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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-8951
M.D.C. HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 84-0622967
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
3600 South Yosemite Street, Suite 900 80237
Denver, Colorado (Zip code)
(Address of principal executive offices)
(303) 773-1100
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of April 25, 1997, 17,462,000 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 MARCH 31, 1997
INDEX
Page
No.
----
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Balance Sheets as of March 31, 1997 (Unaudited)
and December 31, 1996........................ 1
Statements of Income (Unaudited) for the three
months ended March 31, 1997 and 1996......... 3
Statements of Cash Flows (Unaudited) for the
three months ended March 31, 1997 and 1996... 4
Notes to Condensed Consolidated Financial
Statements (Unaudited)....................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 13
Part II. Other Information
Item 1. Legal Proceedings.............................. 24
Item 4. Submission of Matters to a Vote of Shareowners. 24
Item 5. Other Information.............................. 24
Item 6. Exhibits and Reports on Form 8-K............... 25
(i)
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands)
March 31, December 31,
1997 1996
----------- -----------
ASSETS (Unaudited)
Corporate
Cash and cash equivalents..................... $ 6,722 $ 7,235
Property and equipment, net................... 9,328 9,411
Deferred income taxes......................... 10,660 10,804
Deferred debt issue costs, net................ 7,398 9,155
Other assets, net............................. 3,342 3,557
---------- -----------
37,450 40,162
Homebuilding
Cash and cash equivalents..................... 3,636 3,393
Home sales and other accounts receivable...... 16,266 10,218
Investments and marketable securities, net.... 5,201 5,159
Inventories, net
Housing completed or under construction..... 242,329 251,885
Land and land under development............. 195,353 182,927
Prepaid expenses and other assets, net........ 57,597 57,722
---------- -----------
520,382 511,304
Financial Services
Cash and cash equivalents..................... 753 676
Accrued interest and other assets, net........ 5,687 6,419
Mortgage loans held in inventory, net......... 46,542 58,742
---------- -----------
52,982 65,837
Total Assets............................ $ 610,814 $ 617,303
========== ===========
See notes to condensed consolidated financial statements.
-1-
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
March 31, December 31,
1997 1996
----------- ----------
LIABILITIES (Unaudited)
Corporate
Accounts payable and accrued expenses........... $ 21,630 $ 13,519
Income taxes payable............................ 8,312 11,434
Note payable.................................... 3,473 3,487
Senior Notes, net............................... 150,219 187,721
Subordinated notes, net......................... 38,226 38,225
----------- -----------
221,860 254,386
Homebuilding
Accounts payable and accrued expenses........... 99,716 114,794
Lines of credit and other....................... 51,362 11,832
Notes payable................................... 3,027 3,063
----------- -----------
154,105 129,689
Financial Services
Accounts payable and accrued expenses........... 10,199 10,363
Line of credit.................................. 16,147 9,018
----------- -----------
26,346 19,381
Total Liabilities......................... 402,311 403,456
----------- -----------
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; 23,365,000 and 23,050,000 shares
issued, respectively, at March 31, 1997 and
December 31, 1996............................. 234 231
Additional paid-in capital...................... 140,951 138,705
Retained earnings............................... 106,885 106,189
----------- -----------
248,070 245,125
Less treasury stock, at cost; 5,903,000 and
4,966,000 shares, respectively, at
March 31, 1997 and December 31, 1996.......... (39,567) (31,278)
----------- -----------
Total Stockholders' Equity................ 208,503 213,847
----------- -----------
Total Liabilities and Stockholders'Equity. $ 610,814 $ 617,303
=========== ===========
See notes to condensed consolidated financial statements.
-2-
M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months
Ended March 31,
1997 1996
----------- -----------
REVENUES
Homebuilding................................... $ 189,149 $ 191,276
Financial Services............................. 4,231 7,738
Corporate...................................... 439 232
----------- -----------
Total Revenues............................. 193,819 199,246
----------- -----------
COSTS AND EXPENSES
Homebuilding................................... 181,694 185,242
Financial Services............................. 2,351 2,742
Corporate general and administrative........... 3,246 2,601
Corporate and homebuilding interest............ 761 1,851
----------- -----------
Total Expenses............................. 188,052 192,436
----------- -----------
Income before income taxes and extraordinary item. 5,767 6,810
Provision for income taxes........................ (2,181) (2,486)
----------- -----------
Income before extraordinary item.................. 3,586 4,324
Extraordinary loss from early extinguishment of
debt, net of income tax benefit of $1,336....... (2,179) - -
----------- -----------
Net Income........................................ $ 1,407 $ 4,324
=========== ===========
EARNINGS PER SHARE
Primary
Income before extraordinary item........... $ .19 $ .22
=========== ===========
Net Income................................. $ .08 $ .22
=========== ===========
Fully diluted
Income before extraordinary item........... $ .18 $ .20
=========== ===========
Net Income................................. $ .08 $ .20
=========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING
Primary........................................ 18,494 19,863
=========== ===========
Fully diluted.................................. 22,156 23,510
=========== ===========
DIVIDENDS PER SHARE............................... $ .03 $ .03
=========== ===========
See notes to condensed consolidated financial statements.
