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, 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 August 7, 1996, 18,114,000 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, 1996 INDEX Page No. Part I. Financial Information: Item 1. Condensed Consolidated Financial Statements: Balance Sheets as of June 30, 1996 (Unaudited) and December 31, 1995...................................... 1 Statements of Income (Unaudited) for the three and six months ended June 30, 1996 and 1995.................... 3 Statements of Cash Flows (Unaudited) for the six months ended June 30, 1996 and 1995........................... 4 Notes to Financial Statements (Unaudited)................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 18 Part II. Other Information: Item 1. Legal Proceedings....................................... 30 Item 4. Submission of Matters to a Vote of Shareowners.......... 31 Item 6. Exhibits and Reports on Form 8-K........................ 31 (i) M.D.C. HOLDINGS, INC. Condensed Consolidated Balance Sheets (In thousands) June 30, December 31, 1996 1995 ----------- ------------ ASSETS (Unaudited) Corporate Cash and cash equivalents................................................... $ 14,452 $ 10,290 Property and equipment, net................................................. 9,514 9,550 Deferred income taxes....................................................... 8,951 13,730 Deferred debt issue costs, net.............................................. 9,555 9,931 Other assets, net........................................................... 2,936 3,830 ---------- ----------- 45,408 47,331 Homebuilding Cash and cash equivalents................................................... 5,158 5,096 Home sales and other accounts receivable.................................... 22,910 26,192 Investments and marketable securities, net.................................. 5,028 6,481 Inventories, net Housing completed or under construction................................... 274,061 265,205 Land and land under development........................................... 184,609 176,960 Prepaid expenses and other assets, net...................................... 39,622 42,111 ---------- ----------- 531,388 522,045 Financial Services Cash and cash equivalents................................................... 3,958 5,409 Accrued interest and other assets, net...................................... 5,934 3,129 Mortgage loans held in inventory, net....................................... 50,688 53,153 Mortgage Collateral, net of mortgage-backed bonds, and related assets and liabilities........................................................... 2,584 3,744 ---------- ----------- 63,164 65,435 Total Assets.......................................................... $ 639,960 $ 634,811 ========== =========== 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, 1996 1995 ----------- ------------ LIABILITIES (Unaudited) Corporate Accounts payable and accrued expenses....................................... $ 17,807 $ 18,258 Income taxes payable........................................................ 9,659 11,930 Notes payable............................................................... 3,512 3,537 Senior Notes, net........................................................... 187,620 187,525 Subordinated notes, net..................................................... 38,223 38,221 ----------- ----------- 256,821 259,471 Homebuilding Accounts payable and accrued expenses....................................... 84,945 82,164 Lines of credit............................................................. 57,500 43,490 Notes payable............................................................... 6,864 10,571 ----------- ----------- 149,309 136,225 Financial Services Accounts payable and accrued expenses....................................... 12,170 12,092 Line of credit.............................................................. 13,019 21,990 ----------- ----------- 25,189 34,082 Total Liabilities..................................................... 431,319 429,778 ----------- ----------- 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; 22,652,000 and 22,606,000 shares issued, respectively, at June 30, 1996 and December 31, 1995......................................................... 227 226 Additional paid-in capital.................................................. 136,495 136,022 Retained earnings........................................................... 95,292 87,476 ----------- ----------- 232,014 223,724 Less treasury stock, at cost; 3,805,000 and 3,157,000 shares, respectively, at June 30, 1996 and December 31, 1995.................................... (23,373) (18,691) ----------- ----------- Total Stockholders' Equity............................................ 208,641 205,033 ----------- ----------- Total Liabilities and Stockholders' Equity............................ $ 639,960 $ 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 Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- REVENUES Homebuilding........................................... $ 230,329 $ 207,339 $ 421,605 $391,868 Financial Services..................................... 6,950 6,356 14,688 12,506 Corporate.............................................. 497 424 729 837 ----------- ----------- ----------- ----------- Total Revenues..................................... 237,776 214,119 437,022 405,211 ----------- ----------- ----------- ----------- COSTS AND EXPENSES Homebuilding........................................... 223,286 199,274 408,528 375,794 Financial Services..................................... 3,348 2,693 6,090 5,087 Corporate general and administrative................... 2,980 3,482 5,581 6,609 Corporate and homebuilding interest (Note C)........... 1,027 1,890 2,878 4,729 ----------- ----------- ----------- ----------- Total Expenses..................................... 230,641 207,339 423,077 392,219 ----------- ----------- ----------- ----------- Income before income taxes and extraordinary item................................................... 7,135 6,780 13,945 12,992 Provision for income taxes................................ (2,603) (2,449) (5,089) (4,593) ----------- ----------- ----------- ----------- Income before extraordinary item.......................... 4,532 4,331 8,856 8,399 Extraordinary loss from early extinguishment of debt, net of income tax benefit of $242.......................... (421) - - (421) - - ----------- ----------- ----------- ----------- Net Income......................................... $ 4,111 $ 4,331 $ 8,435 $ 8,399 =========== =========== =========== =========== EARNINGS PER SHARE Primary Income before extraordinary item................... $ .23 $ .21 $ .45 $ .41 =========== =========== =========== =========== Net Income......................................... $ .21 $ .21 $ .43 $ .41 =========== =========== =========== =========== Fully diluted Income before extraordinary item................... $ 21 $ .20 $ .42 $ .38 =========== =========== =========== =========== Net Income......................................... $ .20 $ .20 $ .40 $ .38 =========== =========== =========== =========== WEIGHTED-AVERAGE SHARES OUTSTANDING Primary................................................ 19,365 20,305 19,612 20,300 =========== =========== =========== =========== Fully diluted.......................................... 22,978 24,006 23,225 24,043 =========== =========== =========== =========== DIVIDENDS PER SHARE....................................... $ .03 $ .03 $ .06 $ .05 =========== =========== =========== =========== 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, 1996 1995 ----------- ----------- OPERATING ACTIVITIES Net Income.......................................................... $ 8,435 $ 8,399 Adjustments To Reconcile Net Income To Net Cash Provided By (Used In) Operating Activities: Depreciation and amortization.................................. 5,744 4,531 Inventory valuation charges.................................... 2,870 900 Deferred income taxes.......................................... 4,779 509 Gains on sales of mortgage-related assets...................... (1,007) (270) Net Changes In Assets and Liabilities Mortgage loans held in inventory............................... 