8,547,000,
respectively. These sales, net of redemptions, resulted in gains (losses)
totalling ($47,000), $127,000 and $305,000, respectively, in 1997, 1996 and
1995. 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 could have commenced 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. In March
1997, the Company modified the terms of this line of credit, increasing the
available borrowings from $150,000,000 to $175,000,000 and extending the
maturity date of the agreement by one year to June 30, 2001. At December 31,
1997, $20,766,000 was borrowed and $4,180,000 of letters of credit were
outstanding under this line of credit. At December 31, 1997, the
weighted-average interest rate on the line of credit was 7.9%.
Mortgage Lending - The aggregate amount available under MDC's mortgage
lending bank line of credit at December 31, 1997 was $51,000,000. Available
borrowings under this 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, 1997,
$26,094,000 was borrowed and an additional $24,906,000 was collateralized and
available to be borrowed. The line of credit is cancellable upon 90 days'
notice. At December 31, 1997, the weighted-average interest rate on the line of
credit was 6.1%.
F-12
<PAGE>
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, 1997, the Company was in compliance with these
covenants, representations and warranties.
F. Notes Payable
Senior Notes and Subordinated Notes - The senior notes and the
subordinated notes consist of (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Senior notes
11 1/8% Senior Notes due December 2003 (effective rate 12.3%).... $ 150,354 $ 187,721
========== ==========
Subordinated notes
8 3/4% Convertible Subordinated Notes due December 2005,
convertible into MDC 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%)..................................................... 10,229 10,225
---------- ----------
$ 38,229 $ 38,225
========== ==========
</TABLE>
In December 1993, the Company completed an offering of $190,000,000
principal amount of 11 1/8% senior notes due 2003 (the "11 1/8% 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 shares of MDC common stock at an initial conversion price
of $7.75 per share, subject to adjustment upon certain events. The Convertible
Subordinated Notes may be called by the Company beginning in December 1998 at a
price of 105. In March 1997, the Company repurchased $38,000,000 principal
amount of the 11 1/8% Senior Notes, leaving a principal amount outstanding of
$152,000,000 at December 31, 1997. See Note M. On January 28, 1998, the
remaining 11 1/8% Senior Notes either were repurchased or defeased with proceeds
of the issuance of the Company's 8 3/8% senior notes due 2008 (the "8 3/8%
Senior Notes"). See Note U.
Prior to their repurchase and cancellation or defeasance, the 11 1/8%
Senior Notes were subject to various covenants and were guaranteed, fully and
unconditionally, and jointly and severally, on an unsecured subordinated basis
by most of the Company's homebuilding segment subsidiaries (the "Guarantors").
The 11 1/8% Senior Notes also were secured by a pledge of 100% of the common
stock of the Guarantors and HomeAmerican. At December 31, 1997, the Company was
in compliance with all covenants included in the 11 1/8% Senior Notes indenture.
The 8 3/8% Senior Notes indenture imposes certain covenants on the
Company, including limitations on the Company's ability to incur indebtedness,
make certain types of payments, enter into specified transactions with
affiliates of the Company, affect certain sales of assets, incur specified
liens, merge or consolidate or sell substantially all of its assets. The 8 3/8%
Senior Notes indenture does not contain guarantees similar to those contained in
the 11 1/8% Senior Notes indenture, and the 8 3/8% Senior Notes are not secured.
The $10,230,000 principal amount of the 6.64% subordinated fixed-rate
notes was issued in April 1993 in exchange for certain previously outstanding
subordinated variable-rate notes.
Other Notes Payable - Notes payable, other than the notes discussed
above, of $13,108,000 at December 31, 1997 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 $21,016,000 at December 31, 1997.
F-13
<PAGE>
General - The following table sets forth the scheduled principal
payments on the 11 1/8% Senior Notes, subordinated notes and other notes payable
at December 31, 1997 (in thousands).
1998............. $ 19,966
1999............. $ 66
2000............. $ 72
2001............. $ 79
2002............. $ 87
Thereafter....... $ 183,068 *
*The refinancing described in Note U will increase this amount by
$23,000,000.
