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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-8951
M.D.C. HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 84-0622967
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
3600 South Yosemite Street, Suite 900 80237
Denver, Colorado (Zip code)
(Address of principal executive offices)
(303) 773-1100
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of May 1, 1998, 18,007,000 shares of M.D.C. Holdings, Inc. common
stock were outstanding.
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<PAGE>
M.D.C. HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
Page
No.
----
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Balance Sheets as of March 31, 1998 (Unaudited)
and December 31, 1997......................... 1
Statements of Income (Loss) (Unaudited) for the
three months ended March 31, 1998 and 1997.... 3
Statements of Cash Flows (Unaudited) for the
three months ended March 31, 1998 and 1997.... 4
Notes to Condensed Consolidated Financial
Statements (Unaudited)........................ 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 9
Part II. Other Information
Item 1. Legal Proceedings............................... 18
Item 4. Submission of Matters to a Vote of Shareowners.. 18
Item 5. Other Information............................... 18
Item 6. Exhibits and Reports on Form 8-K................ 18
<PAGE>
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Corporate
Cash and cash equivalents......................... $ 3,707 $ 7,110
Property and equipment, net....................... 10,004 9,709
Deferred income taxes............................. 12,355 12,276
Deferred debt issue costs, net.................... 3,823 6,851
Other assets, net................................. 5,790 2,944
---------- -----------
35,679 38,890
---------- -----------
Homebuilding
Cash and cash equivalents......................... 6,713 3,867
Home sales and other accounts receivable.......... 15,218 7,559
Investments and marketable securities, net........ 1,412 1,392
Inventories, net
Housing completed or under construction......... 290,310 249,928
Land and land under development................. 186,896 193,012
Prepaid expenses and other assets, net............ 57,121 55,788
---------- -----------
557,670 511,546
---------- -----------
Financial Services
Cash and cash equivalents......................... 639 701
Mortgage loans held in inventory, net............. 74,280 65,256
Other assets, net................................. 6,284 5,377
---------- -----------
81,203 71,334
---------- -----------
Total Assets................................ $ 674,552 $ 621,770
========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
-1-
<PAGE>
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- -----------
LIABILITIES (Unaudited)
<S> <C> <C>
Corporate
Accounts payable and accrued expenses............ $ 18,921 $ 14,288
Income taxes payable............................. 3,385 11,806
Note payable..................................... 3,417 3,432
Senior notes, net................................ 174,305 150,354
Subordinated notes, net.......................... 38,230 38,229
----------- -----------
238,258 218,109
Homebuilding
Accounts payable and accrued expenses............ 117,785 105,485
Line of credit................................... 48,513 20,766
Notes payable.................................... 2,926 9,676
----------- -----------
169,224 135,927
Financial Services
Accounts payable and accrued expenses............ 18,722 12,047
Line of credit................................... 23,994 26,094
----------- -----------
42,716 38,141
Total Liabilities.......................... 450,198 392,177
----------- -----------
COMMITMENTS AND CONTINGENCIES....................... - - - -
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 25,000,000
shares authorized; none issued................. - - - -
Common stock, $.01 par value; 100,000,000 shares
authorized; 23,856,000 and 23,691,000 shares
issued, respectively, at March 31, 1998 and
December 31, 1997.............................. 239 237
Additional paid-in capital....................... 143,531 142,429
Retained earnings................................ 118,006 125,613
Accumulated comprehensive income................. 1,962 881
----------- -----------
263,738 269,160
Less treasury stock, at cost; 5,876,000 and
5,903,000 shares, respectively,
at March 31, 1998 and December 31, 1997........ (39,384) (39,567)
----------- -----------
Total Stockholders' Equity................. 224,354 229,593
----------- -----------
Total Liabilities and Stockholders' Equity. $ 674,552 $ 621,770
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
-2-
<PAGE>
M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Income (Loss)
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
REVENUES
Homebuilding.................................. $ 238,597 $ 189,149
Financial Services............................ 4,671 4,231
Corporate..................................... 233 439
----------- -----------
Total Revenues............................ 243,501 193,819
----------- -----------
COSTS AND EXPENSES
Homebuilding.................................. 224,453 181,694
Financial Services............................ 2,646 2,351
