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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-8951
M.D.C. HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 84-0622967
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
3600 South Yosemite Street, Suite 900 80237
Denver, Colorado (Zip code)
(Address of principal executive offices)
(303) 773-1100
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of August 2, 2000, 21,237,000 shares of M.D.C. Holdings, Inc. common
stock were outstanding.
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M.D.C. HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of June 30, 2000 (Unaudited)
and December 31, 1999.......................... 1
Statements of Income (Unaudited) for the three
and six months ended June 30, 2000
and 1999....................................... 3
Statements of Cash Flows (Unaudited) for the six
months ended June 30, 2000 and 1999............ 4
Notes to Condensed Consolidated Financial
Statements (Unaudited)......................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................... 18
Part II. Other Information:
Item 1. Legal Proceedings................................ 19
Item 4. Submission of Matters to a Vote of Shareowners... 19
Item 5. Other Information................................ 19
Item 6. Exhibits and Reports on Form 8-K................. 19
(i)
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands)
June 30, December 31,
2000 1999
----------- -----------
ASSETS (Unaudited)
Corporate
Cash and cash equivalents................................................... $ 12,343 $ 33,637
Property and equipment, net................................................. 3,029 2,909
Deferred income taxes....................................................... 26,841 21,201
Deferred debt issue costs, net.............................................. 2,289 2,393
Other assets, net........................................................... 5,835 6,771
---------- -----------
50,337 66,911
Homebuilding
Cash and cash equivalents................................................... 5,943 4,935
Home sales and other accounts receivable.................................... 8,039 3,496
Inventories, net
Housing completed or under construction................................... 448,519 337,029
Land and land under development........................................... 314,281 308,680
Prepaid expenses and other assets, net...................................... 61,264 58,156
---------- -----------
838,046 712,296
Financial Services
Cash and cash equivalents................................................... 497 358
Mortgage loans held in inventory, net....................................... 75,903 89,953
Other assets, net........................................................... 7,305 7,490
---------- -----------
83,705 97,801
Total Assets.......................................................... $ 972,088 $ 877,008
========== ===========
See notes to condensed consolidated financial statements.
-1-
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
June 30, December 31,
2000 1999
----------- -----------
LIABILITIES (Unaudited)
Corporate
Accounts payable and accrued expenses....................................... $ 44,327 $ 46,721
Income taxes payable........................................................ 22,660 18,291
Senior notes, net........................................................... 174,416 174,389
----------- -----------
241,403 239,401
Homebuilding
Accounts payable and accrued expenses....................................... 157,902 152,488
Line of credit.............................................................. 90,000 40,000
----------- -----------
247,902 192,488
Financial Services
Accounts payable and accrued expenses....................................... 10,380 5,862
Line of credit.............................................................. 57,571 50,234
----------- -----------
67,951 56,096
Total Liabilities..................................................... 557,256 487,985
----------- -----------
COMMITMENTS AND CONTINGENCIES.................................................. - - - -
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 25,000,000 shares authorized; none issued..
- - - -
Common stock, $.01 par value; 100,000,000 shares authorized; 28,480,000 and
28,166,000 shares issued, respectively, at June 30, 2000 and
December 31, 1999......................................................... 285 282
Additional paid-in capital.................................................. 182,307 179,094
Retained earnings........................................................... 292,396 245,235
Accumulated comprehensive income............................................ 46 3,623
----------- -----------
475,034 428,234
Less treasury stock, at cost; 7,120,000 and 5,850,000 shares, respectively,
at June 30, 2000 and December 31, 1999.................................... (60,202) (39,211)
----------- -----------
Total Stockholders' Equity............................................ 414,832 389,023
----------- -----------
Total Liabilities and Stockholders' Equity............................ $ 972,088 $ 877,008
=========== ===========
See notes to condensed consolidated financial statements.