-3-
M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months
Ended March 31,
1997 1996
----------- ------------
OPERATING ACTIVITIES
Net Income...................................... $ 1,407 $ 4,324
Adjustments To Reconcile Net Income To
Net Cash Provided By (Used In)
Operating Activities:
Amortization of deferred marketing costs... 2,243 1,903
Depreciation and other amortization........ 686 616
Homebuilding asset impairment charges...... 1,250 - -
Deferred income taxes...................... 144 5,061
Gains on sales of mortgage-related assets.. (98) (935)
Net changes in assets and liabilities:
Home sales and other accounts
receivable......................... (6,048) 6,482
Homebuilding inventories............. (3,245) (9,178)
Mortgage loans held in inventory..... 12,200 2,197
Other assets and liabilities, net.... (10,172) 1,962
----------- -----------
Net Cash Provided By (Used In) Operating
Activities..................................... (1,633) 12,432
----------- -----------
INVESTING ACTIVITIES
Net Proceeds From Mortgage-Related Assets
and Liabilities................................. 481 693
Other, net....................................... (498) (31)
----------- -----------
Net Cash Provided By (Used In) Investing
Activities...................................... (17) 662
----------- -----------
FINANCING ACTIVITIES
Lines of Credit
Advances................................... 189,029 179,344
Principal payments......................... (181,910) (187,452)
Notes Payable
Borrowings................................. - - 480
Principal payments......................... (50) (2,770)
Stock Repurchases................................ (7,349) (1,645)
Dividend Payments................................ (548) (576)
Other, net....................................... 2,285 265
----------- -----------
Net Cash Provided By (Used In) Financing
Activities...................................... 1,457 (12,354)
----------- -----------
Net Increase (Decrease) In Cash and Cash
Equivalents..................................... (193) 740
Cash and Cash Equivalents
Beginning of Period........................ 11,304 20,795
----------- -----------
End of Period.............................. $ 11,111 $ 21,535
=========== ===========
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, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
These statements reflect all adjustments (including all normal recurring
accruals) which, in the opinion of management, are necessary to present fairly
the financial position, results of operations and cash flows of MDC as of March
31, 1997 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, 1996.
Certain reclassifications have been made in the 1996 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. A summary of the Company's segment information
is shown below (in thousands).
Three Months
Ended March 31,
1997 1996
----------- -----------
Homebuilding
Home sales..................................................... $ 187,185 $ 186,023
Land sales..................................................... 1,690 5,159
Other revenues................................................. 274 94
----------- -----------
189,149 191,276
Home cost of sales............................................. 159,723 160,816
Land cost of sales............................................. 1,323 4,932
Asset impairment charges....................................... 1,250 - -
Marketing...................................................... 12,515 11,982
General and administrative..................................... 6,883 7,512
----------- -----------
181,694 185,242
----------- -----------
Homebuilding Operating Profit............................... 7,455 6,034
----------- -----------
-5-
Three Months
Ended March 31,
1997 1996
----------- -----------
Financial Services
Mortgage Lending Revenues
Interest revenues.............................................. 667 805
Origination fees............................................... 1,462 1,389
Gains on sales of mortgage servicing........................... 338 2,622
Gains on sales of mortgage loans, net.......................... 1,315 542
Mortgage servicing and other................................... 128 386
Asset Management Revenues
Management fees and other...................................... 321 1,994
----------- -----------
4,231 7,738
General and Administrative Expenses
Mortgage Lending............................................... 2,336 2,122
Asset Management............................................... 15 620
----------- -----------
2,351 2,742
----------- -----------
Financial Services Operating Profit......................... 1,880 4,996
----------- -----------
Total Operating Profit.............................................. 9,335 11,030
----------- -----------
Corporate
Other revenues................................................. 439 232
Interest expense............................................... (761) (1,851)
General and administrative..................................... (3,246) (2,601)
----------- -----------
Net Corporate Expenses...................................... (3,568) (4,220)
----------- -----------
Income Before Income Taxes and Extraordinary Item................... $ 5,767 $ 6,810
=========== ===========
C. Corporate and Homebuilding Interest Activity (in thousands)
Three Months
Ended March 31,
1997 1996
----------- -----------
Interest capitalized in homebuilding inventory, beginning of period. $ 40,745 $ 40,217
Interest incurred................................................... 6,924 7,774
Interest expensed................................................... (761) (1,851)
Previously capitalized interest included in cost of sales........... (5,746) (5,798)
----------- -----------
Interest capitalized in homebuilding inventory, end of period....... $ 41,162 $ 40,342
=========== ===========
D. Stockholders' Equity
On February 26, 1997, the Company repurchased 838,000 shares of MDC
Common Stock at $8.77 per share, including commissions, completing a program
authorized by the MDC Board of Directors in October 1996 to repurchase up to
1,000,000 shares of MDC Common Stock.
-6-
E. Extraordinary Item
On March 31, 1997, the Company repurchased $38,000,000 principal amount
of its 11 1/8% Senior Notes due 2003 (the "Senior Notes") for $39,520,000. The
Company recognized an extraordinary loss of $2,179,000, net of an income tax
benefit of $1,336,000, due to the repurchase of the Senior Notes at a price
which exceeded their carrying value and the write-off of related unamortized
issuance costs. The Senior Note repurchase settled on April 3, 1997. At March
31, 1997, $39,520,000 was payable by the Company in connection with the
settlement of the Senior Note repurchase. This amount was included in the
homebuilding lines of credit and other balance as of March 31, 1997.
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
MDC Common Stock of all of the $28,000,000 outstanding principal amount of the 8
3/4% Convertible Subordinated Notes due 2005 (the "Convertible Subordinated
Notes") at a conversion price of $7.75 per share of MDC Common Stock. The
primary and fully diluted earnings per share calculations are shown below (in
thousands, except per share amounts).
Three Months
Ended March 31,
1997 1996
----------- ----------
Primary Calculation
Income before extraordinary item............................. $ 3,586 $ 4,324
Extraordinary loss, net...................................... (2,179) - -
----------- -----------
Net Income............................................. $ 1,407 $ 4,324
=========== ===========
Weighted-average shares outstanding.......................... 17,891 19,284
Common Stock equivalents - stock options..................... 603 579
----------- -----------
Total Weighted-Average Shares.......................... 18,494 19,863
=========== ===========
Primary Earnings Per Share
Income before extraordinary item....................... $ .19 $ .22
=========== ===========
Net Income............................................. $ .08 $ .22
=========== ===========
Fully Diluted Calculation
Income before extraordinary item............................. $ 3,586 4,324
Adjustment for interest on Convertible Subordinated Notes,
net of income tax benefit; conversion assumed.............. 393 402
----------- -----------
Adjusted income before extraordinary item.............. 3,979 4,726
Extraordinary loss, net...................................... (2,179) - -
----------- -----------
Adjusted Net Income.................................... $ 1,800 $ 4,726
=========== ===========
Weighted-average shares outstanding.......................... 17,891 19,284
Common Stock equivalents - stock options..................... 652 613
Shares issuable upon conversion of Convertible Subordinated
Notes; conversion assumed.................................. 3,613 3,613
----------- -----------
Total Weighted-Average Shares.......................... 22,156 23,510
=========== ===========
Fully Diluted Earnings Per Share
Income before extraordinary item....................... $ .18 $ .20
=========== ===========
Net Income............................................. $ .08 $ .20
=========== ===========
-7-
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"). The Company's adoption of SFAS 128, which is required on December
31, 1997, will result in the restatement of the Company's primary earnings per
share calculations to "basic" earnings per share. Basic earnings per share based
on income before extraordinary item would have been $.20 and $.22 for the first
quarter of 1997 and 1996, respectively. Basic earnings per share based on net
income would have been $.08 and $.22 for the first quarter of 1997 and 1996,
respectively. SFAS 128 also will require the presentation of "diluted" earnings
per share, which is computed similarly to fully diluted earnings per share.
