SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-8951
M.D.C. HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 84-0622967
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
3600 South Yosemite Street, Suite 900 80237
Denver, Colorado (Zip code)
(Address of principal executive offices)
(303) 773-1100
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of April 18, 1996, 18,801,000 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 MARCH 31, 1996
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of March 31, 1996 (Unaudited)
and December 31, 1995......................... 1
Statements of Income (Unaudited) for the three
months ended March 31, 1996 and 1995.......... 3
Statements of Cash Flows (Unaudited) for the
three months ended March 31, 1996 and 1995.... 4
Notes to Financial Statements (Unaudited)....... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 17
Part II. Other Information:
Item 1. Legal Proceedings............................... 29
Item 4. Submission of Matters to a Vote of Shareowners.. 30
Item 6. Exhibits and Reports on Form 8-K................ 30
(i)
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands)
March 31, December 31,
1996 1995
----------- -----------
ASSETS (Unaudited)
Corporate
Cash and cash equivalents................................................... $ 10,013 $ 10,290
Property and equipment, net................................................. 9,549 9,550
Deferred income taxes....................................................... 8,669 13,730
Deferred issue costs, net................................................... 9,746 9,931
Other assets, net........................................................... 3,737 3,830
---------- -----------
41,714 47,331
Homebuilding
Cash and cash equivalents................................................... 10,074 5,096
Home sales and other accounts receivable.................................... 19,710 26,192
Investments and marketable securities, net.................................. 6,560 6,481
Inventories, net
Housing completed or under construction................................... 279,507 265,205
Land and land under development........................................... 171,802 176,960
Prepaid expenses and other assets, net...................................... 41,503 42,111
---------- -----------
529,156 522,045
Financial Services
Cash and cash equivalents................................................... 1,448 5,409
Accrued interest and other assets, net...................................... 4,304 3,129
Mortgage loans held in inventory, net....................................... 50,956 53,153
Mortgage Collateral, net of mortgage-backed bonds, and related assets and
liabilities............................................................... 3,925 3,744
---------- -----------
60,633 65,435
Total Assets.......................................................... $ 631,503 $ 634,811
========== ===========
See notes to condensed consolidated financial statements.
-1-
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
March 31, December 31,
1996 1995
----------- -----------
LIABILITIES (Unaudited)
Corporate
Accounts payable and accrued expenses....................................... $ 20,791 $ 18,258
Income taxes payable........................................................ 8,564 11,930
Notes payable............................................................... 3,525 3,537
Senior Notes, net........................................................... 187,572 187,525
Subordinated notes, net..................................................... 38,222 38,221
----------- -----------
258,674 259,471
Homebuilding
Accounts payable and accrued expenses....................................... 89,310 82,164
Lines of credit............................................................. 42,359 43,490
Notes payable............................................................... 8,301 10,571
----------- -----------
139,970 136,225
Financial Services
Accounts payable and accrued expenses....................................... 10,143 12,092
Line of credit.............................................................. 15,013 21,990
----------- -----------
25,156 34,082
Total Liabilities..................................................... 423,800 429,778
----------- -----------
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; 22,606,000
shares issued at March 31, 1996 and December 31, 1995................... 226 226
Additional paid-in capital.................................................. 135,884 136,022
Retained earnings........................................................... 91,595 87,476
----------- -----------
227,705 223,724
Less treasury stock, at cost; 3,332,000 and 3,157,000 shares, respectively,
at March 31, 1996 and December 31, 1995................................... (20,002) (18,691)
----------- -----------
Total Stockholders' Equity............................................ 207,703 205,033
----------- -----------
Total Liabilities and Stockholders' Equity............................ $ 631,503 $ 634,811
=========== ===========
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
Ended March 31,
1996 1995
----------- -----------
REVENUES
Homebuilding............................................................... $ 191,276 $ 184,529
Financial Services......................................................... 7,738 6,150
Corporate.................................................................. 232 413
----------- -----------
Total Revenues......................................................... 199,246 191,092
----------- -----------
COSTS AND EXPENSES
Homebuilding............................................................... 185,242 176,520
Financial Services......................................................... 2,742 2,394
Corporate general and administrative....................................... 2,601 3,127
Corporate and homebuilding interest (Note C)............................... 1,851 2,839
----------- -----------
Total Expenses......................................................... 192,436 184,880
----------- -----------
Income before income taxes.................................................... 6,810 6,212
Provision for income taxes.................................................... 2,486 2,144
----------- -----------
Net Income.................................................................... $ 4,324 $ 4,068
=========== ===========
EARNINGS PER SHARE
Primary.................................................................... $ .22 $ .20
=========== ===========
Fully diluted.............................................................. $ .20 $ .19
=========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING
Primary.................................................................... 19,863 20,323
=========== ===========
Fully diluted.............................................................. 23,510 23,936
=========== ===========
DIVIDENDS PER SHARE........................................................... $ .03 $ .02
=========== ===========
See notes to condensed consolidated financial statements.
-3-
M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months
Ended March 31,
1996 1995
----------- -----------
OPERATING ACTIVITIES
Net Income.......................................................... $ 4,324 $ 4,068
Adjustments To Reconcile Net Income To Net Cash Provided By
Operating Activities:
Depreciation and amortization.................................. 2,519 2,123
Deferred income taxes.......................................... 5,061 109
Gains on sales of mortgage-related assets...................... (935) - -
Net Changes In Assets and Liabilities
Mortgage loans held in inventory............................... 2,197 4,199
Homebuilding inventories....................................... (9,178) 1,257
Receivables.................................................... 6,482 (4,530)
Accounts payable and accrued expenses.......................... 4,393 (6,476)
Other, net..................................................... (2,431) 3,565
------------ -----------
Net Cash Provided By Operating Activities............................ 12,432 4,315
----------- -----------
INVESTING ACTIVITIES
Net Proceeds From Mortgage-Related Assets and Liabilities........... 693 (92)
Other, net.......................................................... (31) 368
----------- -----------
Net Cash Provided By Investing Activities............................ 662 276
----------- -----------
(Continued)
See notes to condensed consolidated financial statements.
-4-
M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
(Continued)
Three Months
Ended March 31,
1996 1995
------------ ------------
FINANCING ACTIVITIES
Lines of Credit
Advances....................................................... $ 179,344 $ 155,308
Principal payments............................................. (187,452) (172,586)
Notes Payable
Borrowings..................................................... 480 1,075
Principal payments............................................. (2,770) (8,315)
Treasury Stock Repurchases.......................................... (1,645) - -
Dividend Payments................................................... (576) (387)
Other, net.......................................................... 265 279
------------ ------------
Net Cash Used In Financing Activities............................... (12,354) (24,626)
------------ ------------
Net Increase (Decrease) In Cash and Cash Equivalents................ 740 (20,035)
Cash and Cash Equivalents
Beginning Of Period............................................ 20,795 43,564
------------ ------------
End Of Period.................................................. $ 21,535 $ 23,529
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest, net of amounts capitalized.......................... NA(1) NA(1)
Income taxes.................................................. $ 990 $ 657
(1) Interest capitalized exceeded interest paid during the period.
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Homebuilding land inventory sales financed by MDC................... $ - - $ 156
Homebuilding inventory purchases financed by seller................. - - 1,688
See notes to condensed consolidated financial statements.
-5-
M.D.C. HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A. Presentation of Financial Statements
The condensed consolidated financial statements of M.D.C. Holdings,
Inc. ("MDC" or the "Company," which, unless otherwise indicated, refers to
M.D.C. Holdings, Inc. and its subsidiaries) have been prepared by MDC, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. These statements reflect all adjustments (including all normal
recurring accruals) which, in the opinion of management, are necessary to
present fairly the financial position, results of operations and cash flows of
MDC as of March 31, 1996 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, 1995.