-2-
M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
REVENUES
Homebuilding.......................................... $ 411,942 $ 391,130 $ 752,951 $ 681,010
Financial services.................................... 7,430 7,011 13,304 13,925
Corporate............................................. 275 1,618 550 1,949
----------- ----------- ----------- -----------
Total Revenues.................................... 419,647 399,759 766,805 696,884
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding.......................................... 359,584 347,134 655,122 611,860
Financial services.................................... 3,450 3,714 6,875 7,080
Corporate general and administrative.................. 8,515 7,659 17,069 13,964
----------- ----------- ----------- -----------
Total Costs and Expenses.......................... 371,549 358,507 679,066 632,904
----------- ----------- ----------- -----------
Income before income taxes............................... 48,098 41,252 87,739 63,980
Provision for income taxes............................... (19,289) (16,295) (37,909) (25,272)
----------- ----------- ----------- -----------
NET INCOME............................................... 28,809 24,957 49,830 38,708
Unrealized holding gains (losses) on securities arising
during the period, net................................ (89) 56 (127) 1,297
Reclassification adjustment for gains included in net
income................................................ (76) (35) (3,450) (81)
----------- ----------- ----------- -----------
Net unrealized holding gains (losses) on securities
arising during the period, net of deferred income taxes
(165) 21 (3,577) 1,216
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME..................................... $ 28,644 $ 24,978 $ 46,253 $ 39,924
=========== =========== =========== ===========
EARNINGS PER SHARE
Basic................................................. $ 1.34 $ 1.12 $ 2.29 $ 1.74
=========== =========== =========== ===========
Diluted............................................... $ 1.32 $ 1.10 $ 2.26 $ 1.71
=========== =========== =========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic................................................. 21,477 22,274 21,790 22,189
=========== =========== =========== ===========
Diluted............................................... 21,822 22,695 22,084 22,630
=========== =========== =========== ===========
DIVIDENDS PAID PER SHARE................................. $ .06 $ .05 $ .12 $ .10
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
-3-
M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months
Ended June 30,
2000 1999
----------- -----------
OPERATING ACTIVITIES
Net income........................................................... $ 49,830 $ 38,708
Adjustments to reconcile net income to net cash used in operating
activities
Depreciation and amortization.................................. 8,691 9,276
Deferred income taxes.......................................... (5,640) (269)
Homebuilding asset impairment charge........................... 800 - -
Net changes in assets and liabilities
Home sales and other accounts receivable.................. (4,543) 957
Homebuilding inventories.................................. (117,891) (102,942)
Mortgage loans held in inventory.......................... 14,050 1,147
Accounts payable and accrued expenses and income taxes
payable................................................. 11,049 29,479
Prepaid expenses and other assets......................... (8,473) 1,963
Other, net..................................................... (2,068) 2,360
----------- -----------
Net cash used in operating activities................................ (54,195) (19,321)
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FINANCING ACTIVITIES
Lines of credit
Advances....................................................... 699,537 718,300
Principal payments............................................. (642,200) (687,429)
Notes payable
Principal payments............................................. - - (574)
Dividend payments.................................................... (2,669) (2,217)
Stock repurchases.................................................... (22,851) - -
Proceeds from stock issuance......................................... 2,231 781
----------- -----------
Net cash provided by financing activities............................ 34,048 28,861
----------- -----------
Net increase (decrease) in cash and cash equivalents................. (20,147) 9,540
Cash and cash equivalents
Beginning of period............................................ 38,930 10,079
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End of period.................................................. $ 18,783 $ 19,619
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See notes to condensed consolidated financial statements.
-4-
M.D.C. HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A. Presentation of Financial Statements
The condensed consolidated financial statements of M.D.C. Holdings,
Inc. ("MDC" or the "Company," which refers to M.D.C. Holdings, Inc. and its
subsidiaries) have been prepared, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. These statements reflect
all adjustments (including all normal recurring accruals) which, in the opinion
of management, are necessary to present fairly the financial position, results
of operations and cash flows of MDC as of June 30, 2000 and for all of the
periods presented. These statements are condensed and do not include all of the
information required by generally accepted accounting principles in a full set
of financial statements. These statements should be read in conjunction with
MDC's financial statements and notes thereto included in MDC's Annual Report on
Form 10-K for its fiscal year ended December 31, 1999.
B. Corporate and Homebuilding Interest Activity (in thousands)
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ---------------------------
2000 1999 2000 1999
----------- ------------ ----------- -----------
Interest capitalized in homebuilding
inventory, beginning of period....... $ 17,615 $ 24,533 $ 17,406 $ 26,332
Interest incurred....................... 5,711 5,231 10,492 9,951
Interest expensed....................... - - - - - - - -
Previously capitalized interest included
in cost of sales..................... (5,289) (7,581) (9,861) (14,100)
----------- ----------- ----------- -----------
Interest capitalized in homebuilding
inventory, end of period............. $ 18,037 $ 22,183 $ 18,037 $ 22,183
=========== =========== =========== ===========
C. Earnings Per Share
The basic and diluted earnings per share calculations are shown below
(in thousands, except per share amounts).
Three Months Six Months
Ended June 30, Ended June 30,
------------------------ -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Basic Earnings Per Share
Net income....................................... $ 28,809 $ 24,957 $ 49,830 $ 38,708
=========== =========== =========== ===========
Basic weighted-average shares outstanding........ 21,477 22,274 21,790 22,189
=========== =========== =========== ===========
Per share amounts................................ $ 1.34 $ 1.12 $ 2.29 $ 1.74
=========== =========== =========== ===========
Diluted Earnings Per Share
Net income....................................... $ 28,809 $ 24,957 $ 49,830 $ 38,708