G. Retirement Plans
In October 1997, the Company established a defined benefit retirement
plan (the "Plan") for two executive officers of the Company under which the
Company agreed to make future payments with a projected benefit obligation of
$4,103,000 at December 31, 1997. The Plan is not funded and benefits vest in
either two or five years. Unrecognized prior service cost of $3,899,000 at
December 31, 1997 will be recognized over the employees' average estimated
service period. Plan expense for the year ended December 31, 1997 was $183,000.
At December 31, 1997, there is a liability of $2,883,000 with regard to the
Plan's accumulated benefit obligation and an intangible asset of $2,700,000. A
discount rate of 8% and a future annual compensation rate increase of 4% was
used in the calculation of the actuarial present value of the projected benefit
obligation.
The Company sponsors a 401(k) defined contribution plan covering all of
its eligible employees. At its discretion, the Company may make annual matching
contributions. Expense recorded by the Company for its matching contributions
for the years ended December 31, 1997, 1996 and 1995 was $696,000, $401,000 and
$341,000, respectively.
H. 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") provided 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 and non-statutory 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"), the Company is authorized by the MDC Board of
Directors 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 1997 and
1996, certain eligible executives of the Company exercised options to purchase
175,000 and 100,000 shares of MDC common stock, respectively, under the Employee
Plan and financed the exercises pursuant to the Option Purchase Program.
Aggregate notes receivable under the Option Purchase Program of $1,600,000 and
$1,158,000, respectively, at December 31, 1997 and 1996 have reduced
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 provided for an initial
F-14
<PAGE>
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. During 1997, the Board of
Directors authorized, and the Company's stockholders approved, an additional
350,000 shares of MDC common stock for issuance 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.
A summary of the changes in stock options during each of the three
years ended December 31, 1997 is as follows (in shares of MDC common stock):
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------------ --------------
<S> <C> <C>
Outstanding - January 1, 1995...................... 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) <F1>$ 4.56
Granted......................................... 815,000 $ 7.15
Cancelled....................................... (510,000) $ 6.01
------------
Outstanding - December 31, 1996.................... 2,048,000 $ 5.88
Exercised....................................... (618,000) $ 4.63
Granted......................................... 461,000 $ 11.46
Cancelled....................................... - -
------------
Outstanding - December 31, 1997.................... 1,891,000 $ 7.65
============
Exercisable - December 31,
1997............................................ 1,283,416 $ 6.33
1996............................................ 1,217,500 $ 5.04
1995............................................ 888,327 $ 6.65
Reserved for issuance at December 31, 1997......... 747,840
<F1> Includes 250,000 previously restricted options that became
exercisable during 1996.
</TABLE>
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 1997 would have been
reduced by approximately $520,000, or $.03 per basic and diluted share. Net
income for 1996 and 1995 would have been reduced by $505,000 and $156,000, $.02
and $.01 per basic share, respectively, and $.02 and zero per diluted share,
respectively. The average fair value of each option granted during 1997, 1996
and 1995 is estimated at $4.55, $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 35.60%, 30.80% and 36.70%, respectively, in 1997,
1996 and 1995; (ii) risk free interest rates of 5.9%, 6.0% and 5.5%,
respectively, for 1997, 1996 and 1995; (iii) expected lives of five to six years
with no defaults; and (iv) the Company's present dividend yield rate.
F-15
<PAGE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1997:
<TABLE>
<CAPTION>
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>
$4.25 - $5.00 275,000 2.0 $4.66 275,000 $4.66
$5.13 - $10.00 1,155,000 3.2 $6.85 1,008,416 $6.78
$10.125 - $12.52 461,000 5.6 $11.46 - - - -
--------- ---------
1,891,000 1,283,416
========= =========
</TABLE>
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. In February 1997, the Company repurchased
838,000 shares of MDC common stock at $8.77 per share, including commission,
substantially completing the program. Repurchases under the 1995 and 1996
programs were made at per share prices ranging from $5.91 to $8.77, with an
average cost, including commissions, of $7.23. At December 31, 1997, the Company
held 5,903,000 shares of treasury stock with an average purchase price of $6.70.