2,465 (6,674) Homebuilding inventories....................................... (13,723) 1,192 Home sales and other accounts receivable....................... 3,282 (997) Accounts payable and accrued expenses.......................... (294) (8,035) Other, net..................................................... (4,337) (544) ----------- ----------- Net Cash Provided By (Used In) Operating Activities.................. 8,214 (989) ----------- ----------- INVESTING ACTIVITIES Net Proceeds From Mortgage-Related Assets and Liabilities........... 1,991 686 Other, net.......................................................... 1,843 1,544 ----------- ----------- Net Cash Provided By Investing Activities............................ 3,834 2,230 ----------- ----------- FINANCING ACTIVITIES Lines of Credit Advances....................................................... 487,062 329,633 Principal Payments............................................. (482,023) (336,939) Notes Payable Borrowings..................................................... 480 1,075 Principal payments............................................. (10,071) (14,967) Dividend Payments................................................... (1,141) (988) Treasury Stock Repurchases.......................................... (5,016) (5,321) Other, net.......................................................... 1,434 (89) ----------- ----------- Net Cash Used In Financing Activities............................... (9,275) (27,596) ----------- ----------- Net Increase (Decrease) In Cash and Cash Equivalents................ 2,773 (26,355) Cash and Cash Equivalents Beginning of Period............................................ 20,795 43,564 ----------- ----------- End of Period.................................................. $ 23,568 $ 17,209 =========== =========== See notes to condensed consolidated financial statements. -4- M.D.C. HOLDINGS, INC. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) (continued) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest, net of amounts capitalized.......................... $ 5,481 $ 6,199 Income taxes.................................................. 3,836 4,195 SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS Homebuilding land inventory sales financed by MDC.................. $ 206 $ 353 Homebuilding inventory purchases financed by seller................ 5,858 2,733 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 June 30, 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. 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 Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Homebuilding Home sales.................................. $ 229,006 $ 205,856 $ 415,029 $ 387,920 Land sales.................................. 1,087 511 6,246 2,824 Other revenues.............................. 236 972 330 1,124 ----------- ----------- ----------- ----------- 230,329 207,339 421,605 391,868 ----------- ----------- ----------- ----------- Home cost of sales.......................... 198,102 178,901 358,918 335,916 Land cost of sales.......................... 1,023 418 5,955 2,411 Inventory valuation charges................. 2,870 900 2,870 900 Marketing................................... 14,265 12,510 26,247 23,627 General and administrative.................. 7,026 6,545 14,538 12,940 ----------- ----------- ----------- ----------- 223,286 199,274 408,528 375,794 ----------- ----------- ----------- ----------- Homebuilding Operating Profit........... 7,043 8,065 13,077 16,074 ----------- ----------- ----------- ----------- -6- Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Financial Services Mortgage Lending Revenues Interest revenues........................... $ 869 $ 977 $ 1,674 $ 1,670 Origination fees............................ 1,570 1,256 2,959 2,330 Gains on sale of mortgage servicing......... 1,531 1,972 4,153 4,642 Gains (losses) on sale of mortgage loans, net 1,151 (104) 1,693 (440) Mortgage servicing and other................ 522 449 908 1,015 Asset Management Revenues Management fees and other................... 1,235 1,536 2,294 3,019 Gains on sales of mortgage-related assets... 72 270 1,007 270 ----------- ----------- ----------- ----------- 6,950 6,356 14,688 12,506 ----------- ----------- ----------- ----------- General and Administrative Expenses Mortgage Lending............................ 2,499 2,142 4,621 3,926 Asset Management............................ 849 551 1,469 1,161 ----------- ----------- ----------- ----------- 3,348 2,693 6,090 5,087 ----------- ----------- ----------- ----------- Financial Services Operating Profit..... 3,602 3,663 8,598 7,419 ----------- ----------- ----------- ----------- Total Operating Profit.......................... 10,645 11,728 21,675 23,493 ----------- ----------- ----------- ----------- Corporate Other revenues.............................. 497 424 729 837 Interest expense............................ (1,027) (1,890) (2,878) (4,729) General and administrative expense.......... (2,980) (3,482) (5,581) (6,609) ----------- ----------- ----------- ----------- Net Corporate Expenses.................. (3,510) (4,948) (7,730) (10,501) ----------- ----------- ----------- ----------- Income Before Income Taxes and Extraordinary Item $ 7,135 $ 6,780 $ 13,945 $ 12,992 =========== =========== =========== =========== -7- C. Corporate and Homebuilding Interest Activity Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 (In thousands) (In thousands) ----------- ----------- ----------- ----------- Interest capitalized in homebuilding inventory, beginning of period........................... $ 40,342 $ 42,038 $ 40,217 $ 42,478 Interest incurred................................ 7,605 8,483 15,379 17,472 Interest expensed................................ (1,027) (1,890) (2,878) (4,729) Previously capitalized interest included in cost of sales...................................... (7,081) (7,072) (12,879) (13,662) ----------- ----------- ----------- ----------- Interest capitalized in homebuilding inventory, end of period................................. $ 39,839 $ 41,559 $ 39,839 $ 41,559 =========== =========== =========== =========== June 30, December 31, June 30, 1996 1995 1995 ----------- ----------- ---------- Interest capitalized in homebuilding inventory as a percent of homebuilding inventory................................... 8.7% 9.1% 9.0% =========== =========== =========== D. Stockholders' Equity During 1995, the Company repurchased 865,600 shares of MDC common stock ("Common Stock") pursuant to a program authorized by MDC's Board of Directors to repurchase up to 1,100,000 shares of Common Stock. These shares were purchased at prices ranging from $5.88 to $6.50 per share ($6.32 per share average, including commissions). In January 1996, the Company repurchased 230,000 additional shares of Common Stock at $7.13 per share, substantially completing the program. In April 1996, the Company repurchased 473,000 shares of 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. On July 25, 1996, the MDC Board of Directors authorized a program to repurchase up to 1,000,000 additional shares of Common Stock. As of August 1, 1996, the Company had repurchased approximately 734,000 shares of Common Stock at $6.63 per share pursuant to this program. E. Extraordinary Item In April 1996, the Company entered into a $150,000,000 unsecured revolving credit agreement and used proceeds therefrom to retire borrowings under certain bank lines of credit and project loans collateralized by homebuilding inventories that the Company cancelled after entering into the unsecured credit agreement. The Company recognized an extraordinary loss of $421,000, net of an income tax benefit of $242,000, during the three and six months ended June 30, 1996, due to the write-off of unamortized discounts and deferred financing costs in connection with the cancellation of these secured lines of credit and project loans. -8- F. 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 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 Common Stock. The primary and fully diluted earnings per share calculations are shown below (in thousands, except per share amounts). Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Primary Calculation Income before extraordinary item............................. $ 4,532 $ 4,331 $ 8,856 $ 8,399 Extraordinary loss, net of income tax benefit of $242........ (421) - - (421) - - ----------- ----------- ----------- ----------- Net Income.............................................. $ 4,111 $ 4,331 $ 8,435 $ 8,399 =========== =========== =========== =========== Weighted-average shares outstanding.......................... 18,831 19,698 19,055 19,407 Dilutive stock options....................................... 534 607 557 893 ----------- ----------- ----------- ----------- Total Weighted-Average Shares........................... 19,365 20,305 19,612 20,300 =========== =========== =========== =========== Primary Earnings Per Share Income before extraordinary item........................ $ .23 $ .21 $ .45 $ .41 =========== ============= =========== =========== Net Income.............................................. $ .21 $ .21 $ .43 $ .41 =========== =========== =========== =========== Fully Diluted Calculation Income before extraordinary item............................. $ 4,532 $ 4,331 $ 8,856 $ 8,399 Adjustment for interest on Convertible Notes, net of income tax benefit; conversion assumed........................... 402 391 804 782 ----------- ----------- ----------- ----------- Adjusted income before extraordinary item.................... 4,934 4,722 9,660 9,181 Extraordinary loss, net of income tax benefit of $242........ (421) - - (421) - - ----------- ----------- ----------- ----------- Adjusted Net Income..................................... $ 4,513 $ 4,722 $ 9,239 $ 9,181 =========== =========== =========== =========== Weighted-average shares outstanding.......................... 18,831 19,698 19,055 19,407 Dilutive stock options....................................... 534 695 557 1,023 Shares issuable upon conversion of Convertible Notes; conversion assumed........................................ 3,613 3,613 3,613 3,613 ----------- ----------- ----------- ----------- Total Weighted-Average Shares........................... 22,978 24,006 23,225 24,043 =========== =========== =========== =========== Fully Diluted Earnings Per Share Income before extraordinary item........................ $ .21 $ .20 $ .42 $ .38 =========== =========== =========== =========== Net Income.............................................. $ .20 $ .20 $ .40 $ .38 =========== ========== =========== =========== G. Supplemental Guarantor Information The $190,000,000 principal amount of 11 1/8% senior notes due 2003 (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 June 30, 1996 (In thousands) Unconsolidated ---------------------------------------- Non- ASSETS Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ----------- ----------- ----------- ----------- ----------- Corporate Cash and cash equivalents............... $ 14,452 $ - - $ - - $ - - $ 14,452 Investments in subsidiaries............. 211,366 - - 17,434 (228,800) - - Advances and notes receivable - Parent and subsidiaries...................... 220,849 10 24,471 (245,330) - - Property and equipment, net............. 9,514 - - - - - - 9,514 Deferred income taxes................... 8,951 - - - - - - 8,951 Deferred debt issue costs, net.......... 9,555 - - - - - - 9,555 Other assets, net....................... 2,679 - - 257 - - 2,936 ----------- ----------- ----------- ----------- ----------- 477,366 10 42,162 (474,130) 45,408 ----------- ----------- ----------- ----------- ----------- Homebuilding Cash and cash equivalents............... - - 5,157 1 - - 5,158 Home sales and other accounts receivable - - 36,213 - - (13,303) 22,910 Investments and marketable securities, net................................... 5,028 - - - - - - 5,028 Inventories, net Housing completed or under construction........................ - - 274,061 - - - - 274,061 Land and land under development......................... - - 161,325 24,681 (1,397) 184,609 Prepaid expenses and other assets....... 2,424 37,198 - - - - 39,622 ----------- ----------- ----------- ----------- ----------- 7,452 513,954 24,682 (14,700) 531,388 ----------- ----------- ----------- ----------- ----------- Financial Services Cash and cash equivalents............... - - - - 3,958 - - 3,958 Accrued interest and other assets....... - - - - 5,934 - - 5,934 Mortgage loans held in inventory........ - - - - 50,688 - - 50,688 Mortgage Collateral, net of mortgage-backed bonds, and related assets and liabilities................ - - - - 2,584 - - 2,584 ----------- ----------- ----------- ----------- ----------- - - - - 63,164 - - 63,164 ----------- ----------- ----------- ----------- ----------- Total Assets...................... $ 484,818 $ 513,964 $ 130,008 $ (488,830) $ 639,960 =========== =========== =========== =========== =========== -10- Supplemental Combining Balance Sheet June 30, 1996 (In thousands) (continued) Unconsolidated ---------------------------------------- Non- LIABILITIES Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ----------- ----------- ----------- ----------- ----------- Corporate Accounts payable and accrued expenses... $ 17,355 $ - - $ 452 $ - - $ 17,807 Advances and notes payable - Parent and subsidiaries.......................... 14,634 210,874 28,471 (253,979) - - Income taxes payable.................... 9,659 - - - - - - 9,659 Notes payable........................... 3,512 - - - - - - 3,512 Senior Notes, net....................... 187,620 - - - - - - 187,620 Subordinated notes, net................. 38,223 - - - - - - 38,223 ----------- ----------- ----------- ------------ ----------- 271,003 210,874 28,923 (253,979) 256,821 ----------- ----------- ----------- ------------ ----------- Homebuilding Accounts payable and accrued expenses... 5,174 79,233 538 - - 84,945 Lines of credit......................... - - 57,500 - - - - 57,500 Notes payable........................... - - 6,864 - - - - 6,864 ----------- ----------- ----------- ------------ ----------- 5,174 143,597 538 - - 149,309 ----------- ----------- ----------- ------------ ----------- Financial Services Accounts payable and accrued expenses... - - - - 25,473 (13,303) 12,170 Line of credit.......................... - - - - 13,019 - - 13,019 ----------- ----------- ----------- ------------ ----------- - - - - 38,492 (13,303) 25,189 ----------- ----------- ----------- ------------ ----------- Total Liabilities................. 276,177 354,471 67,953 (267,282) 431,319 ----------- ----------- ----------- ------------ ----------- STOCKHOLDERS' EQUITY Preferred stock......................... - - - - 10 (10) - - Common Stock............................ 227 19 81 (100) 227 Additional paid-in capital.............. 136,495 144,756 224,914 (369,670) 136,495 Retained earnings....................... 95,292 14,718 (162,941) 148,223 95,292 Less treasury stock..................... (23,373) - - (9) 9 (23,373) ----------- ----------- ----------- ------------ ----------- Total Stockholders' Equity........ 208,641 159,493 62,055 (221,548) 208,641 ----------- ----------- ----------- ------------ ----------- Total Liabilities and Stockholders' Equity............ $ 484,818 $ 513,964 $ 130,008 $ (488,830) $ 639,960 =========== =========== =========== ============ =========== -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 debt 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 JUNE 30, 1996 REVENUES Homebuilding............................. $ 64 $ 230,256 $ 9 $ - - $ 230,329 Financial Services....................... - - - - 6,950 - - 6,950 Corporate................................ 488 7 2 - - 497 Equity in earnings of subsidiaries....... 5,404 - - - - (5,404) - - ----------- ----------- ----------- ----------- ----------- Total Revenues..................... 5,956 230,263 6,961 (5,404) 237,776 ----------- ----------- ----------- ----------- ----------- COSTS AND EXPENSES Homebuilding............................. 30 223,085 96 75 223,286 Financial Services....................... - - - - 3,348 - - 3,348 Corporate general and administrative..... 