=========== =========== =========== ===========
Basic weighted-average shares outstanding........ 21,477 22,274 21,790 22,189
Stock options, net............................... 345 421 294 441
Diluted weighted-average shares outstanding...... 21,822 22,695 22,084 22,630
=========== =========== =========== ===========
Per share amounts................................ $ 1.32 $ 1.10 $ 2.26 $ 1.71
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-5-
D. 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).
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ---------------------------
2000 1999 2000 1999
----------- ------------ ----------- -----------
Homebuilding
Home sales......................... $ 407,459 $ 389,144 $ 736,910 $ 677,228
Land sales......................... 3,050 1,439 4,543 2,825
Other revenues..................... 1,433 547 11,498 957
----------- ----------- ----------- -----------
411,942 391,130 752,951 681,010
----------- ----------- ----------- -----------
Home cost of sales................. 317,067 312,065 576,894 546,813
Land cost of sales................. 1,356 984 2,355 2,023
Asset impairment charge............ 800 - - 800 - -
Marketing.......................... 23,163 21,226 41,847 38,109
General and administrative......... 17,198 12,859 33,226 24,915
----------- ----------- ----------- -----------
359,584 347,134 655,122 611,860
----------- ----------- ----------- -----------
Homebuilding Operating Profit.. 52,358 43,996 97,829 69,150
----------- ----------- ----------- -----------
Financial Services
Mortgage Lending Revenues
Net interest income................ 571 616 1,063 1,277
Origination fees................... 3,242 3,217 6,038 5,720
Gains on sales of mortgage
servicing, net................... 1,372 1,026 1,829 2,289
Gains on sales of mortgage loans,
net.............................. 2,092 2,010 4,092 4,350
Mortgage servicing and other....... 153 142 282 289
----------- ----------- ----------- -----------
7,430 7,011 13,304 13,925
General and Administrative Expenses.. 3,450 3,714 6,875 7,080
----------- ----------- ----------- -----------
Financial Services Operating
Profit....................... 3,980 3,297 6,429 6,845
----------- ----------- ----------- -----------
Total Operating Profit................. 56,338 47,293 104,258 75,995
----------- ----------- ----------- -----------
Corporate
Interest and other revenues........ 275 1,618 550 1,949
General and administrative......... (8,515) (7,659) (17,069) (13,964)
----------- ----------- ----------- -----------
Net Corporate Expenses......... (8,240) (6,041) (16,519) (12,015)
----------- ----------- ----------- -----------
Income Before Income Taxes.............. $ 48,098 $ 41,252 $ 87,739 $ 63,980
=========== =========== =========== ===========
-6-
E. Supplemental Disclosure of Cash Flow Information (in thousands)
Six Months
Ended June 30,
2000 1999
------------ ------------
Cash paid during the period for
Interest.................................................... $ 5,736 $ 8,324
Income taxes................................................ $ 31,998 $ 23,734
Non-cash investing and financing activities
Land purchases financed by seller........................... $ - - $ 752
Land sales financed by MDC.................................. $ - - $ 43
F. Stockholders' Equity
On January 24, 2000, MDC's Board of Directors authorized the repurchase
of up to 1,000,000 shares of MDC common stock. On February 21, 2000, MDC's Board
of Directors authorized the repurchase of up to 2,000,000 additional shares of
MDC common stock. The Company has repurchased a total of 1,552,900 shares of MDC
common stock under these programs through June 30, 2000 at a total cost of
$22,851,000. The per share prices, including commissions, for these repurchases
range from $13.53 to $19.15 with an average cost of $14.71.
G. Gain on Sale of Investments
During the quarter and six months ended June 30, 2000, net income
included realized pre-tax gains of $209,000 and $9,521,000, respectively, less
applicable taxes of $133,000 and $6,071,000, respectively, from the sale of
certain investments by MDC's captive insurance subsidiary.
H. Homebuilding Line of Credit
Having received increased participations from two of the Company's
existing banks and one additional lender, in April 2000, the maximum borrowings
available under the Company's homebuilding line of credit was increased to
$350,000,000.
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
M.D.C. Holdings, Inc. is a Delaware Corporation originally
incorporated in Colorado in 1972. We refer to M.D.C. Holdings, Inc. as the
"Company" or as "MDC" in this Form 10-Q. The "Company" or "MDC" includes our
subsidiaries unless we state otherwise. MDC's primary business is building and
selling homes under the name "Richmond American Homes." We also originate
mortgage loans, primarily for customers of Richmond American Homes, through
MDC's subsidiary, HomeAmerican Mortgage Corporation ("HomeAmerican").
RESULTS OF OPERATIONS
The table below summarizes MDC's results of operations (in thousands,
except per share amounts).
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Revenues.................................... $ 419,647 $ 399,759 $ 766,805 $ 696,884
Income Before Income Taxes.................. $ 48,098 $ 41,252 $ 87,739 $ 63,980
Net Income.................................. $ 28,809 $ 24,957 $ 49,830 $ 38,708
Earnings Per Share
Basic.................................. $ 1.34 $ 1.12 $ 2.29 $ 1.74
Diluted................................ $ 1.32 $ 1.10 $ 2.26 $ 1.71
Revenues for the second quarter and first half of 2000 increased
$19,888,000 and $69,921,000, respectively, compared with the same periods in
1999, primarily due to higher homebuilding revenues resulting from (1)
significant increases in average selling prices per home closed; and (2) for the
first six months, gains of $9,521,000 realized on sales of certain investments
by MDC's captive insurance subsidiary.
Income before income taxes increased 17% and 37%, respectively, in the
second quarter and first half of 2000, compared with the same periods in 1999.
These increases primarily were a result of increased operating profit from the
Company's homebuilding segment, due to the home sales revenue increases
described above and 240 basis point increases for both the second quarter and
first half of 2000 in Home Gross Margins (defined below).
-8-
Homebuilding Segment
The table below sets forth information relating to the Company's
homebuilding segment (dollars in thousands).
