================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
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
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
As of August 12, 2003, 29,024,000 shares of M.D.C. Holdings, Inc.
common stock were outstanding.
================================================================================
M.D.C. HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of June 30, 2003 (Unaudited)
and December 31, 2002........................ 1
Statements of Income (Unaudited) for the three
and six months ended June 30, 2003 and 2002.. 3
Statements of Cash Flows (Unaudited) for the
six months ended June 30, 2003 and 2002...... 4
Notes to Condensed Consolidated Financial
Statements (Unaudited)....................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................. 28
Item 4. Controls and Procedures........................ 29
Part II. Other Information:
Item 1. Legal Proceedings.............................. 30
Item 4. Submission of Matters to a Vote of Shareowners. 30
Item 5. Other Information.............................. 30
Item 6. Exhibits and Reports on Form 8-K............... 31
Signatures............................................... 32
(i)
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands)
June 30, December 31,
2003 2002
-------------- --------------
ASSETS (Unaudited)
Corporate
Cash and cash equivalents................................................... $ 20,810 $ 23,164
Property and equipment, net................................................. 10,252 10,851
Deferred income taxes....................................................... 31,441 25,980
Deferred debt issue costs, net.............................................. 2,782 3,305
Other assets, net........................................................... 5,587 6,708
-------------- --------------
70,872 70,008
-------------- --------------
Homebuilding
Cash and cash equivalents................................................... 7,018 4,686
Home sales and other accounts receivable.................................... 26,193 3,519
Inventories, net
Housing completed or under construction................................... 718,297 578,475
Land and land under development........................................... 725,311 656,843
Prepaid expenses and other assets, net...................................... 71,980 65,936
-------------- --------------
1,548,799 1,309,459
Financial Services
Cash and cash equivalents................................................... 2,035 1,092
Mortgage loans held in inventory............................................ 150,441 207,938
Other assets, net........................................................... 7,687 6,683
-------------- --------------
160,163 215,713
-------------- --------------
Total Assets.......................................................... $ 1,779,834 $ 1,595,180
============== ==============
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,
2003 2002
-------------- --------------
LIABILITIES (Unaudited)
Corporate
Accounts payable and accrued expenses........................................ $ 51,511 $ 63,871
Income taxes payable......................................................... 11,541 21,571
Senior notes, net............................................................ 297,075 322,990
-------------- --------------
360,127 408,432
-------------- --------------
Homebuilding
Accounts payable and accrued expenses........................................ 242,890 210,601
Line of credit............................................................... 200,000 - -
-------------- --------------
442,890 210,601
-------------- --------------
Financial Services
Accounts payable and accrued expenses........................................ 32,118 21,506
Line of credit............................................................... 75,325 154,074
-------------- --------------
107,443 175,580
-------------- --------------
Total Liabilities...................................................... 910,460 794,613
-------------- --------------
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; 32,126,000 and
31,802,000 shares issued, respectively, at June 30, 2003 and
December 31, 2002.......................................................... 321 318
Additional paid-in capital................................................... 463,863 371,896
Retained earnings............................................................ 457,734 501,498
Unearned restricted stock.................................................... (1,175) (820)
Accumulated other comprehensive income....................................... 168 2
-------------- --------------
920,911 872,894
Less treasury stock, at cost; 3,158,000 and 5,373,000 shares, respectively,
at June 30, 2003 and December 31,2002...................................... (51,537) (72,327)
-------------- --------------
Total Stockholders' Equity............................................. 869,374 800,567
-------------- --------------
Total Liabilities and Stockholders' Equity............................. $ 1,779,834 $ 1,595,180
============== ==============
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,
------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- ----------
REVENUES
Homebuilding......................................... $ 673,420 $ 499,171 $ 1,228,332 $ 945,932
Financial Services................................... 15,813 9,896 30,326 19,277
Corporate............................................ 209 363 426 595
---------- ---------- ------------ ----------
Total Revenues................................... 689,442 509,430 1,259,084 965,804
---------- ---------- ------------ ----------
COSTS AND EXPENSES
Homebuilding......................................... 588,076 437,956 1,078,530 826,873
Financial services................................... 7,214 4,711 14,160 9,062
Expenses related to debt redemption.................. 9,315 - - 9,315 - -
Corporate general and administrative................. 14,832 10,434 26,308 20,494
---------- ---------- ------------ ----------
Total Costs and Expenses......................... 619,437 453,101 1,128,313 856,429
---------- ---------- ------------ ----------
Income before income taxes.............................. 70,005 56,329 130,771 109,375
Provision for income taxes.............................. (27,311) (21,993) (51,040) (42,703)
---------- ---------- ------------ ----------
NET INCOME.............................................. $ 42,694 $ 34,336 $ 79,731 $ 66,672
========== ========== ============ ==========
EARNINGS PER SHARE
Basic................................................ $ 1.49 $ 1.16 $ 2.77 $ 2.26
========== ========== ============ ==========
Diluted.............................................. $ 1.43 $ 1.11 $ 2.66 $ 2.17
========== ========== ============ ==========
WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic................................................ 28,688 29,701 28,823 29,544
========== ========== ============ ==========
Diluted.............................................. 29,917 30,912 29,926 30,744
========== ========== ============ ==========
DIVIDENDS PAID PER SHARE................................ $ .082 $ .073 $ .155 $ .136
========== ========== ============ ==========
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,
2003 2002
---------------- ------------
OPERATING ACTIVITIES
Net income........................................................... $ 79,731 $ 66,672
Adjustments to reconcile net income to net cash used in operating
activities
Expenses related to debt redemption............................ 9,315 - -
Depreciation and amortization.................................. 16,475 10,818
Deferred income taxes.......................................... (5,461) 412
Net changes in assets and liabilities
Home sales and other accounts receivable.................. (22,674) (9,079)
Homebuilding inventories.................................. (208,290) (262,699)
Prepaid expenses and other assets......................... (17,652) (14,566)
Mortgage loans held in inventory.......................... 57,497 40,868
Accounts payable and accrued expenses .................... 32,257 41,098
Other, net..................................................... (452) 3,159
------------ ------------
Net cash used in operating activities................................ (59,254) (123,317)
------------ ------------
INVESTING ACTIVITIES
Net purchase of property and equipment............................... (3,190) (8,789)
------------ ------------
FINANCING ACTIVITIES
Lines of credit
Advances....................................................... 1,365,300 1,167,200
Principal payments............................................. (1,244,049) (1,050,893)
Senior notes
Proceeds from issuance......................................... 147,279 - -
Repurchase..................................................... (175,000) - -
Premium on repurchase.......................................... (7,329) - -
Dividend payments.................................................... (4,508) (4,031)
Stock repurchases.................................................... (26,731) - -
Proceeds from exercise of stock options.............................. 8,403 5,851
------------ ------------
Net cash provided by financing activities............................ 63,365 118,127
------------ ------------
Net increase (decrease) in cash and cash equivalents................. 921 (13,979)
Cash and cash equivalents
Beginning of period............................................ 28,942 36,600
------------ ------------
End of period.................................................. $ 29,863 $ 22,621
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Six Months
Ended June 30,
2003 2002
---------------- ------------
Cash paid during the period for
Interest....................................................... $ 18,831 $ 8,615
Income taxes................................................... $ 66,531 $ 32,804
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, 2003 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, 2002. Certain reclassifications
have been made in the 2002 financial statements to conform to the
classifications used in the current year.
The Company historically has experienced, and expects to continue to
experience, variability in quarterly results. The condensed consolidated
statements of income are not necessarily indicative of the results to be
expected for the full year.
B. Earnings Per Share
The basic and diluted earnings per share calculations are shown below
(in thousands, except per share amounts). Prior period earnings per share and
weighted-average shares outstanding have been restated to reflect the effect of
a 10% stock dividend declared on April 28, 2003.
Three Months Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Basic Earnings Per Share
Net income....................................... $ 42,694 $ 34,336 $ 79,731 $ 66,672
=========== =========== =========== ===========
Basic weighted-average shares outstanding........ 28,688 29,701 28,823 29,544
=========== =========== =========== ===========
Per share amounts................................ $ 1.49 $ 1.16 $ 2.77 $ 2.26
=========== =========== =========== ===========
Diluted Earnings Per Share
Net income....................................... $ 42,694 $ 34,336 $ 79,731 $ 66,672
=========== =========== =========== ===========
Basic weighted-average shares outstanding........ 28,688 29,701 28,823 29,544
Stock options, net............................... 1,229 1,211 1,103 1,200
----------- ----------- ----------- -----------
Diluted weighted-average shares outstanding...... 29,917 30,912 29,926 30,744
=========== =========== =========== ===========
Per share amounts................................ $ 1.43 $ 1.11 $ 2.66 $ 2.17
=========== =========== =========== ===========
C. Stockholders' Equity
Stock Repurchase Program - On March 24, 2003, the MDC board of
directors authorized the repurchase of up to an additional 1,350,000 shares of
MDC common stock, bringing the total authorization under the Company's stock
repurchase program to 4,350,000 shares. The Company repurchased a total of
727,100 shares of MDC common stock in the 2003 first quarter and no shares in
- 5 -
the second quarter, bringing the total shares repurchased to 2,580,400 and
leaving 1,769,600 shares available to be repurchased as of June 30, 2003 under
this program. The per share prices, including commissions, for the 727,100
shares repurchased ranged from $35.96 to $39.03 with an average cost of $36.76.