2,972 - - 8 - - 2,980 Corporate and homebuilding interest..... (4,181) 4,527 642 39 1,027 ----------- ----------- ----------- ----------- ----------- Total Expenses...................... (1,179) 227,612 4,094 114 230,641 ----------- ----------- ----------- ----------- ----------- Income before income taxes and extraordinary item..................... 7,135 2,651 2,867 (5,518) 7,135 Provision for income taxes............... (2,603) (968) (1,192) 2,160 (2,603) ----------- ----------- ----------- ----------- ----------- Income before extraordinary item......... 4,532 1,683 1,675 (3,358) 4,532 Extraordinary loss, net of income tax benefit of $242........................ (421) - - - - - - (421) ----------- ----------- ----------- ----------- ----------- NET INCOME.................................. $ 4,111 $ 1,683 $ 1,675 $ (3,358) $ 4,111 =========== =========== =========== =========== =========== THREE MONTHS ENDED JUNE 30, 1995 REVENUES Homebuilding............................. $ 95 $ 207,212 $ 32 $ - - $ 207,339 Financial Services....................... - - - - 6,356 - - 6,356 Corporate................................ 424 - - - - - - 424 Equity in earnings of subsidiaries....... 5,733 - - - - (5,733) - - ----------- ----------- ----------- ----------- ----------- Total Revenues..................... 6,252 207,212 6,388 (5,733) 214,119 ----------- ----------- ----------- ----------- ----------- COSTS AND EXPENSES Homebuilding............................. (48) 199,124 198 - - 199,274 Financial Services....................... - - - - 2,693 - - 2,693 Corporate general and administrative..... 3,476 - - 6 - - 3,482 Corporate and homebuilding interest..... (3,956) 5,169 677 - - 1,890 ----------- ----------- ----------- ----------- ----------- Total Expenses..................... (528) 204,293 3,574 - - 207,339 ----------- ----------- ----------- ----------- ----------- Income before income taxes............... 6,780 2,919 2,814 (5,733) 6,780 Provision for income taxes............... (2,449) (1,109) (1,069) 2,178 (2,449) ----------- ----------- ----------- ----------- ----------- NET INCOME.................................. $ 4,331 $ 1,810 $ 1,745 $ (3,555) $ 4,331 =========== =========== =========== =========== =========== -14- Supplemental Combining Statements of Income (In thousands) Unconsolidated ---------------------------------------- Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ----------- ----------- ----------- ----------- ------------ SIX MONTHS ENDED JUNE 30, 1996 REVENUES: Homebuilding............................ $ 143 $ 421,450 $ 12 $ - - $ 421,605 Financial Services...................... - - - - 14,688 - - 14,688 Corporate............................... 705 13 11 - - 729 Equity in earnings of subsidiaries...... 10,995 - - - - (10,995) - - ----------- ----------- ----------- ----------- ----------- Total Revenues.................... 11,843 421,463 14,711 (10,995) 437,022 ----------- ----------- ----------- ----------- ----------- COSTS AND EXPENSES Homebuilding............................ 448 407,666 264 150 408,528 Financial Services...................... - - - - 6,090 - - 6,090 Corporate general and administrative.... 5,566 - - 15 - - 5,581 Corporate and homebuilding interest.... (8,116) 9,575 1,345 74 2,878 ----------- ----------- ----------- ----------- ----------- Total Expenses.................... (2,102) 417,241 7,714 224 423,077 ----------- ----------- ----------- ----------- ----------- Income before income taxes and extraordinary item.................... 13,945 4,222 6,997 (11,219) 13,945 Provision for income taxes.............. (5,089) (1,594) (2,870) 4,464 (5,089) ----------- ----------- ----------- ----------- ----------- Income before extraordinary item........ 8,856 2,628 4,127 (6,755) 8,856 Extraordinary loss, net of income tax benefit of $242....................... (421) - - - - - - (421) ----------- ----------- ----------- ----------- ----------- NET INCOME................................. $ 8,435 $ 2,628 $ 4,127 $ (6,755) $ 8,435 =========== =========== =========== =========== =========== SIX MONTHS ENDED JUNE 30, 1995 REVENUES Homebuilding............................ $ 211 $ 391,533 $ 124 $ - - $ 391,868 Financial Services...................... - - - - 12,506 - - 12,506 Corporate............................... 837 - - - - - - 837 Equity in earnings of subsidiaries...... 11,674 - - - - (11,674) - - ----------- ----------- ----------- ----------- ----------- Total Revenues.................... 12,722 391,533 12,630 (11,674) 405,211 ----------- ----------- ----------- ----------- ----------- COSTS AND EXPENSES Homebuilding............................ 498 374,974 322 - - 375,794 Financial Services...................... - - - - 5,087 - - 5,087 Corporate general and administrative.... 6,568 - - 41 - - 6,609 Corporate and homebuilding interest.... (7,336) 10,648 1,417 - - 4,729 ----------- ----------- ----------- ----------- ----------- Total Expenses.................... (270) 385,622 6,867 - - 392,219 ----------- ----------- ----------- ----------- ----------- Income before income taxes.............. 12,992 5,911 5,763 (11,674) 12,992 Provision for income taxes.............. (4,593) (2,246) (1,979) 4,225 (4,593) ----------- ----------- ----------- ----------- ----------- NET INCOME................................. $ 8,399 $ 3,665 $ 3,784 $ (7,449) $ 8,399 =========== =========== =========== =========== =========== -15- Supplemental Combining Statement of Cash Flows Six Months Ended June 30, 1996 (In thousands) Unconsolidated ---------------------------------------- Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ----------- ----------- ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............................... $ 105,651 $ (12,791) $ 4,214 $ (88,860) $ 8,214 ----------- ----------- ----------- ----------- ----------- INVESTING ACTIVITIES Net (Increase) Reduction in Notes and Advances Receivable From Parent and Subsidiaries............................. (10,193) 23 (2,921) 13,091 - - Net Proceeds From Mortgage-Related Assets and Liabilities.......................... - - - - 1,991 - - 1,991 Other, net.................................. 995 935 (87) - - 1,843 ----------- ----------- ----------- ----------- ----------- Net Cash Provided By (Used In) Investing Activities............................... (9,198) 958 (1,017) 13,091 3,834 ----------- ----------- ----------- ----------- ----------- FINANCING ACTIVITIES Net Increase (Reduction) in Borrowings From Parent and Subsidiaries.................. (84,016) 210 8,037 75,769 - - Lines of Credit Advances............................... - - 487,062 - - - - 487,062 Principal payments..................... - - (473,052) (8,971) - - (482,023) Notes Payable Borrowings............................. - - 480 - - - - 480 Principal payments..................... (3,558) (2,764) (3,749) - - (10,071) Dividend Payments........................... (1,141) - - - - - - (1,141) Treasury Stock Repurchases.................. (5,016) - - - - - - (5,016) Other, net.................................. 1,434 - - - - - - 1,434 ----------- ----------- ----------- ----------- ----------- Net Cash Provided By (Used In) Financing Activities............................... (92,297) 11,936 (4,683) 75,769 (9,275) ----------- ----------- ----------- ----------- ----------- Net Increase (Decrease) In Cash And Cash Equivalents.............................. 4,156 103 (1,486) - - 2,773 Cash And Cash Equivalents Beginning Of Period...................... 10,296 5,054 5,445 - - 20,795 ----------- ----------- ----------- ----------- ----------- End Of Period............................ $ 14,452 $ 5,157 $ 3,959 $ - - $ 23,568 =========== =========== =========== =========== =========== -16- Supplemental Combining Statement of Cash Flows Six Months Ended June 30, 1995 (In thousands) Unconsolidated ---------------------------------------- Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ----------- ----------- ----------- ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES....... $ (88,126) $ (16,698) $ (16,719) $ 120,554 $ (989) ----------- ----------- ----------- ----------- ----------- INVESTING ACTIVITIES Net Proceeds From Mortgage-Related Assets and Liabilities.......................... - - - - 686 - - 686 Net Reduction in Notes and Advances Receivable - Parent and Subsidiaries..... 