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -------------
Home Sales Revenues......................... $ 407,459 $ 389,144 $ 736,910 $ 677,228
Operating Profit............................ $ 52,358 $ 43,996 $ 97,829 $ 69,150
Average Selling Price Per Home Closed..... $ 218.9 $ 208.8 $ 216.0 $ 204.5
Home Gross Margins.......................... 22.2% 19.8% 21.7% 19.3%
Excluding Interest in Home Cost of Sales 23.4% 21.8% 23.0% 21.3%
Orders For Homes, net (units)
Colorado............................. 615 759 1,466 1,604
California........................... 445 407 857 800
Arizona.............................. 456 413 913 938
Nevada............................... 199 146 432 274
Virginia............................. 186 194 464 461
Maryland............................. 71 110 157 198
----------- ----------- ----------- -----------
Total........................... 1,972 2,029 4,289 4,275
=========== =========== =========== ===========
Homes Closed (units)
Colorado............................. 798 691 1,450 1,193
California........................... 299 317 518 540
Arizona.............................. 364 469 689 855
Nevada............................... 166 115 288 256
Virginia............................. 158 190 322 310
Maryland............................. 76 82 145 157
----------- ----------- ----------- -----------
Total........................... 1,861 1,864 3,412 3,311
=========== =========== =========== ===========
June 30, December 31, June 30,
2000 1999 1999
----------- ------------ -----------
Backlog (units)
Colorado............................. 1,642 1,626 1,766
California........................... 596 257 586
Arizona.............................. 676 452 779
Nevada............................... 281 137 164
Virginia............................. 432 290 405
Maryland............................. 191 179 194
----------- ----------- -----------
Total........................... 3,818 2,941 3,894
=========== =========== ===========
Estimated Sales Value........... $ 840,000 $ 600,000 $ 800,000
=========== =========== ===========
-9-
June 30, December 31, June 30,
2000 1999 1999
----------- ------------ -----------
Active Subdivisions
Colorado............................. 46 50 46
California........................... 25 24 20
Arizona.............................. 28 20 22
Nevada............................... 10 12 9
Virginia............................. 13 16 17
Maryland............................. 7 9 8
----------- ----------- -----------
Total........................... 129 131 122
=========== =========== ===========
Home Sales Revenues - Home sales revenues in the second quarter and
first half of 2000 were 5% and 9% higher, respectively, than home sales revenues
for the same periods in 1999. The improved revenues primarily were a result of
higher average selling prices per home closed, as further discussed below.
Homes Closed - Home closings for the quarter and six months ended June
30, 2000 were approximately the same as for the comparable periods in 1999. Home
closings in the second quarter and first half of 2000 were higher in (1)
Colorado (increases of 15% and 22%, respectively) and Nevada (increases of 44%
and 13%, respectively) as a result of the strong demand for homes in these
markets; and (2) Northern California (increases of 41% and 77%, respectively),
where the Company opened seven new active subdivisions since June 1999 in the
San Francisco Bay area. Home closings decreased in the second quarter and first
half of 2000 in Phoenix and Southern California, compared with the same periods
in 1999, primarily due to fewer active subdivisions in each of these markets
during the latter half of 1999. Active subdivisions subsequently have increased
to 19 and 20, respectively, in Southern California and Phoenix at June 30, 2000,
compared with 14 and 11, respectively, at June 30, 1999.
Average Selling Price Per Home Closed - The average selling prices per
home closed in the second quarter and first half of 2000 increased $10,100 and
$11,500, respectively, compared with the same periods in 1999, primarily as a
result of (1) the ability to increase sales prices due to the strong demand for
new homes in most of the Company's markets; (2) a greater number of homes closed
in higher-priced subdivisions in California, where average selling prices
approached or exceeded $300,000; and (3) increased sales volume per home from
the Company's design centers in Southern California, Nevada and Virginia.
Home Gross Margins - We define "Home Gross Margins" to mean home sales
revenues less cost of goods sold (which primarily includes land and construction
costs, capitalized interest, financing costs, and a reserve for warranty
expense) as a percent of home sales revenues. Home Gross Margins increased by
240 basis points during both the quarter and six months ended June 30, 2000,
compared with the same periods in 1999. The increases largely were due to (1)
selling price increases and reduced incentives offered to home buyers due to the
continued strong demand for new homes in most of the Company's markets; (2) in
Maryland, fewer under-performing subdivisions in 2000 and management's continued
efforts to improve profitability; (3) reduced interest in home cost of sales, as
discussed below; (4) increased rebates collected from suppliers through the
Company's national purchasing programs; (5) increases in sales of higher-margin
products through the Company's design centers; (6) a reduction in previous
estimates of costs to complete land development and homes in certain projects in
Phoenix, Southern California and Colorado; and (7) ongoing initiatives in each
of the Company's markets designed to improve operating efficiency, control costs
and increase rates of return.
-10-
Future Home Gross Margins may be impacted adversely by (1) increased
competition; (2) increases in the costs of subcontracted labor, finished lots,
building materials and other resources, to the extent that market conditions
prevent the recovery of increased costs through higher selling prices; (3)
adverse weather; and (4) shortages of subcontractor labor. Looking forward to
the balance of 2000, we currently anticipate that Home Gross Margins for the
third and fourth quarters may be lower than the level realized in the 2000
second quarter, but are expected to exceed margins reported for the comparable
periods in 1999. See "Forward Looking Statements" below.