At June 30, 2003, the Company held 3,158,000 shares of treasury stock with an
average purchase price of approximately $16.32 per share.
Stock Dividend - On April 28, 2003, MDC's board of directors declared
a 10% stock dividend that was distributed on May 27, 2003 to shareowners of
record on May 12, 2003. In accordance with the Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share," basic and diluted net income per share amounts,
weighted-average shares outstanding, and dividends paid per share have been
restated for the quarter and six months ended June 30, 2002 to reflect the
effect of this stock dividend.
Stock-Based Compensation - The Company has elected to account for
stock-based compensation using the intrinsic value method as prescribed by
Accounting Principles Board Opinion ("APB") No. 25 and related interpretations.
Stock options are granted at an exercise price that is not less than the fair
market value of MDC's common stock at the date of grant and, therefore, the
Company recorded no compensation expense in the determination of net income for
the three and six months ended June 30, 2003 and 2002. The following table
illustrates the effect on net income and earnings per share if the fair value
method prescribed by SFAS No. 123, as amended by SFAS No. 148, had been applied
to all outstanding and unvested awards in the three and six month periods ended
June 30, 2003 and 2002.
Three Months Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income, as reported.......................... $ 42,694 $ 34,336 $ 79,731 $ 66,672
Deduct stock-based compensation expense
determined using the fair value method, net of
related tax effects........................... (1,937) (1,647) (3,472) (3,429)
----------- ----------- ----------- -----------
Pro forma net income............................. $ 40,757 $ 32,689 $ 76,259 $ 63,243
=========== =========== =========== ===========
Earnings per share
Basic as reported............................ $ 1.49 $ 1.16 $ 2.77 $ 2.26
=========== =========== =========== ===========
Basic pro forma.............................. $ 1.42 $ 1.10 $ 2.65 $ 2.14
=========== =========== =========== ===========
Diluted as reported.......................... $ 1.43 $ 1.11 $ 2.66 $ 2.17
=========== =========== =========== ===========
Diluted pro forma............................ $ 1.36 $ 1.06 $ 2.55 $ 2.06
=========== =========== =========== ===========
D. Lines of Credit
Homebuilding - The Company has an unsecured revolving line of credit
with a group of lenders for support of its homebuilding operations (the
"Homebuilding Line"). Lender commitments under the Homebuilding Line total
$600,000,000 with a maturity date of July 29, 2006. Pursuant to the terms of the
Homebuilding Line, a term-out of this credit may commence prior to July 29, 2006
under certain circumstances. At June 30, 2003, $200,000,000 was borrowed and
$23,114,000 in letters of credit were outstanding under the Homebuilding Line.
Mortgage Lending - The Company's mortgage lending bank line of credit
(the "Mortgage Line"), has a borrowing limit of $125,000,000 with terms that
allow for increases of up to $50,000,000 in the borrowing limit to a maximum of
$175,000,000, subject to concurrence by the participating banks. In
- 6 -
June 2003, the Company received a commitment to temporarily increase the
borrowing limit to $150,000,000. This temporary increase will terminate on
October 2, 2003. The terms of the Mortgage Line are set forth in a Second
Amended and Restated Warehousing Credit Agreement dated as of September 9, 2002.
Available borrowings under the Mortgage Line are collateralized by mortgage
loans and mortgage-backed certificates and are limited to the value of eligible
collateral as defined. At June 30, 2003, $75,325,000 was borrowed and an
additional $28,846,000 was collateralized and available to be borrowed. The
Mortgage Line is cancelable upon 120 days notice.
E. Interest Activity
The Company capitalizes interest incurred on its corporate and
homebuilding debt during the period of active development and through the
completion of construction of its homebuilding inventories. Corporate and
homebuilding interest incurred but not capitalized is reported as interest
expense. Interest incurred by the financial services segment is charged to
interest expense, which is deducted from interest income and reported as net
interest income in Note F. Interest activity, in total and by business segment,
is shown below (in thousands).
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Total Interest Incurred
Corporate and homebuilding.......... $ 7,363 $ 4,915 $ 14,415 $ 8,956
Financial services.................. 411 290 981 687
----------- ----------- ----------- -----------
Total interest incurred............. $ 7,774 $ 5,205 $ 15,396 $ 9,643
=========== =========== =========== ===========
Corporate/Homebuilding Interest
Capitalized
Interest capitalized in homebuilding
inventory, beginning of period.... $ 20,032 $ 16,937 $ 17,783 $ 17,358
Interest incurred................... 7,363 4,915 14,415 8,956
Interest expense.................... - - - - - - - -
Previously capitalized interest
included in cost of sales......... (6,805) (4,248) (11,608) (8,710)
----------- ----------- ----------- -----------
Interest capitalized in homebuilding
inventory, end of period.......... $ 20,590 $ 17,604 $ 20,590 $ 17,604
=========== =========== =========== ===========
Financial Services Net Interest Income
Interest income..................... $ 1,436 $ 1,231 $ 3,014 $ 2,636
Interest expense.................... (411) (290) (981) (687)
----------- ----------- ----------- -----------
Net interest income................. $ 1,025 $ 941 $ 2,033 $ 1,949
=========== =========== =========== ===========
- 7 -
F. 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,
---------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Homebuilding
Revenues
Home sales.......................... $ 672,439 $ 496,862 $ 1,226,014 $ 942,029
Land sales.......................... - - 746 123 746
Other revenues...................... 981 1,563 2,195 3,157
----------- ----------- ----------- -----------
Total Homebuilding Revenues........... 673,420 499,171 1,228,332 945,932
----------- ----------- ----------- -----------
Home cost of sales.................. 515,985 385,053 943,587 726,114
Land cost of sales.................. - - 504 87 504
Marketing expenses.................. 39,625 27,682 73,225 53,345
General and administrative expenses. 32,466 24,717 61,631 46,910
----------- ----------- ----------- -----------
Total Homebuilding Expenses........... 588,076 437,956 1,078,530 826,873
----------- ----------- ----------- -----------
Homebuilding Operating Profit... 85,344 61,215 149,802 119,059
----------- ----------- ----------- -----------
Financial Services
Revenues
Net interest income................. 1,025 941 2,033 1,949
Origination fees.................... 5,234 3,992 9,894 8,221
Gains on sales of mortgage servicing 329 481 1,163 952
Gains on sales of mortgage loans, net 8,755 4,280 16,097 7,741
Mortgage servicing and other........ 470 202 1,139 414
----------- ----------- ----------- -----------
Total Financial Services Revenues..... 15,813 9,896 30,326 19,277
General and Administrative Expenses... 7,214 4,711 14,160 9,062
----------- ----------- ----------- -----------
Financial Services Operating
Profit........................ 8,599 5,185 16,166 10,215
----------- ----------- ----------- -----------
Total Operating Profit.................. 93,943 66,400 165,968 129,274
----------- ----------- ----------- -----------
Corporate
Expenses related to debt redemption. (9,315) - - (9,315) - -
Interest and other revenues......... 209 363 426 595
General and administrative expenses. (14,832) (10,434) (26,308) (20,494)
----------- ----------- ----------- -----------
Income Before Income Taxes............... $ 70,005 $ 56,329 $ 130,771 $ 109,375
=========== =========== =========== ===========
- 8 -
G. Warranty Reserves
Warranty reserves are reviewed quarterly, using historical data and
other relevant information, to determine the reasonableness and adequacy of both
the reserve and the per unit reserve amount originally included in cost of
sales, as well as the timing of the reversal of the reserve. Warranty reserves
are included in corporate and homebuilding accounts payable and accrued expenses
in the condensed consolidated balance sheets, and totaled $48,190,000 and
$41,648,000, respectively, at June 30, 2003 and 2002. Warranty expense increased
in both the second quarter and first six months of 2003, compared with the same
periods in 2002, primarily in Colorado and Northern California due to costs
incurred in connection with moisture intrusion and related mold concerns.