I. Homebuilding Asset Impairment Charges
Operating results for 1997 were reduced by asset impairment charges
totalling $5,850,000, related to certain of the Company's homebuilding assets in
the Mid-Atlantic, primarily in suburban Maryland, as a result of continued
weakened market conditions and competitive pressure in that market. The asset
impairment charges primarily 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; (ii) the write-off of certain capitalized costs, primarily deferred
marketing and option deposits, related to a number of lower-margin subdivisions
which are being closed out; and (iii) pricing, product and incentive changes
initiated by new management in the Mid-Atlantic to further the Company's
aggressive strategy of accelerating the close-out of under-performing
subdivisions in that market.
During 1996, the Company recorded asset impairment charges totalling
$9,191,000, related to (i) certain homebuilding assets in the Mid-Atlantic as a
result of weakened conditions and competitive pressures in that market; and (ii)
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 under-performing
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.
F-16
<PAGE>
J. Corporate and Homebuilding Interest Activity (in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest capitalized in homebuilding activity,
beginning of year............................... $ 40,745 $ 40,217 $ 42,478
Interest incurred.................................. 26,368 30,296 33,909
Interest expensed.................................. (761) (3,773) (7,773)
Previously capitalized interest included in
cost of sales................................... (28,361) (25,995) (28,397)
---------- ---------- ----------
Interest capitalized in homebuilding inventory,
end of year..................................... $ 37,991 $ 40,745 $ 40,217
========== ========== ==========
</TABLE>
K. Income Taxes
Total income taxes has been allocated as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Tax expense on income before income taxes and
extraordinary item................................ $ 15,122 $ 11,955 $ 9,401
Extraordinary loss................................... (1,336) (242) - -
Stockholders' equity, related to exercise of stock
options........................................... (1,012) (342) (2,281)
---------- ---------- ----------
Total income taxes................................... $ 12,774 $ 11,371 $ 7,120
========== ========== ==========
</TABLE>
The significant components of income tax expense on income before
income taxes and extraordinary item consist of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current tax expense
Federal........................................... $ 14,972 $ 8,612 $ 9,980
State............................................. 1,622 417 1,207
---------- ---------- ----------
Total current................................... 16,594 9,029 11,187
---------- ---------- ----------
Deferred tax expense (benefit)
Federal........................................... (1,349) 2,458 (2,402)
State............................................. (123) 468 616
---------- ---------- ----------
Total deferred.................................. (1,472) 2,926 (1,786)
---------- ---------- ----------
Total income tax expense............................. $ 15,122 $ 11,955 $ 9,401
========== ========== ==========
</TABLE>
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):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Tax expense computed at statutory rate............... $ 13,764 $ 11,464 $ 9,330
Increase (reduction) due to:
Permanent differences between financial
statement income and taxable income........... 231 54 (513)
State income tax, net of federal benefit........ 864 791 584
Adjustments to prior years' income taxes........ - - (297) - -
Other........................................... 263 (57) - -
---------- ---------- ----------
Total income tax expense............................. $ 15,122 $ 11,955 $ 9,401
========== ========== ==========
Effective tax rate................................... 38.5% 36.5% 35.3%
========== ========== ==========
</TABLE>
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,
------------------------
1997 1996
---------- ----------
Deferred tax assets:
Reserve for losses....................... $ 11,657 $ 9,842
Inventory impairment charges............. 8,875 8,369
Accrued liabilities...................... 1,398 2,263
Inventory, additional costs capitalized
for tax purposes....................... 5,912 5,189
Property, equipment and other assets, net 998 979
---------- ----------
Total gross deferred tax assets...... 28,840 26,642
---------- ----------
Deferred tax liabilities:
Deferred revenue......................... 5,752 5,601
Inventory, additional costs capitalized
for financial statement purposes....... 10,663 9,964
Other.................................... 149 273
---------- ----------
Total gross deferred tax liabilities. 16,564 15,838
Net deferred tax asset................... $ 12,276 $ 10,804
========== ==========
During 1996, the Company eliminated the $3,000,000 valuation allowance
which existed at December 31, 1995 for deferred tax assets because 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
American Homes of Colorado, Inc. (formerly Richmond Homes, Inc.) 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 on the
Company's financial position or results of operations.
