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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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 October 31, 1996, 17,936,000 shares of M.D.C. Holdings, Inc.
Common Stock were outstanding.
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M.D.C. HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of September 30, 1996 (Unaudited)
and December 31, 1995............................... 1
Statements of Income (Unaudited) for the three and
nine months ended September 30, 1996 and 1995....... 3
Statements of Cash Flows (Unaudited) for the nine
months ended September 30, 1996 and 1995............ 4
Notes to Financial Statements (Unaudited)............ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 17
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)
September 30, December 31,
1996 1995
----------- -----------
ASSETS (Unaudited)
Corporate
Cash and cash equivalents...................... $ 11,244 $ 10,290
Property and equipment, net.................... 9,505 9,550
Deferred income taxes.......................... 10,532 13,730
Deferred debt issue costs, net................. 9,358 9,931
Other assets, net.............................. 9,916 3,830
---------- -----------
50,555 47,331
Homebuilding
Cash and cash equivalents...................... 4,122 5,096
Home sales and other accounts receivable....... 16,228 26,192
Investments and marketable securities, net..... 5,076 6,481
Inventories, net
Housing completed or under construction...... 281,295 265,205
Land and land under development.............. 177,388 176,960
Prepaid expenses and other assets, net......... 37,119 42,111
---------- -----------
521,228 522,045
Financial Services
Cash and cash equivalents...................... 2,177 5,409
Accrued interest and other assets, net......... 5,212 3,129
Mortgage loans held in inventory, net.......... 46,269 53,153
Mortgage Collateral, net of mortgage-backed
bonds, and related assets and liabilities.... 1,934 3,744
---------- -----------
55,592 65,435
Total Assets............................. $ 627,375 $ 634,811
========== ===========
See notes to condensed consolidated financial statements
-1-
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
September 30, December 31,
1996 1995
----------- -----------
LIABILITIES (Unaudited)
Corporate
Accounts payable and accrued expenses........... $ 21,580 $ 18,258
Income taxes payable............................ 14,059 11,930
Note payable.................................... 3,500 3,537
Senior Notes, net............................... 187,670 187,525
Subordinated notes, net......................... 38,224 38,221
----------- -----------
265,033 259,471
Homebuilding
Accounts payable and accrued expenses........... 92,756 82,164
Lines of credit................................. 28,431 43,490
Notes payable................................... 6,506 10,571
----------- -----------
127,693 136,225
Financial Services
Accounts payable and accrued expenses........... 11,675 12,092
Line of credit.................................. 14,150 21,990
----------- -----------
25,825 34,082
Total Liabilities......................... 418,551 429,778
----------- -----------
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; 22,660,000 and 22,606,000
shares issued, respectively, at September 30,
1996 and December 31, 1995..................... 227 226
Additional paid-in capital...................... 136,518 136,022
Retained earnings............................... 100,511 87,476
----------- -----------
237,256 223,724
Less treasury stock, at cost; 4,564,000 and
3,157,000 shares, respectively, at September 30,
1996 and December 31, 1995.................... (28,432) (18,691)
----------- -----------
Total Stockholders' Equity................ 208,824 205,033
----------- -----------
Total Liabilities and Stockholders' Equity. $ 627,375 $ 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 Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
REVENUES
Homebuilding.......... $ 222,734 $ 226,815 $ 644,339 $ 618,683
Financial Services.... 10,346 6,297 25,034 18,803
Corporate............. 227 359 956 1,196
----------- ----------- ----------- -----------
Total Revenues... 233,307 233,471 670,329 638,682
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding......... 217,828 217,493 626,356 593,287
Financial Services... 3,245 2,778 9,335 7,865
Corporate general and
administrative..... 2,920 3,185 8,501 9,794
Corporate and
homebuilding
interest (Note C).. 486 1,584 3,364 6,313
----------- ----------- ----------- -----------
Total Expenses... 224,479 225,040 647,556 617,259
----------- ----------- ----------- -----------
Income before income
taxes and
extraordinary item.... 8,828 8,431 22,773 21,423
Provision for income
taxes................. (3,225) (2,886) (8,314) (7,479)
----------- ----------- ----------- -----------
Income before
extraordinary item.... 5,603 5,545 14,459 13,944
Extraordinary loss from
early extinguishment of
debt, net of income tax
benefit of $242....... - - - - (421) - -
----------- ----------- ----------- -----------
Net Income....... $ 5,603 $ 5,545 $ 14,038 $ 13,944
=========== =========== =========== ===========
EARNINGS PER SHARE
Primary
Income before
extraordinary item.. $ .30 $ .28 $ .75 $ .69
=========== =========== =========== ===========
Net Income.......... $ .30 $ .28 $ .73 $ .69
=========== =========== =========== ===========
Fully diluted
Income before
extraordinary item.. $ .27 $ .25 $ .68 $ .63
=========== =========== =========== ===========
Net Income.......... $ .27 $ .25 $ .66 $ .63
=========== =========== =========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING
Primary.............. 18,849 20,052 19,352 20,161
=========== =========== =========== ===========
Fully diluted........ 22,462 23,736 22,965 24,113
=========== =========== =========== ===========
DIVIDENDS PER SHARE..... $ .03 $ .03 $ .09 $ .08
=========== =========== =========== ===========
See notes to condensed consolidated financial statements
-3-
M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine months
Ended September 30,
-------------------------
1996 1995
----------- -----------
OPERATING ACTIVITIES
Net Income........................................ $ 14,038 $ 13,944
Adjustments To Reconcile Net Income To Net Cash
Provided By (Used In) Operating Activities:
Depreciation and amortization................ 8,770 7,237
Homebuilding asset impairment charges........ 7,208 2,100
Deferred income taxes........................ 3,198 (1,985)
Gain on sale of FAMC, net.................... (4,042) - -
Net Changes In Assets and Liabilities
Mortgage loans held in inventory............. 6,884 (3,954)
Homebuilding inventories..................... (18,073) 9,056
Home sales and other accounts receivable..... 9,964 (1,877)
Prepaid expenses and other assets............ (2,778) (7,648)
Accounts payable and accrued expenses........ 13,370 6,522
Other, net................................... (2,888) (888)
----------- -----------
Net Cash Provided By Operating Activities.......... 35,651 22,507
----------- -----------
INVESTING ACTIVITIES
Net Proceeds From Mortgage-Related Assets and
Liabilities..................................... 2,858 4,397
Other, net........................................ 1,826 3,963
----------- -----------
Net Cash Provided By Investing Activities.......... 4,684 8,360
----------- -----------
FINANCING ACTIVITIES
Lines of Credit
Advances...................................... 743,462 534,484
Principal payments............................ (766,361) (561,187)
Notes Payable
Borrowings.................................... 480 1,075
Principal payments............................ (10,441) (24,695)
Dividend Payments.................................. (1,684) (1,568)
Treasury Stock Repurchases......................... (10,075) (5,321)
Other, net......................................... 1,032 (54)
----------- -----------
Net Cash Used In Financing Activities.............. (43,587) (57,266)
----------- -----------
Net Decrease In Cash and Cash Equivalents.......... (3,252) (26,399)
Cash and Cash Equivalents
Beginning Of Period........................... 20,795 43,564
----------- -----------
End Of Period................................. $ 17,543 $ 17,165
=========== ===========
See notes to condensed consolidated financial statements
-4-
M.D.C. HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A. Presentation of Financial Statements
The condensed consolidated financial statements of M.D.C. Holdings,
Inc. ("MDC" or the "Company," which, 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 September 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 and Legal Proceedings within Part II of MDC's Form
10-Q for the quarterly period ended September 30, 1996.
