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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 September 30, 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 October 24, 1997, 17,766,235 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, 1997
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of September 30, 1997
(Unaudited) and December 31, 1996.......... 1
Statements of Income (Unaudited) for the three
and nine months ended September 30, 1997
and 1996................................... 3
Statements of Cash Flows (Unaudited) for the
nine months ended September 30, 1997
and 1996................................... 4
Notes to Financial Statements (Unaudited).... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 15
Part II. Other Information:
Item 1. Legal Proceedings............................ 27
Item 4. Submission of Matters to a Vote of
Shareowners................................ 27
Item 5. Other Information............................ 27
Item 6. Exhibits and Reports on Form 8-K............. 27
(i)
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands)
September 30, December 31,
1997 1996
----------- -----------
ASSETS (Unaudited)
Corporate
Cash and cash equivalents...................... $ 8,349 $ 7,235
Property and equipment, net.................... 9,431 9,411
Deferred income taxes.......................... 11,123 10,804
Deferred debt issue costs, net................. 7,039 9,155
Other assets, net.............................. 4,240 3,557
---------- -----------
40,182 40,162
---------- -----------
Homebuilding
Cash and cash equivalents...................... 4,514 3,393
Home sales and other accounts receivable....... 15,863 10,218
Investments and marketable securities, net..... 3,034 5,159
Inventories, net
Housing completed or under construction...... 263,891 251,885
Land and land under development.............. 179,196 182,927
Prepaid expenses and other assets, net......... 56,699 57,722
---------- -----------
523,197 511,304
---------- -----------
Financial Services
Cash and cash equivalents...................... 822 676
Mortgage loans held in inventory, net.......... 72,675 58,742
Other assets, net.............................. 6,152 6,419
---------- -----------
79,649 65,837
---------- -----------
Total Assets............................. $ 643,028 $ 617,303
========== ===========
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,
1997 1996
------------ ----------
LIABILITIES (Unaudited)
Corporate
Accounts payable and accrued expenses........... $ 17,607 $ 13,519
Income taxes payable............................ 11,232 11,434
Note payable.................................... 3,446 3,487
Senior Notes, net............................... 150,307 187,721
Subordinated notes, net......................... 38,228 38,225
----------- -----------
220,820 254,386
----------- -----------
Homebuilding
Accounts payable and accrued expenses........... 110,779 114,794
Lines of credit................................. 45,000 11,832
Notes payable................................... 2,926 3,063
----------- -----------
158,705 129,689
----------- -----------
Financial Services
Accounts payable and accrued expenses........... 13,961 10,363
Line of credit.................................. 27,593 9,018
----------- -----------
41,554 19,381
----------- -----------
Total Liabilities......................... 421,079 403,456
----------- -----------
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; 23,494,000 and
23,050,000 shares issued, respectively,
at September 30, 1997 and December 31, 1996... 235 231
Additional paid-in capital...................... 141,771 138,705
Retained earnings............................... 119,510 106,189
----------- -----------
261,516 245,125
Less treasury stock, at cost; 5,903,000 and
4,966,000 shares, respectively,
at September 30, 1997 and December 31, 1996... (39,567) (31,278)
----------- -----------
Total Stockholders' Equity................ 221,949 213,847
----------- -----------
Total Liabilities and
Stockholders' Equity...................... $ 643,028 $ 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 Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
REVENUES
Homebuilding........... $ 261,057 $ 222,734 $ 683,748 $ 644,339
Financial Services..... 5,337 10,346 13,017 25,034
Corporate.............. 224 227 957 956
----------- ----------- ----------- -----------
Total Revenues..... 266,618 233,307 697,722 670,329
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding........... 250,826 217,828 656,224 626,356
Financial Services..... 2,304 3,245 6,700 9,335
Corporate general and
administrative........ 1,694 2,920 8,194 8,501
Corporate and
homebuilding interest. - - 486 761 3,364
----------- ----------- ---------- ----------
Total Expenses..... 254,824 224,479 671,879 647,556
----------- ----------- ---------- ----------
Income before income taxes
and extraordinary item... 11,794 8,828 25,843 22,773
Provision for income taxes (4,492) (3,225) (9,821) (8,314)
----------- ----------- ----------- ----------
Income before extraordinary
item..................... 7,302 5,603 16,022 14,459
Extraordinary losses from
early extinguishments of
debt, net of income tax
benefit of $1,336 for
1997 and $242 for 1996.. - - - - (2,179) (421)
----------- ----------- ----------- ----------
Net Income............... $ 7,302 $ 5,603 $ 13,843 $ 14,038
=========== =========== =========== ==========
EARNINGS PER SHARE
Primary
Income before
extraordinary
item............. $ .40 $ .30 $ .88 $ .75
=========== =========== =========== ==========
Net Income........ $ .40 $ .30 $ .76 $ .73
=========== =========== =========== ==========
Fully diluted
Income before
extraordinary
item............. $ .35 $ .27 $ .78 $ .68
=========== =========== =========== ==========
Net Income........ $ .35 $ .27 $ .68 $ .66
=========== =========== =========== ==========
WEIGHTED-AVERAGE SHARES OUTSTANDING
Primary............... 18,166 18,849 18,236 19,352