F-18
<PAGE>
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 from amounts
provided.
L. 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 Financial Asset Management LLC ("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 promissory notes which were payable at specified dates during the
10 years following the sale and were convertible, under certain circumstances,
into an equity interest in FAMC. The sale resulted in the recognition of a gain
of $4,042,000 in 1996. An additional gain of $5,450,000 attributable to the
promissory notes was deferred. In 1997, the Company received principal payments
of $1,000,000 on the promissory notes, resulting in the recognition of a gain in
the same amount. At December 31, 1997, a gain of $4,450,000 attributable to the
remaining promissory notes continued to be deferred and may be recognized, in
whole or in part, in future periods based upon a number of factors, including
collection of the promissory notes' principal and the expiration of the
conversion features. The fair value of the promissory notes is not readily
determinable. The Company has the right to convert the remaining $4,450,000 of
promissory notes into as much as a 30% equity interest in FAMC and to call the
promissory notes at any time.
M. Extraordinary Item
Net income for 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 principal amount of its 11 1/8% Senior
Notes. The loss resulted from the repurchase of the 11 1/8% Senior Notes at a
price above their carrying value and the write-off of unamortized deferred debt
issue costs.
In April 1996, the Company retired borrowings under certain bank lines
of credit and project loans which were collateralized by homebuilding
inventories. The Company recognized an extraordinary loss of $421,000, net of an
income tax benefit of $242,000, due to the recognition of unamortized debt
discount and the write-off of deferred debt issue costs.
F-19
<PAGE>
N. Earnings Per Share
Pursuant to SFAS 128, the computation of diluted earnings per share
takes into account the effect of dilutive stock options and 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 basic and diluted earnings per share
calculations are shown below (in thousands, except per share amounts).
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Basic Earnings Per Share
Income before extraordinary item................. $ 24,205 $ 20,799 $ 17,250
Extraordinary loss, net of taxes................. (2,179) (421) - -
---------- ---------- ----------
Net Income.................................... $ 22,026 $ 20,378 $ 17,250
========== ========== ==========
Weighted-Average Shares Outstanding.............. 17,673 18,623 19,362
========== ========== ==========
Per Share Amounts
Income before extraordinary item.............. $ 1.37 $ 1.12 $ 0.89
Net Income.................................... $ 1.25 $ 1.09 $ 0.89
Diluted Earnings Per Share
Income before extraordinary item................. $ 24,205 $ 20,799 $ 17,250
Conversion of Convertible Subordinated Notes..... 1,575 1,608 1,565
---------- ---------- ----------
Adjusted income before extraordinary item..... 25,780 22,407 18,815
Extraordinary loss, net of taxes................. (2,179) (421) - -
---------- ---------- ----------
Adjusted Net Income........................... $ 23,601 $ 21,986 $ 18,815
========== ========== ==========
Weighted-average shares outstanding.............. 17,673 18,623 19,362
Stock Options.................................... 613 527 762
Conversion of Convertible Subordinated Notes..... 3,613 3,613 3,613
---------- ---------- ----------
Diluted Weighted-Average Shares
Outstanding................................. 21,899 22,763 23,737
========== ========== ==========
Per Share Amounts
Income before extraordinary item.............. $ 1.18 $ 0.98 $ 0.79
Net Income.................................... $ 1.08 $ 0.97 $ 0.79
</TABLE>
O. Legal Proceedings
During 1994 and 1995, class action litigation was filed against several
of the Company's subsidiaries (the "Expansive Soils Cases"), alleging claims
relating to the construction of homes on lots with expansive soils. On November
26, 1996 the settlement of the Expansive Soils Cases became final. The
settlement provided for the creation of a warranty program for eligible owners
of homes constructed by the Company's Colorado homebuilding subsidiaries and
closed between June 1986 and June 1996. Indemnity payments in connection with
the settlement have been received by the Company from its participating
insurance carriers. Management believes the settlement will not have a material
adverse effect on the financial condition, results of operations or cash flows
of the Company.