Diluted earnings per share would have been unchanged from fully diluted earnings
per share for the first quarter of 1997 and 1996.
G. Supplemental Disclosure Of Cash Flow Information (in thousands)
Three Months
Ended March 31,
1997 1996
------------ ------------
Cash paid during the period for:
Interest, net of amounts capitalized...................... NA<F1> NA<F1>
Income taxes.............................................. $ 3,535 $ 990
<F1> Interest capitalized exceeded interest paid during the period.
H. Supplemental Guarantor Information
The Senior Notes are guaranteed unconditionally on an unsecured
subordinated basis, jointly and severally (the "Guaranties"), by Richmond
American Homes of California, Inc., Richmond American Homes of Maryland, Inc.,
Richmond American Homes of Nevada, Inc., Richmond American Homes of Virginia,
Inc., Richmond American Homes of Arizona, Inc. and Richmond American Homes of
Colorado, Inc. (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-
M.D.C. Holdings, Inc.
Supplemental Combining Balance Sheet
March 31, 1997
(In thousands)
Unconsolidated
----------------------------------------
Non-
ASSETS Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
------------ ------------ ------------ ------------ ------------
Corporate
Cash and cash equivalents............... $ 6,710 $ - - $ 12 $ - - $ 6,722
Investments in subsidiaries............. 177,127 - - 17,422 (194,549) - -
Advances and notes receivable - Parent
and subsidiaries...................... 254,197 8 8,956 (263,161) - -
Other assets............................ 30,492 - - 236 - - 30,728
------------ ------------ ------------ ------------ ------------
468,526 8 26,626 (457,710) 37,450
------------ ------------ ------------ ------------ ------------
Homebuilding
Cash and cash equivalents............... - - 3,635 1 - - 3,636
Inventories, net
Housing completed or under
construction........................ - - 242,329 - - - - 242,329
Land and land under
development......................... - - 174,230 21,858 (735) 195,353
Other assets ........................... 7,516 58,874 20,542 (7,868) 79,064
------------ ------------ ------------ ------------ ------------
7,516 479,068 42,401 (8,603) 520,382
------------ ------------ ------------ ------------ ------------
Financial Services......................... - - - - 52,982 - - 52,982
------------ ------------ ------------ ------------ ------------
Total Assets...................... $ 476,042 $ 479,076 $ 122,009 $ (466,313) $ 610,814
============ ============ ============ ============= ============
LIABILITIES
Corporate
Accounts payable and accrued expenses... $ 60,621 $ - - $ 529 $ (39,520) $ 21,630
Advances and notes payable - Parent
and subsidiaries...................... 1,980 238,995 27,890 (268,865) - -
Income taxes payable.................... 8,312 - - - - - - 8,312
Note payable............................ 3,473 - - - - - - 3,473
Senior Notes, net....................... 150,219 - - - - - - 150,219
Subordinated notes, net................. 38,226 - - - - - - 38,226
----------- ----------- ----------- ------------ -----------
262,831 238,995 28,419 (308,385) 221,860
----------- ----------- ----------- ------------ -----------
Homebuilding
Accounts payable and accrued expenses... 4,708 73,640 21,368 - - 99,716
Line of credit, notes payable and other. - - 14,869 - - 39,520 54,389
----------- ----------- ----------- ------------ -----------
4,708 88,509 21,368 39,520 154,105
----------- ----------- ----------- ------------ -----------
Financial Services......................... - - - - 33,768 (7,422) 26,346
----------- ----------- ----------- ------------ -----------
Total Liabilities................. 267,539 327,504 83,555 (276,287) 402,311
----------- ----------- ----------- ------------ -----------
STOCKHOLDERS' EQUITY....................... 208,503 151,572 38,454 (190,026) 208,503
----------- ----------- ----------- ------------ -----------
Total Liabilities and
Stockholders' Equity............ $ 476,042 $ 479,076 $ 122,009 $ (466,313) $ 610,814
=========== =========== =========== ============= ===========
-9-
M.D.C. Holdings, Inc.
Supplemental Combining Balance Sheet
December 31, 1996
(In thousands)
Unconsolidated
----------------------------------------
Non-
ASSETS Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
------------ ------------ ------------ ------------ ------------
Corporate
Cash and cash equivalents............... $ 7,235 $ - - $ - - $ - - $ 7,235
Investments in subsidiaries............. 219,387 - - 17,434 (236,821) - -
Advances and notes receivable - Parent
and subsidiaries...................... 207,946 4 787 (208,737) - -
Other assets............................ 32,780 - - 147 - - 32,927
------------ ------------ ------------ ------------ ------------
467,348 4 18,368 (445,558) 40,162
------------ ------------ ------------ ------------ ------------
Homebuilding
Cash and cash equivalents............... 1 3,391 1 - - 3,393
Inventories, net
Housing completed or under
construction........................ - - 251,885 - - - - 251,885
Land and land under
development......................... - - 159,871 24,031 (975) 182,927
Other assets ........................... 7,582 48,737 20,775 (3,995) 73,099
------------ ------------ ------------ ------------ ------------
7,583 463,884 44,807 (4,970) 511,304
------------ ------------ ------------ ------------ ------------
Financial Services......................... - - - - 65,837 - - 65,837
------------ ------------ ------------ ------------ ------------
Total Assets...................... $ 474,931 $ 463,888 $ 129,012 $ (450,528) $ 617,303
============ ============ ============ ============= ============
LIABILITIES
Corporate
Accounts payable and accrued expenses... $ 13,086 $ - - $ 433 $ - - $ 13,519
Advances and notes payable - Parent
and subsidiaries...................... 2,085 197,448 36,119 (235,652) - -
Income taxes payable.................... 11,434 - - - - - - 11,434
Note payable............................ 3,487 - - - - - - 3,487
Senior Notes, net....................... 187,721 - - - - - - 187,721
Subordinated notes, net................. 38,225 - - - - - - 38,225
----------- ----------- ----------- ------------ -----------
256,038 197,448 36,552 (235,652) 254,386
----------- ----------- ----------- ------------ -----------
Homebuilding
Accounts payable and accrued expenses... 5,046 88,240 21,508 - - 114,794
Lines of credit and notes payable....... - - 14,895 - - - - 14,895
----------- ----------- ----------- ------------ -----------
5,046 103,135 21,508 - - 129,689
----------- ----------- ----------- ------------ -----------
Financial Services......................... - - - - 23,376 (3,995) 19,381
----------- ----------- ----------- ------------ -----------
Total Liabilities................. 261,084 300,583 81,436 (239,647) 403,456
----------- ----------- ----------- ------------ -----------
STOCKHOLDERS' EQUITY....................... 213,847 163,305 47,576 (210,881) 213,847
----------- ----------- ----------- ------------ -----------
Total Liabilities and
Stockholders' Equity............ $ 474,931 $ 463,888 $ 129,012 $ (450,528) $ 617,303
=========== =========== =========== ============= ===========
-10-
M.D.C. Holdings, Inc.