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 Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
Homebuilding ----------- ----------- ----------- -----------
Home sales.................................. $ 220,443 $ 220,770 $ 635,472 $ 608,690
Land sales.................................. 2,099 4,954 8,345 7,778
Other revenues.............................. 192 1,091 522 2,215
----------- ----------- ----------- -----------
222,734 226,815 644,339 618,683
----------- ----------- ----------- -----------
Home cost of sales.......................... 190,056 191,164 548,974 527,080
Land cost of sales.......................... 1,830 5,034 7,785 7,445
Asset impairment charges.................... 4,338 1,200 7,208 2,100
Marketing................................... 14,420 13,108 40,667 36,735
General and administrative.................. 7,184 6,987 21,722 19,927
----------- ----------- ----------- -----------
217,828 217,493 626,356 593,287
----------- ----------- ----------- -----------
Homebuilding Operating Profit........... 4,906 9,322 17,983 25,396
----------- ----------- ----------- -----------
-5-
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Financial Services
Mortgage Lending Revenues
Interest revenues........................... 944 869 2,618 2,539
Origination fees............................ 1,528 1,501 4,487 3,831
Gains on sales of mortgage servicing........ 1,593 2,001 5,746 6,643
Gains (losses) on sale of mortgage loans, net
1,545 (405) 3,238 (845)
Mortgage servicing and other................ 288 441 1,196 1,456
Asset Management Revenues
Gain on sale of FAMC, net................... 4,042 - - 4,042 - -
Management fees and other................... 406 1,890 3,707 5,179
----------- ----------- ----------- -----------
10,346 6,297 25,034 18,803
----------- ----------- ----------- -----------
General and Administrative Expenses
Mortgage Lending............................ 2,518 2,140 7,139 6,066
Asset Management............................ 727 638 2,196 1,799
----------- ----------- ----------- -----------
3,245 2,778 9,335 7,865
----------- ----------- ----------- -----------
Financial Services Operating Profit 7,101 3,519 15,699 10,938
----------- ----------- ----------- -----------
Total Operating Profit........................... 12,007 12,841 33,682 36,334
----------- ----------- ----------- -----------
Corporate
Other revenues.............................. 227 359 956 1,196
Interest expense............................ (486) (1,584) (3,364) (6,313)
General and administrative expenses......... (2,920) (3,185) (8,501) (9,794)
----------- ----------- ----------- -----------
Net Corporate Expenses ................. (3,179) (4,410) (10,909) (14,911)
----------- ----------- ----------- -----------
Income Before Income Taxes and Extraordinary Item..
$ 8,828 $ 8,431 $ 22,773 $ 21,423
=========== =========== =========== ===========
C. Corporate and Homebuilding Interest Activity (In thousands)
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Interest capitalized in homebuilding inventory,
beginning of period........................... $ 39,839 $ 41,559 $ 40,217 $ 42,478
Interest incurred................................ 7,582 8,337 22,961 25,809
Interest expensed................................ (486) (1,584) (3,364) (6,313)
Previously capitalized interest included in cost
of sales...................................... (6,066) (7,426) (18,945) (21,088)
----------- ----------- ----------- -----------
Interest capitalized in homebuilding inventory,
end of period................................. $ 40,869 $ 40,886 $ 40,869 $ 40,886
=========== =========== =========== ===========
-6-
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
(the "Directors") to repurchase up to 1,100,000 shares of Common Stock. In
January 1996, the Company substantially completed the program authorized in
1995. On July 25, 1996, and October 8, 1996, respectively, the Directors
authorized additional programs to repurchase up to 1,000,000 shares of Common
Stock under each program. As of November 1, 1996, the Company had completed the
program authorized on July 25 and had repurchased approximately 109,000 shares
of Common Stock pursuant to the program authorized on October 8. Repurchases
under the 1995 and 1996 programs have been made at per share prices ranging from
$5.88 to $7.13, with an average cost, including commissions, of $6.64 per share.
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.
E. Gain on Sale of FAMC
In September 1996, the Company sold its 80% interest in Financial Asset
Management LLC ("FAMC"), the asset manager of two publicly traded real estate
investment trusts, for $11,450,000. The sales proceeds consisted of $6,000,000
cash, received on October 2, and $5,450,000 of subordinated notes which are
payable at specified dates during the next 10 years and are convertible, under
certain circumstances, into as much as a 47.6% ownership interest in FAMC. The
sale resulted in the recognition of a gain, net of related expenses, of
$4,042,000. A gain of $5,450,000 attributable to the notes has been deferred and
may be recognized, in whole or in part, in future periods based upon a number of
factors, including collection of the notes' principal and the expiration of the
conversion features.
F. 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 revolving credit agreement. The Company recognized an extraordinary
loss of $421,000, net of an income tax benefit of $242,000, during the second
quarter and the nine months ended September 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.