Corporate general and administrative.......... 3,512 3,246
Corporate and homebuilding interest........... - - 761
----------- -----------
Total Expenses............................ 230,611 188,052
----------- -----------
Income before income taxes and extraordinary item 12,890 5,767
Provision for income taxes....................... (4,962) (2,181)
----------- -----------
Income before extraordinary item................. 7,928 3,586
Extraordinary loss from early extinguishments of
debt, net of income tax benefit of $9,587 for
1998 and $1,336 for 1997...................... (15,314) (2,179)
----------- -----------
NET INCOME (LOSS)................................ $ (7,386) $ 1,407
----------- -----------
Unrealized holding gains (losses) on securities
arising during the period, net.................. 1,081 (208)
----------- -----------
COMPREHENSIVE INCOME (LOSS)...................... $ (6,305) $ 1,199
=========== ===========
EARNINGS PER SHARE
Basic
Income before extraordinary item.......... $ .44 $ .20
=========== ===========
Net Income (Loss)......................... $ (.41) $ .08
=========== ===========
Diluted
Income before extraordinary item.......... $ .37 $ .18
=========== ===========
Net Income (Loss)......................... $ (.31) $ .08
=========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic......................................... 17,919 17,891
=========== ===========
Diluted....................................... 22,392 22,107
=========== ===========
DIVIDENDS PER SHARE.............................. $ .03 $ .03
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE>
M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss)................................. $ (7,386) $ 1,407
Adjustments To Reconcile Net Income (Loss) To
Net Cash Used In Operating Activities
Loss from the early extinguishments of debt. 24,901 3,515
Depreciation and amortization............... 4,171 2,929
Homebuilding asset impairment charges....... - - 1,250
Deferred income taxes....................... (79) 144
Net changes in assets and liabilities
Home sales and other accounts
receivable.......................... (7,659) (6,048)
Homebuilding inventories.............. (34,549) (3,245)
Mortgage loans held in inventory...... (9,024) 12,200
Accounts payable and accrued expenses
and income taxes payable............ 14,479 (9,706)
Prepaid expenses and other assets..... (5,443) (3,263)
Other, net.................................. (1,427) 687
----------- -----------
Net Cash Used In Operating Activities............. (22,016) (130)
----------- -----------
FINANCING ACTIVITIES
Lines of Credit
Advances..................................... 248,800 189,029
Principal payments........................... (223,153) (181,910)
Notes Payable
Principal payments........................... (6,765) (50)
Senior Notes
Proceeds from issuance....................... 171,541 - -
Repurchase and defeasance.................... (152,000) - -
Premium on repurchase and defeasance......... (17,592) - -
Stock Repurchases.................................. - - (7,349)
Dividend Payments.................................. (538) (548)
Other, net......................................... 1,104 765
----------- -----------
Net Cash Provided By (Used In) Financing
Activities 21,397 (63)
----------- -----------
Net Decrease In Cash and Cash Equivalents.......... (619) (193)
Cash and Cash Equivalents
Beginning of Period.......................... 11,678 11,304
----------- -----------
End of Period................................ $ 11,059 $ 11,111
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
-4-
<PAGE>
M.D.C. HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A. Presentation of Financial Statements
The condensed consolidated financial statements of M.D.C. Holdings,
Inc. ("MDC" or the "Company," which, unless otherwise indicated, refers to
M.D.C. Holdings, Inc. and its subsidiaries) have been prepared, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
These statements reflect all adjustments (including all normal recurring
accruals) which, in the opinion of management, are necessary to present fairly
the financial position, results of operations and cash flows of MDC as of March
31, 1998 and for all of the periods presented. These statements are condensed
and do not include all of the information required by generally accepted
accounting principles in a full set of financial statements. These statements
should be read in conjunction with MDC's financial statements and notes thereto
included in MDC's Annual Report on Form 10-K for its fiscal year ended December
31, 1997.
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") was issued. Pursuant to SFAS 130,
all items that are required to be recognized as components of comprehensive
income have been reported in these financial statements.
All 1997 per share amounts have been adjusted pursuant to Statement
of Financial Accounting Standards No. 128, "Earnings per Share."
Certain reclassifications have been made in the 1997 financial
statements to conform to the classifications used in the current year.
B. Information on Business Segments
The Company operates in two business segments: homebuilding
and financial services. A summary of the Company's segment information is
shown below (in thousands).