Reserves carried over from prior years primarily are the result of the Company's
volume of homes closed increasing by over 300% in the last ten years, giving
rise to continuing warranty reserves that exceed current expenditures. In
addition, the carryover includes additional qualified settlement fund warranty
reserves created pursuant to litigation settled in 1996. Warranty activity for
the quarters and six months ended June 30, 2003 and 2002 is shown below (in
thousands).
Three Months Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
----------- ----------- ----------- ------------
Warranty reserve balance at beginning of period.. $ 45,740 $ 38,384 $ 44,743 $ 38,430
Warranty expense provided........................ 10,109 7,056 18,154 10,458
Warranty expenditures............................ (7,659) (3,792) (14,707) (7,240)
----------- ----------- ----------- -----------
Warranty reserve balance at end of period........ $ 48,190 $ 41,648 $ 48,190 $ 41,648
=========== =========== =========== ===========
H. Commitments and Contingencies
The Company is often required to obtain bonds and letters of credit in
support of its related obligations with respect to subdivision improvement,
homeowners association dues and start-up expenses, warranty work, contractors
license fees and earnest money deposits. At June 30, 2003, MDC had outstanding
approximately $27,131,000 and $223,147,000 of letters of credit and performance
bonds, respectively. In the event any such bonds or letters of credit are
called, MDC would be obligated to reimburse the issuer of the bond or letter of
credit. However, the Company does not currently believe that any outstanding
bonds or letters of credit will be called.
I. Senior Notes
In May 2003, the Company completed a public offering of $150,000,000
principal amount of 5 1/2% senior notes due December 2013 (the "5 1/2% Senior
Notes") at a discount, with an effective yield of 5.74%. The principal amount
outstanding, net of unamortized discount, at June 30, 2003 was $148,568,000. The
5 1/2% Senior Notes may be redeemed, at the election of the Company, in whole at
any time or in part from time to time, at the redemption prices set forth in the
5 1/2% Senior Notes supplemental indenture.
Also in May 2003, the Company redeemed $175,000,000 principal amount of
its 8 3/8% senior notes due 2008 (the "8 3/8% Senior Notes"). The 8 3/8% Senior
Notes were redeemed at 104.188% of their principal amount, or $182,329,000, plus
accrued and unpaid interest through the date of redemption. In compliance with
SFAS No. 145, the expenses related to this debt redemption of $9,315,000 are no
longer treated as an extraordinary loss.
- 9 -
J. Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for classifying and measuring as liabilities
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150 is effective
immediately for instruments entered into or modified after May 31, 2003 and to
all other instruments that exist as of the beginning of the first interim
financial reporting period beginning after June 15, 2003. The adoption of SFAS
No. 150 did not have a material effect on the Company's financial position or
results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 provides for
more consistent reporting of contracts as either freestanding derivative
instruments subject to SFAS No. 133 in its entirety, or as hybrid instruments
with debt host contracts and embedded derivative features. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, and
hedging relationships designated after June 30, 2003. The company anticipates
that the adoption of SFAS No. 149 will not have a material effect on the
Company's financial position or results of operations.
In January 2003, the FASB issued its Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). A variable interest
entity ("VIE") is an entity that has (1) an insufficient amount of equity to
absorb the entity's expected losses; or (2) equity owners as a group that are
not able to make decisions about the entity's activities, do not have the
obligation to absorb the entity's expected losses or do not have the right to
receive the entity's expected residual returns. FIN 46 requires the
consolidation of a VIE by the Company when the Company will absorb a majority of
the VIE's expected losses, receive a majority of the VIE's expected residual
returns, or both. FIN 46 applies immediately to VIEs created after January 31,
2003, and applies to all VIEs created prior to February 1, 2003 for reporting
periods ending after July 1, 2003.
In the normal course of business, MDC enters into lot option
purchase contracts to acquire land. Option contracts generally require the
payment of cash for the right to acquire land during a specified period of time
at a specified price. The Company's liability with respect to option contracts
generally is limited to forfeiture of the related non-refundable deposits and
letters of credit, which aggregated approximately $18,782,000 at June 30, 2003.
Under the regulations of FIN 46, certain of these contracts create a variable
interest for the Company, with the land seller being the VIE. The Company has
evaluated its lot option purchase contracts created after January 31, 2003,
which represent over 50% of the lots controlled by the Company under option
purchase contracts as of June 30, 2003. Based on this evaluation, MDC has
determined that its interests in these VIEs do not result in significant
variable interests or require consolidation as the Company's interests do not
qualify it as the primary beneficiary of residual returns or losses. The Company
is in the process of reviewing its lot option purchase contracts created prior
to February 1, 2003, but does not believe that the application of the
requirements of FIN 46 to these contracts will result in a material impact on
its financial position or results of operations.
K. Supplemental Guarantor Information
The Company's senior notes are fully and unconditionally guaranteed
on an unsecured 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., Richmond American Homes of Colorado, Inc.,
M.D.C. Land Corporation, Richmond American Construction, Inc., Richmond American
Homes of West
- 10 -
Virginia, Inc., Richmond American Homes of California (Inland Empire), Inc.,
Richmond American Homes of Utah, Inc., Richmond American Homes of Texas, Inc.,
RAH of Texas, LP and RAH Texas Holdings, LLC (collectively, the "Guarantor
Subsidiaries"). Non-guarantor subsidiaries primarily consist of HomeAmerican
Mortgage Corporation, American Home Title and Escrow Company, American Home
Insurance Agency, Inc., Lion Insurance Company and StarAmerican Insurance Ltd.
(collectively, the "Non-Guarantor Subsidiaries"). The Company has determined
that separate, full financial statements of the Guarantor Subsidiaries would not
be material to investors and, accordingly, supplemental financial information
for the Guarantor Subsidiaries is presented.
- 11 -
M.D.C. Holdings, Inc.
Supplemental Combining Balance Sheet
June 30, 2003
(In thousands)
(Unaudited)
Non-
Guarantor Guarantor Eliminating
MDC Subsidiaries Subsidiaries Entries Total
----------- ----------- ----------- ----------- -----------
ASSETS
Corporate
Cash and cash equivalents............... $ 20,810 $ - - $ - - $ - - $ 20,810
Investments in and advances to parent
and subsidiaries...................... 244,676 523 (2,574) (242,625) - -
Other assets............................ 52,209 - - (2,147) - - 50,062
----------- ----------- ----------- ----------- -----------
317,695 523 (4,721) (242,625) 70,872
----------- ----------- ----------- ----------- -----------
Homebuilding
Cash and cash equivalents............... - - 5,441 1,577 - - 7,018
Home sales and other accounts receivable - - 36,557 188 (10,552) 26,193
Inventories, net
Housing completed or under construction - - 718,297 - - - - 718,297
Land and land under development....... - - 725,311 - - - - 725,311
Other assets............................ - - 53,486 18,494 - - 71,980
----------- ----------- ----------- ----------- -----------
- - 1,539,092 20,259 (10,552) 1,548,799
----------- ----------- ----------- ----------- -----------
Financial Services - - - - 160,163 - - 160,163
----------- ----------- ----------- ----------- -----------
Total Assets...................... $ 317,695 $ 1,539,615 $ 175,701 $ (253,177) $ 1,779,834
=========== =========== =========== =========== ===========
LIABILITIES
Corporate
Accounts payable and accrued
expenses.............................. $ 51,401 $ - - $ 110 $ - - $ 51,511
Advances and notes payable - Parent
and subsidiaries...................... (1,060,488) 1,045,593 14,895 - - - -
Income taxes payable.................... (35,440) 43,161 3,820 - - 11,541
Senior Notes, net....................... 297,075 - - - - - - 297,075
----------- ----------- ----------- ----------- -----------
(747,452) 1,088,754 18,825 - - 360,127
----------- ----------- ----------- ----------- -----------
Homebuilding
Accounts payable and accrued
expenses.............................. - - 236,884 6,006 - - 242,890
Line of credit.......................... 200,000 - - - - - - 200,000
----------- ----------- ----------- ----------- -----------
200,000 236,884 6,006 - - 442,890
----------- ----------- ----------- ----------- -----------
Financial Services - - - - 118,069 (10,626) 107,443
----------- ----------- ----------- ----------- -----------
Total Liabilities................. (547,452) 1,325,638 142,900 (10,626) 910,460
----------- ----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY....................... 865,147 213,977 32,801 (242,551) 869,374
----------- ----------- ----------- ----------- -----------
Total Liabilities and
Stockholders' Equity............ $ 317,695 $ 1,539,615 $ 175,701 $ (253,177) $ 1,779,834
=========== =========== =========== =========== ===========
- 12 -
M.D.C. Holdings, Inc.