Supplemental Combining Statements of Income
(In thousands)
Three Months Ended March 31, 1997
Unconsolidated
----------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
------------ ------------ ------------ ------------ ------------
REVENUES
Homebuilding............................. $ 42 $ 188,967 $ 140 $ - - $ 189,149
Financial Services....................... - - - - 4,231 - - 4,231
Corporate................................ 241 - - 198 - - 439
Equity in earnings of subsidiaries....... 3,884 - - - - (3,884) - -
----------- ----------- ----------- ----------- -----------
Total Revenues..................... 4,167 188,967 4,569 (3,884) 193,819
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................. 57 181,298 264 75 181,694
Financial Services....................... - - - - 2,351 - - 2,351
Corporate general and administrative..... 3,246 - - - - - - 3,246
Corporate and homebuilding
interest............................... (4,903) 4,953 646 65 761
----------- ----------- ----------- ----------- -----------
Total Expenses..................... (1,600) 186,251 3,261 140 188,052
----------- ----------- ----------- ----------- -----------
Income before income taxes and
extraordinary item....................... 5,767 2,716 1,308 (4,024) 5,767
Provision for income taxes.................. (2,181) (1,034) (456) 1,490 (2,181)
Extraordinary item, net..................... (2,179) - - - - - - (2,179)
----------- ----------- ----------- ----------- -----------
NET INCOME.................................. $ 1,407 $ 1,682 $ 852 $ (2,534) $ 1,407
=========== =========== =========== =========== ===========
Three Months Ended March 31, 1996
REVENUES
Homebuilding............................. $ 79 $ 191,194 $ 3 $ - - $ 191,276
Financial Services....................... - - - - 7,738 - - 7,738
Corporate................................ 217 6 9 - - 232
Equity in earnings of subsidiaries....... 5,591 - - - - (5,591) - -
----------- ----------- ----------- ----------- -----------
Total Revenues..................... 5,887 191,200 7,750 (5,591) 199,246
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................. 418 184,581 168 75 185,242
Financial Services....................... - - - - 2,742 - - 2,742
Corporate general and administrative..... 2,594 - - 7 - - 2,601
Corporate and homebuilding
interest............................... (3,935) 5,048 703 35 1,851
----------- ----------- ----------- ----------- -----------
Total Expenses..................... (923) 189,629 3,620 110 192,436
----------- ----------- ----------- ----------- -----------
Income before income taxes.................. 6,810 1,571 4,130 (5,701) 6,810
Provision for income taxes.................. (2,486) (626) (1,678) 2,304 (2,486)
----------- ----------- ----------- ----------- -----------
NET INCOME.................................. $ 4,324 $ 945 $ 2,452 $ (3,397) $ 4,324
=========== =========== =========== =========== ===========
-11-
M.D.C. Holdings, Inc.
Supplemental Combining Statement of Cash Flows
(In thousands)
Three Months Ended March 31, 1997
Unconsolidated
----------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
------------ ------------ ------------ ------------ ------------
Net Cash Provided By (Used In) Operating
Activities............................... $ 51,708 $ (41,083) $ 8,953 $ (21,211) $ (1,633)
----------- ----------- ----------- ----------- -----------
Net Cash Used In Investing Activities....... (46,483) (194) (7,764) 54,424 (17)
----------- ----------- ----------- ----------- -----------
Financing Activities
Net Increase (Reduction) in Borrowings From
Parent and Subsidiaries.................. (125) 41,567 (8,229) (33,213) - -
Lines of Credit
Advances............................... - - 181,900 7,129 - - 189,029
Principal payments..................... - - (181,910) - - - - (181,910)
Other, net.................................. (5,626) (36) - - - - (5,662)
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In)Financing
Activities............................... (5,751) 41,521 (1,100) (33,213) 1,457
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) In Cash And Cash
Equivalents.............................. (526) 244 89 - - (193)
Cash And Cash Equivalents
Beginning Of Period...................... 7,236 3,391 677 - - 11,304
----------- ----------- ----------- ----------- -----------
End Of Period............................ $ 6,710 $ 3,635 $ 766 $ - - $ 11,111
=========== =========== =========== =========== ===========
Three Months Ended March 31, 1996
Net Cash Provided By (Used In) Operating
Activities............................... $ 73,593 $ 1,550 $ (4,003) $ (58,708) $ 12,432
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Investing
Activities............................... 16,349 295 (754) (15,228) 662
----------- ----------- ----------- ----------- -----------
Financing Activities
Net Increase (Reduction) in Borrowings From
Parent and Subsidiaries.................. (87,810) 6,417 7,457 73,936 - -
Lines of Credit
Advances............................... - - 179,344 - - - - 179,344
Principal payments..................... - - (180,475) (6,977) - - (187,452)
Other, net.................................. (2,409) (2,118) 281 - - (4,246)
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Financing
Activities............................... (90,219) 3,168 761 73,936 (12,354)
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) In Cash And Cash
Equivalents.............................. (277) 5,013 (3,996) - - 740
Cash And Cash Equivalents
Beginning Of Period...................... 10,296 5,054 5,445 - - 20,795
----------- ----------- ----------- ----------- -----------
End Of Period............................ $ 10,019 $ 10,067 $ 1,449 $ - - $ 21,535
=========== =========== =========== =========== ===========
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
MDC is a major regional homebuilder and is the ninth largest
homebuilder in the United States. The Company operates in two segments:
homebuilding and financial services. In its homebuilding segment, MDC builds and
sells homes under the name "Richmond American Homes" 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 (the mortgage lending operations); and (ii) through
September 30, 1996, Financial Asset Management LLC (a former 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 (in thousands,
except per share amounts).