Price Waterhouse LLP has made a review, and not an audit, of the
unaudited condensed consolidated financial statements of the Company for the
three-month periods ended March 31, 1996 and 1995 (based on procedures adopted
by the American Institute of Certified Public Accountants) as set forth in their
separate report dated April 24, 1996, which is included as an exhibit to this
Form 10-Q. This report is not a "report" within the meaning of Sections 7 and 11
of the Securities Act of 1933, and the independent accountant's liability under
Section 11 does not extend to it.
Certain reclassifications have been made in the 1995 financial
statements to conform to the classifications used in the current year.
B. Information on Business Segments
The Company operates in two business segments: homebuilding and
financial services (which consists of mortgage lending and asset management
operations). A summary of the Company's segment information is shown below (in
thousands).
Three Months
Ended March 31,
1996 1995
----------- -----------
Homebuilding
Home sales.................................. $ 186,023 $ 182,064
Land sales.................................. 5,159 2,313
Other revenues.............................. 94 152
----------- -----------
191,276 184,529
----------- -----------
Home cost of sales.......................... 160,816 157,015
Land cost of sales.......................... 4,932 1,993
Marketing................................... 11,982 11,117
General and administrative.................. 7,512 6,395
----------- -----------
185,242 176,520
----------- -----------
Homebuilding Operating Profit........... 6,034 8,009
----------- -----------
-6-
Three Months
Ended March 31,
1996 1995
----------- -----------
Financial Services
Mortgage Lending Revenues
Interest revenues......................... $ 805 $ 693
Origination fees.......................... 1,389 1,074
Gains on sale of mortgage servicing....... 2,622 2,670
Gains (losses) on sale of mortgage loans,
net..................................... 542 (336)
Mortgage servicing and other.............. 386 566
Asset Management Revenues
Management fees and other................. 1,059 1,483
Gains on sales of mortgage-related assets. 935 - -
----------- -----------
7,738 6,150
----------- -----------
General and Administrative Expenses
Mortgage Lending............................ 2,122 1,784
Asset Management............................ 620 610
----------- -----------
2,742 2,394
----------- -----------
Financial Services Operating Profit..... 4,996 3,756
----------- -----------
Total Operating Profit........................... 11,030 11,765
----------- -----------
Corporate
Other revenues.............................. 232 413
Interest expense............................ (1,851) (2,839)
General and administrative expense.......... (2,601) (3,127)
------------ ------------
Net Corporate Expenses.................. (4,220) (5,553)
----------- -----------
Income Before Income Taxes....................... $ 6,810 $ 6,212
=========== ===========
-7-
C. Corporate and Homebuilding Interest Activity
Three Months
Ended March 31,
1996 1995
----------- -----------
(In thousands)
Interest capitalized in homebuilding inventory,
beginning of period.............................. $ 40,217 $ 42,478
Interest incurred................................... 7,774 8,989
Interest expensed................................... (1,851) (2,839)
Previously capitalized interest included in cost of
sales............................................ (5,798) (6,590)
----------- -----------
Interest capitalized in homebuilding inventory, end
of period........................................ $ 40,342 $ 42,038
=========== ===========
Interest capitalized in homebuilding inventory as a
percent of homebuilding inventory................ 8.9% 9.1%
=========== ===========
D. Stockholders' Equity
On January 19, 1996, the Company repurchased 230,000 shares of MDC
Common Stock at $7.13 per share, substantially completing a program authorized
by the MDC Board of Directors to repurchase up to 1,100,000 shares of MDC Common
Stock. During 1995, the Company repurchased 865,600 shares of Common Stock
pursuant to this program at prices ranging from $5.88 to $6.50 per share ($6.32
per share average, including commissions).
In April 1996, the Company repurchased 473,000 shares of MDC Common
Stock for $7.13 per share from Spencer I. Browne (former President, Co-Chief
Operating Officer and a director of the Company) pursuant to an agreement
between Mr. Browne and the Company.
-8-
E. Earnings Per Share
Primary earnings per share are based on the weighted-average number of
common and common equivalent shares outstanding during each period. The
computation of fully diluted earnings per share also assumes the conversion into
MDC Common Stock of all of the $28,000,000 outstanding principal amount of the 8
3/4% convertible subordinated notes due December 2005 (the "Convertible Notes")
at a conversion price of $7.75 per share of MDC Common Stock. The primary and
fully diluted earnings per share calculations are shown below (in thousands,
except per share amounts).
Three Months
Ended March 31,
1996 1995
----------- -----------
Primary Earnings Per Share Calculation
Net Income................................................... $ 4,324 $ 4,068
=========== ===========
Weighted-average shares outstanding.......................... 19,284 19,128
Dilutive stock options....................................... 579 1,195
----------- -----------
Total Weighted-Average Shares........................... 19,863 20,323
=========== ===========
Primary Earnings Per Share................................... $ .22 $ .20
=========== ===========
Fully Diluted Earnings Per Share Calculation
Net Income................................................... $ 4,324 $ 4,068
Adjustment for interest on Convertible Notes, net of income
tax benefit; conversion assumed........................... 402 384
----------- -----------
Adjusted Net Income..................................... $ 4,726 $ 4,452
=========== ===========
Weighted-average shares outstanding.......................... 19,284 19,128
Dilutive stock options....................................... 613 1,195
Shares issuable upon conversion of Convertible Notes;
conversion assumed........................................ 3,613 3,613
----------- -----------
Total Weighted-Average Shares........................... 23,510 23,936
=========== ===========
Fully Diluted Earnings Per Share............................. $ .20 $ .19
=========== ===========
F. Supplemental Guarantor Information
The Senior Notes are guaranteed unconditionally on an unsecured
subordinated basis, jointly and severally (the "Guaranties"), 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, Inc., Richmond Homes, Inc. I and Richmond Homes,
Inc. II (collectively, the "Guarantors"). The Guaranties are subordinated to all
Guarantor Senior Indebtedness (as defined in the Senior Notes Indenture).
Supplemental combining financial information follows.