Interest in Home Cost of Sales - Interest in home cost of sales as a
percent of home sales revenues decreased to 1.2% and 1.3%, respectively, in the
second quarter and first half of 2000, compared with 2.0% for the same periods
in 1999. These reductions resulted from lower levels of capitalized interest in
homebuilding inventories at the beginning of 2000, compared with the beginning
of 1999. Interest capitalized as a percentage of homebuilding inventories has
continued to decrease to 2.4% at June 30, 2000, from 3.6% at June 30, 1999 and
6.7% at June 30, 1998. This decrease primarily is due to (1) the close-out of
older projects with higher levels of capitalized interest in Colorado, Virginia
and Maryland; and (2) the financing of expanded homebuilding operations with
cash from current operations.
Orders for Homes and Backlog - Orders for homes in the second quarter
and first half of 2000 were approximately the same as for the comparable periods
in 1999. Home orders in the second quarter of 2000 particularly were strong in
Southern California, Phoenix and Nevada, as a result of the recent increase in
active subdivisions, as discussed above, and the continued strong demand for
homes in these markets. Home orders were lower for the three months ended June
30, 2000 in Colorado, primarily resulting from fewer active subdivisions; a
greater number of active subdivisions nearing close-out, with fewer homes
available for sale; and the close-out of several high-volume subdivisions after
the second quarter of 1999.
Homes under contract but not yet delivered ("Backlog") at June 30, 2000
was 3,818 units with an estimated sales value of $840,000,000, compared with a
Backlog of 3,894 units with an estimated sales value of $800,000,000 at June 30,
1999. Assuming no significant change in market conditions or mortgage interest
rates, the Company expects approximately 75% of its June 30, 2000 Backlog to
close under existing sales contracts during the second half of 2000 and first
quarter of 2001. The remaining 25% of the homes in Backlog are not expected to
close under existing contracts due to cancellations. See "Forward-Looking
Statements" below.
Other Revenues - Other revenues during the first half of 2000 included
gains realized on the sales of certain investments by MDC's captive insurance
subsidiary of $9,521,000, compared with $134,000 realized in the comparable
period of 1999.
Asset Impairment Charge - Operating results during the second quarter
and first half of 2000 were reduced by an asset impairment charge of $800,000
related to certain of the Company's homebuilding assets in Southern California.
The asset impairment charge resulted from the write-down to fair value of a
subdivision that experienced slow sales during the second quarter of 2000 and
anticipated negative Home Gross Margins. No asset impairment charge was recorded
during the first half of 1999.
Marketing - Marketing expenses (which include sales commissions,
advertising, amortization of deferred marketing and other costs) totalled
$23,163,000 and $41,847,000, respectively, for the quarter
-11-
and six months ended June 30, 2000, compared with $21,226,000 and $38,109,000,
respectively, for the same periods in 1999. The increases in 2000 primarily
resulted from higher sales commissions, advertising and other costs incurred in
connection with the Company's increased home sales revenues.
General and Administrative - General and administrative expenses
increased to $17,198,000 and $33,226,000, respectively, during the second
quarter and first half of 2000, compared with $12,859,000 and $24,915,000,
respectively, for the same periods in 1999, primarily due to increased
compensation costs resulting from expanded operations in certain of the
Company's markets, most notably Colorado and Southern California.
Land Inventory
The table below shows the carrying value of land and land under
development, by market, the total number of lots owned and lots controlled under
option agreements, and total option deposits (dollars in thousands).
June 30, December 31, June 30,
2000 1999 1999
----------- ----------- -----------
Colorado....................................... $ 81,365 $ 74,117 $ 54,012
California..................................... 149,012 161,508 132,838
Arizona........................................ 43,412 29,426 17,358
Nevada......................................... 23,975 27,419 31,771
Virginia....................................... 10,838 6,357 8,734
Maryland....................................... 5,679 9,853 9,892
----------- ----------- -----------
Total..................................... $ 314,281 $ 308,680 $ 254,605
=========== =========== ===========
Lots Owned (excluding lots in work-in-process). 10,400 10,452 9,191
Lots Controlled Under Option................... 8,314 8,063 7,950
----------- ----------- -----------
Total Lots Owned and Controlled........... 18,714 18,515 17,141
=========== =========== ===========
Option Deposits................................ $ 6,922 $ 8,673 $ 8,677
=========== =========== ===========
-12-
Financial Services Segment
The table below sets forth information relating to HomeAmerican's
operations (in thousands).
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Loan Origination Fees....................... $ 3,242 $ 3,217 $ 6,038 $ 5,720
Gains on Sales of Mortgage Loans, net....... $ 2,092 $ 2,010 $ 4,092 $ 4,350
Gains on Sales of Mortgage Servicing, net... $ 1,372 $ 1,026 $ 1,829 $ 2,289
Operating Profit............................ $ 3,980 $ 3,297 $ 6,429 $ 6,845
Principal Amount of Loans Originated and
Purchased
MDC home buyers.......................... $ 206,964 $ 225,694 $ 375,932 $ 387,417
Spot..................................... 3,777 10,239 7,837 22,526
Correspondent............................ - - - - - - 12,074
----------- ----------- ----------- -----------
Total.............................. $ 210,741 $ 235,933 $ 383,769 $ 422,017
=========== =========== =========== ===========
Principal Amount of Loans Brokered
MDC home buyers.......................... $ 62,876 $ 44,915 $ 112,622 $ 73,289
Spot..................................... 1,217 1,256 2,391 2,839
----------- ----------- ----------- -----------
Total.............................. $ 64,093 $ 46,171 $ 115,013 $ 76,128
=========== =========== =========== ===========
Capture Rate................................ 63% 71% 64% 70%
=========== =========== =========== ===========
Including brokered loans................. 79% 83% 80% 81%
=========== =========== =========== ===========
HomeAmerican's operating profits for the second quarter of 2000
increased, compared with the second quarter of 1999, due to higher gains on
sales of mortgage servicing and decreased general and administrative expenses.