=========== =========== =========== ==========
Fully diluted......... 21,833 22,462 21,969 22,965
=========== =========== =========== ==========
DIVIDENDS PER SHARE...... $ .03 $ .03 $ .09 $ .09
=========== =========== =========== ==========
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,
-------------------------
1997 1996
----------- -----------
OPERATING ACTIVITIES
Net Income....................................... $ 13,843 $ 14,038
Adjustments To Reconcile Net Income To Net Cash
Provided By (Used In) Operating Activities:
Depreciation and amortization............... 10,588 8,770
Homebuilding asset impairment charges....... 5,850 7,208
Deferred income taxes....................... (319) 3,198
Gain on sale of FAMC, net................... - - (4,042)
Net changes in assets and liabilities
Home sales and other accounts receivable. (5,645) 9,964
Homebuilding inventories................. (13,658) (18,073)
Mortgage loans held in inventory......... (13,933) 6,884
Other, net............................... (2,180) 7,704
----------- -----------
Net Cash Provided By (Used In) Operating
Activities....................................... (5,454) 35,651
----------- -----------
INVESTING ACTIVITIES
Net Proceeds From Mortgage-Related Assets and
Liabilities...................................... 1,587 2,858
Other, net........................................ 278 1,826
----------- -----------
Net Cash Provided By Investing Activities......... 1,865 4,684
----------- -----------
FINANCING ACTIVITIES
Lines of Credit
Advances..................................... 767,875 743,462
Principal payments........................... (716,132) (766,361)
Notes Payable
Borrowings................................... 144 480
Principal payments........................... (38,178) (10,441)
Stock Repurchases................................. (7,349) (10,075)
Dividend Payments................................. (1,599) (1,684)
Other, net........................................ 1,209 1,032
----------- -----------
Net Cash Provided By (Used In) Financing
Activities....................................... 5,970 (43,587)
----------- -----------
Net Increase (Decrease) In Cash and Cash
Equivalents...................................... 2,381 (3,252)
Cash and Cash Equivalents
Beginning of Period.......................... 11,304 20,795
----------- -----------
End of Period................................ $ 13,685 $ 17,543
=========== ===========
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
September 30, 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 Nine Months
Ended September 30, Ended September 30,
-------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Homebuilding
Home sales......................... $ 259,720 $ 220,443 $ 676,674 $ 635,472
Land sales......................... 1,011 2,099 6,256 8,345
Other revenues..................... 326 192 818 522
----------- ----------- ----------- -----------
261,057 222,734 683,748 644,339
----------- ----------- ----------- -----------
Home cost of sales................. 221,912 190,056 577,859 548,974
Land cost of sales................. 744 1,830 5,199 7,785
Asset impairment charges........... 3,500 4,338 5,850 7,208
Marketing.......................... 16,367 14,420 44,467 40,667
General and administrative......... 8,303 7,184 22,849 21,722
----------- ----------- ----------- -----------
250,826 217,828 656,224 626,356
----------- ----------- ----------- -----------
Homebuilding Operating Profit.. 10,231 4,906 27,524 17,983
----------- ----------- ----------- -----------
-5-
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- ----------
Financial Services
Mortgage Lending Revenues
Interest revenues.................. $ 465 $ 944 $ 1,411 $ 2,618
Origination fees................... 1,795 1,528 4,811 4,487
Gains on sales of mortgage
servicing......................... 1,009 1,593 1,560 5,746
Gains on sales of mortgage loans,
net.............................. 1,876 1,545 4,368 3,238
Mortgage servicing and other....... 140 288 419 1,196
Asset Management Revenues
Management fees and other.......... 52 4,448 448 7,749
----------- ----------- ----------- -----------
5,337 10,346 13,017 25,034
----------- ----------- ----------- -----------
General and Administrative Expenses
Mortgage Lending................... 2,297 2,518 6,666 7,139
Asset Management................... 7 727 34 2,196
----------- ----------- ----------- -----------
2,304 3,245 6,700 9,335
----------- ----------- ----------- -----------
Financial Services Operating
Profit....................... 3,033 7,101 6,317 15,699
----------- ------------- ----------- -----------
Total Operating Profit................. 13,264 12,007 33,841 33,682
----------- ------------- ----------- -----------
Corporate
Interest and other revenues........ 224 227 957 956
Interest expense................... - - (486) (761) (3,364)
General and administrative......... (1,694) (2,920) (8,194) (8,501)
----------- ----------- ----------- -----------
Net Corporate Expenses......... (1,470) (3,179) (7,998) (10,909)
----------- ----------- ----------- -----------
Income Before Income Taxes and
Extraordinary Item................... $ 11,794 $ 8,828 $ 25,843 $ 22,773
=========== =========== =========== ===========
C. Corporate and Homebuilding Interest Activity (in thousands)
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Interest capitalized in homebuilding
inventory, beginning of period....... $ 40,659 $ 39,839 $ 40,745 $ 40,217
Interest incurred....................... 6,689 7,582 20,192 22,961
Interest expensed....................... - - (486) (761) (3,364)
Previously capitalized interest included
in cost of sales..................... (7,529) (6,066) (20,357) (18,945)
----------- ----------- ----------- -----------
Interest capitalized in homebuilding
inventory, end of period............. $ 39,819 $ 40,869 $ 39,819 $ 40,869
=========== =========== =========== ===========
-6-
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.
