<PAGE>
P R O S P E C T U S S U P P L E M E N T
(TO PROSPECTUS DATED OCTOBER 30, 1997)
$175,000,000
[LOGO]
M.D.C. HOLDINGS, INC.
8 3/8 % Senior Notes due 2008
---------
The 8 3/8% Senior Notes due 2008 (the "Notes") are being offered (the
"Offering") by M.D.C. Holdings, Inc. ("MDC" or the "Company"). The Notes will
mature on February 1, 2008. Interest on the Notes will be payable semi-annually
on February 1 and August 1 of each year, commencing August 1, 1998.
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after February 1, 2003, at the redemption prices set
forth herein, plus accrued and unpaid interest thereon, if any, to the
redemption date. In addition, prior to February 1, 2001, the Company may redeem
up to 33% of the aggregate principal amount of the Notes issued under the
Indenture (as defined) at a redemption price equal to 108.375% of the principal
amount of the Notes so redeemed, plus accrued and unpaid interest thereon, if
any, to the redemption date, with the net cash proceeds of one or more Public
Equity Offerings (as defined); PROVIDED, HOWEVER, that at least $125,000,000
aggregate principal amount of the Notes would remain outstanding immediately
after giving effect to any such redemption. In the event of a Change of Control
Triggering Event (as defined), the Company is required to offer to repurchase
all of the Notes at a price equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
The Notes will be general unsecured obligations of the Company, ranking
senior in right of payment to all future Indebtedness (as defined) of the
Company that is, by its terms, expressly subordinated in right of payment to the
Notes and PARI PASSU in right of payment with all existing and future unsecured
Indebtedness and other obligations of the Company that are not so subordinated.
Secured creditors of the Company will have a claim on the assets which secure
the obligations of the Company to such creditors, prior to claims of holders of
the Notes against those assets. In addition, claims of creditors of the Company,
including the holders of the Notes, effectively will be subordinated to all
existing and future Indebtedness and other obligations, including trade
payables, of the Company's subsidiaries. At September 30, 1997, as adjusted to
give effect to the Offering and the retirement of certain indebtedness, the
Company would have had approximately $215,971,000 (including the Notes) of
Indebtedness outstanding, of which approximately $3,446,000 would have been
secured Indebtedness and approximately $38,228,000 would have been subordinated
to the Notes. At September 30, 1997, the Company's subsidiaries had
approximately $75,519,000 of indebtedness reflected on the Company's
consolidated balance sheet (which would have ranked structurally senior to the
Notes).
The Company's Common Stock is traded on the New York and Pacific Stock
Exchanges under the symbol "MDC." The Notes have been approved for listing on
the New York Stock Exchange, subject to official notice of issuance.
----------------
SEE "RISK FACTORS" ON PAGE S-8 FOR A DISCUSSION OF CERTAIN MATTERS THAT
SHOULD BE CONSIDERED PRIOR TO AN INVESTMENT IN THE NOTES.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
<S> <C> <C> <C>
Per Note 99.598% 1.375% 98.223%
Total $174,296,500 $2,406,250 $171,890,250
</TABLE>
(1) Plus accrued interest, if any, from date of original issuance.
(2) For information regarding indemnification of the Underwriters, see
"Underwriting."
(3) Before deducting expenses payable by the Company, estimated to be $350,000.
------------------
The Notes are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
various prior conditions, including the right to reject orders in whole or in
part. It is expected that delivery of the Notes will be made through the
book-entry facilities of The Depository Trust Company, against payment therefor
in same day funds on or about January 28, 1998.
----------------
Salomon Smith Barney
Morgan Stanley Dean Witter
SBC Warburg Dillon Read Inc.
January 23, 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITES,
SEE "UNDERWRITING."
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, EXCEPT AS THE CONTEXT
OTHERWISE REQUIRES, M.D.C. HOLDINGS, INC. AND ITS SUBSIDIARIES ARE REFERRED TO
COLLECTIVELY AS "MDC" OR THE "COMPANY" AND THE FINANCIAL AND OPERATING DATA
REFLECT THE CONSOLIDATED RESULTS OF SUCH ENTITIES FOR THE PERIODS INDICATED.
THE COMPANY
M.D.C. Holdings, Inc. is a leading homebuilder, selling homes to the
first-time and move-up buyer under the name "Richmond American Homes." In 1996,
the Company was the 9th largest builder of single-family detached homes in the
United States. The Company also provides mortgage financing, primarily for MDC's
home buyers, through its wholly owned subsidiary, HomeAmerican Mortgage
Corporation ("HomeAmerican"). The Company sells primarily single-family detached
homes in Denver and Colorado Springs, Colorado; Riverside, Orange, Los Angeles,
Ventura, San Bernardino and San Diego Counties, California; Phoenix and Tucson,
Arizona; Northern Virginia; suburban Maryland and Las Vegas, Nevada. The base
prices for the Company's homes range from $80,000 to $700,000, with an average
sales price in the first nine months of 1997 of $178,400. During the twelve
months ended September 30, 1997, the Company generated total revenues and EBITDA
(as defined) of $949,988,000 and $86,889,000, respectively.
The Company has a significant presence in some of the strongest housing
markets in the United States. The Company has been the leading homebuilder in
the Denver market for over ten consecutive years and is a top five builder in
Riverside County, Northern Virginia and suburban Maryland (collectively, the
"Mid-Atlantic"), Tucson and Colorado Springs. The Company is a top ten builder
in Phoenix and has a growing presence in California and Las Vegas. The Company
has been geographically diversifying its operations by expanding in California,
Arizona and Nevada. The Company's homes are designed and built to meet local
customer preferences and the changing needs of its home buyers.
The Company's mortgage lending operations are an integral part of the
Company's homebuilding business. HomeAmerican is a full-service mortgage lender,
originating mortgage loans primarily for MDC's home buyers through offices
located in each of MDC's markets. HomeAmerican is the principal originator of
mortgage loans for MDC's home buyers. In the nine months ended September 30,
1997, HomeAmerican originated mortgage loans for almost 70% of MDC's home
buyers.
The Company's home sales revenues increased from $417,190,000 in 1992 to
$880,358,000 in 1996, while homebuilding operating profit grew from $17,600,000
to $28,000,000 over the same period. During the first nine months of 1997,
compared with the same period in 1996, the Company's home sales revenues
increased 6.5% to $676,674,000, while its homebuilding operating profit
increased 53.1% to $27,524,000. At September 30, 1997, the Company's backlog was
2,093 units with an estimated sales value of $382,000,000, compared with 1,845
units with an estimated sales value of $326,000,000 at September 30, 1996.
BUSINESS STRATEGY
The Company believes its success is driven by its discipline and focus on
its homebuilding operations. MDC's business strategy is designed for controlled
growth and includes the following:
GEOGRAPHIC DIVERSIFICATION IN ATTRACTIVE GROWTH MARKETS--The Company's
homebuilding operations have a significant or growing market share in 15
geographic markets in six states. The Company has selected these markets based
on its belief in their prospects for economic, population and employment growth.
The Company's objective is to have a significant presence in each of its
markets, which enables it to compete effectively for land, subcontractor labor
and customers.
DISCIPLINED LAND INVENTORY POLICY--The Company seeks to maintain a two-year
supply of land. MDC's land acquisition policy is designed to maximize the
risk-weighted return on its capital. The Company prefers to acquire finished
lots pursuant to rolling option contracts, wherever possible, or in phases for
cash. When potential returns justify the risk, the Company also acquires land
for development into finished
S-3
<PAGE>
lots. The Company generally limits the acquisition of lots in new projects to
fewer than 150 to avoid overexposure to any single submarket. Generally, MDC
acquires finished lots and land for development only in areas which have
available utilities and suitable zoning. The Company's asset management
committee, comprised of senior officers of MDC, must approve all land
acquisitions following a detailed due diligence process.
DIVERSE PRODUCT AND HOME BUYER BASE--The Company builds and markets homes in
a variety of series, each designed to appeal to the largest segments of the
housing market, first-time and move-up home buyers. Within each series, the
Company builds several models, each with different floor plans, elevations and
features. The Company continually reengineers and redesigns its homes in
response to customer preferences within a particular geographic region.
IMPROVING OPERATING EFFICIENCY AND RETURNS--MDC continues to focus on
increasing its margins and returns and reducing its costs. The Company's
initiatives include designing more efficient homes, emphasizing sales of options
and upgrades through Company-operated design centers, coordinating sales
activities with construction through an integrated point-of-sale computer
program and recently commencing a national purchasing program. The Company also
has sought to maximize its returns by allocating additional capital to its
expanding operations in Southern California, Arizona and Nevada.
EXPERIENCED MANAGEMENT--The three top executives of MDC average over 18
years with the Company. The Company's division managers average over 20 years of
experience in the homebuilding business. Each division manager is responsible
for managing the day-to-day activities of that division, supported by MDC's
centralized treasury, capital allocation, human resources, information systems,
legal and risk management services.
RECENT DEVELOPMENTS
MDC recently announced its 1997 fourth quarter and year-end home orders,
home closings and backlog. In 1997, the Company received orders for 5,769 homes,
the largest number of orders in the Company's history and 14% higher than the
5,049 orders for homes in 1996. This improved performance was achieved despite a
10% decrease in the number of active subdivisions to 137 at the end of 1997 from
152 at the end of 1996. In the fourth quarter of 1997, MDC received orders for
1,370 homes, an increase of 36% over the 1,009 orders received for the same
period in 1996. This increase is attributable to improved home orders in each of
the Company's markets except Northern California, with particular strength in
Phoenix (84% increase), Colorado (45% increase), Tucson (34% increase) and the
Mid-Atlantic (32% increase). The Company closed 1,431 and 5,223 homes,
respectively, in the quarter and year ended December 31, 1997, compared with
1,368 and 4,974 home closings during the same periods in 1996.
The Company's strong home orders in the fourth quarter of 1997 contributed
to a record year-end backlog. At December 31, 1997 the Company's backlog was
2,032 units, 37% higher than the backlog of 1,486 units at December 31, 1996.
The Company also has recently announced income before extraordinary item for
the quarter ended December 31, 1997 of $8.2 million, compared with $6.3 million
for the same period in 1996. Income before extraordinary item for the year ended
December 31, 1997 was $24.2 million, compared with $20.8 million for 1996.
Revenues for the quarter and year ended December 31, 1997, which reached record
levels in both periods, totalled $271.8 million and $969.6 million,
respectively, compared with $252.3 million and $922.6 million, respectively, for
the same periods in 1996. Operating results for 1997 were impacted adversely by
non-cash, pre-tax charges of $5.9 million for the impairment of certain
homebuilding assets, compared with similar charges of $9.2 million for 1996. No
asset impairment charges were recorded for the fourth quarter of 1997, compared
with $2.0 million for the fourth quarter of 1996. The Company's ratios of EBITDA
to fixed charges for the years ended December 31, 1997 and December 31, 1996
were 3.3x and 2.7x, respectively. The ratios of EBITDA to interest incurred for
the years ended December 31, 1997 and December 31, 1996 were 3.4x and 2.8x,
respectively. Each of the Company's homebuilding divisions achieved profitable
and improved operating results in 1997 except Maryland and Northern California.
S-4
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Securities Offered............ $175,000,000 aggregate principal amount of 8 3/8% Senior Notes due 2008.
Maturity Date................. February 1, 2008.
Interest Payment Dates........ Interest will accrue from the date of issuance and will be payable semi-annually
on each February 1 and August 1, commencing August 1, 1998.
Optional Redemption........... The Notes will be redeemable at the option of the Company, in whole or in part,
at any time on or after February 1, 2003, at the redemption prices set forth
herein, plus accrued and unpaid interest thereon, if any, to the redemption date.
In addition, prior to February 1, 2001, the Company may redeem up to 33% of the
aggregate principal amount of the Notes issued under the Indenture at a
redemption price equal to 108.375% of the principal amount of the Notes so
redeemed, plus accrued and unpaid interest thereon, if any, to the redemption
date with the net cash proceeds of one or more Public Equity Offerings; PROVIDED,
HOWEVER, that at least $125,000,000 aggregate principal amount of the Notes would
remain outstanding immediately after giving effect to any such redemption.
Change of Control............. Upon the occurrence of a Change of Control Triggering Event (as defined), each
holder of the Notes will have the right to require the Company to repurchase such
holder's Notes at 101% of the principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the repurchase date.
Ranking....................... The Notes will be general unsecured obligations of the Company, ranking senior in
right of payment to all future Indebtedness of the Company that is, by its terms,
expressly subordinated in right of payment to the Notes and PARI PASSU in right
of payment with all existing and future unsecured Indebtedness and other
obligations of the Company that are not so subordinated. Secured creditors of the
Company will have a claim on the assets which secure the obligations of the
Company to such creditors, prior to claims of holders of the Notes against those
assets. In addition, claims of creditors of the Company, including the holders of
the Notes, effectively will be subordinated to all existing and future
Indebtedness and other obligations, including trade payables, of the Company's
Subsidiaries. At September 30, 1997, as adjusted to give effect to the Offering
and the retirement of the Company's 11 1/8% Senior Notes due 2003 (the "11 1/8%
Senior Notes"), the Company would have had approximately $215,971,000 (including
the Notes) of Indebtedness outstanding, of which approximately $3,446,000 would
have been secured Indebtedness and approximately $38,228,000 would have been
subordinated to the Notes. At September 30, 1997 the Company's Subsidiaries had
approximately $75,519,000 of indebtedness reflected on the Company's balance
sheet. In addition, the Company's Subsidiaries have significant additional
liabilities (which together with the indebtedness of the Company's Subsidiaries
would have ranked structurally senior to the Notes).
Certain Covenants............. The Indenture imposes certain limitations on the ability of the Company and the
Restricted Subsidiaries to, among other things, incur Indebtedness, make
Restricted Payments, enter into certain transactions with Affiliates, effect
certain Asset Sales, incur certain liens, merge or consolidate with any other
person, or transfer all or substantially all of their properties and assets.
These covenants are subject to a number of important qualifications and
limitations.
Risk Factors.................. Prospective purchasers of the Notes should carefully consider the factors
discussed in detail elsewhere in this Prospectus Supplement under the caption
"Risk Factors."
Use of Proceeds............... The Company will use the net proceeds from the Offering to defease, or to make
open market or negotiated purchases of, the Company's outstanding 11 1/8% Senior
Notes and for general corporate purposes.
</TABLE>
S-5
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The income statement data and balance sheet data set forth below at December
31, 1992, 1993, 1994, 1995 and 1996 and for the years then ended have been
derived from the Company's audited consolidated financial statements. The income
statement data and balance sheet data set forth below at September 30, 1997 and
the nine months ended September 30, 1996 and 1997 have been derived from the
Company's unaudited financial statements which, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such information. The operating results for
the nine months ended September 30, 1997 are not necessarily indicative of
results for the full fiscal year. This information 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 included elsewhere or incorporated by reference herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues
Homebuilding..................... $ 423,131 $ 596,813 $ 793,793 $ 840,362 $ 890,536 $ 644,339 $ 683,748
Financial services
Mortgage lending............... 19,344 19,725 15,850 17,559 22,222 17,285 12,569
Asset management(1)............ 35,206 15,409 6,245 6,389 8,356 7,749 448
---------- ---------- ---------- ---------- ---------- ---------- -------------
Total financial services..... 54,550 35,134 22,095 23,948 30,578 25,034 13,017
Corporate........................ 2,496 2,376 1,357 1,546 1,481 956 957
---------- ---------- ---------- ---------- ---------- ---------- -------------
Total revenues............... $ 480,177 $ 634,323 $ 817,245 $ 865,856 $ 922,595 $ 670,329 $ 697,722
---------- ---------- ---------- ---------- ---------- ---------- -------------
---------- ---------- ---------- ---------- ---------- ---------- -------------
Operating profit
Homebuilding..................... $ 17,561 $ 22,496 $ 44,464 $ 33,018 $ 27,967 $ 17,983 $ 27,524
Financial services
Mortgage lending............... 9,230 7,508 6,951 9,288 12,584 10,146 5,903
Asset management(1)............ 8,700 8,996 2,796 4,050 6,073 5,553 414
---------- ---------- ---------- ---------- ---------- ---------- -------------
Total financial services..... 17,930 16,504 9,747 13,338 18,657 15,699 6,317
---------- ---------- ---------- ---------- ---------- ---------- -------------
Total operating profit....... 35,491 39,000 54,211 46,356 46,624 33,682 33,841
Net corporate expenses(2).......... (28,971) (23,968) (23,229) (19,705) (13,870) (10,909) (7,998)
---------- ---------- ---------- ---------- ---------- ---------- -------------
Income before income taxes and
extraordinary item............... $ 6,520 $ 15,032 $ 30,982 $ 26,651 $ 32,754 $ 22,773 $ 25,843
---------- ---------- ---------- ---------- ---------- ---------- -------------
---------- ---------- ---------- ---------- ---------- ---------- -------------
Income before extraordinary item... $ 4,765 $ 10,056 $ 19,255 $ 17,250 $ 20,799 $ 14,459 $ 16,022
---------- ---------- ---------- ---------- ---------- ---------- -------------
---------- ---------- ---------- ---------- ---------- ---------- -------------
Net income......................... $ 3,852 $ 25,879 $ 19,255 $ 17,250 $ 20,378 $ 14,038 $ 13,843
---------- ---------- ---------- ---------- ---------- ---------- -------------
---------- ---------- ---------- ---------- ---------- ---------- -------------
Earnings to fixed charges(3)....... 1.61x 1.71x 1.81x 1.79x 2.02x 1.92x 2.29x
SELECTED OPERATING DATA:
Orders for homes, net units........ 2,703 3,875 4,177 4,536 5,049 4,040 4,399
Homes closed, units................ 2,414 3,344 4,200 4,570 4,974 3,606 3,792
Backlog, units(4).................. 826 1,357 1,334 1,355 1,486 1,845 2,093
Backlog, estimated sales value(4).. $ 142,800 $ 250,530 $ 241,900 $ 243,000 $ 261,000 $ 326,000 $ 382,000
Average selling price per home..... 172.8 175.8 186.8 181.1 177.0 176.2 178.4
</TABLE>
S-6
<PAGE>
<TABLE>
<CAPTION>
FOUR FISCAL QUARTERS ENDED
-------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------- -------------
1992 1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(5)..................................... $ 51,111 $ 61,615 $ 84,790 $ 79,270 $ 85,478 $ 86,889
Interest incurred............................. 24,802 25,505 35,799 33,909 30,296 27,527
ADJUSTED DATA(6):
Interest incurred............................. $ 24,849
EBITDA to interest incurred................... 3.50x
Homebuilding and corporate debt to EBITDA..... 3.04x
Earnings to fixed charges(3).................. 2.54x
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1997
---------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 ACTUAL ADJUSTED(6)
---------- ---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Housing completed or under
construction..................... $ 132,752 $ 201,023 $ 280,319 $ 265,205 $ 251,885 $ 263,891 $ 263,891
Land and land under development.... 206,583 192,881 183,838 176,960 182,927 179,196 179,196
Total assets....................... 602,597 653,366 664,571 634,811 617,303 643,028 641,107
Homebuilding and corporate debt.... 287,401 316,176 325,069 283,344 244,328 239,907 264,600
Total debt......................... 325,835 345,676 348,280 305,334 253,346 267,500 292,193
Total stockholders' equity......... 164,182 175,854 192,295 205,033 213,847 221,949 206,555
</TABLE>
- --------------------------
(1) The Company sold its interest in Financial Asset Management LLC ("FAMC") in
September 1996, which resulted in an extraordinary gain of $4,042,000. The
Company does not anticipate making additional investments related to the
asset management operations. Therefore, asset management operations after
the third quarter of 1996 are not expected to be material except to the
extent any gains are recognized with respect to FAMC's $5,450,000
subordinated notes held by the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations (1996 and 1995)--Financial Services Segment-- Asset Management
Operations."
(2) 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.
(3) In computing the ratio of earnings to fixed charges, fixed charges consist
of homebuilding and corporate interest expense plus (i) amortization and
expensing of debt expenses; (ii) amortization of discount or premium
relating to indebtedness; and (iii) capitalized interest. Earnings are
computed by adding fixed charges (except capitalized interest) and
amortization of previously capitalized interest during the period to pretax
earnings from continuing operations.
(4) At end of period. See "Business--Homebuilding Segment--Backlog."
(5) "EBITDA" has been computed in accordance with the definition of
"Consolidated EBITDA" set forth under "Description of Notes--Certain
Definitions." 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.
(6) As adjusted to give effect to the issuance and sale by the Company of the
Notes and the application of the estimated net proceeds therefrom for the
assumed defeasance of all of the outstanding 11 1/8% Senior Notes.
S-7
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus Supplement, the accompanying
Prospectus and the information incorporated by reference herein constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. Such factors include the
factors described below under "Risk Factors."
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CONSIDER THE RISK FACTORS SET FORTH BELOW AS
WELL AS ALL OF THE OTHER INFORMATION SET FORTH OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS SUPPLEMENT AND IN THE ACCOMPANYING PROSPECTUS PRIOR TO
PURCHASING THE NOTES OFFERED HEREBY.
GENERAL ECONOMIC CONDITIONS
The homebuilding industry is cyclical and is affected significantly by
changes in general and local economic conditions, such as employment levels,
availability of financing for home buyers, interest rates, consumer confidence
and housing demand. In addition, homebuilders are subject to various risks,
including overbuilding, availability and cost of building lots, materials and
labor, weather conditions, delays in construction schedules, cost overruns,
changes in governmental regulation and increases in real estate taxes and other
local government fees. The Company and its competitors also are impacted by
federal, state and local statutes and rules regulating environmental matters,
zoning, building design and density requirements, as they affect the
availability and cost of lots, the cost of building homes and the timing of
homebuilding activities.
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."
COMPETITION
The real estate industry is fragmented and highly competitive. MDC competes
with numerous homebuilders, including a number of homebuilders that are
substantially larger and have greater financial resources. The Company also
competes with subdivision developers and land development companies, some of
which are themselves homebuilders or affiliates of homebuilders. Homebuilders
compete for customers, 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. MDC, through
HomeAmerican, also competes with numerous banks, thrifts and other mortgage
bankers, many of which are larger and have greater resources than the Company.
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, mortgage association rules and regulations
and health and safety regulations and laws (including, but not limited to, those
of the Occupational Safety and
S-8
<PAGE>
Health Administration). Various localities in which the Company operates have
imposed (or may impose in the future) fees on developers to fund schools, open
space, 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 and land under development. See "Forward-Looking
Statements."
The homebuilding operations also are affected by environmental
considerations pertaining to availability of water, municipal sewage treatment
capacity, land use, hazardous waste disposal, naturally occurring radioactive
materials, building materials, population density and preservation of endangered
species, the natural terrain and vegetation (collectively, "Environmental
Laws"). The particular Environmental Laws which apply to any given homebuilding
project vary greatly according to the site's location, the site's environmental
conditions and the present and former uses of the site. These Environmental Laws
may (i) result in project delays; (ii) cause the Company to incur substantial
compliance and other costs; and/or (iii) prohibit or severely restrict
homebuilding activity in certain environmentally sensitive regions or areas. See
"Forward-Looking Statements."
SUBSTANTIAL LEVERAGE; FUTURE CAPITAL REQUIREMENTS
The Company has, and after consummation of the Offering will continue to
have, significant debt service obligations. As of September 30, 1997, after
giving pro forma effect to the Offering and the retirement of the outstanding
11 1/8% Senior Notes, the Company would have had total consolidated Indebtedness
of $291,490,000. The degree to which the Company is leveraged could have
important consequences to holders of the Notes, including (i) the ability of the
Company to obtain any necessary financing in the future for working capital,
capital expenditures, acquisitions, debt service requirements or other purposes
may be limited; (ii) a substantial portion of the Company's cash flows from
operations must be dedicated to the payment of the principal of and interest on
its Indebtedness and will not be available for other purposes; (iii) the
Company's level of Indebtedness could limit its flexibility in planning for, or
reacting to, changes in its business; (iv) the Company is more highly leveraged
than some of its competitors, which may place it at a competitive disadvantage;
and (v) the Company's significant amount of Indebtedness could be adverse in the
event of a downturn in its business or in general economic conditions. The
ability of the Company to meet its debt service and other obligations will
depend upon its future performance and no assurance can be given that the
Company will be able to meet such obligations. The Company is engaged in
businesses that are substantially affected by changes in economic cycles, and
its revenues and earnings vary with the level of general economic activity in
the markets where MDC builds homes, many of which are beyond the Company's
control. The Company's ability to meet its debt service obligations also may be
affected by changes in prevailing interest rates, as borrowings under certain of
the Company's existing credit facilities bear interest at floating rates. See
"Capitalization."
In the event that internally generated funds and amounts available under
MDC's existing credit facilities are not sufficient to fund the Company's
capital expenditures and its debt service obligations, including the Notes, the
Company would be required to raise additional funds through the sale of equity
securities, the issuance of additional debt, the refinancing of all or part of
its Indebtedness or the sale of assets. These alternatives are dependent upon
financial, business and other general economic factors affecting the Company,
many of which are beyond the control of the Company, and there can be no
assurance that any such alternatives would be available to the Company, if at
all, on satisfactory terms. While the Company believes that cash flow generated
by operations, along with borrowing availability under existing credit
facilities, will provide adequate sources of long-term liquidity, a significant
drop in operating cash flows resulting from economic conditions, competition or
other uncertainties beyond the
S-9
<PAGE>
Company's control could increase the need for refinancing, new capital or both.
See "Forward-Looking Statements."
The Indenture governing the Notes imposes restrictions on the operations and
activities of the Company. The most significant restrictions relate to debt
incurrence and cash distributions by the Company and require the Company to
comply with certain financial covenants. The failure to comply with any of these
restrictions or covenants could result in an event of default under the
Indenture which could permit acceleration of the Notes. See "Description of
Notes."
RANKING; HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION
The Notes will be general unsecured obligations of the Company, ranking PARI
PASSU in right of payment with all existing and future unsubordinated
indebtedness of the Company. Because they are unsecured, however, the Notes will
be junior to any secured indebtedness of the Company as to claims against the
assets securing such indebtedness. Substantially all of the Company's operations
are conducted through its homebuilding Subsidiaries and HomeAmerican. As a
result, the Company's cash flow and ability to repay the Notes are dependent on
the results of those operations and the dividends and other distributions of the
Subsidiaries' earnings to MDC. The ability of the Company's Subsidiaries to pay
such dividends or make such distributions will be subject to, among other
things, applicable state laws and, under certain circumstances, restrictions
contained in existing and future agreements or debt instruments that the Company
or its Subsidiaries may enter into after the date of the Indenture. The
Company's Subsidiaries are separate and distinct legal entities and have no
obligation, contingent or otherwise, to pay any amounts due pursuant to the
Notes or to make funds available therefor. Any right of the Company to receive
assets of any of its Subsidiaries upon their liquidation or reorganization, and
the consequent right of the holders of the Notes to participate in the proceeds
of such a liquidation effectively will be subordinate to the claims of the
liquidating Subsidiary's creditors, thus subordinating the claims of the
Company's creditors, including the holders of the Notes, to those of the
creditors of the liquidating Subsidiary. At September 30, 1997, the Company's
Subsidiaries had approximately $75,519,000 of indebtedness reflected on the
Company's consolidated balance sheet. In addition, the Company's Subsidiaries
have significant additional liabilities. The Indenture will permit the Company
to incur significant amounts of additional indebtedness including secured
indebtedness. See "Description of Notes."
CONTROL RELATIONSHIPS
Larry A. Mizel, David D. Mandarich and other affiliates of the Company in
the aggregate own, directly or indirectly, approximately 36% of the Company's
outstanding Common Stock. Such persons may effectively be able to elect the
entire board of directors of the Company and control its management, operations
and affairs. Circumstances may occur in which the interest of the controlling
shareholders could be in conflict with the interests of the holders of the
Notes. In addition, such persons may have an interest in pursuing transactions
that, in their judgment, enhance the value of their equity investment in the
Company, even though such transactions may involve risks to the holders of the
Notes.
CHANGE OF CONTROL
Upon a Change of Control Triggering Event, each holder of the Notes will
have the right to require the Company to repurchase any or all of the Notes
owned by such holder at a price equal to 101% of the principal amount thereof,
together with accrued and unpaid interest. A Change of Control Triggering Event
requires both a Change of Control (as defined) and a Rating Decline (as
defined). The Company's ability to repurchase the Notes upon a Change of Control
Triggering Event effectively may be limited by the terms of the then existing
contractual obligations of the Company and its Subsidiaries. In addition, the
Company may not have adequate financial resources to effect such a repurchase,
and there can be no assurance that the Company would be able to obtain such
resources through a refinancing of the Notes to be repurchased or otherwise. If
the Company fails to repurchase all of the Notes tendered for purchase
S-10
<PAGE>
upon the occurrence of a Change of Control Triggering Event, such failure will
constitute an Event of Default under the Indenture. See "--Substantial Leverage;
Future Capital Requirements."
With respect to the sale of assets referred to in the definition of Change
of Control, the phrase "all or substantially all" as used in such definition
varies according to the facts and circumstances of the subject transaction, has
no clearly established meaning under the relevant law and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of a person and
therefore it may be unclear whether a Change of Control Triggering Event has
occurred and whether the Notes are subject to an offer to purchase.
The Change of Control provision may not necessarily afford the holders
protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger, or other similar transaction involving
the Company that may adversely affect the holders, because such transactions may
not involve a shift in voting power or beneficial ownership or, even if they do,
may not involve a shift of the magnitude required under the definition of Change
of Control to trigger such provisions.
NATURAL DISASTERS
The climates and geology of many of the states in which the Company
operates, including California, present increased risks of natural disasters. To
the extent that hurricanes, severe storms, earthquakes, droughts, floods,
wildfires or other natural disasters or similar events occur, the homebuilding
industry in general, and the Company's business in particular, in such states
may be adversely affected.
LACK OF A PUBLIC MARKET FOR THE NOTES
The Notes are a new issue of securities. There is no active public trading
market for the Notes. The Notes have been approved for listing on the New York
Stock Exchange, subject to official notice of issuance. The Underwriters have
advised the Company that they currently intend to make a market in the Notes,
but the Underwriters are not obligated to do so and may discontinue any such
market-making at any time. There can be no assurance that any market that may
develop for the Notes will provide liquidity for the Notes or the ability of
holders to sell their Notes at a price which holders would be willing to accept.
USE OF PROCEEDS
The Company will use the net proceeds from the Offering to defease, or to
make open market or negotiated purchases of, the Company's outstanding 11 1/8%
Senior Notes and for general corporate purposes.
S-11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997, on an historical and as adjusted basis to reflect the sale
by the Company of the Notes offered hereby and the application of the estimated
net proceeds therefrom as described under "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------
ACTUAL AS ADJUSTED(1)
---------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt:
Homebuilding and corporate
Revolving credit facility(2)................................ $ 45,000 $ 45,000
Notes payable............................................... 6,372 6,372
11 1/8% Senior Notes due 2003............................... 150,307 --
8 3/8% Senior Notes due 2008................................ -- 174,297
8 3/4% Convertible Subordinated Notes due 2005.............. 28,000 28,000
6.64% Subordinated Fixed-Rate Notes due 1998................ 10,228 10,228
---------- --------
Total homebuilding and corporate debt..................... 239,907 263,897
Financial services(2)......................................... 27,593 27,593
---------- --------
Total debt.............................................. 267,500 291,490
---------- --------
Stockholders' equity:
Preferred Stock; 25,000,000 shares authorized, no shares
issued...................................................... -- --
Common Stock; 100,000,000 shares authorized; 23,494,000 shares
issued and outstanding...................................... 235 235
Additional paid-in capital.................................... 141,771 141,771
Retained earnings(3).......................................... 119,510 103,779
---------- --------
261,516 245,785
Less treasury stock, at cost; 5,903,000 shares................ (39,567) (39,567)
---------- --------
Total stockholders' equity.............................. 221,949 206,218
---------- --------
Total capitalization............................................ $ 489,449 $ 497,708
---------- --------
---------- --------
</TABLE>
- ------------------------
(1) As adjusted to reflect the sale of $175,000,000 of the Notes offered hereby
by the Company and the application of the estimated net proceeds therefrom
to defease and repay the $150,307,000 outstanding balance of the
indebtedness under the 11 1/8% Senior Notes plus call premium and accrued
interest through December 15, 1998, the date the 11 1/8% Senior Notes will
be called for redemption. See "Use of Proceeds."
(2) Presently, the Company has a $175,000,000 unsecured credit facility with
four financial institutions that matures in June 2001. At September 30,
1997, $45,000,000 was borrowed and $4,696,000 of letters of credit were
outstanding on this facility. In addition, at September 30, 1997, there was
$23,407,000 collateralized and available to be borrowed under the Company's
mortgage lending line of credit. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
(3) Change in retained earnings results from recognition of an extraordinary
loss upon the assumed defeasance of all of the outstanding 11 1/8% Senior
Notes.
S-12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARISONS TO THE
SAME PERIODS IN 1996 ARE DERIVED FROM MDC'S FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 1997.
RESULTS OF OPERATIONS
The table below summarizes MDC's results of operations (in thousands, except
per share amounts).
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues..................................... $ 233,307 $ 266,618 $ 670,329 $ 697,722
Income before income taxes and extraordinary
item....................................... $ 8,828 $ 11,794 $ 22,773 $ 25,843
Net Income................................... $ 5,603 $ 7,302 $ 14,038 $ 13,843
Earnings Per Share:
Primary
Income before extraordinary item......... $ .30 $ .40 $ .75 $ .88
Net Income............................... $ .30 $ .40 $ .73 $ .76
Fully Diluted
Income before extraordinary item......... $ .27 $ .35 $ .68 $ .78
Net Income............................... $ .27 $ .35 $ .66 $ .68
</TABLE>
Income before income taxes and extraordinary item increased in the third
quarter and first nine months of 1997, compared with the same periods in 1996.
The 1997 increases resulted from (i) higher operating profits from the Company's
homebuilding operations in the third quarter and first nine months of 1997,
primarily due to 80 and 100 basis point increases, respectively, in the
Company's Home Gross Margins (as hereinafter defined) and increased levels of
homes closed; (ii) decreased interest expense; and (iii) lower corporate general
and administrative expenses. These improvements to income in 1997 partially were
offset by lower operating profits from the Company's financial services segment,
primarily due to net increases to income in the third quarter and first nine
months of 1996 totalling approximately $4,500,000 and $9,200,000, respectively,
as a result of (i) the September 1996 sale of FAMC; (ii) lower gains from sales
of mortgage-related assets in the third quarter and first nine months of 1997,
compared with the same periods in 1996; and (iii) a required change in
accounting principle regarding mortgage loans and mortgage loan servicing
rights.
Net income for the first nine months of 1997 included an extraordinary loss
of $2,179,000, net of an income tax benefit of $1,336,000, recognized in
connection with the Company's repurchase of $38,000,000 face value (20% of the
outstanding amount) of its Senior Notes. The loss resulted from the repurchase
of the Senior Notes at an amount above their carrying value and the write-off of
related unamortized issuance costs. Net income for the nine months ended
September 30, 1996 included an extraordinary loss of $421,000, net of an income
tax benefit of $242,000, due to the write-off of unamortized discounts and
deferred financing costs in connection with the extinguishment of secured lines
of credit and project loans.
S-13
<PAGE>
HOMEBUILDING SEGMENT
The tables below set forth information relating to the Company's
homebuilding segment (dollars in thousands).
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- -------------------------
1996 1997 1996 1997
------------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
Home Sales Revenues..................................... $ 220,443 $ 259,720 $ 635,472 $ 676,674
Operating Profits Before Asset Impairment Charges....... $ 9,244 $ 13,731 $ 25,191 $ 33,374
Operating Profits....................................... $ 4,906 $ 10,231 $ 17,983 $ 27,524
Average Selling Price Per Home Closed................... $ 175.1 $ 180.9 $ 176.2 $ 178.4
Home Gross Margins...................................... 13.8% 14.6% 13.6% 14.6%
Orders For Homes, net (UNITS)
Colorado.............................................. 405 490 1,483 1,565
Mid-Atlantic.......................................... 246 158 898 774
California............................................ 185 257 634 750
Arizona............................................... 237 349 843 964
Nevada................................................ 61 116 182 346
------------- ------------ ------------- ----------
Total............................................... 1,134 1,370 4,040 4,399
------------- ------------ ------------- ----------
------------- ------------ ------------- ----------
Homes Closed (UNITS)
Colorado.............................................. 465 469 1,400 1,259
Mid-Atlantic.......................................... 262 302 657 806
California............................................ 191 229 594 602
Arizona............................................... 261 314 764 824
Nevada................................................ 80 122 191 301
------------- ------------ ------------- ----------
Total............................................... 1,259 1,436 3,606 3,792
------------- ------------ ------------- ----------
------------- ------------ ------------- ----------
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1996 1996 1997
------------- ------------ -------------
<S> <C> <C> <C> <C>
Backlog (UNITS)
Colorado.............................................. 741 576 882
Mid-Atlantic.......................................... 516 421 389
California............................................ 215 160 308
Arizona............................................... 313 231 371
Nevada................................................ 60 98 143
------------- ------------ -------------
Total............................................... 1,845 1,486 2,093
------------- ------------ -------------
------------- ------------ -------------
Estimated Sales Value............................... $ 326,000 $ 261,000 $ 382,000
------------- ------------ -------------
------------- ------------ -------------
Active Subdivisions
Colorado.............................................. 50 51 45
Mid-Atlantic.......................................... 51 53 49
California............................................ 21 20 13
Arizona............................................... 22 23 30
Nevada................................................ 5 5 8
------------- ------------ -------------
Total............................................... 149 152 145
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
S-14
<PAGE>
HOME SALES REVENUES AND HOMES CLOSED--Home sales revenues in the third
quarter and first nine months of 1997 were the highest for all comparable
periods in the Company's history. The increases in 1997 home sales revenues
primarily were due to increases in home closings and the average selling price
per home closed (each discussed below).