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
Homebuilding
Home sales..................................................... $ 232,763 $ 187,185
Land sales..................................................... 5,527 1,690
Other revenues................................................. 307 274
----------- -----------
238,597 189,149
Home cost of sales............................................. 196,269 159,723
Land cost of sales............................................. 3,106 1,323
Asset impairment charges....................................... - - 1,250
Marketing...................................................... 15,250 12,515
General and administrative..................................... 9,828 6,883
----------- -----------
224,453 181,694
Homebuilding Operating Profit............................... 14,144 7,455
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-5-
<PAGE>
Three Months
Ended March 31,
1998 1997
----------- -----------
Financial Services
Mortgage Lending Revenues
Interest revenues.............................................. 531 667
Origination fees............................................... 1,865 1,462
Gains on sales of mortgage servicing........................... 235 338
Gains on sales of mortgage loans, net.......................... 2,004 1,315
Mortgage servicing and other................................... 30 128
Asset Management Revenues........................................ 6 321
----------- -----------
4,671 4,231
General and Administrative Expenses.............................. 2,646 2,351
----------- -----------
Financial Services Operating Profit......................... 2,025 1,880
----------- -----------
Total Operating Profit.............................................. 16,169 9,335
----------- -----------
Corporate
Interest and other revenues.................................... 233 439
Interest expense............................................... - - (761)
General and administrative..................................... (3,512) (3,246)
----------- -----------
Net Corporate Expenses...................................... (3,279) (3,568)
----------- -----------
Income Before Income Taxes and Extraordinary Item................... $ 12,890 $ 5,767
=========== ===========
</TABLE>
C. Corporate and Homebuilding Interest Activity (in thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
Interest capitalized in homebuilding inventory, beginning of period. $ 37,991 $ 40,745
Interest incurred................................................... 5,772 6,924
Interest expensed................................................... - - (761)
Previously capitalized interest included in home cost of sales...... (6,846) (5,686)
Previously capitalized interest included in land cost of sales...... (1,371) (60)
----------- -----------
Interest capitalized in homebuilding inventory, end of period....... $ 35,546 $ 41,162
=========== ===========
</TABLE>
D. Stockholders' Equity
On February 26, 1997, the Company repurchased 838,000 shares of MDC
common stock at $8.77 per share, including commissions, completing a program
authorized by the MDC board of directors in October 1996 to repurchase up to
1,000,000 shares of MDC common stock.
-6-
<PAGE>
E. Extraordinary Item
On January 28, 1998, the Company sold $175,000,000 principal amount of
8 3/8% Senior Notes due 2008 (the "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 due 2003
(the "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 resulted in an extraordinary charge to income (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.
Net income for the first quarter of 1997 included an extraordinary loss
of $2,179,000, net of an income tax benefit of $1,336,000, recognized in
connection with the Company's repurchase of $38,000,000 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.
F. Earnings Per Share
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 (the "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>
Three Months
Ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
Basic Earnings Per Share
Income before extraordinary item........................... $ 7,928 $ 3,586
Extraordinary loss, net of taxes........................... (15,314) (2,179)
----------- -----------
Net Income (Loss)...................................... $ (7,386) $ 1,407
=========== ===========
Weighted-Average Shares Outstanding........................ 17,919 17,891
=========== ===========
Per Share Amounts
Income before extraordinary item....................... $ .44 $ .20
=========== ===========
Net Income (Loss)...................................... $ (.41) $ .08
=========== ===========
Diluted Earnings Per Share
Income before extraordinary item........................... $ 7,928 $ 3,586
Conversion of Convertible Subordinated Notes............... 391 393
----------- -----------
Adjusted income before extraordinary item.................. 8,319 3,979
Extraordinary loss, net of taxes........................... (15,314) (2,179)
----------- -----------
Adjusted Net Income (Loss)............................. $ (6,995) $ 1,800
=========== ===========
Weighted-average shares outstanding........................ 17,919 17,891
Stock Options.............................................. 860 603
Conversion of Convertible Subordinated Notes............... 3,613 3,613
----------- -----------
Diluted Weighted-Average Shares Outstanding............ 22,392 22,107
=========== ===========
Per Share Amounts
Income before extraordinary item....................... $ .37 $ .18
=========== ===========
Net Income (Loss)...................................... $ (.31) $ .08
=========== ===========
</TABLE>
-7-
<PAGE>
G. Supplemental Disclosure Of Cash Flow Information (in thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1998 1997
----------- ------------
<S> <C> <C>
Cash paid during the period for:
Interest, net of amounts capitalized...................... $ - - $ - -
Income taxes.............................................. $ 4,439 $ 3,535
</TABLE>
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
MDC is a major regional homebuilder and one of the largest homebuilders
in the United States. The Company operates in two segments: homebuilding and
financial services. In its homebuilding segment, MDC builds and sells homes
under the name "Richmond American Homes" in (i) metropolitan Denver and Colorado
Springs, Colorado; (ii) Northern Virginia and suburban Maryland (the
"Mid-Atlantic"); (iii) Northern and Southern California; (iv) Phoenix and
Tucson, Arizona; and (v) Las Vegas, Nevada. 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.