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 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 in the third
quarter of 1996. A gain of $5,450,000 attributable to the notes was deferred and
may be recognized, in whole or in part, in future periods based upon a number of
factors, including collection or prepayment of the notes' principal and the
expiration of the conversion features. The entire $5,450,000 gain remained
deferred at September 30, 1997.
F. 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 Company recognized an extraordinary loss of $421,000, net of an
income tax benefit of $242,000, during the nine months ended September 30, 1996,
due to the write-off of unamortized discounts and deferred financing costs in
connection with the April 1996 retirement of certain secured bank lines of
credit and project loans with proceeds from the Company's unsecured revolving
line of credit.
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
Subordinated Notes") at a conversion price of $7.75 per share. The primary and
fully diluted earnings per share calculations are as follows: (in thousands,
except per share amounts).
-7-
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Primary Calculation
Income before extraordinary item................... $ 7,302 $ 5,603 $ 16,022 $ 14,459
Extraordinary loss, net............................ - - - - (2,179) (421)
----------- ----------- ----------- -----------
Net Income................................ $ 7,302 $ 5,603 $ 13,843 $ 14,038
=========== =========== =========== ===========
Weighted-average shares outstanding................ 17,569 18,358 17,641 18,821
Common Stock equivalents - stock options........... 597 491 595 531
----------- ----------- ----------- -----------
Total Weighted-Average Shares............. 18,166 18,849 18,236 19,352
=========== =========== =========== ===========
Primary Earnings Per Share
Income before extraordinary item.......... $ .40 $ .30 $ .88 $ .75
=========== =========== =========== ===========
Net Income................................ $ .40 $ .30 $ .76 $ .73
=========== =========== =========== ===========
Fully Diluted Calculation
Income before extraordinary item................... $ 7,302 $ 5,603 $ 16,022 $ 14,459
Adjustment for interest on Convertible
Subordinated Notes, net of income tax benefit;
conversion assumed............................... 394 402 1,181 1,206
----------- ----------- ----------- -----------
Adjusted income before extraordinary item. 7,696 6,005 17,203 15,665
Extraordinary loss, net............................ - - - - (2,179) (421)
----------- ----------- ----------- -----------
Adjusted Net Income....................... $ 7,696 $ 6,005 $ 15,024 $ 15,244
=========== =========== =========== ===========
Weighted-average shares outstanding................ 17,569 18,358 17,641 18,821
Common Stock equivalents - stock options........... 651 491 715 531
Shares issuable upon conversion of Convertible
Subordinated Notes; conversion assumed........... 3,613 3,613 3,613 3,613
----------- ----------- ----------- -----------
Total Weighted-Average Shares............. 21,833 22,462 21,969 22,965
=========== =========== =========== ===========
Fully Diluted Earnings Per Share
Income before extraordinary item.......... $ .35 $ .27 $ .78 $ .68
=========== =========== =========== ===========
Net Income................................ $ .35 $ .27 $ .68 $ .66
=========== =========== =========== ===========
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 $.42 and $.31 for the
third quarter of 1997 and 1996, respectively, and $.91 and $.77 for the first
nine months of 1997 and 1996, respectively. Basic earnings per share, based on
net income, would have been $.42 and $.31 for the third quarter of 1997 and
1996, respectively, and $.78 and $.75 for the first nine months 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 third quarter and first nine months of 1997 and 1996.
-8-
H. Supplemental Disclosure of Cash Flow Information (in thousands)
Nine Months
Ended September 30,
------------------------
1997 1996
--------- ----------
Cash paid during the period for:
Interest, net of amounts capitalized....................... $ - - $ 1,791
Income taxes............................................... $ 8,678 $ 4,278
Non-cash transactions:
Homebuilding land inventory sales financed by MDC........... $ 867 $ 271
Homebuilding inventory purchases financed by seller......... $ - - $ 5,858
I. Subsequent Event
On September 29, 1997, the Company filed a Shelf Registration Statement
on Form S-3 with the Securities and Exchange Commission (the "Commission") to
sell up to $300,000,000 in securities. On October 30, 1997, the Registration
Statement was declared effective by the Commission. Further details of the
securities to be offered by the Company will be available in a supplemental
prospectus to be prepared by the Company at a later date. A shelf registration
allows a company to register securities and sell them from time-to-time when
financing needs arise.
J. 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.
-9-
M.D.C. Holdings, Inc.