62,779 31 1,739 (64,549) - - Other, net.................................. (267) 408 1,403 - - 1,544 ----------- ----------- ----------- ----------- ----------- Net Cash Provided By Investing Activities............................... 62,512 439 3,828 (64,549) 2,230 ----------- ----------- ----------- ----------- ----------- FINANCING ACTIVITIES Net Increase In Borrowings From Parent and Subsidiaries............................. 10,089 32,454 13,462 (56,005) - - Lines of Credit Advances............................... - - 329,633 - - - - 329,633 Principal payments..................... - - (336,859) (80) - - (336,939) Notes Payable Borrowings............................. - - 1,075 - - - - 1,075 Principal payments..................... (48) (13,803) (1,116) - - (14,967) Dividend Payments........................... (988) - - - - - - (988) Treasury Stock Repurchases.................. (5,321) - - - - - - (5,321) Other, net.................................. (89) - - - - - - (89) ----------- ----------- ----------- ----------- ----------- Net Cash Provided By (Used In) Financing Activities............................... 3,643 12,500 12,266 (56,005) (27,596) ----------- ----------- ----------- ----------- ----------- Net Decrease In Cash And Cash Equivalents... (21,971) (3,759) (625) - - (26,355) Cash And Cash Equivalents Beginning Of Period...................... 31,210 9,656 2,698 - - 43,564 ----------- ----------- ----------- ----------- ----------- End Of Period............................ $ 9,239 $ 5,897 $ 2,073 $ - - $ 17,209 =========== =========== =========== =========== =========== -17- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. INTRODUCTION MDC is a major regional homebuilder and ranks as 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.,) 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 (in thousands, except per share amounts). Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Revenues.......................................... $ 237,776 $ 214,119 $ 437,022 $ 405,211 Income before inventory valuation charges, income taxes and extraordinary item................... 10,005 7,680 16,815 13,892 Income before income taxes and extraordinary item. 7,135 6,780 13,945 12,992 Income before extraordinary item.................. 4,532 4,331 8,856 8,399 Net Income........................................ 4,111 4,331 8,435 8,399 Earnings Per Share: Primary Income before extraordinary item............ .23 .21 .45 .41 Net Income.................................. .21 .21 .43 .41 Fully Diluted Income before extraordinary item............ .21 .20 .42 .38 Net Income.................................. .20 .20 .40 .38 Revenues for the three and six months ended June 30, 1996 increased 11% and 8%, respectively, compared with revenues during the same periods in 1995, and exceeded revenues for all comparable periods in the Company's history. The revenue increases primarily resulted from increases in homes closed. The Company closed 1,296 and 2,347 homes, respectively, during the second quarter and first half of 1996, increases of 16% and 10%, respectively, over the 1,121 and 2,129 homes closed in the comparable periods in 1995. -18- Income before income taxes and extraordinary item was higher in the second quarter and first half of 1996, compared with the same periods in 1995, primarily as a result of (i) lower interest expense; (ii) lower corporate general and administrative expenses; and (iii) higher operating profit from the Company's financial services segment, primarily resulting from larger gains on sales of mortgage loans and mortgage-related assets. These increases to income partially were offset by decreases in operating profits from the Company's homebuilding operations in the second quarter and first six months of 1996, compared with the same periods for 1995. These decreases, which more than offset the positive affects of increases in homes closed, were caused by (i) non-cash inventory valuation charges of $2,870,000 for the impairment of certain homebuilding assets, primarily in the Mid-Atlantic region due to weakened conditions in that market; (ii) lower average selling prices on homes closed; and (iii) increased marketing and general and administrative expenses incurred in support of the Company's expanding homebuilding operations. 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 may reduce the demand for homes and home mortgages and, 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 a high of 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, which adversely affected the Company's (i) home sales in the last three quarters of 1994 and the first quarter of 1995; and (ii) Home Gross Margins (as hereinafter defined) throughout most of 1995. From December 1994 through February 1996, home mortgage interest rates generally declined to a low of 6.9% which, among other things, led to improved home sales levels in the last three quarters of 1995 and the first four months of 1996, compared with the same periods in 1994 and 1995. Since February 1996, home mortgage interest rates have increased to a high of 8.4%, and currently are approximately 8.2%. While current mortgage interest rates are low compared with historical rates, the recent increases in mortgage interest rates, particularly since May 1996 when rates moved above 8.0%, have affected adversely and may continue to affect adversely in the future, the Company's homebuilding operations. 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. See "Forward-Looking Statements" below. -19- Homebuilding Segment. The table below sets forth certain information with respect to the Company's homes sold, closed and delivered, units sold under a contract but not delivered ("Backlog") and active subdivisions (dollars in thousands). Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 ----------- ----------- ----------- ---------- Home sales revenues................................ $ 229,006 $ 205,856 $ 415,029 $ 387,920 Operating profits before inventory valuation charges.......................................... 9,913 8,965 15,947 16,974 Operating profits.................................. 7,043 8,065 13,077 16,074 Average selling price per housing unit............. 176.7 183.6 176.8 182.2 Home Gross Margins................................. 13.5% 13.1% 13.5% 13.4% Homes (units) Sales contracted, net Colorado.................................. 410 539 1,078 1,079 Mid-Atlantic.............................. 225 317 652 647 California................................ 200 218 449 378 Arizona................................... 280 197 606 375 Nevada.................................... 70 10 121 35 ----------- ----------- ----------- ---------- Total................................ 1,185 1,281 2,906 2,514 =========== =========== =========== ========== Closed and delivered Colorado.................................. 498 480 935 960 Mid-Atlantic.............................. 238 255 395 446 California................................ 208 170 403 296 Arizona................................... 287 201 503 385 Nevada.................................... 65 15 111 42 ----------- ----------- ----------- ---------- Total................................ 1,296 1,121 2,347 2,129 =========== =========== =========== ========== June 30, December 31, June 30, 1996 1995 1995 ----------- ----------- ----------- Backlog (units) Colorado.................................. 801 658 729 Mid-Atlantic.............................. 532 275 538 California................................ 221 175 183 Arizona................................... 337 234 247 Nevada.................................... 79 13 22 ----------- ----------- ----------- Total................................ 1,970 1,355 1,719 =========== =========== =========== Backlog (estimated sales value)............... $ 349,000 $ 243,000 $ 321,000 =========== =========== =========== Active Subdivisions (units) Colorado.................................. 48 49 55 Mid-Atlantic.............................. 49 48 43 California................................ 20 23 18 Arizona................................... 24 22 21 Nevada.................................... 3 2 2 ----------- ----------- ----------- Total................................ 