Home closings increased in the third quarter and first nine months of 1997,
compared with the same periods in 1996, (i) by 53% and 58%, respectively, in
Nevada, where the Company has increased the number of active subdivisions to
eight from two at the beginning of 1996; (ii) by 47% and 25%, respectively, in
Southern California, resulting from the Company's increased operations and
improving economic conditions in that market; (iii) by 20% and 8%, respectively,
in Arizona due to a higher level of 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; and (iv) by 15% and 23%, respectively, in the Mid-Atlantic
market, due to weather-related delays in the completion and delivery of homes
during the first nine months of 1996, and a Backlog (as hereinafter defined) at
the beginning of 1997 that was more than 50% greater than Backlog at the
beginning of 1996. In Colorado, home closings decreased 10% in the first nine
months of 1997, compared with the same period in 1996, primarily due to a lower
Backlog at the beginning of 1997 compared with Backlog at the beginning of 1996.
In Northern California, home closings decreased in the third quarter and first
nine months of 1997, compared with the same periods in 1996, as the Company has
exited the Sacramento market and presently has only one active subdivision in
the San Francisco Bay area.
AVERAGE SELLING PRICE PER HOME CLOSED--The higher average selling prices per
home closed in the third quarter and first nine months of 1997, compared with
the same periods in 1996, resulted from increases in average selling prices in
Colorado, California and the Mid-Atlantic region, principally due to the impact
of closing a greater number of homes in higher-priced subdivisions during the
1997 periods. These increases partially were offset by lower average selling
prices in the third quarter and first nine months of 1997 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 by 80 and 100 basis points,
respectively, during the third quarter and first nine months of 1997, compared
with the third quarter and first nine months of 1996. The increases largely were
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
the first nine months of 1996 and the closing of homes in four new higher-margin
subdivisions in the first nine months of 1997; (iii) the receipt in the second
quarter of 1997 of a $783,000 refund of school impact fees in Colorado which
previously were charged to cost of sales; and (iv) 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 in the third quarter and
first nine months of 1997 increased 21% and 9%, respectively, over the
comparable periods in 1996. Home orders for the third quarter of 1997 were the
highest third quarter orders in the Company's history and orders for the first
nine months of 1997 reached a ten-year high. These increases primarily were due
to comparatively strong home orders experienced since the first quarter of 1997
in all of the Company's markets except the Mid-Atlantic region and Northern
California in response to an improving national economy stimulated by decreasing
mortgage interest rates, low unemployment and high levels of consumer
confidence. Third quarter 1997 home orders particularly were strong in Nevada,
Arizona and Southern California, which increased 90%, 47% and 42%, respectively,
as a result of the factors discussed above and the increased number of active
subdivisions in Nevada and Arizona and a 50% increase in the number of sales per
active subdivision in Southern California.
S-15
<PAGE>
As a result of the increased orders for homes in the third quarter of 1997,
the Company's homes under contract but not yet delivered ("Backlog") at
September 30, 1997 increased 13% from September 30, 1996, to the highest
September 30 Backlog in the Company's history. Assuming no significant change in
market conditions or mortgage interest rates, the Company expects approximately
70% of its September 30, 1997 Backlog to close under existing sales contracts
during the fourth quarter of 1997 and the first half of 1998. The remaining 30%
of the homes in Backlog are not expected to close due to cancellations. See
"Forward-Looking Statements."
MARKETING--Marketing expenses (which include, among other things,
amortization of deferred marketing costs, model home advertising expenses and
sales commissions) totalled $16,367,000 and $44,467,000, respectively, for the
third quarter and first nine months of 1997, compared with $14,420,000 and
$40,667,000, respectively, for the same periods in 1996. The increases in 1997
primarily resulted from (i) additional advertising and model home expenses
incurred to stimulate sales in response to increased competition in Colorado,
Arizona and the Mid-Atlantic; and (ii) cost increases incurred in connection
with the Company's expanded operations in Southern California, Arizona and
Nevada.
GENERAL AND ADMINISTRATIVE--General and administrative expenses totalled
$8,303,000 and $22,849,000, respectively, during the third quarter and first
nine months of 1997, compared with $7,184,000 and $21,722,000, respectively, for
the same periods in 1996. The increases in 1997 primarily were due to increased
administrative costs incurred in support of the Company's expanded operations in
Southern California and Phoenix.
ASSET IMPAIRMENT CHARGES
Operating results during the third quarter and first nine months of 1997
were reduced by asset impairment charges totalling $3,500,000 and $5,850,000,
respectively, related to certain of the Company's homebuilding assets in the
Mid-Atlantic region, primarily in suburban Maryland, as a result of continued
weakened market conditions and competitive 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) in the third quarter of 1997, pricing,
product and incentive changes initiated by new management in the Mid-Atlantic
region to further the Company's aggressive strategy of accelerating the close
out of under-performing subdivisions in that market. While intending to maintain
its market share in the Mid-Atlantic region, 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.
Operating results during the three and nine months ended September 30, 1996
were impacted adversely by $4,338,000 and $7,208,000, respectively, in asset
impairment charges. These charges primarily were related to certain
under-performing subdivisions in Northern California and the Mid-Atlantic
region.
S-16
<PAGE>
LAND INVENTORY
The table below shows the carrying value of land and land under development,
by market, as well as the total number of lots owned, lots controlled under
option agreements and total option deposits (dollars in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1996 1996 1997
------------- ------------ -------------
<S> <C> <C> <C>
Land and Land Under Development
Colorado....................................... $ 60,887 $ 66,529 $ 58,968
Mid-Atlantic................................... 49,186 46,124 40,417
California..................................... 21,891 23,733 28,333
Arizona........................................ 29,749 32,129 35,768
Nevada......................................... 15,675 14,412 15,710
------------- ------------ -------------
Total........................................ $ 177,388 $ 182,927 $ 179,196
------------- ------------ -------------
------------- ------------ -------------
Total Lots Owned................................. 10,784 10,523 9,725
Total Lots Controlled Under Option............... 6,793 6,698 5,249
------------- ------------ -------------
Total Lots Owned and Controlled................ 17,577 17,221 14,974
------------- ------------ -------------
------------- ------------ -------------
Total Option Deposits............................ $ 5,449 $ 5,951 $ 6,802
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
FINANCIAL SERVICES SEGMENT
MORTGAGE LENDING OPERATIONS
The tables below set forth information relating to HomeAmerican's operations
(in thousands).
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Gains on Sales of Mortgage Servicing............................. $ 1,593 $ 1,009 $ 5,746 $ 1,560
Gains on Sales of Mortgage Loans, net............................ $ 1,545 $ 1,876 $ 3,238 $ 4,368
Operating Profits................................................ $ 3,380 $ 2,988 $ 10,146 $ 5,903
Principal Amount of Loan Originations and Purchases
MDC home buyers................................................ $ 119,584 $ 145,074 $ 343,066 $ 377,325
Spot........................................................... 8,280 9,516 34,056 24,078
Correspondent.................................................. 15,690 19,898 42,203 50,504
---------- ---------- ---------- ----------
Total........................................................ $ 143,554 $ 174,488 $ 419,325 $ 451,907
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Capture Rate..................................................... 65% 68% 66% 68%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1996 1996 1997
------------- ------------ -------------
<S> <C> <C> <C>
Composition of Servicing Portfolio
FHA insured/VA guaranteed.................................... $ 81,054 $ 117,681 $ 165,517
Conventional................................................. 259,803 277,217 349,117
------------- ------------ -------------
Total Servicing Portfolio...................................... $ 340,857(1) $ 394,898 $ 514,634
------------- ------------ -------------
------------- ------------ -------------
Salable Portion of Servicing Portfolio......................... $ 226,880(2) $ 292,428(2) $ 340,568(2)
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
- ------------------------
(1) Includes servicing of $62,181 sold in August 1996, serviced by HomeAmerican
under a subservicing arrangement until transfer to the purchaser in October
and November 1996.
(2) Substantially all originated subsequent to the adoption of SFAS 122 (as
hereinafter defined).
S-17
<PAGE>
HomeAmerican's operating profits for the third quarter and first nine months
of 1997 decreased, compared with the same periods in 1996, primarily due to
decreases in gains from sales of mortgage servicing which, for the first nine
months of 1997, partially were offset by an increase in gains from sales of
mortgage loans. These differences principally resulted from sales of mortgage
loans and mortgage loan servicing in 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 SFAS
125 (as hereinafter defined) on January 1, 1997.
SFAS 125 requires the Company to allocate the costs of mortgage loans
originated by HomeAmerican between the mortgage loans and the right to service
the mortgage loans, based on their relative values. For mortgage loans
originated by HomeAmerican prior to 1996, the costs of such loans were assigned
to the mortgage loans, with no costs assigned to the servicing rights. Assuming
that all other factors remain unchanged, SFAS 125 results in higher gains (or
lower losses) on sales of mortgage loans originated by HomeAmerican after
January 1, 1996 and, correspondingly, lower gains on sales of the related
servicing rights, compared with gains or losses on sales of mortgage loans and
related servicing rights originated by HomeAmerican prior to January 1, 1996.
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 future quarters will not be impacted by the
application of SFAS 125. See "Forward-Looking Statements."
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.
ASSET MANAGEMENT OPERATIONS
The following table sets forth certain information with respect to the
results of the asset management operations during each of the periods presented
(in thousands).
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Gain on Sale of FAMC................................... $ 4,042 $ -- $ 4,042 $ --
Operating Profits...................................... $ 3,721 $ 45 $ 5,553 $ 414
</TABLE>
The decreased operating profits in the third quarter and first nine months
of 1997 primarily were due to the $4,042,000 gain, net of related expenses, on
the September 1996 sale of FAMC. The sales proceeds consisted of $6,000,000 of
cash and $5,450,000 of subordinated notes, which are payable at specified dates
during the 10 years following the sale and are convertible, under certain
circumstances, into as much as a 47.6% ownership interest in FAMC. A gain of
$5,450,000 attributable to the notes has been deferred and may be recognized, in
whole or in part, in future periods based upon a number of factors, including
collection or prepayment of the notes' principal and the expiration of the
conversion features. The entire $5,450,000 gain remained deferred at September
30, 1997.
Due to the sale of FAMC and the fact that the Company does not anticipate
making additional mortgage-related investments, future operating results of the
asset management operations are expected to be immaterial, except to the extent
any gains are recognized with respect to FAMC's $5,450,000 subordinated notes
discussed above. See "Forward-Looking Statements."
S-18
<PAGE>
OTHER OPERATING RESULTS
INTEREST EXPENSE--The Company capitalizes interest on its homebuilding
inventories during the period of active development and through the completion
of construction. Corporate and homebuilding interest incurred which is not
capitalized is reflected as interest expense and totalled $761,000 for the first
nine months of 1997, compared with $3,364,000 for the same period in 1996.
During the third quarter of 1997, the Company capitalized all interest incurred,
which resulted in no interest expense for such period, compared with $486,000 of
interest expense in the third quarter of 1996.
Corporate and homebuilding interest incurred decreased by 12% to $6,689,000
and $20,192,000, respectively, for the third quarter and first nine months of
1997, compared with $7,582,000 and $22,961,000, respectively, for the same
periods in 1996, primarily due to (i) lower average outstanding borrowings
during the first nine months of 1997, compared with the first nine months of
1996, as a result of reduced homebuilding inventories and the increased use of
internally generated funds; and (ii) lower average effective interest rates with
respect to the Company's outstanding debt in 1997.
For a reconciliation of interest incurred, capitalized and expensed, see
Note I to the Company's Consolidated Financial Statements.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES--Corporate general and
administrative expenses totalled $1,694,000 and $8,194,000, respectively, during
the third quarter and first nine months of 1997, compared with $2,920,000 and
$8,501,000, respectively, for the same periods of 1996. The 1997 amounts include
the favorable impact of insurance recoveries and a reversal of reserves no
longer required, which totalled $2,032,000 and $2,458,000 for the respective
periods, as well as reduced debt-related fixed charges and insurance costs,
partially offset by higher compensation expenses and costs associated with the
Year 2000 Project (as defined below). Corporate general and administrative
expenses for the first nine months of 1996 were impacted favorably by insurance
recoveries of $1,250,000 received in the first quarter of 1996.
The Company is modifying its computer systems to accurately process
information which includes the year 2000 date and beyond (the "Year 2000
Project"). Pursuant to current accounting rules, the cost of the Year 2000
Project must be expensed as incurred. Management believes that future costs of
the Year 2000 Project, expected to be incurred over the next 15 months, will not
have a material adverse effect on the Company's results of operations, financial
position or cash flows. See "Forward-Looking Statements."
INCOME TAXES--M.D.C. Holdings, Inc. and its wholly owned subsidiaries file a
consolidated federal income tax return (an "MDC Consolidated Return"). Richmond
American Homes of Colorado, Inc. (formerly Richmond Homes, Inc. I) and its
wholly owned subsidiaries filed a separate consolidated federal income tax
return (each a "Richmond Homes Consolidated Return") from its inception
(December 28, 1989) through February 2, 1994, the date Richmond American Homes
of Colorado, Inc. became a wholly owned subsidiary of MDC.
In June 1997, the Company and the Internal Revenue Service (the "IRS")
reached final agreement on the examinations of the MDC Consolidated Returns for
the years 1986 through 1990. In July 1997, the Company and the IRS reached final
agreement on the examinations of the Richmond Homes Consolidated Returns for the
years 1991 through 1993. These agreements resulted in no material impact 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."
S-19
<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
MDC anticipates continuing to acquire finished lots and partially developed
land for use in its future homebuilding operations. 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."
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,
or general economic conditions, occur as a result of the various risk factors
described elsewhere herein, in particular, increases in interest rates. See
"Forward-Looking Statements."
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 September 30, 1997, $45,000,000 was borrowed under this line
of credit.
MORTGAGE LENDING--To provide funds to originate and purchase mortgage loans
and to finance these mortgage loans on a short-term basis, HomeAmerican utilizes
its mortgage lending bank line of credit (the "Mortgage Line"). HomeAmerican's
mortgage loans normally are sold within 25 to 60 days after origination. During
the first nine months of 1997 and 1996, HomeAmerican sold $438,400,000 and
$426,265,000, respectively, principal amount of mortgage loans and mortgage
certificates.
Available borrowings under the Mortgage Line are collateralized by mortgage
loans and mortgage-backed certificates and are limited to the value of eligible
collateral, as defined. The aggregate amount available under the Mortgage Line
at September 30, 1997 was $51,000,000. At September 30, 1997, $27,593,000 was
borrowed and an additional $23,407,000 was collateralized and available to be
borrowed. The Mortgage Line is cancelable upon 90 days notice.
CONSOLIDATED CASH FLOW
During the first nine months of 1997, the Company used $7,349,000 and
$39,520,000 of cash to repurchase 838,000 shares of MDC Common Stock and
$38,000,000 of 11 1/8% Senior Notes, respectively. The Company also used
$5,454,000 of cash in its operating activities. The Company financed these
activities primarily with internally generated funds and line of credit
borrowings.
S-20
<PAGE>
During the first nine months of 1996, the Company generated $35,651,000 in
cash from its operating activities. The Company used this cash and other
internally generated funds to (i) pay down lines of credit and notes payable by
$32,860,000; and (ii) repurchase 1,463,000 shares of MDC Common Stock for
$10,075,000.
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
IS DERIVED FROM MDC'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1996.
RESULTS OF OPERATIONS
1996 COMPARED WITH 1995. Revenues for the year ended December 31, 1996 were
$922,595,000, a 7% increase from 1995. The increase primarily resulted from a 9%
increase in home closings, the revenue impact of which was offset partially by a
$4,100 decrease in the average selling price per home closed.
Income before income taxes and extraordinary item in 1996 increased 23% from
1995, primarily due to (i) higher operating profit from the financial services
segment, primarily resulting from a $4,042,000 gain recognized on the sale of
FAMC and record profits from the mortgage lending operations; (ii) lower
corporate and homebuilding interest expense; and (iii) lower corporate general
and administrative expenses. These income improvements partially were offset by
a decrease in homebuilding operating profits caused by (i) increased asset
impairment charges, primarily in the Mid-Atlantic region due to intense
competition and weakened conditions in that market; (ii) lower average selling
prices on homes closed; and (iii) higher marketing and general and
administrative expenses incurred in support of expanding homebuilding operations
in California, Arizona and Nevada, which more than offset the positive effects
of increased home closings and Home Gross Margins.
During 1996, the Company strengthened its balance sheet in several areas.
The Company reduced its aggregate indebtedness at December 31, 1996 to
$253,346,000, a reduction of 17% from year-end 1995. In addition, the Company's
equity at December 31, 1996 increased to $213,847,000, or $11.83 per share, an
increase of 12% from $10.54 at December 31, 1995. These improvements contributed
to a reduction in the debt-to-equity ratio at December 31, 1996 to 1.18, a 20%
improvement over the 1.49 ratio as of December 31, 1995.
1995 COMPARED WITH 1994. MDC's revenues increased 6% for 1995, compared
with 1994, primarily as a result of a 9% increase in home closings, which more
than offset a $5,700 decrease in the average selling price per home closed.
Income before income taxes was lower for 1995, compared with 1994, primarily
as a result of lower homebuilding operating profits, partially offset by higher
mortgage lending and asset management operating profits, lower corporate and
homebuilding interest expense and lower corporate general and administrative
expenses. The reduction in homebuilding operating profits primarily resulted
from a 13% decline in Home Gross Margins caused by increased incentives offered
to home buyers in order to counter weakening demand due to higher mortgage
interest rates, particularly during the second half of 1994 and the first
quarter of 1995, and increased competition.
S-21
<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,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Home Sales Revenues.......................................................... $ 784,453 $ 827,448 $ 880,358
Operating Profits Before Asset Impairment Charges............................ $ 48,464 $ 36,695 $ 37,158
Operating Profits............................................................ $ 44,464 $ 33,018 $ 27,967
Average Selling Price Per Home Closed........................................ $ 186.8 $ 181.1 $ 177.0
Home Gross Margins........................................................... 15.4% 13.4% 13.7%
Orders For Homes, net (UNITS)
Colorado................................................................... 1,837 1,939 1,811
Mid-Atlantic............................................................... 1,048 996 1,115
California................................................................. 567 770 822
Arizona.................................................................... 614 779 1,041
Nevada..................................................................... 111 52 260
---------- ---------- ----------
Total.................................................................... 4,177 4,536 5,049
---------- ---------- ----------
---------- ---------- ----------
Homes Closed (UNITS)
Colorado................................................................... 1,887 1,891 1,893
Mid-Atlantic............................................................... 1,136 1,058 969
California................................................................. 564 751 837
Arizona.................................................................... 504 802 1,044
Nevada..................................................................... 109 68 231
---------- ---------- ----------
Total.................................................................... 4,200 4,570 4,974
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Backlog (UNITS)
Colorado................................................................... 610 658 576
Mid-Atlantic............................................................... 337 275 421
California................................................................. 101 175 160
Arizona.................................................................... 257 234 231
Nevada..................................................................... 29 13 98
---------- ---------- ----------
Total.................................................................... 1,334 1,355 1,486
---------- ---------- ----------
---------- ---------- ----------
Estimated Sales Value...................................................... $ 241,900 $ 243,000 $ 261,000
---------- ---------- ----------
---------- ---------- ----------
Active Subdivisions
Colorado................................................................... 53 49 51
Mid-Atlantic............................................................... 41 48 53
California................................................................. 21 23 20
Arizona.................................................................... 16 22 23
Nevada..................................................................... 4 2 5
---------- ---------- ----------
Total.................................................................... 135 144 152
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
S-22
<PAGE>
HOMEBUILDING ACTIVITIES--1996 COMPARED WITH 1995.
HOME SALES REVENUES AND HOMES CLOSED. Home sales revenues in 1996 increased
6% from home sales revenues in 1995. The increase primarily resulted from
increased home closings, partially offset by an overall decrease in the average
selling price per home closed, as discussed below.
Home closings increased in 1996, compared with 1995, in (i) Arizona, due to
a significant expansion of operations in Phoenix, where the Company has
increased the number of active subdivisions from nine at December 31, 1994 to 15
at December 31, 1996; (ii) California, due to the acquisition and opening of
several new subdivisions in Southern California, including subdivisions in
Riverside County acquired from Mesa Homes in July 1995; and (iii) Nevada, due to
the closing of homes in subdivisions acquired from Longford Homes in February
1996. The Mid-Atlantic operations closed fewer homes in 1996 than were closed
during the same periods in 1995, primarily as a result of severe weather
conditions during most of 1996 which delayed construction and development
activities and the delivery of certain homes.
AVERAGE SELLING PRICE PER HOME CLOSED. The decrease in the average selling
price per home closed in 1996, compared with 1995, reflects the impact of the
Company's continuing emphasis on offering lower-priced, more affordable homes
primarily marketed to first-time and first-time move-up home buyers. This
strategy resulted in lower average sales prices in 1996, compared with 1995, in
(i) Arizona; (ii) Las Vegas, where the Company closed affordably priced homes in
subdivisions acquired from Longford Homes; and (iii) the Mid-Atlantic region,
where the Company has opened a number of new, affordable townhome projects.
HOME GROSS MARGINS. Home Gross Margins increased during 1996, compared with
1995. These increases largely were due to increased margins in (i) Colorado,
where stronger market conditions during the first half of 1996 resulted in lower
levels of required incentives for home buyers and increased selling prices; (ii)
Las Vegas, due to increased profits from homes sold in subdivisions acquired
from Longford Homes; and (iii) Northern California, due to a greater percentage
of home closings coming from more profitable subdivisions in that market. These
increases partially were offset by Home Gross Margin decreases in the
Mid-Atlantic, where (i) increased costs associated with severe weather
conditions were incurred during most of the year; and (ii) the Company continues
to offer incentives to reduce its inventory of older unsold homes under
construction, and in response to weakened market conditions and strong
competition.
ORDERS FOR HOMES AND BACKLOG. Orders for homes increased by 11% to 5,049
units in 1996, compared with 4,536 units in 1995, primarily as a result of
increased orders for homes in (i) Phoenix, Southern California and Las Vegas,
due to the Company's continued expansion in these markets, as previously
discussed; and (ii) the Mid-Atlantic, due to an increase in the number of active
subdivisions. As a result of these increased orders for homes, Backlog at
December 31, 1996 increased 10% to 1,486 units, compared with 1,355 units at
December 31, 1995. Assuming no significant change in market conditions or
mortgage interest rates, the Company expects approximately 70% of its December
31, 1996 Backlog to close under existing sales contracts during the first six
months of 1997. The remaining 30% of the homes in Backlog are not expected to
close due to cancellations. See "Forward-Looking Statements."
MARKETING. Marketing expenses (which include, among other things,
amortization of deferred marketing costs, model home expenses and sales
commissions) totalled $56,078,000 during 1996, compared with $49,938,000 in
1995. The increase during 1996, compared with 1995, principally resulted from
additional marketing-related salary, sales commission and model home operating
expenses incurred to support the Company's expanded operations and to stimulate
sales in response to increased competition in 1996.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $29,122,000 during 1996, compared with $26,694,000 for 1995, primarily due to
additional costs incurred in support of expanded operations in Southern
California and Las Vegas.
S-23
<PAGE>
ASSET IMPAIRMENT CHARGES. Operating results during 1996 were impacted
adversely by asset impairment charges totalling $9,191,000, primarily related to
certain homebuilding assets in the Mid-Atlantic region as a result of continued
weakened conditions and competitive pressures in that market. The Mid-Atlantic
asset impairment charges primarily resulted from (i) the write-down to fair
market value of a single-family detached home subdivision in which the Company
intends to sell the majority of the remaining lots in bulk; (ii) the recognition
of losses anticipated from closing certain homes in Backlog and from offering
increased incentives to stimulate sales of completed unsold homes in inventory;
(iii) the write-off of capitalized costs, primarily deferred marketing and
option deposits, related to several low-margin projects; and (iv) the write-down
to fair market value, pursuant to the requirements of SFAS 121 (as hereinafter
defined), of several single-family detached home subdivisions which began to
experience extremely slow sales and negative Home Gross Margins during 1996.
While intending to maintain its market share in the Mid-Atlantic region, the
Company is strategically eliminating lower-margin projects in that market and
redeploying capital to its expanding operations in Southern California, Phoenix
and Las Vegas. See "Forward-Looking Statements."
Asset impairment charges for 1996 also included charges with respect to
certain homebuilding assets in Northern California as a result of increased
incentives and sales price reductions offered to potential home buyers in
connection with the Company's efforts to exit several underperforming
subdivisions in the Sacramento area.
HOMEBUILDING ACTIVITIES--1995 COMPARED WITH 1994.
HOME SALES REVENUES, ORDERS FOR HOMES AND HOMES CLOSED. Home sales revenues
increased in 1995, compared with 1994, primarily as a result of increases in
home closings, partially offset by an overall decrease in the average selling
price per home closed, as discussed below. Orders for homes and home closings
increased in 1995 in (i) Arizona, primarily due to a significant expansion of
the Company's operations in Phoenix; (ii) California, primarily due to the
acquisition and opening of several new subdivisions in Southern California; and
(iii) Colorado, due to, among other things, efforts to reduce the level of
unsold homes under construction and a continuing emphasis on offering more
affordable homes.
In its Mid-Atlantic market, the Company experienced lower orders for homes
and closings per active subdivision in 1995, compared with 1994. The impact of
lower orders for homes per active subdivision was partially offset by an
increase in the number of the Company's active subdivisions in that market at
December 31, 1995, compared with December 31, 1994. The lower orders for homes
and closing levels per active subdivision were primarily the result of the
entire Mid-Atlantic market experiencing (i) an increase in active subdivisions
due to aggressive competition; (ii) reduced consumer confidence due to
reductions in the number of federal employees and government shutdowns, and the
potential for further reductions in the number of federal employees as a result
of deficit reduction plans; and (iii) a decline in total market home orders.
AVERAGE SELLING PRICE PER HOME CLOSED. The decrease in the average selling
price per home closed in 1995, compared with 1994, is the result of the
Company's emphasis on offering lower-priced, more affordable homes primarily
marketed to first-time and first-time move-up home buyers. This strategic change
in market mix resulted in lower average sales prices compared with prices in
1994 (i) in Colorado, Maryland and Tucson; and (ii) beginning in the third
quarter of 1995, in Southern California as the Company began offering homes
ranging in price from $105,000 to $170,000 in the Riverside County subdivisions
acquired in July 1995.
HOME GROSS MARGINS. Home Gross Margins decreased to 13.4% in 1995 from
15.4% in 1994. This decline was due to (i) increased incentives offered to home
buyers in order to counter weakening demand due to higher mortgage interest
rates, particularly during the second half of 1994 and the first quarter of
1995; (ii) increased incentives used to reduce the Company's inventory of unsold
homes under construction; and (iii) increased competition in MDC's homebuilding
markets.
S-24
<PAGE>
MARKETING. Marketing expenses totalled $49,938,000 for 1995, compared with
$44,588,000 for 1994. The increases reflect the impact of significant additional
marketing-related salary, sales commission and model home operating expenses
incurred to support the Company's expanded operations. Additionally, the Company
increased its marketing efforts to stimulate sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses totalled
$26,694,000 in 1995, compared with $29,215,000 for 1994. General and
administrative expenses as a percentage of home sales revenues decreased to 3.2%
in 1995, compared with 3.7% in 1994, as the Company was able to deliver more
homes in 1995 with a reduced level of overhead.
ASSET IMPAIRMENT CHARGES. Operating results during the year ended December
31, 1995 were impacted adversely by $3,677,000 in asset impairment charges.
These charges primarily were related to certain under-performing projects in
California, Arizona and the Mid-Atlantic region. Asset impairment charges
totalled $4,000,000 in 1994, primarily related to certain projects in Northern
California which experienced significant slowing in sales and reduced selling
prices due to softness in consumer demand which led to a general decline in home
order activity.
LAND SALES.
Revenue from land sales totalled $9,471,000, $10,396,000 and $8,296,000,
respectively, in 1996, 1995 and 1994, respectively. The land sales primarily
were in Colorado and, to a lesser extent, in California. Gross profits from
these land sales were $698,000, $220,000 and $319,000, respectively, for the
years 1996, 1995 and 1994.
FINANCIAL SERVICES SEGMENT.
MORTGAGE LENDING OPERATIONS.
The table below summarizes the results of HomeAmerican's operations (dollars
in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Gains from sales of mortgage servicing
Bulk............................................ $ 5,785 $ 6,374 $ 5,291
Other........................................... $ 985 $ 1,962 $ 729
Gains (losses) on sales of mortgage loans......... $ (585) $ (1,293) $ 4,905
Operating profit.................................. $ 6,951 $ 9,288 $ 12,584
Principal amount of originations and purchases:
MDC home buyers................................. $ 323,079 $ 413,525 $ 482,106
Spot............................................ 69,037 36,200 39,730
Correspondent................................... 64,365 63,051 60,373
------------ ------------ ------------
Total......................................... $ 456,481 $ 512,776 $ 582,209
------------ ------------ ------------
------------ ------------ ------------
Capture Rate...................................... 52% 61% 66%
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
S-25
<PAGE>
The table below sets forth certain information regarding HomeAmerican's
portfolio of mortgage loans serviced (in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Beginning Servicing Portfolio.......................... $ 653,331 $ 569,063 $ 486,811
Servicing retained on loans originated............... 392,116 449,725 521,836
Purchases from correspondents........................ 64,365 63,051 60,373
Bulk servicing sales................................. (427,340) (417,075) (485,757)
Loan sales servicing released........................ (80,884) (141,174) (158,802)
Loan principal payments and other.................... (32,525) (36,779) (29,563)
----------- ----------- -----------
Ending Servicing Portfolio............................. $ 569,063 $ 486,811 $ 394,898
----------- ----------- -----------
----------- ----------- -----------
<CAPTION>
DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Composition of Servicing Portfolio:
FHA insured/VA guaranteed............................ $ 203,991 $ 85,002 $ 117,681
Conventional......................................... 365,072 401,809 277,217
----------- ----------- -----------
Total Servicing Portfolio.............................. $ 569,063 $ 486,811 $ 394,898(1)
----------- ----------- -----------
----------- ----------- -----------
Salable portion of servicing portfolio................. $ 506,098 $ 429,328 $ 292,428(2)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------
(1) Includes servicing of $52,131 sold in November 1996, serviced by
HomeAmerican under a subservicing arrangement until transfer to the
purchaser in January and February 1997.
(2) Substantially all originated subsequent to the adoption of SFAS 122 (as
hereinafter defined).
1996 COMPARED WITH 1995. HomeAmerican's operating profits for 1996 were the
highest in its history, and exceeded by 35% the operating profits for 1995
primarily because of gains on sales of mortgage loans totalling $4,905,000 in
1996, compared with losses totalling $1,293,000 in 1995. These gains are in
large measure attributable to the Company's required adoption in 1996 of SFAS
122.
SFAS 122 requires the Company to allocate the cost of mortgage loans
originated after January 1, 1996 between the mortgage loans and the rights to
service the mortgage loans, based on their relative values. Prior to 1996, the
cost of mortgage loans originated by HomeAmerican was assigned to the mortgage
loans, with no cost assigned to the servicing rights. Assuming that all other
factors remain unchanged, the adoption of SFAS 122 results in higher gains (or
lower losses) on sales of mortgage loans originated by HomeAmerican after
January 1, 1996 and correspondingly lower gains on sales of the related
servicing rights, compared with gains or losses on sales of mortgage loans and
related servicing rights originated by HomeAmerican prior to January 1, 1996.
The Company's adoption of SFAS 122 resulted in additional net gains in 1996
of $3,082,000 from the sale of mortgage loans and servicing rights compared with
the net gains that would have been recorded under the accounting method
applicable in 1995 and prior years.
During the first, second and third quarters of 1996, respectively, the
Company recorded gains of approximately $2,435,000, $1,382,000 and $1,271,000
(or $5,088,000 in total) related to bulk sales of approximately $398,809,000
principal amount of mortgage servicing rights held prior to the adoption of SFAS
122 on January 1, 1996. The substantial majority of these mortgage servicing
rights were related to mortgage loans originated by the Company and, as a
result, had no costs assigned to such servicing rights. Future gains from sales
of mortgage servicing will be significantly lower than prior comparable periods
as
S-26
<PAGE>
the Company sold substantially all of its pre-1996 servicing portfolio prior to
December 31, 1996. See "Forward-Looking Statements."
HomeAmerican's loan originations and purchases increased by 14% in 1996,
compared with 1995, primarily due to increases in (i) the Company's home
closings; and (ii) HomeAmerican's "Capture Rate", or the number of mortgage
loans originated for Company home buyers as a percentage of total Company home
closings. HomeAmerican opened origination facilities in Southern California in
late 1995 and Nevada in February 1996, which favorably affected HomeAmerican's
total originations and Capture Rate. HomeAmerican continues to benefit from the
Company's homebuilding growth as Company home buyers were the source of more
than 80% of the principal amount of mortgage loans originated and purchased by
HomeAmerican in 1996 and 1995.
1995 COMPARED WITH 1994. HomeAmerican's operating profit in 1995 was higher
than in 1994 principally due to gains from sales of mortgage servicing totalling
$8,336,000 in 1995, compared with gains totalling $6,770,000 in 1994. The
Company sold approximately the same principal amount of servicing in 1995 as in
1994, but generated higher revenues on the 1995 sales as stronger market demand
resulted in more favorable prices than in 1994. Gains from mortgage servicing
sales other than bulk sales also comprised a larger percentage of total gains
(24% for 1995, compared with 15% for 1994) primarily due to increased
originations and purchases of adjustable rate mortgages, which generally are
sold "servicing released."
HomeAmerican's loan originations and purchases increased by 12% in 1995,
compared with 1994, primarily due to an increase in the Company's home closings
and an increase in the percentage of mortgage originations for buyers of the
Company's homes, partially offset by a 48% decrease in the dollar amount of spot
originations, as increased mortgage interest rates during the second half of
1994 and first quarter of 1995 significantly decreased refinancing activity
market-wide.
ASSET MANAGEMENT OPERATIONS.
The following table sets forth certain information with respect to the
results of the asset management operations (in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Gain on sale of FAMC............................................. $ -- $ -- $ 4,042
Operating profit................................................. $ 2,796 $ 4,050 $ 6,073
</TABLE>
The increased operating profits in 1996 primarily were due to the $4,042,000
gain, net of related expenses, on the sale of FAMC in September 1996. The sales
proceeds of $11,450,000 included $6,000,000 of cash and $5,450,000 of
subordinated convertible notes, which are payable at specified dates during the
next 10 years and are convertible, under certain circumstances, into as much as
a 47.6% ownership interest in FAMC. A gain of $5,450,000 attributable to the
notes has been deferred and may be recognized, in whole or in part, in future
periods based upon a number of factors, including collection of the principal on
the notes and the expiration of the conversion features. See "Forward-Looking
Statements."
Due to the sale of FAMC and the fact that the Company does not anticipate
making additional mortgage-related investments, future operating results related
to the asset management operations are expected to be immaterial. See
"Forward-Looking Statements."
OTHER OPERATING RESULTS.
INTEREST EXPENSE. Corporate and homebuilding interest incurred decreased to
$30,296,000 in 1996, compared with $33,909,000 in 1995 and $35,799,000 in 1994,
primarily due to (i) lower effective interest
S-27
<PAGE>
rates with respect to variable-rate debt; and (ii) lower levels of borrowings
resulting from the reduction in homebuilding inventories and the increased use
of internally generated funds.
The portion of corporate and homebuilding interest which was capitalized
(the Company capitalizes interest on its homebuilding inventories during the
period of active development and through the completion of construction) during
1996 totalled $26,523,000, compared with $26,136,000 and $26,345,000,
respectively, during 1995 and 1994.
Corporate and homebuilding interest incurred but not capitalized is
reflected as interest expense and totalled $3,773,000 for 1996, compared with
$7,773,000 and $9,454,000, respectively, for 1995 and 1994.
For a reconciliation of interest incurred, capitalized and expensed, see
Note I to the Company's Consolidated Financial Statements.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and
administrative expenses totalled $11,578,000 for 1996, compared with $13,478,000
and $15,132,000, respectively, for 1995 and 1994. The 14% decrease in 1996,
compared with 1995, primarily was due to (i) reductions in insurance costs and
debt-related expenses; and (ii) an insurance recovery of $1,250,000 received in
the first quarter of 1996 related to the recovery of certain homebuilding
expenditures previously expensed. The 11% decrease in 1995, compared with 1994,
primarily was due to reductions in insurance costs, legal expenses and
professional fees, partially offset by an increase in salary expense and
financing costs associated with the Company's expanded operations in 1995.