Supplemental Combining Balance Sheet
September 30, 1997
(In thousands)
Unconsolidated
---------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ----------- -----------
ASSETS
Corporate
Cash and cash equivalents............... $ 8,349 $ - - $ - - $ - - $ 8,349
Investments in subsidiaries............. 185,377 - - 17,435 (202,812) - -
Advances and notes receivable - Parent
and subsidiaries...................... 220,549 - - - - (220,549) - -
Other assets............................ 31,726 - - 107 - - 31,833
----------- ----------- ----------- ----------- -----------
446,001 - - 17,542 (423,361) 40,182
----------- ----------- ----------- ----------- -----------
Homebuilding
Cash and cash equivalents............... - - 4,465 49 - - 4,514
Inventories, net
Housing completed or under
construction......................... - - 263,891 - - - - 263,891
Land and land under development....... - - 157,777 22,220 (801) 179,196
Other assets............................ 5,299 59,764 22,342 (11,809) 75,596
----------- ----------- ----------- ----------- -----------
5,299 485,897 44,611 (12,610) 523,197
----------- ----------- ----------- ----------- -----------
Financial Services......................... - - - - 79,649 - - 79,649
----------- ----------- ----------- ----------- -----------
Total Assets...................... $ 451,300 $ 485,897 $ 141,802 $ (435,971) $ 643,028
=========== =========== =========== =========== ===========
LIABILITIES
Corporate
Accounts payable and accrued expenses... $ 17,296 $ - - $ 311 $ - - $ 17,607
Advances and notes payable - Parent and
subsidiaries.......................... 4,937 194,354 28,889 (228,180) - -
Income taxes payable.................... 11,232 - - - - - - 11,232
Note payable............................ 3,446 - - - - - - 3,446
Senior Notes, net....................... 150,307 - - - - - - 150,307
Subordinated notes, net................. 38,228 - - - - - - 38,228
----------- ----------- ----------- ------------ -----------
225,446 194,354 29,200 (228,180) 220,820
----------- ----------- ----------- ------------ -----------
Homebuilding
Accounts payable and accrued expenses... 3,905 84,767 22,107 - - 110,779
Line of credit and notes payable........ - - 47,926 - - - - 47,926
----------- ----------- ----------- ------------ -----------
3,905 132,693 22,107 - - 158,705
----------- ----------- ----------- ------------ -----------
Financial Services......................... - - - - 52,514 (10,960) 41,554
----------- ----------- ----------- ------------ -----------
Total Liabilities................. 229,351 327,047 103,821 (239,140) 421,079
----------- ----------- ----------- ------------ -----------
STOCKHOLDERS' EQUITY....................... 221,949 158,850 37,981 (196,831) 221,949
----------- ----------- ----------- ------------ -----------
Total Liabilities and
Stockholders' Equity............ $ 451,300 $ 485,897 $ 141,802 $ (435,971) $ 643,028
=========== =========== =========== ============ ===========
-10-
M.D.C. Holdings, Inc.
Supplemental Combining Balance Sheet
December 31, 1996
(In thousands)
Unconsolidated
---------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
ASSETS ------------ ------------ ------------ ------------ ------------
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
============ ============ ============ ============= ============
-11-
M.D.C. Holdings, Inc.
Supplemental Combining Statements of Income
(In thousands)
Three Months Ended September 30, 1997
Unconsolidated
---------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ----------- -----------
REVENUES
Homebuilding............................. $ 69 $ 260,703 $ 285 $ - - $ 261,057
Financial Services....................... - - - - 5,337 - - 5,337
Corporate................................ 208 6 10 - - 224
Equity in earnings of subsidiaries....... 9,123 - - - - (9,123) - -
----------- ----------- ----------- ----------- -----------
Total Revenues..................... 9,400 260,709 5,632 (9,123) 266,618
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................. 29 250,515 206 76 250,826
Financial Services....................... - - - - 2,304 - - 2,304
Corporate general and
administrative......................... 1,694 - - - - - - 1,694
Corporate and homebuilding interest..... (4,156) 3,755 340 61 - -
----------- ----------- ----------- ----------- -----------
Total Expenses...................... (2,433) 254,270 2,850 137 254,824
----------- ----------- ----------- ----------- -----------
Income before income taxes............... 11,833 6,439 2,782 (9,260) 11,794
Provision for income taxes............... (4,531) (2,175) (1,089) 3,303 (4,492)
----------- ----------- ----------- ----------- -----------
NET INCOME.................................. $ 7,302 $ 4,264 $ 1,693 $ (5,957) $ 7,302
=========== =========== =========== =========== ===========
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 Expenses...................... (1,374) 221,582 4,154 117 224,479
----------- ----------- ----------- ----------- -----------
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
=========== =========== =========== =========== ===========
-12-
M.D.C. Holdings, Inc.
Supplemental Combining Statements of Income
(In thousands)
Nine Months Ended September 30, 1997
Unconsolidated
--------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ----------- -----------
REVENUES
Homebuilding............................. $ 176 $ 682,768 $ 804 $ - - $ 683,748
Financial Services....................... - - - - 13,017 - - 13,017
Corporate................................ 727 9 221 - - 957
Equity in earnings of subsidiaries....... 19,146 - - - - (19,146) - -
----------- ----------- ----------- ----------- -----------
Total Revenues..................... 20,049 682,777 14,042 (19,146) 697,722
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding............................. 116 655,038 843 227 656,224
Financial Services....................... - - - - 6,700 - - 6,700
Corporate general and administrative..... 8,186 - - 8 - - 8,194
Corporate and homebuilding interest..... (14,096) 13,094 1,582 181 761
----------- ----------- ----------- ----------- -----------
Total Expenses..................... (5,794) 668,132 9,133 408 671,879
----------- ----------- ----------- ----------- -----------
Income before income taxes and
extraordinary item..................... 25,843 14,645 4,909 (19,554) 25,843
Provision for income taxes............... (9,821) (5,681) (1,840) 7,521 (9,821)
----------- ----------- ----------- ----------- -----------
Income before extraordinary item......... 16,022 8,964 3,069 (12,033) 16,022
Extraordinary loss, net of income tax
benefit of $1,336...................... (2,179) - - - - - - (2,179)
----------- ----------- ----------- ----------- -----------
NET INCOME.................................. $ 13,843 $ 8,964 $ 3,069 $ (12,033) $ 13,843
=========== =========== =========== =========== ===========
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
=========== =========== =========== =========== ===========
-13-
M.D.C. Holdings, Inc.