144 144 139 =========== =========== =========== -20- Home Sales Revenues and Homes Closed and Delivered. Home sales revenues in the second quarter and first half of 1996 exceeded all comparable periods in the Company's history, increasing 11% and 7%, respectively, from home sales revenues for the same periods in 1995. The increases primarily resulted from increased home closings, partially offset by an overall decrease in the average selling price per home closed as discussed below. Home closings increased in 1996 from 1995 in (i) Arizona, due to a significant expansion of the Company's operations in Phoenix, where the Company has increased the number of active subdivisions from 9 at December 31, 1994 to 16 at June 30, 1996; (ii) California, 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; (iii) Nevada, due to the closing of homes in subdivisions acquired from Longford Homes in February 1996; and (iv) for the second quarter, Colorado, due to a strong Backlog at March 31, 1996. The Company's Mid-Atlantic operations closed fewer homes in the second quarter and first half of 1996 than were closed during the same periods in 1995 primarily as a result of adverse weather conditions throughout most of the first half of 1996 which delayed construction and development activities and the delivery of certain homes. These delays, combined with a high level of homes sold but not started at June 30, 1996 in the Mid-Atlantic region, Colorado and Arizona, as well as the accelerated June 1996 closing of a number of homes which had been scheduled for closing in July 1996 may reduce total Company home closings in the third quarter of 1996 to levels comparable to the third quarter of 1995. See "Forward-Looking Statements" below. Average Selling Price Per Housing Unit. The decrease in the average selling price per housing unit in the second quarter and first half of 1996 compared with the same periods in 1995 reflects the impact of the Company's continuing emphasis on offering lower-priced, more affordable homes primarily marketed to first-time and first-time move-up home buyers. This strategy resulted in lower average sales prices in the first half of 1996, compared with prices in 1995, in (i) Colorado and Arizona; (ii) Southern California and Las Vegas, as the Company closed affordably priced homes in subdivisions acquired from Mesa Homes and Longford Homes, respectively; and (iii) the Mid-Atlantic region as the Company has opened a number of new affordable townhome projects in this market. The Company believes that its average selling price on homes closed during the remainder of 1996 will be lower than in comparable periods in 1995 and could decline an additional two to three percent from the second quarter 1996 level. See "Forward-Looking Statements" below. 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 revenue ("Home Gross Margins") increased during the second quarter and first half of 1996, compared with the same periods in 1995. These increases largely were due to increased margins in (i) Colorado, as the favorable impact of lower interest rates during late 1995 and the first quarter of 1996 resulted in stronger market conditions which reduced the level of incentives required for Company home buyers during such period; (ii) Las Vegas, due to increased margins from homes sold in subdivisions acquired from Longford Homes; and (iii) Northern California, due to the impact of increased home closings in certain of the Company's more profitable subdivisions in that market. These increases partially were offset by Home Gross Margin decreases in (i) Southern California and Phoenix, as the Company experienced the affects of increased incentives offered to home buyers and higher land prices resulting from increased competition in these markets, and because certain highly profitable subdivisions in each of these markets were substantially completed in 1995; and (ii) the Mid-Atlantic, where the Company continues to offer incentives in response to weakened market -21- conditions and strong competition and to reduce the Company's inventory of older unsold homes under construction. The Company believes that growth in Home Gross Margins over the next two quarters will be limited because of the continued impact of increased incentives offered to home buyers to stimulate sales and counter increased competition in each of its markets. 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. See "Forward-Looking Statements" below. Home Sales and Backlog. Home sales for the first half of 1996 increased 16% from the same period in 1995 as a result of increased home sales in Phoenix, Southern California and Las Vegas due to the Company's continued expansion in these markets as previously discussed. Home sales for the second quarter of 1996 decreased by 7% from the same period in 1995, as the Company began to experience a general decline in demand for new homes primarily resulting from the increase in mortgage interest rates since February 1996. The Company's home sales in July 1996 totalled 357 units, compared with unseasonably strong sales of 473 homes in July 1995 (which reflected the positive effect on the demand for new homes of the lowest mortgage interest rates in more than 15 months during July 1995). The Company is unable to predict if the lower comparable monthly sales, which began in May 1996, will continue in the future. Primarily as a result of higher first half 1996 home sales, the Company's Backlog at June 30, 1996 increased to 1,970 units, a 45% increase from the 1,355 units at December 31, 1995 and a 15% increase from the 1,719 units at June 30, 1995. The Company expects approximately 70% of its June 30, 1996 Backlog to close under existing sales contracts during the third and fourth quarters of 1996, assuming no significant change in mortgage interest rates. See "Forward-Looking Statements" below. Marketing. Marketing expenses (which include, among other things, amortization of deferred marketing costs, model home expenses and sales commissions) totalled $14,265,000 and $26,247,000, respectively, for the second quarter and first half of 1996, compared with $12,510,000 and $23,627,000, respectively, for the same periods in 1995. The 14% and 11% increases during the second quarter and first half of 1996 compared with 1995 principally resulted from (i) variable cost increases due to increased home sales revenues; and (ii) additional marketing-related salary, sales commission and model home operating expenses incurred to support the Company's expanded operations and to stimulate sales in response to increased competition in its markets. General and Administrative. General and administrative expenses totalled $7,026,000 and $14,538,000, respectively, during the second quarter and first half of 1996, compared with $6,545,000 and $12,940,000, respectively, for the same periods in 1995. General and administrative expenses increased primarily due to additional costs incurred in support of the Company's expanded operations in Southern California and Las Vegas. Land Sales. Revenues from land sales totalled $1,087,000 and $6,246,000, respectively, for the second quarter and first half of 1996, compared with $511,000 and $2,824,000 for the same periods in 1995. Gross profits from these land sales were $64,000 and $291,000, respectively, for the second quarter and first half of 1996, compared with $93,000 and $413,000 for the same periods in 1995. -22- First half 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. 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: June 30, December 31, June 30, 1996 1995 1995 ----------- ----------- ----------- Finished or currently under development Colorado............................... $ 29,287 $ 34,331 $ 43,300 Mid-Atlantic........................... 49,377 47,247 39,440 California............................. 33,411 26,694 36,139 Arizona................................ 26,956 20,586 23,743 Nevada................................. 10,564 4,559 6,246 ----------- ----------- ----------- Total.............................. 149,595 133,417 148,868 Held for future development or sale*........ 