Three Months
Ended March 31,
1997 1996
---------- -----------
Revenues.................................. $ 193,819 $ 199,246
Income before income taxes and
extraordinary item.................... $ 5,767 $ 6,810
Net Income............................... $ 1,407 $ 4,324
Earnings Per Share:
Primary
Income before extraordinary item. $ .19 $ .22
Net Income....................... $ .08 $ .22
Fully Diluted
Income before extraordinary item. $ .18 $ .20
Net Income....................... $ .08 $ .20
Revenues for the first quarter of 1997 decreased 3% from the same
period in 1996, primarily due to decreased revenues from the Company's financial
services segment and from reduced land sales. These decreases more than offset
increased home sales revenues in the first quarter of 1997 generated by record
first quarter 1997 home closings.
-13-
Income before income taxes and extraordinary item decreased in the
first quarter of 1997, compared with the first quarter of 1996. This decrease
was a result of (i) lower operating profit from the Company's financial services
segment, primarily due to lower gains from sales of mortgage-related assets in
the first quarter of 1997 and net increases to income in the first quarter of
1996 totalling approximately $1,800,000 which will not recur as a result of a
required change in accounting principle regarding mortgage loans and mortgage
loan servicing rights and the September 1996 sale of FAMC; and (ii) increased
corporate general and administrative expenses in 1997, primarily due to a
non-recurring insurance recovery of $1,250,000 recognized in the first quarter
of 1996. These decreases in income partially were offset by increased operating
profits from the Company's homebuilding operations in the first quarter of 1997,
compared with the same period for 1996. These increased profits primarily
resulted from (i) increased home closings; and (ii) increased Home Gross Margins
(as hereinafter defined), partially offset by $1,250,000 in asset impairment
charges recorded in the Mid-Atlantic region. Operating results for the first
quarter of 1997 also were impacted favorably by decreased interest expense,
compared with the same period in 1996.
Net income for the first quarter of 1997 included an extraordinary loss
of $2,179,000, net of an income tax benefit of $1,336,000, recognized in
connection with the Company's repurchase of $38,000,000 face value (20% of the
outstanding amount) of its Senior Notes. The loss resulted from the repurchase
of the Senior Notes above their carrying value and the write-off of related
unamortized issuance costs.
-14-
Homebuilding Segment
The table below sets forth information relating to the Company's
homebuilding segment (dollars in thousands).
Three Months
Ended March 31,
1997 1996
----------- ------------
Home Sales Revenues............................... $ 187,185 $ 186,023
Operating Profits Before Asset Impairment Charges. $ 8,705 $ 6,034
Operating Profits................................. $ 7,455 $ 6,034
Average Selling Price Per Home Closed............. $ 174.6 $ 177.0
Home Gross Margins................................ 14.7% 13.6%
Orders For Homes, net (units)
Colorado................................... 573 668
Mid-Atlantic............................... 327 427
California................................. 234 249
Arizona.................................... 315 326
Nevada..................................... 79 51
------------ ------------
Total................................ 1,528 1,721
============ ============
Homes Closed (units)
Colorado................................... 391 437
Mid-Atlantic............................... 197 157
California................................. 175 195
Arizona.................................... 227 216
Nevada..................................... 82 46
----------- -----------
Total................................ 1,072 1,051
=========== ===========
March 31, December 31, March 31,
1997 1996 1996
----------- ------------ ----------
Backlog (units)
Colorado................................... 758 576 889
Mid-Atlantic............................... 551 421 545
California................................. 219 160 229
Arizona.................................... 319 231 344
Nevada..................................... 95 98 74
----------- ------------ ----------
Total................................ 1,942 1,486 2,081
=========== ============ ==========
Estimated Sales Value................ $ 340,000 $ 261,000 $ 370,000
=========== ============ ==========
Active Subdivisions
Colorado................................... 55 51 51
Mid-Atlantic............................... 55 53 49
California................................. 16 20 20
Arizona.................................... 22 23 24
Nevada..................................... 7 5 6
----------- ------------ ----------
Total............................. 155 152 150
=========== ============ ==========
-15-
Home Sales Revenues and Homes Closed - Home sales revenues for the
quarter ended March 31, 1997 represented the highest first quarter level in the
Company's history, up slightly from home sales revenues for the same period in
1996. The improved revenues were a result of increased home closings, partially
offset by the reduced average selling price per home closed.
Home closings increased in the first quarter of 1997, compared with the
first quarter of 1996, in (i) Nevada, where the Company has increased the number
of active subdivisions to seven from two at the beginning of 1996; (ii) the
Mid-Atlantic market, due to a Backlog (as hereinafter defined) level at the
beginning of 1997 more than 50% greater than Backlog at the beginning of 1996,
as well as weather-related delays in the completion and delivery of homes during
the first quarter of 1996 in that region; and (iii) Arizona, due to the
Company's continued expansion in that market. The Company's 1997 first quarter
home closings in Colorado were impacted adversely by lower Backlog at December
31, 1996, as compared with December 31, 1995. Home closings in the first quarter
of 1997 also decreased relative to the first quarter of 1996 in California in
connection with the Company's reduced number of active subdivisions in Northern
California, as the Company continued to reduce its presence in the Sacramento
market.