INCOME TAXES. M.D.C. Holdings, Inc. and its wholly owned subsidiaries file
a consolidated federal income tax return (an "MDC Consolidated Return").
Richmond American Homes of Colorado, Inc. (formerly known as Richmond Homes,
Inc. I, a wholly owned subsidiary of M.D.C. Holdings, Inc.; "Richmond Homes")
and its wholly owned subsidiaries filed separate consolidated federal income tax
returns (each a "Richmond Homes Consolidated Return") from its inception
(December 28, 1989) through February 2, 1994, the date Richmond Homes became a
wholly owned subsidiary of MDC.
MDC's overall effective income tax rates of 36.5%, 35.3% and 37.9%,
respectively, for 1996, 1995, and 1994, differed from the federal statutory rate
of 35% primarily due to (i) the impact of state income taxes; (ii) in 1995 and
1994, the realization of non-taxable income for financial reporting purposes for
which no tax liability was recorded; and (iii) in 1994, the adjustments of prior
years' income taxes.
In April 1995, the Company and the Internal Revenue Service (the "IRS")
reached final agreement on the IRS examinations of (i) the MDC Consolidated
Returns for the years 1984 and 1985; and (ii) the Richmond Homes Consolidated
Returns for the years 1989 and 1990. These agreements had no material impact
upon the Company's financial position or results of operations.
S-28
<PAGE>
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 six states--Colorado, Virginia, Maryland, California, Arizona and Nevada. In
the financial services segment, HomeAmerican, a wholly owned subsidiary of MDC,
also provides mortgage financing, primarily for the Company's home buyers. In
addition, until September 30, 1996, MDC managed two Real Estate Investment
Trusts ("REITs"). The Company sold its 80% interest in the subsidiary that
managed the REITs in September 1996 and does not expect to engage in significant
asset management activities in the future. See "Forward-Looking Statements."
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 $80,000 to $400,000, although the
Company builds homes with prices as high as $700,000. The average sales prices
of the Company's homes closed in 1996 and the first nine months of 1997 were
$177,000 and $178,400, 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.
It is also a priority of the Company 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 through offices located in each of MDC's
markets. As the principal originator of mortgage loans for MDC's home buyers,
HomeAmerican is an integral part of MDC's homebuilding operations.
HOMEBUILDING SEGMENT
GENERAL. The Company's homebuilding business consists principally of the
acquisition of finished lots and, to a lesser extent, land for development in
its homebuilding activities; and the design, construction and sale of
single-family residential homes. These operations are financed primarily with
publicly traded debt, bank lines of credit and internally generated funds.
The Company is one of the 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;
among the top five builders in Riverside County, California, Northern Virginia,
suburban Maryland, Tucson and Colorado Springs; among the top ten builders in
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. Homes are constructed according to
basic designs based on local customer preferences. The Company, as the general
contractor, supervises the development and construction of all of its projects
and employs subcontractors for site development and home construction.
S-29
<PAGE>
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 region, 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 over the first nine months of
1997 and 1996 and the last three years, as represented by home sales revenues in
each of its markets (dollars in thousands).
<TABLE>
<CAPTION>
TOTAL HOME SALES REVENUES
----------------------------------------------------------
NINE MONTHS ENDED PERCENT OF TOTAL
YEAR ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ---------------------- --------------------
1994 1995 1996 1996 1997 1996 1997
---------- ---------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Colorado....................... $ 333,908 $ 325,834 $ 327,256 $ 240,685 $ 235,109 38% 35%
Mid-Atlantic................... 226,547 208,552 187,254 126,201 156,112 20% 23%
California..................... 119,559 146,947 182,131 128,640 137,539 20% 20%
Arizona........................ 84,588 133,625 154,875 115,483 110,206 18% 16%
Nevada......................... 19,851 12,490 28,842 24,463 37,708 4% 6%
---------- ---------- ---------- ---------- ---------- --------- ---------
Total...................... $ 784,453 $ 827,448 $ 880,358 $ 635,472 $ 676,674 100% 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 location is based on customer preference and the area's
demographics.
Through design centers in its Denver, Southern California and Phoenix
homebuilding divisions, MDC provides home buyers the convenience of "one stop
shopping." Home buyers can choose their homes and select finishes and upgrades
within a short time of their decision to purchase a Richmond home. The design
centers, which are being considered 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.
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 tends 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 future
periods utilizing option contracts, normally on a "rolling" basis. Generally, in
a rolling option contract, the Company obtains the right to purchase finished
lots in consideration for an option deposit. In the event the Company elects not
to purchase the finished lots within a specified period of time, the agreements
limit the Company's loss to the option deposit, thereby limiting the Company's
risk while preserving its liquidity. At September 30,
S-30
<PAGE>
1997, MDC had the right to acquire approximately 5,249 lots under option
agreements with approximately $6,802,000 in total option deposits. Because of
increased demand for finished lots in certain of its markets, the Company's
ability to acquire lots using rolling options has been reduced or become
significantly more expensive.
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 its current intended use for substantially
all of MDC's undeveloped land. When developed, these lots generally will be used
in the Company's homebuilding activities, although a limited number of lots may
be sold to others. Certain undeveloped lots also may be sold to others in their
present state.
The table below shows the carrying value of land and land under development,
by market (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Colorado.................................. $ 90,619 $ 75,448 $ 66,529 $ 58,968
Mid-Atlantic.............................. 29,076 47,247 46,124 40,417
California................................ 32,106 27,912 23,733 28,333
Arizona................................... 25,271 21,794 32,129 35,768
Nevada.................................... 6,766 4,559 14,412 15,710
---------- ---------- ---------- -------------
Total................................. $ 183,838 $ 176,960 $ 182,927 $ 179,196
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
</TABLE>
The table below shows the number of lots owned and under option, by market.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Lots Owned
Colorado................................ 11,299 8,628 5,849 5,099
Mid-Atlantic............................ 675 1,105 1,919 1,872
California.............................. 886 446 488 531
Arizona................................. 1,400 1,242 1,651 1,704
Nevada.................................. 248 135 616 519
---------- ---------- ---------- -------------
Total................................. 14,508 11,556 10,523 9,725
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
Lots Under Option
Colorado................................ 4,250 2,795 2,486 2,281
Mid-Atlantic............................ 3,092 4,019 2,975 1,883
California.............................. 110 675 538 652
Arizona................................. 744 519 654 418
Nevada.................................. -- -- 45 15
---------- ---------- ---------- -------------
Total................................. 8,196 8,008 6,698 5,249
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
</TABLE>
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 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
S-31
<PAGE>
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."
SEASONAL NATURE OF BUSINESS. MDC's business is seasonal to the extent that
its Colorado and Mid-Atlantic operations encounter weather-related slowdowns
during the winter months, and its Mid-Atlantic and California operations
encounter heavy seasonal rains. Delays in development and construction
activities resulting from these adverse weather conditions increase the
Company's risk of higher costs for interest, materials and labor. In addition,
home buyer preferences and demographics influence the seasonal nature of MDC's
business.
BACKLOG. As of September 30, 1997 and 1996, homes under contract but not
yet delivered ("Backlog") totalled 2,093 and 1,845, respectively, with an
estimated sales value of $382,000,000 and $326,000,000, respectively. Based on
its past experience, assuming no significant changes in market conditions and
mortgage interest rates, MDC anticipates that approximately 70% of its September
30, 1997 Backlog will close under existing sales contracts during the last three
months of 1997 and first half of 1998. The remaining 30% of the homes in Backlog
are not expected to close due to cancellations. See "Forward-Looking
Statements."
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.
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.
MDC sells its homes to customers who finance their purchases through Federal
Housing Administration-insured ("FHA") mortgage loans, Veterans
Administration-guaranteed ("VA") mortgage loans and conventional mortgage loans.
HomeAmerican is a FHA, VA, Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC") authorized mortgage loan
originator. HomeAmerican is also an authorized loan servicer for FNMA, FHLMC and
the Government National Mortgage Association ("GNMA") and, as such, is subject
to the rules and regulations of such organizations. HomeAmerican also purchases
loans and the related servicing rights from unaffiliated loan correspondents;
the origination fees for these loans are retained by the correspondents.
S-32
<PAGE>
Substantially all of the mortgage loans originated or purchased by
HomeAmerican are sold to private investors within 45 days of origination or
purchase. HomeAmerican uses its secured warehouse line of credit, other
collateralized borrowings and internally generated funds to finance these
mortgage loans until they are sold.
Mortgage loan origination volume is dependent on factors such as
competition, the economy and interest rates. Generally, lower interest rates
allow additional first-time home buyers to enter the market and existing home
owners to "move up" to larger new homes.
PORTFOLIO OF MORTGAGE LOAN SERVICING. HomeAmerican has sold, and intends to
sell in the future, mortgage loan servicing. Servicing involves the collection
of principal, interest, taxes and insurance premiums from the borrower and the
remittance of such funds to the mortgage loan investor, local taxing authorities
and insurance companies, for which the servicer is paid a fee. HomeAmerican
obtains the servicing rights related to the mortgage loans it and its
correspondents originate. Certain mortgage loan servicing rights are sold
"servicing released" (included with the sale of the corresponding mortgage
loans). The servicing rights on mortgage loans not sold servicing released
generally are sold in bulk at a later date.
As a mortgage loan servicer, HomeAmerican generally is required to advance
to the owner of the mortgage, mortgage payments on loans that are delinquent or
in foreclosure. To the extent that these and other advances by HomeAmerican are
not collected or reimbursed by the mortgage loan insurer or guarantor,
HomeAmerican incurs losses. In the past these amounts have not been material.
HomeAmerican's portfolio of mortgage loan servicing at September 30, 1997
consisted of servicing rights with respect to approximately 4,067 single-family
loans, approximately 89.1% 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 11.5% to 5.5% and averaging 7.7%. 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 September 30, 1997 had an aggregate principal balance of
$229,254,000. Approximately 70% of the Pipeline at September 30, 1997 is
anticipated to close during the last three months of 1997. If mortgage interest
rates fall, a smaller percentage of these loans would be expected to close. See
"Forward-Looking Statements."
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 ("FAMC"), a
subsidiary of the Company, managed Asset Investors Corporation and Commercial
Assets, Inc., two publicly traded REITs. MDC also owns other mortgage-related
interests. On September 30, 1996, the Company sold its interest in FAMC. Due to
the sale of FAMC and the fact that the Company does not intend to make
additional mortgage-related investments, future operating profits and cash flows
from the asset management operations (other than payment of the balance of the
purchase price for the sale of the Company's interest in
S-33
<PAGE>
FAMC of approximately $5,450,000 at September 30, 1997) are expected to be
immaterial. See "Forward-Looking Statements."
EMPLOYEES.
At September 30, 1997, MDC employed approximately 1,200 persons. MDC
considers its employee relations to be satisfactory.
MANAGEMENT
The directors and executive officers of the Company, their ages and
positions with the Company and brief descriptions of their business experience
are set forth below. The Board of Directors of the Company is divided into three
classes. Each class is elected annually, for a three year term. Also set forth
below for each director is the class to which the director belongs and the year
in which the director's current term expires.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- -------------------------------------------------
<S> <C> <C>
Larry A. Mizel................ 55 Chairman of the Board of Directors, President and
Chief Executive Officer (Class I, 1998)
Steven J. Borick.............. 45 Director (Class III, 2000)
David D. Mandarich............ 50 Executive Vice President-Real Estate, Chief
Operating Officer and Director (Class III, 2000)
Herbert T. Buchwald........... 67 Director (Class I, 1998)
Gilbert Goldstein............. 79 Director (Class II, 1999)
William B. Kemper............. 60 Director (Class II, 1999)
Paris G. Reece III............ 43 Senior Vice President, Chief Financial Officer
and Principal Accounting Officer
Michael Touff................. 52 Vice President and General Counsel
</TABLE>
LARRY A. MIZEL was elected President of the Company in March 1996 and has
served as Chairman of the Board of Directors and Chief Executive Officer of the
Company for more than five years. Mr. Mizel also serves as a director of the
Company's wholly owned subsidiary, Richmond American Homes of Colorado, Inc.
Until September 30, 1996, Mr. Mizel also was chairman of the boards of directors
of Asset Investors Corporation, a New York Stock Exchange-listed REIT and
Commercial Assets, Inc., an American Stock Exchange-listed REIT, both of which
were managed by a subsidiary of the Company. Mr. Mizel has been a Director of
the Company since founding the Company in January 1972 and is a member of the
Legal Committee.
STEVEN J. BORICK has been the president of Texakota, Inc., an oil and gas
exploration and development company, and a general partner in Texakota Oil
Company, a private oil and gas partnership, for more than the past five years.
He also is a director of Superior Industries International, Inc., a New York
Stock Exchange-listed manufacturer of automobile accessories, and Richmond
American Homes of Colorado, Inc. Mr. Borick has been a Director of the Company
since April 1987 and is a member of the Audit Committee and Chairman of the
Compensation Committee.
DAVID D. MANDARICH was elected Chief Operating Officer of the Company in
March 1996, Co-Chief Operating Officer in September 1994 and Executive Vice
President-Real Estate in April 1993 and appointed a Director of the Company in
March 1994. From April 1989 to April 1993, Mr. Mandarich served as a consultant
to the Company. In April 1990, Mr. Mandarich was elected as chairman of the
board of directors of Richmond American Homes of Colorado, Inc. Mr. Mandarich
also was a Director of the Company from September 1980 until April 1989.
S-34
<PAGE>
HERBERT T. BUCHWALD has been a principal in the law firm of Herbert T.
Buchwald, P.A. and president and chairman of the board of directors of BPR
Management Corporation, a property management company located in Denver,
Colorado, for more than the past five years. Mr. Buchwald was appointed to the
Company's Board of Directors in March 1994 and is Chairman of the Audit
Committee and a member of the Compensation and Legal Committees.
GILBERT GOLDSTEIN has been engaged in private law practice for more than the
past five years as the principal in the law firm of Gilbert Goldstein, P.C. Mr.
Goldstein has been a Director of the Company since January 1976. Mr. Goldstein
also is the Chairman of the Legal Committee.
WILLIAM B. KEMPER has been engaged in private real estate investments, real
estate development and property management since May 1982. Prior to May 1982, he
was president of Gold Crown, Inc., a real estate development company. Mr. Kemper
has been a Director of the Company since January 1972. He is a member of the
Audit and the Compensation Committees.
PARIS G. REECE III was elected as a Vice President of the Company in August
1988, as Secretary in February 1990, as Chief Financial Officer in June 1990, as
Treasurer in September 1993 and as Senior Vice President in September 1994. Mr.
Reece resigned as Secretary of the Company in May 1996 and as Treasurer of the
Company in November 1996. Mr. Reece also is an officer, director or both of most
of the Company's subsidiaries. Until September 30, 1996, Mr. Reece also was an
Executive Vice President and the Chief Financial Officer of Asset Investors
Corporation and Commercial Assets, Inc.
MICHAEL TOUFF was elected as a Vice President and the General Counsel of the
Company in December 1994. From August 1992 through December 1994, he was an
officer in the law firm of Ireland, Stapleton, Pryor & Pascoe, P.C. Prior to
August 1992, Mr. Touff was an officer in the law firm of Holmes & Starr, A
Professional Corporation.
S-35
<PAGE>
DESCRIPTION OF NOTES
The following description of the terms of the Notes supplements and, to the
extent inconsistent therewith, replaces the description of the general terms of
the Debt Securities set forth under the heading "Descriptions of Debt
Securities" in the accompanying Prospectus. The Notes will be issued under an
Indenture dated as of January 28, 1998 (the "Indenture"), between the Company
and First Trust National Association, as trustee (the "Trustee"). The following
summary of certain provisions of the Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, all the
provisions of the Indenture, including the definitions of certain terms therein,
and those terms made a part thereof by the Trust Indenture Act of 1939, as
amended. For purposes of this "Description of Notes," references to the
"Company" mean M.D.C. Holdings, Inc. and does not include any of its
Subsidiaries.
Definitions of certain terms are set forth under "Certain Definitions" and
throughout this description. Capitalized terms that are used but not otherwise
defined herein have the meanings assigned to them in the Indenture.
GENERAL
The Notes will be general unsecured obligations of the Company and limited
to an aggregate principal amount of $250,000,000, of which an aggregate
principal amount of $175,000,000 will be issued in the Offering. Additional
Notes may be issued from time to time subject to the limitations set forth under
"Certain Covenants--Limitations on Indebtedness." The Notes will bear interest
from the date the Notes are first issued at the rate per annum shown on the
cover page of this Prospectus Supplement, payable semiannually on February 1 and
August 1 of each year, commencing August 1, 1998, to Holders of record at the
close of business on January 15 or July 15, as the case may be, immediately
preceding each such interest payment date. The Notes will mature on February 1,
2008, and will be issued in denominations of $1,000 and integral multiples
thereof.
RANKING
The Notes will rank senior in right of payment to all future Indebtedness of
the Company that is, by its terms, expressly subordinated in right of payment to
the Notes and PARI PASSU in right of payment with all existing and future
unsecured Indebtedness and other obligations of the Company that are not so
subordinated. Secured creditors of the Company will have a claim on the assets
which secure the obligations of the Company to such creditors prior to claims of
Holders of the Notes against those assets. In addition, any right of the Company
and its creditors, including the Holders, to participate in the assets of any of
the Company's Subsidiaries upon any liquidation of any such Subsidiary will be
subject to the prior claims of the creditors of such Subsidiary. Therefore, the
claims of creditors of the Company, including the Holders, will be effectively
subordinated to all existing and future Indebtedness and other obligations,
including trade payables, of the Company's Subsidiaries. At September 30, 1997,
as adjusted to give effect to the Offering and the proposed use of proceeds
therefrom, the Company would have had approximately $215,971,000 (including the
Notes) of Indebtedness outstanding, of which approximately $3,446,000 would have
been secured Indebtedness and approximately $38,228,000 would have been
subordinated to the Notes. At September 30, 1997, the Company's Subsidiaries had
approximately $75,519,000 of indebtedness reflected on the Company's
consolidated balance sheet. In addition the Company's Subsidiaries had
significant other liabilities (which together with the indebtedness of the
Company's Subsidiaries would have ranked structurally senior to the Notes).
REDEMPTION
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after February 1, 2003, at the redemption prices
(expressed as a percentage of principal amount) set forth
S-36
<PAGE>
below, plus accrued and unpaid interest thereon, if any, to the redemption date,
if redeemed during the 12-month period beginning on February 1 of the years
indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ----------------------------------------------------------------------- -----------
<S> <C>
2003................................................................... 104.188%
2004................................................................... 102.792%
2005................................................................... 101.396%
2006 and thereafter.................................................... 100.000%
</TABLE>
In addition, prior to February 1, 2001, the Company may redeem up to 33% of
the aggregate principal amount of the Notes issued under the Indenture at a
redemption price equal to 108.375% of the principal amount of the Notes so
redeemed, plus accrued and unpaid interest thereon, if any, to the redemption
date with the net cash proceeds of one or more Public Equity Offerings;
provided, however, that (x) at least $125,000,000 aggregate principal amount of
the Notes would remain outstanding immediately after giving effect to any such
redemption (excluding any Notes held by the Company) and (y) notice of any such
redemption is given within 60 days of the applicable Public Equity Offering.
Selection of the Notes or portions thereof for redemption pursuant to the
foregoing shall be made by the Trustee pro rata or by lot or by such other
method as the Trustee shall determine to be fair and appropriate. Notice of
redemption will be mailed at least 15 days but not more than 60 days before the
redemption date to each Holder whose Notes are to be redeemed at the registered
address of such Holder. On and after the redemption date, interest ceases to
accrue on the Notes or portions thereof called for redemption.
There will be no sinking fund for the Notes.
REPURCHASE OF NOTES UPON CHANGE OF CONTROL TRIGGERING EVENT
In the event that a Change of Control Triggering Event has occurred, each
Holder will have the right, at such Holder's option, subject to the terms and
conditions of the Indenture, to require the Company to repurchase all or any
part of such Holder's Notes (provided that the principal amount of such Notes
must be $1,000 or an integral multiple thereof) on the date that is no later
than 90 Business Days (unless a later date is required by applicable law) after
the occurrence of such Change of Control Triggering Event (the "Change of
Control Payment Date"), at a cash price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any (the "Change of Control
Purchase Price"), to the Change of Control Payment Date.
The Company shall notify the Trustee within 10 Business Days after the
Company knows or reasonably should know of the occurrence of a Change of Control
Triggering Event. Within 20 Business Days after the Company knows or reasonably
should know of the occurrence of a Change of Control Triggering Event, the
Company will make an unconditional offer (a "Change of Control Offer") to all
Holders of Notes to purchase all of the Notes at the Change of Control Purchase
Price by sending written notice of a Change of Control Offer, by first class
mail, to each Holder at its registered address, with a copy to the Trustee.
On or before the Change of Control Payment Date, the Company will (i) accept
for payment Notes or portions thereof properly tendered pursuant to the Change
of Control Offer, (ii) deposit with the Paying Agent U.S. Legal Tender
sufficient to pay the Change of Control Purchase Price (together with accrued
and unpaid interest) of all Notes so tendered and (iii) deliver to the Trustee
Notes so accepted together with an Officers' Certificate listing the Notes or
portions thereof being purchased by the Company. The Paying Agent will promptly
mail to the Holders of Notes so accepted payment in an amount equal to the
Change of Control Purchase Price (together with accrued and unpaid interest),
and the Trustee will promptly authenticate and mail or deliver to such Holders a
new Note equal in principal amount to any
S-37
<PAGE>
unpurchased portion of the Note surrendered. Any Note not so accepted will be
promptly mailed or delivered by the Company to the Holder thereof. The Company
will publicly announce the results of the Change of Control Offer on or as soon
as practicable after the Change of Control Payment Date.
The Change of Control Triggering Event purchase feature of the Notes may
make more difficult or discourage a takeover of the Company, and, thus, the
removal of incumbent management. To the extent applicable and if required by
law, the Company will comply with Section 14 of the Exchange Act and the
provisions of Regulation 14E and any other tender offer rules under the Exchange
Act and other securities laws, rules and regulations which may then be
applicable to any offer by the Company to purchase the Notes at the option of
Holders upon a Change of Control Triggering Event.
CERTAIN COVENANTS
The following is a summary of certain covenants that will be contained in
the Indenture. Such covenants will be applicable (unless waived or amended as
permitted by the Indenture) so long as any of the Notes are outstanding or until
the Notes are defeased pursuant to provisions described under "Discharge of
Indenture."
LIMITATIONS ON RESTRICTED PAYMENTS. The Indenture will provide that until
the Notes are rated Investment Grade by both Rating Agencies, after which time
the following covenant no longer will be binding on the Company:
(a) neither the Company nor any of its Restricted Subsidiaries will,
directly or indirectly, make any Restricted Payment, if, after giving effect
thereto on a pro forma basis;
(i) the Company could not Incur $1.00 of additional Indebtedness
pursuant to provisions described in the second paragraph under "Certain
Covenants--Limitations on Indebtedness";
(ii) a Default or an Event of Default would occur or be continuing;
or
(iii) the aggregate amount of all Restricted Payments, including such
proposed Restricted Payment, made by the Company and its Restricted
Subsidiaries, from and after the Issue Date and on or prior to the date
of such Restricted Payment, shall exceed the sum (the "Basket") of:
(A) 50% of Consolidated Net Income of the Company for the period
(taken as one accounting period), commencing with the first full
fiscal quarter which commenced after the Issue Date, to and including
the fiscal quarter ended immediately prior to the date of each
calculation (or, if Consolidated Net Income for such period is
negative, then minus 100% of such deficit); plus
(B) 100% of the amount of any Indebtedness of the Company or a
Restricted Subsidiary that is converted into or exchanged for
Qualified Capital Stock of the Company after the Issue Date; plus
(C) 100% of the aggregate amounts received by the Company or any
Restricted Subsidiary upon the return (including by way of dividend
and any release of any guaranty) of any Investment but only to the
extent (1) not included in Consolidated Net Income of the Company and
(2) that the making of such Investment constituted a Restricted
Investment made pursuant to the Indenture; plus
(D) unless accounted for pursuant to clause (B) above, 100% of
the aggregate net proceeds (after payment of reasonable out-of-pocket
expenses, commissions and discounts incurred in connection therewith)
received by the Company from the sale or issuance (other than to a
Subsidiary of the Company) of its Qualified Capital Stock after the
Issue Date and on or prior to the date of such Restricted Payment;
plus
S-38
<PAGE>
(E) with respect to any Unrestricted Subsidiary that is
redesignated as a Restricted Subsidiary after the Issue Date in
accordance with the definition of Unrestricted Subsidiary (so long as
the designation of such Subsidiary as an Unrestricted Subsidiary was
treated as a Restricted Payment made after the Issue Date and only to
the extent not included in the calculation of Consolidated Net
Income), an amount equal to the lesser of (x) the book value in
accordance with GAAP of the Company's or a Restricted Subsidiaries'
investment in such Subsidiary, and (y) the Designation Amount at the
time of such Subsidiary's designation as an Unrestricted Subsidiary.
(b) The foregoing clause (a) does not prohibit:
(i) the payment of any dividend within 60 days after the date of its
declaration if such dividend could have been made on the date of its
declaration in compliance with the foregoing provisions;
(ii) the payment of cash dividends or other distributions to any
Equity Investor or joint venture participant of a Restricted Subsidiary
with respect to a class of Capital Stock of such Restricted Subsidiary
owned by such Equity Investor or joint venture participant so long as the
Company or its Restricted Subsidiaries simultaneously receive a dividend
or distribution with respect to their Investment in such Restricted
Subsidiary either in U.S. Legal Tender or the same form as the dividend
or distribution received by such Equity Investor or joint venture
participant and in proportion to their proportionate interest in the same
class of Capital Stock of such Restricted Subsidiary, as the case may be;
(iii) repurchases or redemptions of Capital Stock of the Company from
any former directors, officers and employees of the Company in the
aggregate up to $1,000,000 during any calendar year (PROVIDED, HOWEVER,
that any amounts not used in any calendar year may be used in any
subsequent year);
(iv) the retirement of Capital Stock of the Company or the
retirement of Indebtedness of the Company, in exchange for or out of the
proceeds of a substantially concurrent sale (other than a sale to a
Subsidiary of the Company) of, other shares of its Qualified Capital
Stock and the retirement of Capital Stock or Indebtedness of a Restricted
Subsidiary in exchange for or out of the proceeds of a substantially
concurrent sale of its Qualified Capital Stock;
(v) the payment of cash dividends on, and acquisitions or other
retirement for value of, shares of Capital Stock of Restricted
Subsidiaries required to be held by employees thereof in accordance with
the laws governing the Company's consolidated real estate business in the
ordinary course of business; or
(vi) Restricted Payments not otherwise permitted above up to
$75,000,000 in the aggregate after the Issue Date.
Any Restricted Payment made in accordance with this paragraph (other than
pursuant to clause (ii) or (v)) shall reduce the Basket. In calculating the
Basket, any Restricted Payment not made in cash and any non-cash amounts
received for purposes of clause (C) or (D) shall be valued in accordance with
GAAP.
LIMITATIONS ON INDEBTEDNESS. The Indenture will provide that:
(a) neither the Company nor any of its Restricted Subsidiaries may,
directly or indirectly, Incur any Indebtedness except (i) Non-Recourse
Indebtedness Incurred in the ordinary course of business; (ii) Indebtedness
evidenced by Notes issued on the Issue Date; (iii) Indebtedness of the
Company solely to any Restricted Subsidiary, or Indebtedness of any
Restricted Subsidiary solely to the Company or to any Restricted Subsidiary,
PROVIDED that (x) neither the Company nor any Restricted Subsidiary shall
become liable to any Person with respect to such Indebtedness other than the
Company or a Restricted Subsidiary and (y) any such Indebtedness of the
Company (other than to the
S-39
<PAGE>
Company's financial services segment Subsidiaries) is subordinate and junior
in right of payment to the Notes; (iv) Refinancing Indebtedness (A) of any
Indebtedness permitted to be Incurred pursuant to this clause (iv) or the
immediate following paragraph (b) or (B) of any Indebtedness to the extent
outstanding on the Issue Date (other than under the Bank Credit Facility);
(v) Indebtedness Incurred solely in respect of performance, completion,
guaranty and similar bonds and similar purpose undertakings and Indebtedness
under any earnest money notes, tenders, bids, leases, statutory obligations,
surety and appeal bonds, progress statements, government contracts, letters
of credit, escrow agreements and other obligations of like nature and
deposits made to secure performance of any of the foregoing, in each case in
the ordinary course of business; (vi) Indebtedness under the Bank Credit
Facility in an aggregate principal amount not to exceed $175,000,000 at any
time, and guaranties thereof; (vii) (A) Indebtedness which represents the
assumption by the Company or a Restricted Subsidiary of Indebtedness of a
Restricted Subsidiary, and (B) Indebtedness of a Restricted Subsidiary
represented by guaranties in respect of Indebtedness of another Restricted
Subsidiary permitted to be Incurred pursuant to the Indenture and
Indebtedness of the Company represented by guaranties in respect of
Indebtedness of a Restricted Subsidiary permitted to be Incurred pursuant to
the Indenture; (viii) Capitalized Lease Obligations; (ix) Indebtedness under
warehouse lines of credit, repurchase agreements and Indebtedness secured by
mortgage loan servicing of mortgage lending Subsidiaries in the ordinary
course of a mortgage lending business; (x) obligations for, pledge of assets
in respect of, and guaranties of, bond financings of political subdivisions
or enterprises thereof in the ordinary course of business; (xi) Indebtedness
secured by mortgages and mortgage-related assets and Indebtedness
representing all mortgage-related liabilities in the ordinary course of the
mortgage lending and asset management business; and (xii) Disqualified
Capital Stock of Restricted Subsidiaries outstanding on the Issue Date and
which may from time to time be issued as required by laws governing the
Company's consolidated real estate business.
(b) Notwithstanding the foregoing, (I) the Company may Incur
Indebtedness, and (II) a Restricted Subsidiary may Incur (x) Real Property
Indebtedness or (y) Acquired Indebtedness, in each case, if, at the time
such Indebtedness is Incurred: (i) no Default or Event of Default shall have
occurred and be continuing or would occur after giving effect to such
transaction, and (ii) immediately after giving effect thereto (without
duplication) on a pro forma basis, either (A) the Consolidated Fixed Charge
Coverage Ratio of the Company on the date of such Incurrence is at least
equal to 2.0 to 1 or (B) the ratio of Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis on the date of such
Incurrence (excluding for purposes of such calculation other Indebtedness
specifically permitted to be Incurred pursuant to the preceding paragraph),
to Consolidated Net Worth of the Company is less than 3.25 to 1.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. The Indenture will provide
that until the Notes are rated Investment Grade by both Rating Agencies, after
which time the following covenant no longer will be binding on the Company:
(a) neither the Company nor any of its Restricted Subsidiaries may,
directly or indirectly, make any loan, advance, guaranty or capital
contribution to or for the benefit of, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or for the benefit of, or
purchase or lease any property or assets from, or enter into or amend any
contract, agreement or understanding with, or for the benefit of any
Affiliate which transaction involves or has a value in excess of $250,000
(each an "Affiliate Transaction"), except for (i) Restricted Payments
otherwise permitted under the Indenture, and (ii) transactions, the terms of
which are at least as favorable as the terms which could be obtained by the
Company or such Restricted Subsidiary, as the case may be, in a comparable
transaction made on an arm's-length basis with Persons who are not
Affiliates.
(b) In addition, (a) with respect to any Affiliate Transaction or series
of related Affiliate Transactions with an aggregate value in excess of
$5,000,000, such transaction must first be approved,
S-40
<PAGE>
by a majority of the Disinterested Directors and (b) with respect to any
Affiliate Transaction or related series of Affiliate Transactions with an
aggregate value in excess of $25,000,000, the Company must first deliver to
the Trustee a favorable written opinion from an independent financial
advisor of national reputation as to the fairness from a financial point of
view of such transaction to the Company or such Subsidiary, as the case may
be.
(c) Notwithstanding the foregoing, Affiliate Transactions shall not
include (i) transactions exclusively between or among the Company and one or
more Restricted Subsidiaries or between or among one or more Restricted
Subsidiaries, (ii) any contract, agreement or understanding with, or for the
benefit of, or planned for the benefit of, employees of the Company or any
Restricted Subsidiaries (in their capacity as such) that has been approved
by the Board of Directors, (iii) issuances of Qualified Capital Stock of the
Company to members of the Board of Directors, officers and employees of the
Company or its Subsidiaries pursuant to plans approved by the stockholders
or the Board of Directors of the Company or the respective Subsidiary, (iv)
home sales and readily marketable mortgage loans to employees, officers and
directors of the Company and Subsidiaries in the ordinary course of
business, (v) payment of regular fees and reimbursement of expenses to
directors of the Company who are not employees of the Company and
reimbursement of expenses and payment of wages and other compensation to
officers and employees of the Company or any of its Subsidiaries or (vi)
contractual arrangements in effect on the Issue Date and renewals and
extensions thereof not involving modifications adverse to the Company or any
Restricted Subsidiary.
LIMITATIONS ON ASSET SALES. The Indenture will provide that, subject to the
"Limitations on Mergers, Consolidations and Sales of Assets" covenant, neither
the Company nor any Restricted Subsidiary may, directly or indirectly,
consummate an Asset Sale, unless the Company (or such Restricted Subsidiary, as
the case may be) receives consideration at the time of such Asset Sale at least
equal to the fair market value (reasonably evidenced by a good faith resolution
of the Board of Directors) of the assets sold or otherwise disposed of, provided
that the aggregate fair market value of the consideration received from any
Asset Sale that is not in the form of cash or Cash Equivalents will not, when
aggregated with the fair market value of all other noncash consideration
received by the Company and its Restricted Subsidiaries from all previous Asset
Sales since the Issue Date that has not been converted into cash or Cash
Equivalents, exceed 10% of the Consolidated Net Assets of the Company at the
time of the Asset Sale under consideration; and, provided, further, however,
that the amount of (x) any liabilities of the Company or any Restricted
Subsidiary (other than liabilities that are Incurred in connection with or in
contemplation of such Asset Sale) that are assumed by the transferee of any such
assets and (y) any notes or other obligations received by the Company or any
such Restricted Subsidiary from such transferee that are promptly converted by
the Company or such Restricted Subsidiary into cash, shall be deemed to be cash
(to the extent of the cash received) for purposes of this provision.
The Indenture will require that within one year after any Asset Sale, the
Company (or such Restricted Subsidiary, as the case may be) shall apply 100% of
the Net Cash Proceeds from such Asset Sale as follows: (A) to repay any
outstanding Indebtedness of any Restricted Subsidiary or any unsubordinated
Indebtedness of the Company, provided that the Company may repay unsecured
Indebtedness that is PARI PASSU in right of payment with the Notes only if the
Company shall, prior to or simultaneously therewith, make an irrevocable,
unconditional offer to Holders to purchase Notes on a pro rata basis in an
amount equal to the Net Cash Proceeds from such Asset Sale multiplied by a
fraction, the numerator of which is the principal amount of the Notes then
outstanding and the denominator of which is the principal amount of the Notes
then outstanding plus the aggregate amount of outstanding unsecured Indebtedness
other than the Notes ranking PARI PASSU in right of payment with the Notes that
is to be repaid with such Net Cash Proceeds and, provided, further, that the
Company shall not be required to offer to repurchase the Notes unless the amount
available for such repurchase is at least $20,000,000 or (B) to replace the
properties and assets that were the subject of the Asset Sale, or to acquire or
improve properties and assets that will be used by the Company and its
Restricted Subsidiaries in the ordinary course of business.
S-41
<PAGE>
The Indenture will also provide that, notwithstanding the foregoing, to the
extent the Company or any Restricted Subsidiary receives securities or other
noncash property or assets as proceeds of any Asset Sale, the Company will not
be required to make any application of such noncash proceeds as described in the
immediately preceding paragraph until it receives cash or cash equivalent
proceeds from a sale, repayment, exchange, redemption or retirement of or
extraordinary cash dividend or return of capital on such noncash property.
The Indenture will also provide that to the extent the Company is required
to make an offer to purchase the Notes pursuant to this covenant (an "Asset Sale
Offer"), the Company will so notify the Trustee in writing by delivery of an
Officers' Certificate and will offer to purchase from all Holders, and will
purchase from Holders accepting such Asset Sale Offer on the date fixed for the
closing of such Asset Sale Offer (the "Asset Sale Offer Date"), the maximum
principal amount (expressed as a multiple of $1,000) of Notes that may be
purchased out of the Net Cash Proceeds, at an offer price (the "Asset Sale Offer
Price") in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest, if any, to the Asset Sale Offer Date, in accordance
with the procedures as described below. To the extent that the aggregate amount
of Notes tendered pursuant to an Asset Sale Offer is less than the Net Cash
Proceeds relating thereto, then the Company may use such Excess Proceeds, or a
portion thereof, for general corporate purposes. Upon completion of an Asset
Sale Offer, the amount of Net Cash Proceeds will be reset to zero.
The Indenture will also provide that:
(a) In the event the aggregate principal amount of Notes surrendered by
the Holders exceeds the amount of Net Cash Proceeds available to such
Holders, the Company will select the Notes to be purchased on a pro rata
basis from all Notes so surrendered, with such adjustments as may be deemed
appropriate by the Company so that only Notes in denominations of $1,000, or
integral multiples thereof, will be purchased. Holders whose Notes are
purchased only in part will be issued new Notes equal in principal amount to
the unpurchased portion of the Notes surrendered.