35,014 43,543 48,555 ----------- ----------- ----------- Total.............................. $ 184,609 $ 176,960 $ 197,423 =========== =========== =========== *A 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 option contracts, normally on a "rolling" basis. Generally, in a rolling option contract, the Company obtains the right to purchase finished lots in consideration for an option deposit (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 generally limit the Company's loss to the option deposit, thereby limiting the Company's risk while preserving its liquidity. At June 30, 1996, approximately 8,400 lots were controlled under option agreements with $7,400,000 in 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. Inventory Valuation Charges. Operating results during the second quarter and first half of 1996 were impacted adversely by inventory valuation charges totalling $2,870,000, primarily related to certain of the Company's homebuilding assets in the Mid-Atlantic region as a result of continued weakened conditions and strong competition in that market. These valuation charges resulted from (i) the write down to fair market value of a single-family detached home subdivision in Maryland which began to experience extremely slow sales and negative Home Gross Margins during the second quarter of 1996; (ii) the recognition of losses anticipated from the closing of certain homes in Backlog and from the offering of increased incentives to stimulate sales of certain completed unsold homes in inventory; and (iii) the write-off of capitalized costs, primarily deferred marketing and option deposits, related to certain low-margin projects which the -23- Company is considering closing out. While intending to maintain its market share in the Mid-Atlantic region, the Company is strategically eliminating lower-margin projects in that market and redeploying capital to more profitable operations, including Southern California where the Company recently acquired five new projects. See "Forward-Looking Statements" below. The Company recognized a $900,000 inventory valuation charge in the second quarter of 1995, primarily in relation to several projects in Northern California which experienced slowed sales and reduced selling prices due to the continued decline in home sales activity in the Sacramento market. Financial Services Segment. Mortgage Lending Operations. The table below summarizes the results of HomeAmerican (in thousands). Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Gains from sales of mortgage servicing: Bulk........................................... $ 1,389 $ 1,516 $ 3,791 $ 3,734 Other.......................................... 142 456 362 908 Net interest income............................... 793 902 1,598 1,595 Origination fees.................................. 1,570 1,256 2,959 2,330 Gains (losses) on sales of mortgage loans......... 1,151 (104) 1,693 (440) Mortgage servicing and other...................... 522 449 908 1,015 General and administrative expenses............... (2,423) (2,067) (4,545) (3,851) ----------- ----------- ----------- ----------- Operating profit......................... $ 3,144 $ 2,408 $ 6,766 $ 5,291 =========== =========== =========== =========== Principal amount of originations and purchases: MDC home buyers.............................. $ 124,082 $ 102,736 $ 223,483 $ 180,479 Spot......................................... 12,443 7,814 25,776 13,831 Correspondent................................ 15,545 19,748 26,512 28,878 ----------- ----------- ----------- ----------- Total.................................... $ 152,070 $130,298 $ 275,771 $ 223,188 =========== ======== =========== =========== Capture Rate...................................... 66% 61% 66% 58% =========== =========== =========== =========== June 30, December 31, June 30, 1996 1995 1995 ----------- ------------ ---------- Composition of Servicing Portfolio at End of Period: FHA insured/VA guaranteed..................... $ 129,066 $ 85,002 $ 113,275 Conventional.................................. 338,656* 401,809 378,968 ----------- ------------ ----------- Total Servicing Portfolio......................... $ 467,722 $ 486,811 $ 492,243 =========== ============ =========== Salable Portion of Servicing Portfolio............ $ 260,925** $ 429,328 $ 431,394 =========== ============ =========== *Includes servicing of $154,000,000 which was sold in May 1996 but was being serviced by HomeAmerican under a subservicing arrangement until the ultimate transfer to the purchaser in July 1996. **Includes servicing originated prior to 1996 of approximately $65,000,000. -24- HomeAmerican's operating profits for the second quarter and first half of 1996 exceeded the operating profits for the same periods in 1995 primarily because of gains on sales of mortgage loans totalling $1,151,000 and $1,693,000, respectively, in the second quarter and first half of 1996, compared with losses totalling $104,000 and $440,000, respectively, for the same periods in 1995. These gains are in large measure attributable to 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. Assuming that all other factors remain unchanged, the net effect of the adoption of SFAS 122 will be higher gains (or lower 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 second quarter and first half of 1996 of approximately $1,784,000 and $2,617,000, respectively, on the sale of mortgage loans which were originated and sold by HomeAmerican during such period. Gains from the sale of mortgage servicing rights in the second quarter and first half of 1996 were reduced by $762,000 and $974,000, respectively, due to the allocation of mortgage loan costs to the sold servicing rights which were originated in 1996 in accordance with the requirements of SFAS 122. HomeAmerican's loan originations and purchases increased by 17% and 24%, respectively, in the second quarter and first half of 1996 compared with the same periods 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 Company home buyers as a percentage of total Company home closings; and (iii) the dollar amount of spot originations resulting from increased refinancing activity stimulated by lower mortgage interest rates during the first four months of 1996 compared with the same period in 1995. HomeAmerican opened origination facilities in Southern California and Nevada in late 1995 and February 1996, respectively, which favorably affected HomeAmerican's total originations and Capture Rate. HomeAmerican continues to benefit from the Company's homebuilding growth as Company home buyers were the source of more than 80% of the principal amount of mortgage loans originated or purchased by HomeAmerican 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 which are subject to processing and origination. Such contracts are the only significant financial derivative instrument utilized by MDC. -25- Asset Management Segment. The following table summarizes the results of the asset management operations (in thousands). Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Management fees from REITs......................... $ 802 $ 500 $ 1,598 $ 1,632 Gains on sales of mortgage-related assets.......... 72 270 1,007 270 Other revenues, net................................ 433 1,036 696 1,387 General and administrative expenses................ (849) (551) (1,469) (1,161) ----------- ----------- ----------- ----------- Operating profit........................ $ 458 $ 1,255 $ 1,832 $ 2,128 =========== =========== =========== =========== The Company does not anticipate making additional mortgage-related investments. As a result, future income from the asset management segment will be substantially dependent on management fees earned from two publicly traded REITs. At June 30, 1996, the REITs had approximately $158,000,000 in assets under management by the Company. See "Forward-Looking Statements" below. Other Operating Results. Interest Expense. Corporate and homebuilding interest incurred decreased by 10% and 12% to $7,605,000 and $15,379,000, respectively, for the second quarter and first half of 1996, compared with $8,483,000 and $17,472,000, respectively, for the same periods in 1995. The decreases in 1996 primarily were due to (i) lower effective interest rates with respect to the Company's variable-rate debt in 1996; and (ii) lower average outstanding borrowings, as the Company maintained lower average levels of cash and homebuilding inventories in the first half of 1996. 