-9-
Supplemental Combining Balance Sheet
March 31, 1996
(In thousands)
Unconsolidated
----------------------------------------
Non-
ASSETS Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
------------ ------------ ------------ ------------ ------------
Corporate
Cash and cash equivalents............... $ 10,013 $ - - $ - - $ - - $ 10,013
Investments in subsidiaries............. 208,029 - - 17,434 (225,463) - -
Advances and notes receivable - Parent
and subsidiaries...................... 227,304 6 20,157 (247,467) - -
Property and equipment, net............. 9,549 - - - - - - 9,549
Deferred income taxes................... 8,669 - - - - - - 8,669
Deferred issue costs, net............... 9,746 - - - - - - 9,746
Other assets, net....................... 3,386 - - 351 - - 3,737
------------ ------------ ------------ ------------ ------------
476,696 6 37,942 (472,930) 41,714
------------ ------------ ------------ ------------ ------------
Homebuilding
Cash and cash equivalents............... 6 10,067 1 - - 10,074
Home sales and other accounts
receivable............................ - - 28,468 - - (8,758) 19,710
Investments and marketable securities,
net................................... 6,560 - - - - - - 6,560
Inventories, net
Housing completed or under
construction........................ - - 279,507 - - - - 279,507
Land and land under
development......................... - - 144,390 28,417 (1,005) 171,802
Prepaid expenses and other assets ...... 3,411 38,092 - - - - 41,503
------------ ------------ ------------ ------------ ------------
9,977 500,524 28,418 (9,763) 529,156
------------ ------------ ------------ ------------ ------------
Financial Services
Cash and cash equivalents............... - - - - 1,448 - - 1,448
Accrued interest and other assets ...... - - - - 4,304 - - 4,304
Mortgage loans held in inventory ....... - - - - 50,956 - - 50,956
Mortgage Collateral, net of
mortgage-backed bonds, and related
assets and liabilities................ - - - - 3,925 - - 3,925
------------ ------------ ------------ ------------ ------------
- - - - 60,633 - - 60,633
------------ ------------ ------------ ------------ ------------
Total Assets...................... $ 486,673 $ 500,530 $ 126,993 $ (482,693) $ 631,503
============ ============ ============ ============= ============
-10-
Supplemental Combining Balance Sheet
March 31, 1996
(In thousands)
(continued)
Unconsolidated
----------------------------------------
Non-
LIABILITIES Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
------------ ------------ ------------ ------------ ------------
Corporate
Accounts payable and accrued expenses... $ 20,339 $ - - $ 452 $ - - $ 20,791
Advances and notes payable - Parent and
subsidiaries.......................... 10,715 217,171 27,891 (255,777) - -
Income taxes payable.................... 8,564 - - - - - - 8,564
Notes payable........................... 3,525 - - - - - - 3,525
Senior Notes, net....................... 187,572 - - - - - - 187,572
Subordinated notes, net................. 38,222 - - - - - - 38,222
----------- ----------- ----------- ------------ -----------
268,937 217,171 28,343 (255,777) 258,674
----------- ----------- ----------- ------------ -----------
Homebuilding
Accounts payable and accrued expenses... 6,857 81,533 922 (2) 89,310
Lines of credit......................... - - 42,359 - - - - 42,359
Notes payable........................... 3,176 1,657 3,468 - - 8,301
----------- ----------- ----------- ------------ -----------
10,033 125,549 4,390 (2) 139,970
----------- ----------- ----------- ------------ -----------
Financial Services
Accounts payable and accrued expenses... - - - - 18,903 (8,760) 10,143
Line of credit.......................... - - - - 15,013 - - 15,013
----------- ----------- ----------- ------------ -----------
- - - - 33,916 (8,760) 25,156
----------- ----------- ----------- ------------ -----------
Total Liabilities................. 278,970 342,720 66,649 (264,539) 423,800
----------- ----------- ----------- ------------ -----------
STOCKHOLDERS' EQUITY
Preferred stock......................... - - - - 10 (10) - -
Common Stock............................ 226 19 81 (100) 226
Additional paid-in capital.............. 135,884 144,756 224,914 (369,670) 135,884
Retained earnings....................... 91,595 13,035 (164,652) 151,617 91,595
Less treasury stock..................... (20,002) - - (9) 9 (20,002)
----------- ----------- ----------- ------------ -----------
Total Stockholders' Equity........ 207,703 157,810 60,344 (218,154) 207,703
----------- ----------- ----------- ------------ -----------
Total Liabilities and
Stockholders' Equity............ $ 486,673 $ 500,530 $ 126,993 $ (482,693) $ 631,503
=========== =========== =========== ============= ===========
-11-
Supplemental Combining Balance Sheet
December 31, 1995
(In thousands)
Unconsolidated
---------------------------------------
Non-
ASSETS Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
------------ ------------ ------------ ------------ ------------
Corporate
Cash and cash equivalents.............. $ 10,290 $ - - $ - - $ - - $ 10,290
Investments in subsidiaries............ 303,694 - - 17,434 (321,128) - -
Advances and notes receivable - Parent
and subsidiaries..................... 210,656 33 21,550 (232,239) - -
Property and equipment, net............ 9,550 - - - - - - 9,550
Deferred income taxes.................. 13,730 - - - - - - 13,730
Deferred issue costs, net.............. 9,931 - - - - - - 9,931
Other assets, net...................... 3,730 - - 100 - - 3,830
---------- ---------- ---------- ------------ ----------
561,581 33 39,084 (553,367) 47,331
---------- ---------- ---------- ------------ ----------
Homebuilding
Cash and cash equivalents.............. 6 5,054 36 - - 5,096
Home sales and other accounts
receivable........................... - - 37,726 - - (11,534) 26,192
Investments and marketable securities,
net.................................. 6,481 - - - - - - 6,481
Inventories, net
Housing completed or under
construction....................... - - 265,205 - - - - 265,205
Land and land under development...... - - 150,531 27,676 (1,247) 176,960
Prepaid expenses and other assets...... 3,633 38,453 25 - - 42,111
---------- ---------- ---------- ------------ ----------
10,120 496,969 27,737 (12,781) 522,045
---------- ---------- ---------- ------------ ----------
Financial Services
Cash and cash equivalents.............. - - - - 5,409 - - 5,409
Accrued interest and other assets...... - - - - 3,129 - - 3,129
Mortgage loans held in inventory....... - - - - 53,153 - - 53,153
Mortgage Collateral, net of
mortgage-backed bonds, and related
assets and liabilities............... - - - - 3,744 - - 3,744
---------- ---------- ---------- ------------ ----------
- - - - 65,435 - - 65,435
---------- ---------- ---------- ------------ ----------
Total Assets..................... $ 571,701 $ 497,002 $ 132,256 $ (566,148) $ 634,811
========== ========== ========== ============ ==========
-12-
Supplemental Combining Balance Sheet
December 31, 1995
(In thousands)
(continued)
Unconsolidated
---------------------------------------
Non-
LIABILITIES Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
------------ ------------ ------------ ------------ ------------
Corporate
Accounts payable and accrued expenses.... $ 17,897 $ - - $ 361 $ - - $ 18,258
Advances and notes payable - Parent and
Subsidiaries........................... 98,525 210,754 20,434 (329,713) - -
Income taxes payable..................... 11,930 - - - - - - 11,930
Notes payable............................ 3,537 - - - - - - 3,537
Senior Notes, net........................ 187,525 - - - - - - 187,525
Subordinated notes, net.................. 38,221 - - - - - - 38,221
----------- ----------- ----------- ------------ -----------
357,635 210,754 20,795 (329,713) 259,471
----------- ----------- ----------- ------------ -----------
Homebuilding
Accounts payable and accrued expenses.... 5,403 75,831 924 6 82,164
Lines of credit.......................... - - 43,490 - - - - 43,490
Notes payable............................ 3,630 3,192 3,749 - - 10,571
----------- ----------- ----------- ------------ -----------
9,033 122,513 4,673 6 136,225
----------- ----------- ----------- ------------ -----------
Financial Services
Accounts payable and accrued expenses.... - - - - 23,655 (11,563) 12,092
Line of credit........................... - - - - 21,990 - - 21,990
----------- ----------- ----------- ------------ -----------
- - - - 45,645 (11,563) 34,082
----------- ----------- ----------- ------------ -----------
Total Liabilities.................. 366,668 333,267 71,113 (341,270) 429,778
----------- ----------- ----------- ------------ -----------
STOCKHOLDERS' EQUITY
Preferred stock.......................... - - - - 10 (10) - -
Common Stock............................. 226 19 82 (101) 226
Additional paid-in capital............... 136,022 144,756 224,914 (369,670) 136,022
Retained earnings........................ 87,476 18,960 (163,854) 144,894 87,476
Less treasury stock...................... (18,691) - - (9) 9 (18,691)
----------- ----------- ----------- ------------ -----------