Supplemental Combining Statement of Cash Flows
(In thousands)
Nine Months Ended September 30, 1997
Unconsolidated
----------------------------------------
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Operating
Activities............................... $ 55,464 $ (28,226) $ (13,408) $ (19,284) $ (5,454)
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Investing
Activities............................... (11,567) (588) 2,208 11,812 1,865
----------- ----------- ----------- ----------- -----------
Financing Activities
Net Increase (Reduction) in Borrowings From
Parent and Subsidiaries.................. 2,852 (3,094) (7,230) 7,472 - -
Lines of Credit
Advances............................... - - 749,300 18,575 - - 767,875
Principal payments..................... - - (716,132) - - - - (716,132)
Notes Payable............................... (37,897) (137) - - - - (38,034)
Other, net.................................. (7,739) - - - - - - (7,739)
----------- ----------- ----------- ----------- -----------
Net Cash Provided By (Used In) Financing
Activities............................... (42,784) 29,937 11,345 7,472 5,970
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) In Cash and Cash
Equivalents.............................. 1,113 1,123 145 - - 2,381
Cash and Cash Equivalents
Beginning of Period...................... 7,236 3,391 677 - - 11,304
----------- ----------- ----------- ----------- -----------
End of Period............................ $ 8,349 $ 4,514 $ 822 $ - - $ 13,685
=========== =========== =========== =========== ===========
Nine Months Ended September 30, 1996
Net Cash Provided By (Used In) Operating
Activities............................... $ 112,289 $ 17,169 $ (4,963) $ (88,844) $ 35,651
----------- ----------- ----------- ----------- -----------
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)
Other, net.................................. (14,395) (2,544) (3,749) - - (20,688)
----------- ----------- ----------- ----------- -----------
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
=========== =========== =========== =========== ===========
-14-
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 Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Revenues.................................... $ 266,618 $ 233,307 $ 697,722 $ 670,329
Income before income taxes and extraordinary
item...................................... $ 11,794 $ 8,828 $ 25,843 $ 22,773
Net Income.................................. $ 7,302 $ 5,603 $ 13,843 $ 14,038
Earnings Per Share:
Primary
Income before extraordinary item....... $ .40 $ .30 $ .88 $ .75
Net Income............................. $ .40 $ .30 $ .76 $ .73
Fully Diluted
Income before extraordinary item....... $ .35 $ .27 $ .78 $ .68
Net Income............................. $ .35 $ .27 $ .68 $ .66
Income before income taxes and extraordinary item increased in the
third quarter and first nine months of 1997, compared with the same periods in
1996. The 1997 increases resulted from (i) higher operating profits from the
Company's homebuilding operations in the third quarter and first nine months of
1997, primarily due to 80 and 100 basis point increases, respectively, in the
Company's Home Gross Margins (as hereinafter defined) and increased levels of
homes closed; (ii) decreased interest expense; and (iii) lower corporate general
and administrative expenses. These improvements to income in 1997
-15-
partially were offset by lower operating profits from the Company's financial
services segment, primarily due to net increases to income in the third quarter
and first nine months of 1996 totalling approximately $4,500,000 and $9,200,000,
respectively, as a result of (i) the September 1996 sale of FAMC; (ii) lower
gains from sales of mortgage-related assets in the third quarter and first nine
months of 1997, compared with the same periods in 1996; and (iii) a required
change in accounting principle regarding mortgage loans and mortgage loan
servicing rights.
Net income for the first nine months 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 at an amount above their carrying value and the write-off of
related unamortized issuance costs. Net income for the nine months ended
September 30, 1996 included an extraordinary loss of $421,000, net of an income
tax benefit of $242,000, due to the write-off of unamortized discounts and
deferred financing costs in connection with the extinguishment of secured lines
of credit and project loans.
-16-
Homebuilding Segment
The tables below set forth information relating to the Company's
homebuilding segment (dollars in thousands).
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Home Sales Revenues......................... $ 259,720 $ 220,443 $ 676,674 $ 635,472
Operating Profits Before Asset Impairment
Charges................................... $ 13,731 $ 9,244 $ 33,374 $ 25,191
Operating Profits........................... $ 10,231 $ 4,906 $ 27,524 $ 17,983
Average Selling Price Per Home Closed..... $ 180.9 $ 175.1 $ 178.4 $ 176.2
Home Gross Margins.......................... 14.6% 13.8% 14.6% 13.6%
Orders For Homes, net (units)
Colorado............................. 490 405 1,565 1,483
Mid-Atlantic......................... 158 246 774 898
California........................... 257 185 750 634
Arizona.............................. 349 237 964 843
Nevada............................... 116 61 346 182
----------- ----------- ----------- -----------
Total........................... 1,370 1,134 4,399 4,040
=========== =========== =========== ===========
Homes Closed (units)
Colorado............................. 469 465 1,259 1,400
Mid-Atlantic......................... 302 262 806 657
California........................... 229 191 602 594
Arizona.............................. 314 261 824 764
Nevada............................... 122 80 301 191
----------- ----------- ----------- -----------
Total........................... 1,436 1,259 3,792 3,606
=========== =========== =========== ===========
September 30, December 31, September 30,
1997 1996 1996
----------- ------------ -----------
Backlog (units)
Colorado............................. 882 576 741
Mid-Atlantic......................... 389 421 516
California........................... 308 160 215
Arizona.............................. 371 231 313
Nevada............................... 143 98 60
----------- ----------- -----------
Total........................... 2,093 1,486 1,845
=========== =========== ===========
Estimated Sales Value........... $ 382,000 $ 261,000 $ 326,000
=========== =========== ===========
Active Subdivisions
Colorado............................. 45 51 50
Mid-Atlantic......................... 49 53 51
California........................... 13 20 21
Arizona.............................. 30 23 22
Nevada............................... 8 5 5
----------- ----------- -----------
Total........................... 145 152 149
=========== =========== ===========
-17-
Home Sales Revenues and Homes Closed - Home sales revenues in the third
quarter and first nine months of 1997 were the highest for all comparable
periods in the Company's history. The increases in 1997 home sales revenues
primarily were due to increases in home closings and the average selling price
per home closed (each discussed below).