G. 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).
-7-
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Primary Calculation
Income before extraordinary item............................. $ 5,603 $ 5,545 $ 14,459 $ 13,944
Extraordinary loss, net of income tax benefit of $242........ - - - - (421) - -
----------- ----------- ----------- -----------
Net Income.............................................. $ 5,603 $ 5,545 $ 14,038 $ 13,944
=========== =========== =========== ===========
Weighted-average shares outstanding.......................... 18,358 19,310 18,821 19,345
Dilutive stock options....................................... 491 742 531 816
----------- ----------- ----------- -----------
Total Weighted-Average Shares........................... 18,849 20,052 19,352 20,161
=========== =========== =========== ===========
Primary Earnings Per Share
Income before extraordinary item........................ $ .30 $ .28 $ .75 $ .69
=========== ============= =========== ===========
Net Income.............................................. $ .30 $ .28 $ .73 $ .69
=========== =========== =========== ===========
Fully Diluted Calculation
Income before extraordinary item............................. $ 5,603 $ 5,545 $ 14,459 $ 13,944
Adjustment for interest on Convertible Notes, net of income
tax benefit; conversion assumed........................... 402 391 1,206 1,173
----------- ----------- ----------- -----------
Adjusted income before extraordinary item.................... 6,005 5,936 15,665 15,117
Extraordinary loss, net of income tax benefit of $242........ - - - - (421) - -
----------- ----------- ----------- -----------
Adjusted Net Income..................................... $ 6,005 $ 5,936 $ 15,244 $ 15,117
=========== =========== =========== ===========
Weighted-average shares outstanding.......................... 18,358 19,310 18,821 19,345
Dilutive stock options....................................... 491 813 531 1,155
Shares issuable upon conversion of Convertible Notes;
conversion assumed........................................ 3,613 3,613 3,613 3,613
----------- ----------- ----------- -----------
Total Weighted-Average Shares........................... 22,462 23,736 22,965 24,113
=========== =========== =========== ===========
Fully Diluted Earnings Per Share
Income before extraordinary item........................ $ .27 $ .25 $ .68 $ .63
=========== =========== =========== ===========
Net Income.............................................. $ .27 $ .25 $ .66 $ .63
=========== ========== =========== ===========
H. Supplemental Cash Flow Information (In thousands)
Nine Months
Ended September 30,
1996 1995
----------- ----------
Cash paid during the period for:
Interest, net of amounts capitalized.......................... $ 1,791 $ 2,486
Income taxes.................................................. $ 4,278 $ 7,130
Homebuilding inventory purchases financed by seller................ $ 5,858 $ 3,705
I. 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.
-8-
Supplemental Combining Balance Sheet
September 30, 1996
(In thousands)
Unconsolidated
---------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ----------- -----------
ASSETS
Corporate
Cash and cash equivalents............... $ 11,244 $ - - $ - - $ - - $ 11,244
Investments in subsidiaries............. 215,940 - - 17,434 (233,374) - -
Advances and notes receivable - Parent
and subsidiaries...................... 232,952 1 26,877 (259,830) - -
Property and equipment, net............. 9,505 - - - - - - 9,505
Deferred income taxes................... 10,532 - - - - - - 10,532
Deferred debt issue costs, net.......... 9,358 - - - - - - 9,358
Other assets, net....................... 3,820 - - 6,096 - - 9,916
----------- ----------- ----------- ----------- -----------
493,351 1 50,407 (493,204) 50,555
----------- ----------- ----------- ----------- -----------
Homebuilding
Cash and cash equivalents............... - - 4,121 1 - - 4,122
Home sales and other accounts receivable - - 24,852 - - (8,624) 16,228
Investments and marketable securities,
net................................... 5,076 - - - - - - 5,076
Inventories, net
Housing completed or under construction - - 281,295 - - - - 281,295
Land and land under development....... - - 154,485 24,375 (1,472) 177,388
Prepaid expenses and other assets, net.. 2,416 34,703 - - - - 37,119
----------- ----------- ----------- ----------- -----------
7,492 499,456 24,376 (10,096) 521,228
----------- ----------- ----------- ----------- -----------
Financial Services
Cash and cash equivalents............... - - - - 2,177 - - 2,177
Accrued interest and other assets....... - - - - 5,212 - - 5,212
Mortgage loans held in inventory........ - - - - 46,269 - - 46,269
Mortgage Collateral, net of
mortgage-backed bonds, and related
assets and liabilities................ - - - - 1,934 - - 1,934
----------- ----------- ----------- ----------- -----------
- - - - 55,592 - - 55,592
----------- ----------- ----------- ----------- -----------
Total Assets...................... $ 500,843 $ 499,457 $ 130,375 $ (503,300) $ 627,375
=========== =========== =========== =========== ===========
-9-
Supplemental Combining Balance Sheet
September 30, 1996
(In thousands)
(continued)
Unconsolidated
---------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ------------ -----------
LIABILITIES
Corporate
Accounts payable and accrued expenses... $ 21,138 $ - - $ 442 $ - - $ 21,580
Advances and notes payable - Parent and
subsidiaries.......................... 22,652 217,344 28,464 (268,460) - -
Income taxes payable.................... 14,059 - - - - - - 14,059
Note payable............................ 3,500 - - - - - - 3,500
Senior Notes, net....................... 187,670 - - - - - - 187,670
Subordinated notes, net................. 38,224 - - - - - - 38,224
----------- ----------- ----------- ------------ -----------
287,243 217,344 28,906 (268,460) 265,033
----------- ----------- ----------- ------------ -----------