Supplemental Combining Balance Sheet
December 31, 2002
(In thousands)
Non-
Guarantor Guarantor Eliminating
MDC Subsidiaries Subsidiaries Entries Total
----------- ----------- ----------- ----------- ------------
ASSETS
Corporate
Cash and cash equivalents............... $ 23,164 $ - - $ - - $ - - $ 23,164
Investments in and advances to parent
and subsidiaries...................... 345,214 774 (2,645) (343,343) - -
Other assets ........................... 49,017 - - (2,173) - - 46,844
----------- ----------- ----------- ----------- ------------
417,395 774 (4,818) (343,343) 70,008
----------- ----------- ----------- ----------- ------------
Homebuilding
Cash and cash equivalents............... - - 4,171 515 - - 4,686
Home sales and other accounts receivable - - 3,317 202 - - 3,519
Inventories, net
Housing completed or under construction - - 578,475 - - - - 578,475
Land and land under development....... - - 656,843 - - - - 656,843
Other assets............................ - - 48,168 17,768 - - 65,936
----------- ----------- ----------- ----------- ------------
- - 1,290,974 18,485 - - 1,309,459
----------- ----------- ----------- ----------- ------------
Financial Services - - - - 215,713 - - 215,713
----------- ----------- ----------- ----------- ------------
Total Assets...................... $ 417,395 $ 1,291,748 $ 229,380 $ (343,343) $ 1,595,180
=========== =========== =========== =========== ============
LIABILITIES
Corporate
Accounts payable and accrued expenses. $ 63,772 $ - - $ 99 $ - - $ 63,871
Advances and notes payable - parent and
subsidiaries.......................... (673,479) 658,804 14,675 - - - -
Income taxes payable.................... (90,854) 108,829 3,596 - - 21,571
Senior notes, net....................... 322,990 - - - - - - 322,990
----------- ----------- ----------- ------------ ------------
(377,571) 767,633 18,370 - - 408,432
----------- ----------- ----------- ------------ ------------
Homebuilding
Accounts payable and accrued expenses. - - 204,615 5,986 - - 210,601
Line of credit.......................... - - - - - - - - - -
----------- ----------- ----------- ------------ ------------
- - 204,615 5,986 - - 210,601
----------- ----------- ----------- ------------ ------------
Financial Services - - - - 175,580 - - 175,580
----------- ----------- ----------- ------------ ------------
Total Liabilities................. (377,571) 972,248 199,936 - - 794,613
----------- ----------- ----------- ------------ ------------
STOCKHOLDERS' EQUITY...................... 794,966 319,500 29,444 (343,343) 800,567
----------- ----------- ----------- ------------ ------------
Total Liabilities and
Stockholders' Equity............ $ 417,395 $ 1,291,748 $ 229,380 $ (343,343) $ 1,595,180
=========== =========== =========== ============ ============
- 13 -
M.D.C. Holdings, Inc.
Supplemental Combining Statements of Income
(In thousands)
(Unaudited)
Three Months Ended June 30, 2003
Non-
Guarantor Guarantor Eliminating
MDC Subsidiaries Subsidiaries Entries Total
----------- ----------- ----------- ----------- ------------
REVENUES
Homebuilding............................. $ - - $ 672,573 $ 932 $ (85) $ 673,420
Financial Services....................... - - - - 15,813 - - 15,813
Corporate................................ 204 - - 5 - - 209
Equity in earnings of subsidiaries....... 45,024 - - - - (45,024) - -
----------- ----------- ----------- ----------- ------------
Total Revenues..................... 45,228 672,573 16,750 (45,109) 689,442
----------- ----------- ----------- ----------- ------------
COSTS AND EXPENSES
Homebuilding............................. 30 609,144 (70) (21,028) 588,076
Financial Services....................... - - - - 7,214 - - 7,214
Expenses related to debt redemption...... 9,315 - - - - - - 9,315
Corporate general and administrative..... 14,832 - - - - - - 14,832
Corporate and homebuilding interest...... (21,028) - - - - 21,028 - -
----------- ----------- ----------- ----------- ------------
Total Expenses...................... 3,149 609,144 7,144 - - 619,437
----------- ----------- ----------- ----------- ------------
Income before income taxes............... 42,079 63,429 9,606 (45,109) 70,005
Provision for income taxes............... 1,848 (25,412) (3,747) - - (27,311)
----------- ----------- ----------- ----------- ------------
NET INCOME.................................. $ 43,927 $ 38,017 $ 5,859 $ (45,109) $ 42,694
=========== =========== =========== =========== ============
Three Months Ended June 30, 2002
Non-
Guarantor Guarantor Eliminating
MDC Subsidiaries Subsidiaries Entries Total
----------- ----------- ----------- ----------- ------------
REVENUES
Homebuilding............................. $ - - $ 493,065 $ 6,182 $ (76) $ 499,171
Financial Services....................... - - - - 9,896 - - 9,896
Corporate................................ 309 - - 54 - - 363
Equity in earnings of subsidiaries....... 38,201 - - - - (38,201) - -
----------- ----------- ----------- ----------- ------------
Total Revenues..................... 38,510 493,065 16,132 (38,277) 509,430
----------- ----------- ----------- ----------- ------------
COSTS AND EXPENSES
Homebuilding............................. 175 437,639 4,995 (4,853) 437,956
Financial Services....................... - - - - 4,711 - - 4,711
Corporate general and administrative..... 10,399 - - 35 - - 10,434
Corporate and homebuilding interest...... (4,853) - - - - 4,853 - -
----------- ----------- ----------- ----------- ------------
Total Expenses...................... 5,721 437,639 9,741 - - 453,101
----------- ----------- ----------- ----------- ------------
Income before income taxes............... 32,789 55,426 6,391 (38,277) 56,329
Provision for income taxes............... 2,700 (22,211) (2,482) - - (21,993)
----------- ----------- ----------- ----------- ------------
NET INCOME.................................. $ 35,489 $ 33,215 $ 3,909 $ (38,277) $ 34,336
=========== =========== =========== =========== ============
- 14 -
M.D.C. Holdings, Inc.
Supplemental Combining Statements of Income
(In thousands)
(Unaudited)
Six Months Ended June 30, 2003
Non-
Guarantor Guarantor Eliminating
MDC Subsidiaries Subsidiaries Entries Total
----------- ----------- ----------- ----------- ------------
REVENUES
Homebuilding............................. $ - - $ 1,226,805 $ 1,688 $ (161) $ 1,228,332
Financial Services....................... - - - - 30,326 - - 30,326
Corporate................................ 411 - - 15 - - 426
Equity in earnings of subsidiaries....... 77,772 - - - - (77,772) - -
----------- ----------- ----------- ----------- ------------
Total Revenues..................... 78,183 1,226,805 32,029 (77,933) 1,259,084
----------- ----------- ----------- ----------- ------------
COSTS AND EXPENSES
Homebuilding............................. (5) 1,118,468 (25) (39,908) 1,078,530
Financial Services....................... - - - - 14,160 - - 14,160
Expenses related to debt redemption...... 9,315 - - - - - - 9,315
Corporate general and administrative..... 26,308 - - - - - - 26,308
Corporate and homebuilding interest...... (39,908) - - - - 39,908 - -
----------- ----------- ----------- ----------- ------------
Total Expenses...................... (4,290) 1,118,468 14,135 - - 1,128,313
----------- ----------- ----------- ----------- ------------
Income before income taxes............... 82,473 108,337 17,894 (77,933) 130,771
Provision for income taxes............... (917) (43,161) (6,962) - - (51,040)
----------- ----------- ----------- ----------- ------------
NET INCOME.................................. $ 81,556 $ 65,176 $ 10,932 $ (77,933) $ 79,731
=========== =========== =========== =========== ============
Six Months Ended June 30, 2002
Non-
Guarantor Guarantor Eliminating
MDC Subsidiaries Subsidiaries Entries Total
----------- ----------- ----------- ----------- ------------
REVENUES
Homebuilding............................. $ - - $ 938,781 $ 7,293 $ (142) $ 945,932
Financial Services....................... - - - - 19,277 - - 19,277
Corporate................................ 497 - - 98 - - 595
Equity in earnings of subsidiaries....... 73,953 - - - - (73,953) - -
----------- ----------- ----------- ----------- ------------
Total Revenues..................... 74,450 938,781 26,668 (74,095) 965,804
----------- ----------- ----------- ----------- ------------
COSTS AND EXPENSES
Homebuilding............................. 107 831,237 5,267 (9,738) 826,873
Financial Services....................... - - - - 9,062 - - 9,062
Corporate general and administrative..... 20,423 - - 71 - - 20,494
Corporate and homebuilding interest...... (9,738) - - - - 9,738 - -
----------- ----------- ----------- ----------- ------------
Total Expenses...................... 10,792 831,237 14,400 - - 856,429
----------- ----------- ----------- ----------- ------------
Income before income taxes............... 63,658 107,544 12,268 (74,095) 109,375
Provision for income taxes............... 5,054 (42,987) (4,770) - - (42,703)
----------- ----------- ----------- ----------- ------------
NET INCOME.................................. $ 68,712 $ 64,557 $ 7,498 $ (74,095) $ 66,672
=========== =========== =========== =========== ============
- 15 -
M.D.C. Holdings, Inc.