(b) Not later than one Business Day prior to the Asset Sale Offer Date
in connection with which the Asset Sale Offer is being made, the Company
will (i) accept for payment Notes or portions thereof tendered pursuant to
the Asset Sale Offer (on a pro rata basis if required pursuant to the
Indenture), (ii) deposit with the Paying Agent money sufficient, in
immediately available funds, to pay the purchase price of all Notes or
portions thereof so accepted, and (iii) deliver to the Paying Agent an
Officers' Certificate identifying the Notes or portions thereof accepted for
payment by the Company. The Paying Agent will promptly mail or deliver to
Holders of Notes so accepted payment in an amount equal to the Asset Sale
Offer Price of the Notes purchased from each such Holder. Any Notes not so
accepted will be promptly mailed or delivered by the Paying Agent at the
Company's expense to the Holder thereof.
Any Asset Sale Offer will be conducted by the Company in compliance with
applicable law, including, without limitation, Section 14(e) of the Exchange Act
and Rule 14e-1 thereunder, if applicable.
LIMITATIONS ON RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES. The
Indenture will provide that neither the Company nor any of its Restricted
Subsidiaries may create, assume or suffer to exist any consensual encumbrance or
restriction on the ability of any Restricted Subsidiary to pay dividends or make
other distributions on the Capital Stock of any Restricted Subsidiary or pay any
obligation to the Company or any of its Restricted Subsidiaries or otherwise
transfer assets or make or pay loans or advances to the Company or any of its
Restricted Subsidiaries, except encumbrances and restrictions existing under or
contained in (a) the Indenture and the Notes or Refinancing Indebtedness
Incurred to refinance the Notes; provided that in the case the Notes are
refinanced in part, such encumbrances and restrictions are no more restrictive
than those contained in the Indenture as in effect on the Issue Date, (b)
applicable law, (c) any agreement relating to the financing of the acquisition,
development or construction of real or tangible personal property after the
Issue Date, which encumbrance or restriction relates only to the
S-42
<PAGE>
transfer of the property so acquired, (d) any agreement of a Person acquired by
the Company or a Restricted Subsidiary, which restrictions existed at the time
of acquisition, were not put in place in anticipation of such acquisition and
are not applicable to any Person or property other than the Person or any
property of the Person so acquired, (e) reasonable and customary covenants set
forth in credit agreements evidencing Real Property Indebtedness or Indebtedness
permitted by clauses (vi), (ix) and (xi) of the first paragraph under "Certain
Covenants--Limitations on Indebtedness" (including, but not limited to,
covenants limiting (A) dividends to a certain percentage of the net income of
such Restricted Subsidiary, (B) distributions after the occurrence of a default
under such Indebtedness and (C) transfers of assets by such Restricted
Subsidiary), (f) covenants or restrictions contained in instruments evidencing
or securing Existing Indebtedness of the Company or any Restricted Subsidiary as
in effect on the Issue Date or any Refinancing Indebtedness with respect
thereto, provided that any restrictions or encumbrances relating to or that
arise under Refinancing Indebtedness are not more restrictive than those under
the agreement creating or evidencing the Indebtedness being refunded or
refinanced thereby, (g) any agreement restricting the sale or other disposition
of properties securing Indebtedness permitted by the Indenture if such agreement
does not expressly restrict the ability of a Restricted Subsidiary to pay
dividends or make loans or advances to the Company, (h) restrictions or
encumbrances contained in any security agreements permitted by the Indenture
securing Indebtedness permitted by the Indenture to the extent that such
restrictions or encumbrances restrict the transfer of assets subject to such
security agreement, (i) any restrictions or encumbrances with respect to a
Restricted Subsidiary imposed pursuant to an agreement which has been entered
into for the sale or disposition of the Capital Stock or assets of such
Restricted Subsidiary or such an agreement which has been entered into for the
sale or disposition of assets of the Company to the extent otherwise permitted
by the Indenture, as applicable only to such assets or Capital Stock to be sold,
and (j) customary agreements entered into in the ordinary course of business
restricting the ability of a joint venture to make distributions or payments of
cash or property to participants in such joint venture. Notwithstanding the
foregoing, customary provisions restricting subletting or assignment of any
lease entered into in the ordinary course of business shall not be considered a
restriction on the ability of the applicable Restricted Subsidiary to transfer
such agreement or assets, as the case may be.
REPORTS TO HOLDERS OF NOTES. The Company shall deliver to the Trustee and
each Holder, within 15 days after it files the same with the SEC, copies of all
reports and information (or copies of such portions of any of the foregoing as
the SEC may by rules and regulations prescribe), if any, exclusive of exhibits,
which the Company is required to file with the SEC pursuant to Section 13 or
15(d) of the Exchange Act or pursuant to the immediately following sentence. So
long as any Notes remain outstanding, the Company shall file with the Commission
such reports as may be required pursuant to Section 13 of the Exchange Act in
respect of a security registered pursuant to Section 12 of the Exchange Act. If
the Company is not subject to the requirements of Section 13 or 15(d) of the
Exchange Act (or otherwise required to file reports pursuant to the immediately
preceding sentence), the Company shall deliver to the Trustee and to each
Holder, within 15 days after it would have been required to file such
information with the SEC were it required to do so, financial statements,
including any notes thereto (and, in the case of a fiscal year end, an auditors'
report by an independent certified public accounting firm of established
national reputation), and a "Management's Discussion and Analysis of Financial
Condition and Results of Operations," substantially equivalent to that which it
would have been required to include in such quarterly or annual reports,
information, documents or other reports if it had been subject to the
requirements of Section 13 or 15(d) of the Exchange Act. The Company shall also
comply with the other provisions of TIA Section 314(a).
LIMITATIONS ON LIENS. The Indenture will provide that the Company may not
and may not permit any Restricted Subsidiary to Incur, or suffer to exist any
Lien (other than Permitted Liens) upon any of its property or assets, whether
now owned or hereafter acquired.
S-43
<PAGE>
LIMITATIONS ON MERGERS, CONSOLIDATIONS AND SALES OF ASSETS.
(a) The Company shall not consolidate with or merge with or into, any other
corporation, or transfer all or substantially all of its assets to, any entity
unless permitted by law and unless (i) the resulting, surviving or transferee
entity, which shall be a corporation, partnership, limited liability company or
other entity organized and existing under the laws of the United States or a
State thereof, assumes by supplemental indenture, in a form reasonably
satisfactory to the Trustee, all of the obligations of the Company under the
Notes and the Indenture, (ii) immediately after giving effect to, and as a
result of, such transaction, no Default or Event of Default shall have occurred
and be continuing, (iii) immediately after giving effect to such transaction on
a pro forma basis, the net worth of the surviving or transferee entity on a
stand-alone basis is at least equal to the Consolidated Net Worth of the Company
immediately prior to such transaction; and (iv) the Company or the surviving or
transferee entity thereof would immediately thereafter be permitted to Incur at
least $1.00 of additional Indebtedness pursuant to the provisions described in
the second paragraph under "Certain Covenants--Limitations on Indebtedness." The
provisions of clause (iv) above shall not apply to a transaction or series of
related transactions in which the sole participants are Restricted Subsidiaries
of the Company or to a transaction between the Company and its Restricted
Subsidiaries.
(b) For purposes of clause (a), the sale, lease, conveyance, assignment,
transfer, or other disposition of all or substantially all of the properties and
assets of one or more Subsidiaries of the Company, which properties and assets,
if held by the Company instead of such Subsidiaries, would constitute all or
substantially all of the properties and assets of the Company, on a consolidated
basis, shall be deemed to be the transfer of all or substantially all of the
properties and assets of the Company. Thereafter such successor corporation or
corporations shall succeed to and be substituted for the Company with the same
effect as if it had been named herein as the "Company" and all such obligations
of the predecessor corporation shall terminate.
EVENTS OF DEFAULT
"Event of Default," wherever used herein, means any one of the following
events:
(a) default in the payment of interest on the Notes as and when the same
becomes due and payable and the continuance of any such failure for 30 days;
(b) default in the payment of all or any part of the principal or
premium, if any, on the Notes when and as the same become due and payable at
maturity, redemption, by declaration of acceleration or otherwise;
(c) default in the observance or performance of, or breach of, any
covenant, agreement or warranty of the Company contained in the Notes or the
Indenture (unless specifically dealt with elsewhere), and continuance of
such default or breach for a period of 60 days after there has been given,
by registered or certified mail, to the Company by the Trustee, or to the
Company and the Trustee by Holders of at least 25% in aggregate principal
amount of the outstanding Notes, a written notice specifying such default or
breach, requiring it to be remedied and stating that such notice is a
"Notice of Default" under the Indenture;
(d) a decree, judgment, or order by a court of competent jurisdiction
shall have been entered adjudging the Company or any of its Significant
Subsidiaries as bankrupt or insolvent, or approving as properly filed a
petition in an involuntary case or proceeding seeking reorganization of the
Company or any of its Significant Subsidiaries under any bankruptcy or
similar law, or a decree, judgment or order of a court of competent
jurisdiction directing the appointment of a receiver, liquidator, trustee,
or assignee in bankruptcy or insolvency of the Company, any of its
Significant Subsidiaries, or of the property of any such Person, or the
winding up or liquidation of the affairs of any such Person, shall have been
entered, and the continuance of any such decree, judgment or order unstayed
and in effect for a period of 90 consecutive days;
S-44
<PAGE>
(e) the Company or any of its Significant Subsidiaries shall institute
proceedings to be adjudicated a voluntary bankrupt (including conversion of
an involuntary proceeding into a voluntary proceeding), or shall consent to
the filing of a bankruptcy proceeding against it, or shall file a petition
or answer or consent to the filing of any such petition, or shall consent to
the appointment of a Custodian, receiver, liquidator, trustee, or assignee
in bankruptcy or insolvency of it or any of its assets or property, or shall
make a general assignment for the benefit of creditors, or shall admit in
writing its inability to pay its debts generally as they become due, or
shall, within the meaning of any Bankruptcy Law, become insolvent, or fail
generally to pay its debts as they become due;
(f) (i) the acceleration of any Indebtedness (other than Non-Recourse
Indebtedness) of the Company or any of its Restricted Subsidiaries (in
accordance with the terms of such Indebtedness and after giving effect to
any applicable grace period set forth in the documents governing such
Indebtedness) that has an outstanding principal amount of $20,000,000 or
more individually or in the aggregate to be immediately due and payable;
provided that, in the event any such acceleration is withdrawn or otherwise
rescinded (including satisfaction of such Indebtedness) within a period of
ten business days after such acceleration by the holders of such
Indebtedness, any Event of Default under this clause (f) will be deemed to
be cured and any acceleration under the Indenture will be deemed withdrawn
or rescinded; and (ii) the failure by the Company or any of its Restricted
Subsidiaries to make any principal, premium, interest or other required
payment in respect of Indebtedness (other than Non-Recourse Indebtedness) of
the Company or any of its Restricted Subsidiaries with an outstanding
aggregate principal amount of $20,000,000 or more individually or in the
aggregate (after giving effect to any applicable grace period set forth in
the documents governing such Indebtedness); and
(g) one or more final nonappealable judgments (in the amount not covered
by insurance or not reserved for) or the issuance of any warrant of
attachment against any portion of the property or assets (except with
respect to Non-Recourse Indebtedness) of the Company or any Restricted
Subsidiary, which are $20,000,000 or more individually or in the aggregate,
at any one time rendered against the Company or any of its Restricted
Subsidiaries by a court of competent jurisdiction and not bonded, satisfied
or discharged for a period (during which execution shall not be effectively
stayed) of (i) 60 days after the judgment (which, if there is more than one
judgment, causes such judgments to exceed $20,000,000 in the aggregate)
becomes final and such court shall not have ordered or approved, and the
parties shall not have agreed upon, the payment of such judgment at a later
date or dates or (ii) 60 days after all or any part of such judgment is
payable pursuant to any court order or agreement between the parties.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in sub-clauses (d) or (e) above relating to the Company), then
in each such case, unless the principal of all of the Notes shall have already
become due and payable, either the Trustee or the holders of 25% in aggregate
principal amount of the Notes then outstanding, by notice in writing to the
Company (and to the Trustee if given by the Holders) (an "Acceleration Notice"),
may declare all principal, determined as set forth below, including in each case
accrued interest thereon, to be due and payable immediately. If an Event of
Default specified in sub-clauses (d) or (e) above occurs relating to the
Company, all principal and accrued and unpaid interest thereon will be
immediately due and payable on all outstanding Notes without any declaration or
other act on the part of the Trustee or the Holders. The Holders of a majority
in principal amount of the Notes then outstanding by written notice to the
Trustee and the Company may waive any Default or Event of Default (other than
any Default or Event of Default in payment of principal or interest) on the
Notes under the Indenture. Holders of a majority in principal amount of the then
outstanding Notes may rescind an acceleration and its consequence (except an
acceleration due to nonpayment of principal or interest on the Notes) if the
rescission would not conflict with any judgment or decree and if all existing
Events of Default (other than the non-payment of accelerated principal) have
been cured or waived.
S-45
<PAGE>
The Holders may not enforce the provisions of the Indenture or the Notes
except as provided in the Indenture. Subject to certain limitations, holders of
a majority in principal amount of the Notes then outstanding may direct the
Trustee in its exercise of any trust or power; provided, however, that such
direction does not conflict with the terms of the Indenture. The Trustee may
withhold from the Holders notice of any continuing Default or Event of Default
(except any Default or Event of Default in payment of principal, premium or
interest on the Notes) if the Trustee determines that withholding such notice is
in the Holders' interest.
The Company is required to deliver to the Trustee an annual statement
regarding compliance with the Indenture. Such statement must indicate if any
Officer of the Company is aware of any Default or Event of Default, specifying
such Default or Event of Default and what action the Company is taking or
proposes to take with respect thereto. In addition, the Company is required to
deliver to the Trustee prompt written notice of the occurrence of any Default or
Event of Default.
DISCHARGE OF INDENTURE
The Indenture will permit the Company to terminate all of its obligations
under the Indenture, other than the obligation to pay interest on and the
principal of the Notes and certain other obligations, at any time by (i)
depositing in trust with the Trustee, under an irrevocable trust agreement,
money or U.S. government obligations in an amount sufficient to pay principal of
and interest on the Notes to their maturity or redemption; and (ii) complying
with certain other conditions, including delivery to the Trustee of an opinion
of counsel or a ruling received from the Internal Revenue Service to the effect
that Holders will not recognize income, gain or loss for federal income tax
purposes as a result of the Company's exercise of such right and will be subject
to federal income tax on the same amount and in the same manner and at the same
times as would have been the case otherwise.
In addition, the Indenture will permit the Company to terminate all of its
obligations under the Indenture (including the obligations to pay interest on
and the principal of the Notes and certain other obligations), at any time by
(i) depositing in trust with the Trustee, under an irrevocable trust agreement,
money or U.S. government obligations in an amount sufficient to pay principal of
and interest on the Notes to their maturity or redemption; and (ii) complying
with certain other conditions, including delivery to the Trustee of an opinion
of counsel or a ruling received from the Internal Revenue Service to the effect
that Holders will not recognize income, gain or loss for federal income tax
purposes as a result of the Company's exercise of such right and will be subject
to federal income tax on the same amount and in the same manner and at the same
times as would have been the case otherwise, which opinion of counsel is based
upon a change in the applicable federal tax law since the date of the Indenture.
In addition, the Indenture will permit the Company to terminate all of its
obligations under the Indenture (including the obligations to pay interest on
and the principal of the Notes and certain other obligations), at any time that
all of the Notes have become due and payable or will become due and payable
within one year, either by the terms of such Notes or upon redemption (and if
upon redemption the Company has deposited with the Trustee irrevocable
instructions to redeem such Notes) by (i) depositing in trust with the Trustee,
under an irrevocable trust agreement, money or U.S. government obligations in an
amount sufficient to pay principal of and interest on the Notes to their
maturity or redemption, and (ii) complying with certain other conditions,
including delivery to the Trustee of an opinion of counsel that all conditions
precedent to termination have been complied with.
S-46
<PAGE>
BOOK ENTRY, DELIVERY AND FORM
The Notes will be issued in the form of a fully registered Global Note (the
"Global Note"). The Global Note will be deposited on or about the Issue Date
with, or on behalf of, The Depository Trust Company (the "Depositary") and
registered in the name of Cede & Co., as nominee of the Depositary (such nominee
being referred to herein as the "Global Note Holder").
The Depositary is a limited-purpose trust company which was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the
Underwriters), banks and trust companies, clearing corporations and certain
other organizations. Access to the Depositary's system is also available to
other entities such as banks, brokers, dealers and trust companies
(collectively, the "Indirect Participants" or the "Depositary's Indirect
Participants") that clear through or maintain a custodial relationship with a
participant, either directly or indirectly. Persons who are not Participants may
beneficially own securities held by or on behalf of the Depositary only through
the Depositary's Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants designated by the Underwriters with portions of the
principal amount of the Global Note and (ii) ownership of the Notes will be
shown on, and the transfer of ownership thereof will be effected only through,
records maintained by the Depositary (with respect to the interests of the
Depositary's Participants), the Depositary's Participants and the Depositary's
Indirect Participants. Prospective purchasers are advised that the laws of some
states require that certain Persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer Notes will be
limited to such extent.
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole owner or holder of such Notes
outstanding under the Indenture. Except as provided below, owners of Notes will
not be entitled to have Notes registered in their names, will not receive or be
entitled to receive physical delivery of Notes in definitive form, and will not
be considered the owners or holders thereof under the Indenture for any purpose,
including with respect to the giving of any directions, instructions or
approvals to the Trustee thereunder. As a result, the ability of a Person having
a beneficial interest in Notes represented by the Global Note to pledge such
interest to Persons or entities that do not participate in the Depositary's
system or to otherwise take actions in respect of such interest may be affected
by the lack of a physical certificate evidencing such interest.
Neither the Company, the Trustee, the Paying Agent nor the Notes Registrar
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of Notes by the Depositary, or for maintaining,
supervising or reviewing any records of the Depositary relating to such Notes.
Payments in respect of the principal, premium, if any, and interest on any
Notes registered in the name of a Global Note Holder on the applicable record
date will be payable by the Trustee to or at the direction of such Global Note
Holder under the Indenture. Under the terms of the Indenture, the Company and
the Trustee may treat the Persons in whose names the Notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, none of
the Company nor the Trustee has or will have any responsibility or liability for
the payment of such amounts to beneficial owners of Notes (including principal,
premium, if any, and interest).
The Company believes, however, that it is currently the policy of the
Depositary to immediately credit the accounts of the relevant Participants with
such payment, in amounts proportionate to their respective
S-47
<PAGE>
holdings in principal amount of beneficial interests in the relevant security as
shown on the records of the Depositary. Payments by the Depositary's
Participants and the Depositary's Indirect Participants to the beneficial owner
of Notes will be governed by standing instructions and customary practice and
will be the responsibility of the Depositary's Participants or the Depositary's
Indirect Participants.
CERTIFICATED SECURITIES
Subject to certain conditions, any Person having a beneficial interest in
the Global Note may, upon request to the Company or the Trustee, exchange such
beneficial interest for Notes in the form of Certificated Securities. Upon any
such issuance, the Trustee is required to register such Notes in the name of,
and cause the same to be delivered to, such Person or Persons (or the nominee of
any thereof). In addition, if (i) the Company notifies the Trustee in writing
that the Depositary is no longer willing or able to act as a depositary and the
Company is unable to locate a qualified successor within 90 days or (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of Notes in the form of Certificated Securities under the
Indenture, then, upon surrender by the relevant Holder of its Global Note, Notes
in such form will be issued to each Person that such Holder and the Depositary
identify as the beneficial owner of the related Notes.
Neither the Company nor the Trustee shall be liable for any delay by the
related Global Note Holder or the Depositary in identifying the beneficial
owners of Notes and each such Person may conclusively rely on and shall be
protected in relying on, instructions from the Global Note Holder or of the
Depositary for all purposes (including with respect to the registration and
delivery, and the respective principal amounts, of the Notes to be issued).
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes (including
principal, premium, if any, and interest) be made by wire transfer of
immediately available funds to the accounts specified by the Global Note
Holders. The Company expects that secondary trading in the Certificated Notes
also will be settled in immediately available funds.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange the Notes in accordance with the
procedures set forth in the Indenture. The Registrar may require a Holder, among
other things, to furnish appropriate endorsements and transfer documents, and to
pay any taxes and fees required by law or permitted by the Indenture. The
Registrar is not required to transfer or exchange any Note selected for
redemption. Also, the Registrar is not required to transfer or exchange any Note
for a period of 15 days before a selection of the Notes to be redeemed.
The registered Holder will be treated as the owner of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture or the Notes may be amended or
supplemented with the consent (which may include consents obtained in connection
with a tender offer or exchange offer for Notes) of the Holders of at least a
majority in principal amount of the Notes then outstanding, and any existing
Default under, or compliance with any provision of the Indenture may be waived
(other than any continuing Default or Event of Default in the payment of
interest on or the principal of the Notes) with the consent (which may include
consents obtained in connection with a tender offer or exchange offer for Notes)
of the holders of a majority in principal amount of the Notes then outstanding.
Without the consent of any Holder, the Company and the Trustee may amend or
supplement the Indenture or the Notes to cure any ambiguity, defect or
inconsistency; to comply with the provisions described under "Certain
Covenants--Limitations on Mergers, Consolidations and Sales of Assets;" to
provide for uncertificated Notes in
S-48
<PAGE>
addition to or in place of certificated Notes; or to make any change that does
not adversely affect any Holder.
Without the consent of each Holder affected, the Company and the Trustee may
not (i) reduce the amount of Notes whose holders must consent to an amendment,
supplement or waiver; (ii) reduce the rate of or change the time for payment of
interest, including default interest, on any Note; (iii) reduce the principal of
or change the fixed maturity of any Note or alter the provisions (including
related definitions) with respect to redemptions described under "Redemption" or
with respect to repurchases described under "Repurchase of Notes Upon Change of
Control Triggering Event"; (iv) modify the ranking or priority of the Notes; (v)
make any change in the provisions of the Indenture relating to amendments,
waivers of past defaults or the absolute right of Holders to receive payment;
(vi) waive a continuing Default or Event of Default in the payment of principal
of or interest on the Notes; or (vii) make any Note payable at a place or in
money other than that stated in the Note, or impair the right of any Holder to
bring suit as permitted by the Indenture.
The right of any Holder to participate in any consent required or sought
pursuant to any provision of the Indenture (and the obligation of the Company to
obtain any such consent otherwise required from such Holder) may be subject to
the requirement that such Holder shall have been the Holder of record of any
Notes with respect to which such consent is required or sought as of a date
identified by the Company in accordance with the terms of the Indenture.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest (as defined in
the Indenture), it must eliminate such conflict or resign.
The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
occurs and is not cured, the Trustee will be required, in the exercise of its
power, to use the degree of care of a prudent person in similar circumstances in
the conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to the Trustee.
GOVERNING LAW
The Indenture and the Notes will be governed by the laws of the State of New
York without giving effect to principles of conflict of laws.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used and
defined in the Indenture. Reference is made to the Indenture for the full
definition of all terms used in the Indenture.
"Acquired Indebtedness" means Indebtedness of any Person that is not a
Restricted Subsidiary, which Indebtedness is outstanding at the time such Person
becomes a Restricted Subsidiary, or is merged into or consolidated with, the
Company or a Restricted Subsidiary; PROVIDED, HOWEVER, that such Indebtedness
was not Incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or such merger or consolidation.
S-49
<PAGE>
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by, or under direct or indirect
common control with, such specified Person. For purposes of this definition, the
term "control" means (a) the power to direct the management and policies of a
Person, either directly or through one or more intermediaries, whether through
the ownership of voting securities, by contract, or otherwise, or (b) without
limiting the foregoing, ownership of 10% or more of the voting power of the
voting common equity of such Person (on a fully diluted basis). Notwithstanding
the foregoing, the term "Affiliate" will not include, with respect to the
Company or any Restricted Subsidiary, any Restricted Subsidiary or, with respect
to any Restricted Subsidiary, the Company.
"Asset Sale" means, with respect to any Person, the sale, lease, conveyance
or other disposition (including, without limitation, by merger or consolidation,
and whether by operation of law or otherwise) of any of that Person's assets
(including, without limitation, the sale or other disposition of Capital Stock
of any Subsidiary of such Person, whether by such Person or by such Subsidiary,
not including the capital contribution to a joint venture in consideration of
the Company's or its Restricted Subsidiaries' interest in such joint venture),
whether owned on the Issue Date or subsequently acquired, in one transaction or
a series of related transactions, in which such Person and/or its Subsidiaries
receive cash and/or other consideration (including, without limitation, the
unconditional assumption of Indebtedness of such Person and/or its Subsidiaries)
having an aggregate fair market value of $10,000,000 or more as to such
transaction or series of related transactions (each such transaction being
referred to herein as a "disposition"); provided, however, that the following
transactions shall not constitute an Asset Sale: (i) a transaction or series of
related transactions that results in a Change of Control Triggering Event; (ii)
dispositions of land, homes, infrastructure, other buildings, improvements,
appurtenances and entitlements and dispositions of mortgage loans, mortgage loan
servicing and mortgage-backed securities in the ordinary course of business;
(iii) exchanges or swaps of real estate by the Company in the ordinary course of
business for real estate of substantially equivalent value (or for real estate
and cash or Cash Equivalents which, in the aggregate, have a substantially
equivalent value); (iv) dispositions between or among the Company and any one or
more Restricted Subsidiaries or between or among Restricted Subsidiaries; (v) a
disposition that is a Permitted Investment (to the extent such Permitted
Investment may be deemed to constitute an Asset Sale) or a Restricted Payment
permitted under the Indenture; and (vi) dispositions of securities of the
Company or any Restricted Subsidiary held exclusively by the Company or any
Restricted Subsidiary and such disposition is made to the issuer of such
securities or a Restricted Subsidiary of such issuer which issuer is the Company
or a Restricted Subsidiary (regardless of whether such disposition is a direct
disposition or an indirect disposition through the sale of all of the Capital
Stock of a Restricted Subsidiary whose principal asset is the securities which
are the subject of the disposition).
"Attributable Debt" means, with respect to any Capitalized Lease
Obligations, the capitalized amount thereof determined in accordance with GAAP.
"Bank Credit Facility" means the Credit Agreement, dated as of April 10,
1996, among the Company, as guarantor, certain of its Restricted Subsidiaries,
as borrowers, and the lenders named therein and Bank One, Arizona, NA, as Agent
(together with the documents related thereto (including, without limitation, any
guaranty agreements)), as such facility has been or may be amended, restated,
supplemented or otherwise modified from time to time, and includes any facility
extending the maturity of, increasing the total commitment of, or restructuring
(including, without limitation, the inclusion of additional borrowers thereunder
that are Subsidiaries of the Company and whose obligations thereunder are
guaranteed by the Company) all or any portion of, the Indebtedness under such
facility or any successor or replacement facilities and includes any facility
with one or more agents or lenders refinancing or replacing all or any portion
of the Indebtedness under such facility or any successor facilities.
"Bankruptcy Law" means Title 11 of the United States Code, as amended, or
any similar federal or state law for the relief of debtors.
S-50
<PAGE>
"Board of Directors" means the board of directors of the Company or any
authorized committee thereof.
"Capital Stock" means any and all shares, interests, participations or other
equivalents (however designated) of or in a Person's capital stock or other
equity interests, and options, rights or warrants to purchase such capital stock
or other equity interests, whether now outstanding or issued after the Issue
Date, including, without limitation, all Preferred Stock of such Person if such
Person is a corporation or membership interests if such Person is a limited
liability company and each general and limited partnership interest of such
Person if such Person is a partnership.
"Capitalized Lease Obligations" of any Person means the obligations of such
Person to pay rent or other amounts under a lease that is required to be
capitalized for financial reporting purposes in accordance with GAAP, and the
amount of such obligations will be the capitalized amount thereof determined in
accordance with GAAP.
"Cash Equivalents" means (a) U.S. government obligations; (b) GNMA
securities; (c) debt insured by other agencies guaranteed by the full faith and
credit of the United States of America; (d) commercial paper rated either "A1"
or comparable by S&P or "P1" or comparable by Moody's; (e) Dutch auction
preferred stocks rated either "AA" or comparable by S&P or "Aa2" or comparable
by Moody's; (f) certificates of deposit issued by commercial banks or savings
and loan associations whose short-term debt is rated either "A1" or comparable
by S&P or "P1" or comparable by Moody's , or if such an institution is a
subsidiary, then its parent corporation may have such a rating; (g) bankers
acceptances issued by financial institutions that meet the requirements for
certificates of deposit; (h) deposits in institutions having the same
qualifications required for investments in certificates of deposit; (i)
repurchase agreements collateralized by any otherwise acceptable collateral as
defined above; and (j) money market accounts a majority of whose assets are
composed of items described by any of the foregoing clauses (a) through (i)
through brokerage firms deemed acceptable by the Company's management.
"Change of Control" means (i) any sale, transfer or other conveyance (other
than to the Company or a wholly owned Subsidiary), whether direct or indirect,
of all or substantially all of the assets of the Company, on a consolidated
basis, to any "person" or "group" in one transaction or a series of related
transactions, provided that a transaction where the holders of all classes of
voting stock of the Company immediately prior to such transaction own, directly
or indirectly, 50% or more of the aggregate voting power of all classes of
voting stock of such "person" or "group" immediately after such transaction will
not be a Change of Control, or (ii) any "person" or "group," other than the
Management Group (as defined below), is or becomes the "beneficial owner,"
directly or indirectly, of more than 50% of the total voting power of the voting
stock then outstanding. For the purpose of this definition, (i) the terms
"person" and "group" shall have the meanings used for purposes of Rules 13d-3
and 13d-5 of the Exchange Act, whether or not applicable and (ii) the term
"beneficial owner" shall have the meaning used in Rules 13d-3 and 13d-5 under
the Exchange Act, whether or not applicable; except that a Person shall be
deemed to have "beneficial ownership" of all shares that any such Person had the
right to acquire, whether such right is exercisable immediately or only after
the passage of time or upon the occurrence of certain events.
"Change of Control Triggering Event" shall mean the occurrence of both a
Change of Control and a Rating Decline.
"Consolidated EBITDA" of any Person for any period means (a) the
Consolidated Net Income of such Person for such period, plus (b) the sum,
without duplication (and only to the extent such amounts are deducted in
determining such Consolidated Net Income), of (i) the provision for income taxes
for such period for such Person and its Subsidiaries (or, with respect to the
Company, for the Company and its Restricted Subsidiaries) (except to the extent
of tax benefits associated with an extraordinary loss) for such period, (ii)
depreciation and amortization expense of such Person and its Subsidiaries (or,
with respect to the Company, for the Company and its Restricted Subsidiaries),
(iii) Consolidated Interest Expense of such Person for such period, and (iv) all
other noncash, nonextraordinary charges reducing Consolidated
S-51
<PAGE>
Net Income for such period determined, in each case, on a consolidated basis for
such Person and its Subsidiaries (or, with respect to the Company, for the
Company and its Restricted Subsidiaries) in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" on any date (the "Transaction
Date") means, with respect to any Person, the ratio of (a) the aggregate amount
of Consolidated EBITDA of such Person attributable to continuing operations and
businesses for the Reference Period to (b) the sum of (i) the aggregate
Consolidated Interest Incurred of such Person (exclusive of amounts attributable
to discontinued operations and businesses, but in each case only to the extent
that the obligations giving rise to such Consolidated Interest Incurred would no
longer be obligations contributing to such Person's Consolidated Interest
Incurred subsequent to the Transaction Date) for the Reference Period, plus (ii)
dividends paid or accrued (unless paid to, or accrued in favor of, the Company
or its Restricted Subsidiaries) on Disqualified Capital Stock of the Company and
Restricted Subsidiaries of the Company during the Reference Period; provided
that for purposes of such computation, in calculating Consolidated EBITDA and
Consolidated Interest Incurred, (w) the transaction giving rise to the need to
calculate the Consolidated Fixed Charge Coverage Ratio will be assumed to have
occurred (on a pro forma basis) on the first day of the Reference Period; (x)
the Incurrence of any Refinancing Indebtedness during the Reference Period or
subsequent thereto and on or prior to the Transaction Date (and the proceeds of
which were used to refinance Indebtedness other than Indebtedness under
revolving credit facilities) will be assumed to have occurred (on a pro forma
basis) on the first day of such Reference Period; (y) Consolidated Interest
Incurred attributable to any Indebtedness being Incurred bearing a floating
interest rate shall be computed as if the rate in effect on the Transaction Date
had been the applicable rate for the entire period, unless the Company or any of
its Restricted Subsidiaries is a party to an Interest Swap Obligation (which
shall remain in effect for the 12-month period after the Transaction Date) that
has the effect of fixing the interest rate on the date of computation, in which
case such rate (whether higher or lower) shall be used; and (z) all members of
the consolidated group of the Company on the Transaction Date that were acquired
during the Reference Period or on or prior to the Transaction Date shall be
deemed to be members of the consolidated group of the Company, along with any
Indebtedness incurred in connection with the acquisition thereof, for the entire
Reference Period.
"Consolidated Interest Expense" of any Person for any period means the
Interest Expense of such Person and its Subsidiaries or, with respect to the
Company, of the Company and its Restricted Subsidiaries (other than the
Company's financial services segment Restricted Subsidiaries) for such period,
determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Incurred" of any Person for any period means the
Interest Incurred of such Person and its Subsidiaries or, with respect to the
Company, of the Company and its Restricted Subsidiaries (other than the
Company's financial services segment Restricted Subsidiaries) for such period,
determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Assets" of the Company as of any date means the total
amount of assets of the Company and its Restricted Subsidiaries (less applicable
reserves) on a consolidated basis at the end of the fiscal quarter immediately
preceding such date for which financial information is available, as determined
in accordance with GAAP, as reflected on the consolidated balance sheet of the
Company and its Restricted Subsidiaries as of the end of such fiscal quarter.
"Consolidated Net Income" of any Person for any period means the aggregate
net income (or loss) of such Person and its Subsidiaries (or, with respect to
the Company, of the Company and its Restricted Subsidiaries) (collectively for
the purposes of this definition of Consolidated Net Income only, the "Relevant
Person") for such period, determined on a consolidated basis in accordance with
GAAP, excluding without duplication: (a) the net income (or loss) of any other
Person in which the Relevant Person has an ownership interest, other than the
lesser of (i) cash dividends or cash distributions during
S-52
<PAGE>
such period that have been received by the Relevant Person; and (ii) the
Relevant Person's pro rata share of such other Person's aggregate net income;
(b) extraordinary gains and losses, net of the tax effects thereof; (c) except
to the extent includable in Consolidated Net Income pursuant to the foregoing
clause (a), the net income (or loss) of any Person that accrued prior to the
date that such Person was acquired by the Relevant Person or is merged into or
consolidated with the Relevant Person or any of its Subsidiaries (or in the case
of the Company, any Person is an Unrestricted Subsidiary or prior to the date
that such Person is acquired by the Company as a Restricted Subsidiary becomes a
Restricted Subsidiary); and (d) the net income of any Restricted Subsidiary
(other than any Mortgage Subsidiary) to the extent that (and only so long as)
the declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of that income is prohibited by the terms of its charter
or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary during such
period.
"Consolidated Net Worth" of any Person as of any date means the
stockholders' equity (including any preferred stock that is classified as equity
under GAAP, but excluding Disqualified Capital Stock) of such Person and its
Subsidiaries (or, with respect to the Company, of the Company and its Restricted
Subsidiaries) on a consolidated basis at the end of the fiscal quarter
immediately preceding such date for which financial information is available, as
determined in accordance with GAAP.
"Currency Agreement" of any Person means any foreign exchange contract,
currency swap agreement or other similar agreement or arrangement designed to
protect such Person or any of its Subsidiaries or Affiliates against
fluctuations in currency values.
"Custodian" means any receiver, trustee, assignee, liquidator, sequestrator
or similar official under any Bankruptcy Law.
"Default" means any event, act or condition that is, or after notice or the
passage of time or both would be, unless otherwise timely cured, an Event of
Default.
"Designation Amount" has the meaning set forth in the definition of
"Unrestricted Subsidiary."
"Disinterested Director" means a member of the Board of Directors of the
Company who does not have any material direct or indirect financial interest in
or with respect to the transaction being considered.
"Disqualified Capital Stock" means (a) with respect to any Person, any
Capital Stock of such Person or its Subsidiaries that, by its terms or by the
terms of any security into which it is convertible or exchangeable, is, or upon
the happening of an event or the passage of time would be, required to be
redeemed or repurchased by such Person or its Subsidiaries, including at the
option of the Holder, in whole or in part, or has, or upon the happening of an
event or passage of time would have, a redemption or similar payment due on or
prior to the Stated Maturity; and (b) with respect to any Restricted Subsidiary,
any Capital Stock (other than (i) Capital Stock owned by the Company or a
Restricted Subsidiary; and (ii) common stock with no preferences or privileges
and with no redemption or repayment provisions).