Homebuilding
Accounts payable and accrued expenses... 4,776 87,141 839 - - 92,756
Line of credit.......................... - - 28,431 - - - - 28,431
Notes payable........................... - - 6,506 - - - - 6,506
----------- ----------- ----------- ------------ -----------
4,776 122,078 839 - - 127,693
----------- ----------- ----------- ------------ -----------
Financial Services
Accounts payable and accrued expenses... - - - - 20,299 (8,624) 11,675
Line of credit.......................... - - - - 14,150 - - 14,150
----------- ----------- ----------- ------------ -----------
- - - - 34,449 (8,624) 25,825
----------- ----------- ----------- ------------ -----------
Total Liabilities................. 292,019 339,422 64,194 (277,084) 418,551
----------- ----------- ----------- ------------ -----------
STOCKHOLDERS' EQUITY
Preferred stock......................... - - - - 10 (10) - -
Common Stock............................ 227 19 81 (100) 227
Additional paid-in capital.............. 136,518 144,756 224,914 (369,670) 136,518
Retained earnings....................... 100,511 15,260 (158,815) 143,555 100,511
Less treasury stock..................... (28,432) - - (9) 9 (28,432)
----------- ----------- ----------- ------------ -----------
Total Stockholders' Equity........ 208,824 160,035 66,181 (226,216) 208,824
----------- ----------- ----------- ------------ -----------
Total Liabilities and
Stockholders' Equity............ $ 500,843 $ 499,457 $ 130,375 $ (503,300) $ 627,375
=========== =========== =========== ============ ===========
-10-
Supplemental Combining Balance Sheet
December 31, 1995
(In thousands)
Unconsolidated
---------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
ASSETS ----------- ----------- ----------- ------------ -----------
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, net. 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
========== ========== ========== ============ ==========
-11-
Supplemental Combining Balance Sheet
December 31, 1995
(In thousands)
(continued)
Unconsolidated
---------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ------------ -----------
LIABILITIES
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
Note 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
=========== =========== ======== ============ ===========
-12-
Supplemental Combining Statements of Income
(In thousands)
Unconsolidated
---------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ------------ -----------
THREE MONTHS ENDED SEPTEMBER 30, 1996
REVENUES
Homebuilding............................. $ 46 $ 222,596 $ 92 $ - - $ 222,734
Financial Services....................... - - - - 10,346 - - 10,346
Corporate................................ 227 - - - - - - 227
Equity in earnings of subsidiaries....... 7,181 - - - - (7,181) - -
----------- ----------- ----------- ----------- -----------
Total Revenues..................... 7,454 222,596 10,438 (7,181) 233,307
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................. 155 217,423 175 75 217,828
Financial Services....................... - - - - 3,245 - - 3,245
Corporate general and
administrative......................... 2,912 - - 8 - - 2,920
Corporate and homebuilding interest.....
(4,441) 4,159 726 42 486
----------- ----------- ----------- ----------- -----------
Total (1,374) 221,582 4,154 117 224,479
----------- ----------- ----------- ----------- -----------
Expenses..........................
Income before income taxes............... 8,828 1,014 6,284 (7,298) 8,828
Provision for income taxes............... (3,225) (385) (2,388) 2,773 (3,225)
----------- ----------- ----------- ----------- -----------
NET INCOME.................................. $ 5,603 $ 629 $ 3,896 $ (4,525) $ 5,603
=========== =========== =========== =========== ===========
THREE MONTHS ENDED SEPTEMBER 30, 1995
REVENUES
Homebuilding............................. $ 88 $ 226,688 $ 39 $ - - $ 226,815
Financial Services....................... - - - - 6,297 - - 6,297
Corporate................................ 359 - - - - - - 359
Equity in earnings of subsidiaries....... 7,629 - - - - (7,629) - -
----------- ----------- ----------- ----------- -----------
Total Revenues..................... 8,076 226,688 6,336 (7,629) 233,471
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................. 88 217,111 294 - - 217,493
Financial Services....................... - - - - 2,778 - - 2,778
Corporate general and administrative.....
3,172 - - 13 - - 3,185
Corporate and homebuilding interest.....
(3,615) 4,852 347 - - 1,584
----------- ----------- ----------- ----------- -----------
Total Expenses..................... (355) 221,963 3,432 - - 225,040
----------- ----------- ----------- ----------- -----------
Income before income taxes............... 8,431 4,725 2,904 (7,629) 8,431
Provision for income taxes............... (2,886) (1,796) (842) 2,638 (2,886)
----------- ----------- ----------- ----------- -----------
NET INCOME.................................. $ 5,545 $ 2,929 $ 2,062 $ (4,991) $ 5,545
=========== =========== =========== =========== ===========
-13-
Supplemental Combining Statements of Income
(In thousands)
Unconsolidated
---------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ------------ -----------
NINE MONTHS ENDED SEPTEMBER 30, 1996
REVENUES
Homebuilding............................ $ 189 $ 644,046 $ 104 $ - - $ 644,339
Financial Services...................... - - - - 25,034 - - 25,034
Corporate............................... 932 13 11 - - 956
Equity in earnings of subsidiaries...... 18,176 - - - - (18,176) - -
----------- ----------- ----------- ----------- -----------
Total Revenues.................... 19,297 644,059 25,149 (18,176) 670,329
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................ 603 625,089 439 225 626,356
Financial Services...................... - - - - 9,335 - - 9,335
Corporate general and administrative.... 8,478 - - 23 - - 8,501
Corporate and homebuilding interest....