Average Selling Price Per Home Closed - The decrease in the average
selling price per home closed in the first quarter of 1997, compared with the
first quarter of 1996, 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 quarter of 1997 in the Mid-Atlantic region, Arizona
and Nevada. These decreases partially were offset by an increase in the average
selling price in Colorado and Southern California, principally due to the impact
of closing a greater number of homes in higher-priced subdivisions during the
first quarter of 1997, compared with the first quarter of 1996.
Home Gross Margins - Gross margins (home sales revenues less cost of
goods sold, which primarily includes land and construction costs, capitalized
interest, a reserve for warranty expense and financing costs) as a percent of
home sales revenues ("Home Gross Margins") increased by 110 basis points during
the first quarter of 1997, compared with the first quarter of 1996. The increase
largely was due to (i) initiatives implemented in each of the Company's markets
which are designed to improve operating efficiency, control costs and increase
rates of return; and (ii) the favorable impact of a large number of home
closings in certain highly profitable subdivisions, particularly in Phoenix and
Southern California.
Looking forward, while the Company believes that Home Gross Margins for
each of the remaining quarters in 1997 will exceed margins for comparable
quarters in 1996, the Company currently estimates that such margins will be
lower than the margins achieved in the first quarter of 1997. In addition, the
Company believes that future growth in Home Gross Margins will be impacted
adversely by increased incentives offered to home buyers to stimulate sales and
counter increased competition in most of its markets. Increases in, among other
things, the costs of subcontracted labor, finished lots and building materials
also 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.
Orders for Homes and Backlog - Orders for homes decreased 11% during
the first quarter of 1997, compared with the first quarter of 1996. This
decrease was primarily due to comparatively strong home orders experienced in
Colorado and the Mid-Atlantic region in the first quarter of 1996 as a result of
lower mortgage interest rates available during that period. Lower first quarter
1997 orders also are
-16-
attributable to reduced market-wide home sales activity and increased
competition in both the Colorado and Mid-Atlantic markets in the first quarter
of 1997, compared with the first quarter of 1996. Decreased orders for homes
also were experienced in (i) Northern California, due to a reduction in the
number of active subdivisions in that market from nine in the first quarter of
1996 to five in the first quarter of 1997; and (ii) Phoenix, due to decreased
market-wide home sales activity and a slight reduction in the number of the
Company's active subdivisions in that market. These decreases partially were
offset by increased orders in Southern California and Nevada, reflecting the
impact of the Company's continued expansion in those markets.
The Company's home orders in April 1997 increased 22% to 550 units,
compared with 452 home orders in April 1996, led by the strongest monthly home
orders in more than twelve months in Colorado, Arizona and Southern California.
The Company is unable to predict if higher year-over-year home orders in 1997,
compared with 1996, will continue in the future. See "Forward-Looking
Statements" below.
As a result of the decreased orders for homes in the first quarter of
1997, the Company's homes under contract but not yet delivered ("Backlog") at
March 31, 1997 decreased by 7% from Backlog at March 31, 1996. Assuming no
significant change in market conditions or mortgage interest rates, the Company
expects approximately 70% of its March 31, 1997 Backlog to close under existing
sales contracts during the remainder of 1997. The remaining 30% of the homes in
Backlog are not expected to close due to cancellations. See "Forward-Looking
Statements" below.
Marketing - Marketing expenses (which include, among other things,
amortization of deferred marketing, model home expenses and sales commissions)
totalled $12,515,000 for the first quarter of 1997, compared with $11,982,000
for the same period in 1996. This 4% increase principally resulted from (i)
increased sales commissions in connection with the higher home closings; and
(ii) additional marketing-related salary, advertising and model home operating
expenses incurred to stimulate sales in response to weakened market conditions
and increased competition, particularly in the Mid-Atlantic region, Colorado and
Arizona.
General and Administrative - General and administrative expenses
decreased to $6,883,000 during the first quarter of 1997, compared with
$7,512,000 during the same period in 1996, primarily due to reduced legal
expenses and certain costs incurred in the first quarter of 1996 in connection
with the acquisition of Longford Homes in Nevada.
Asset Impairment Charges
Operating results during the first quarter of 1997 were reduced by
asset impairment charges totalling $1,250,000 related to certain of the
Company's homebuilding assets in the Mid-Atlantic region, primarily in Suburban
Maryland, as a result of continued weakened market conditions and competitive
pressures in that market. The asset impairment charges resulted from (i) 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 (ii) the write-off of certain
capitalized costs, primarily deferred marketing and option deposits, related to
a number of low-margin projects which the Company is closing out. While
intending to maintain its market share in the Mid-Atlantic region, the Company
has continued to eliminate lower-margin projects and redeploy capital to more
profitable operations within and outside that market, including California,
Arizona and Nevada.
-17-
Land Inventory
The table below shows the carrying value of land and land under
development, by market, as well as the total number of lots owned, lots
controlled under option agreements and total option deposits (dollars in
thousands).
March 31, December 31, March 31,
1997 1996 1996
----------- ----------- -----------
Colorado................................ $ 63,263 $ 66,529 $ 67,316
Mid-Atlantic............................ 50,174 46,124 50,579
California.............................. 29,081 23,733 19,436
Arizona................................. 38,140 32,129 24,460
Nevada.................................. 14,695 14,412 10,011
----------- ----------- -----------
Total.............................. $ 195,353 $ 182,927 $ 171,802
=========== =========== ===========
Total Lots Owned........................ 10,611 10,523 11,202
=========== =========== ===========
Total Lots Controlled Under Option...... 6,151 6,698 7,708
=========== =========== ===========
Total Option Deposits................... $ 6,448 $ 5,951 $ 7,500
=========== =========== ===========
Financial Services Segment
Mortgage Lending Operations
The table below summarizes the results of HomeAmerican's operations (in
thousands).