Supplemental Combining Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended June 30, 2003
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities..................... $ (2,002) $ (146,415) $ 89,324 $ (161) $ (59,254)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities....... (771) (1,947) (472) - - (3,190)
------------ ------------ ------------ ------------ ------------
Financing activities
Net increase (reduction) in borrowings from
parent and subsidiaries.................. (141,534) 149,632 (8,098) - - - -
Lines of credit
Advances............................... 1,365,300 - - - - - - 1,365,300
Principal payments..................... (1,165,300) - - (78,749) - - (1,244,049)
Senior notes
Proceeds from issuance................. 147,279 - - - - - - 147,279
Repurchase............................. (175,000) - - - - - - (175,000)
Premium on repurchase.................. (7,329) - - - - - - (7,329)
Dividend payments........................... (4,669) - - - - 161 (4,508)
Stock repurchases........................... (26,731) - - - - - - (26,731)
Proceeds from exercise of stock options..... 8,403 - - - - - - 8,403
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities............................... 419 149,632 (86,847) 161 63,365
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents.............................. (2,354) 1,270 2,005 - - 921
Cash and cash equivalents
Beginning of period...................... 23,164 4,171 1,607 - - 28,942
------------ ------------ ------------ ------------ ------------
End of period............................ $ 20,810 $ 5,441 $ 3,612 $ - - $ 29,863
============ ============ ============ ============ ============
Six Months Ended June 30, 2002
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities..................... $ (2,660) $ (171,834) $ 51,319 $ (142) $ (123,317)
------------ ------------ ------------ ------------- ------------
Net cash used in investing activities....... (7,784) (923) (82) - - (8,789)
------------ ------------ ------------ ------------ ------------
Financing activities
Net increase (reduction) in borrowings from
parent and subsidiaries.................. (171,406) 173,782 (2,376) - - - -
Lines of credit
Advances............................... 1,167,200 - - - - - - 1,167,200
Principal payments..................... (1,002,200) - - (48,693) - - (1,050,893)
Dividend payments........................... (4,173) - - - - 142 (4,031)
Proceeds from exercise of stock options..... 5,851 - - - - - - 5,851
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities............................... (4,728) 173,782 (51,069) 142 118,127
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents.............................. (15,172) 1,025 168 - - (13,979)
Cash and cash equivalents
Beginning of period...................... 31,322 4,352 926 - - 36,600
------------ ------------ ------------ ------------ ------------
End of period............................ $ 16,150 $ 5,377 $ 1,094 $ - - $ 22,621
============ ============ ============ ============ ============
- 16 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
M.D.C. Holdings, Inc. is a Delaware Corporation. 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 owning and managing subsidiary companies that build and sell homes
under the name "Richmond American Homes." We also own and manage HomeAmerican
Mortgage Corporation ("HomeAmerican"), which originates mortgage loans primarily
for MDC's home buyers; American Home Title and Escrow Company ("American Home
Title"), which provides title agency services; and American Home Insurance
Agency, Inc. ("American Home Insurance"), which offers insurance to MDC's home
buyers.
RESULTS OF OPERATIONS
The table below summarizes MDC's results of operations (in thousands,
except per share amounts). Prior period earnings per share have been restated to
reflect the effect of a 10% stock dividend declared on April 28, 2003.
Three Months Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
----------- ---------- ----------- -----------
Revenues.................................... $ 689,442 $ 509,430 $ 1,259,084 $ 965,804
Income Before Income Taxes.................. $ 70,005 $ 56,329 $ 130,771 $ 109,375
Net Income.................................. $ 42,694 $ 34,336 $ 79,731 $ 66,672
Earnings Per Share
Basic.................................. $ 1.49 $ 1.16 $ 2.77 $ 2.26
Diluted................................ $ 1.43 $ 1.11 $ 2.66 $ 2.17
Revenues for the second quarter and first half of 2003 increased by
$180,012,000 and $293,280,000 to levels 35% and 30% higher than the respective
periods in 2002, primarily due to increased homebuilding revenues resulting from
significant increases in home closings. Revenues from the financial services
segment for the three and six months ended June 30, 2003 increased by $5,917,000
and $11,049,000, respectively, representing increases of 60% and 57%,
respectively, from the same periods in 2002, primarily due to higher gains on
sales of mortgage loans and increased origination fee income.
Income before income taxes increased 24% and 20%, respectively, in the
second quarter and first half of 2003, compared with the same periods in 2002.
The increases were the result of record operating profits from both the
homebuilding and financial services segments. The increases in homebuilding
segment profits primarily resulted from the higher home closings described above
and, in the second quarter of 2003, an increase of 80 basis points in Home Gross
Margins (as defined below), compared with the same period in 2002. Financial
services segment profits increased primarily due to higher gains on sales of
mortgage loans and increased origination fee income, partially offset by higher
general and administrative expenses resulting from HomeAmerican's expanded loan
origination activity. Income before income taxes for the three and six months
ended June 30, 2003 included expenses of $9,315,000 related to the redemption of
the Company's $175,000,000 principal amount of 8 3/8% Senior Notes.
- 17 -
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,
------------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Home Sales Revenues........................... $ 672,439 $ 496,862 $ 1,226,014 $ 942,029
Operating Profit.............................. $ 85,344 $ 61,215 $ 149,802 $ 119,059
Average Selling Price Per Home Closed......... $ 256.3 $ 254.0 $ 259.5 $ 259.5
Home Gross Margins............................ 23.3% 22.5% 23.0% 22.9%
Home Gross Margins Excluding Interest......... 24.2% 23.4% 23.9% 23.8%
Orders For Homes, net (units)
Colorado............................... 812 757 1,483 1,758
California............................. 511 633 1,041 1,224
Nevada................................. 774 411 1,357 618
Arizona................................ 986 671 1,910 1,341
Utah................................... 93 31 186 31
Texas.................................. 69 - - 119 - -
Virginia............................... 305 176 708 418
Maryland............................... 115 74 226 139
------------- ------------- ------------- -------------
Total.............................. 3,665 2,753 7,030 5,529
============= ============= ============= =============
Homes Closed (units)
Colorado............................... 625 706 1,234 1,315
California............................. 487 362 915 654
Nevada................................. 508 247 781 388
Arizona................................ 663 446 1,234 884
Utah................................... 69 25 109 25
Texas.................................. 29 - - 39 - -
Virginia............................... 166 104 268 234
Maryland............................... 77 66 144 130
------------- ------------- ------------- -------------
Total.............................. 2,624 1,956 4,724 3,630
============= ============= ============= =============
June 30, December 31, June 30,
2003 2002 2002
------------- ------------- -------------
Backlog (units)
Colorado............................... 1,206 957 1,638
California............................. 1,048 922 1,060
Nevada................................. 926 350 524
Arizona................................ 1,752 1,076 1,082
Utah................................... 127 50 47
Texas.................................. 96 16 - -
Virginia............................... 916 476 418
Maryland............................... 270 188 166
------------- ------------- -------------
Total.............................. 6,341 4,035 4,935
============= ============= =============
Backlog Estimated Sales Value................. $ 1,630,000 $ 1,120,000 $ 1,300,000
============= ============= =============
Average Sales Price in Backlog................ $ 257.1 $ 277.6 $ 263.4
============= ============= =============
- 18 -
June 30, December 31, June 30,
2003 2002 2002
------------- ------------- -------------
Active Subdivisions
Colorado............................... 56 61 63
California............................. 20 24 27
Nevada................................. 22 18 15
Arizona................................ 42 44 34
Utah................................... 7 4 4
Texas.................................. 6 1 - -
Virginia............................... 30 20 16
Maryland............................... 7 6 6
------------- ------------- -------------
Total.............................. 190 178 165
============= ============= =============
Average for the quarter................ 198 176 160
============= ============= =============
Average for the last six months........ 193 173 152
============= ============= =============
Home Sales Revenues - Home sales revenues in the second quarter and
first half of 2003 were 35% and 30% higher, respectively, than home sales
revenues for the same periods in 2002. The improved revenues primarily were a
result of increased home closings, as discussed below.