"Equity Investor" with respect to any Person means any other Person that has
made an investment in the capital stock, shares, interests, participation or
other ownership interests of such other Person (including any option, warrant or
right to acquire any such interest) or has made any capital contribution to such
other Person and owns a minority interest in such Person.
"Event of Default" has the meaning set forth in "Events of Default."
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Indebtedness" means all of the Indebtedness of the Company and its
Subsidiaries that is outstanding on the Issue Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and
S-53
<PAGE>
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as may be approved by a significant
segment of the accounting profession of the United States, as in effect on the
date of the Indenture.
"Holder" means the person in whose name a Note is registered on the register
for the Notes.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have meanings
correlative to the foregoing). Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or is merged or consolidated with or
into the Company or any Restricted Subsidiary shall be deemed to be Incurred at
such time. Neither the accrual of interest, nor the accretion of original issue
discount, shall be deemed to be an Incurrence of Indebtedness. In addition, the
mere extension of the term of lender commitments to extend credit or funds to
the Company or any of its Subsidiaries pursuant to a revolving credit agreement
or similar arrangement shall not be deemed to be an Incurrence of Indebtedness.
"Indebtedness" of any Person means, without duplication, (a) any liability
of such Person (other than accounts payable, other trade payables, general
contingency and tax reserves, liabilities for deposits and deferred income which
in accordance with GAAP are recorded as liabilities and accrued expenses
(including without limitation, obligations for insurance premiums) Incurred in
the ordinary course of business) (i) for borrowed money or under any
reimbursement obligation relating to a letter of credit or other similar
instruments (other than standby letters of credit, performance, completion,
surety or similar bonds or instruments issued for the benefit of such Person or
surety, performance, completion or payment bonds, earnest money notes or similar
purpose undertakings or indemnifications issued by, such Person in the ordinary
course of business); (ii) evidenced by a bond, note, debenture or similar
instrument (including a purchase money obligation) given in connection with the
acquisition of any businesses, properties or assets of any kind or with services
(other than any obligation to pay a contingent purchase price which, as of the
date of Incurrence thereof is not required to be recorded as a liability in
accordance with GAAP); or (iii) in respect of Capitalized Lease Obligations (to
the extent of the Attributable Debt in respect thereof), (b) any Indebtedness of
others that such Person has guaranteed to the extent of the guaranty, (c) to the
extent not otherwise included, Interest Swap Obligations or the obligations of
such Person under Currency Agreements, in either case to the extent recorded as
liabilities not constituting Interest Incurred, net of amounts recorded as
assets in respect of such agreements, in accordance with GAAP, (d) all
Indebtedness of others secured by a Lien (other than a Permitted Lien) on any
asset of such Person, whether or not such Indebtedness is assumed by such
Person, and (e) all Disqualified Stock issued by such Person (the amount of
indebtedness represented by any Disqualified Stock will equal the greater of the
voluntary or involuntary liquidation preference plus accrued and unpaid
dividends). The amount of Indebtedness of any Person at any date shall be (A)
the outstanding balance at such date of all unconditional obligations as
described above, net of any unamortized discount to be accounted for as Interest
Expense, in accordance with GAAP, (B) the maximum liability of such Person for
any contingent obligations under clause (b) above at such date, net of, any
unamortized discount to be accounted for as Interest Expense in accordance with
GAAP and (C) in the case of clause (d) above, the lesser of (1) the fair market
value of any asset subject to a Lien securing the Indebtedness of others on the
date that the Lien attaches and (2) the amount of the Indebtedness secured.
"Indenture" means the Indenture as amended or supplemented from time to
time, including pursuant to any Authorizing Resolution or supplemental indenture
pertaining to any Series.
"Interest Expense" of any Person for any period means, without duplication,
the aggregate amount of interest which, in conformity with GAAP, should be set
opposite the caption "interest expense" or any like caption on an income
statement for such Person (including, without limitation, imputed interest
included
S-54
<PAGE>
on Capitalized Lease Obligations, the interest portion of any deferred payment
obligation, amortization of discount or premium, if any, and all other noncash
interest expense) plus, with respect to the Company and its Restricted
Subsidiaries, without duplication (including duplication of the foregoing
items), amortization of issue costs on Indebtedness, all interest included as a
component of cost of sales for such period, and all commissions, discounts and
other fees and charges owed with respect to bankers' acceptance financing, and
amortization and expensing of other financing fees and expenses, and all
interest actually paid by the Company or a Restricted Subsidiary under any
guaranty of Indebtedness (including, without limitation, a guaranty of
principal, interest or any combination thereof) of any other Person during such
period.
"Interest Incurred" of any Person for any period means, without duplication,
the aggregate amount of interest which, in conformity with GAAP, should be set
opposite the caption "interest expense" or any like caption on an income
statement for such Person (including, without limitation, imputed interest
included on Capitalized Lease Obligations, the interest portion of any deferred
payment obligation, amortization of discount or premium, if any, and all other
noncash interest expense) plus, with respect to the Company and its Restricted
Subsidiaries, without duplication (including duplication of the foregoing
items), all interest capitalized for such period, amortization of issue costs on
Indebtedness, all commissions, discounts and other fees and charges owed with
respect to bankers' acceptance financing, amortization and expensing of other
financing fees and expenses, and all interest actually paid by the Company or a
Restricted Subsidiary under any guaranty of Indebtedness (including, without
limitation, a guaranty of principal, interest or any combination thereof) of any
other Person during such period.
"Interest Swap Obligation" means any obligation of any Person pursuant to
any arrangement whereby such Person is entitled to receive from time to time
periodic payments calculated by applying either a fixed or floating rate of
interest on a stated notional amount in exchange for periodic payments made by
such Person calculated by applying a fixed or floating rate of interest on the
same notional amount; provided, that the term "Interest Swap Obligation" shall
also include interest rate exchange, collar, swap option, futures contracts or
other similar agreements providing interest rate protection.
"Investment" by any Person in any other Person means (without duplication)
(a) the acquisition by such Person (whether for cash, property, services,
securities or otherwise) of Capital Stock, bonds, notes, debentures,
partnership, or other ownership interests, or other securities of such other
Person, (b) the making by such Person of any deposit with, or advance, loan or
other extension of credit to, such other Person (including the purchase of
property from such other Person subject to an understanding or agreement,
contingent or otherwise, to resell such property to such other Person), except
in the ordinary course of business, (c) the entering into by such Person of any
guaranty of, or other contingent obligation with respect to, Indebtedness or
other liability of such other Person, or (d) the making of any capital
contribution by such Person to such other Person. Notwithstanding the preceding
sentence, the assets of the Company's insurance operations shall not be deemed
to be Investments.
"Investment Grade" shall mean BBB- or higher by S&P or Baa3 or higher by
Moody's or the equivalent of such ratings by S&P or Moody's.
"Issue Date" means the date of original issuance of the Notes.
"Lien" means any mortgage, lien, pledge, charge, security interest or
encumbrance of any kind with respect to any Property.
"Management Group" means the executive officers of the Company as of the
Issue Date, members of their immediate families, certain trusts for their
benefit, and legal representatives of, or heirs, beneficiaries or legatees
receiving Common Stock (or securities convertible or exchangeable for Common
Stock) under any such person's estate.
"Moody's" means Moody's Investors Service, Inc. or any successor to its debt
rating business.
S-55
<PAGE>
"Mortgage Subsidiary" means any Subsidiary of the Company substantially all
of whose operations consists of the mortgage lending business.
"Net Cash Proceeds" means (i) cash (in U.S. dollars or freely convertible
into U.S. dollars) received by the Company or any Restricted Subsidiary from an
Asset Sale net of all (a) brokerage commissions, and all other fees and expenses
(including, without limitation, fees and expenses of counsel and investment
bankers) related to such Asset Sale, (b) provisions for all income and other
taxes measured by or resulting from such Asset Sale, (c) payments made to retire
Indebtedness where payment of such Indebtedness is required by instruments
governing such indebtedness and secured by the assets sold pursuant to and in
connection with such Asset Sale, (d) amounts required to be paid to any Person
(other than the Company or Subsidiary) owning a legal or beneficial interest in
the assets subject to the Asset Sale, (e) appropriate amounts to be provided by
the Company or any Restricted Subsidiary thereof, as the case may be, as a
reserve, in accordance with GAAP, against any liabilities associated with such
Asset Sale and retained by the Company or any Restricted Subsidiary thereof, as
the case may be, after such Asset Sale, including, without limitation, pension
and other post-employment liabilities under any indemnification obligations
associated with such Asset Sale, all as reflected in an Officers' Certificate
delivered to the Trustee, and (ii) all noncash consideration received by the
Company or any of its Restricted Subsidiaries from such Asset Sale promptly
thereupon liquidated or converted into cash, without duplication, net of all
items enumerated in subclauses (a) through (e) of clause (i) hereof.
"Non-Recourse Indebtedness" means, with respect to any Person, Indebtedness
(or any portion thereof) of such Person for which the sole legal recourse for
collection of principal, premium, and interest on such Indebtedness is against
the specific property identified in the instruments evidencing or securing such
Indebtedness, which property was acquired with the proceeds of such Indebtedness
or such Indebtedness was Incurred within 180 days after the acquisition of such
property, without any liability on the part of any such Person for any
deficiency with respect to principal, premium or interest.
"Notes" means the 8 3/8% Senior Notes due 2008 issued under the Indenture,
as supplemented from time to time in accordance with the terms hereof.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary of the Company.
"Permitted Investment" means (a) Investments in Cash Equivalents, (b)
Investments in the Company or in its Restricted Subsidiaries, (c) loans or
advances made in the ordinary course of business to officers, directors or
employees of the Company or any of its Restricted Subsidiaries, (d) Investments
in any receivables or loans taken by the Company or a Subsidiary of the Company,
(e) Investments in joint ventures in a Related Business with unaffiliated third
parties in an aggregate amount at any time outstanding not to exceed 10% of
Consolidated Net Assets at such time, (f) Investments in interests in issuances
of collateralized mortgage obligations, mortgages, mortgage loan servicing or
other mortgage related assets, (g) Investments in contract rights granted by,
entitlements granted by, interests in securities issued by, or tangible assets
of, political subdivisions or enterprises thereof related to the homebuilding or
real estate operations of the Company or its Restricted Subsidiaries, (h)
Investments made prior to the Issue Date, (i) Investments in the form of
guaranties to the extent such guaranties are permitted to be Incurred pursuant
to the provisions described under "Certain Covenants--Limitations on
Indebtedness," and (j) any other Investments which would not otherwise be
permitted by the foregoing in an aggregate amount at any time outstanding not to
exceed $25,000,000.
"Permitted Liens" means (a) Liens for taxes, assessments or governmental
charges or claims that either (i) are not yet delinquent, (ii) are being
contested in good faith by appropriate proceedings and as to which appropriate
reserves have been established or other provisions have been made in accordance
with GAAP, or (iii) solely encumber property abandoned or in the process of
being abandoned, (b) statutory Liens of landlords and carriers', warehousemen's,
mechanics', suppliers', materialmen's, repairmen's or other Liens imposed by law
and arising in the ordinary course of business and with respect to amounts that,
to the extent applicable, either (i) are not yet delinquent; or (ii) are being
contested in good faith by
S-56
<PAGE>
appropriate proceedings and as to which appropriate reserves have been
established or other provisions have been made in accordance with GAAP, (c)
Liens Incurred or deposits made in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other types of social
security, (d) Liens Incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds, progress
payments, government contracts, utility services and other obligations of like
nature in each case Incurred in the ordinary course of business, (e) attachment
or judgment Liens with respect to judgments or proceedings which, with the
passage of time, would not constitute an Event of Default and which are being
contested in good faith by appropriate proceedings, (f) easements, dedications,
assessment district or similar Liens in connection with municipal or special
district financing, rights-of-way, zoning restrictions, reservations and other
similar charges, encumbrances or burdens not materially interfering with the
ordinary course of business, (g) leases or subleases granted to others not
materially interfering with the ordinary course of business, (h) purchase money
mortgages (including, without limitation, Capitalized Lease Obligations and
purchase money security interests), (i) Liens on assets securing Refinancing
Indebtedness which refinanced Indebtedness that was previously secured by such
assets, (j) Liens securing Real Property Indebtedness Incurred in compliance
with the Indenture, (k) any interest in or title of a lessor to property subject
to any Capitalized Lease Obligations Incurred in compliance with the Indenture,
(l) Liens existing on the date of the Indenture, including without limitation,
Liens securing Existing Indebtedness, (m) any right of first refusal, right of
first offer, option, contract or other agreement to sell or purchase an asset,
pay lot premiums or participate in the income or revenue derived therefrom, (n)
Liens securing Non-Recourse Indebtedness of the Company or a Restricted
Subsidiary, (o) Liens on property or assets of any Subsidiary securing
Indebtedness of such Subsidiary owing to the Company or one or more of its
Restricted Subsidiaries, (p) Liens with respect to any asset, which Lien existed
at the time such asset was acquired by the Company or any of its Subsidiaries,
PROVIDED that such Liens only extend to assets that were subject to such Liens
prior to the acquisition of such asset by such Person, (q) any legal right of,
or right granted in good faith to, a lender or lenders to which the Company or a
Restricted Subsidiary may be indebted to offset against, or appropriate and
apply to the payment of, such Indebtedness any and all balances, credits,
deposits, accounts or monies of the Company or a Restricted Subsidiary with or
held by such lender or lenders, (r) any pledge or deposit of cash or property by
the Company or any Restricted Subsidiary in conjunction with obtaining surety
and performance bonds, letters of credit and similar instruments required to
engage in constructing on-site and off-site improvements or as otherwise
required by political subdivisions or other governmental authorities in the
ordinary course of business or secured Indebtedness permitted to be Incurred in
compliance with clause (a)(x) of "Certain Covenants--Limitations on
Indebtedness," (s) Liens in favor of the Trustee arising pursuant to the
Indenture, (t) Liens Incurred in the ordinary course of business as security for
the Company's or its Restricted Subsidiaries' obligations with respect to
indemnification in favor of title insurance providers, (u) letters of credit,
bonds or other assets pledged to secure insurance in the ordinary course of
business, (v) Liens on assets securing warehouse lines of credit and other
credit facilities to finance the operations of the Company's financial services
segment Restricted Subsidiaries and Liens related to issuances of CMOs and
mortgage-related securities, and (w) any other Liens which would not otherwise
be permitted by the foregoing; provided that the aggregate amount of obligations
secured by such other Liens outstanding at any one time does not exceed 10% of
the sum of (i) the Company's Consolidated Net Worth at such time plus (ii) the
consolidated minority interests of the Company (determined in accordance with
GAAP) at such time.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, incorporated or unincorporated association, joint stock
company, trust, unincorporated organization or government or any agency or
political subdivision thereof.
"Preferred Stock" of any Person means all Capital Stock of such Person which
has a preference in liquidation or with respect to the payment of dividends.
S-57
<PAGE>
"Property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person, whether or not included in
the most recent consolidated balance sheet of such Person and its Subsidiaries
under GAAP.
"Qualified Capital Stock" means Capital Stock other than Disqualified
Capital Stock.
"Public Equity Offering" means an underwritten public offering by the
Company of its Qualified Capital Stock pursuant to a registration statement
effective under the Securities Act (other than a registration statement on Form
S-8 or similar form).
"Rating Agencies" shall mean (i) S&P and (ii) Moody's.
"Rating Category" shall mean (i) with respect to S&P, any of the following
categories: BB, B, CCC, CC, C and D (or equivalent successor categories); and
(ii) with respect to Moody's, any of the following categories; Ba, B, Caa, Ca, C
and D (or equivalent successor categories). In determining whether the rating of
the Notes has decreased by one or more gradations, gradations within Rating
Categories shall be taken into account (e.g., with respect to S&P, a decline in
a rating from BB to BB-, as well as from BB- to B+, will constitute a decrease
of one gradation).
"Rating Date" shall mean that date which is 90 days prior to public notice
by the Company of the occurrence of a Change of Control or of the specific
intention by the Company or any member of the Management Group to enter into a
transaction to effect a Change of Control; provided that if the Company publicly
announces termination of its or any member of the Management Group's intention
to effect such transactions, such prior notice shall not be utilized in
determining an applicable Rating Date.
"Rating Decline" shall mean, at any time during the period (i) from and
after the date of public notice of either (x) the occurrence of a Change of
Control or (y) the specific intention by the Company or any member of the
Management Group to effect a Change of Control and (ii) until the date which is
90 days after the date of the occurrence of a Change of Control, the occurrence
of (a) in the event the Notes are rated by both Moody's and S&P on the Rating
Date as Investment Grade, the rating of the Notes by either Rating Agency being
below Investment Grade; (b) in the event the Notes are rated by either, but not
both, of the Rating Agencies on the Rating Date as Investment Grade, the rating
of the Notes by both Rating Agencies being below Investment Grade; or (c) in the
event the Notes are rated below Investment Grade by both Rating Agencies on the
Rating Date, the rating of the Notes by either Rating Agency decreasing by one
or more gradations (including gradations within Rating Categories as well as
between Rating Categories).
"Real Property Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary Incurred to finance the acquisition, holding and/or
development of real property and related appurtenances and the construction of
improvements, including homes, thereon in the ordinary course of business.
"Reference Period" with regard to any Person means the four full fiscal
quarters of such Person ended on or immediately preceding any date upon which
any determination is to be made pursuant to the terms of the Notes or the
Indenture for which financial information is available.
"Refinancing Indebtedness" means Indebtedness that is an extension, renewal,
replacement or refunding permitted to be Incurred by the Indenture; provided,
however, that (a) the maximum principal amount of Refinancing Indebtedness (or,
if such Refinancing Indebtedness does not require cash payments prior to
maturity or is otherwise issued at a discount, the original issue price of such
Refinancing Indebtedness) permitted may not exceed the lesser of (i) the
principal amount of the Indebtedness being extended, renewed, replaced or
refunded plus reasonable financing fees and other associated reasonable
out-of-pocket expenses (collectively, "Refinancing Fees"); or (ii) if such
Indebtedness being extended, renewed, replaced, or refunded was issued at an
original issue discount, the original issue price, plus amortization of the
original issue discount at the time of the Incurrence of the Refinancing
Indebtedness plus Refinancing Fees, (b) except with respect to Indebtedness
Incurred to finance the acquisition, holding or development of real property and
related appurtenances and the construction of improvements thereon and Incurred
in the ordinary course of business and in compliance with the terms of the
Indenture, the
S-58
<PAGE>
Refinancing Indebtedness has a Weighted Average Life and a final maturity that
is equal to or greater than the Indebtedness being extended, renewed, replaced
or refunded at the time of such extension, renewal, replacement or refunding,
(c) the Refinancing Indebtedness shall rank with respect to the Notes to an
extent no less favorable in respect thereof to the Holders than the Indebtedness
being refinanced, and (d) the Company may Incur Refinancing Indebtedness only to
refinance Indebtedness of the Company or a Restricted Subsidiary, and a
Restricted Subsidiary may Incur Refinancing Indebtedness only to refinance
Indebtedness of a Restricted Subsidiary.
"Related Business" means any line or lines of business or business activity
reasonably related to (x) the real estate business or (y) a business or business
activity of the Company and/or its Restricted Subsidiaries conducted on the
Issue Date.
"Restricted Payment" means, with respect to any Person, (a) any dividend or
other distribution on shares of Capital Stock of the Company or any Restricted
Subsidiary, (b) any payment on account of the purchase, redemption or other
acquisition or retirement for value, in whole or in part, of any shares of
Capital Stock of the Company or any Restricted Subsidiary, (c) any defeasance,
redemption, repurchase, or other acquisition or retirement for value, or any
payment in respect of any amendment (in anticipation of or in connection with
any such retirement, acquisition, or defeasance), in whole or in part, of any
Indebtedness of the Company or a Restricted Subsidiary that is subordinate in
right of payment to the Notes, but only if such defeasance, redemption,
repurchase or other acquisition or retirement is made prior to the scheduled
payment on such Indebtedness and (d) any Investment (other than a Permitted
Investment); PROVIDED, HOWEVER, that the term "Restricted Payment" does not
include (i) any dividend, distribution, or other payment on shares of Capital
Stock of the Company or a Restricted Subsidiary solely in shares of Qualified
Capital Stock of the Company, (ii) any dividend, distribution, or other payment
to the Company or any of its Restricted Subsidiaries by any of its Subsidiaries,
(iii) the purchase, redemption or other acquisition or retirement for value of
any shares of Capital Stock of a Subsidiary owned by the Company, (iv) any
defeasance, redemption, repurchase or other acquisition or retirement for value,
in whole or in part, of (A) Indebtedness of the Company payable solely in shares
of Capital Stock or Subordinated Indebtedness of the Company, (B) Indebtedness
or Disqualified Capital Stock of a Restricted Subsidiary payable solely in
shares of Capital Stock of the Company or such Restricted Subsidiary or
Subordinated Indebtedness of the Company, or (C) Indebtedness of the Company
subordinated to the Notes owed to its Restricted Subsidiaries, (v) any
defeasance, redemption, repurchase, or other acquisition or retirement for
value, in whole or in part, of Subordinated Indebtedness of the Company or a
Restricted Subsidiary existing on the Issue Date or (vi) any proportionate
payment in respect of minority interests in Restricted Subsidiaries to the
extent that the payment constitutes a return of capital that was not included in
the Company's shareholders' equity or a dividend or similar distribution not
included in determining the Company's Consolidated Net Income.
"Restricted Subsidiary" means each of the Subsidiaries of the Company which
is not an Unrestricted Subsidiary.
"S&P" means Standard and Poor's Ratings Group or any successor to its debt
rating business.
"SEC" means the Securities and Exchange Commission or any successor agency
performing the duties now assigned to it under the TIA.
"Securities Act" means the Securities Act of 1933, as amended.
"Significant Subsidiary" means any Subsidiary of the Company which would
constitute a "significant subsidiary" as defined in Rule 1.02 of Regulation S-X
under the Securities Act and the Exchange Act.
"Stated Maturity," when used with respect to any Note, means February 1,
2008.
"Subordinated Indebtedness" means Indebtedness of the Company which is
subordinated in right of payment to the prior payment in full, including all
payment of principal, premium and all accrued interest (and post-petition
interest) on, and all other amounts owing in connection with the Notes.
S-59
<PAGE>
"Subsidiary" of any Person means any corporation or other entity (other than
political subdivisions or enterprises thereof or governmental agencies) of which
at least 50% of the Capital Stock having ordinary voting power to elect the
Board of Directors or other persons performing similar functions is at the time
directly or indirectly owned or controlled by such Person.
"TIA" means the Trust Indenture Act of 1939, as in effect from time to time.
"Trustee" means the party named as such in the Indenture until a successor
replaces it pursuant to the Indenture and thereafter means the successor serving
under the Indenture.
"U.S. government obligations" means securities which are (a) direct
obligations of the United States for the payment of which its full faith and
credit is pledged or (b) obligations of a person controlled or supervised by and
acting as an agency or instrumentality of the United States the payment of which
is unconditionally guaranteed as a full faith and credit obligation by the
United States, which, in either case are not callable or redeemable at the
option of the issuer thereof, and shall also include a depositary receipt issued
by a bank or trust company as custodian with respect to any such U.S. government
obligations or a specific payment of interest on or principal of any such U.S.
government obligation held by such custodian for the account of the Holder of a
depositary receipt; provided, that (except as required by law) such custodian is
not authorized to make any deduction from the amount payable to the Holder of
such depositary receipt from any amount received by the custodian in respect of
the U.S. government obligation or the specific payment of interest on or
principal of the U.S. government obligation evidenced by such depositary
receipt.
"U.S. Legal Tender" means such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts.
"Unrestricted Subsidiary" means each of the Subsidiaries of the Company so
designated by a resolution adopted by the Board of Directors of the Company as
provided below and whose creditors have no direct or indirect recourse
(including, without limitation, no recourse with respect to the payment of
principal or interest on Indebtedness of such Subsidiary) to the Company or a
Restricted Subsidiary. The Board of Directors of the Company may redesignate an
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that (i) any
such redesignation will be deemed to be an Incurrence by the Company and its
Restricted Subsidiaries of the Indebtedness (if any) of such redesignated
Subsidiary for purposes of the Indenture as of the date of such redesignation,
and (ii) immediately after giving effect to such redesignation and the
incurrence of any such additional Indebtedness, the Company and its Restricted
Subsidiaries could incur $1.00 of additional Indebtedness pursuant to the second
paragraph under the caption, "Limitations on Indebtedness." Subject to the
foregoing, the Board of Directors of the Company also may designate any
Restricted Subsidiary to be an Unrestricted Subsidiary; provided that (i) a
Restricted Payment will be deemed to be made at the time of such designation and
such designation will reduce the Basket to the extent of the book value (in
accordance with GAAP) of the Company's or a Restricted Subsidiary's investment
in the Subsidiary being designated an Unrestricted Subsidiary (the "Designation
Amount"), and (ii) immediately after giving effect to such designation and
reduction of the Basket, the Company and its Restricted Subsidiaries could incur
$1.00 of additional Indebtedness pursuant to the second paragraph under the
caption "Limitations on Indebtedness." Any such designation or redesignation by
the Board of Directors of the Company will be evidenced to the Trustee by the
filing with the Trustee a certified copy of the resolution of the Board of
Directors of the Company giving effect to such designation or redesignation and
an Officers' Certificate certifying that such designation or redesignation
complied with the foregoing conditions and setting forth the underlying
calculations of such Officers' Certificate.
"Weighted Average Life" means, as of the date of determination, with respect
to any debt instrument, the quotient obtained by dividing (i) the sum of the
products of the number of years from the date of determination to the dates of
each successive scheduled principal payment of such debt instrument multiplied
by the amount of such principal payment by (ii) the sum of all such principal
payments.
S-60
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), each of the
underwriters named below (the "Underwriters") has severally agreed to purchase
from the Company, and the Company has agreed to sell to the Underwriters
severally, the principal amount of Notes set forth opposite the name of such
Underwriter below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITERS OF NOTES
- ---------------------------------------------------------------------------- ----------------
<S> <C>
Salomon Brothers Inc ....................................................... $ 96,250,000
Morgan Stanley & Co. Incorporated........................................... 39,375,000
SBC Warburg Dillon Read Inc................................................. 39,375,000
----------------
Total................................................................... $ 175,000,000
----------------
----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Notes offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters will be obligated to take and pay for all of
the Notes offered hereby (other than those covered by the over-allotment option
described below) if any of such Notes are purchased.
The Underwriters initially propose to offer part of the Notes offered hereby
directly to the public at the public offering price set forth on the cover page
of this Prospectus Supplement and part of the Notes offered hereby to certain
dealers at a price which represents a concession not in excess of .50% of the
principal amount per Note under the price to public. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of .25% of the
principal amount per Note to certain other dealers. After the Offering, the
public offering price and such concessions may be changed by the Underwriters.
In connection with the Offering and in compliance with applicable law, the
Underwriters may engage in transactions which stabilize or maintain the market
price of the Notes at levels above those which might otherwise prevail in the
open market. Specifically, the Underwriters may over-allot in connection with
the Offering creating a short position in the Notes for their own account. For
the purposes of covering a syndicate short position or stabilizing the price of
the Notes, the Underwriters may place bids for the Notes or effect purchases of
the Notes in the open market. A syndicate short position may also be covered by
exercise of the over-allotment option described above. Finally, the Underwriters
may impose a penalty bid on certain Underwriters and dealers. This means that
the underwriting syndicate may reclaim selling concessions allowed to an
Underwriter or a dealer for distributing the Notes in the Offering if the
syndicate repurchases previously distributed Notes in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. The
Underwriters are not required to engage in any of these activities and any such
activities, if commenced, may be discontinued at any time.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act of 1933, or
to contribute to payments in respect therof.
Proceeds of the Offering will be used to defease or to make open market or
negotiated purchases of the Company's 11 1/8% Senior Notes. Salomon Brothers Inc
holds such amount of 11 1/8% Senior Notes the retirement of which would require
more than 10% of the net proceeds of the Offering. As a result, more than 10% of
the net proceeds of the Offering may be deemed to be paid to Salomon Brothers
Inc. Therefore, this Offering is being made pursuant to Rule 2710(c)(8) of the
Conduct Rules of the National Association of Securities Dealers, Inc. SBC
Warburg Dillon Read Inc. has assumed the responsibilities of acting as a
"qualified independent underwriter" in pricing the Offering and conducting due
diligence.
The Notes have been approved for listing on the New York Stock Exchange,
subject to official notice of issuance. The Company has been advised by the
Underwriters that they currently intend to make a
S-61
<PAGE>
market in the Notes. However, the Underwriters are not obligated to do so, and
any market making may be discontinued at any time without any notice. There can
be no assurance as to whether an active trading market for the Notes will
develop.
LEGAL MATTERS
Certain matters with respect to the legality and binding nature of the Notes
are being passed upon for the Company by Holme Roberts & Owen LLP, Denver,
Colorado. Certain legal matters in connection with the Offering are being passed
upon for the Underwriters by Cahill Gordon & Reindel (a partnership including a
professional corporation), New York, New York.
S-62
<PAGE>
M.D.C. HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (unaudited)............ F-4
Consolidated Statements of Income for each of the Three Years Ended December 31, 1996 and the Nine Months
Ended September 30, 1997 and 1996 (unaudited)............................................................ F-6
Consolidated Statements of Stockholders' Equity for each of the Three Years Ended December 31, 1996 and for
the Nine Months Ended September 30, 1997 (unaudited)..................................................... F-7
Consolidated Statements of Cash Flows for each of the Three Years Ended December 31, 1996 and for the Nine
Months Ended September 30, 1997 and 1996 (unaudited)..................................................... F-8
Notes to Consolidated Financial Statements (unaudited as to September 30, 1997 and the Nine Months Ended
September 30, 1997 and 1996)............................................................................. F-9
</TABLE>
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, 1995 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Denver, Colorado
February 3, 1997
F-2
<PAGE>
(This page has been left blank intentionally.)
F-3
<PAGE>
M.D.C. HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------- -------------
1995 1996 1997
---------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Corporate
Cash and cash equivalents............................................... $ 10,290 $ 7,235 $ 8,349
Property and equipment, net............................................. 9,550 9,411 9,431
Deferred income taxes................................................... 13,730 10,804 11,123
Deferred debt issue costs, net.......................................... 9,931 9,155 7,039
Other assets, net....................................................... 3,830 3,557 4,240
---------- ---------- -------------
47,331 40,162 40,182
---------- ---------- -------------
Homebuilding
Cash and cash equivalents............................................... 5,096 3,393 4,514
Home sales and other accounts receivable................................ 26,192 10,218 15,863
Investments and marketable securities, net.............................. 6,481 5,159 3,034
Inventories, net
Housing completed or under construction............................... 265,205 251,885 263,891
Land and land under development....................................... 176,960 182,927 179,196
Prepaid expenses and other assets, net.................................. 42,111 57,722 56,699
---------- ---------- -------------
522,045 511,304 523,197
---------- ---------- -------------
Financial Services
Cash and cash equivalents............................................... 5,409 676 822
Mortgage loans held in inventory, net................................... 53,153 58,742 72,675
Other assets, net....................................................... 6,873 6,419 6,152
---------- ---------- -------------
65,435 65,837 79,649
---------- ---------- -------------
Total Assets........................................................ $ 634,811 $ 617,303 $ 643,028
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
M.D.C. HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------- -------------
1995 1996 1997
---------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
LIABILITIES
Corporate
Accounts payable and accrued expenses................................... $ 18,258 $ 13,519 $ 17,607
Income taxes payable.................................................... 11,930 11,434 11,232
Note payable............................................................ 3,537 3,487 3,446
Senior Notes, net....................................................... 187,525 187,721 150,307
Subordinated notes, net................................................. 38,221 38,225 38,228
---------- ---------- -------------
259,471 254,386 220,820
---------- ---------- -------------
Homebuilding
Accounts payable and accrued expenses................................... 82,164 114,794 110,779
Lines of credit......................................................... 43,490 11,832 45,000
Notes payable........................................................... 10,571 3,063 2,926
---------- ---------- -------------
136,225 129,689 158,705
---------- ---------- -------------
Financial Services
Accounts payable and accrued expenses................................... 12,092 10,363 13,961
Line of credit.......................................................... 21,990 9,018 27,593
---------- ---------- -------------
34,082 19,381 41,554
---------- ---------- -------------
Total Liabilities..................................................... 429,778 403,456 421,079
---------- ---------- -------------
COMMITMENTS AND CONTINGENCIES (Notes J, N and P).......................... -- -- --
---------- ---------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 25,000,000 shares authorized; none
issued................................................................ -- -- --
Common Stock, $.01 par value; 100,000,000 shares authorized; 22,606,000,
23,050,000 and 23,494,000 shares issued, respectively, at December 31,
1995 and 1996 and September 30, 1997 (unaudited)...................... 226 231 235
Additional paid-in capital.............................................. 136,022 138,705 141,771
Retained earnings....................................................... 87,476 106,189 119,510
---------- ---------- -------------
223,724 245,125 261,516
Less treasury stock, at cost; 3,157,000, 4,966,000 and 5,903,000 shares,
respectively, at December 31, 1995 and 1996 and September 30, 1997
(unaudited)........................................................... (18,691) (31,278) (39,567)
---------- ---------- -------------
Total Stockholders' Equity............................................ 205,033 213,847 221,949
---------- ---------- -------------
Total Liabilities and Stockholders' Equity............................ $ 634,811 $ 617,303 $ 643,028
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
M.D.C. HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Homebuilding.............................................. $ 793,793 $ 840,362 $ 890,536 $ 644,339 $ 683,748
Financial Services........................................ 22,095 23,948 30,578 25,034 13,017
Corporate................................................. 1,357 1,546 1,481 956 957
---------- ---------- ---------- ---------- ----------
Total Revenues........................................ 817,245 865,856 922,595 670,329 697,722
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES
Homebuilding.............................................. 749,329 807,344 862,569 626,356 656,224
Financial Services........................................ 12,348 10,610 11,921 9,335 6,700
Corporate general and administrative...................... 15,132 13,478 11,578 8,501 8,194
Corporate and homebuilding interest....................... 9,454 7,773 3,773 3,364 761
---------- ---------- ---------- ---------- ----------
Total Expenses........................................ 786,263 839,205 889,841 647,556 671,879
---------- ---------- ---------- ---------- ----------
Income before income taxes and extraordinary item......... 30,982 26,651 32,754 22,773 25,843
Provision for income taxes................................ 11,727 9,401 11,955 8,314 9,821
---------- ---------- ---------- ---------- ----------
Income before extraordinary item.......................... 19,255 17,250 20,799 14,459 16,022
Extraordinary losses from early extinguishments of debt,
net of income tax benefit of $242 for 1996 and $1,336
for 1997 (unaudited).................................... -- -- (421) (421) (2,179)
---------- ---------- ---------- ---------- ----------
NET INCOME.................................................. $ 19,255 $ 17,250 $ 20,378 $ 14,038 $ 13,843
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
EARNINGS PER SHARE
Primary
Income before extraordinary item........................ $ .94 $ .86 $ 1.09 $ .75 $ .88
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net Income.............................................. $ .94 $ .86 $ 1.06 $ .73 $ .76
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Fully diluted
Income before extraordinary item........................ $ .87 $ .79 $ .98 $ .68 $ .78
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net Income.............................................. $ .87 $ .79 $ .96 $ .66 $ .68
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
WEIGHTED-AVERAGE SHARES OUTSTANDING
Primary................................................... 20,406 20,124 19,150 19,352 18,236
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Fully diluted............................................. 24,021 23,918 22,924 22,965 21,969
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
DIVIDENDS PAID PER SHARE.................................... $ .06 $ .11 $ .12 $ .09 $ .09
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-6
<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, 1994............................. $ 209 $ 133,455 $ 57,879 $ (15,689) $ 175,854
Shares issued....................................... 3 265 (46) 256 478
Shares reacquired................................... -- -- -- (1,505) (1,505)
Shares issued to acquire Richmond Homes common
stock............................................. -- -- (3,585) 3,585 --
Unrealized losses on available-for-sale securities,
net............................................... -- -- (860) -- (860)
Non-qualified stock options exercised............... -- 214 -- -- 214
Dividends declared.................................. -- -- (1,141) -- (1,141)
Net income.......................................... -- -- 19,255 -- 19,255
----- ---------- ---------- ---------- ----------
BALANCES--DECEMBER 31, 1994........................... 212 133,934 71,502 (13,353) 192,295
Shares issued....................................... 14 1,168 (11) 128 1,299
Shares reacquired................................... -- -- -- (5,466) (5,466)
Unrealized gains on available-for-sale securities,
net............................................... -- -- 888 -- 888
Non-qualified stock options exercised............... -- 2,281 -- -- 2,281
Notes receivable for stock purchases................ -- (1,361) -- -- (1,361)
Dividends declared.................................. -- -- (2,153) -- (2,153)
Net income.......................................... -- -- 17,250 -- 17,250
----- ---------- ---------- ---------- ----------
BALANCES--DECEMBER 31, 1995........................... 226 136,022 87,476 (18,691) 205,033
Shares issued....................................... 5 2,138 70 334 2,547
Shares reacquired................................... -- -- -- (12,921) (12,921)
Unrealized gains on available-for-sale securities,
net............................................... -- -- 487 -- 487
Non-qualified stock options exercised............... -- 342 -- -- 342
Repayments of notes receivable for stock purchases,
net............................................... -- 203 -- -- 203
Dividends declared.................................. -- -- (2,222) -- (2,222)
Net income.......................................... -- -- 20,378 -- 20,378
----- ---------- ---------- ---------- ----------
BALANCES--DECEMBER 31, 1996........................... 231 138,705 106,189 (31,278) 213,847
Shares issued (unaudited)........................... 4 1,983 45 (940) 1,092
Shares reacquired (unaudited)....................... -- -- -- (7,349) (7,349)
Unrealized gains on available-for-sale securities,
net (unaudited)................................... -- -- 1,032 -- 1,032
Non-qualified stock options exercised (unaudited)... -- 725 -- -- 725
Repayments of notes receivable for stock purchases,
net (unaudited)................................... -- 358 -- -- 358
Dividends declared (unaudited)...................... -- -- (1,599) -- (1,599)
Net income (unaudited).............................. -- -- 13,843 -- 13,843
----- ---------- ---------- ---------- ----------
BALANCES--SEPTEMBER 30, 1997 (UNAUDITED).............. $ 235 $ 141,771 $ 119,510 $ (39,567) $ 221,949
----- ---------- ---------- ---------- ----------
----- ---------- ---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
M.D.C. HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Income....................................... $ 19,255 $ 17,250 $ 20,378 $ 14,038 $ 13,843
Adjustments To Reconcile Net Income To Net Cash
Provided By (Used In) Operating Activities:
Depreciation and amortization................ 10,134 10,280 12,067 8,770 10,588
Homebuilding asset impairment charges........ 4,000 3,677 9,191 7,208 5,850
Deferred income taxes........................ (3,844) (1,786) 2,926 3,198 (319)
Gain on sales of FAMC, net................... -- -- (4,042) (4,042) --
Net changes in assets and liabilities:
Home sales and other accounts receivable... (5,462) (13,684) 15,973 9,964 (5,645)
Homebuilding inventories................... (76,991) 21,005 4,288 (18,073) (13,658)
Mortgage loans held in inventory........... 24,076 (8,785) (5,589) 6,884 (13,933)
Other, net................................... (7,958) (5,404) (7,267) 7,704 (2,180)
---------- ---------- ----------- ---------- ----------
Net Cash Provided By (Used In) Operating
Activities..................................... (36,790) 22,553 47,925 35,651 (5,454)
---------- ---------- ----------- ---------- ----------
INVESTING ACTIVITIES
Net Proceeds from Mortgage-Related Assets and
Liabilities.................................... (7,786) 4,596 3,849 2,858 1,587
Proceeds from the Sale of FAMC................... -- -- 6,000 -- --
Changes in Investments and Marketable
Securities..................................... (6,377) (414) 3,016 1,511 2,129
Changes in Restricted Cash....................... 16,159 2,650 -- -- --
Other, net....................................... 17,272 1,896 1,133 315 (1,851)
---------- ---------- ----------- ---------- ----------
Net Cash Provided By Investing Activities........ 19,268 8,728 13,998 4,684 1,865
---------- ---------- ----------- ---------- ----------
FINANCING ACTIVITIES
Lines of Credit
Advances..................................... 641,874 741,053 1,008,531 743,462 767,875
Principal payments........................... (612,449) (761,116) (1,053,161) (766,361) (716,132)
Notes Payable
Borrowings................................... 15,870 1,114 487 480 144
Principal payments........................... (44,835) (27,690) (13,897) (10,441) (38,178)
Stock Repurchases................................ (1,505) (5,466) (12,921) (10,075) (7,349)
Dividend Payments................................ (1,141) (2,153) (2,222) (1,684) (1,599)
Other, net....................................... 269 208 1,769 1,032 1,209
---------- ---------- ----------- ---------- ----------
Net Cash Provided By (Used In) Financing
Activities..................................... (1,917) (54,050) (71,414) (43,587) 5,970
---------- ---------- ----------- ---------- ----------
Net Increase (Decrease) In Cash and Cash
Equivalents.................................... (19,439) (22,769) (9,491) (3,252) 2,381
Cash and Cash Equivalents
Beginning of Period.......................... 63,003 43,564 20,795 20,795 11,304
---------- ---------- ----------- ---------- ----------
End of Period................................ $ 43,564 $ 20,795 $ 11,304 $ 17,543 $ 13,685
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-8
<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.