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.
F-20
<PAGE>
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.
P. 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 (other than those assets held for eligible claims made under
warranties created pursuant to the settlement of the Expansive Soils Cases, see
Notes A and O) are recorded on the balance sheet at cost, which approximates
market value. Accordingly, the carrying value of the investment is a reasonable
estimate of the fair value.
Restricted Investments - Restricted investments in marketable
securities are recorded 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 - The estimated fair value of the
11 1/8% Senior Notes and subordinated notes in the following table are valued
based on dealer quotes.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------- ------------------------
Recorded Estimated Recorded Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
11 1/8% Senior Notes............................ $ 150,354 $ 167,960 $ 187,721 $ 190,475
Subordinated notes.............................. $ 38,229 $ 65,850 $ 38,225 $ 44,616
</TABLE>
Q. 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, 1997, commitments by HomeAmerican to originate
mortgage loans totalled $29,219,000 at market rates of interest. At December 31,
1997, unexpired short-term forward commitments to sell loans totalled
$49,500,000 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 $2,035,000 in 1998,
F-21
<PAGE>
$1,585,000 in 1999, $1,093,000 in 2000, $805,000 in 2001 and $290,000 in 2002.
Rent expense under cancellable and noncancellable leases totalled $3,091,000,
$2,877,000 and $2,662,000 in 1997, 1996 and 1995, respectively.
MDC has entered into agreements to guarantee payment of principal and
interest on $30,628,000 principal amount of bonds issued by municipal agencies
to fund the development of project infrastructure for a master-planned community
in Colorado.
R. Supplemental Disclosure of Cash Flow Information (in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid during the year for:
Interest, net of amounts capitalized.... $ 2,919 $ 7,892 $ 8,923
Income taxes............................ $ 14,307 $ 8,941 $ 7,155
Land purchases financed by seller............ $ 6,750 $ 5,852 $ 4,787
Land sales financed by MDC................... $ 1,183 $ 205 $ 1,609
Disposition of land inventories
collateralized by notes payable
Inventories.............................. - - - - $ 1,270
Notes payable............................ - - - - $ 1,270
</TABLE>
S. Related Party Transactions
MDC has transacted business with related or affiliated companies and
with certain officers and directors of the Company.
Gilbert Goldstein, P.C., a law firm of which a director of the Company
is the sole shareholder was paid legal fees of $404,000, $189,000 and $170,000
in 1997, 1996 and 1995, respectively.
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 1997, 1996 and 1995, the Company paid
$1,975,000, $3,586,000 and $7,372,000, respectively, for plumbing, door and
millwork services provided by these companies.
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 $414,000, $305,000, and $188,000, respectively,
in 1997, 1996 and 1995.