Homes Closed - Home closings in the second quarter and first half of
2003 were 34% and 30% higher, respectively, than the same periods in 2002. Home
closings in the three and six months ended June 30, 2003 particularly were
strong in (1) Nevada (increases of 106% and 101%, respectively), Phoenix
(increases of 90% and 74%, respectively) and Virginia (increases of 60% and 15%,
respectively), as a result of year-over-year increases in active subdivisions in
prior quarters which contributed to higher home orders and larger Backlogs (as
defined below) in these markets prior to the 2003 second quarter; and (2)
Southern California (increases of 50% and 53%, respectively) primarily due to
the strong demand for new homes in this market. In addition, the Company closed
98 and 148 homes, respectively, in Utah and Texas in the second quarter and
first half of 2003, new markets in which a total of only 25 homes were closed
during comparable periods in 2002.
Average Selling Price Per Home Closed - The average selling price per
home closed in the second quarter of 2003 was $256,300, compared with $254,000
for the same period in 2002. For the six months ended June 30, 2003, average
selling prices were $259,500 for both 2003 and 2002. Average selling price
increases in Virginia and Maryland were offset by a greater percentage of homes
closed in Nevada, Phoenix, Utah and Texas, where the average selling price of
homes closed is lower than the Company average.
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 were 23.3% and
23.0%, respectively, for the second quarter and first six months of 2003,
compared with 22.5% and 22.9%, respectively, for the same periods in 2002. Home
Gross Margins improved in the second quarter of 2003, compared with the same
period in 2002, in Nevada, Southern California and Maryland, primarily due to
the ability to increase selling prices as a result of the strong demand for new
homes in these markets and, in Southern California, reductions in previous
estimates to complete land development. These increases in Home Gross Margins
partially were offset by decreased Home Gross Margins in Colorado, due to
increased incentives resulting from the more challenging economic conditions
experienced in this market, and higher warranty reserves related to water
intrusion and related
- 19 -
mold concerns, as well as a greater number of homes closed in Utah and Texas
where Home Gross Margins were lower than the Company average.
Future Home Gross Margins may be impacted adversely by (1) 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, finished lots and other resources. See
"Forward-Looking Statements" below.
Orders for Homes and Backlog - Orders for homes increased 33% and 27%,
respectively, in the three and six months ended June 30, 2003, compared with the
same periods in 2002. Home orders during the quarter and six months ended June
30, 2003 particularly were strong in Nevada (up 88% and 120%, respectively),
Virginia (up 73% and 69%, respectively), Maryland (up 55% and 63%, respectively)
and Phoenix (up 51% and 45%, respectively), aided by year-over-year increases in
the number of active subdivisions and the continued strong demand for new homes
in these markets. Home orders also improved in Colorado in the 2003 second
quarter, where orders were up 7%, compared with the 2002 second quarter.
Colorado home orders were lower in the first six months of 2003, compared with
the same period in 2002, due to the market's more challenging economic
environment in the 2003 first quarter. The Company also received 162 and 305
home orders, respectively, in the 2003 second quarter and first six months from
its new markets in Utah and Dallas/Fort Worth. Home orders were lower in
Southern California in the quarter and six months ended June 30, 2003, primarily
due to a temporary reduction in the number of active subdivisions resulting from
the sell-out of several communities earlier than expected.
Record home orders received during the first six months of 2003
contributed to the increase in homes under contract but not yet delivered
("Backlog") at June 30, 2003 to 6,341 units with an estimated sales value of
$1,630,000,000, 28% higher than the Backlog of 4,935 units with an estimated
sales value of $1,300,000,000 at June 30, 2002. Assuming no significant change
in market conditions or mortgage interest rates, the Company expects
approximately 80% of its June 30, 2003 Backlog to close under existing sales
contracts during the second half of 2003 and first quarter of 2004. The
remaining 20% of the homes in Backlog are not expected to close under existing
contracts due to cancellations. See "Forward-Looking Statements" below.
Marketing - Marketing expenses (which include sales commissions,
advertising, amortization of deferred marketing costs, model home expenses and
other costs) totaled $39,625,000 and $73,225,000, respectively, for the quarter
and six months ended June 30, 2003, compared with $27,682,000 and $53,345,000,
respectively, for the same periods in 2002. The increases in 2003 primarily were
due to (1) higher sales commissions resulting from the Company's increased home
sales revenues; (2) higher product advertising and deferred marketing
amortization, primarily as a result of the increased number of active
subdivisions during the second quarter and first six months of 2003, compared
with the same periods in 2002; and (3) increased sales overhead resulting from
the Company's expanding home sales activities.
General and Administrative - General and administrative expenses
increased to $32,466,000 and $61,631,000, respectively, during the second
quarter and first half of 2003, compared with $24,717,000 and $46,910,000,
respectively, for the same periods in 2002, primarily due to higher compensation
and other costs associated with expanded operations in most of the Company's
markets, most notably California, Nevada, Phoenix and Virginia.
- 20 -
Title Operations - American Home Title provides title agency services
to MDC home buyers in Virginia, Maryland and Colorado. The Company is evaluating
opportunities to provide title agency services in its other markets. Income
before income taxes from title operations was $650,000 and $1,109,000,
respectively, for the quarter and six months ended June 30, 2003, compared with
$597,000 and $1,066,000, respectively, for the same periods in 2002.
New Homebuilding Divisions
In February 2002, the Company expanded into the Dallas/Fort Worth
market by hiring a division president to manage the start-up operation. During
2002 and the first half of 2003, the Company acquired control of almost 1,200
lots in 14 subdivisions in this market. In the 2003 second quarter and first six
months of 2003, this division received 69 and 119 home orders, respectively, and
closed 29 and 39 homes, respectively.
In April 2002, one of the Company's subsidiaries acquired most of the
homebuilding assets, and hired former employees, of John Laing Homes in Salt
Lake City, marking the Company's entry into this market. The assets acquired
included approximately 750 lots and 24 homes under construction in five
subdivisions. The Company now controls almost 1,500 lots in this market. In the
second quarter and first six months of 2003, this division received 93 and 186
home orders, respectively, and closed 69 and 109 homes, respectively.
The Company expanded into the Houston and Philadelphia/Delaware Valley
markets in the 2003 second quarter and into the West Florida and Chicago
markets in the third quarter of 2003. Each of these expansion efforts was
initiated by hiring a division president to manage start-up operations. As of
this filing, no lots had been acquired by the Company in any of these new
markets.
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 cash option deposits (dollars in thousands).
June 30, December 31, June 30,
2003 2002 2002
----------- ----------- -----------
Colorado................................... $ 117,460 $ 140,930 $ 141,696
California................................. 225,760 154,980 125,737
Nevada..................................... 124,026 114,142 109,302
Arizona.................................... 84,090 92,639 97,311
Utah....................................... 15,209 12,984 9,744
Texas...................................... 6,389 5,559 - -
Virginia................................... 110,619 113,717 79,094
Maryland................................... 41,758 21,892 19,501
----------- ----------- -----------
Total................................... $ 725,311 $ 656,843 $ 582,385
=========== =========== ===========
Total Lots Owned (excluding lots in
work-in-process)......................... 16,273 16,962 16,773
Total Lots Controlled Under Option......... 6,608 6,995 6,403
----------- ----------- -----------
Total Lots Owned and Controlled
(excluding lots in work-in-process).... 22,881 23,957 23,176
=========== =========== ===========
Total Cash Option Deposits................. $ 15,239 $ 18,007 $ 16,034
=========== =========== ===========
- 21 -
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,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Mortgage loan origination fees............... $ 5,234 $ 3,992 $ 9,894 $ 8,221
Gains on sales of mortgage servicing, net.... $ 329 $ 481 $ 1,163 $ 952
Gains on sales of mortgage loans, net........ $ 8,755 $ 4,280 $ 16,097 $ 7,741
Operating Profit............................. $ 8,599 $ 5,185 $ 16,166 $ 10,215
Principal amount of loan originations
MDC home buyers........................... $ 364,021 $ 270,566 $ 679,043 $ 521,454
Spot...................................... 6,003 6,034 9,752 15,564
----------- ----------- ----------- -----------
Total............................... $ 370,024 $ 276,600 $ 688,795 $ 537,018
=========== =========== =========== ===========
Principal amount of loans brokered
MDC home buyers........................... $ 84,611 $ 59,697 $ 129,936 $ 103,299
Spot...................................... 1,000 1,510 1,538 3,118
----------- ----------- ----------- -----------
Total.............................. $ 85,611 $ 61,207 $ 131,474 $ 106,417
=========== =========== =========== ===========
Capture Rate................................ 66% 69% 68% 71%
=========== =========== =========== ===========
Including brokered loans................. 81% 81% 81% 82%
=========== =========== =========== ===========
Financial services operating profit for the second quarter and first
half of 2003 increased, compared with the same periods in 2002, primarily due to
higher gains on sales of mortgage loans and increased origination fee income,
partially offset by higher general and administrative expenses resulting from
HomeAmerican's expanded loan origination activity. The principal amounts of
originated and brokered loans were $455,635,000 and $820,269,000, respectively,
in the second quarter and first half of 2003, compared with $337,807,000 and
$643,435,000, respectively, for the same periods in 2002. These improvements
primarily were due to increases in homes closed by the homebuilding segment. MDC
home buyers were the source of approximately 99% of the principal amount of
mortgage loans originated and brokered by HomeAmerican in the second quarter and
first half of 2003.