Operating profits for the first half of 2000 decreased, compared with the same
period in 1999, primarily due to decreased gains on sales of mortgage loans and
bulk sales of mortgage servicing. HomeAmerican continues to benefit from the
Company's homebuilding growth as MDC home buyers were the source of
approximately 99% and 98%, respectively, of the principal amount of mortgage
loans originated and brokered by HomeAmerican in the second quarter and first
half of 2000.
Mortgage loans originated by HomeAmerican for MDC home buyers as a
percentage of total MDC home closings ("Capture Rate") decreased to 63% and 64%,
respectively, for the quarter and six months ended June 30, 2000, compared with
71% and 70%, respectively, for the same periods in 1999. However, the number of
mortgage loans brokered by HomeAmerican for origination by outside lending
institutions has increased, primarily due to an increase in the number of MDC
home buyers with non-agency qualified credit. These brokered mortgage loans, for
which HomeAmerican receives a fee, have been excluded from the computation of
the Capture Rate above. The Capture Rate including brokered loans was 79% and
80%, respectively, for the second quarter and first half of 2000, compared with
83% and 81%, respectively, for the same periods in 1999.
Forward Sales Commitments - HomeAmerican's operations are affected by
changes in mortgage interest rates. HomeAmerican utilizes forward mortgage
securities contracts to manage the interest rate
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risk on its fixed-rate mortgage loans owned and rate-locked mortgage loans in
the pipeline. These contracts are the only significant financial derivative
instrument utilized by MDC.
Other Operating Results
Corporate Other Revenues - In the second quarter of 1999, the Company
recognized income of approximately $1,500,000 related to its share of a gain
from the sale of substantially all of the assets of a partnership in which it
was an investor.
Interest Expense - The Company capitalizes interest on its homebuilding
inventories during the period of active development and through the completion
of construction. Corporate and homebuilding interest incurred but not
capitalized is reflected as interest expense and totalled zero for both the
second quarter and first half of 2000 and 1999.
For a reconciliation of interest incurred, capitalized and expensed,
see Note B to the Company's Condensed Consolidated Financial Statements.
Corporate General and Administrative Expenses - Corporate general and
administrative expenses totalled $8,515,000 and $17,069,000, respectively,
during the second quarter and first half of 2000, compared with $7,659,000 and
$13,964,000, respectively, for the same periods in 1999, primarily due to
greater compensation-related costs in 2000 as a result of the Company's higher
profitability and increased homebuilding activities.
Income Taxes - MDC's overall effective income tax rate of 40.1% and
43.2% for the second quarter and first half of 2000, respectively, compared with
39.5% for the same periods in 1999, differed from the federal statutory rate of
35% partially due to the impact of state income taxes. In addition, in the first
half of 2000, the investment gains of $9,521,000, discussed under "Results of
Operations" above, are subject to taxation at both the subsidiary level and
corporate level, resulting in taxes at an effective rate of 64%.
The Internal Revenue Service ("IRS") has completed its examination of
the Company's federal income tax returns for the years 1991 through 1995 and has
proposed adjustments to the taxable income reflected in such returns. The
Company is protesting certain of these proposed adjustments. In the opinion of
management, adequate provision has been made for additional income taxes and
interest, if any, which may arise as a result of this examination. In April
2000, the IRS completed its examination of the Company's federal income tax
returns for the years 1996 and 1997. The conclusion of this latter examination
resulted in no material impact to the Company's financial position or results of
operations. See "Forward-Looking Statements" below.
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LIQUIDITY AND CAPITAL RESOURCES
MDC uses its liquidity and capital resources to (1) support its
operations, including its inventories of homes, home sites and land; (2) provide
working capital; and (3) provide mortgage loans for its home buyers. Liquidity
and capital resources are generated internally from operations and from external
sources.
Capital Resources
The Company's capital structure is a combination of (1) permanent
financing, represented by stockholders' equity; (2) long-term financing,
represented by its publicly traded 8 3/8% senior notes due 2008 (the "Senior
Notes") and its homebuilding line of credit; and (3) current financing,
primarily its mortgage lending line of credit. Based upon its current capital
resources and additional liquidity available under existing credit agreements,
the Company believes that its current financial condition is both balanced to
fit its current operating structure and adequate to satisfy its current and
near-term capital requirements, including the acquisition of land. The Company
believes that it can meet its long-term capital needs (including meeting future
debt payments and refinancing or paying off other long-term debt as it becomes
due) from operations and external financing sources, assuming that no
significant adverse changes in the Company's business occur as a result of the
various risk factors described elsewhere in this report. See "Forward-Looking
Statements" below.