RESULTS OF OPERATIONS
The table below summarizes MDC's results of operations (in thousands,
except per share amounts).
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1998 1997
---------- -----------
<S> <C> <C>
Revenues............................................................. $ 243,501 $ 193,819
Income before income taxes and extraordinary item.................... $ 12,890 $ 5,767
Income before extraordinary item..................................... $ 7,928 $ 3,586
Net Income (Loss).................................................... $ (7,386) $ 1,407
Earnings Per Share
Basic
Income before extraordinary item............................. $ .44 $ .20
Net Income (Loss)............................................ $ (.41) $ .08
`
Diluted
Income before extraordinary item............................. $ .37 $ .18
Net Income (Loss)............................................ $ (.31) $ .08
</TABLE>
Revenues for the first quarter of 1998 increased 26% from the same
period in 1997, primarily due to (i) increased home sales revenues resulting
from an 18% increase in home closings to 1,270 units; (ii) an $8,700 increase in
the average selling price per home closed; and (iii) increased revenues from
HomeAmerican. In addition, the Company recognized land sales revenues of
$5,527,000 in the first quarter of 1998, compared with $1,690,000 for the same
period in 1997.
Income before income taxes and extraordinary item increased in the
first quarter of 1998, compared with the first quarter of 1997. This increase
primarily was a result of increased operating profit from the Company's
homebuilding segment, due to (i) increased home closings; (ii) an increased
-9-
<PAGE>
average selling price per home closed; (iii) a 100 basis point increase in Home
Gross Margins (as hereinafter defined); (iv) increased land sale gains; and (v)
no asset impairment charges. Operating results for the first quarter of 1998
also were impacted favorably by decreased interest expense, compared with the
same period in 1997.
In January 1998, the Company sold $175,000,000 principal amount of 8
3/8% Senior Notes due 2008 (the "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 due 2003
(the "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 resulted in an extraordinary charge to income in the first quarter of 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. Including this extraordinary loss, the Company recognized a net loss
for the first quarter of 1998 of $7,386,000.
Net income for the first quarter of 1997 included an extraordinary loss
of $2,179,000, net of an income tax benefit of $1,336,000, recognized in
connection with the Company's repurchase of $38,000,000 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.
-10-
<PAGE>
Homebuilding Segment
The table below sets forth information relating to the Company's
homebuilding segment (dollars in thousands).
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1998 1997
----------- ------------
<S> <C> <C>
Home Sales Revenues............................... $ 232,763 $ 187,185
Operating Profits................................. $ 14,144 $ 7,455
Average Selling Price Per Home Closed............. $ 183.3 $ 174.6
Home Gross Margins................................ 15.7% 14.7%
Orders For Homes, net (units)
Colorado................................... 910 573
Mid-Atlantic............................... 393 327
California................................. 310 234
Arizona.................................... 521 315
Nevada..................................... 142 79
------------ ------------
Total................................ 2,276 1,528
============ ============
Homes Closed (units)
Colorado................................... 480 391
Mid-Atlantic............................... 193 197
California................................. 181 175
Arizona.................................... 326 227
Nevada..................................... 90 82
----------- -----------
Total................................ 1,270 1,072
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1998 1997 1997
----------- ------------ ----------
<S> <C> <C> <C>
Backlog (units)
Colorado................................... 1,310 880 758
Mid-Atlantic............................... 594 394 551
California................................. 399 270 219
Arizona.................................... 588 393 319
Nevada..................................... 147 95 95
----------- ------------ ----------
Total................................ 3,038 2,032 1,942
=========== ============ ==========
Estimated Sales Value................ $ 570,000 $ 380,000 $ 340,000
=========== ============ ==========
Active Subdivisions
Colorado................................... 51 48 55
Mid-Atlantic............................... 39 42 55
California................................. 14 12 16
Arizona.................................... 26 29 22
Nevada..................................... 8 6 7
----------- ------------ ----------
Total............................. 138 137 155
=========== ============ ==========
</TABLE>
-11-
<PAGE>
Home Sales Revenues and Homes Closed - Home sales revenues for the
quarter ended March 31, 1998 represented the highest first quarter level in the
Company's history and were 24% higher than home sales revenues for the same
period in 1997. The improved revenues were a result of increased home closings
and a higher average selling price per home closed, as further discussed below.