(12,557) 13,734 2,071 116 3,364
----------- ----------- ----------- ----------- -----------
Total Expenses.................... (3,476) 638,823 11,868 341 647,556
----------- ----------- ----------- ----------- -----------
Income before income taxes and
extraordinary item.................... 22,773 5,236 13,281 (18,517) 22,773
Provision for income taxes.............. (8,314) (1,979) (5,258) 7,237 (8,314)
----------- ----------- ----------- ----------- -----------
Income before extraordinary item........ 14,459 3,257 8,023 (11,280) 14,459
Extraordinary loss, net of income tax
benefit of $242....................... (421) - - - - - - (421)
----------- ----------- ----------- ----------- -----------
NET INCOME................................. $ 14,038 $ 3,257 $ 8,023 $ (11,280) $ 14,038
=========== =========== =========== =========== ===========
NINE MONTHS ENDED SEPTEMBER 30, 1995
REVENUES
Homebuilding............................ $ 299 $ 618,221 $ 163 $ - - $ 618,683
Financial Services...................... - - - - 18,803 - - 18,803
Corporate............................... 1,196 - - - - - - 1,196
Equity in earnings of subsidiaries...... 19,303 - - - - (19,303) - -
----------- ----------- ----------- ----------- -----------
Total Revenues.................... 20,798 618,221 18,966 (19,303) 638,682
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................ 586 592,085 616 - - 593,287
Financial Services...................... - - - - 7,865 - - 7,865
Corporate general and administrative.... 9,740 - - 54 - - 9,794
Corporate and homebuilding interest..... (10,951) 15,500 1,764 - - 6,313
----------- ----------- ----------- ----------- -----------
Total Expenses.................... (625) 607,585 10,299 - - 617,259
----------- ----------- ----------- ----------- -----------
Income before income taxes.............. 21,423 10,636 8,667 (19,303) 21,423
Provision for income taxes.............. (7,479) (4,042) (2,821) 6,863 (7,479)
----------- ----------- ----------- ----------- -----------
NET INCOME................................. $ 13,944 $ 6,594 $ 5,846 $ (12,440) $ 13,944
=========== =========== =========== =========== ===========
-14-
Supplemental Combining Statement of Cash Flows
Nine Months Ended September 30, 1996
(In thousands)
Unconsolidated
---------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES... $ 112,289 $ 17,169 $ (4,963) $ (88,844) $ 35,651
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Net (Increase) Reduction in Notes and
Advances Receivable From Parent and
Subsidiaries............................. (22,296) 32 (5,327) 27,591 - -
Net Proceeds From Mortgage-Related Assets
and Liabilities.......................... - - - - 2,858 - - 2,858
Other, net.................................. 1,223 719 (116) - - 1,826
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Investing
Activities............................... (21,073) 751 (2,585) 27,591 4,684
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Net Increase (Reduction) in Borrowings From
Parent and Subsidiaries.................. (75,873) 6,590 8,030 61,253 - -
Lines of Credit
Advances............................... - - 743,462 - - - - 743,462
Principal payments..................... - - (766,361) - - (766,361)
Notes Payable
Borrowings............................. - - 480 - - - - 480
Principal payments..................... (3,668) (3,024) (3,749) - - (10,441)
Dividend Payments........................... (1,684) - - - - - - (1,684)
Treasury Stock Repurchases.................. (10,075) - - - - - - (10,075)
Other, net.................................. 1,032 - - - - - - 1,032
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Financing
Activities............................... (90,268) (18,853) 4,281 61,253 (43,587)
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) In Cash and Cash
Equivalents.............................. 948 (933) (3,267) - - (3,252)
Cash and Cash Equivalents
Beginning Of Period...................... 10,296 5,054 5,445 - - 20,795
----------- ----------- ----------- ----------- -----------
End Of Period............................ $ 11,244 $ 4,121 $ 2,178 $ - - $ 17,543
=========== =========== =========== =========== ===========
-15-
Supplemental Combining Statement of Cash Flows
Nine Months Ended September 30, 1995
(In thousands)
Unconsolidated
---------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................... $ 39,856 $ (894) $ (10,095) $ (6,360) $ 22,507
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Net Increase in Notes and Advances
Receivable From Parent and Subsidiaries.. (72,138) (13) (8,202) 80,353 - -
Net Proceeds From Mortgage-Related Assets
and Liabilities.......................... - - - - 4,397 - - 4,397
Other, net.................................. (890) 1,241 3,612 - - 3,963
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Investing
Activities............................... (73,028) 1,228 (193) 80,353 8,360
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Net Increase in Borrowings From Parent and
Subsidiaries............................. 18,193 42,631 13,169 (73,993) - -
Lines of credit
Advances............................... - - 534,484 - - - - 534,484
Principal payments..................... - - (558,623) (2,564) - - (561,187)
Notes Payable
Borrowings............................. - - 1,075 - - - - 1,075
Principal payments..................... (34) (23,264) (1,397) - - (24,695)
Dividend Payments........................... (1,568) - - - - - - (1,568)
Treasury Stock Repurchases.................. (5,321) - - - - - - (5,321)
Other, net.................................. (54) - - - - - - (54)
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Financing
Activities............................... 11,216 (3,697) 9,208 (73,993) (57,266)
----------- ----------- ----------- ----------- -----------
Net Decrease In Cash and Cash Equivalents... (21,956) (3,363) (1,080) - - (26,399)
Cash and Cash Equivalents
Beginning Of Period...................... 31,210 9,656 2,698 - - 43,564
----------- ----------- ----------- ----------- -----------
End Of Period............................ $ 9,254 $ 6,293 $ 1,618 $ - - $ 17,165
=========== =========== =========== =========== ===========
-16-
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) through September 30, 1996,
Financial Asset Management LLC (an indirect subsidiary of M.D.C. Holdings, Inc.,
"FAMC") managed, 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 Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Revenues.......................................... $ 233,307 $ 233,471 $ 670,329 $ 638,682
Income before income taxes and extraordinary item. $ 8,828 $ 8,431 $ 22,773 $ 21,423
Net Income........................................ $ 5,603 $ 5,545 $ 14,038 $ 13,944
Earnings Per Share:
Primary........................................ $ .30 $ .28 $ .73 $ .69
Fully diluted.................................. $ .27 $ .25 $ .66 $ .63
Revenues for the nine months ended September 30, 1996 were the highest
in the Company's history, representing a 5% increase from the same period in
1995. Increased revenues were primarily due to an increase in homes closed. The
Company closed 3,606 homes during the nine months ended September 30, 1996,
representing a 7% increase over the 3,364 homes closed in the same period in
1995. The revenue impact of increased unit closings was partially offset by a 3%
decrease in the average selling price per home closed.
Income before income taxes and extraordinary item was higher in the
third quarter and first nine months of 1996, compared with the same periods in
1995, primarily as a result of (i) higher operating profit from the Company's
financial services segment, primarily resulting from a $4,042,000 gain, net of
related expenses, recognized on the sale of FAMC and higher gains on sales of
mortgage loans; (ii) lower interest expense; and (iii) lower corporate general
and administrative expenses. These increases in income partially were offset by
decreases in operating profits from the Company's homebuilding operations in the
third quarter and first nine months of 1996, compared with the same periods for
1995. These decreases were caused by (i) increased homebuilding asset impairment
charges, primarily in the
-17-
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, which more than offset the positive affects
of increased home closings and Home Gross Margins (as hereinafter defined).