Total Stockholders' Equity......... 205,033 163,735 61,143 (224,878) 205,033
----------- ----------- ----------- ------------ -----------
Total Liabilities and
Stockholders' Equity............. $ 571,701 $ 497,002 $ 132,256 $ (566,148) $ 634,811
=========== =========== =========== ============ ===========
-13-
Supplemental Combining Statements of Income
(In thousands)
Unconsolidated
----------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
------------ ------------ ------------ ------------ ------------
THREE MONTHS ENDED MARCH 31, 1996
REVENUES
Homebuilding............................. $ 79 $ 191,194 $ 3 $ - - $ 191,276
Financial Services....................... - - - - 7,738 - - 7,738
Corporate................................ 217 6 9 - - 232
Equity in earnings of subsidiaries....... 5,591 - - - - (5,591) - -
----------- ----------- ----------- ----------- -----------
Total Revenues..................... 5,887 191,200 7,750 (5,591) 199,246
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................. 418 184,581 168 75 185,242
Financial Services....................... - - - - 2,742 - - 2,742
Corporate general and administrative..... 2,594 - - 7 - - 2,601
Corporate and homebuilding
interest............................... (3,935) 5,048 703 35 1,851
----------- ----------- ----------- ----------- -----------
Total Expenses..................... (923) 189,629 3,620 110 192,436
----------- ----------- ----------- ----------- -----------
Income before income taxes.................. 6,810 1,571 4,130 (5,701) 6,810
Provision for income taxes.................. 2,486 626 1,678 (2,304) 2,486
----------- ----------- ----------- ----------- -----------
NET INCOME.................................. $ 4,324 $ 945 $ 2,452 $ (3,397) $ 4,324
=========== =========== =========== =========== ===========
THREE MONTHS ENDED MARCH 31, 1995
REVENUES
Homebuilding............................. $ 33 $ 184,802 $ 91 $ (397) $ 184,529
Financial Services....................... - - - - 6,150 - - 6,150
Corporate................................ 413 - - - - - - 413
Equity in earnings of subsidiaries....... 6,000 1,196 - - (7,196) - -
----------- ----------- ----------- ----------- -----------
Total Revenues..................... 6,446 185,998 6,241 (7,593) 191,092
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................. 546 175,850 124 - - 176,520
Financial Services....................... - - - - 2,394 - - 2,394
Corporate general and
administrative......................... 3,092 - - 35 - - 3,127
Corporate and homebuilding
interest............................... (3,404) 5,959 740 (456) 2,839
----------- ----------- ----------- ----------- -----------
Total Expenses..................... 234 181,809 3,293 (456) 184,880
----------- ----------- ----------- ----------- -----------
Income before income taxes.................. 6,212 4,189 2,948 (7,137) 6,212
Provision for income taxes.................. 2,144 1,593 913 (2,506) 2,144
----------- ----------- ----------- ----------- -----------
NET INCOME.................................. $ 4,068 $ 2,596 $ 2,035 $ (4,631) $ 4,068
=========== =========== =========== =========== ===========
-14-
Supplemental Combining Statement of Cash Flows
Three Months Ended March 31, 1996
(In thousands)
Unconsolidated
----------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
------------ ------------ ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................... $ 73,593 $ 1,550 $ (4,003) $ (58,708) $ 12,432
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Net Proceeds From Mortgage-Related Assets
And Liabilities.......................... - - - - 693 - - 693
Affiliate Notes Receivable.................. 16,648 (27) (1,393) (15,228) - -
Other, net.................................. (299) 322 (54) - - (31)
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Investing
Activities............................... 16,349 295 (754) (15,228) 662
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Net Increase (Reduction) In Borrowings From
Parent and Subsidiaries.................. (87,810) 6,417 7,457 73,936 - -
Lines of Credit
Advances............................... - - 179,344 - - - - 179,344
Principal payments..................... - - (180,475) (6,977) - - (187,452)
Notes Payable
Borrowings............................. - - 480 - - - - 480
Principal payments..................... (453) (2,598) 281 - - (2,770)
Treasury Stock Repurchases.................. (1,645) - - - - - - (1,645)
Dividend Payments........................... (576) - - - - - - (576)
Other, net.................................. 265 - - - - - - 265
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Financing
Activities............................... (90,219) 3,168 761 73,936 (12,354)
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) In Cash And Cash
Equivalents.............................. (277) 5,013 (3,996) - - 740
Cash And Cash Equivalents
Beginning Of Period...................... 10,296 5,054 5,445 - - 20,795
----------- ----------- ----------- ----------- -----------
End Of Period............................ $ 10,019 $ 10,067 $ 1,449 $ - - $ 21,535
=========== =========== =========== =========== ===========
-15-
Supplemental Combining Statement of Cash Flows
Three Months Ended March 31, 1995
(In thousands)
Unconsolidated
----------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
------------ ------------ ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................... $ (23,026) $ (21,079) $ 6,233 $ 42,187 $ 4,315
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Net Proceeds From Mortgage-Related Assets And
Liabilities.............................. - - - - (92) - - (92)
Affiliate Notes Receivable.................. 14,257 - - - - (14,257) - -
Other, net.................................. - - - - 368 - - 368
----------- ----------- - ----------- ----------- - -----------
Net Cash Provided By Investing
Activities................................ 14,257 - - 276 (14,257) 276
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Net Increase (Reduction) In Borrowings
From Parent and Subsidiaries............. (8,545) 23,038 13,437 (27,930) - -
Lines of Credit
Advances............................... - - 155,308 - - - - 155,308
Principal payments..................... - - (152,865) (19,721) - - (172,586)
Notes Payable
Borrowings............................. - - 1,075 - - - - 1,075
Principal payments..................... (12) (7,243) (1,060) - - (8,315)
Dividend Payments........................... (387) - - - - - - (387)
Other, net.................................. 279 - - - - - - 279
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In)
Financing Activities...................... (8,665) 19,313 (7,344) (27,930) (24,626)
----------- ----------- ----------- ----------- -----------
Net Decrease In Cash And Cash Equivalents...
(17,434) (1,766) (835) - - (20,035)
Cash And Cash Equivalents
Beginning Of Period...................... 31,210 9,656 2,698 - - 43,564
----------- ----------- ----------- ----------- -----------
End Of Period............................ $ 13,776 $ 7,890 $ 1,863 $ - - $ 23,529
=========== =========== =========== =========== ===========
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
MDC is the seventh largest homebuilder in the United States based on
homebuilding revenues. The Company operates in two segments: homebuilding and
financial services. In its homebuilding segment, MDC is engaged in the
construction and sale of residential housing in (i) metropolitan Denver and
Colorado Springs, Colorado; (ii) northern Virginia and suburban Maryland (the
"Mid-Atlantic"); (iii) Northern and Southern California; (iv) Phoenix and
Tucson, Arizona; and (v) Las Vegas, Nevada. In its financial services segment,
(i) HomeAmerican Mortgage Corporation (a wholly owned subsidiary of M.D.C.
Holdings, Inc., "HomeAmerican") provides mortgage loans primarily to the
Company's home buyers and, to a lesser extent, to others (the mortgage lending
operations); and (ii) Financial Asset Management LLC (an indirect subsidiary of
M.D.C. Holdings, Inc., "FAMC") manages, by contract, the operations of two
publicly traded real estate investment trusts (each, a "REIT") (the asset
management operations).
RESULTS OF OPERATIONS
The table below summarizes MDC's results of operations during each of
the periods presented (in thousands, except per share amounts).
Three Months
Ended March 31,
1996 1995
----------- -----------
Revenues.......................................... $ 199,246 $ 191,092
Income Before Income Taxes........................ 6,810 6,212
Net Income........................................ 4,324 4,068
Earnings Per Share:
Primary...................................... .22 .20
Fully diluted................................ .20 .19
Revenues for the first quarter of 1996 reached the highest first
quarter level in the Company's history and increased 4% compared with the same
period in 1995, primarily due to an increase in the number of homes closed. The
Company closed 1,051 homes during the first quarter of 1996, the highest level
of first quarter home closings in the Company's history and a 4% increase over
the 1,008 homes closed in the same period in 1995.