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) totalled $6,578,000 and $12,501,000, respectively, in the second quarter and first half of 1996, compared with $6,593,000 and $12,743,000, respectively, for the same periods in 1995. Corporate and homebuilding interest incurred but not capitalized is reflected as interest expense and totalled $1,027,000 and $2,878,000, respectively, for the second quarter and first half of 1996, compared with $1,890,000 and $4,729,000, respectively, for the same periods of 1995. 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 $2,980,000 and $5,581,000, respectively, during the second quarter and first half of 1996, compared with $3,482,000 and $6,609,000, respectively, for the same periods of 1995. The decreases in 1996 primarily resulted from (i) reduced commitment fees, appraisal costs and other related costs in the second quarter of 1996 as a result of the Company's replacement of its secured homebuilding lines of credit and certain project loans with the $150,000,000 unsecured line of credit in April 1996; and (ii) 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. -26- 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 rate during the second quarter and first half of 1996 was 36.5%, compared with 36.1% and 35.4%, respectively, during the same periods in 1995. These effective income tax rates differed from the federal statutory rate of 35% 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. 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 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. See "Forward-Looking Statements" below. 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. See "Forward-Looking Statements" below. 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, the substantial majority of which are due 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. See "Forward-Looking Statements" below. The Company's debt-to-equity ratio improved to 1.47 to 1 at June 30, 1996 compared with 1.49 to 1 at December 31, 1995. The improvement resulted from (i) the earnings of the Company, which -27- contributed to the increase in the Company's Stockholders' Equity at June 30, 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. See "Forward-Looking Statements" below. 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, meeting future debt payments and refinancing or paying off other long-term debt as it becomes due) from operations and external financing sources, assuming that no significant adverse changes in the Company's business occur as a result of the various risk factors described elsewhere herein, in particular, increases in interest rates. See "Forward-Looking Statements" below. Lines of Credit and Notes Payable. Homebuilding. In April 1996, the Company entered into an agreement with a group of banks for a $150,000,000 unsecured revolving line of credit maturing June 30, 2000, although a term-out may commence earlier under certain circumstances. Some of the initial advances at closing of this credit agreement were used to retire the borrowings under cancelled bank lines of credit and project loans collateralized by homebuilding inventories. At June 30, 1996, $57,500,000 was borrowed under this unsecured bank line of credit. 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 normally sold within 25 to 60 days after origination. During the first half of 1996 and 1995, HomeAmerican sold $277,788,000 and $216,927,000, respectively, principal amount of mortgage loans and mortgage certificates. The aggregate amount available under the Mortgage Line at June 30, 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 June 30, 1996, $13,019,000 was borrowed and an additional $30,416,000 was collateralized and available to be borrowed under the Mortgage Line. HomeAmerican also has additional borrowing capability with available repurchase agreements. General. The Company's lines 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. In the event that MDC's lines of credit are not renewed as they become due or are renewed at substantially lower levels, the Company believes that it could meet its financing requirements through a combination of internally generated funds and new borrowings. See "Forward-Looking Statements" below. -28- Consolidated Cash Flow. During the first half of 1996, the Company generated $8,214,000 in cash from its operating activities. The Company used this cash and other internally generated funds to (i) pay down lines of credit and notes payable by $4,552,000; and (ii) repurchase 703,000 shares of MDC Common Stock for $5,016,000. During the first half of 1995, MDC used $26,355,000 of cash and other internally generated funds to pay down lines of credit and notes payable by $21,198,000 and to repurchase 843,600 shares of MDC Common Stock for $5,321,000. ADOPTION OF STATEMENTS 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 condition of the Company. 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. In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125 "Accounting for Transfers and Servicing of Financial Assets and Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). The Company's adoption of SFAS 125, beginning in 1997, is not anticipated to have a material adverse impact on the results of operations or financial condition of the Company. See "Forward-Looking Statements" below. 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 interpretations of income tax and environmental laws; and (xi) other factors over which the Company has little or no control. -29- 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 (the "Expansive Soils Cases"), each of which seek certification of a class action, 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 and non-disclosures. 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. On June 11, 1996, representative plaintiffs and the Company's Colorado homebuilding subsidiaries jointly filed with the Douglas County District Court an agreement to settle the Expansive Soils Cases. On June 13, 1996, the Douglas County District Court granted preliminary approval of the settlement. The settlement is subject to final court approval and provides for the creation of a warranty program for eligible owners of homes located in Colorado which were built by the Company's homebuilding subsidiaries since June 1986. If approved by the court, a settlement class, including the purported classes in the Expansive Soils Cases, will be certified and all pending claims will be dismissed. Indemnity payments for funding the settlement are expected to be provided by participating insurance carriers. While there can be no assurance that the proposed settlement will in fact be implemented, management does not believe that these matters are likely to have a material adverse effect on the financial condition, results of operations or cash flows of the Company. Other. The Company and certain of its subsidiaries and affiliates have been named as defendants in various other claims, complaints and legal actions arising in the normal course of business. 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 - -------- <F1> Colescott, et al vs. Richmond Homes Limited, et al.(now entitled Morello 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> Costantini 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. -30- 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, results of operations or cash flows 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREOWNERS. MDC held its Annual Meeting of Shareowners (the "Meeting") on May 3, 1996. At the Meeting, two nominees, Messrs. Gilbert Goldstein and William B. Kemper were elected as Class II Directors to three-year terms expiring in 1999. The selection of Price Waterhouse LLP as the Company's independent accountants for 1996 was ratified at the Meeting. A proposal submitted by a shareowner to eliminate staggered terms for directors was not approved. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibit: 10.1 Letter Agreement effective October 1, 1996 by and between Gilbert Goldstein, P.C. and the Company. 27 Financial Data Schedule. (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. 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 13, 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 -31-