Home closings increased 18% in the first quarter of 1998, compared with
the first quarter of 1997. This increase primarily was due to higher home
closings in Phoenix (a 54% increase), Colorado (a 23% increase) and Southern
California (a 14% increase), where Backlog (as hereinafter defined) levels at
the beginning of 1998 were higher by 89%, 53% and 80%, respectively, than at the
beginning of 1997. Home closings decreased in Northern California in the first
quarter of 1998, compared with the first quarter of 1997, because the Company
has exited the Sacramento market and presently has only one active subdivision
in the San Francisco Bay area.
While the Company anticipates that it will deliver a higher number of
home closings in the second quarter of 1998 than in the second quarter of 1997,
the 1998 second quarter home closings should represent a lower percentage of
March 31 Backlog than in 1997, due to a number of factors. These factors include
severe weather conditions and shortages of subcontractor labor in California and
Arizona, which delayed the development of lots and extended the construction
period for a number of homes in these markets. See "Forward-Looking Statements"
below.
Average Selling Price Per Home Closed - The increase in the average
selling price per home closed in the first quarter of 1998, compared with the
first quarter of 1997, reflects the impact of (i) a greater number of homes
closed in higher-priced subdivisions in Southern California, Phoenix and Nevada
during the first quarter of 1998, than in the first quarter of 1997; (ii) a
higher proportion of detached homes closed in the Mid-Atlantic, which generally
have higher selling prices than townhomes; and (iii) selling price increases in
certain of the Company's markets, particularly in Southern California.
Home Gross Margins - Gross margins (home sales revenues less cost of
goods sold, which primarily includes land and construction costs, capitalized
interest, a reserve for warranty expense and financing costs) as a percent of
home sales revenues ("Home Gross Margins") increased by 100 basis points during
the first quarter of 1998, compared with the first quarter of 1997, including
increases of 310, 280 and 130 basis points, respectively, in Tucson, Colorado
and Southern California. The increase in Home Gross Margins largely resulted
from (i) selling price increases and reduced incentives offered to home buyers
primarily in Southern California and Colorado due to increased demand for new
homes in these markets; (ii) the favorable impact of a number of home closings
in certain highly profitable subdivisions, particularly in Tucson; (iii) an
increased level of volume discounts received from suppliers and manufacturers in
connection with certain national purchasing contracts; and (iv) initiatives
implemented in each of the Company's markets designed to improve operating
efficiency, control costs and increase rates of return.
Looking forward, the Company believes that Home Gross Margins for each
of the remaining quarters in 1998 will exceed margins for comparable quarters in
1997. Future growth in Home Gross Margins may be impacted adversely by (i)
increased competition in most of its markets; (ii) increases in, among other
things, the costs of subcontracted labor, finished lots and building materials
to the extent that market conditions prevent the recovery of increased costs
through higher sales prices; and (iii) adverse weather and shortages of
subcontractor labor in California and Arizona. See "Forward Looking Statements"
below.
-12-
<PAGE>
Orders for Homes and Backlog - Orders for homes increased 49% during
the first quarter of 1998, compared with the first quarter of 1997, despite a
decrease in the number of active subdivisions to 138 at March 31, 1998, compared
with 155 at March 31, 1997. This home order increase resulted from comparatively
strong home orders experienced in all of the Company's markets except Northern
California and Maryland in response to a robust national economy marked by low
unemployment, low mortgage rates, high consumer confidence and low inventories
of new homes. First quarter 1998 home orders particularly were strong in (i)
Nevada, Arizona and Southern California, which increased 80%, 65% and 59%,
respectively, as a result of the Company's continuing expansion in those markets
and significant increases in the number of monthly orders per active
subdivision; (ii) Colorado, which increased by 59% due to the strong demand for
homes in this market; and (iii) Virginia, which increased 36% due to improved
orders per active subdivision.