Income before income taxes and net income were higher in the first
quarter of 1996 compared with the first quarter of 1995 as a result of (i)
higher operating profit from the Company's financial services segment, primarily
due to larger gains on sales of mortgage loans and mortgage-related assets in
1996; (ii) lower interest expense as the Company had fewer completed unsold
homes in the first quarter of 1996 compared with 1995; and (iii) lower corporate
general and administrative expenses in 1996. These increases to income partially
were offset by a reduction in operating profit from the Company's homebuilding
operations in the first quarter of 1996 compared with the first quarter of 1995
primarily resulting from (i) lower operating profit from the Company's
Mid-Atlantic operations due to fewer home closings and a decline in Home Gross
Margins (as hereinafter defined); (ii) lower operating profit from the Company's
Colorado operations due to fewer home closings at lower average selling prices;
and (iii) increased marketing and general and administrative expenses incurred
in support of the Company's expanding homebuilding activities.
-17-
Impact of Home Mortgage Interest Rates.
The Company's homebuilding and mortgage lending operations are
dependent upon the availability and cost of mortgage financing. Increases in
home mortgage interest rates (i) may reduce the demand for homes and home
mortgages; and (ii) generally will reduce home mortgage refinancing activity.
In October 1993, home mortgage interest rates reached their lowest
levels in 25 years, dropping to an average of 6.7% on a 30-year, fixed-rate
mortgage. From October 1993 to December 1994, home mortgage interest rates
increased to as high as 9.25%. During this period of rising interest rates, the
Company experienced a general weakening in demand for new homes in most of its
markets. This weakened demand, along with a general buildup in unsold homes
under construction by the Company and other homebuilders, adversely affected the
Company's home sales and Home Gross Margins on such sales in 1995, particularly
in the first quarter. Since December 1994, home mortgage interest rates
generally declined to as low as 6.9% in February 1996. The decline during 1995
and early 1996, among other things, led to improved home sales levels in the
last three quarters of 1995 and the first quarter of 1996 compared with the same
periods in the prior year. However, Home Gross Margins have not recovered as
quickly, as the Company and other homebuilders in the Company's markets have
continued to offer increased incentives to sell homes, especially unsold homes
under construction.
Mortgage interest rates have recently increased to as high as 8.1%. The
Company is unable to predict the extent to which recent or future increases in
home mortgage interest rates will affect adversely the Company's operating
activities and results of operations.
-18-
Homebuilding Segment.
The table below sets forth certain information with respect to the
Company's homes sold, closed and delivered during each of the periods presented,
as well as units sold under a contract but not delivered ("Backlog") and active
subdivisions at each date shown (dollars in thousands).
Three Months,
Ended March 31,
1996 1995
----------- ------------
Home sales revenues............................... $ 186,023 $ 182,064
Operating profit.................................. $ 6,034 $ 8,009
Average selling price per housing unit............ $ 177.0 $ 180.6
Home Gross Margins................................ 13.6% 13.8%
Homes (units)
Sales contracted, net
Colorado................................... 668 540
Mid-Atlantic............................... 427 330
California................................. 249 160
Arizona.................................... 326 178
Nevada..................................... 51 25
------------ ------------
Total................................ 1,721 1,233
============ ============
Closed and delivered
Colorado................................... 437 480
Mid-Atlantic............................... 157 191
California................................. 195 126
Arizona.................................... 216 184
Nevada..................................... 46 27
----------- ------------
Total................................ 1,051 1,008
=========== ============
March 31, December 31, March 31,
1996 1995 1995
----------- ------------ -----------
Backlog (units)
Colorado................................... 889 658 670
Mid-Atlantic............................... 545 275 476
California................................. 229 175 135
Arizona.................................... 344 234 251
Nevada..................................... 74 13 27
----------- ------------ -----------
Total................................ 2,081 1,355 1,559
=========== ============ ===========
Estimated sales value............................. $ 370,100 $ 243,000 $ 288,700
=========== ============ ===========
Active Subdivisions
Colorado................................... 51 49 52
Mid-Atlantic............................... 49 48 41
California................................. 20 23 16
Arizona.................................... 24 22 20
Nevada..................................... 6 2 3
----------- ------------ -----------
Total................................ 150 144 132
=========== ============ ===========
-19-
Home Sales Revenues and Homes Closed and Delivered. Home sales revenues
for the three months ended March 31, 1996 reached their highest first quarter
level in the Company's history, representing an increase of 2% over home sales
revenues for the same period in 1995, primarily as a result of increased home
closings, partially offset by reduced average selling prices on homes closed.
The Company experienced increases in home closings in (i) California (a 55%
increase) due to the Company's acquisition and opening of several new
subdivisions in Southern California, including five active subdivisions in
Paloma del Sol, a master planned community in Temecula, Riverside County,
acquired from Mesa Homes in July 1995; (ii) Arizona (a 17% increase) primarily
due to continued expansion of the Company's operations in Phoenix; and (iii)
Nevada (a 70% increase) as the Company began closing homes in four active
subdivisions acquired from Longford Homes in February 1996.
The Company's Mid-Atlantic and Colorado operations delivered fewer
homes in the first quarter of 1996 compared with the same period in 1995. Home
closings in the Company's Mid-Atlantic market adversely were impacted by lower
home sales Backlog at the end of 1995 than at the end of 1994 and adverse
weather conditions in the first three months of 1996 which delayed construction
and development activities and the delivery of certain homes. Such construction
and development delays will also impair the delivery of some homes originally
scheduled to close in the second quarter of 1996. Home closings were lower in
Colorado primarily due to the favorable impact in the first quarter of 1995 of
the sale and delivery of unsold homes under construction at December 31, 1994
which were considered to be in excess of the Company's plan and needs.
Average Selling Price Per Housing Unit. The decrease in the average
selling price per housing unit in the first quarter of 1996 compared with the
first quarter of 1995 reflects the impact of management's continuing emphasis on
offering lower-priced, more affordable homes primarily marketed to first-time
and first-time move-up home buyers. This strategy resulted in lower average
sales prices in the first quarter of 1996 compared with prices in the first
quarter of 1995 in (i) Colorado, Maryland and Arizona; and (ii) Southern
California and Nevada as the Company closed affordably priced homes in
subdivisions acquired from Mesa Homes and Longford Homes, respectively. These
decreases partially were offset by an increase in the average selling price in
the Northern California market principally due to the mix of homes closed. The
Company believes that its average selling price will be lower during the
remainder of 1996 than in comparable periods in 1995 and could decline an
additional two to three percent from the first quarter 1996 level.
Home Gross Margins. Gross margins (home sales revenues less cost of
goods sold, which primarily includes land and construction costs, capitalized
interest, a reserve for warranty expense and financing costs) as a percent of
home sales revenues ("Home Gross Margins") decreased slightly during the first
quarter of 1996 compared with the first quarter of 1995. The 1996 first quarter
decline largely was due to increased incentives offered to home buyers (i) in
order to stimulate sales in view of weakening conditions in the Mid-Atlantic
market; (ii) to counter increased competition in each of the Company's markets;
and (iii) to continue to reduce the Company's older inventory of unsold homes
under construction. Although the first quarter 1996 Home Gross Margins improved
from the fourth quarter of 1995, the Company believes that further growth in
Home Gross Margins over the next two quarters will be limited primarily due to
the continued impact of increased incentives offered to home buyers. In
addition, increases in, among other things, the costs of subcontracted labor,
finished lots and building materials may affect adversely future Home Gross
Margins to the extent that market conditions prevent the recovery of increased
costs through higher sales prices.