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
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 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 generally increased to a high of 8.4%,
although rates recently have declined to 7.8%. While current mortgage interest
rates are low compared with historical rates, increases in mortgage interest
rates, such as those occurring during the second and third quarters of 1996 when
rates generally were above 8.0%, have affected adversely and may continue to
affect adversely in the future, the Company's homebuilding and mortgage lending
operations.
The Company is unable to predict the extent to which recent or future
changes in home mortgage interest rates will affect the Company's operating
activities and results of operations. See "Forward-Looking Statements" below.
-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") at each
date shown (dollars in thousands).
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Home sales revenues................................ $ 220,443 $ 220,770 $ 635,472 $ 608,690
Operating profits before asset impairment charges.. $ 9,244 $ 10,522 $ 25,191 $ 27,496
Operating profits.................................. $ 4,906 $ 9,322 $ 17,983 $ 25,396
Average selling price per housing unit............. $ 175.1 $ 178.8 $ 176.2 $ 180.9
Home Gross Margins................................. 13.8% 13.4% 13.6% 13.4%
Homes (units)
Sales contracted, net
Colorado.................................. 405 483 1,483 1,562
Mid-Atlantic.............................. 246 205 898 852
California................................ 185 231 634 609
Arizona................................... 237 231 843 606
Nevada.................................... 61 15 182 50
----------- ----------- ----------- -----------
Total................................ 1,134 1,165 4,040 3,679
=========== =========== =========== ===========
Closed and delivered
Colorado.................................. 465 493 1,400 1,453
Mid-Atlantic.............................. 262 288 657 734
California................................ 191 232 594 528
Arizona................................... 261 201 764 586
Nevada.................................... 80 21 191 63
----------- ----------- ----------- -----------
Total................................ 1,259 1,235 3,606 3,364
=========== =========== =========== ===========
September 30, December 31, September 30,
1996 1995 1995
----------- ------------ --------
Backlog (units)
Colorado.................................. 741 658 719
Mid-Atlantic.............................. 516 275 455
California................................ 215 175 237
Arizona................................... 313 234 277
Nevada.................................... 60 13 16
----------- ------------ -----------
Total................................. 1,845 1,355 1,704
=========== ============ ===========
Backlog (estimated sales value)............... $ 326,000 $ 243,000 $ 305,000
=========== =========== ===========
Active Subdivisions (units)
Colorado.................................. 50 49 53
Mid-Atlantic.............................. 51 48 45
California................................ 21 23 25
Arizona................................... 22 22 22
Nevada.................................... 5 2 2
----------- ------------ -----------
Total................................. 149 144 147
=========== ============ ===========
-19-
Home Sales Revenues and Homes Closed and Delivered. Home sales revenues
in the first nine months of 1996 exceeded all comparable periods in the
Company's history, increasing 4% from home sales revenues for the same period in
1995. The increase primarily resulted from increased home closings, partially
offset by an overall decrease in the average selling price per home closed as
discussed below. Home closings increased in the first nine months of 1996
compared with 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 nine at December 31, 1994 to 14 at September 30, 1996;
(ii) California, due to the Company's acquisition and opening of several new
subdivisions in Southern California, including subdivisions in Riverside County
acquired from Mesa Homes in July 1995; and (iii) Nevada, due to the closing of
homes in subdivisions acquired from Longford Homes in February 1996. Home sales
revenues in the third quarter of 1996 were approximately the same as home sales
revenues for the third quarter of 1995, as the impact of slightly increased home
closings was offset by the decrease in the average selling price.
The Company's Mid-Atlantic operations closed fewer homes in the third
quarter and first nine months of 1996 than were closed during the same periods
in 1995, primarily as a result of adverse weather conditions throughout most of
the first nine months of 1996 which delayed construction and development
activities and the delivery of certain homes.
Average Selling Price Per Housing Unit. The decrease in the average
selling price per housing unit in the third quarter and first nine months 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 nine months of 1996
compared with 1995 in (i) Arizona; (ii) Las Vegas, as the Company closed
affordably priced homes in subdivisions acquired from Longford Homes; and (iii)
the Mid-Atlantic region, as the Company has opened a number of new affordable
townhome projects in this market.
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 third quarter and
first nine months 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 early 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 profits 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 the
Mid-Atlantic, where the Company continues to offer incentives to reduce the
Company's inventory of older unsold homes under construction and in response to
weakened market conditions and strong competition. During the third quarter of
1996, Home Gross Margins increased compared with the third quarter of 1995 in
(i) Phoenix, due to the favorable impact of closings in successful projects
opened in late 1995 and early 1996; and (ii) Southern California, due to the
adverse impact on 1995 third quarter margins of closings from underperforming
projects which have since been substantially completed. For the nine-month
period ended September 30, 1996, Home Gross Margins decreased compared with the
comparable period in 1995 in Phoenix and Southern California as third quarter
1996 Home Gross Margins increases were more than offset by decreases during the
first six months of 1996. These six-month decreases were due to the adverse
affects in 1996 of increased incentives offered to home buyers and higher land
prices resulting from increased competition in these markets.
-20-
The Company believes that future growth in Home Gross Margins will be
adversely impacted by the 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, particularly the recently announced
increases in lumber prices, 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. Although home sales in the third quarter of
1996 were consistent with the third quarter of 1995, home sales for the first
nine months of 1996 were 10% higher than home sales for the same period in 1995.
The increase in 1996 primarily was the result of increased home sales in
Arizona, Southern California and Las Vegas due to the Company's continued
expansion in these markets, as previously discussed. As a result of these
increased home sales, the Company's Backlog at September 30, 1996 increased to
1,845 units, a 36% increase from the 1,355 units at December 31, 1995, and an 8%
increase from the 1,704 units at September 30, 1995. The Company expects
approximately 70% of its September 30, 1996 Backlog to close under existing
sales contracts during the fourth quarter of 1996 and the first quarter of 1997,
assuming no significant change in mortgage interest rates. See "Forward-Looking
Statements" below.
The Company's home sales in October 1996 totalled 366 units, representing
an 8% increase from the 337 homes sold in October 1995.