Home closings increased in the third quarter and first nine months of
1997, compared with the same periods in 1996, (i) by 53% and 58%, respectively,
in Nevada, where the Company has increased the number of active subdivisions to
eight from two at the beginning of 1996; (ii) by 47% and 25%, respectively, in
Southern California, resulting from the Company's increased operations and
improving economic conditions in that market; (iii) by 20% and 8%, respectively,
in Arizona due to a higher level of closings per active subdivision resulting
from the Company's increasing emphasis in this market on offering lower priced,
more affordable homes primarily marketed to the first-time and first-time
move-up home buyer; and (iv) by 15% and 23%, respectively, in the Mid-Atlantic
market, due to weather-related delays in the completion and delivery of homes
during the first nine months of 1996, and a Backlog (as hereinafter defined) at
the beginning of 1997 that was more than 50% greater than Backlog at the
beginning of 1996. In Colorado, home closings decreased 10% in the first nine
months of 1997, compared with the same period in 1996, primarily due to a lower
Backlog at the beginning of 1997 compared with Backlog at the beginning of 1996.
In Northern California, home closings decreased in the third quarter and first
nine months of 1997, compared with the same periods in 1996, as the Company has
exited the Sacramento market and presently has only one active subdivision in
the San Francisco Bay area.
Average Selling Price Per Home Closed - The higher average selling
prices per home closed in the third quarter and first nine months of 1997,
compared with the same periods in 1996, resulted from increases in average
selling prices in Colorado, California and the Mid-Atlantic region, principally
due to the impact of closing a greater number of homes in higher-priced
subdivisions during the 1997 periods. These increases partially were offset by
lower average selling prices in the third quarter and first nine months of 1997
in Arizona, reflecting the impact of the Company's emphasis on offering
lower-priced, more affordable homes in this market as discussed above.
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 80 and 100 basis points,
respectively, during the third quarter and first nine months of 1997, compared
with the third quarter and first nine months of 1996. The increases largely were
due to (i) the favorable impact of a large number of home closings in certain
highly profitable subdivisions, particularly in Arizona and Southern California;
(ii) in Nevada, the completion of several under-performing subdivisions during
the first nine months of 1996 and the closing of homes in four new higher-margin
subdivisions in the first nine months of 1997; (iii) the receipt in the second
quarter of 1997 of a $783,000 refund of school impact fees in Colorado which
previously were charged to cost of sales; and (iv) initiatives implemented in
each of the Company's markets designed to improve operating efficiency, control
costs and increase rates of return.
Orders for Homes and Backlog - Orders for homes in the third quarter
and first nine months of 1997 increased 21% and 9%, respectively, over the
comparable periods in 1996. Home orders for the third quarter of 1997 were the
highest third quarter orders in the Company's history and orders for the first
nine months of 1997 reached a ten-year high. These increases primarily were due
to comparatively strong home orders experienced since the first quarter of 1997
in all of the Company's markets except the
-18-
Mid-Atlantic region and Northern California in response to an improving national
economy stimulated by decreasing mortgage interest rates, low unemployment and
high levels of consumer confidence. Third quarter 1997 home orders particularly
were strong in Nevada, Arizona and Southern California, which increased 90%, 47%
and 42%, respectively, as a result of the factors discussed above and the
increased number of active subdivisions in Nevada and Arizona and a 50% increase
in the number of sales per active subdivision in Southern California.
As a result of the increased orders for homes in the third quarter of
1997, the Company's homes under contract but not yet delivered ("Backlog") at
September 30, 1997 increased 13% from September 30, 1996, to the highest
September 30 Backlog in the Company's history. Assuming no significant change in
market conditions or mortgage interest rates, the Company expects approximately
70% of its September 30, 1997 Backlog to close under existing sales contracts
during the fourth quarter of 1997 and the first half of 1998. 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 costs, model home advertising expenses and
sales commissions) totalled $16,367,000 and $44,467,000, respectively, for the
third quarter and first nine months of 1997, compared with $14,420,000 and
$40,667,000, respectively, for the same periods in 1996. The increases in 1997
primarily resulted from (i) additional advertising and model home expenses
incurred to stimulate sales in response to increased competition in Colorado,
Arizona and the Mid-Atlantic; and (ii) cost increases incurred in connection
with the Company's expanded operations in Southern California, Arizona and
Nevada.