F-22
<PAGE>
T. Summarized Quarterly Consolidated Financial Information (Unaudited)
Unaudited summarized quarterly consolidated financial information for
the two years ended December 31, 1997 is as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Quarter
-----------------------------------------------------
Fourth Third Second First
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1997
Revenues........................................ $ 271,840 $ 266,618 $ 237,285 $ 193,819
=========== =========== =========== ===========
Income before extraordinary item................ $ 8,183 $ 7,302 $ 5,134 $ 3,586
Extraordinary loss.............................. - - - - - - (2,179)
----------- ----------- ----------- -----------
Net income............................... $ 8,183 $ 7,302 $ 5,134 $ 1,407
=========== =========== =========== ===========
Earnings Per Share
Basic
Income before extraordinary item......... $ .46 $ .42 $ .29 $ .20
=========== =========== =========== ===========
Net income............................... $ .46 $ .42 $ .29 $ .08
=========== =========== =========== ===========
Diluted
Income before extraordinary item......... $ .39 $ .35 $ .26 $ .18
=========== =========== =========== ===========
Net income............................... $ .39 $ .35 $ .26 $ .08
=========== =========== =========== ===========
Weighted-Average Shares Outstanding
Basic.................................... 17,770 17,569 17,463 17,891
=========== =========== =========== ===========
Diluted.................................. 22,041 21,779 21,583 22,107
=========== =========== =========== ===========
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
Basic
Income before extraordinary item......... $ .35 $ .31 $ .24 $ .22
=========== =========== =========== ===========
Net income............................... $ .35 $ .31 $ .22 $ .22
=========== =========== =========== ===========
Diluted
Income before extraordinary item......... $ .30 $ .27 $ .21 $ .20
=========== =========== =========== ===========
Net income............................... $ .30 $ .27 $ .20 $ .20
=========== =========== =========== ===========
Weighted-Average Shares Outstanding.............
Basic.................................... 18,034 18,358 18,831 19,284
=========== =========== =========== ===========
Diluted.................................. 22,157 22,462 22,978 23,476
=========== =========== =========== ===========
</TABLE>
U. Subsequent Event
On January 28, 1998, the Company sold $175,000,000 principal amount of
8 3/8% Senior Notes due February 2008, at an issue price of 99.598%. The Company
used the proceeds of the sale of the 8 3/8% Senior Notes to repurchase
$61,181,000 principal amount of MDC's 11 1/8% Senior Notes, to defease the
remaining $90,819,000 principal amount of 11 1/8% Senior Notes outstanding and
for general corporate purposes. The repurchase and subsequent cancellation and
defeasance of the 11 1/8% Senior Notes for $169,592,000 resulted in an
extraordinary charge to income in January 1998 (including the recognition of
unamortized debt discount and write-off of deferred debt issue costs) of
$15,314,000, net of an income tax benefit of $9,587,000.
F-23
<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 1998 Annual Meeting of Shareowners to be held on or about May
18, 1998.
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 1998 Annual Meeting of Shareowners to be held on or about May
18, 1998.
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 1998 Annual Meeting of Shareowners to be held on or about May
18, 1998.
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 1998 Annual Meeting of Shareowners to be held on or about May
18, 1998.
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, 1997 and 1996... F-3
Consolidated Statements of Income for each of the Three Years
Ended December 31, 1997...................................... F-5
Consolidated Statements of Stockholders' Equity for each of
the Three Years Ended December 31, 1997...................... F-6
Consolidated Statements of Cash Flows for each of the Three
Years Ended December 31, 1997................................ 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 11 1/8% Senior Note
(the "11 1/8% 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 11 1/8% 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). *
4.12 Form of Senior Notes Indenture dated as of January 28, 1998
by and between the Company and U.S. Bank National Association,
as Trustee (incorporated herein by reference to Exhibit
4.2(a) of the Company's Post Effective Amendment No. 1 to
Form S-3). *
10.1 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). *
10.2 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). *
10.3 First Amendment to M.D.C. Holdings, Inc. Director Equity
Incentive Plan (incorporated herein by reference to Exhibit A
of the Company's Proxy Statement dated March 24, 1997
relating to the 1997 Annual Meeting of Stockholders). *
10.4 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). *
23
<PAGE>
10.5(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). *
10.5(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). *
10.6 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).*
10.7 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). *
10.8 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). *
10.9 Letter Agreement effective October 1, 1996 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). *
10.10 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). *
10.11 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 Stockholders). *
10.12(a) 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). *
10.12(b) Amendment No. 1 to Executive Option Purchase program,
effective November 4, 1997 in part and December 1, 1997
in part.
10.13 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). *
10.14 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). *
10.15 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). *
24
<PAGE>
10.16(a) Forms of Promissory Notes and Pledge Agreements 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 (incorporated herein by
reference to Exhibit 10.19 of the Company's Annual Report and
Form 10-K dated December 31, 1996). *
10.16(b) Forms of Promissory Notes and Pledge Agreements dated December
18, 1997 between the Company and Michael Touff and Paris G.