The Company received 576 orders for homes in April 1998, compared with
550 for April 1997. The Company is unable to predict if higher year-over-year
home orders in 1998, compared with 1997, will continue in the future. See
"Forward-Looking Statements" below.
As a result of the increased orders for homes in the first quarter of
1998, the Company's homes under contract but not yet delivered ("Backlog") at
March 31, 1998 increased by 56% to 3,038 units, compared with a Backlog of 1,942
units at March 31, 1997. Assuming no significant change in market conditions or
mortgage interest rates, the Company expects approximately 70% of its March 31,
1998 Backlog to close under existing sales contracts during the remainder 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, model home expenses and sales commissions)
totalled $15,250,000 for the first quarter of 1998, compared with $12,515,000
for the same period in 1997. The increase in 1998 resulted from higher (i) sales
commissions incurred and deferred marketing costs amortized in connection with
the increased number of home closings; and (ii) product advertising, model home
expenses and other costs incurred in connection with the Company's expanded
operations in Southern California.
General and Administrative - General and administrative expenses
increased to $9,828,000 during the first quarter of 1998, compared with
$6,883,000 during the same period in 1997, primarily due to (i) increased
compensation costs resulting from expanded operations in several of the
Company's markets except Northern California and Maryland; (ii) the write-off of
due diligence costs and deposits with respect to certain proposed homebuilding
projects which were not acquired; and (iii) additional costs associated with new
branch offices in Southern California and Colorado and design centers in
Southern California and Phoenix.
Asset Impairment Charges
No asset impairment charges were recorded in the first quarter of 1998.
Operating results for the first quarter of 1997 were reduced by asset impairment
charges totalling $1,250,000 related to certain of the Company's homebuilding
assets in the Mid-Atlantic region, primarily in Suburban Maryland, as a result
of continued weakened market conditions and competitive pressures in that
market.
-13-
<PAGE>
Land Inventory
The table below shows the carrying value of land and land under
development, by market, the total number of lots owned and lots controlled under
option agreements, and total option deposits (dollars in thousands).
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1998 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
Colorado................................ $ 54,927 $ 62,093 $ 63,263
Mid-Atlantic............................ 31,592 37,087 50,174
California.............................. 49,300 44,423 29,081
Arizona................................. 33,324 32,067 38,140
Nevada.................................. 17,753 17,342 14,695
----------- ----------- -----------
Total.............................. $ 186,896 $ 193,012 $ 195,353
=========== =========== ===========
Total Lots Owned........................ 8,297 9,466 10,611
Total Lots Controlled Under Option...... 5,366 5,730 6,151
----------- ----------- -----------
Total Lots Owned and Controlled... 13,663 15,196 16,762
=========== =========== ===========
Total Option Deposits................... $ 6,341 $ 7,545 $ 6,448
=========== =========== ===========
</TABLE>
Financial Services Segment
The table below summarizes the results of HomeAmerican's operations (in
thousands).
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
Gains on Sales of Mortgage Loans, net............... $ 2,004 $ 1,315
Operating Profits................................... $ 2,026 $ 1,574
Principal Amount of Originations and Purchases
MDC home buyers................................ $ 141,123 $ 107,334
Spot........................................... 11,990 6,920
Correspondent.................................. 40,678 15,443
----------- -----------
Total...................................... $ 193,791 $ 129,697
=========== ===========
Capture Rate........................................ 73% 69%
=========== ===========
</TABLE>
HomeAmerican's operating profit for the first quarter of 1998
increased, compared with the same period in 1997, primarily due to (i) a
$400,000 increase in origination fees; and (ii) a $700,000 increase in gains
from sales of mortgage loans. These increases partially were offset by higher
general and administrative expenses resulting from the increased mortgage
lending activity.
HomeAmerican's loan originations and purchases increased by 49% in the
first quarter of 1998, compared with the same period in 1997. This improvement
primarily was due to increases in (i) the Company's home closings; (ii) the
number of mortgage loans originated by HomeAmerican for MDC home buyers as a
percentage of total MDC home closings ("Capture Rate"); and (iii) the number of
loans purchased from correspondents. HomeAmerican continues to benefit from the
Company's homebuilding growth as MDC home buyers were the source of
approximately 73% of the principal amount of mortgage loans originated and
purchased by HomeAmerican in the first quarter of 1998.