The financial information as of and for the nine months ended September 30,
1997 and 1996 is unaudited. This financial information reflects 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 September 30, 1997 and for all of the periods
presented.
GENERAL. In the homebuilding segment of its operations, the Company (i)
principally acquires finished lots and, to a lesser extent, acquires land and
develops it for use in its homebuilding activities; and (ii) designs, constructs
and sells single-family residential homes. These operations are financed
primarily with publicly traded debt, an unsecured revolving bank line of credit
and internally generated funds. The Company conducts its homebuilding operations
in (i) metropolitan Denver and Colorado Springs, Colorado; (ii) Northern
Virginia and suburban Maryland (the "Mid-Atlantic"); (iii) Northern and Southern
California; (iv) Phoenix and Tucson, Arizona; and (v) Las Vegas, Nevada.
The Company's financial services segment principally consists of its
mortgage lending operations, which are conducted by HomeAmerican Mortgage
Corporation ("HomeAmerican"). HomeAmerican primarily provides mortgage loans for
MDC home buyers. Substantially all of the mortgage loans originated by
HomeAmerican, as well as mortgage loans purchased from unaffiliated loan
correspondents, subsequently are sold to private investors. Additionally,
HomeAmerican sells mortgage loan servicing.
Through September 30, 1996, Financial Asset Management LLC (an indirect
subsidiary of M.D.C. Holdings, Inc., and the successor as of April 1, 1996 to
Financial Asset Management Corporation; "FAMC") managed two publicly traded real
estate investment trusts (each a "REIT"). MDC also owns other mortgage-related
interests. The results of FAMC and these mortgage-related interests are included
in the asset management operations of the financial services segment.
HOMEBUILDING.
INVENTORIES--Inventories are stated at cost, as adjusted in accordance with
SFAS 121 (as hereinafter defined), and include interest capitalized during the
period of active development through the completion of construction.
Construction-related overhead and salaries are capitalized and allocated
proportionately to projects actively being developed. Land and related costs are
transferred to housing inventory when construction commences.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). In accordance
with SFAS 121, whenever events or circumstances indicate that the carrying value
of the homebuilding inventories may not be recoverable, impairment losses are
recorded and the related assets are adjusted to their estimated fair market
value, less selling costs.
PREPAID EXPENSES AND OTHER ASSETS--Homebuilding prepaid expenses and other
assets include restricted investments of $22,243,000 and $20,775,000 at
September 30, 1997 and December 31, 1996, respectively, which are held for the
payment of eligible claims made under the warranties created pursuant to the
settlement of the Expansive Soils Cases. These investments are carried on the
Consolidated Balance Sheet at market value, with a related unrealized gain
included in retained earnings. See Note N.
F-9
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
the year ended December 31, 1996, the Company recorded additional warranty
reserves of $23,086,000, net of warranty expenditures, which included an amount
arising from the settlement of the Expansive Soils Cases. See Note N. Warranty
reserves are included in homebuilding accounts payable and accrued expenses and
totalled $36,930,000, $35,507,000 and $12,421,000, respectively, at September
30, 1997 and December 31, 1996 and 1995.
MORTGAGE LENDING.
MORTGAGE LOANS HELD IN INVENTORY--The Company generally purchases forward
commitments to deliver mortgage loans held for sale. Mortgage loans held in
inventory are stated at the lower of aggregate cost or market based upon such
commitments for loans to be delivered into such commitments or prevailing market
for uncommitted loans. Substantially all of the loans originated or purchased by
the Company are sold to private investors within 45 days of origination or
purchase. Gains or losses on mortgage loans held in inventory are realized when
the loans are sold.
REVENUE RECOGNITION--Loan origination fees in excess of origination costs
incurred and loan commitment fees are deferred until the related loans are sold.
Loan servicing fees are recorded as revenue when the mortgage loan payments are
received. Loan servicing costs are recognized as incurred. Revenues from the
sale of mortgage loan servicing are recognized when title and all risks and
rewards of ownership have irrevocably passed to the buyer and there are no
significant unresolved contingencies.
The mortgage lending operations are affected by, among other things, changes
in mortgage interest rates. The Company utilizes forward mortgage securities
contracts to manage the interest rate risk on its fixed-rate mortgage loans
owned and rate-locked mortgage loans in process which have not closed. Such
contracts are the only significant financial derivative instrument utilized by
MDC. Hedging gains or losses are recognized when the hedged mortgage loans are
sold.
MORTGAGE SERVICING RIGHTS--Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights an Amendment of FASB Statement No. 65" ("SFAS 122"), 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 122 and SFAS 125 require the
Company to allocate the cost of mortgage loans originated by HomeAmerican after
January 1, 1996 between the mortgage loans and the right to service the mortgage
loans, based on their relative values. Prior to 1996, the cost of mortgage loans
originated by HomeAmerican was assigned to the mortgage loans, with no cost
assigned to the servicing rights. The Company's adoption of SFAS 122 resulted in
additional net gains in the nine months ended September 30, 1997 and 1996 and
the year ended December 31, 1996 of $912,000, $2,304,000 and $3,082,000,
respectively, from the sale of mortgage loans and servicing rights, compared
with the gains that would have been recorded under the accounting method
applicable in 1995 and prior years.
F-10
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The Company
reflects its ownership interests in Mortgage Collateral net of the related
mortgage-backed bonds and its earnings from such interests net of the related
interest expense.
GENERAL.
CASH AND CASH EQUIVALENTS--The Company periodically invests funds not
immediately required for operating purposes in highly liquid, short-term
investments with an original maturity of 90 days or less such as commercial
paper and repurchase agreements which are included in cash and cash equivalents
in the Consolidated Balance Sheets and Consolidated Statements 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--Primary earnings per share are based on the
weighted-average number of common and common equivalent shares outstanding
during each period. Fully diluted earnings per share also assumes the conversion
into MDC Common Stock of all of the outstanding Convertible Subordinated Notes
(as hereinafter defined) at the stated conversion price.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). The Company's adoption of SFAS 128, which is required on December 31,
1997, will result in the restatement of the Company's primary earnings per share
calculations to "basic" earnings per share. Basic earnings per share, based on
income before extraordinary item, would have been $.91 and $.77 for the first
nine months of 1997 and 1996, respectively, and $1.12, $.89 and $1.02 for the
years ended December 31, 1996, 1995 and 1994. Basic earnings per share, based on
net income, would have been $.78 and $.75 for the first nine months of 1997 and
1996, respectively, and $1.10, $.89 and $1.02 for the years ended December 31,
1996, 1995 and 1994. SFAS 128 also requires the presentation of "diluted"
earnings per share, which is computed similarly to fully diluted earnings per
share. Diluted earnings per share would not have been materially different from
fully diluted earnings per share for all of the periods presented.
ESTIMATES IN FINANCIAL STATEMENTS--The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Such estimates include warranty, other accrued expenses and estimates related to
potential asset impairment charges.
RECLASSIFICATIONS--Certain amounts in the 1996, 1995 and 1994 consolidated
financial statements have been reclassified to conform to the 1997 presentation.
F-11
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
HOMEBUILDING
Home sales......................................... $ 784,453 $ 827,448 $ 880,358 $ 635,472 $ 676,674
Land sales......................................... 8,296 10,396 9,471 8,345 6,256
Other revenues..................................... 1,044 2,518 707 522 818
---------- ---------- ---------- ---------- ----------
793,793 840,362 890,536 644,339 683,748
---------- ---------- ---------- ---------- ----------
Home cost of sales................................. 663,549 716,859 759,405 548,974 577,859
Land cost of sales................................. 7,977 10,176 8,773 7,785 5,199
Asset impairment charges........................... 4,000 3,677 9,191 7,208 5,850
Marketing.......................................... 44,588 49,938 56,078 40,667 44,467
General and administrative......................... 29,215 26,694 29,122 21,722 22,849
---------- ---------- ---------- ---------- ----------
749,329 807,344 862,569 626,356 656,224
---------- ---------- ---------- ---------- ----------
HOMEBUILDING OPERATING PROFIT.................. 44,464 33,018 27,967 17,983 27,524
---------- ---------- ---------- ---------- ----------
FINANCIAL SERVICES
Mortgage Lending Revenues
Interest revenues................................ 2,897 3,412 3,543 2,618 1,411
Origination fees................................. 4,671 5,258 6,209 4,487 4,811
Gains on sales of mortgage servicing............. 6,770 8,336 6,020 5,746 1,560
Gains (losses) on sale of mortgage loans, net.... (585) (1,293) 4,905 3,238 4,368
Mortgage servicing and other..................... 2,097 1,846 1,545 1,196 419
---------- ---------- ---------- ---------- ----------
15,850 17,559 22,222 17,285 12,569
---------- ---------- ---------- ---------- ----------
Asset Management Revenues
Management fees and other........................ 6,245 6,389 4,314 3,707 448
Gain on sale of FAMC............................. -- -- 4,042 4,042 --
---------- ---------- ---------- ---------- ----------
6,245 6,389 8,356 7,749 448
---------- ---------- ---------- ---------- ----------
22,095 23,948 30,578 25,034 13,017
---------- ---------- ---------- ---------- ----------
General and Administrative Expenses
Mortgage Lending................................. 8,899 8,271 9,638 7,139 6,666
Asset Management................................. 3,449 2,339 2,283 2,196 34
---------- ---------- ---------- ---------- ----------
12,348 10,610 11,921 9,335 6,700
---------- ---------- ---------- ---------- ----------
FINANCIAL SERVICES OPERATING PROFIT............ 9,747 13,338 18,657 15,699 6,317
---------- ---------- ---------- ---------- ----------
TOTAL OPERATING PROFIT............................... 54,211 46,356 46,624 33,682 33,841
---------- ---------- ---------- ---------- ----------
CORPORATE
Other revenues..................................... 1,357 1,546 1,481 956 957
---------- ---------- ---------- ---------- ----------
Interest expense................................... 9,454 7,773 3,773 3,364 761
General and administrative......................... 15,132 13,478 11,578 8,501 8,194
---------- ---------- ---------- ---------- ----------
24,586 21,251 15,351 11,865 8,955
---------- ---------- ---------- ---------- ----------
Net Corporate Expenses......................... (23,229) (19,705) (13,870) (10,909) (7,998)
---------- ---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM.... $ 30,982 $ 26,651 $ 32,754 $ 22,773 $ 25,843
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
F-12
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. INFORMATION ON BUSINESS SEGMENTS (CONTINUED)
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 nine months ended
September 30, 1997 and 1996 and the years ended December 31, 1996, 1995 and 1994
were not material. Identifiable segment assets are shown on the face of the
Consolidated Balance Sheet.
C. MORTGAGE LOANS HELD IN INVENTORY
Mortgage loans held in inventory consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- --------- SEPTEMBER 30,
-------------
1997
-------------
(UNAUDITED)
<S> <C> <C> <C>
First mortgage loans
Conventional.................................... $ 33,451 $ 33,865 $ 50,414
FHA and VA...................................... 21,272 27,261 24,064
--------- --------- -------------
54,723 61,126 74,478
Less
Unamortized discounts........................... (469) (1,218 (1) (511)
Deferred fees................................... (300) (322) (387)
Allowance for loan losses....................... (801) (844) (905)
--------- --------- -------------
Total......................................... $ 53,153 $ 58,742 $ 72,675
--------- --------- -------------
--------- --------- -------------
</TABLE>
- ------------------------
(1) 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.
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 7.4%, 7.5% and 7.4%, respectively, at September 30,
1997 and December 31, 1996 and 1995.
D. MORTGAGE COLLATERAL, NET OF MORTGAGE-BACKED BONDS, AND RELATED ASSETS
AND LIABILITIES
Mortgage Collateral and related net assets of $5,418,000, $18,570,000
and $45,979,000, respectively, as well as mortgage-backed bonds and other
liabilities of $5,246,000, $17,157,000 and $42,235,000, respectively, were held
by a trustee at September 30, 1997 and December 31, 1996 and 1995. The Company
has not guaranteed, nor is it otherwise obligated with respect to, these
mortgage-backed bond issues.
In the years ended December 31, 1996, 1995 and 1994, MDC sold, at a
premium, Mortgage Collateral totalling $17,842,000, $9,618,000 and $19,088,000,
respectively. The proceeds from these sales were utilized to redeem in full the
related outstanding mortgage-backed bonds which totalled $17,554,000, $8,547,000
and $19,109,000, respectively. These sales, net of redemptions, resulted in
gains totalling $127,000, $305,000 and $295,000, respectively.
F-13
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. LINES OF CREDIT
HOMEBUILDING--In April 1996, the Company entered into an agreement
with a group of banks for a $150,000,000 unsecured revolving line of credit
maturing June 30, 2000, although a term-out may commence earlier under certain
circumstances. Some of the initial advances at closing of this credit agreement
were used to retire the borrowings under cancelled bank lines of credit and
project loans collateralized by homebuilding inventories. In March 1997, the
Company modified the terms of the unsecured revolving line of credit, increasing
the available borrowings from $150,000,000 to $175,000,000 and extending the
maturity date of the agreement one year to June 30, 2001. At September 30, 1997
and December 31, 1996, $45,000,000 and $11,832,000 were borrowed under this
unsecured revolving line of credit, respectively. At September 30, 1997 and
December 31, 1996, the weighted-average interest rates of the line of credit
were 7.6% and 7.5%, respectively.
MORTGAGE LENDING--The aggregate amount available under MDC's mortgage
lending bank line of credit at September 30, 1997 and December 31, 1996 was
$51,000,000. Available borrowings under this bank line of credit are
collateralized by mortgage loans and mortgage-backed certificates and are
limited to the value of "eligible collateral" (as defined in the credit
agreement). At September 30, 1997 and December 31, 1996, $27,593,000 and
$9,018,000, respectively, were borrowed and an additional $23,407,000 and
$38,362,000, respectively, were collateralized and available to be borrowed. The
mortgage lending line of credit is cancellable upon 90 days' notice. At
September 30, 1997 and December 31, 1996, the interest rates of the line were
5.6% and 6.7%, respectively.
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 September 30, 1997 and December 31, 1996, the Company was in
compliance with these covenants, representations and warranties.
F. NOTES PAYABLE
SENIOR NOTES AND SUBORDINATED NOTES--The Senior Notes (as hereinafter
defined) and the subordinated notes consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ---------- SEPTEMBER 30,
-------------
1997
-------------
(UNAUDITED)
<S> <C> <C> <C>
Senior Notes
11 1/8% Senior Notes due December 2003
(effective rate 12.3%)........................ $ 187,525 $ 187,721 $ 150,307
---------- ---------- -------------
---------- ---------- -------------
Subordinated notes
8 3/4% Convertible Subordinated Notes due
December 2005, convertible into Common Stock
at $7.75 per common share (effective rate
9.5%)......................................... $ 28,000 $ 28,000 $ 28,000
6.64% Subordinated Fixed-Rate Notes due April
1998 (effective rate 6.7%).................... 10,221 10,225 10,228
---------- ---------- -------------
$ 38,221 $ 38,225 $ 38,228
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
In December 1993, the Company completed an offering of $190,000,000
principal amount of 11 1/8% senior notes due 2003 (the "Senior Notes") and
$28,000,000 principal amount of 8 3/4% convertible
F-14
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. NOTES PAYABLE (CONTINUED)
subordinated notes due 2005 (the "Convertible Subordinated Notes"). The
Convertible Subordinated Notes are convertible into MDC Common Stock at an
initial conversion price of $7.75 per share, subject to adjustment upon certain
events. The $10,230,000 principal amount of subordinated fixed-rate notes was
issued in April 1993 in exchange for certain previously outstanding subordinated
variable-rate notes. On March 31, 1997, the Company repurchased $38,000,000
principal amount of its 11 1/8% Senior Notes due 2003 for $39,520,000 (See Note
L).
The Senior Notes are guaranteed, fully and unconditionally, and
jointly and severally on an unsecured subordinated basis (the "Guaranties"), by
most of the Company's homebuilding segment subsidiaries (the "Guarantors"). The
Guaranties are subordinated to all Guarantor Senior Indebtedness as defined in
the indenture pursuant to which the Senior Notes are issued (the "Senior Notes
Indenture"). In addition, the Senior Notes are secured by a first priority
pledge of the capital stock of the Guarantors plus the capital stock of
HomeAmerican. The Senior Notes Indenture contains certain covenants which, among
other things, limit (i) the incurrence of additional Indebtedness (as defined)
by the Company and Restricted Subsidiaries (as defined); (ii) the payment of
dividends; (iii) the repurchase of capital stock or subordinated indebtedness;
and (iv) the ability to enter into certain transactions with Affiliates (as
defined) or merge, consolidate or transfer substantially all of the Company's or
a Guarantor's assets. At September 30, 1997 and December 31, 1996, the Company
was in compliance with these covenants.
OTHER NOTES PAYABLE--Notes payable, other than the notes discussed
above, of $6,372,000 and $6,550,000 at September 30, 1997 and December 31, 1996,
respectively, consist principally of loans collateralized by real estate. These
notes bear interest at rates ranging from 8.0% to 9.25%. The aggregate net
carrying value of the assets collateralizing the other notes payable totalled
approximately $13,000,000 at December 31, 1996.
GENERAL--The following table sets forth the scheduled principal
payments on the Senior Notes, subordinated notes and notes payable at December
31, 1996 (in thousands).
<TABLE>
<S> <C>
1997.............................................................. $ 3,118
1998.............................................................. $ 10,290
1999.............................................................. $ 66
2000.............................................................. $ 72
2001.............................................................. $ 79
Thereafter........................................................ $ 221,155
</TABLE>
The following table sets forth the scheduled principal payments on
the Senior Notes, subordinated notes and notes payable at September 30, 1997 (in
thousands--unaudited).
<TABLE>
<S> <C>
Remainder of 1997................................................. $ 14
1998.............................................................. $ 13,216
1999.............................................................. $ 66
2000.............................................................. $ 72
2001.............................................................. $ 79
Thereafter........................................................ $ 183,155
</TABLE>
G. STOCKHOLDERS' EQUITY
STOCK OPTION PLANS--A summary of the Company's stock option incentive
plans follows.
F-15
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. STOCKHOLDERS' EQUITY (CONTINUED)
EMPLOYEE EQUITY INCENTIVE PLAN--The Employee Equity Incentive Plan
(the "Employee Plan") provides for an initial authorization of 2,100,000 shares
of MDC Common Stock for issuance thereunder, plus an additional annual
authorization equal to 10% of the then authorized shares of MDC Common Stock
under the Employee Plan as of each succeeding annual anniversary of the
effective date of the Employee Plan. Under the Employee Plan, the Company may
grant awards of restricted stock, incentive and non-statutory stock options and
dividend equivalents, or any combination thereof, to officers and employees of
the Company or any of its subsidiaries. The incentive stock options granted
under the Employee Plan are exercisable at prices greater than or equal to the
market value on the date of grant over periods of up to six years.
Pursuant to the terms of the Executive Option Purchase Program (the
"Option Purchase Program"), which was authorized by the MDC Board of Directors,
the Company is authorized to lend eligible executives of the Company up to
two-thirds of the aggregate exercise price and state and federal taxes payable
in connection with their exercise of stock options under the Employee Plan,
subject to certain maximum amounts as set forth under the Option Purchase
Program. Notes receivable under the Option Purchase Program are recourse and
secured by 100% of the shares of MDC Common Stock issued in connection with
options exercised. During the years ended December 31, 1996 and 1995, certain
eligible executives of the Company exercised options to purchase 100,000 and
824,414 shares of MDC Common Stock, respectively, under the Option Purchase
Program. Notes receivable under the Option Purchase Program of $800,000,
$1,158,000 and $1,361,000, respectively, at September 30, 1997 and December 31,
1996 and 1995 are deducted from stockholders' equity.
DIRECTOR EQUITY INCENTIVE PLAN--Under the Director Equity Incentive
Plan (the "Director Plan"), non-employee directors of the Company are granted
stock options. The Director Plan provides for an initial authorization of
300,000 shares of MDC Common Stock for issuance thereunder plus an additional
annual authorization of shares equal to 10% of the then authorized shares of MDC
Common Stock under the Director Plan. During 1997, the Board of Directors
authorized, and the shareholders 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.
F-16
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the changes in stock options during the nine months
ended September 30, 1997 and each of the three years ended December 31, 1996 is
as follows (in shares of MDC Common Stock):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------------- -----------------
<S> <C> <C>
Outstanding--January 1, 1994...................... 3,201,374 $ 2.93
----------------
Exercised....................................... (271,974) $ .99
Granted......................................... 635,000 $ 4.81
Cancelled....................................... (3,000) $ 1.88
----------------
Outstanding--December 31, 1994.................... 3,561,400 $ 3.42
----------------
Exercised....................................... (1,418,900) $ .83
Granted......................................... 105,000 $ 6.74
Cancelled....................................... (100,000) $ 5.62
----------------
Outstanding--December 31, 1995.................... 2,147,500 $ 5.18
----------------
Exercised(1).................................... (404,500) $ 4.56
Granted......................................... 815,000 $ 7.15
Cancelled....................................... (510,000) $ 6.01
----------------
Outstanding--December 31, 1996.................... 2,048,000 $ 5.88
----------------
Exercised (unaudited)............................. (443,000) $ 4.37
Granted (unaudited)............................... --
Cancelled (unaudited)............................. --
----------------
Outstanding--September 30, 1997 (unaudited)....... 1,605,000 $ 6.31
----------------
----------------
Exercisable--
September 30, 1997 (unaudited).................. 1,378,250 $ 6.16
----------------
----------------
December 31, 1996............................... 1,217,500 $ 5.04
----------------
----------------
December 31, 1995............................... 888,327 $ 6.65
----------------
----------------
December 31, 1994............................... 1,953,888 $ 1.79
----------------
----------------
Reserved for issuance--
September 30, 1997 (unaudited).................. 1,208,840
----------------
----------------
December 31, 1996............................... 504,400
----------------
----------------
</TABLE>
-------------------------------
(1) Includes 250,000 previously restricted options that became
exercisable during 1996.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), issued in October 1995, established
financial accounting and reporting standards for stock-based employee
compensation plans. As permitted by SFAS 123, the Company elected to continue to
use Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations, in accounting for its stock option
incentive plans.
F-17
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. STOCKHOLDERS' EQUITY (CONTINUED)
If the Company had elected to recognize compensation cost based on
the fair value of the options granted at grant date and the vesting provisions
under the plans in accordance with SFAS 123, net income in 1996 would have been
reduced by approximately $505,000, or $.02 per primary and fully diluted share.
Net income for 1995 would have been reduced by $156,000 or $.01 per primary and
fully diluted share. Net income for the nine months ended September 30, 1997,
would have been reduced by $138,000, or $.01 per primary and fully diluted
share. The average fair value of each option granted during 1996 and 1995 is
estimated at $2.61 and $2.42, respectively, on the date of grant using the
Black-Scholes option pricing model with the following assumptions: (i)
volatility of 30.80% and 36.70%, respectively, in 1996 and 1995; (ii) risk free
interest rates of 6.0% and 5.5%, respectively, for 1996 and 1995; (iii) expected
lives of five years with no defaults; and (iv) the Company's present dividend
yield rate. No options were granted in the nine months ended September 30, 1997.
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ---------------------------
WEIGHTED WEIGHTED
RANGE OF EXERCISE NUMBER AVERAGE REMAINING AVERAGE NUMBER AVERAGE
PRICE OUTSTANDING CONTRACT LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------- ----------- ----------------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
$3.00 - $4.25 484,000 2.0 $ 3.78 484,000 $ 3.78
$5.00 - $6.00 634,000 2.1 $ 5.69 621,500 $ 5.71
$6.38 - $7.50 930,000 4.7 $ 7.09 112,000 $ 6.71
----------- ----------
2,048,000 1,217,500
----------- ----------
----------- ----------
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at September 30, 1997 (unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ---------------------------
WEIGHTED WEIGHTED
RANGE OF EXERCISE NUMBER AVERAGE REMAINING AVERAGE NUMBER AVERAGE
PRICE OUTSTANDING CONTRACT LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------- ----------- ----------------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
$3.00 - $4.25 200,000 2.3 $ 4.25 200,000 $ 4.25
$5.00 - $6.00 458,334 1.6 $ 5.58 445,834 $ 5.59
$6.38 - $7.50 946,666 3.9 $ 7.09 732,416 $ 7.02
----------- ----------
1,605,000 1,378,250
----------- ----------
----------- ----------
</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. At December 31, 1996, 838,200 shares
remained authorized for repurchase. 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 $5.88 to $8.77, with an
average cost, including commissions, of $7.23.
F-18
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. STOCKHOLDERS' EQUITY (CONTINUED)
REPURCHASE OF STOCK--In April 1996, the Company repurchased 473,000 shares
of MDC Common Stock, priced at $7.13 per share, originally held by Mr. Spencer
I. Browne (former President, Co-Chief Operating Officer and director of the
Company) in connection with the Agreement (as hereinafter defined) between Mr.
Browne and the Company. See Note K.
EXCHANGE OF COMMON STOCK--Prior to February 2, 1994, Larry A. Mizel
(Chairman of the Board, President and Chief Executive Officer of the Company)
and David D. Mandarich (Executive Vice President--Real Estate, Chief Operating
Officer and director of the Company) owned 35% of the outstanding shares of
Richmond American Homes of Colorado, Inc. (formerly known as Richmond Homes,
Inc. I, a wholly owned subsidiary of M.D.C. Holdings, Inc.; "Richmond Homes")
common stock. In furtherance of the Company's desire to own all of the
outstanding shares of Richmond Homes common stock, in December 1993, a special
committee of the MDC Board of Directors negotiated on behalf of the Company
terms of an option agreement with Messrs. Mizel and Mandarich to acquire the
shares of Richmond Homes common stock owned by them in exchange for MDC Common
Stock with a value of up to $3,500,000 in the aggregate. For purposes of the
exchange, the shares of MDC Common Stock were valued at $5.75 per share, the
closing price of MDC Common Stock on the date of the option agreement. The
special committee engaged a financial advisor to perform a business enterprise
valuation of Richmond Homes. In February 1994, based on the results of the
valuation, the maximum value of $3,500,000 of MDC Common Stock (an aggregate of
608,695 shares) was issued to Messrs. Mizel and Mandarich in exchange for their
shares of Richmond Homes common stock. Since February 2, 1994, MDC has owned
100% of the equity of Richmond Homes.
As the transaction with Messrs. Mizel and Mandarich was between related
parties, the issuance of the MDC Common Stock was recorded based on the net book
value of Richmond Homes, which had approximately zero common stockholders'
equity at the date of the acquisition. Accordingly, the value of the shares of
MDC Common Stock issued to Messrs. Mizel and Mandarich was recorded at zero.
H. HOMEBUILDING ASSET IMPAIRMENT CHARGES
During 1996, the Company recorded asset impairment charges totalling
$9,191,000, primarily related to certain homebuilding assets in the Mid-Atlantic
region as a result of continued weakened conditions and competitive pressures in
that market. The Mid-Atlantic asset impairment charges primarily resulted from
(i) the write-down to fair market value of a single-family detached home
subdivision in which the Company intends to sell the majority of the remaining
lots in bulk; (ii) the recognition of losses anticipated from the closing of
certain homes in Backlog and from the offering of increased incentives to
stimulate sales of completed unsold homes in inventory; (iii) the write-off of
capitalized costs, primarily deferred marketing and option deposits, related to
several low-margin projects; and (iv) the write-down to fair market value of
several single-family detached home subdivisions which began to experience
extremely slow sales and negative Home Gross Margins during 1996.
Asset impairment charges for 1996 also included charges with respect to
certain homebuilding assets in Northern California as a result of increased
incentives and sales price reductions offered to potential home buyers in
connection with the Company's efforts to exit several underperforming
subdivisions in the Sacramento area.
During 1995, the Company recorded asset impairment charges totalling
$3,677,000. These charges primarily were related to certain under-performing
projects in California, Arizona and the Mid-Atlantic
F-19
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. HOMEBUILDING ASSET IMPAIRMENT CHARGES (CONTINUED)
region. Asset impairment charges totalled $4,000,000 in 1994, primarily related
to certain projects in Northern California which experienced significant slowing
in sales and reduced selling prices due to softness in consumer demand which led
to a general decline in home sales activity.
Operating results during the first nine months of 1997 were reduced by asset
impairment charges totalling $5,850,000, 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 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 region to
further the Company's aggressive strategy of accelerating the close-out of
under-performing subdivisions in that market.
I. CORPORATE AND HOMEBUILDING INTEREST ACTIVITY (in thousands)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest capitalized in homebuilding inventory, beginning
of period................................................ $ 42,681 $ 42,478 $ 40,217 $ 40,217 $ 40,745
Interest incurred.......................................... 35,799 33,909 30,296 22,961 20,192
Interest expensed.......................................... (9,454) (7,773) (3,773) (3,364) (761)
Previously capitalized interest included in cost of
sales.................................................... (26,548) (28,397) (25,995) (18,945) (20,357)
--------- --------- --------- --------- ---------
Interest capitalized in homebuilding inventory, end of
period................................................... $ 42,478 $ 40,217 $ 40,745 $ 40,869 $ 39,819
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
J. INCOME TAXES
Total income taxes has been allocated as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tax expense on income before income taxes and extraordinary
item..................................................... $ 11,727 $ 9,401 $ 11,955 $ 8,314 $ 9,821
Extraordinary loss......................................... -- -- (242) (242) (1,336)
Stockholders' equity, related to exercise of stock
options.................................................. (214) (2,281) (342) (17) (725)
--------- --------- --------- --------- ---------
Total income taxes......................................... $ 11,513 $ 7,120 $ 11,371 $ 8,055 $ 7,760
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-20
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. INCOME TAXES (CONTINUED)
The significant components of income tax expense on income before income
taxes and extraordinary item consist of the following (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current tax expense
Federal................................................... $ 13,970 $ 9,980 $ 8,612 $ 4,789 $ 9,342
State..................................................... 1,603 1,207 417 327 798
--------- --------- --------- --------- ---------
Total Current........................................... 15,573 11,187 9,029 5,116 10,140
--------- --------- --------- --------- ---------
Deferred tax expense (Benefit)
Federal................................................... (2,540) (2,402) 2,458 2,866 (294)
State..................................................... (1,306) 616 468 332 (25)
--------- --------- --------- --------- ---------
Total Deferred.......................................... (3,846) (1,786) 2,926 3,198 (319)
--------- --------- --------- --------- ---------
Total Income Tax Expense............................ $ 11,727 $ 9,401 $ 11,955 $ 8,314 $ 9,821
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
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>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tax expense computed at statutory rate...................... $ 10,844 $ 9,330 $ 11,464 $ 7,971 $ 9,045
Increase (reduction) due to:
Permanent differences between financial statement income
and taxable income...................................... (1,089) (513) 54 60 96
State income tax, net of federal benefit.................. 933 584 791 667 420
Adjustments to prior years' income taxes.................. 978 -- (297) (351) 260
Other..................................................... 61 -- (57) (33) --
--------- --------- --------- --------- ---------
Total Income Tax Expense............................ $ 11,727 $ 9,401 $ 11,955 $ 8,314 $ 9,821
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Effective tax rate.................................. 37.9% 35.3% 36.5% 36.5% 38.0%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-21
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. INCOME TAXES (CONTINUED)
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).
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred Tax Assets:
Reserve for losses............................................................................ $12,335 $ 9,996 $11,062
Inventory impairment charges.................................................................. 5,947 8,243 7,970
Accrued liabilities........................................................................... 3,811 2,263 1,353
Inventory, additional costs capitalized for tax purposes...................................... 2,562 4,692 5,147
Property, equipment and other assets, net..................................................... 1,252 753 483
------- ------- -------------
Total gross deferred tax assets............................................................. 25,907 25,947 26,015
Less valuation allowance...................................................................... (3,000) -- --
------- ------- -------------
Deferred tax assets......................................................................... 22,907 25,947 26,015
------- ------- -------------
Deferred Tax Liabilities:
Discount on notes receivable.................................................................. 9,086 6,827 5,991
Deferred revenue.............................................................................. 91 3,288 3,035
Inventory, additional costs capitalized for financial statement purposes...................... -- 5,028 5,866
------- ------- -------------
Total gross deferred tax liabilities........................................................ 9,177 15,143 14,892
------- ------- -------------
Net Deferred Tax Asset.................................................................. $13,730 $10,804 $11,123
------- ------- -------------
------- ------- -------------
</TABLE>
During 1996, the Company eliminated the valuation allowance for deferred tax
assets as uncertainties related to the recovery of certain deferred tax assets
were eliminated.
M.D.C. Holdings, Inc. and its wholly owned subsidiaries file a consolidated
federal income tax return (an "MDC Consolidated Return"). Richmond 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 Homes became a wholly owned
subsidiary of MDC.
In April 1995, the Company and the Internal Revenue Service (the "IRS")
reached final agreement on the IRS examinations of (i) the MDC Consolidated
Returns for the years 1984 and 1985; and (ii) the Richmond Homes Consolidated
Returns for the years 1989 and 1990. These agreements had no material impact
upon the Company's financial position or results of operations.
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-22
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. INCOME TAXES (CONTINUED)
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.