Reece III related to amounts advanced to such persons in
connection with income taxes due and the portion of their 1997
performance bonuses paid in the form of the Company's common
stock.
10.17(a) Employment Agreement between the Company and Larry A. Mizel
dated October 1, 1997 (incorporated herein by reference to
Exhibit 99.1 of the Company's Form 8-K dated
January 14, 1998). *
10.17(b) Employment Agreement between the Company and David D.
Mandarich dated October 1, 1997 (incorporated herein by
reference to Exhibit 99.2 of the Company's Form 8-K dated
January 14, 1998). *
21 Subsidiaries of the Company.
23 Consent of Price Waterhouse LLP.
27 Financial Data Schedule.
- -------------------
* Incorporated herein by reference.
(b)Reports on Form 8-K.
The Company filed a Form 8-K on October 29, 1997.
25
<PAGE>
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 10th day of February, 1998 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 February 10, 1998
- ------------------------- of Directors, President
Larry A. Mizel and Chief Executive Officer
/s/ DAVID D. MANDARICH Director, Executive Vice February 10, 1998
- ------------------------- President - Real Estate
David D. Mandarich and Chief Operating Officer
/s/ STEVEN J. BORICK Director February 10, 1998
- -------------------------
Steven J. Borick
/s/ GILBERT GOLDSTEIN Director February 10, 1998
- -------------------------
Gilbert Goldstein
/s/ WILLIAM B. KEMPER Director February 10, 1998
- -------------------------
William B. Kemper
/s/ HERBERT T. BUCHWALD Director February 10, 1998
- -------------------------
Herbert T. Buchwald
(A Majority of the Board of Directors)
26
Exhibit 10.12(b)
M.D.C. HOLDINGS, INC.
AMENDMENT NO. 1
EXECUTIVE OPTION PURCHASE PROGRAM
Pursuant to Section 16 the M.D.C. Holdings, Inc. Executive Option
Purchase Program (the "Program"), the Board of Directors of M.D.C. Holdings,
Inc. hereby amends the Program as set forth in this Amendment No. 1 (the
"Amendment"). All capitalized Terms defined in the Program shall have the same
meanings in this Amendment as they have in the Program. Except as amended
hereby, all terms and provisions of the Program shall remain in full
force and effect.
1. Loan Participants. Section 3 of the Program is amended to
read as follows:
The Loan Participants shall be Larry A. Mizel, David D.
Mandarich, Paris G. Reece III and Michael Touff.
2. Limitations. Section 8 of the Program is hereby amended to
read as follows:
The aggregate amount of Loans which may be made to each of
Messrs. Mizel and Mandarich shall be $1,000,000 and to each of
Messrs. Reece and Touff shall be $300,000. The maximum amount
of such Loans available under the Program shall not be reduced
by operation of Section 12 of the Program (or the provisions
of any Promissory Notes evidencing such Loans executed after
the effective date of the Amendment) which requires repayment
of 10% of the outstanding principal amount of each Loan made
pursuant to the Program on April 1 of each year during the
term of such Loans. Notwithstanding the preceding sentence, no
additional amounts may be borrowed pursuant to the Program in
connection with options exercised prior to the effective date
of this Amendment.
3. Effective Date.
This Amendment is effective as of November 4, 1997, except
that Michael Touff's participation in the Program shall
commence on December 1, 1997.
Exhibit 10.16(b)
PROMISSORY NOTE
December 18, 1997
Borrower: Michael Touff Lender: M.D.C. Holdings, Inc.,
a Delaware corporation
Amount: $41,511.00 Maturity Date: December 30, 2002
For value received, Borrower promises to pay to the order of Lender at
Lender's corporate office in Denver, Colorado, the sum of $41,511.00 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,
1998 based upon a ten year amortization. The remaining principal and accrued
interest shall be payable in full on the earlier of: (a) December 30, 2002; (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:
-----------------------------
Michael Touff
<PAGE>
PLEDGE AGREEMENT
THIS AGREEMENT is entered into as of the 18th day of December
1997, by and between M.D.C. Holdings, Inc., a Delaware corporation ("MDC") and
Michael Touff ("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 $41,511.00 (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 $11.38.