-14-
<PAGE>
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.
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 zero for the first
quarter of 1998, compared with $761,000 for the first quarter of 1997.
Corporate and homebuilding interest incurred decreased by 17% to
$5,772,000 for the first quarter of 1998, compared with $6,924,000 for the same
period in 1997, primarily due to the January 1998 refinancing of the of 11 1/8%
Senior Notes and the 1997 repurchase of $38,000,000 of 11 1/8% Senior Notes
discussed above.
For a reconciliation of interest incurred, capitalized and expensed,
see Note C to the Company's Condensed Consolidated Financial Statements.
Corporate General and Administrative Expenses - Corporate general and
administrative expenses totalled $3,512,000 during the first quarter of 1998,
compared with $3,246,000 during the first quarter of 1997.
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 completed
successfully 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% and 37.8%,
respectively, for the first quarters of 1998 and 1997, differed from the federal
statutory rate of 35% primarily due to the impact of state income taxes.
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.
-15-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
MDC uses its liquidity and capital resources to, among other things,
(i) support its operations, including its inventories of homes, home sites and
land; (ii) provide working capital; and (iii) provide mortgage loans for its
home buyers. Liquidity and capital resources are generated internally from
operations and from external sources.
Capital Resources
The Company's capital structure is a combination of (i) permanent
financing, represented by Stockholders' Equity; (ii) long-term financing,
represented by publicly traded 8 3/8% Senior Notes and Convertible Subordinated
Notes due in 2008 and 2005, respectively; and (iii) current financing, primarily
lines of credit, as discussed below. The Company believes that its current
financial condition is both balanced to fit its current operating structure and
adequate to satisfy its current and near-term capital requirements. See
"Forward-Looking Statements" below.
MDC anticipates acquiring finished lots and partially developed land
for use in its future homebuilding operations during the remainder of 1998. The
Company currently intends to acquire a portion of the land inventories required
in future periods through takedowns of lots subject to option contracts entered
into in prior periods and under new option contracts. The use of option
contracts lessens the Company's land-related risk and improves liquidity.
Because of increased demand for partially developed and finished lots in certain
of the markets where the Company builds homes, the Company's ability to acquire
lots using option contracts has been reduced or has become more expensive. See
"Forward-Looking Statements" below.
The Company anticipates that it has adequate financial resources to
satisfy its current and near-term capital requirements based on its current
capital resources and additional liquidity available under existing credit
agreements. The Company believes that it can meet its long-term capital needs
(including, among other things, meeting future debt payments and refinancing or
paying off other long-term debt as it becomes due) from operations and external
financing sources, assuming that no significant adverse changes in the Company's
business occur as a result of the various risk factors described elsewhere
herein, in particular, increases in interest rates. See "Forward-Looking
Statements" below.
Lines of Credit and Other
Homebuilding - The Company maintains a $175,000,000 unsecured revolving
line of credit (the "Homebuilding Line") with a group of banks to support its
homebuilding operations. The Homebuilding Line matures on June 30, 2001,
although, pursuant to the terms of the related credit agreement, a term-out of
this credit may commence earlier under certain circumstances. At March 31, 1998,
$48,513,000 was borrowed and $4,554,000 in letters of credit were outstanding
under the Homebuilding Line.
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 normally are sold within 35 days after origination or purchase.
During the first quarter of 1998 and 1997, HomeAmerican sold $184,325,000 and
$142,759,000, respectively, principal amount of mortgage loans and mortgage
certificates to unaffiliated purchasers.
-16-
<PAGE>
Available borrowings under the Mortgage Line are collateralized by
mortgage loans and mortgage-backed certificates and are limited to the value of
eligible collateral, as defined. The aggregate amount available under the
Mortgage Line at March 31, 1998 was $51,000,000. At March 31, 1998, $23,994,000
was borrowed and an additional $27,000,000 was collateralized and available to
be borrowed. The Mortgage Line is cancelable upon 90 days' notice.
General - The agreements for the Company's 8 3/8% Senior Notes,
subordinated notes and bank lines of credit include representations, warranties
and covenants. The Company believes that it is in compliance with these
representations, warranties and covenants.