Home Sales and Backlog. Home sales increased 40% during the first
quarter of 1996 compared with the first quarter of 1995 primarily due to a 14%
increase in active subdivisions and a 29% increase
-20-
in home sales per active subdivision to 3.6 per month during the first quarter
of 1996 compared with 2.8 per month during the same period in 1995. As a result
of these strong sales, the Company's Backlog at March 31, 1996 increased to
2,081 homes, representing a 54% increase from a Backlog of 1,355 homes at
December 31, 1995 and a 33% increase from 1,559 homes at March 31, 1995. These
strong year-over-year increases in sales and Backlog are a result of increased
sales in each of MDC's markets, particularly Southern California, Phoenix and
Las Vegas due to the Company's continued expansion in these markets. Strong
sales results also were experienced in Colorado and the Mid-Atlantic region
fueled in part by the relatively low level of mortgage interest rates during the
first quarter of 1996. Additionally, the Company increased the number of active
subdivisions in the Mid-Atlantic region by 14% in the first quarter of 1996
compared with the same period in 1995. MDC expects approximately 70% of its
March 31, 1996 Backlog to close under existing sales contracts during the
remainder of 1996, assuming no significant change in interest rates.
The Company's home sales in April 1996 totalled 457 units compared with
426 homes sold in April 1995. The Company is unable to predict if this trend of
higher home sales in 1996 compared with 1995 will continue in the future,
particularly in view of recent increases in mortgage interest rates.
Marketing. Marketing expenses (which include, among other things,
amortization of deferred marketing, model home expenses and sales commissions)
totalled $11,982,000 for the first quarter of 1996 compared with $11,117,000 for
the same period in 1995. This 8% increase during 1996 principally was due to (i)
variable cost increases resulting from the increase in homebuilding revenues;
and (ii) additional marketing-related salary, advertising and model home
operation expenses incurred to support the Company's expanded operations
and to stimulate sales in response to increased competition in each of its
markets.
General and Administrative. General and administrative expenses
increased to $7,512,000 during the first quarter of 1996 compared with
$6,395,000 during the same period in 1995 primarily due to additional costs
incurred in support of the Company's expanded operations in Southern California,
Phoenix and Las Vegas.
Land Sales.
Revenues from land sales totalled $5,159,000 and $2,313,000,
respectively, for the first quarter of 1996 and 1995. The land sales for both
periods primarily were in Colorado. Gross profits from these land sales were
$227,000 and $320,000, respectively, for the first quarter of 1996 and 1995.
First quarter 1996 land sales include a sale of approximately 54 acres
of land held for future development or sale in the Company's Rock Creek Ranch
development in Colorado for approximately $4,800,000, which generated gross
profit of $234,000. The purchaser acquired the option to purchase this land in
August 1995.
-21-
Land Inventory.
The table below shows (in thousands) the carrying value of MDC's land
and land under development in each of its homebuilding markets at March 31,
1996, December 31, 1995 and March 31, 1995.
March 31, December 31, March 31,
1996 1995 1995
----------- ----------- -----------
Finished or currently under development
Colorado............................... $ 29,009 $ 34,331 $ 42,033
Mid-Atlantic........................... 50,579 47,247 33,162
California............................. 18,451 26,694 32,642
Arizona................................ 23,247 20,586 22,073
Nevada................................. 10,011 4,559 6,414
----------- ----------- -----------
Total.............................. 131,297 133,417 136,324
Held for future development or sale*........ 40,505 43,543 49,827
----------- ----------- -----------
Total.............................. $ 171,802 $ 176,960 $ 186,151
=========== =========== ===========
*The substantial majority of the land held for future
development or sale consists of unfinished lots located in
Colorado which generally are in close proximity to projects
currently being developed.
In addition to its land inventory, the Company controls a portion of
the land it will require for its homebuilding operations in future periods
utilizing "rolling" option contracts. Generally, in a rolling option contract,
the Company obtains the right to purchase finished lots in consideration for an
option deposit (generally $50,000 to $200,000 per contract). In the event the
Company elects not to purchase the finished lots within a specified period of
time (generally, 5 to 20 lots per project per calendar quarter), the agreements
limit the Company's loss to the option deposit, thereby limiting the Company's
risk while preserving its liquidity. At March 31, 1996, 7,708 lots were
controlled under rolling option agreements with $7,500,000 in total option
deposits. Because of increased demand for finished lots in certain of the
markets where the Company builds homes, the Company's ability to acquire lots
using rolling options has been reduced or has become more expensive.
-22-
Financial Services Segment.
Mortgage Lending Operations.
The table below summarizes the results of HomeAmerican's operations
during each of the periods presented (in thousands).
Three Months
Ended March 31,
1996 1995
----------- -----------
Gains from sales of mortgage servicing:
Bulk........................................... $ 2,402 $ 2,218
Other.......................................... 220 452
Net interest income............................... 805 693
Origination fees.................................. 1,389 1,074
Gains (losses) on sales of mortgage loans......... 542 (336)
Mortgage servicing and other...................... 386 566
General and administrative expenses............... (2,122) (1,784)
----------- -----------
Operating profit......................... $ 3,622 $ 2,883
=========== ===========
Principal amount of originations and purchases:
MDC home buyers.............................. $ 99,401 $ 77,743
Spot......................................... 13,333 6,017
Correspondent................................ 10,963 9,130
----------- -----------
Total.................................... $ 123,697 $ 92,890
=========== ===========
Capture Rate...................................... 65.4% 53.8%
=========== ===========
March 31, December 31, March 31,
1996 1995 1995
----------- ------------ -----------
Composition of Servicing Portfolio at End of Period:
FHA insured/VA guaranteed...................... $ 96,946 $ 85,002 $ 208,981
Conventional................................... 347,959 401,809 416,409
----------- ------------ ----------
Total Servicing Portfolio.......................... $ 444,905 $ 486,811 $ 625,390
=========== ============ ==========
Salable Portion of Servicing Portfolio*............ $ 309,097 $ 429,328 $ 448,166
=========== ============ ==========
*Salable servicing portfolio at March 31, 1996 includes servicing
originated prior to 1996 of $202,156.
HomeAmerican's operating profit for the first quarter of 1996 increased
compared with the same period in 1995 primarily due to the recording of gains on
sales of mortgage loans totalling $542,000 in 1996, compared with losses
totalling $336,000 in 1995. These increased gains primarily resulted from the
Company's adoption in 1996 of SFAS 122 (as hereinafter defined).
SFAS 122 requires the Company to allocate the cost of mortgage loans
originated by HomeAmerican after January 1, 1996 between the mortgage loans and
the right to service the mortgage loans, based on their relative values. Prior
to 1996, the cost of mortgage loans originated by HomeAmerican was assigned to
the mortgage loans, with no cost assigned to the servicing rights. The net
effect of the adoption of SFAS 122, all other factors held constant, will be
higher gains (or lower
-23-
losses) on sales of mortgage loans originated by HomeAmerican after January 1,
1996 and lower gains on sales of the related servicing rights, compared with
gains on sales of mortgage loans and related servicing rights originated by
HomeAmerican prior to January 1, 1996.
The Company's adoption of SFAS 122 resulted in additional gains in the
first quarter of 1996 of approximately $830,000 on the sale of mortgage loans
which were originated and sold by HomeAmerican during such period. In addition,
gains from the non-bulk sale of mortgage servicing rights in the first quarter
of 1996 were reduced by $210,000 due to the allocation of mortgage loan costs to
the servicing rights sold in accordance with the requirements of SFAS 122. Gains
from bulk sales of mortgage servicing in the first quarter of 1996 were not
impacted significantly by the adoption of SFAS 122 as the servicing rights sold
primarily were originated by HomeAmerican prior to January 1, 1996.