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.
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-
<PAGE>
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.
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
<PAGE>
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 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;
<PAGE>
(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.
4.6 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:
<PAGE>
(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 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
<PAGE>
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: Chief Financial Officer
(B) if to Pledgor:
Mr. Michael Touff
3600 South Yosemite, Suite 900
Denver, CO 80237
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.
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.
<PAGE>
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.
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: Michael Touff
<PAGE>
Schedule 1 to Pledge Agreement
PLEDGED SHARES
Stock Cert. Number of
Number Shares
__ 4,560
------------
-- ------------
<PAGE>
PROMISSORY NOTE
December 18, 1997
Borrower: Paris G. Reece III Lender: M.D.C. Holdings, Inc.,
a Delaware corporation
Amount: $52,581.00 Maturity Date: December 30, 2002
For value received, Borrower promises to pay to the order of Lender at
Lender's corporate office in Denver, Colorado, the sum of $52,581.00 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,
1998 based upon a ten year amortization. The remaining principal and accrued
interest shall be payable in full on the earlier of: (a) December 30, 2002; (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:
-----------------------------
Paris G. Reece III
<PAGE>
PLEDGE AGREEMENT
THIS AGREEMENT is entered into as of the 18th day of December
1997, by and between M.D.C. Holdings, Inc., a Delaware corporation ("MDC") and
Paris G. Reece III ("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:
8. PLEDGE.
1.1 Security Interest. As security for the promissory note of Pledgor
of even date herewith in the original principal amount of $52,581.00 (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 $11.38.
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.
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-
<PAGE>
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.
9. 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.
10. 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.
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
<PAGE>
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.
11. 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 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
<PAGE>
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.
4.6 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
<PAGE>
(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.
12. 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.
13. 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 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.
14. 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.
<PAGE>
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: General Counsel
(B) if to Pledgor:
Mr. Paris G. Reece III
3600 South Yosemite, Suite 900
Denver, CO 80237
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.
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.
<PAGE>
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.
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: Paris G. Reece III
<PAGE>
Schedule 1 to Pledge Agreement
PLEDGED SHARES
Stock Cert. Number of
Number Shares
__ 5,776
------------
-- ------------
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
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
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, 333-17035 and 333-36631), Form S-4 (no. 33-52245), and Forms
S-8 (nos. 333-22167 and 33-54429) of M.D.C. Holdings, Inc. of our report dated
February 5, 1998 appearing on page F-2 of this Form 10-K.
/s/Price Waterhouse
- ---------------------
PRICE WATERHOUSE LLP
Denver, Colorado
February 5, 1998
<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-K for
the year ended December 31, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,678
<SECURITIES> 1,392
<RECEIVABLES> 7,559
<ALLOWANCES> 0
<INVENTORY> 442,940
<CURRENT-ASSETS> 0
<PP&E> 9,709
<DEPRECIATION> 0
<TOTAL-ASSETS> 621,770
<CURRENT-LIABILITIES> 0
<BONDS> 248,551
0
0
<COMMON> 237
<OTHER-SE> 229,356
<TOTAL-LIABILITY-AND-EQUITY> 621,770
<SALES> 949,790
<TOTAL-REVENUES> 969,562
<CGS> (908,247)
<TOTAL-COSTS> (917,625)
<OTHER-EXPENSES> (11,849)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (761)
<INCOME-PRETAX> 39,327
<INCOME-TAX> (15,122)
<INCOME-CONTINUING> 24,205
<DISCONTINUED> 0
<EXTRAORDINARY> (2,179)
<CHANGES> 0
<NET-INCOME> 22,026
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.08
</TABLE>