General and Administrative - General and administrative expenses
totalled $8,303,000 and $22,849,000, respectively, during the third quarter and
first nine months of 1997, compared with $7,184,000 and $21,722,000,
respectively, for the same periods in 1996. The increases in 1997 primarily were
due to increased administrative costs incurred in support of the Company's
expanded operations in Southern California and Phoenix.
Asset Impairment Charges
Operating results during the third quarter and first nine months of
1997 were reduced by asset impairment charges totalling $3,500,000 and
$5,850,000, respectively, 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 pressure in that market.
The asset impairment charges primarily 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; (ii) the write-off of certain capitalized costs, primarily
deferred marketing and option deposits, related to a number of lower-margin
subdivisions which are being closed out; and (iii) in the third quarter of 1997,
pricing, product and incentive changes initiated by new management in the
Mid-Atlantic region to further the Company's aggressive strategy of accelerating
the close out of under-performing subdivisions in that market. While intending
to maintain its market share in the Mid-Atlantic region, the Company continues
to eliminate lower-margin subdivisions and redeploy capital to more profitable
operations within and outside that market, including California, Arizona and
Nevada.
Operating results during the three and nine months ended September 30,
1996 were impacted adversely by $4,338,000 and $7,208,000, respectively, in
asset impairment charges. These charges
-19-
primarily were related to certain under-performing subdivisions in Northern
California and the Mid-Atlantic region.
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).
September 30, December 31, September 30,
1997 1996 1996
----------- ----------- -----------
Land and Land Under Development
Colorado........................... $ 58,968 $ 66,529 $ 60,887
Mid-Atlantic....................... 40,417 46,124 49,186
California......................... 28,333 23,733 21,891
Arizona............................ 35,768 32,129 29,749
Nevada............................. 15,710 14,412 15,675
----------- ----------- -----------
Total......................... $ 179,196 $ 182,927 $ 177,388
=========== =========== ===========
Total Lots Owned........................ 9,725 10,523 10,784
Total Lots Controlled Under Option...... 5,249 6,698 6,793
----------- ----------- -----------
Total Lots Owned and Controlled... 14,974 17,221 17,577
=========== =========== ===========
Total Option Deposits................... $ 6,802 $ 5,951 $ 5,449
=========== =========== ===========
Financial Services Segment
Mortgage Lending Operations
The tables below set forth information relating to HomeAmerican's
operations (in thousands).
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Gains on Sales of Mortgage Servicing........ $ 1,009 $ 1,593 $ 1,560 $ 5,746
Gains on Sales of Mortgage Loans, net....... $ 1,876 $ 1,545 $ 4,368 $ 3,238
Operating Profits........................... $ 2,988 $ 3,380 $ 5,903 $ 10,146
Principal Amount of Loan Originations and
Purchases
MDC home buyers.......................... $ 145,074 $ 119,584 $ 377,325 $ 343,066
Spot..................................... 9,516 8,280 24,078 34,056
Correspondent............................ 19,898 15,690 50,504 42,203
----------- ----------- ----------- -----------
Total.............................. $ 174,488 $ 143,554 $ 451,907 $ 419,325
=========== =========== =========== ===========
Capture Rate................................ 68% 65% 68% 66%
=========== =========== =========== ===========
-20-
September 30, December 31, September 30,
1997 1996 1996
----------- ------------ -----------
Composition of Servicing Portfolio
FHA insured/VA guaranteed.................. $ 165,517 $ 117,681 $ 81,054
Conventional............................... 349,117 277,217 259,803
------------ ------------ ------------
Total Servicing Portfolio..................... $ 514,634 $ 394,898 $ 340,857<F2>
============ ============ ============
Salable Portion of Servicing Portfolio........ $ 340,568<F1> $ 292,428<F1>$ 226,880<F1>
============ ============ ============
<F1> Substantially all originated subsequent to the adoption of
SFAS 122 (as hereinafter defined).
<F2> 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.
HomeAmerican's operating profits for the third quarter and first nine
months of 1997 decreased, compared with the same periods in 1996, primarily due
to decreases in gains from sales of mortgage servicing which, for the first nine
months of 1997, partially were offset by an increase in gains from sales of
mortgage loans. These differences principally resulted from sales of mortgage
loans and mortgage loan servicing in 1996 which were originated prior to the
Company's required adoption, on January 1, 1996, of Statement of Financial
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.
Because the Company sold substantially all of its pre-1996 mortgage
loans and mortgage loan servicing during the first nine months of 1996, the
year-over-year comparability of gains (or losses) on sales of mortgage loans and
mortgage loan servicing in future quarters will not be impacted by the
application of SFAS 125. See "Forward-Looking Statements" below.
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.
-21-
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,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Gain on Sale of FAMC........................ $ - - $ 4,042 $ - - $ 4,042
Management Fees from REITs.................. $ - - $ 775 $ - - $ 2,373
Operating Profits........................... $ 45 $ 3,721 $ 414 $ 5,553
The decreased operating profits in the third quarter and first nine
months of 1997 primarily were due to the $4,042,000 gain, net of related
expenses, on the September 1996 sale of FAMC. The sales proceeds consisted of
$6,000,000 of cash and $5,450,000 of subordinated notes, which are payable at
specified dates during the 10 years following the sale 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 or prepayment of the notes' principal and the
expiration of the conversion features. The entire $5,450,000 gain remained
deferred at September 30, 1997.