Three Months
Ended March 31,
1997 1996
----------- -----------
Gains on Sales of Mortgage Servicing................ $ 338 $ 2,622
Gains on Sales of Mortgage Loans, net............... $ 1,315 $ 542
Operating Profits.......................... $ 1,574 $ 3,622
Principal Amount of Originations and Purchases
MDC home buyers................................ $ 107,334 $ 99,401
Spot........................................... 6,920 13,333
Correspondent.................................. 15,443 10,963
----------- -----------
Total...................................... $ 129,697 $ 123,697
=========== ===========
Capture Rate........................................ 69% 65%
=========== ===========
-18-
March 31, December 31, March 31,
1997 1996 1996
----------- ------------ -----------
Composition of Servicing Portfolio at End of Period
FHA insured/VA guaranteed...................... $ 127,214 $ 117,681 $ 96,946
Conventional................................... 292,107 277,217 347,959
------------ ------------ ------------
Total Servicing Portfolio.......................... $ 419,321 $ 394,898 $ 444,905
============ ============ ============
Salable Portion of Servicing Portfolio............. $ 323,468<F1>$ 292,428<F1>$ 309,097<F2>
============ ============ ============
<F1> Substantially all originated subsequent to the adoption of
SFAS 122 (as hereinafter defined).
<F2> Included servicing originated prior to 1996 of $202,156.
HomeAmerican's operating profit for the first quarter of 1997
decreased, compared with the same period in 1996, primarily due to the
$2,284,000 decrease in gains from sales of mortgage servicing, partially offset
by a $773,000 increase in gains from sales of mortgage loans. Both of these
differences principally resulted from sales of mortgage loans and mortgage loan
servicing in the first quarter of 1996 which were originated prior to the
Company's required adoption, on January 1, 1996, of Statement of Accounting
Standards No. 122 "Accounting for Mortgage Servicing Rights an Amendment of FASB
Statement No. 65" ("SFAS 122"), which was superseded by SFAS 125 (as hereinafter
defined) on January 1, 1997.
SFAS 125 requires the Company to allocate the costs of mortgage loans
originated by HomeAmerican between the mortgage loans and the right to service
the mortgage loans, based on their relative values. For mortgage loans
originated by HomeAmerican prior to 1996, the costs of such loans were assigned
to the mortgage loans, with no costs assigned to the servicing rights. Assuming
that all other factors remain unchanged, SFAS 125 results in higher gains (or
lower losses) on sales of mortgage loans originated by HomeAmerican after
January 1, 1996 and, correspondingly, lower gains on sales of the related
servicing rights, compared with gains or losses on sales of mortgage loans and
related servicing rights originated by HomeAmerican prior to January 1, 1996.
Similar to the first quarter of 1997, gains from sales of mortgage
servicing in the second and third quarters of 1997 will be significantly lower
than during the comparable periods in 1996, as the Company sold its pre-1996
servicing portfolio throughout the first three quarters of 1996. Because the
Company sold its pre-1996 mortgage loans during the first quarter of 1996, the
comparability of gains (or losses) on mortgage loan sales in future quarters
will not be impacted by the application of SFAS 125. See "Forward-Looking
Statements" below.
HomeAmerican's loan originations and purchases increased by 5% in the
first quarter of 1997, compared with the same period in 1996. This increase is
primarily due to increases in (i) the Company's home closings; and (ii)
HomeAmerican's "Capture Rate", or the number of mortgage loans originated for
MDC home buyers as a percentage of total MDC home closings. HomeAmerican
continues to benefit from the Company's homebuilding growth as MDC home buyers
were the source of approximately 83% of the principal amount of mortgage loans
originated and purchased by HomeAmerican in the first quarter of 1997 and
throughout 1996.
-19-
Forward Sales Commitments - HomeAmerican's operations are affected by,
among other things, changes in mortgage interest rates. HomeAmerican utilizes
forward mortgage securities contracts to manage the interest rate risk on its
fixed-rate mortgage loans owned and rate-locked mortgage loans in the pipeline.
Such contracts are the only significant financial derivative instrument utilized
by MDC.
Asset Management Operations
The table below summarizes the results of the asset management
operations (in thousands).
Three Months
Ended March 31,
1997 1996
----------- -----------
Gains on Sales of Mortgage-Related Assets....... $ 98 $ 935
Management Fees from REITs, net................. $ - - $ 212
Operating Profits............................... $ 306 $ 1,374
Due to the sale of FAMC in September 1996 and the fact that the Company
does not anticipate making additional mortgage-related investments, future
operating results related to the asset management operations are expected to be
immaterial. See "Forward-Looking Statements" below.
Other Operating Results
Interest Expense - The Company capitalizes interest on its homebuilding
inventories during the period of active development and through the completion
of construction. Corporate and homebuilding interest incurred which is not
capitalized is reflected as interest expense and totalled $761,000 for the first
quarter of 1997, compared with $1,851,000 for the first quarter of 1996.
Corporate and homebuilding interest incurred decreased by 11% to
$6,924,000 for the first quarter of 1997, compared with $7,774,000 for the same
period in 1996, primarily due to (i) lower average outstanding borrowings during
the first quarter of 1997, compared with the first quarter of 1996, resulting
from reduced homebuilding inventories and the increased use of internally
generated funds; and (ii) lower average effective interest rates with respect to
the Company's variable-rate debt in 1997.
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 $3,246,000 during the first quarter of 1997,
compared with $2,601,000 during the first quarter of 1996. The $645,000 increase
in the first quarter of 1997 primarily was due to the favorable impact of an
insurance settlement of $1,250,000 received in the first quarter of 1996 related
to the recovery of certain homebuilding expenditures which were previously
expensed, which more than offset reduced insurance costs, debt-related fixed
charges and legal expenses during the first quarter of 1997.
Income Taxes - M.D.C. Holdings, Inc. and its wholly owned
subsidiaries file a consolidated federal income tax return (an "MDC Consolidated
Return"). Richmond American Homes of Colorado, Inc. (formerly Richmond Homes,
Inc. I) 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
American Homes of Colorado, Inc. became a wholly owned subsidiary of MDC.
-20-
MDC's overall effective income tax rates of 37.8% and 36.5%,
respectively, for the first quarters of 1997 and 1996, differed from the federal
statutory rate of 35% due to the impact of state income taxes.
The Internal Revenue Service (the "IRS") has completed its examination
of the MDC Consolidated Returns for the years 1986 through 1990 and has proposed
adjustments to taxable income as originally reported. 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 due primarily
in 2003 and 2005, respectively; and (iii) current financing, primarily lines of
credit, as discussed below. The Company believes that its current financial
condition is both balanced to fit its current operating structure and adequate
to satisfy its current and near-term capital requirements. See "Forward-Looking
Statements" below.