Mortgage loans originated by HomeAmerican for MDC home buyers as a
percentage of total MDC home closings ("Capture Rate") were 66% and 68%,
respectively, for the quarter and six months ended June 30, 2003, compared with
69% and 71%, respectively, for the same periods in 2002. HomeAmerican also
brokers mortgage loans originated by outside lending institutions for MDC home
buyers. These brokered loans, for which HomeAmerican receives a fee, have been
excluded from the computation of the Capture Rate. The Capture Rate including
brokered loans was 81% for the second quarter and first half of 2003, compared
with 81% and 82%, respectively, for the same periods in 2002.
Forward Sales Commitments - HomeAmerican's operations are affected by
changes in mortgage interest rates. HomeAmerican utilizes forward mortgage
securities contracts to manage price risk related to fluctuations in interest
rates on its fixed-rate mortgage loans owned and rate-locked mortgage loans in
the pipeline. Reported gains on sales of mortgage loans may vary significantly
from period to period depending on the volatility in the interest rate market.
- 22 -
Insurance Operations - American Home Insurance provides homeowners,
auto and other types of casualty insurance in each of MDC's markets. The results
of its operations were not material for any of the periods presented.
Other Operating Results
Interest Expense - The Company capitalizes interest incurred on its
corporate and homebuilding debt during the period of active development and
through the completion of construction of its homebuilding inventories.
Corporate and homebuilding interest incurred but not capitalized is reported as
interest expense. Interest incurred by the financial services segment is charged
to interest expense, which is deducted from interest income and reported as net
interest income in Note F to the Company's Condensed Consolidated Financial
Statements. For a reconciliation of interest incurred, capitalized and expensed,
see Note E to the Company's Condensed Consolidated Financial Statements.
Expenses Related to Debt Redemption - In May 2003, the Company redeemed
$175,000,000 principal amount of its 8 3/8% senior notes due 2008 (the "8 3/8%
Senior Notes"). The 8 3/8% Senior Notes were redeemed at 104.188% of their
principal amount, or $182,329,000, plus accrued and unpaid interest through the
date of redemption. Expenses for the quarter and six months ended June 30, 2003
related to this debt redemption of $9,315,000 include the above redemption
premium of $7,329,000 and the related unamortized discount and debt issuance
costs of $1,986,000. In compliance with the Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 145, the
expenses related to this debt redemption are no longer treated as an
extraordinary loss.
Corporate General and Administrative Expenses - Corporate general and
administrative expenses totaled $14,832,000 and $26,308,000, respectively,
during the second quarter and first half of 2003, from $10,434,000 and
$20,494,000, respectively, for the same periods of 2002. The increases in 2003
primarily were due to (1) greater compensation-related costs principally
resulting from the Company's higher profitability; and (2) increased
compensation and other expenses for information technology, as the Company is
focusing on improving its systems in preparation for the growth of its
homebuilding and financial services operations.
Income Taxes - MDC's overall effective income tax rate of 39% for the
second quarter and first half of 2003, compared with 39%, respectively, for the
same periods in 2002, differed from the federal statutory rate of 35%, primarily
due to the impact of state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
MDC uses its liquidity and capital resources to (1) support its
operations, including its homebuilding inventories; (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.
The Company currently has an effective registration statement that would allow
the Company to issue up to $450,000,000 of equity, debt or hybrid securities.
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 7% senior notes due 2012 (the "7% Senior
Notes"), 5 1/2% senior notes due 2013 (the "5 1/2% Senior Notes") and its
homebuilding
- 23 -
line of credit (the "Homebuilding Line"); and (3) current financing, primarily
its mortgage lending line of credit (the "Mortgage Line"). Based upon its
current capital resources and additional capacity 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
and expansion into new markets. 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 or capital and credit markets 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 - The Company has an unsecured revolving line of credit
with a group of lenders for support of its homebuilding operations (the
"Homebuilding Line"). Lender commitments under the Homebuilding Line total
$600,000,000 with a maturity date of July 29, 2006. Pursuant to the terms of the
Homebuilding Line, a term-out of this credit may commence prior to July 29, 2006
under certain circumstances. At June 30, 2003, $200,000,000 was borrowed and
$23,114,000 in letters of credit were outstanding under the Homebuilding Line.
Mortgage Lending - The Company's mortgage lending bank line of credit
(the "Mortgage Line"), has a borrowing limit of $125,000,000 with terms that
allow for increases of up to $50,000,000 in the borrowing limit to a maximum of
$175,000,000, subject to concurrence by the participating banks. In June 2003,
the Company received a commitment to temporarily increase the borrowing limit to
$150,000,000. This temporary increase will terminate on October 2, 2003. The
terms of the Mortgage Line are set forth in a Second Amended and Restated
Warehousing Credit Agreement dated as of September 9, 2002. Available borrowings
under the Mortgage Line are collateralized by mortgage loans and mortgage-backed
certificates and are limited to the value of eligible collateral as defined. At
June 30, 2003, $75,325,000 was borrowed and an additional $28,846,000 was
collateralized and available to be borrowed. The Mortgage Line is cancelable
upon 120 days notice.
General - The agreements for the Company's bank lines of credit and the
indentures for the Company's senior notes require compliance with certain
representations, warranties and covenants. The Company believes that it is in
compliance with these representations, warranties and covenants. The agreements
for the bank lines of credit and the indentures for the Company's senior notes
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, 2002.
The financial covenants contained in the Homebuilding Line 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 times (subject to downward adjustment in certain
circumstances) MDC's "adjusted consolidated tangible net worth," as defined.
Under the adjusted consolidated tangible net worth test, MDC's "adjusted
consolidated tangible net worth," as defined, must not be less than the sum of
(1) $491,382,000; (2) 50% of "consolidated net income," as defined, of the
"borrower," as defined, and the "guarantors," as defined, after December 31,
2001; and (3) 50% of the net proceeds or other consideration received for the
issuance of capital stock. In addition, "adjusted consolidated tangible net
worth," as defined, must not be less than $307,114,000.
- 24 -
The Company's senior notes are not secured and the senior notes
indentures do not contain financial covenants. The Company's senior notes are
fully and unconditionally guaranteed on an unsecured basis, jointly and
severally, by most of the Company's homebuilding segment subsidiaries.
MDC Common Stock Repurchase Programs
On March 24, 2003, the MDC board of directors authorized the repurchase
of up to an additional 1,350,000 shares of MDC common stock, bringing the total
authorization under the Company's stock repurchase program to 4,350,000 shares.
The Company repurchased a total of 727,100 shares of MDC common stock in the
2003 first quarter and no shares in the second quarter, bringing the total
shares repurchased to 2,580,400 and leaving 1,769,600 shares available to be
repurchased as of June 30, 2003 under this program. The per share prices,
including commissions, for the 727,100 shares repurchased ranged from $35.96 to
$39.03 with an average cost of $36.76. At June 30, 2003, the Company held
3,158,000 shares of treasury stock with an average purchase price of
approximately $16.32 per share.
Consolidated Cash Flow
During the first six months of 2003, the Company used $59,254,000 of
cash in its operating activities. Cash provided by (1) net income before
depreciation, amortization and expenses related to debt redemption; and (2) the
sale of mortgage loans was more than offset by cash used to build net
homebuilding assets in support of the Company's expanding homebuilding
activities. The Company financed these operating cash requirements, as well as
the repurchase of 727,100 shares of stock for $26,731,000 and the payment of
dividends, primarily through borrowings on its bank lines of credit. Also during
the second quarter of 2003, the Company issued the 5 1/2% Senior Notes with a
$150,000,000 principal amount at a discount of $2,721,000, and redeemed all
$175,000,000 principal amount of its 8 3/8% Senior Notes. The Company paid a
premium of $7,329,000 on the redemption.