HomeAmerican's loan originations and purchases increased by 33% in the
first quarter of 1996 compared with the same period in 1995 primarily due to
increases in (i) the Company's home closings; (ii) HomeAmerican's "Capture
Rate", or the number of mortgage loans originated for MDC home buyers as a
percentage of total MDC home closings; and (iii) the dollar amount of spot
originations primarily resulting from increased refinancing activity in view of
lower mortgage interest rates. HomeAmerican opened origination facilities in
Southern California and Nevada in late 1995 and February 1996, respectively,
which favorably affected, and favorably will affect in the future,
HomeAmerican's total originations and Capture Rate. HomeAmerican continues to
benefit from the Company's homebuilding growth as MDC home buyers were the
source of more than 80% of the principal amount of mortgage loans originated or
purchased in 1996 and throughout 1995.
Forward Sales Commitments. HomeAmerican's operations are affected by,
among other things, changes in mortgage interest rates. HomeAmerican utilizes
forward mortgage securities contracts to manage the interest rate risk on its
fixed-rate mortgage loans owned and rate-locked mortgage loans in the pipeline.
Such contracts are the only significant financial derivative instrument utilized
by HomeAmerican.
Asset Management Operations.
The following table summarizes the results of the asset management
operations during the periods presented (in thousands).
Three Months
Ended March 31,
1996 1995
----------- -----------
Management fees from REITs......................... $ 796 $ 637
Gains on sales of mortgage-related assets.......... 935 - -
Other revenues, net................................ 263 846
General and administrative expenses................ (620) (610)
----------- -----------
Operating profit........................ $ 1,374 $ 873
=========== ===========
The Company currently does not anticipate making additional
mortgage-related investments. As a result, future income from the asset
management operations substantially will be dependent on management fees earned
from two publicly traded REITs. At March 31, 1996, the REITs had approximately
$151,500,000 in assets under management by the Company.
-24-
Other Operating Results.
Interest Expense. Corporate and homebuilding interest incurred
decreased by 14% to $7,774,000 for the first quarter of 1996 compared with
$8,989,000 for the same period in 1995, primarily due to (i) lower average
effective interest rates with respect to the Company's variable-rate bank lines
of credit and project loans in 1996; and (ii) lower average outstanding
borrowings during the first quarter of 1996 compared with the first quarter of
1995 as the Company had lower levels of completed unsold homes in the first
quarter of 1996 compared with 1995.
The portion of corporate and homebuilding interest which was
capitalized (the Company capitalizes interest on its homebuilding inventories
during the period of active development and through the completion of
construction) during the first quarter of 1996 totalled $5,923,000, which was
slightly lower than the $6,150,000 of interest capitalized in the final quarter
of 1995.
Corporate and homebuilding interest incurred but not capitalized is
reflected as interest expense and totalled $1,851,000 for the first quarter of
1996 compared with $2,839,000 for the first quarter of 1995, reflecting the net
impact of the $1,215,000 decrease in interest incurred, partially offset by the
$227,000 decrease in interest capitalized.
For a reconciliation of interest incurred, capitalized and expensed,
see Note C to the Company's Condensed Consolidated Financial Statements.
Corporate General and Administrative Expenses. Corporate general and
administrative expenses totalled $2,601,000 during the three months ended March
31, 1996, compared with $3,127,000 during the first quarter of 1995. The
decrease in the first quarter of 1996 primarily was due to an insurance
settlement of $1,250,000 received in the first quarter of 1996 related to the
recovery of certain homebuilding expenditures which were previously expensed,
which more than offset increases in certain insurance costs and expenses
incurred in connection with the Company's new national marketing initiative.
Income Taxes. M.D.C. Holdings, Inc. and its wholly owned subsidiaries
file a consolidated federal income tax return (an "MDC Consolidated Return").
Richmond Homes and its wholly owned subsidiaries filed a separate consolidated
federal income tax return (each a "Richmond Homes Consolidated Return") from its
inception (December 28, 1989) through February 2, 1994, the date Richmond Homes
became a wholly owned subsidiary of MDC.
MDC's overall effective income tax rates of 36.5% and 34.5%,
respectively, for the first quarter of 1996 and 1995 differed from the federal
statutory rate of 35%. These differences primarily were due to, among other
things, (i) the impact of state income taxes; and (ii) in 1995, the realization
of non-taxable income for financial reporting purposes for which no tax
liability was recorded.
In April 1995, the Company and the Internal Revenue Service (the "IRS")
reached final agreement on the IRS examinations of (i) the MDC Consolidated
Returns for the years 1984 and 1985; and (ii) the Richmond Homes Consolidated
Returns for the years 1989 and 1990. These agreements had no material impact
upon the Company's financial position or results of operations.
The IRS has completed its examination of the MDC Consolidated Returns
for the years 1986 through 1990 and has proposed adjustments that would shift
the recognition of certain items of income and expense from one year to another
("Timing Adjustments"). To the extent taxable income in a prior
-25-
year is increased by proposed Timing Adjustments, taxable income may be reduced
by a corresponding amount in other years; however, the Company would incur an
interest charge as a result of such adjustment. The Company currently is
protesting many of these proposed adjustments through the IRS appeals process.
In the opinion of management, adequate provision has been made for any
additional income taxes and interest which may result from the proposed
adjustments; however, it is reasonably possible that the ultimate resolution
could result in amounts which differ materially in the near-term from amounts
provided.
The IRS currently is examining the MDC and Richmond Homes Consolidated
Returns for the years 1991, 1992 and 1993. No reports have been issued by the
IRS in connection with these examinations. In the opinion of management,
adequate provision has been made for additional income taxes and interest, if
any, which may result from these examinations; however, it is reasonably
possible that the ultimate resolution could result in amounts which differ
materially in the near term from amounts provided.
LIQUIDITY AND CAPITAL RESOURCES
MDC uses its liquidity and capital resources to, among other things,
(i) support its operations, including its inventories of homes, home sites and
land; (ii) provide working capital; and (iii) provide mortgage loans for its
home buyers. Liquidity and capital resources are generated internally from
operations and from external sources.
Capital Resources.
The Company's capital structure is a combination of (i) permanent
financing, represented by Stockholders' Equity; (ii) long-term financing,
represented by publicly traded Senior Notes and subordinated notes due primarily
in 2003 and 2005, respectively; and (iii) current financing, primarily lines of
credit, as discussed below. The Company believes that its current financial
condition is both balanced to fit its current operational structure and adequate
to satisfy its current and near-term capital requirements.
The Company's debt-to-equity ratio improved to 1.42 to 1 at March 31,
1996 compared with 1.49 to 1 at December 31, 1995. The improvement primarily is
a result of (i) the earnings of the Company, which contributed to the increase
in the Company's Stockholders' Equity at March 31, 1996; and (ii) the use of
internally generated cash flow to reduce debt.
Based upon its current business plan, MDC anticipates the acquisition
of various parcels of finished lots and partially developed land for use in its
future homebuilding operations during the remainder of 1996. The Company
currently intends to acquire a portion of the land inventories required in
future periods through takedowns of lots subject to "rolling" options entered
into in prior periods and under new "rolling" options. The use of "rolling"
options lessens the Company's land-related risk and improves liquidity.
Based upon its current capital resources and additional liquidity
available under existing credit relationships, MDC anticipates that it has
adequate financial resources to satisfy its current and near-term capital
requirements. The Company believes that it can meet its long-term capital needs
(including, among other things, meeting future debt payments and refinancing or
paying off other long-term debt as it becomes due) from operations and external
financing sources, assuming that no significant adverse
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changes in the Company's business occur as a result of the various risk factors
described elsewhere herein, in particular, increases in interest rates.
Lines of Credit and Notes Payable.