Lines of Credit and Other
Homebuilding - In October 1999, the homebuilding line of credit (the
"Homebuilding Line") was amended and restated (the "Amended and Restated Credit
Agreement") to extend the maturity date to September 30, 2004 and increase the
$300,000,000 maximum amount available to $450,000,000 upon the Company's
request, subject to the receipt of additional commitments from existing or
additional participant lenders. Pursuant to the terms of the Amended and
Restated Credit Agreement, a term-out of this credit may commence earlier under
certain circumstances. Having received increased participations from two of the
Company's existing banks and one additional lender, the maximum amount available
under the Homebuilding Line was increased to $350,000,000 in April 2000. There
is no assurance that existing or additional lenders will agree to provide
additional commitments. At June 30, 2000, $90,000,000 was borrowed and
$5,312,000 in letters of credit were outstanding under the Homebuilding Line.
Mortgage Lending - To provide funds to originate and purchase mortgage
loans and to finance these mortgage loans on a short-term basis, HomeAmerican
utilizes its mortgage lending bank line of credit (the "Mortgage Line"). These
mortgage loans are pooled into GNMA, FNMA and FHLMC pools, or retained as whole
loans, and subsequently sold in the open market on a spot basis or pursuant to
mortgage loan sale commitments, generally within 40 days after origination.
During the first six months of 2000 and 1999, HomeAmerican sold $397,025,000 and
$422,279,000, respectively, principal amount of mortgage loans and
mortgage-backed certificates to unaffiliated purchasers.
Available borrowings under the Mortgage Line are collateralized by
mortgage loans and mortgage-backed certificates and are limited to the value of
eligible collateral, as defined. In December 1999, the Company modified the
terms of the Mortgage Line, increasing the available borrowings from $51,000,000
to $75,000,000. At June 30, 2000, $57,571,000 was borrowed under the Mortgage
Line and an additional $12,437,000 was collateralized and available to be
borrowed. The Mortgage Line is cancelable upon 90 days' notice.
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General - The agreements for the Company's Senior Notes and bank lines
of credit require compliance with certain representations, warranties and
covenants. The Company believes that it is in compliance with these
representations, warranties and covenants. The agreements containing these
representations, warranties and covenants, other than the Mortgage Line, are on
file with the Securities and Exchange Commission and are listed in the Exhibit
Table in Part IV of MDC's Annual Report on Form 10-K for its fiscal year ended
December 31, 1999.
The financial covenants contained in the Amended and Restated Credit
Agreement include a leverage test and a consolidated tangible net worth test.
Under the leverage test, generally MDC's consolidated indebtedness is not
permitted to exceed 2.15 (subject to downward adjustment in certain
circumstances) times MDC's "adjusted consolidated tangible net worth," as
defined. Under the consolidated tangible net worth test, MDC's "tangible net
worth," as defined, must not be less the sum of $238,000,000 and 50% of
"consolidated net income," as defined, after December 31, 1998. In addition,
"consolidated tangible net worth," as defined, must not be less than
$150,000,000.
The Company's Senior Notes indenture does not contain financial
covenants. However, there are covenants that limit transactions with affiliates,
limit the amount of additional indebtedness that MDC may incur, restrict certain
payments on, or the redemptions of the Company's securities, restrict certain
sales of assets and limit incurring liens. In addition, under certain
circumstances, in the event of a change of control (generally a sale, transfer,
merger or acquisition of MDC or substantially all of its assets), MDC may be
required to offer to repurchase the Senior Notes. The Senior Notes are not
secured.
MDC Common Stock Repurchase Programs
On January 24, 2000, MDC's Board of Directors authorized the repurchase
of up to 1,000,000 shares of MDC common stock. On February 21, 2000, MDC's Board
of Directors authorized the repurchase of up to 2,000,000 additional shares of
MDC common stock. The Company has repurchased a total of 1,552,900 shares of MDC
common stock under these programs through June 30, 2000. The per share prices,
including commissions, for these repurchases range from $13.53 to $19.15 with an
average cost of $14.71. At June 30, 2000, the Company held 7,120,000 shares of
treasury stock with an average purchase price of $8.46.
Consolidated Cash Flow
During the first six months of 2000 and 1999, the Company used
$54,195,000 and $19,321,000, respectively, of cash in its operating activities,
primarily due to increases in homebuilding inventories related to its expanded
homebuilding operations. In addition, in the first half of 2000, the Company
used $22,851,000 to repurchase 1,552,900 shares of MDC common stock. The Company
financed these operating cash requirements and stock repurchases primarily
through borrowings on its bank lines of credit.
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IMPACT OF INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS
Real estate and residential housing prices are affected by inflation,
which can cause increases in the price of land, raw materials and subcontracted
labor. Unless these increased costs are recovered through higher sales prices,
Home Gross Margins would decrease. If interest rates increase, construction and
financing costs, as well as the cost of borrowings, also would increase, which
can result in lower Home Gross Margins. Increases in home mortgage interest
rates make it more difficult for MDC's customers to qualify for home mortgage
loans, potentially decreasing home sales volume. Increases in interest rates
also may affect adversely the volume of mortgage loan originations.
The volatility of interest rates could have an adverse effect on MDC's
future operations and liquidity. An increase in interest rates may affect
adversely the demand for housing and the availability of mortgage financing and
may reduce the credit facilities offered to MDC by banks, investment bankers and
mortgage bankers. See "Forward-Looking Statements" below.