Marketing. Marketing expenses (which include, among other things,
amortization of deferred marketing costs, model home expenses and sales
commissions) totalled $14,420,000 and $40,667,000, respectively, for the third
quarter and first nine months of 1996, compared with $13,108,000 and
$36,735,000, respectively, for the same periods in 1995. The 10% and 11%
increases during the third quarter and first nine months of 1996 compared with
1995, respectively, 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 $7,184,000 and $21,722,000, respectively, during the third quarter and
first nine months of 1996, compared with $6,987,000 and $19,927,000,
respectively, for the same periods in 1995. General and administrative expenses
increased in 1996 primarily due to additional costs incurred in support of the
Company's expanded operations in Southern California and Las Vegas.
-21-
Land Inventory
The table below shows the carrying value of MDC's land and land under
development in each of its homebuilding markets (in thousands).
September 30, December 31, September 30,
1996 1995 1995
----------- ----------- ------------
Finished or currently under development
Colorado................................ $ 32,116 $ 34,331 $ 38,717
Mid-Atlantic............................ 49,186 47,247 40,307
California.............................. 20,535 26,694 28,688
Arizona................................. 28,508 20,586 19,193
Nevada.................................. 15,675 4,559 5,238
----------- ----------- -----------
Total............................... 146,020 133,417 132,143
Held for future development or sale*......... 31,368 43,543 45,787
----------- ----------- -----------
Total............................... $ 177,388 $ 176,960 $ 177,930
=========== =========== ===========
*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 normally limit the Company's loss to the
option deposit, thereby limiting the Company's risk while preserving its
liquidity. At September 30, 1996, approximately 6,800 lots were controlled under
option agreements with $5,450,000 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.
Asset Impairment Charges
Operating results during the third quarter and first nine months of
1996 were impacted adversely by asset impairment charges totalling $4,338,000
and $7,208,000, respectively, 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. The Mid-Atlantic asset
impairment charges resulted from (i) the write-down to fair market value of a
single-family detached home subdivision in which the Company currently intends
to sell the majority of the remaining lots in bulk; (ii) the recognition of
losses anticipated from the closing of certain homes in Backlog and from the
offering of increased incentives to stimulate sales of certain completed unsold
homes in inventory; (iii) the write-off of capitalized costs, primarily deferred
marketing and option deposits, related to certain low-margin projects which the
Company is considering closing out; and (iv) for the nine-month period, the
write-down to fair market value in the second quarter of 1996, pursuant to the
requirements of SFAS 121 (as hereinafter defined), of a single-family detached
home subdivision which began to experience extremely slow sales and negative
Home Gross Margins during such period. While intending to maintain its market
share in the Mid-Atlantic region, the Company is strategically eliminating
lower-margin projects
-22-
in that market and redeploying capital to more profitable operations, including
Southern California, Phoenix and Las Vegas. See "Forward-Looking Statements"
below.
Asset impairment charges for the third quarter and first nine months of
1996 also included charges with respect to certain of the Company's homebuilding
assets in Northern California as a result of increased incentives and sales
price reductions offered to potential home buyers in connection with the
Company's efforts to exit certain underperforming subdivisions in the Sacramento
area.
Operating results during the three and nine months ended September 30,
1995 were impacted adversely by $1,200,000 and $2,100,000, respectively, in
asset impairment charges. These charges primarily were related to certain
underperforming projects in Arizona, Northern California and the Mid-Atlantic
region.
Financial Services Segment
Mortgage Lending Operations
The table below sets forth certain information with respect to
HomeAmerican's operations during each of the periods presented, as well as its
servicing portfolio at each date shown (in thousands).
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Gains from sales of mortgage servicing:
Bulk........................................... $ 1,418 $ 1,528 $ 5,209 $ 5,262
Other.......................................... $ 175 $ 473 $ 537 $ 1,381
Gains (losses) on mortgage loan sales, net........ $ 1,545 $ (405) $ 3,238 $ (845)
Operating profit.................................. $ 3,380 $ 2,267 $ 10,146 $ 7,558
Principal amount of originations and purchases:
MDC home buyers.............................. $ 119,584 $ 114,642 $ 343,066 $ 295,121
Spot......................................... 8,280 12,423 34,056 26,254
Correspondent................................ 15,690 20,031 42,203 48,909
----------- ----------- ----------- -----------
Total.................................... $ 143,554 $ 147,096 $ 419,325 $ 370,284
=========== =========== =========== ===========
Capture Rate...................................... 65% 62% 66% 59%
=========== =========== =========== ===========
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September 30, December 31, September 30,
1996 1995 1995
----------- ----------- -----------
Composition of Servicing Portfolio
FHA insured/VA guaranteed.................... $ 81,054 $ 85,002 $ 141,589
Conventional................................. 259,803* 401,809 444,072
----------- ----------- -----------
Total servicing portfolio......................... $340,857 $ 486,811 $ 585,661
=========== =========== ===========
Salable portion of servicing portfolio............ $ 226,880** $ 429,328 $442,817
=========== =========== ===========
*Includes servicing of $62,181 sold in August 1996, serviced by
HomeAmerican under a subservicing arrangement until transfer to the
purchaser in October and November 1996.
**Substantially all originated subsequent to the adoption of SFAS 122
(as hereinafter defined).
HomeAmerican's operating profits for the third quarter and first nine
months of 1996 exceeded the operating profits for the same periods in 1995
primarily because of gains on sales of mortgage loans totalling $1,545,000 and
$3,238,000, respectively, in the third quarter and first nine months of 1996,
compared with losses totalling $405,000 and $845,000, respectively, for the same
periods in 1995. These gains are in large measure attributable to the Company's
required adoption in 1996 of SFAS 122.
SFAS 122 requires the Company to allocate the cost of mortgage loans
originated 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
third quarter and first nine months of 1996 of approximately $1,765,000 and
$4,382,000, respectively, on the sale of mortgage loans which were originated
and sold by HomeAmerican during such periods. Gains from the sale of mortgage
servicing rights in the third quarter and first nine months of 1996 were reduced
by $1,106,000 and $2,078,000, 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.