During the first six months of 2002, the Company used $123,317,000 of
cash in its operating activities. Cash provided by (1) net income before
depreciation and amortization; and (2) the sale of mortgage loans was more than
offset by cash used to build net homebuilding assets in support of the Company's
expanding homebuilding activities. The Company financed these operating cash
requirements primarily through borrowings on its bank lines of credit.
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 revenue. 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. Reported gains on sales of mortgage loans may
vary significantly from period to period depending on the volatility in the
interest rate market. Derivative instruments utilized in the normal course of
business by HomeAmerican include forward sales securities commitments, private
investor sales commitments and commitments to originate mortgage loans. The
Company utilizes these commitments to
- 25 -
manage the price risk on fluctuations in interest rates on its mortgage loans
held in inventory and commitments to originate mortgage loans. Such contracts
are the only significant financial derivative instruments utilized by MDC.
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.
CRITICAL ACCOUNTING POLICIES
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. Due to uncertainties in the estimation process, it is at least
reasonably possible that actual results could differ from those estimates. The
Company has determined that its critical accounting policies, or those policies
that require significant use of judgment and estimates in their application, are
those related to (1) homebuilding inventory valuation; (2) estimates to complete
land development and home construction; (3) warranty costs; and (4) litigation
reserves.
Homebuilding Inventory Valuation - Homebuilding inventories under
development and construction are carried at cost unless facts and circumstances
indicate that the carrying value of the underlying projects may be impaired.
Impairment is determined by comparing the estimated future cash flows
(undiscounted and without interest charges) from an individual project to its
carrying value. If such cash flows are less than the project's carrying value,
the carrying value of the project is written down to its fair value.
Homebuilding inventories held for sale are carried at the lower of cost or fair
value, less selling costs, and are evaluated on an individual asset basis. Fair
value is determined by management estimate and incorporates anticipated future
revenues and costs.
Estimates to Complete Land Development and Home Construction - Home
sales revenue is recognized when a home is closed. In order to properly match
revenues with expenses, an estimation must be made by the Company as to certain
construction and land development costs incurred but not yet paid at the time of
closing. Estimated costs to complete a home are determined for each closed home
based upon historical data with respect to similar product types and
geographical areas.
Warranty Costs - Warranty reserves are established as homes close on a
per-unit basis in an amount estimated to be adequate to cover expected
warranty-related costs for materials and outside labor to be incurred during the
warranty period. Reserves are determined based upon historical data with respect
to similar product types and geographical areas.
Litigation Reserves - The Company and certain of its subsidiaries have
been named as defendants in various cases arising in the normal course of
business. The Company has reserved for costs to be incurred with respect to
these cases based upon information provided by its legal counsel.
- 26 -
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, 2002, 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) the availability and cost of
performance bonds and insurance covering risks associated with our business; (7)
shortages and the cost of labor; (8) weather related slowdowns; (9) slow growth
initiatives; (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; (14)
terrorist acts and other acts of war; and (15) other factors over which the
Company has little or no control.
- 27 -
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. Reported gains on sales of
mortgage loans may vary significantly from period to period depending on the
volatility in the interest rate market. Derivative instruments utilized in the
normal course of business by HomeAmerican include forward sales securities
commitments, private investor sales commitments and commitments to originate
mortgage loans. The Company utilizes these commitments to manage the price risk
on fluctuations in interest rates on its mortgage loans owned and commitments to
originate mortgage loans. Such contracts are the only significant financial
derivative instruments utilized by MDC.
HomeAmerican provides mortgage loans that 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 price risk due to fluctuations in interest rates on rate-locked
mortgage loans in process that have not closed. Due to this hedging philosophy,
the market risk associated with these mortgages is limited.
The Company utilizes both short-term and long-term debt in its
financing strategy. 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 the Company would be required to refinance
such debt.
As of June 30, 2003, short-term debt was $75,325,000, which consisted
of amounts outstanding on 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, which bear interest
at the prevailing market rates. Long-term debt obligations outstanding, their
maturities and estimated fair values at June 30, 2003 are as follows (in
thousands).
Maturities through December 31,
--------------------------------------------------------------- Estimated
2003 2004 2005 2006 2007 Thereafter Total Fair Value
---------- --------- ---------- --------- ---------- ---------- --------- ----------
Fixed Rate Debt............ $ - - $ - - $ - - $ - - $ - - $ 300,000 $ 300,000 $ 311,314
Average Interest Rate (units) - - - - - - - - - - 6.25% 6.25%
Variable Rate Debt......... $ - - $ - - $ - - $ 200,000 $ - - $ - - $ 200,000 $ 200,000
Average Interest Rate... - - - - - - 2.70% - - - - 2.70%
The Company believes that its overall balance sheet structure has
repricing and cash flow characteristics that mitigate the impact of interest
rate changes.
- 28 -
ITEM 4. CONTROLS AND PROCEDURES.
Management of MDC recognizes its responsibility for maintaining
effective and efficient internal controls, disclosure controls and procedures.
The Company has a group of officers who are responsible for reviewing all
quarterly and annual SEC reports. This group consists of most of MDC's senior
management, including its chief financial officer, general counsel, treasurer,
and homebuilding and mortgage lending presidents and vice presidents of finance.
An evaluation of the effectiveness of the design and operation of
the Company's disclosure controls and procedures was performed under the
supervision, and with the participation, of the Company's management, including
the chief executive officer and the chief financial officer. Based on that
evaluation, the Company's management, including the chief executive officer and
chief financial officer, concluded that the Company's disclosure controls and
procedures were effective as of June 30, 2003. The evaluation did not identify
any change in the Company's internal control over financial reporting that
occurred during the quarter ended June 30, 2003 that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
- 29 -
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, including moisture intrusion and
related mold claims. 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 that would result in material contingent liabilities related
to environmental hazards or asbestos.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREOWNERS.
The annual meeting of the Company's shareowners was held on April 28,
2003. The following members of the Board of Directors were elected as Class III
Directors for three-year terms expiring in 2006:
Votes For Votes Withheld
Steven J. Borick 24,993,617 302,506
David D. Mandarich 21,897,587 3,398,536
David E. Blackford 25,116,799 179,324
Larry A. Mizel, Herbert T. Buchwald, Gilbert Goldstein and William
B. Kemper continued to serve as directors of the Company after the annual
meeting. Also at the meeting, the shareowners approved an amendment to the
M.D.C. Holdings, Inc. 2001 Equity Incentive Plan (the "Equity Incentive Plan")
that increased by 1,000,000 the number of shares of MDC common stock authorized
for issuance under the Equity Incentive Plan. The results of the vote were as
follows:
Votes For Votes Against Votes Abstaining Broker Non-Votes
-------------------- -------------------- -------------------- ------------------
15,817,457 9,465,747 12,919 0
ITEM 5. OTHER INFORMATION.
On July 31, 2003, the Company's board of directors declared a dividend
of twelve and one half cents per share for the quarter ended June 30, 2003,
payable August 28, 2003 to shareowners of record on
- 30 -
August 14, 2003. 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) Exhibits:
10.1 Agreement to increase commitment amount dated as of
June 27, 2003, by and among HomeAmerican Mortgage
Corporation, as borrower, U.S. Bank National
Association, as agent, and U.S. Bank National
Association, as a bank.
12 Ratio of Earnings to Fixed Charges Schedule
31.1 Certification of Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of Chief Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of Chief Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K:
Form 8-K (Item 9) dated July 15, 2003, reporting
second quarter earnings information with a copy of
the Press Release attached and provided pursuant to
both Item 9 and Item 12.
Form 8-K (Item 9) dated July 2, 2003, reporting home
orders, home closings and quarter-end backlog for the
quarterly period ended June 30, 2003 with a copy of
the Press Release attached and provided pursuant to
both Item 9 and Item 12.
Form 8-K (Item 5) dated May 19, 2003, reporting the
offering of $150,000,000 of the Company's 5 1/2%
Senior Notes due 2013.
Form 8-K (Item 9) dated April 9, 2003, reporting
first quarter earnings information with a copy of the
Press Release attached and provided pursuant to both
Item 9 and Item 12.
Form 8-K (Item 9) dated April 2, 2003, reporting home
orders, home closings and quarter-end backlog for the
quarterly period ended March 31, 2003 with a copy of
the Press Release attached and provided pursuant to
Item 12.
- 31 -
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 14, 2003 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
- 31 -
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------------------------
10.1 Agreement to increase commitment amount dated
as of June 27, 2003, by and among HomeAmerican
Mortgage Corporation, as borrower, U.S. Bank
National Association, as agent, and U.S. Bank
National Association, as a bank.
12 Ratio of Earnings to Fixed Charges Schedule
31.1 Certification of Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of Chief Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of Chief Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
- 33 -