K. REORGANIZATION AND SALE OF FAMC
In March 1996, M.D.C. Holdings, Inc. ("Holdings"), Mr. Spencer I. Browne,
M.D.C. Residual Holdings, Inc., a wholly owned subsidiary of Holdings
("Residual") and Financial Asset Management Corporation ("Management
Corporation") entered into an agreement (the "Agreement") effective as of April
1, 1996, pursuant to which Mr. Browne, Residual and Management Corporation
formed FAMC. From April 1, 1996 to September 30, 1996, Mr. Browne owned 20% of
FAMC, and Management Corporation and Residual owned the remaining 80% of FAMC.
Pursuant to the Agreement, (i) Mr. Browne resigned as President, Co-Chief
Operating Officer and director of Holdings; (ii) Mr. Browne and Holdings entered
into an employment agreement (the "Employment Agreement"); (iii) Mr. Browne was
appointed President and Chief Executive Officer of FAMC; and (iv) FAMC assumed
Management Corporation's business of managing two publicly traded REITs and
performing certain other asset management functions.
In September 1996, the Company sold its interest in FAMC for $11,450,000,
Mr. Browne resigned his positions with FAMC and the Employment Agreement was
terminated. The sales proceeds consisted of $6,000,000 cash and $5,450,000 of
subordinated notes payable at specified dates during the next 10 years and
convertible, under certain circumstances, into as much as a 47.6% ownership
interest in FAMC. The sale resulted in the recognition of a gain of $4,042,000.
An additional gain of $5,450,000 attributable to the notes was deferred and may
be recognized, in whole or in part, in future periods based upon a number of
factors, including collection of the notes' principal and the expiration of the
conversion features. The fair value of the subordinated notes are not readily
determinable.
L. EXTRAORDINARY ITEMS
In April 1996, the Company entered into an unsecured revolving credit
agreement and used proceeds therefrom to retire borrowings under certain bank
lines of credit and project loans collateralized by homebuilding inventories
that the Company cancelled after entering into the unsecured revolving credit
agreement. The Company recognized an extraordinary loss of $421,000, net of an
income tax benefit of $242,000, during 1996 due to the write-off of unamortized
discounts and deferred financing costs in connection with the cancellation of
these secured lines of credit and project loans.
Net income for the nine months ended September 30, 1997 included an
extraordinary loss of $2,179,000, net of an income tax benefit of $1,336,000,
recognized in connection with the Company's repurchase of $38,000,000 face value
(20% of the outstanding amount) of its Senior Notes. The loss resulted from the
repurchase of the Senior Notes above their carrying value and the write-off of
related unamortized issuance costs.
F-23
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
M. EARNINGS PER SHARE
Primary earnings per share are based on the weighted-average number of
common and common equivalent shares outstanding during each period. The
computation of fully diluted earnings per share also assumes the conversion into
MDC Common Stock of all of the $28,000,000 outstanding principal amount of the
8 3/4% Convertible Subordinated Notes at a conversion price of $7.75 per share
of MDC Common Stock. The primary and fully diluted earnings per share
calculations are shown below (in thousands, except per share amounts).
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
PRIMARY CALCULATION
Income before extraordinary item................................................... $19,255 $17,250 $20,799 $14,459 $16,022
Extraordinary loss, net of income tax benefit of $242 in 1996 and $1,336
(unaudited) for 1997............................................................. -- -- (421) (421) (2,179)
------- ------- ------- ------- -------
Net income......................................................................... $19,255 $17,250 $20,378 $14,038 $13,843
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Weighted-average shares outstanding................................................ 18,951 19,362 18,527 18,821 17,641
Common Stock equivalents--stock options............................................ 1,455 762 623 531 595
------- ------- ------- ------- -------
Total Weighted-Average Shares.................................................... 20,406 20,124 19,150 19,352 18,236
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Primary Earnings Per Share
Income before extraordinary item................................................. $ .94 $ .86 $ 1.09 $ .75 $ .88
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net Income....................................................................... $ .94 $ .86 $ 1.06 $ .73 $ .76
------- ------- ------- ------- -------
------- ------- ------- ------- -------
FULLY DILUTED CALCULATION
Income before extraordinary item................................................... $19,255 $17,250 $20,799 $14,459 $16,022
Adjustment for interest on Convertible Subordinated Notes, net of income tax
benefit; conversion assumed...................................................... 1,536 1,565 1,608 1,206 1,181
------- ------- ------- ------- -------
Adjusted income before extraordinary item.......................................... 20,791 18,815 22,407 15,665 17,203
Extraordinary loss, net of income tax benefit of $242 for 1996 and $1,336
(unaudited) for 1997............................................................. -- -- (421) (421) (2,179)
------- ------- ------- ------- -------
Adjusted Net Income.............................................................. $20,791 $18,815 $21,986 $15,244 $15,024
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Weighted-average shares outstanding................................................ 18,951 19,362 18,527 18,821 17,641
Common Stock equivalents--stock options............................................ 1,457 943 784 531 715
Shares issuable upon conversion of Convertible Subordinated Notes; conversion
assumed.......................................................................... 3,613 3,613 3,613 3,613 3,613
------- ------- ------- ------- -------
Total Weighted-Average Shares.................................................... 24,021 23,918 22,924 22,965 21,969
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Fully Diluted Earnings Per Share
Income before extraordinary item................................................. $ .87 $ .79 $ .98 $ .68 $ .78
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net Income....................................................................... $ .87 $ .79 $ .96 $ .66 $ .68
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
F-24
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
N. LEGAL PROCEEDINGS
EXPANSIVE SOILS CASES.
On October 21, 1994, a complaint was served on several of the Company's
subsidiaries in an action initiated by six homeowners in Highlands Ranch,
Colorado. On January 26, 1995, counsel for the Company accepted service of two
additional complaints by a homeowner in the Stonegate subdivision in Douglas
County, Colorado and by a homeowner in the Rock Creek development located in
Boulder County, Colorado. On September 12, 1995, the Company was served with a
similar complaint relating to homeowners in Douglas County, Colorado. The
complaints (the "Expansive Soils Cases"), each of which sought certification of
a class, alleged substantially identical claims relating to the construction of
homes on lots with expansive soils, including negligence, breach of express and
implied warranties, violation of the Colorado Consumer Protection Act and
non-disclosures. The homeowners in each complaint sought, individually and on
behalf of the alleged class, recovery in unspecified amounts, including actual
damages, statutory damages, exemplary damages and treble damages. The Company
filed a response to each of the complaints and to initial discovery requests in
the first filed case.
On June 11, 1996, the Company's Colorado homebuilding subsidiaries and
representative plaintiffs agreed to settle the Expansive Soils Cases. The
settlement was approved by the Douglas County District Court on October 11, 1996
and became final on November 26, 1996. The settlement provides for the creation
of a warranty program for eligible owners of homes constructed by the Company's
Colorado homebuilding subsidiaries since June 1986. Indemnity payments in
connection with the settlement have been received by the Company from its
participating insurance carriers, and management does not believe the settlement
will have a material adverse effect on the financial condition, results of
operations or cash flows of the Company.
OTHER.
The Company and certain of its subsidiaries and affiliates have been named
as defendants in various other claims, complaints and legal actions arising in
the normal course of business. In the opinion of management, the outcome of
these matters will not have a material adverse effect upon the financial
condition, results of operations or cash flows of the Company.
Because of the nature of the homebuilding business, and in the ordinary
course of the Company's operations, the Company from time to time may be subject
to product liability claims, including claims similar to those discussed under
the description of the Expansive Soils Cases, above.
The Company is not aware of any litigation, matter or pending claim against
the Company which would result in material contingent liabilities related to
environmental hazards or asbestos.
O. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
such value.
CASH AND CASH EQUIVALENTS--For cash and cash equivalents, the carrying value
is a reasonable estimate of fair value.
INVESTMENTS AND MARKETABLE SECURITIES, NET--Investments in marketable equity
securities are carried on the balance sheet at cost, which approximates market
value. Accordingly, the carrying value of the investments is a reasonable
estimate of the fair value.
F-25
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
O. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
RESTRICTED INVESTMENTS--Restricted investments in marketable 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 N) are
carried on the balance sheet at cost, which approximates market value.
Accordingly, the carrying value of the investments is a reasonable estimate of
the fair value.
MORTGAGE LOANS HELD IN INVENTORY--The Company generally purchases forward
commitments to deliver mortgage loans held for sale. For loans which have no
forward commitments, loans in inventory are stated at the lower of cost or
market. Accordingly, the carrying value is a reasonable estimate of fair value.
NOTES PAYABLE AND LINES OF CREDIT--The Company's notes payable and lines of
credit are at floating rates or at fixed rates which approximate current market
rates and have relatively short-term maturities. Accordingly, the carrying value
is a reasonable estimate of fair value.
SENIOR NOTES AND SUBORDINATED NOTES--The estimated fair value of the Senior
Notes and subordinated notes in the following table are based on dealer quotes
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996 SEPTEMBER 30, 1997
-------------------- -------------------- --------------------
ESTIMATED ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Senior Notes.................... $ 187,525 $ 183,350 $ 187,721 $ 190,475 $ 150,307 $ 166,060
Subordinated notes.............. $ 38,221 $ 38,220 $ 38,225 $ 44,616 $ 38,228 $ 48,907
</TABLE>
P. COMMITMENTS AND CONTINGENCIES
The Company believes that it is subject to risks and uncertainties common to
the homebuilding industry as follows: (i) cyclical markets sensitive to changes
in general and local economic conditions; (ii) volatility of interest rates,
which affects homebuilding demand and may affect credit availability; (iii)
seasonal nature of the business due to weather-related factors; (iv) significant
fluctuations in the price of building materials, particularly lumber, and of
finished lots and subcontract labor; (v) counterparty non-performance risk
associated with performance bonds; and (vi) environmental regulations which vary
significantly according to a site's condition, location and former uses. The
Company's operations are concentrated in the geographic regions of Colorado, the
Mid-Atlantic, California and Arizona.
To reduce exposure to fluctuations in interest rates, HomeAmerican makes
commitments to originate (buy) and sell loans and mortgage-backed securities. At
September 30, 1997 and December 31, 1996, commitments by HomeAmerican to
originate mortgage loans totalled $43,250,000 and $22,929,000, respectively, at
market rates of interest. At September 30, 1997 and December 31, 1996, unexpired
short-term forward commitments to sell loans totalled $80,520,000 and
$65,980,000, respectively, at market rates of interest.
MDC leases office space, equipment and certain of its model show homes under
noncancellable operating leases.
F-26
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
P. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 1996, future minimum rental payments for leases with initial
terms in excess of one year were as follows (in thousands):
<TABLE>
<S> <C>
1997................................................ $ 1,490
1998................................................ $ 1,381
1999................................................ $ 972
2000................................................ $ 438
2001................................................ $ 281
</TABLE>
Rent expense under cancellable and noncancellable leases totalled
$2,877,000, $2,662,000 and $3,250,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
At September 30, 1997 and December 31, 1996, MDC had entered into agreements
to guarantee payment of principal and interest on $26,980,000 principal amount
of bonds issued by municipal agencies to fund the development of project
infrastructure for a master-planned community in Colorado.
Q. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED DECEMBER 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Paid During the Period for:
Interest, net of amounts capitalized............. $ 15,313 $ 8,923 $ 7,892 $ 1,791 $ --
Income taxes..................................... $ 32,529 $ 7,155 $ 8,941 $ 4,278 $ 8,678
Land purchases financed by seller.................. $ 4,164 $ 4,787 $ 5,852 $ 5,858 $ --
Land sales financed by MDC......................... $ 1,438 $ 1,609 $ 205 $ 271 $ 867
Disposition of land inventories collateralized by
notes payable
Inventories...................................... $ 2,864 $ 1,270 -- -- --
Notes payable.................................... $ 2,176 $ 1,270 -- -- --
Accrued interest and other liabilities........... $ 688 -- -- -- --
</TABLE>
R. RELATED PARTY TRANSACTIONS
MDC has transacted business with related or affiliated companies and with
certain officers and directors of the Company.
FAMC had agreements through September 30, 1996 with Asset Investors
Corporation and Commercial Assets, Inc., each a publicly traded REIT, to advise
them on various facets of their business and to manage their day-to-day
operations subject to the supervision of their respective boards of directors.
FAMC earned fees from management and administration, including from acquisitions
and incentives from these agreements which are included in asset management
revenues of $2,373,000, $3,324,000 and $2,780,000 during 1996, 1995 and 1994,
respectively.
F-27
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
R. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company acquired certain assets from Messrs. Mizel and Mandarich in
February 1994. See Note G.
On December 28, 1989, MDC granted loans to Messrs. Mizel and Mandarich for
purposes of purchasing shares of common stock of Richmond Homes. On February 2,
1994, in conjunction with MDC's acquisition of Richmond Homes common stock from
Messrs. Mizel and Mandarich as discussed in Note G, MDC exchanged these loans
for new loans of equal amount. Each of the notes evidencing the new loans now
provides that, upon sale of any of the MDC Common Stock acquired by Messrs.
Mizel and Mandarich in exchange for their respective Richmond Homes common
stock, the cash proceeds shall be remitted to the Company in payment of accrued
interest and principal under the notes. The new loans, which mature in 1999,
bear interest at 8.0% and are unsecured. At September 30, 1997, $280,000 of such
loans were outstanding, and at both December 31, 1996 and 1995, $840,000 of such
loans were outstanding. Interest income of $23,000 was recognized on these loans
in the nine months ended September 30, 1997, and $67,000 was recognized on these
loans in each of 1996, 1995 and 1994.
The Company utilizes the services of companies owned by two former employees
of the Company, one of whom is the brother-in-law of a current officer and
director of the Company. During the nine months ended September 30, 1997 and
1996, and the years ended December 31, 1996, 1995 and 1994, the Company paid
$1,403,000, $3,018,000, $3,586,000, $7,372,000 and $11,880,000, respectively,
for plumbing, door and millwork services provided by these companies.
The Company leases office space and furniture to certain organizations in
which certain officers and/ or directors of the Company have an ownership
interest. The rental revenue from those leases totalled $71,000, $72,000,
$96,000, $320,000 and $250,000, respectively, in the nine months ended September
30, 1997 and 1996 and the years ended December 31, 1996, 1995 and 1994.
The Company utilizes in the ordinary course of business the services of a
marketing and communications firm which is owned by the brother-in-law of an
officer and director of the Company. Total fees paid for advertising and
marketing design services were $470,000, $431,000, $499,000, $188,000 and
$275,000, respectively, in the nine months ended September 30, 1997 and 1996,
and the years ended December 31, 1996, 1995 and 1994.
During 1996, the Company purchased, for $1,089,000, a parcel of land from a
partnership in which an officer and director of the Company had an indirect
ownership interest.
F-28
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
S. SUMMARIZED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
Unaudited summarized quarterly consolidated financial information for the
nine months ended September 30, 1997 and the two years ended December 31, 1996
is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER
----------------------------------
THIRD SECOND FIRST
---------- ---------- ----------
<S> <C> <C> <C>
1997
Revenues..................................................................... $ 266,618 $ 237,285 $ 193,819
---------- ---------- ----------
---------- ---------- ----------
Income before extraordinary item............................................. $ 7,302 $ 5,134 $ 3,586
Extraordinary Loss........................................................... -- -- (2,179)
---------- ---------- ----------
Net Income................................................................. $ 7,302 $ 5,134 $ 1,407
---------- ---------- ----------
---------- ---------- ----------
Earnings Per Share
Primary
Income before extraordinary item........................................... $ .40 $ .29 $ .19
---------- ---------- ----------
---------- ---------- ----------
Net Income................................................................. $ .40 $ .29 $ .08
---------- ---------- ----------
---------- ---------- ----------
Fully Diluted
Income before extraordinary item........................................... $ .35 $ .26 $ .18
---------- ---------- ----------
---------- ---------- ----------
Net Income................................................................. $ .35 $ .26 $ .08
---------- ---------- ----------
---------- ---------- ----------
Weighted-Average Shares Outstanding
Primary.................................................................... 18,166 17,970 18,494
---------- ---------- ----------
---------- ---------- ----------
Fully Diluted.............................................................. 21,833 21,614 22,156
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
QUARTER
----------------------------------------------
FOURTH THIRD SECOND FIRST
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1996
Revenues......................................................... $ 252,266 $ 233,307 $ 237,776 $ 199,246
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income before extraordinary item................................. $ 6,340 $ 5,603 $ 4,532 $ 4,324
Extraordinary Loss............................................... -- -- (421) --
---------- ---------- ---------- ----------
Net Income..................................................... $ 6,340 $ 5,603 $ 4,111 $ 4,324
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings Per Share
Primary
Income before extraordinary item............................... $ .34 $ .30 $ .23 $ .22
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net Income..................................................... $ .34 $ .30 $ .21 $ .22
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Fully Diluted
Income before extraordinary item............................... $ .30 $ .27 $ .21 $ .20
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net Income..................................................... $ .30 $ .27 $ .20 $ .20
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted-Average Shares Outstanding
Primary........................................................ 18,544 18,849 19,365 19,863
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Fully Diluted.................................................. 22,296 22,462 22,978 23,510
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
F-29
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
S. SUMMARIZED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
QUARTER
----------------------------------------------
FOURTH THIRD SECOND FIRST
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1995
Revenues......................................................... $ 227,174 $ 233,471 $ 214,119 $ 191,092
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net Income..................................................... $ 3,306 $ 5,545 $ 4,331 $ 4,068
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings Per Share
Primary........................................................ $ .17 $ .28 $ .21 $ .20
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Fully Diluted.................................................. $ .16 $ .25 $ .20 $ .19
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted-Average Shares Outstanding
Primary........................................................ 20,021 20,052 20,305 20,323
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Fully Diluted.................................................. 23,649 23,736 24,006 23,936
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
T. SUPPLEMENTAL GUARANTOR INFORMATION
The Senior Notes are unconditionally guaranteed on an unsecured subordinated
basis, jointly and severally, by Richmond American Homes of California, Inc.,
Richmond American Homes of Maryland, Inc., Richmond American Homes of Nevada,
Inc., Richmond American Homes of Virginia, Inc., Richmond American Homes of
Arizona, Inc. (formerly known as Richmond American Homes, Inc.) and Richmond
Homes (collectively, the "Guarantors"). The Guaranties are subordinated to all
Guarantor Senior Indebtedness (as defined in the Senior Notes Indenture).
Supplemental combining financial information follows.
F-30
<PAGE>
M.D.C. HOLDINGS, INC.
SUPPLEMENTAL COMBINING BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
---------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Corporate
Cash and cash equivalents................. $ 8,349 $ -- $ -- $ -- $ 8,349
Investments in subsidiaries............... 185,377 -- 17,435 (202,812) --
Advances and notes receivable-- Parent and
subsidiaries............................ 220,549 -- -- (220,549) --
Other assets.............................. 31,726 -- 107 -- 31,833
---------- ----------- -------------- ----------- ------------
446,001 -- 17,542 (423,361) 40,182
---------- ----------- -------------- ----------- ------------
Homebuilding
Cash and cash equivalents................. -- 4,465 49 -- 4,514
Inventories, net
Housing completed or under
construction.......................... -- 263,891 -- -- 263,891
Land and land under development......... -- 157,777 22,220 (801) 179,196
Other assets.............................. 5,299 59,764 22,342 (11,809) 75,596
---------- ----------- -------------- ----------- ------------
5,299 485,897 44,611 (12,610) 523,197
---------- ----------- -------------- ----------- ------------
Financial Services.......................... -- -- 79,649 -- 79,649
---------- ----------- -------------- ----------- ------------
Total Assets.......................... $ 451,300 $ 485,897 $ 141,802 $ (435,971) $ 643,028
---------- ----------- -------------- ----------- ------------
---------- ----------- -------------- ----------- ------------
LIABILITIES
Corporate
Accounts payable and accrued expenses..... $ 17,296 $ -- $ 311 $ -- $ 17,607
Advances and notes payable--Parent and
subsidiaries............................ 4,937 194,354 28,889 (228,180) --
Income taxes payable...................... 11,232 -- -- -- 11,232
Note payable.............................. 3,446 -- -- -- 3,446
Senior Notes, net......................... 150,307 -- -- -- 150,307
Subordinated notes, net................... 38,228 -- -- -- 38,228
---------- ----------- -------------- ----------- ------------
225,446 194,354 29,200 (228,180) 220,820
---------- ----------- -------------- ----------- ------------
Homebuilding
Accounts payable and accrued expenses... 3,905 84,767 22,107 -- 110,779
Line of credit and notes payable........ -- 47,926 -- -- 47,926
---------- ----------- -------------- ----------- ------------
3,905 132,693 22,107 -- 158,705
---------- ----------- -------------- ----------- ------------
Financial Services.......................... -- -- 52,514 (10,960) 41,554
---------- ----------- -------------- ----------- ------------
Total Liabilities..................... 229,351 327,047 103,821 (239,140) 421,079
---------- ----------- -------------- ----------- ------------
STOCKHOLDERS' EQUITY........................ 221,949 158,850 37,981 (196,831) 221,949
---------- ----------- -------------- ----------- ------------
Total Liabilities and Stockholders'
Equity.............................. $ 451,300 $ 485,897 $ 141,802 $ (435,971) $ 643,028
---------- ----------- -------------- ----------- ------------
---------- ----------- -------------- ----------- ------------
</TABLE>
F-31
<PAGE>
M.D.C. HOLDINGS, INC.
SUPPLEMENTAL COMBINING BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
---------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Corporate
Cash and cash equivalents................. $ 7,235 $ -- $ -- $ -- $ 7,235
Investments in subsidiaries............... 219,387 -- 17,434 (236,821) --
Advances and notes receivable-- Parent and
subsidiaries............................ 207,946 4 787 (208,737) --
Other assets.............................. 32,780 -- 147 -- 32,927
---------- ----------- -------------- ----------- ------------
467,348 4 18,368 (445,558) 40,162
---------- ----------- -------------- ----------- ------------
Homebuilding
Cash and cash equivalents................. 1 3,391 1 -- 3,393
Inventories, net
Housing completed or under
construction.......................... -- 251,885 -- -- 251,885
Land and land under development......... -- 159,871 24,031 (975) 182,927
Other assets.............................. 7,582 48,737 20,775 (3,995) 73,099
---------- ----------- -------------- ----------- ------------
7,583 463,884 44,807 (4,970) 511,304
---------- ----------- -------------- ----------- ------------
Financial Services.......................... -- -- 65,837 -- 65,837
---------- ----------- -------------- ----------- ------------
Total Assets.......................... $ 474,931 $ 463,888 $ 129,012 $ (450,528) $ 617,303
---------- ----------- -------------- ----------- ------------
---------- ----------- -------------- ----------- ------------
LIABILITIES
Corporate
Accounts payable and accrued expenses..... $ 13,086 $ -- $ 433 $ -- $ 13,519
Advances and notes payable--Parent and
subsidiaries............................ 2,085 197,448 36,119 (235,652) --
Income taxes payable...................... 11,434 -- -- -- 11,434
Note payable.............................. 3,487 -- -- -- 3,487
Senior Notes, net......................... 187,721 -- -- -- 187,721
Subordinated notes, net................... 38,225 -- -- -- 38,225
---------- ----------- -------------- ----------- ------------
256,038 197,448 36,552 (235,652) 254,386
---------- ----------- -------------- ----------- ------------
Homebuilding
Accounts payable and accrued expenses..... 5,046 88,240 21,508 -- 114,794
Line of credit and notes payable.......... -- 14,895 -- -- 14,895
---------- ----------- -------------- ----------- ------------
5,046 103,135 21,508 -- 129,689
---------- ----------- -------------- ----------- ------------
Financial Services.......................... -- -- 23,376 (3,995) 19,381
---------- ----------- -------------- ----------- ------------
Total Liabilities..................... 261,084 300,583 81,436 (239,647) 403,456
---------- ----------- -------------- ----------- ------------
STOCKHOLDERS' EQUITY........................ 213,847 163,305 47,576 (210,881) 213,847
---------- ----------- -------------- ----------- ------------
Total Liabilities and Stockholders'
Equity.............................. $ 474,931 $ 463,888 $ 129,012 $ (450,528) $ 617,303
---------- ----------- -------------- ----------- ------------
---------- ----------- -------------- ----------- ------------
</TABLE>
F-32
<PAGE>
M.D.C. HOLDINGS, INC.
SUPPLEMENTAL COMBINING BALANCE SHEET
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
---------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Corporate
Cash and cash equivalents................. $ 10,290 $ -- $ -- $ -- $ 10,290
Investments in and advances to parent and
subsidiaries............................ 514,350 33 38,984 (553,367) --
Other assets.............................. 36,941 -- 100 -- 37,041
---------- ----------- -------------- ----------- ------------
561,581 33 39,084 (553,367) 47,331
---------- ----------- -------------- ----------- ------------
Homebuilding
Cash and cash equivalents................. 6 5,054 36 -- 5,096
Home sales and other accounts
receivable.............................. -- 37,726 -- (11,534) 26,192
Inventories, net
Housing completed or under
construction.......................... -- 265,205 -- -- 265,205
Land and land under development......... -- 150,531 27,676 (1,247) 176,960
Other assets.............................. 10,114 38,453 25 -- 48,592
---------- ----------- -------------- ----------- ------------
10,120 496,969 27,737 (12,781) 522,045
---------- ----------- -------------- ----------- ------------
Financial Services.......................... -- -- 65,435 -- 65,435
---------- ----------- -------------- ----------- ------------
Total Assets.......................... $ 571,701 $ 497,002 $ 132,256 $ (566,148) $ 634,811
---------- ----------- -------------- ----------- ------------
---------- ----------- -------------- ----------- ------------
LIABILITIES
Corporate
Accounts payable and accrued expenses..... $ 17,897 $ -- $ 995 $ -- $ 18,892
Advances and notes payable--Parent and
subsidiaries............................ 98,525 210,754 20,434 (329,713) --
Income taxes payable...................... 11,930 -- -- -- 11,930
Note payable.............................. 3,537 -- -- -- 3,537
Senior Notes, net......................... 187,525 -- -- -- 187,525
Subordinated notes, net................... 38,221 -- -- -- 38,221
---------- ----------- -------------- ----------- ------------
357,635 210,754 21,429 (329,713) 260,105
---------- ----------- -------------- ----------- ------------
Homebuilding
Accounts payable and accrued expenses..... 5,403 75,831 924 6 82,164
Lines of credit and notes payable......... 3,630 46,682 3,749 -- 54,061
---------- ----------- -------------- ----------- ------------
9,033 122,513 4,673 6 136,225
---------- ----------- -------------- ----------- ------------
Financial Services.......................... -- -- 45,011 (11,563) 33,448
---------- ----------- -------------- ----------- ------------
Total Liabilities..................... 366,668 333,267 71,113 (341,270) 429,778
---------- ----------- -------------- ----------- ------------
STOCKHOLDERS' EQUITY........................ 205,033 163,735 61,143 (224,878) 205,033
---------- ----------- -------------- ----------- ------------
Total Liabilities and Stockholders'
Equity.............................. $ 571,701 $ 497,002 $ 132,256 $ (566,148) $ 634,811
---------- ----------- -------------- ----------- ------------
---------- ----------- -------------- ----------- ------------
</TABLE>
F-33
<PAGE>
M.D.C. HOLDINGS, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF INCOME
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
---------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Homebuilding.................................. $ 176 $ 682,768 $ 804 $ -- $ 683,748
Financial Services............................ -- -- 13,017 -- 13,017
Corporate..................................... 727 9 221 -- 957
Equity in earnings of subsidiaries............ 19,146 -- -- (19,146) --
---------- ----------- ------- ----------- ------------
Total Revenues.............................. 20,049 682,777 14,042 (19,146) 697,722
---------- ----------- ------- ----------- ------------
COSTS AND EXPENSES
Homebuilding.................................. 116 655,038 843 227 656,224
Financial Services............................ -- -- 6,700 -- 6,700
Corporate general and administrative.......... 8,186 -- 8 -- 8,194
Corporate and homebuilding interest........... (14,096) 13,094 1,582 181 761
---------- ----------- ------- ----------- ------------
Total Expenses.............................. (5,794) 668,132 9,133 408 671,879
---------- ----------- ------- ----------- ------------
Income before income taxes and extraordinary
item........................................ 25,843 14,645 4,909 (19,554) 25,843
Provision for income taxes.................... (9,821) (5,681) (1,840) 7,521 (9,821)
---------- ----------- ------- ----------- ------------
Income before extraordinary item.............. 16,022 8,964 3,069 (12,033) 16,022
Extraordinary loss, net of income tax benefit
of $1,336................................... (2,179) -- -- -- (2,179)
---------- ----------- ------- ----------- ------------
NET INCOME...................................... $ 13,843 $ 8,964 $ 3,069 $ (12,033) $ 13,843
---------- ----------- ------- ----------- ------------
---------- ----------- ------- ----------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<CAPTION>
UNCONSOLIDATED
---------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
---------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Homebuilding.................................. $ 189 $ 644,046 $ 104 $ -- $ 644,339
Financial Services............................ -- -- 25,034 -- 25,034
Corporate..................................... 932 13 11 -- 956
Equity in earnings of subsidiaries............ 18,176 -- -- (18,176) --
---------- ----------- ------- ----------- ------------
Total Revenues.............................. 19,297 644,059 25,149 (18,176) 670,329
---------- ----------- ------- ----------- ------------
COSTS AND EXPENSES
Homebuilding.................................. 603 625,089 439 225 626,356
Financial Services............................ -- -- 9,335 -- 9,335
Corporate general and administrative ...... 8,478 -- 23 -- 8,501
Corporate and homebuilding interest........... (12,557) 13,734 2,071 116 3,364
---------- ----------- ------- ----------- ------------
Total Expenses.............................. (3,476) 638,823 11,868 341 647,556
---------- ----------- ------- ----------- ------------
Income before income taxes and extraordinary
item........................................ 22,773 5,236 13,281 (18,517) 22,773
Provision for income taxes.................... (8,314) (1,979) (5,258) 7,237 (8,314)
---------- ----------- ------- ----------- ------------
Income before extraordinary item.............. 14,459 3,257 8,023 (11,280) 14,459
Extraordinary loss, net of income tax benefit
of $242..................................... (421) -- -- -- (421)
---------- ----------- ------- ----------- ------------
NET INCOME...................................... $ 14,038 $ 3,257 $ 8,023 $ (11,280) $ 14,038
---------- ----------- ------- ----------- ------------
---------- ----------- ------- ----------- ------------
</TABLE>
F-34
<PAGE>
M.D.C. HOLDINGS, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF INCOME
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
UNCONSOLIDATED
--------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Homebuilding.................................... $ 275 $ 890,059 $ 202 $ -- $ 890,536
Financial Services.............................. -- -- 30,578 -- 30,578
Corporate....................................... 1,429 23 29 -- 1,481
Equity in earnings of subsidiaries.............. 25,582 -- -- (25,582) --
--------- ----------- ------- ----------- ------------
Total Revenues................................ 27,286 890,082 30,809 (25,582) 922,595
--------- ----------- ------- ----------- ------------
COSTS AND EXPENSES
Homebuilding.................................... 482 861,156 631 300 862,569
Financial Services.............................. -- -- 11,921 -- 11,921
Corporate general and administrative............ 11,555 -- 23 -- 11,578
Corporate and homebuilding interest............. (17,505) 18,534 2,581 163 3,773
--------- ----------- ------- ----------- ------------
Total Expenses................................ (5,468) 879,690 15,156 463 889,841
--------- ----------- ------- ----------- ------------
Income before income taxes and extraordinary
item.......................................... 32,754 10,392 15,653 (26,045) 32,754
Provision for income taxes...................... 11,955 3,950 6,175 (10,125) 11,955
Extraordinary item, net......................... (421) -- -- -- (421)
--------- ----------- ------- ----------- ------------
NET INCOME........................................ $ 20,378 $ 6,442 $ 9,478 $ (15,920) $ 20,378
--------- ----------- ------- ----------- ------------
--------- ----------- ------- ----------- ------------
</TABLE>
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
---------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Homebuilding.................................. $ 393 $ 839,913 $ 56 $ -- $ 840,362
Financial Services............................ -- -- 23,948 -- 23,948
Corporate..................................... 1,546 -- -- -- 1,546
Equity in earnings of subsidiaries............ 24,353 -- -- (24,353) --
---------- ----------- ------- ----------- ------------
Total Revenues.............................. 26,292 839,913 24,004 (24,353) 865,856
---------- ----------- ------- ----------- ------------
COSTS AND EXPENSES
Homebuilding.................................. 555 805,804 685 300 807,344
Financial Services............................ -- -- 10,610 -- 10,610
Corporate general and administrative.......... 13,416 -- 62 -- 13,478
Corporate and homebuilding interest........... (14,330) 20,477 1,512 114 7,773
---------- ----------- ------- ----------- ------------
Total Expenses.............................. (359) 826,281 12,869 414 839,205
---------- ----------- ------- ----------- ------------
Income before income taxes.................... 26,651 13,632 11,135 (24,767) 26,651
Provision for income taxes.................... 9,401 5,180 3,127 (8,307) 9,401
---------- ----------- ------- ----------- ------------
NET INCOME...................................... $ 17,250 $ 8,452 $ 8,008 $ (16,460) $ 17,250
---------- ----------- ------- ----------- ------------
---------- ----------- ------- ----------- ------------
</TABLE>
F-35
<PAGE>
M.D.C. HOLDINGS, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF INCOME
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
---------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Homebuilding.................................. $ 131 $ 794,542 $ 3,400 $ (4,280) $ 793,793
Financial Services............................ -- -- 22,095 -- 22,095
Corporate..................................... 1,294 -- 63 -- 1,357
Equity in earnings of subsidiaries............ 36,187 4,351 2,230 (42,768) --
---------- ----------- ------- ----------- ------------
Total Revenues............................ 37,612 798,893 27,788 (47,048) 817,245
---------- ----------- ------- ----------- ------------
COSTS AND EXPENSES
Homebuilding.................................. 2,432 746,278 3,122 (2,503) 749,329
Financial Services............................ -- -- 12,348 -- 12,348
Corporate general and administrative.......... 14,876 -- 256 -- 15,132
Corporate and homebuilding interest........... (10,678) 18,144 3,836 (1,848) 9,454
---------- ----------- ------- ----------- ------------
Total Expenses............................ 6,630 764,422 19,562 (4,351) 786,263
---------- ----------- ------- ----------- ------------
Income before income taxes.................... 30,982 34,471 8,226 (42,697) 30,982
Provision for income taxes.................... 11,727 13,444 3,208 (16,652) 11,727
---------- ----------- ------- ----------- ------------
NET INCOME...................................... $ 19,255 $ 21,027 $ 5,018 $ (26,045) $ 19,255
---------- ----------- ------- ----------- ------------
---------- ----------- ------- ----------- ------------
</TABLE>
F-36
<PAGE>
M.D.C. HOLDINGS, INC.
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
---------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.................................... $ 55,464 $ (28,226) $ (13,408) $ (19,284) $ (5,454)
---------- ----------- -------------- ----------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................... (11,567) (588) 2,208 11,812 1,865
---------- ----------- -------------- ----------- ------------
FINANCING ACTIVITIES
Net Increase (Reduction) in Borrowings From
Parent and Subsidiaries....................... 2,852 (3,094) (7,230) 7,472 --
Lines of Credit
Advances...................................... -- 749,300 18,575 -- 767,875
Principal payments............................ -- (716,132) -- -- (716,132)
Notes Payable................................... (37,897) (137) -- -- (38,034)
Other, net...................................... (7,739) -- -- -- (7,739)
---------- ----------- -------------- ----------- ------------
Net Cash Provided By (Used In) Financing
Activities.................................... (42,784) 29,937 11,345 7,472 5,970
---------- ----------- -------------- ----------- ------------
Net Increase In Cash and Cash Equivalents....... 1,113 1,123 145 -- 2,381
Cash and Cash Equivalents
Beginning of Period........................... 7,236 3,391 677 -- 11,304
---------- ----------- -------------- ----------- ------------
End of Period................................. $ 8,349 $ 4,514 $ 822 $ -- $ 13,685
---------- ----------- -------------- ----------- ------------
---------- ----------- -------------- ----------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.................................... $ 112,289 $ 17,169 $ (4,963) $ (88,844) $ 35,651
---------- ----------- -------------- ----------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................... (21,073) 751 (2,585) 27,591 4,684
---------- ----------- -------------- ----------- ------------
FINANCING ACTIVITIES
Net Increase (Reduction) in Borrowings From
Parent and Subsidiaries....................... (75,873) 6,590 8,030 61,253 --
Lines of Credit
Advances...................................... -- 743,462 -- -- 743,462
Principal payments............................ -- (766,361) -- -- (766,361)
Other, net...................................... (14,395) (2,544) (3,749) -- (20,688)
---------- ----------- -------------- ----------- ------------
Net Cash Provided By (Used In) Financing
Activities.................................... (90,268) (18,853) 4,281 61,253 (43,587)
---------- ----------- -------------- ----------- ------------
Net Increase (Decrease) In Cash and Cash
Equivalents................................... 948 (933) (3,267) -- (3,252)
Cash and Cash Equivalents
Beginning of Period........................... 10,296 5,054 5,445 -- 20,795
---------- ----------- -------------- ----------- ------------
End of Period................................. $ 11,244 $ 4,121 $ 2,178 $ -- $ 17,543
---------- ----------- -------------- ----------- ------------
---------- ----------- -------------- ----------- ------------
</TABLE>
F-37
<PAGE>
M.D.C. HOLDINGS, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................ $ 105,475 $ 47,212 $ (34,203) $ (70,559) $ 47,925
----------- ------------- ----------- ----------- -------------
NET CASH PROVIDED BY INVESTING ACTIVITIES... 4,947 2,082 30,471 (23,502) 13,998
----------- ------------- ----------- ----------- -------------
FINANCING ACTIVITIES
Net Increase (Reduction) in Borrowings From
Parent and Subsidiaries................... (96,440) (13,306) 15,685 94,061 --
Lines of Credit
Advances.................................. -- 1,008,531 -- -- 1,008,531
Principal payments........................ -- (1,040,189) (12,972) -- (1,053,161)
Other, net.................................. (17,042) (5,993) (3,749) -- (26,784)
----------- ------------- ----------- ----------- -------------
Net Cash Used In Financing Activities....... (113,482) (50,957) (1,036) 94,061 (71,414)
----------- ------------- ----------- ----------- -------------
Net Decrease In Cash and Cash Equivalents... (3,060) (1,663) (4,768) (9,491)
Cash and Cash Equivalents
Beginning Of Year......................... 10,296 5,054 5,445 -- 20,795
----------- ------------- ----------- ----------- -------------
End Of Year............................... $ 7,236 $ 3,391 $ 677 $ -- $ 11,304
----------- ------------- ----------- ----------- -------------
----------- ------------- ----------- ----------- -------------
</TABLE>
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
UNCONSOLIDATED
---------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................ $ 33,423 $ 921 $(100,404) $ 88,613 $ 22,553
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES................................ (65,794) 1,482 92,870 (19,830) 8,728
----------- ------------- ----------- ----------- -------------
FINANCING ACTIVITIES........................