MDC's business also is affected significantly by general economic
conditions and, particularly, the demand for new homes in the markets in which
it builds.
ISSUANCE OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") was
issued. SFAS 133 addresses the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. In June 1999, the effective date of SFAS 133 was deferred until to
January 1, 2001. The Company anticipates that the adoption of SFAS 133 as of
January 1, 2001 will not have a material effect on its financial position or
results of operations. See "Forward-Looking Statements" below.
OTHER
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, the Company's
Annual Report on Form 10-K for its fiscal year ended December 31, 1999, the
Company's Annual Report to Shareowners, as well as statements made by the
Company in periodic press releases, oral statements made by the Company's
officials to analysts and shareowners in the course of presentations about the
Company and conference calls following quarterly earnings releases, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. Such factors include, among other things, (1)
general economic and business conditions; (2) interest rate changes; (3) the
relative stability of debt and equity markets; (4) competition; (5) the
availability and cost of land and other raw materials used by the Company in its
homebuilding operations; (6) demographic changes; (7) shortages and the cost of
labor; (8) weather related slowdowns; (9) slow growth initiatives (including
initiatives which may be considered in Colorado and Arizona in November 2000);
(10) building moratoria; (11) governmental regulation, including the
interpretation of tax, labor and environmental laws; (12) changes in consumer
confidence and preferences; (13) required accounting changes; and (14) other
factors over which the Company has little or no control.
-17-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risks related to fluctuations in
interest rates on mortgage loans receivable and debt. The Company utilizes
forward sale commitments to mitigate some of the risk associated with the
mortgage loan portfolio. Other than these forward commitments, the Company does
not utilize interest rate swaps, forward option contracts on foreign currencies
or commodities, or other types of derivative financial instruments.
HomeAmerican provides mortgage loans which generally are sold forward
and subsequently delivered to a third-party purchaser within approximately 40
days. Forward commitments are used for non-trading purposes to sell mortgage
loans and hedge interest rate risk on rate-locked mortgage loans in process
which have not closed. Due to this hedging philosophy, the market risk
associated with these mortgages is minimal.
The Company utilizes both short-term and long-term debt to finance its
operations. For fixed rate debt, changes in interest rates generally affect the
fair value of the debt instrument, but not the Company's earnings or cash flows.
Conversely, for variable rate debt, changes in interest rates generally do not
impact the fair value of the debt instrument, but may affect the Company's
future earnings and cash flows. The Company does not have an obligation to
prepay fixed rate debt prior to maturity and, as a result, interest rate risk
and changes in fair value should not have a significant impact on the fixed rate
debt until such time as the Company is required to refinance such debt.
As of June 30, 2000, short-term debt was $57,571,000, which consisted
of MDC's Mortgage Line. The Mortgage Line is collateralized by residential
mortgage loans. The Company borrows on a short-term basis from banks under
committed lines of credit that bear interest at prevailing market rates.
Long-term debt obligations outstanding, their maturities and estimated
fair value at June 30, 2000 are as follows (in thousands).
Maturities through December 31, Estimated
---------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total Fair Value
-------------------- -------------------- ---------- -------------------- ----------
Fixed Rate Debt............ $ - - $ - - $ - - $ - - $ - - $ 175,000 $ 175,000 $ 155,531
Average Interest Rate
(units)............... - - - - - - - - - - 8.38% 8.38%
Variable Rate Debt......... $ - - $ - - $ - - $ - - $ 90,000 $ - - $ 90,000 $ 90,000
Average Interest Rate... - - - - - - - - 7.73% - - 7.73%
The Company believes that its overall balance sheet structure has
repricing and cash flow characteristics that mitigate the impact of interest
rate movements.
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M.D.C. HOLDINGS, INC.
FORM 10-Q
PART II
ITEM 1. LEGAL PROCEEDINGS.
- ------ -----------------
The Company and certain of its subsidiaries and affiliates have been
named as defendants in various claims, complaints and other legal actions
arising in the normal course of business. In the opinion of management, the
outcome of these matters will not have a material adverse effect upon the
financial condition, results of operations or cash flows of the Company.
Because of the nature of the homebuilding business, and in the ordinary
course of its operations, the Company from time to time may be subject to
product liability claims.
The Company is not aware of any litigation, matter or pending claim
against the Company which would result in material contingent liabilities
related to environmental hazards or asbestos.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREOWNERS.
- ------ ----------------------------------------------
MDC held its Annual Meeting of Shareowners (the "Meeting") on May 19,
2000. At the Meeting, Steven J. Borick and David D. Mandarich were re-elected to
three-year terms as Class III directors.
ITEM 5. OTHER INFORMATION.
- ------ -----------------
On July 24, 2000, the Company's board of directors declared a dividend
of six cents per share for the quarter ended June 30, 2000, payable August 14,
2000, to shareowners of record on August 3, 2000. Future dividend payments are
subject to the discretion of the Company's board of directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ --------------------------------
(a) Exhibit:
27 Financial Data Schedule.
(b) Reports on Form 8-K:
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(1) Form 8-K dated May 11, 2000 reporting
the Company's change in independent
auditors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 4, 2000 M.D.C. HOLDINGS, INC.
-------------- (Registrant)
By: /s/ Paris G. Reece III
----------------------
Paris G. Reece III,
Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer
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