Consolidated Cash Flow
During the first quarter of 1998, the Company used $22,016,000
of cash in its operating activities, primarily due to increases in homebuilding
and mortgage loan inventories in conjunction with its expanded homebuilding
operations. The Company financed these operating cash requirements primarily
through borrowings on its lines of credit.
During the first quarter of 1997, the Company used $7,349,000 of cash
to repurchase 838,000 shares of MDC common stock. The Company financed this
repurchase primarily with internally generated funds and line of credit
borrowings.
OTHER
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, as well as
statements made by the Company in periodic press releases, oral statements made
by the Company's officials to analysts and shareowners in the course of
presentations about the Company and conference calls following quarterly
earnings releases, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. Such factors include,
among other things, (i) general economic and business conditions; (ii) interest
rate changes; (iii) competition; (iv) the availability and cost of land and
other raw materials used by the Company in its homebuilding operations; (v)
demographic changes; (vi) shortages and the cost of labor; (vii) weather related
slowdowns; (viii) slow growth initiatives; (ix) building moratoria; (x)
governmental regulation, including 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.
-17-
<PAGE>
M.D.C. HOLDINGS, INC.
FORM 10-Q
PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company and certain of its subsidiaries and affiliates have been
named as defendants in various claims, complaints and other legal actions
arising in the normal course of business. In the opinion of management, the
outcome of these matters will not have a material adverse effect upon the
financial condition, results of operations or cash flows of the Company.
Because of the nature of the homebuilding business, and in the ordinary
course of its operations, the Company from time to time may be subject to
product liability claims.
The Company is not aware of any litigation, matter or pending claim
against the Company which would result in material contingent liabilities
related to environmental hazards or asbestos.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREOWNERS.
No meetings of the Company's stockholders were held during the first
quarter of 1998.
ITEM 5. OTHER INFORMATION.
On April 21, 1998, the Company's board of directors declared a dividend
of four cents per share for the quarter ended March 31, 1998, representing an
increase of one cent per share, or 33%, compared with dividends for each quarter
of 1997. Future dividend payments are subject to the discretion of the Company's
board of directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit:
10.1 Change in Control Agreement between
M.D.C. Holdings, Inc. and Paris G.
Reece III effective January 26, 1998
(incorporated herein by reference to
Exhibit 10.1 to the Company's Form 8-K
dated March 27, 1998).
-18-
<PAGE>
10.2 Change in Control Agreement between
M.D.C. Holdings, Inc. and Michael
Touff effective January 26, 1998
(incorporated herein by reference to
Exhibit 10.2 to the Company's Form 8-K
dated March 27, 1998).
10.3 Form of Change in Control Agreement
between M.D.C. Holdings, Inc. and
certain employees of M.D.C. Holdings,
Inc. (incorporated herein by
reference to Exhibit 10.3 to the
Company's Form 8-K dated March 27,
1998).
27 Financial Data Schedule.
(b) Reports on Form 8-K:
The Company filed a Form 8-K on each of January 14,
1998, January 22, 1998 and March 27, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 6, 1998 M.D.C. HOLDINGS, INC.
----------- (Registrant)
By: /s/ Paris G. Reece III
----------------------------
Paris G. Reece III,
Senior Vice President,
Chief Financial Officer and
Principal Accounting Officer
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from MDC
Holdings, Inc. consolidated financial statements included in its Form 10-Q for
the quarter ended March 31, 1998 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,059
<SECURITIES> 1,412
<RECEIVABLES> 15,218
<ALLOWANCES> 0
<INVENTORY> 477,206
<CURRENT-ASSETS> 0
<PP&E> 10,004
<DEPRECIATION> 0
<TOTAL-ASSETS> 674,552
<CURRENT-LIABILITIES> 0
<BONDS> 291,385
0
0
<COMMON> 239
<OTHER-SE> 224,115
<TOTAL-LIABILITY-AND-EQUITY> 674,552
<SALES> 238,597
<TOTAL-REVENUES> 243,501
<CGS> (224,453)
<TOTAL-COSTS> (227,099)
<OTHER-EXPENSES> (3,512)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,890
<INCOME-TAX> (4,962)
<INCOME-CONTINUING> 7,928
<DISCONTINUED> 0
<EXTRAORDINARY> (15,314)
<CHANGES> 0
<NET-INCOME> (7,386)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.31)
</TABLE>