During the nine months ended September 30, 1996, the Company recorded
gains of approximately $5,100,000 related to bulk sales of approximately
$400,000,000 principal amount of mortgage servicing rights held prior to the
adoption of SFAS 122 on January 1, 1996. The substantial majority of these
mortgage servicing rights were related to mortgage loans originated by the
Company and, as a result, had no costs assigned to such servicing rights. Gains
from sales of mortgage servicing in the fourth quarter of 1996 and thereafter
will be significantly lower than prior comparable periods as the Company sold
substantially all of its pre-1996 servicing portfolio prior to September 30,
1996. See "Forward-Looking Statements" below.
HomeAmerican's loan originations and purchases increased by 13% in the
first nine months 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
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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 and 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.
Asset Management Operations
The following table sets forth certain information with respect to the
results of the asset management operations during each of the periods presented
(in thousands).
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Gain on sale of FAMC, net.......................... $ 4,042 $ - - $ 4,042 $ - -
Management fees from REITs......................... $ 775 $ 778 $ 2,373 $ 2,143
Operating profit................................... $ 3,721 $ 1,252 $ 5,553 $ 3,380
The increased operating profits in the third quarter and first nine
months of 1996 primarily were due to the $4,042,000 gain, net of related
expenses, on the September 1996 sale of FAMC. The sales proceeds of $11,450,000
included $6,000,000 of cash, received on October 2, 1996, and $5,450,000 of
subordinated convertible notes, which are payable at specified dates during the
next 10 years and are convertible, under certain circumstances, into as much as
a 47.6% ownership interest in FAMC. A gain of $5,450,000 attributable to the
notes has been deferred and may be recognized, in whole or in part, in future
periods based upon a number of factors, including collection of the notes'
principal and the expiration of the conversion features. This increase partially
was offset by a $533,000 charge to income to reduce the Company's collateralized
mortgage obligations to their net realizable value.
Due to the sale of FAMC and the fact that the Company does not
anticipate making additional mortgage-related investments, future operating
profit from the asset management operations will be immaterial.
See "Forward-Looking Statements" below.
Other Operating Results
Interest Expense. Corporate and homebuilding interest incurred
decreased by 9% and 11% to $7,582,000 and $22,961,000, respectively, for the
third quarter and first nine months of 1996, compared with $8,337,000 and
$25,809,000, 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 nine months of 1996.
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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 $7,096,000 and $19,597,000, respectively, in the third
quarter and first nine months of 1996, compared with $6,753,000 and $19,496,000,
respectively, for the same periods in 1995.
Corporate and homebuilding interest incurred but not capitalized is
reflected as interest expense and totalled $486,000 and $3,364,000,
respectively, for the third quarter and first nine months of 1996, compared with
$1,584,000 and $6,313,000, 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 $2,920,000 and $8,501,000, respectively, during
the third quarter and first nine months of 1996, compared with $3,185,000 and
$9,794,000, respectively, for the same periods of 1995. The decreases in 1996
primarily resulted from (i) reduced commitment fees, appraisal costs and other
related costs 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) for the nine-month period, 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.
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 third quarter and
first nine months of 1996 was 36.5%, compared with 34.2% and 34.9%,
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.
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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 1.33 to 1 at September
30, 1996, compared with 1.49 to 1 at December 31, 1995 and September 30, 1995.
The improvement resulted from (i) the earnings of the Company, which contributed
to the increase in the Company's Stockholders' Equity at September 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 land in various stages of completion and finished lots for
use in its future homebuilding operations during the remainder of 1996 and 1997.
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 preserves
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
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 September 30, 1996,
$28,431,000 was borrowed under this unsecured revolving 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 or
purchase. During the first nine months of 1996 and 1995, HomeAmerican sold
-27-
$426,265,000 and $366,455,000, respectively, principal amount of mortgage loans
and mortgage certificates.
The aggregate amount available under the Mortgage Line at September 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 September 30,
1996, $14,150,000 was borrowed and an additional $18,614,000 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.
Consolidated Cash Flow
During the first nine months of 1996, the Company generated $40,335,000
in cash from its operating and investing activities. The Company used this cash
and other internally generated funds to reduce outstanding lines of credit and
notes payable by $32,860,000 and to repurchase 1,463,000 shares of MDC Common
Stock for $10,075,000.
During the first nine months of 1995, the Company generated $30,867,000
in cash from its operating and investing activities. The Company used these
funds and $24,777,000 of existing cash balances to reduce outstanding lines of
credit and notes payable by $50,323,000 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 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.
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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.
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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 (the "Expansive Soils Cases"), each of which sought certification of
a class action, alleged substantially identical claims relating to the
construction of homes on lots with expansive soils, including negligence, breach
of express and implied warranties, violation of the Colorado Consumer Protection
Act and non-disclosures. The homeowners in each complaint sought, individually
and on behalf of the alleged class, recovery in unspecified amounts including
actual damages, statutory damages, exemplary damages and treble damages. The
Company filed a response to each of the complaints and to initial discovery
requests in the first filed case.
On June 11, 1996, 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 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. The settlement provides for a settlement class,
including the purported classes in the Expansive Soils Cases, to be certified
and all pending claims to be dismissed. Indemnity payments for funding the
settlement are to be provided by participating insurance carriers. On October
11, 1996 the Court approved the settlement which, in the absence of the filing
of an appeal, will become final 45 days after the Court's approval of the
settlement. 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. In the opinion of management, the
outcome of these matters will not have a material adverse effect upon the
financial condition, results of operations or cash flows of the Company. Because
of the nature of the homebuilding business, and in the ordinary course of the
Company's operations, the Company from time
- --------
<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-
to time may be subject to product liability claims, including claims similar to
those discussed under the description of the Expansive Soils Cases, above.
The Company is not aware of any litigation, matter or pending claim
against the Company which would result in material contingent liabilities
related to environmental hazards or asbestos.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREOWNERS
No matters were submitted to shareowners during the third quarter of
1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
10.1 Acquisition Agreement by and among
FAM Acquisitions LLC and M.D.C.
Holdings, Inc., Financial Asset
Management Corporation and M.D.C.
Residual Holdings, Inc. dated as of
September 6, 1996 (the "Acquisition
Agreement").
10.2 Amendment No. 1 to Acquisition
Agreement dated as of September 30, 1996.
10.3 Closing Agreement dated as of
September 30, 1996 between M.D.C.
Holdings, Inc. and Spencer I. Browne.
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: November 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
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