MDC anticipates acquiring finished lots and partially developed land
for use in its future homebuilding operations during the remainder of 1997. The
Company currently intends to acquire a portion of the land inventories required
in future periods through takedowns of lots subject to option contracts entered
into in prior periods and under new option contracts. The use of option
contracts lessens the Company's land-related risk and improves liquidity.
Because of increased demand for partially developed and finished lots in certain
of the markets where the Company builds homes, the Company's ability to acquire
lots using option contracts has been reduced or has become more expensive. See
"Forward-Looking Statements" below.
The Company anticipates that it has adequate financial resources to
satisfy its current and near-term capital requirements based on its current
capital resources and additional liquidity available under existing credit
agreements. The Company believes that it can meet its long-term capital needs
(including, among other things, meeting future debt payments and refinancing or
paying off other long-term debt as it becomes due) from operations and external
financing sources, assuming that no
-21-
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 Other
Homebuilding - In March 1997, the Company modified its agreement with a
group of banks for its unsecured revolving line of credit. Under the modified
terms, the available borrowings have been increased to $175,000,000 from
$150,000,000, and the maturity date of the agreement has been extended for one
year to June 30, 2001, although a term-out of this credit may commence earlier
under certain circumstances. At March 31, 1997, $11,842,000 was borrowed under
this line of credit.
Homebuilding lines of credit and other at March 31, 1997 included
$39,520,000 due from the Company upon settlement of the March 31 Senior Note
repurchase transaction. This transaction settled and the amount due was paid by
the Company on April 3, 1997.
Mortgage Lending - To provide funds to originate and purchase mortgage
loans and to finance these mortgage loans on a short-term basis, HomeAmerican
utilizes its mortgage lending bank line of credit (the "Mortgage Line"). These
mortgage loans are normally sold within 35 days after origination or purchase.
During the first quarter of 1997 and 1996, HomeAmerican sold $142,759,000 and
$125,452,000, respectively, principal amount of mortgage loans and mortgage
certificates to unaffiliated purchasers.
Available borrowings under the Mortgage Line are collateralized by
mortgage loans and mortgage-backed certificates and are limited to the value of
eligible collateral, as defined. The aggregate amount available under the
Mortgage Line at March 31, 1997 was $51,000,000. At March 31, 1997, $16,147,000
was borrowed and an additional $16,896,000 was collateralized and available to
be borrowed. The Mortgage Line is cancelable upon 90 days' notice.
General - The agreements for the Company's Senior Notes, subordinated
notes and bank lines of credit include representations, warranties and
covenants, the most restrictive of which require that the Company maintain
certain minimum defined stockholders' equity. The Company believes that it is in
compliance with these representations, warranties and covenants.
Consolidated Cash Flow
During the first quarter of 1997, the Company used $7,349,000 of cash
to repurchase 838,000 shares of MDC Common Stock. The Company also used
$1,633,000 of cash in its operating activities. The Company financed these
activities primarily with internally generated funds and line of credit
borrowings.
During the first quarter of 1996, the Company generated $13,094,000 in
cash from operating and investing activities. The Company used this cash
primarily to pay down lines of credit and notes payable by $10,398,000 and to
repurchase, for $1,645,000, 230,000 shares of MDC Common Stock.
-22-
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
In June 1996, the FASB 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 on January 1, 1997 did not have a material adverse impact on the results of
operations or financial condition of the Company.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). The Company's adoption of
SFAS 128, which is required on December 31, 1997, will result in the restatement
of the Company's primary earnings per share calculations to "basic" earnings per
share. Basic earnings per share, based on income before extraordinary item,
would have been $.20 and $.22 for the first quarter of 1997 and 1996,
respectively. Basic earnings per share, based on net income, would have been
unchanged for the first quarter of 1997 and 1996. SFAS 128 also will require the
presentation of "diluted" earnings per share, which is computed similarly to
fully diluted earnings per share. Diluted earnings per share would have been
unchanged from fully diluted earnings per share for the first quarter of 1997
and 1996.
OTHER
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, 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) demographic changes; (vi) shortages and the cost of labor; (vii)
weather-related slowdowns; (viii) slow growth initiatives; (ix) building
moratoria; (x) governmental regulation, including interpretation of tax and
environmental laws; (xi) changes in consumer confidence; (xii) required
accounting changes; and (xiii) other factors over which the Company has little
or no control.
-23-
M.D.C. HOLDINGS, INC.
FORM 10-Q
PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company and certain of its subsidiaries and affiliates have been
named as defendants in various claims, complaints and other legal actions
arising in the normal course of business. In the opinion of management, the
outcome of these matters will not have a material adverse effect upon the
financial condition, results of operations or cash flows of the Company.
Because of the nature of the homebuilding business, and in the ordinary
course of its operations, the Company from time to time may be subject to
product liability claims, including claims for damages as a result of expansive
soils.
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 April 25,
1997. At the Meeting, (i) Mr. Larry A. Mizel was elected as a Class I Director
for a one-year term expiring in 1998; (ii) Messrs. Steven J. Borick and David D.
Mandarich were elected as Class III Directors for three-year terms expiring in
2000; (iii) an amendment to the Company's Director Equity Incentive Plan (the
"Plan") to increase by 350,000 the number of shares of MDC Common Stock
authorized for issuance pursuant to the Plan was approved; and (iv) a proposal
submitted by a shareowner to provide for cumulative voting in the election of
directors was not approved.
ITEM 5. OTHER INFORMATION.
The Company's 1997 Proxy Statement and notes to the financial
statements in its Annual Report on Form 10-K for the fiscal year ended December
31, 1996 disclosed that, during 1996, the Company paid $11,489,000 for plumbing,
door and millwork services provided by companies owned by two former employees
of the Company, one of whom is the brother-in-law of a current officer and
director of the Company. The actual amount paid in 1996 to these companies for
these services was $3,586,000. In addition, it was disclosed that total fees in
1996 for advertising and marketing design services paid to a marketing and
communications firm owned by the brother-in-law of an officer and director of
the Company were $305,000. The actual amount paid to this firm in 1996 was
$499,000.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit:
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: May 7, 1997 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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