Homebuilding. MDC's homebuilding bank line of credit facilities at
March 31, 1996 aggregated $158,500,000. At March 31, 1996, $42,359,000 was
borrowed and an additional $113,079,000 was collateralized and available to be
borrowed under the bank lines of credit. All such agreements were paid in full
and cancelled in April 1996 as discussed below.
In April 1996, the Company entered into a $150,000,000 unsecured
revolving credit agreement maturing June 30, 2000, although a term-out may
commence earlier under certain circumstances. The new unsecured line of credit
will result in reduced administrative expenses and related direct costs compared
with levels incurred under the secured line of credit agreements. Initial
advances at closing of $40,000,000 primarily were used to retire the borrowings
under the cancelled bank lines of credit collateralized by homebuilding
inventories.
Financial Services. To provide funds to originate and purchase mortgage
loans and to finance these mortgage loans on a short-term basis, HomeAmerican
utilizes its mortgage lending bank line of credit (the "Mortgage Line"). These
mortgage loans are pooled into GNMA, FNMA and FHLMC pools or retained as whole
loans and subsequently are sold in the open market on a "spot" basis or pursuant
to mortgage loan sale commitments. During the first quarter of 1996 and 1995,
respectively, HomeAmerican sold $125,452,000, and $85,350,000, respectively,
principal amount of mortgage loans and mortgage certificates to unaffiliated
purchasers.
The aggregate amount available under the Mortgage Line at March 31,
1996 was $51,000,000. Borrowings under the Mortgage Line are collateralized by
mortgage loans and mortgage-backed certificates and are limited to the value of
"eligible collateral" (as defined in the credit agreement). At March 31, 1996,
$15,013,000 was borrowed and an additional $23,557,000 was collateralized and
available to be borrowed under the Mortgage Line. The Company also has
additional borrowing capability with available repurchase agreements.
General. The Company's line of credit and notes payable require
compliance with certain covenants, representations and warranties. Currently,
the Company believes that it is in compliance with these covenants,
representations and warranties.
Consolidated Cash Flow.
During the first quarter of 1996, the Company generated $12,432,000 in
cash from operating activities. The Company primarily used this cash to pay down
lines of credit and notes payable by $10,398,000 and to repurchase, for
$1,645,000, 230,000 shares of MDC Common Stock at $7.13 per share. This stock
repurchase substantially completed an announced program to repurchase up to
1,100,000 shares of MDC Common Stock.
During the first quarter of 1995, MDC used $20,035,000 of cash and
other internally generated funds totalling $4,483,000 to pay down lines of
credit and notes payable by $24,518,000.
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ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"). The Company's adoption of SFAS 121 on January 1, 1996 did not have
a material impact on the results of operations or financial position of the
Company upon adoption.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing Rights
an Amendment of FASB Statement No. 65" ("SFAS 122"). As previously discussed,
the Company adopted this statement effective January 1, 1996.
OTHER
Forward-Looking Statements.
Some of the statements in this Form 10-Q Quarterly Report, 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 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. Such
factors include, among other things, (i) general economic and business
conditions; (ii) interest rate changes; (iii) competition; (iv) the availability
and cost of land and other raw materials used by the Company in its homebuilding
operations; (v) unanticipated demographic changes; (vi) shortages of labor;
(vii) weather related slowdowns; (viii) slow growth initiatives; (ix) building
moratoria; (x) governmental regulation including environmental laws; and (xi)
other factors over which the Company has little or no control.
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M.D.C. HOLDINGS, INC.
FORM 10-Q
PART II
ITEM 1. LEGAL PROCEEDINGS.
Expansive Soils Cases.
On October 21, 1994, a complaint was served on several of the Company's
subsidiaries in an action initiated by six homeowners in Highlands Ranch,
Colorado<F1>. On January 26, 1995, counsel for the Company accepted service of
two additional complaints by a homeowner in the Stonegate subdivision in Douglas
County, Colorado<F2> and by a homeowner in the Rock Creek development located in
Boulder County, Colorado<F3>. On September 12, 1995, the Company was served with
a similar complaint relating to homeowners in Douglas County, Colorado<F4>. The
complaints, each of which seek certification of a class action, purport to
allege substantially identical claims relating to the construction of homes on
lots with expansive soils, including negligence, breach of express and implied
warranties, violation of the Colorado Consumer Protection Act, non-disclosure
and a claim for exemplary damages. The homeowners in each complaint seek,
individually and on behalf of the alleged class, recovery in unspecified amounts
including actual damages, statutory damages, exemplary damages and treble
damages. The Company has filed a response to each of the complaints and to
initial discovery requests in the first filed case. The ultimate outcome of the
cases is uncertain at this time; however, management does not believe that the
outcome of these matters will have a material adverse effect on the financial
condition or results of operations of the Company.
The Company has notified its insurance carriers of these complaints and
currently is reviewing with the carriers how the Company will proceed. The
insurance carriers providing primary coverage have agreed to defend the Company
in the cases subject to reservations of rights.
Other.
The Company and certain of its subsidiaries and affiliates have been
named as defendants in various other claims, complaints and legal actions
arising in the normal course of business. Because of the nature of the
homebuilding business, and in the ordinary course of the Company's operations,
the Company from time to time may be subject to product liability claims,
including claims similar to those discussed under the description of the
Expansive Soils Cases, above. In the opinion of management, the outcome of these
matters will not have a material adverse effect upon the financial condition or
results of operations of the Company.
The Company is not aware of any litigation, matter or pending claim
against the Company which would result in material contingent liabilities
related to environmental hazards or asbestos.
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<F1> Colescott, et al vs. Richmond Homes Limited, et al. in the District Court,
Douglas County, State of Colorado, Civil Action No. 94 CV 352, Division 2.
<F2> Moore vs. Richmond Homes Limited, et al. in the District Court, Douglas
County, State of Colorado, Civil Action No. 95 CV 321, Division 2.
<F3> Constantini vs. Richmond Homes Limited, et al. in the District Court,
Boulder County, State of Colorado, Civil Action No. 95 CV 1052, Division 3.
<F4> Rodenburg vs. Richmond Homes Limited, et al.in the District Court, Douglas
County, State of Colorado, Civil Action No. 95 CV 298, Division 1.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREOWNERS.
No matters were submitted to shareowners during the first quarter of
1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit:
4.1 Credit Agreement dated as of April 10,
1996 among Richmond American Homes of
California, Inc., Richmond American
Homes of Maryland, Inc., Richmond
American Homes of Nevada, Inc.,
Richmond American Homes of Virginia,
Inc., Richmond American Homes, Inc.,
Richmond Homes, Inc. I and Richmond
Homes, Inc. II as Borrowers and the
Banks Named Herein as Banks and Bank
One, Arizona, NA as Agent (the "Credit
Agreement").
4.2 Schedule "2.21" to Credit Agreement--
Terms Relating to Last 24 Months of
Term/No Extension.
4.3 Schedule "2.22" to Credit Agreement--
Terms Relating to Conversion Period.
4.4 Guaranty of Credit Agreement dated
as of April 10, 1996 by M.D.C.
Holdings, Inc.
4.5 Form of Promissory Note of Richmond
American Homes of California, Inc.,
Richmond American Homes of Maryland,
Inc., Richmond American Homes of
Nevada, Inc., Richmond American Homes
of Virginia, Inc., Richmond American
Homes, Inc., Richmond Homes, Inc. I
and Richmond Homes, Inc.
II as Makers dated April __, 1996.
27 Financial Data Schedule.
28 Form of Independent Accountants'
Review Report dated April 24, 1996.
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the
Registrant during the period covered by this
Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 1996 M.D.C. HOLDINGS, INC.
(Registrant)
By: /s/ Paris G. Reece III
---------------------------
Paris G. Reece III,
Senior Vice President,
Chief Financial Officer and
Principal Accounting Officer
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