Net Increase in Borrowings From Parent and
Subsidiaries.............................. 19,860 35,874 13,049 (68,783) --
Lines of Credit
Advances.................................. -- 741,053 -- -- 741,053
Principal payments........................ -- (759,895) (1,221) -- (761,116)
Principal Payments on Notes Payable......... (992) (25,151) (1,547) -- (27,690)
Other, net.................................. (7,411) 1,114 -- -- (6,297)
----------- ------------- ----------- ----------- -------------
Net Cash Provided By (Used In) Financing
Activities................................ 11,457 (7,005) 10,281 (68,783) (54,050)
----------- ------------- ----------- ----------- -------------
Net Increase (Decrease) In Cash and Cash
Equivalents............................... (20,914) (4,602) 2,747 -- (22,769)
Cash and Cash Equivalents
Beginning Of Year......................... 31,210 9,656 2,698 -- 43,564
----------- ------------- ----------- ----------- -------------
End Of Year............................... $ 10,296 $ 5,054 $ 5,445 $ -- $ 20,795
----------- ------------- ----------- ----------- -------------
----------- ------------- ----------- ----------- -------------
</TABLE>
F-38
<PAGE>
M.D.C. HOLDINGS, INC.
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
UNCONSOLIDATED
------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................... $ (22,467) $ (29,215) $ 3,239 $ 11,653 $ (36,790)
---------- ----------- ----------- ----------- ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES...... 20,604 5,498 17,545 (24,379) 19,268
---------- ----------- ----------- ----------- ------------
FINANCING ACTIVITIES
Net Increase (Reduction) in Borrowings From
Parent and Subsidiaries...................... (1,623) 18,905 (12,675) (4,607) --
Lines of Credit
Advances..................................... -- 641,874 -- -- 641,874
Principal payments........................... -- (606,160) (6,289) -- (612,449)
Notes Payable
Borrowings................................... -- 15,870 -- -- 15,870
Principal payments........................... (5,370) (37,575) (1,890) -- (44,835)
Maturity of Affiliate-Owned Debt............... -- (17,333) -- 17,333 --
Other, net..................................... (2,377) -- -- -- (2,377)
---------- ----------- ----------- ----------- ------------
Net Cash Provided By (Used In) Financing
Activities................................... (9,370) 15,581 (20,854) 12,726 (1,917)
---------- ----------- ----------- ----------- ------------
Net Decrease In Cash and Cash Equivalents...... (11,233) (8,136) (70) -- (19,439)
Cash and Cash Equivalents
Beginning Of Year............................ 42,443 17,792 2,768 -- 63,003
---------- ----------- ----------- ----------- ------------
End Of Year.................................. $ 31,210 $ 9,656 $ 2,698 $ -- $ 43,564
---------- ----------- ----------- ----------- ------------
---------- ----------- ----------- ----------- ------------
</TABLE>
F-39
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Investments in subsidiaries are accounted for on the equity method for
purposes of the supplemental information. The Guarantors follow the accounting
policies set forth in Note A.
RELATED PARTIES. The Guarantors are members of a group of affiliated
companies and have transactions and relationships with members of the group.
MDC charges the Guarantors for a share of its general and administrative
expenses, which amounted to $4,721,000, $4,332,000 and $3,926,000, respectively,
in 1996, 1995 and 1994.
MDC pays costs associated with certain litigation and other significant
claims against the Guarantors which it considers to be general corporate
expenses. Amounts paid by MDC on behalf of the Guarantors amounted to
approximately $282,000, $270,000 and $769,000, respectively, in 1996, 1995 and
1994. In 1996 and 1995, MDC recovered a portion of such payments.
Advances and notes receivable/payable--Parent (M.D.C. Holdings, Inc.) and
subsidiaries consists of ongoing activities relating to the Guarantors'
participation in MDC's cash management system and current and deferred income
taxes.
INCOME TAXES. The Guarantors report their results of operations as if they
were separate taxpayers. The current tax liabilities and deferred income tax
assets and liabilities of the Guarantors are reported in the financial
statements in the Advances and notes receivable/payable--Parent and subsidiaries
accounts.
F-40
<PAGE>
PROSPECTUS
$300,000,000
M.D.C. HOLDINGS, INC.
DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
---------------------
M.D.C. Holdings, Inc. ("MDC" or the "Company") may offer from time to time
in one or more series: (i) its unsecured debt securities ("Debt Securities"),
(ii) shares of its preferred stock, $.01 par value per share ("Preferred Stock")
and (iii) shares of its common stock, $.01 par value per share ("Common Stock"),
with an aggregate public offering price of up to $300,000,000 in amounts, at
prices and on terms to be determined at the time of offering. The Debt
Securities, Preferred Stock and Common Stock (collectively, the "Securities")
may be offered separately or together, in separate series, in amounts, at prices
and on terms to be set forth in one or more supplements to this Prospectus
(each, a "Prospectus Supplement").
The specific terms of the Securities for which this Prospectus is being
delivered will be set forth in the applicable Prospectus Supplement. In the case
of Debt Securities, the specific terms will include the title, aggregate
principal amount, ranking, form (which may be registered or bearer, or
certificated or global), authorized denominations, maturity, rate (or manner of
calculation thereof) and time of payment of interest, guarantees thereof (if
any), terms for redemption at the option of the Company or repayment at the
option of the holder, terms for sinking fund payments, terms for conversion into
Common Stock or Preferred Stock, covenants and any initial public offering
price. In the case of Preferred Stock, the specific terms to be described in a
Prospectus Supplement will include the designation and stated value per share,
any dividend, liquidation, redemption, conversion, voting and other rights, and
any initial public offering price. In the case of Common Stock, the specific
terms to be described in a Prospectus Supplement will include any initial public
offering price.
The applicable Prospectus Supplement also will contain information, where
appropriate, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Securities covered
by such Prospectus Supplement.
The Securities may be offered by the Company directly to one or more
purchasers, through agents designated from time to time by the Company or to or
through underwriters or dealers. If any agents or underwriters are involved in
the sale of any of the securities, their names, and any applicable purchase
price, fee, commission or discount arrangement between or among them will be set
forth, or will be calculable from the information set forth, in an accompanying
Prospectus Supplement. See "Plan of Distribution." No Securities may be sold
without delivery of a Prospectus Supplement describing the method and terms of
the offering of such Securities.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS OCTOBER 30, 1997
<PAGE>
AVAILABLE INFORMATION
The Company and certain of its subsidiaries that are co-registrants have
filed jointly with the Securities and Exchange Commission (the "Commission") a
registration statement (together with all amendments and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Securities that are being offered by this
Prospectus. This Prospectus is part of the Registration Statement, but does not
contain all of the information set forth in the Registration Statement. Certain
parts of the Registration Statement are omitted from this Prospectus in
accordance with the rules and regulations of the Commission. For further
information about the Company and the Securities, interested persons are
referred to the Registration Statement.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In accordance with those
requirements, MDC files reports, proxy and information statements and other
information with the Commission. The Registration Statement, as well as such
reports, proxy and information statements and other information filed by the
Company with the Commission, may be inspected and copied (at prescribed rates)
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549 and at the Commission's regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New
York 10048. The Commission also maintains an Internet Web Site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding MDC that are filed electronically with the
Commission. In addition, such reports, proxy and information statements and
other information concerning the Company may be inspected at the offices of the
New York Stock Exchange, at 20 Broad Street, New York, New York 10005.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission (File No.
1-8951) pursuant to the Exchange Act are incorporated into this Prospectus by
reference:
(i) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
(ii) the Company's Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, 1997 and June 30, 1997; and
(iii) The Company's Current Report on Form 8-K dated October 22, 1997.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Securities offered hereby (except for
portions of such documents not deemed to be filed) shall be deemed incorporated
by reference into this Prospectus and to be a part hereof from the date such
documents are filed.
Any statement contained in this Prospectus or in a document incorporated or
deemed to be incorporated by reference in this Prospectus will be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in the applicable Prospectus Supplement or in any
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded will not be deemed to constitute a part of this
Prospectus, except as so modified or superseded.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of each document incorporated herein by reference (not including the
exhibits to those documents, unless the exhibits are specifically incorporated
by reference therein or herein). Requests for such copies should be directed to:
Daniel S. Japha, Secretary, M.D.C. Holdings, Inc., 3600 South Yosemite Street,
Suite 900, Denver, Colorado 80237, (303) 773-1100.
2
<PAGE>
THE COMPANY
M.D.C. Holdings, Inc. is a Delaware corporation which originally was
incorporated in Colorado in 1972. The Company is one of the ten largest
homebuilders in the United States, building homes under the name "Richmond
American Homes." MDC is a major regional homebuilder, with a significant
presence in a number of selected growth markets. The Company is the largest
homebuilder in Denver; among the top five builders in Riverside County,
California, Northern Virginia, suburban Maryland, Tucson and Colorado Springs;
among the top ten builders in Phoenix; and has a growing presence in Orange,
Ventura, San Bernardino, Los Angeles and San Diego Counties, California and Las
Vegas. The Company also builds homes in Sacramento and the San Francisco Bay
area.
The Company's strategy is to build quality homes at affordable prices,
generally for the first-time and move-up buyer. Homes are constructed according
to designs based on 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 Northern Virginia and suburban
Maryland, where MDC also builds a significant number of townhomes.
Homes are built and sold by wholly owned subsidiaries of the Company. The
base prices for these homes range from approximately $80,000 to $400,000,
although the Company builds homes with prices as high as $700,000. The Company's
average sales price per home closed in both 1996 and the first six months of
1997 was $177,000.
HomeAmerican Mortgage Corporation ("HomeAmerican"), a wholly owned
subsidiary of MDC, is a full service mortgage lender originating mortgage loans
primarily for MDC's home buyers through offices located in each of MDC's
markets. As the principal originator of mortgage loans for MDC's home buyers,
HomeAmerican is an integral part of MDC's homebuilding operations.
The principal executive offices of the Company are located at 3600 South
Yosemite Street, Suite 900, Denver, Colorado 80237 (telephone (303) 773-1100).
USE OF PROCEEDS
Unless otherwise set forth in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Securities for
general corporate purposes.
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the consolidated ratio of earnings to fixed
charges for the Company for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, FISCAL YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges
(unaudited)(1)........................... 2.02 1.89 2.02 1.79 1.81 1.72 1.61
</TABLE>
- ------------------------
(1) In computing the ratio of earnings to fixed charges, fixed charges consist
of homebuilding and corporate interest expense plus (i) amortization and
expensing of debt expenses; (ii) amortization of discount or premium
relating to indebtedness; and (iii) capitalized interest. Earnings are
computed by adding fixed charges (except capitalized interest) and
amortization of previously capitalized interest during the period to pretax
earnings from continuing operations.
3
<PAGE>
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Debt Securities will be direct unsecured obligations of the Company and
may be either senior Debt Securities ("Senior Debt Securities"), senior
subordinated Debt Securities ("Senior Subordinated Debt Securities") or junior
subordinated Debt Securities ("Junior Subordinated Debt Securities"). The Debt
Securities will be issued under one or more indentures, each dated as of a date
prior to the issuance of the Debt Securities to which the indenture relates.
Senior Debt Securities, Senior Subordinated Debt Securities and Junior
Subordinated Debt Securities may be issued pursuant to separate indentures
(respectively, a "Senior Indenture", a "Senior Subordinated Indenture" and a
"Junior Subordinated Indenture"), in each case between the Company and a trustee
(the "Trustee"), which may be the same Trustee, and in the form that has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part, subject to such amendments or supplements as may be adopted from time to
time. The Senior Indenture, the Senior Subordinated Indenture and the Junior
Subordinated Indenture, as amended or supplemented from time to time, are
sometimes hereinafter referred to individually as an "Indenture" and
collectively as the "Indentures." The Indentures will be subject to and governed
by the Trust Indenture Act of 1939, as amended (the "TIA"). The statements made
relating to the Debt Securities and the Indentures are summaries of the
anticipated provisions thereof, do not purport to be complete and are qualified
in their entirety by reference to the Indentures, the applicable Prospectus
Supplements and such Debt Securities.
Capitalized terms used herein and not defined shall have the meanings
assigned to them in the applicable Indenture.
TERMS
The Debt Securities will be direct, unsecured obligations of the Company.
The indebtedness represented by Senior Subordinated Debt Securities or Junior
Subordinated Debt Securities will be subordinated in right of payment to the
prior payment in full of senior Indebtedness of the Company. The particular
terms of the Debt Securities offered by a Prospectus Supplement and any
applicable federal income tax considerations will be described in the applicable
Prospectus Supplement. Accordingly, for a description of the terms of any series
of Debt Securities, reference must be made to both the Prospectus Supplement
relating thereto and the description of the Debt Securities set forth in this
Prospectus.
Except as set forth in any Prospectus Supplement, the Debt Securities may be
issued without limit as to aggregate principal amount, in one or more series.
Specific terms of each series of debt securities will be contained in
authorizing resolutions or a supplemental indenture and described in an
applicable Prospectus Supplement. All Debt Securities of one series need not be
issued at the same time and, unless otherwise provided, a series may be
reopened, without the consent of the holders of the Debt Securities of such
series, for issuance of additional Debt Securities of such series.
The Prospectus Supplement relating to the series of Debt Securities being
offered will describe the specific terms of the Debt Securities. The following
summarizes certain general terms and provisions of the Indentures and the Debt
Securities.
(1) The title of such Debt Securities and whether such Debt Securities are
Senior Debt Securities, Senior Subordinated Debt Securities or Junior
Subordinated Debt Securities;
(2) The aggregate principal amount of such Debt Securities and any limit on
such aggregate principal amount;
(3) The price (expressed as a percentage of the principal amount thereof) at
which such Debt Securities will be issued and, if other than the principal
amount thereof, the portion of the principal amount thereof payable upon
declaration of acceleration of the maturity thereof, or (if applicable) the
4
<PAGE>
portion of the principal amount of such Debt Securities that is convertible
into Common Stock or Preferred Stock, and the method by which any such
portion shall be determined;
(4) If convertible, the terms on which such Debt Securities are convertible,
including the initial conversion price or rate and the conversion period
and any applicable limitations on the ownership or transferability of the
Common Stock or Preferred Stock receivable on conversion;
(5) The date or dates, or the method for determining such date or dates, on
which the principal of such Debt Securities will be payable;
(6) The rate or rates (which may be fixed or variable), or the method by which
such rate or rates shall be determined, at which such Debt Securities will
bear interest, if any;
(7) The date or dates, or the method for determining such date or dates, from
which any such interest will accrue, the date or dates on which any such
interest will be payable, the record date or dates for such interest
payments, or the method by which such date or dates shall be determined,
the persons to whom such interest shall be payable, and the basis upon
which interest shall be calculated if other than that of a 360-day year or
twelve 30-day months;
(8) The place or places where the principal of and interest, if any, on such
Debt Securities will be payable, where such Debt Securities may be
surrendered for registration of transfer or exchange and where notices or
demands to or upon the Company in respect of such Debt Securities and the
applicable Indenture may be served;
(9) The period or periods, if any, within which, the price or prices at which,
and the other terms and conditions upon which, such Debt Securities may,
pursuant to any optional or mandatory redemption provisions, be redeemed,
as a whole or in part, at the option of the Company;
(10) The obligation, if any, of the Company to redeem, repay or purchase such
Debt Securities pursuant to any sinking fund or analogous provision or at
the option of a holder thereof, and the period or periods within which,
the price or prices at which and the other terms and conditions upon which
such Debt Securities will be redeemed, repaid or purchased, as a whole or
in part, pursuant to such obligation;
(11) Any changes to the Events of Default (as defined in the Indenture) of the
Company with respect to Debt Securities of the series, whether or not such
Events of Default are consistent with the Events of Default described
herein;
(12) The applicability, if any, of the defeasance and covenant defeasance
provisions of the Indenture to the Debt Securities of the series;
(13) Any guarantees by subsidiaries of the Company that may guarantee the Debt
Securities, including the terms of any subordination of any such guarantee
to other obligations of the Company;
(14) Any other terms of the series (which terms shall not be inconsistent with
the provisions of the Indenture under which the Debt Securities are
issued).
If so provided in the applicable Prospectus Supplement, the Debt Securities
may be issued at a discount below their principal amount and provide for less
than the entire principal amount thereof to be payable upon declaration of
acceleration of the maturity thereof ("Original Issue Discount Securities"). In
such cases, all material U.S. federal income tax, accounting and other
considerations applicable to Original Issue Discount Securities will be
described in the applicable Prospectus Supplement.
Except as may be set forth in any Prospectus Supplement, the Debt Securities
will not contain any provisions that would limit the ability of the Company to
incur indebtedness or that would afford holders of Debt Securities protection in
the event of a highly leveraged or similar transaction involving the Company or
in the event of a change of control. The applicable Prospectus Supplement will
contain
5
<PAGE>
information with respect to any deletions from, modifications of, or additions
to, the events of default or covenants of the Company that are described below,
including any addition of a covenant or other provision providing event risk or
similar protection.
CERTAIN COVENANTS
The applicable Prospectus Supplement will describe any material covenants to
which a series of Debt Securities will be subject.
EVENTS OF DEFAULT, NOTICE AND WAIVER
The applicable Prospectus Supplement and each Indenture will provide the
events that constitute "Events of Default" with respect to any series of Debt
Securities issued thereunder, including the following: (a) default in the
payment of any interest on any Debt Security of such series when such interest
becomes due and payable that continues for a period of 30 days; (b) default in
the payment of the principal of any Debt Security of such series when due and
payable; (c) default in the performance, or breach of any other covenant or
warranty of the Company in the applicable Indenture with respect to the Debt
Securities of such series and continuance of such default or breach for a period
of 90 days after written notice as provided in the Indenture; and (d) any other
event of default provided with respect to a particular series of Debt
Securities.
If an Event of Default under any Indenture occurs and is continuing, then
the applicable Trustee or the holders of not less than 25% in principal amount
of the Debt Securities of that series will have the right to declare the
principal amount (or, if the Debt Securities of that series are Original Issue
Discount Securities or indexed securities, such portion of the principal amount
as may be specified in the terms thereof) of all the Debt Securities of that
series to be due and payable immediately by written notice thereof to the
Company (and to the applicable Trustee if given by the holders). However, at any
time after such a declaration of acceleration with respect to Debt Securities of
such series has been made, but before a judgment or decree for payment of the
money due has been obtained by the applicable Trustee, the holders of not less
than a majority of the principal amount of outstanding Debt Securities of such
series may rescind and annul the acceleration if all conditions set forth in the
applicable Indenture are met. The Indentures also will provide that the holders
of not less than a majority of the principal amount of the outstanding Debt
Securities of any series may waive any past default with respect to such series
and its consequences, except a default (i) in the payment of the principal of or
interest on any Debt Security of such series or (ii) in respect of a covenant or
provision contained in the applicable Indenture that cannot be modified or
amended without the consent of the holder of each outstanding Debt Security
affected thereby.
The Indentures will provide for other procedures that may be followed by
holders of Debt Securities, the Trustee of any series of Debt Securities, or
both, upon the occurrence of an Event of Default.
MODIFICATION OF THE INDENTURES
Modifications and amendments of an Indenture will be permitted only with the
consent of the holders of not less than a majority in principal amount of all
outstanding Debt Securities issued under such Indenture affected by such
modification or amendment. No such modification or amendment may, without the
consent of the holder of each such Debt Security affected thereby, (a) reduce
the amount of Debt Securities whose holders must consent to an amendment,
supplement or waiver; (b) reduce the rate of or change the time for payment of
interest, including defaulted interest, on any Debt Security; (c) reduce the
principal of or change the fixed maturity of any Debt Security or alter the
provisions (including related definitions) with respect to redemption of Debt
Securities or with respect to any obligations on the part of the Company to
offer to purchase or to redeem Debt Securities; (d) modify the ranking or
priority of the Debt Securities or any guarantee thereof; (e) release any
guarantor from any of its obligations under its
6
<PAGE>
guarantee otherwise than in accordance with the terms of the applicable
Indenture; (f) waive a continuing Default or Event of Default in the payment of
the principal of or interest on any Debt Security; or (g) make any Debt Security
payable at a place or in money other than that stated in the Debt Security, or
impair the right of any holder of Debt Securities to bring suit.
The holders of a majority in aggregate principal amount of the outstanding
Debt Securities of each series may, on behalf of all holders of Debt Securities
of that series, waive, insofar as that series is concerned, compliance by the
Company with certain restrictive covenants of the applicable Indenture.
Certain modifications and amendments of an Indenture will be permitted to be
made by the Company and the respective Trustee thereunder without the consent of
any holder of Debt Securities as set forth in the applicable Indenture and as
described in the applicable Prospectus Supplement.
SUBORDINATION
Senior Subordinated Debt Securities and Junior Subordinated Debt Securities,
if any, will be subject to the subordination provisions set forth in the
applicable Prospectus Supplement.
If this Prospectus is being delivered in connection with a series of Senior
Subordinated Debt Securities or Junior Subordinated Debt Securities, the
accompanying Prospectus Supplement or the information incorporated herein by
reference will set forth the approximate amount of Senior Indebtedness (as
defined in the applicable Indenture) outstanding as of the end of the Company's
most recent fiscal quarter.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Unless otherwise indicated in the applicable Prospectus Supplement, the
Company will be permitted, at its option, to discharge certain obligations to
holders of any series of Debt Securities issued under any Indenture that have
not already been delivered to the applicable Trustee for cancellation by
irrevocably depositing with the applicable Trustee, in trust, funds in an amount
sufficient to pay the entire indebtedness on such Debt Securities in respect of
principal and interest to the date of such deposit (if such Debt Securities have
become due and payable) or to the stated maturity or redemption date, as the
case may be.
The Indentures will provide that, unless otherwise indicated in the
applicable Prospectus Supplement, the Company may elect either (a) to defease
and be discharged from any and all obligations with respect to such Debt
Securities (except for the obligations to register the transfer or exchange of
such Debt Securities, to replace temporary or mutilated, destroyed, lost or
stolen Debt Securities, to maintain an office or agency in respect of such Debt
Securities, and to hold moneys for payment in trust) ("defeasance") or (b) to be
released from certain obligations with respect to such Debt Securities under the
applicable Indenture or, if provided in the applicable Prospectus Supplement,
its obligations with respect to any other covenant, and any omission to comply
with such obligations shall not constitute an Event of Default with respect to
such Debt Securities ("covenant defeasance"), in either case upon the
irrevocable deposit by the Company with the applicable Trustee, in trust, of an
amount, which through the scheduled payment of principal and interest in
accordance with their terms will provide money in an amount sufficient to pay
the principal of and interest on such Debt Securities, and any mandatory sinking
fund or analogous payments thereon, on the scheduled due dates therefor.
Such a trust will be permitted to be established only if, among other
conditions, the Company has delivered to the applicable Trustee an opinion of
counsel to the effect that the holders of such Debt Securities will not
recognize income, gain or loss for U.S. federal income tax purposes as a result
of such defeasance or covenant defeasance and will be subject to U.S. federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such defeasance or covenant defeasance had not
occurred. In the event of such defeasance, the holders of such Debt Securities
would thereafter be able to look only to such trust fund for payment of
principal and interest.
7
<PAGE>
The applicable Prospectus Supplement may further describe the provisions and
additional conditions, if any, permitting such defeasance or covenant
defeasance, including any modifications to the provisions described above, with
respect to the Debt Securities or a particular series.
BOOK-ENTRY SYSTEM
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities ("Global Securities"). Global Securities
will be deposited with, or on behalf of, a depository (the "Depository")
identified in the Prospectus Supplement relating to such series. Global
Securities, if any, issued in the United States are expected to be deposited
with The Depository Trust Company ("DTC"). Global Securities may be issued in
fully registered form and may be issued in either temporary or permanent form.
Unless and until it is exchanged in whole or in part for the individual Debt
Securities represented thereby, a Global Security may not be transferred except
as a whole by the Depository for such Global Security to a nominee of such
Depository or by a nominee of such Depository to such Depository or another
nominee of such Depository or by such Depository or any nominee of such
Depositor to a successor Depository or any nominee of such successor. The
specific terms of the depository arrangement with respect to a series of Debt
Securities will be described in the Prospectus Supplement relating to such
series.
PAYMENT AND PAYING AGENTS
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of and interest on any series of Debt Securities will be payable at
the corporate trust office of the Trustee, the address of which will be stated
in the applicable Prospectus Supplement; provided that, at the option of the
Company, payment of interest may be made by check mailed to the address of the
person entitled thereto as it appears in the applicable register for such Debt
Securities or by wire transfer of funds to such person at an account maintained
within the United States.
All moneys paid by the Company to a paying agent or a Trustee for the
payment of the principal of or interest on any Debt Security which remain
unclaimed at the end of two years after such payment has become due and payable
will be repaid to the Company, and the holder of such Debt Security thereafter
may look only to the Company for payment thereof.
DESCRIPTION OF PREFERRED STOCK
The description of the Company's preferred stock, par value $.01 per share
("Preferred Stock"), set forth below does not purport to be complete and is
qualified in its entirety by reference to the Company's Certificate of
Incorporation, as amended (the "Certificate of Incorporation") and amended
By-laws (the "Bylaws").
GENERAL
Under the Certificate of Incorporation, the Company has authority to issue
up to 25 million shares of Preferred Stock, none of which were issued and
outstanding as of August 31, 1997. Shares of Preferred Stock may be issued from
time to time, in one or more series, as authorized by the Board of Directors of
the Company with any terms, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption (collectively, the "Terms
of the Preferred Stock"), as are determined by the Company's Board of Directors
and permitted by Delaware law. At such time as MDC's Board of Directors
determines the Terms of the Preferred Stock, such terms will be set forth in a
Certificate of Designations to be filed with the Secretary of State of Delaware.
Upon filing, the Certificate of Designations will constitute an amendment to the
Certificate of Incorporation pursuant to the Delaware General Corporation Law
(the "DGCL"). The Preferred Stock will, when issued, be fully paid and
nonassessable and will have no preemptive rights. The
8
<PAGE>
Company's Board of Directors could authorize the issuance of shares of Preferred
Stock with terms and conditions that could have the effect of discouraging a
takeover or other transaction that holders of Common Stock might believe to be
in their best interests or in which holders of some, or a majority, of the
shares of Common Stock might receive a premium for their shares over the then
market price of such shares of Common Stock.
TERMS
The Terms of the Preferred Stock will be described in any Prospectus
Supplement related to the Preferred Stock and may include the following:
(1) The title and stated value of such Preferred Stock;
(2) The number of shares of such Preferred Stock offered and the offering
price and liquidation preference per share of such Preferred Stock;
(3) The dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculation thereof applicable to such Preferred Stock;
(4) The date from which dividends on such Preferred Stock shall accumulate,
if applicable;
(5) The procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) The provision for a sinking fund, if any, for such Preferred Stock;
(7) The provision for redemption, if applicable, of such Preferred Stock;
(8) Any voting rights of holders of the Preferred Stock;
(9) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock;
(10) The relative ranking and preference of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company;
(11) Any limitations on issuance of any series of Preferred Stock ranking
senior to or on a parity with such series of Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company; and
(12) The terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into or participate in dividends, if any, paid
on the Common Stock, including the conversion price (or manner of
calculation thereof).
TRANSFER AGENT
The transfer agent and registrar for the Preferred Stock will be set forth
in the applicable Prospectus Supplement.
DESCRIPTION OF COMMON STOCK
The Company has authorized 100,000,000 shares of Common Stock, $.01 par
value ("Common Stock").
At September 12, 1997, approximately 23,493,919 shares of the Common Stock
were issued and approximately 17,590,763 shares were outstanding. Holders of
shares of Common Stock are entitled to one vote for each share held of record on
matters submitted to a vote of stockholders. Holders of shares of the Common
Stock do not have cumulative voting rights in the election of directors to the
Company's Board of Directors, which is divided into three classes, with members
of each class serving a three-year term.
9
<PAGE>
A vote by the holders of a majority of shares of the Common Stock present at
a meeting at which a quorum is present is necessary to take action, except for
certain extraordinary matters which require the approval of the holders of 80%
of the outstanding shares of voting stock. In addition, certain Business
Combinations (as defined in the Company's Certificate of Incorporation, but
generally a merger or consolidation of the Company with any holder (directly or
indirectly) of more than 10% of the outstanding shares of voting stock of the
Company (an "Interested Stockholder") or certain related parties; the sale or
other disposition by the Company of any assets or securities to an Interested
Stockholder involving assets or securities having a value of $15,000,000 or more
than 15% of the book value of the total assets or 15% of the stockholders'
equity of the Company; the adoption of any plan or proposal for the liquidation
or dissolution of the Company; the adoption of any amendment to the Company's
Bylaws; or any reclassification of securities, recapitalization, merger with a
subsidiary or other transaction which has the effect of increasing an Interested
Stockholder's proportionate ownership of the capital stock of the Company)
involving the Company and an Interested Stockholder, must be approved by the
holders of 80% of the shares of outstanding voting stock, unless approved by a
majority of Continuing Directors (as defined in the Certificate of
Incorporation) or unless certain minimum price and procedural requirements are
met. In the case of any Business Combination involving payments to holders of
shares of the Common Stock, the fair market value per share of such payments
would have to be at least equal to the highest value determined under the
following alternatives: (i) the highest price per share of the Common Stock paid
by or on behalf of the Interested Stockholder during the two years prior to the
public announcement of the proposed Business Combination (the "Announcement
Date") or in the transaction in which it became an Interested Stockholder,
whichever is higher; and (ii) the fair market value per share of the Common
Stock on the Announcement Date or on the date on which the Interested
Stockholder became an Interested Stockholder, whichever is higher. "Fair market
value" is defined in the Certificate of Incorporation to mean, in the case of
exchange-listed or NASDAQ-quoted stock, the highest closing price or closing bid
in the 30 days preceding the date in question, and, in the case of other
property, the fair market value as determined by a majority of the Continuing
Directors.
Subject to the preferences applicable to any then outstanding shares of
Preferred Stock of the Company, holders of shares of Common Stock are entitled
to dividends when and as declared by the Board of Directors of the Company from
funds legally available therefor and are entitled, in the event of liquidation,
to share ratably in all assets remaining after payment of liabilities. The
shares of Common Stock are neither redeemable nor convertible, and the holders
thereof have no preemptive or subscription rights to purchase any securities of
the Company. All issued and outstanding shares of Common Stock are validly
issued, fully paid and nonassessable.
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company, New York, New York.
PLAN OF DISTRIBUTION
The Company may sell the Securities offered hereby (i) through agents; (ii)
through underwriters; (iii) through dealers; (iv) directly to purchasers
(through a specific bidding or auction process or otherwise); or (v) through a
combination of any such methods of sale. The distribution of Securities may be
effected from time to time in one or more transactions at a fixed price or
prices, which may be changed, or at market prices prevailing at the time of the
sale, at prices relating to such prevailing market prices or at negotiated
prices.
Each Prospectus Supplement will set forth the terms of the offering of the
particular issuance of Securities to which such Prospectus Supplement relates,
including (i) the name or names of any underwriters or agents with whom the
Company has entered into arrangements with respect to the sale of such
Securities; (ii) the initial public offering or purchase price of such
Securities; (iii) any underwriting discounts, commissions and other items
constituting underwriters' compensation from the Company and
10
<PAGE>
any other discounts, concessions, or commissions allowed or reallowed or paid by
any underwriters to other dealers; and (iv) the securities exchange, if any, on
which such Securities will be listed.
If an underwriter or underwriters are utilized in the sale of Securities,
the Company will execute an underwriting agreement with such underwriter or
underwriters at the time an agreement for such sale is reached, and the names of
the specific managing underwriter or underwriters, as well as any other
underwriters, and the terms of the transactions, including compensation of the
underwriters and dealers, if any, will be set forth in the applicable Prospectus
Supplement, which will be used by the underwriters to make resales of the
Securities.
If a dealer is utilized in the sale of the Securities, the Company will sell
such Securities to the dealer, as principal. The dealer may then resell such
Securities to the public at varying prices to be determined by such dealer at
the time of resale. The name of the dealer and the terms of the transactions
will be set forth in the applicable Prospectus Supplement relating thereto.
Offers to purchase the Securities may be solicited directly by the Company
and sales thereof may be made by the Company directly to institutional investors
or others. The terms of any such sales, including the terms of any bidding or
auction process, if utilized, will be described in the applicable Prospectus
Supplement.
Agents, underwriters and dealers may be entitled under agreements which may
be entered into with the Company to indemnification by the Company against
certain liabilities, including liabilities under the Securities Act, and any
such agents, underwriters or dealers, or their affiliates may be customers of,
engage in transactions with or perform services for, the Company in the ordinary
course of business.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize agents, underwriters and other persons to solicit offers by certain
institutions to purchase Securities from the Company pursuant to contracts
providing for payment and delivery on a future date. Institutions with such
contracts may include commercial and savings banks, insurance companies, pension
funds, investment companies, educational and charitable institutions and others,
but in all cases such institutions must be approved by the Company. The
obligations of any purchaser under any such contract will be subject to the
condition that the purchaser of the Securities shall not at the time of delivery
be prohibited under the laws of the jurisdiction to which such purchaser is
subject. The underwriters and such other agents will not have any responsibility
in respect of the validity or performance of such contracts.
The Company may grant underwriters who participate in the distribution of
Securities an option to purchase additional Securities to cover over-allotments,
if any.
The place and date of delivery for Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement.
Unless otherwise indicated in the applicable Prospectus Supplement, the
Securities in respect of which this Prospectus is being delivered will be a new
issue of securities, will not have an established trading market when issued and
will not be listed on any securities exchange. Any underwriters or agents to or
through whom such Securities are sold by the Company for public offering and
sale may make a market in such Securities, but such underwriters or agents will
not be obligated to do so and may discontinue any market making at any time
without notice. No assurance can be given as to the liquidity of the trading
market for any such Securities.
LEGAL MATTERS
Certain matters with respect to the legality and binding nature of the
Securities have been passed upon for the Company and the co-registrants by Holme
Roberts & Owen LLP, Denver, Colorado.
11
<PAGE>
EXPERTS
The financial statements incorporated in this Prospectus by reference to the
Annual Report on Form 10-K for the year ended December 31, 1996, have been so
incorporated in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
12
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
NOTES, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE NOTES TO ANY PERSON, IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT PAGE
----
<S> <C>
Prospectus Supplement Summary............................................. S-3
Forward-Looking Statements................................................ S-8
Risk Factors.............................................................. S-8
Use of Proceeds........................................................... S-11
Capitalization............................................................ S-12
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. S-13
Business.................................................................. S-29
Management................................................................ S-34
Description of Notes...................................................... S-36
Underwriting.............................................................. S-61
Legal Matters............................................................. S-62
Index to Financial Statements............................................. F-1
<CAPTION>
PROSPECTUS PAGE
----
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Information by Reference......................... 2
The Company............................................................... 3
Use of Proceeds........................................................... 3
Consolidated Ratio of Earnings to Fixed Charges........................... 3
Description of Debt Securities............................................ 4
Description of Preferred Stock............................................ 8
Description of Common Stock............................................... 9
Plan of Distribution...................................................... 10
Legal Matters............................................................. 11
Experts................................................................... 12
</TABLE>
$175,000,000
M.D.C. HOLDINGS, INC.
8 3/8 % Senior Notes
due 2008
[LOGO]
---------
P R O S P E C T U S
S U P P L E M E N T
JANUARY 23, 1998
---------
Salomon Smith Barney
Morgan Stanley Dean Witter
SBC Warburg Dillon Read Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