Due to the sale of FAMC and the fact that the Company does not
anticipate making additional mortgage-related investments, future operating
results of the asset management operations are expected to be immaterial, except
to the extent any gains are recognized with respect to FAMC's $5,450,000
subordinated notes discussed above. 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
nine months of 1997, compared with $3,364,000 for the same period in 1996.
During the third quarter of 1997, the Company capitalized all interest incurred,
which resulted in no interest expense for such period, compared with $486,000 of
interest expense in the third quarter of 1996.
Corporate and homebuilding interest incurred decreased by 12% to
$6,689,000 and $20,192,000, respectively, for the third quarter and first nine
months of 1997, compared with $7,582,000 and $22,961,000, respectively, for the
same periods in 1996, primarily due to (i) lower average outstanding borrowings
during the first nine months of 1997, compared with the first nine months of
1996, as a result of reduced homebuilding inventories and the increased use of
internally generated funds; and (ii) lower average effective interest rates with
respect to the Company's outstanding 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 $1,694,000 and $8,194,000, respectively, during
the third quarter and first nine months of 1997, compared with $2,920,000 and
$8,501,000, respectively, for the same periods of 1996. The 1997 amounts include
the favorable impact of insurance recoveries and a reversal of reserves no
longer
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required, which totalled $2,032,000 and $2,458,000 for the respective periods,
as well as reduced debt-related fixed charges and insurance costs, partially
offset by higher compensation expenses and costs associated with the Year 2000
Project (as defined below). Corporate general and administrative expenses for
the first nine months of 1996 were impacted favorably by insurance recoveries of
$1,250,000 received in the first quarter of 1996.
The Company is modifying its computer systems to accurately process
information which includes the year 2000 date and beyond (the "Year 2000
Project"). Pursuant to current accounting rules, the cost of the Year 2000
Project must be expensed as incurred. Management believes that future costs of
the Year 2000 Project, expected to be incurred over the next 15 months, will not
have a material adverse effect on the Company's results of operations, financial
position or cash flows. See "Forward-Looking Statements" below.
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.
In June 1997, the Company and the Internal Revenue Service (the "IRS")
reached final agreement on the examinations of the MDC Consolidated Returns for
the years 1986 through 1990. In July 1997, the Company and the IRS reached final
agreement on the examinations of the Richmond Homes Consolidated Returns for the
years 1991 through 1993. These agreements resulted in no material impact on the
Company's financial position or results of operations.
The IRS currently is examining the MDC Consolidated Returns for the
years 1991 through 1995 and the Richmond Homes Consolidated Return for the
period ended February 2, 1994. No audit 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 Convertible 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.
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MDC anticipates continuing to acquire finished lots and partially
developed land for use in its future homebuilding operations. 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 significant adverse changes in the Company's
business, or general economic conditions, occur as a result of the various risk
factors described elsewhere herein, in particular, increases in interest rates.
See "Forward-Looking Statements" below.
Lines of Credit and Notes Payable
Homebuilding - In 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 September 30, 1997, $45,000,000 was borrowed
under this line of credit.
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").
HomeAmerican's mortgage loans normally are sold within 25 to 60 days after
origination. During the first nine months of 1997 and 1996, HomeAmerican sold
$438,400,000 and $426,265,000, respectively, principal amount of mortgage loans
and mortgage certificates.
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 September 30, 1997 was $51,000,000. At September 30, 1997,
$27,593,000 was borrowed and an additional $23,407,000 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, Convertible
Subordinated Notes and bank lines of credit require compliance with certain
representations, warranties and covenants. The Company believes that it is in
compliance with these representations, warranties and covenants.
Consolidated Cash Flow
During the first nine months of 1997, the Company used $7,349,000 and
$39,520,000 of cash to repurchase 838,000 shares of MDC Common Stock and
$38,000,000 of Senior Notes, respectively. The Company also used $5,454,000 of
cash in its operating activities. The Company financed these activities
primarily with internally generated funds and line of credit borrowings.
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During the first nine months of 1996, the Company generated $35,651,000
in cash from its operating activities. The Company used this cash and other
internally generated funds to (i) pay down lines of credit and notes payable by
$32,860,000; and (ii) repurchase 1,463,000 shares of MDC Common Stock for
$10,075,000.
ADOPTION OF STATEMENTS 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 $.42 and $.31 for the third quarter of 1997 and 1996,
respectively, and $.91 and $.77 for the first nine months of 1997 and 1996,
respectively. Basic earnings per share, based on net income, would have been
$.42 and $.31 for the third quarter of 1997 and 1996, respectively, and $.78 and
$.75 for the first nine months 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 third quarter
and first nine months of 1997 and 1996.
OTHER
Subsequent Event
On September 29, 1997, the Company filed a Shelf Registration Statement
on Form S-3 with the Securities and Exchange Commission (the "Commission") to
sell up to $300,000,000 in securities. On October 30, 1997, the Registration
Statement was declared effective by the Commission. Further details of the
securities to be offered by the Company will be available in a supplemental
prospectus to be prepared by the Company at a later date. A shelf registration
allows a company to register securities and sell them from time-to-time when
financing needs arise.
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. 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
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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 the interpretation of tax, labor 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.
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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
No matters were submitted to shareowners during the third quarter of
1997.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
27 Financial Data Schedule.
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(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: October 30, 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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