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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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 July 28, 1998, 18,241,000 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 JUNE 30, 1998
INDEX
Page
No.
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Part I. Financial Information:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of June 30, 1998 (Unaudited)
and December 31, 1997.......................... 1
Statements of Income (Unaudited) for the three
and six months ended June 30, 1998 and 1997.... 3
Statements of Cash Flows (Unaudited) for the six
months ended June 30, 1998 and 1997............ 4
Notes to Financial Statements (Unaudited)........ 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 9
Part II. Other Information:
Item 1. Legal Proceedings................................ 19
Item 4. Submission of Matters to a Vote of Shareowners... 19
Item 5. Other Information................................ 19
Item 6. Exhibits and Reports on Form 8-K................. 19
(i)
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands)
June 30, December 31,
1998 1997
----------- -----------
ASSETS (Unaudited)
Corporate
Cash and cash equivalents................................................... $ 6,922 $ 7,110
Property and equipment, net................................................. 1,671 9,709
Deferred income taxes....................................................... 16,100 12,276
Deferred debt issue costs, net.............................................. 3,754 6,851
Other assets, net........................................................... 6,394 2,944
---------- -----------
34,841 38,890
Homebuilding
Cash and cash equivalents................................................... 8,031 3,867
Home sales and other accounts receivable.................................... 21,396 7,559
Investments and marketable securities, net.................................. 1,431 1,392
Inventories, net
Housing completed or under construction................................... 322,413 249,928
Land and land under development........................................... 172,900 193,012
Prepaid expenses and other assets, net...................................... 60,631 55,788
---------- -----------
586,802 511,546
Financial Services
Cash and cash equivalents................................................... 432 701
Mortgage loans held in inventory, net....................................... 89,421 65,256
Other assets, net........................................................... 8,004 5,377
---------- -----------
97,857 71,334
Total Assets.......................................................... $ 719,500 $ 621,770
========== ===========
See notes to condensed consolidated financial statements.
-1-
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
June 30, December 31,
1998 1997
----------- -----------
LIABILITIES (Unaudited)
Corporate
Accounts payable and accrued expenses....................................... $ 27,275 $ 14,288
Income taxes payable........................................................ 13,343 11,806
Note payable................................................................ - - 3,432
Senior notes, net........................................................... 174,316 150,354
Subordinated notes, net..................................................... 28,000 38,229
----------- -----------
242,934 218,109
Homebuilding
Accounts payable and accrued expenses....................................... 124,382 105,485
Line of credit.............................................................. 65,000 20,766
Notes payable............................................................... 494 9,676
----------- -----------
189,876 135,927
Financial Services
Accounts payable and accrued expenses....................................... 19,075 12,047
Line of credit.............................................................. 29,729 26,094
----------- -----------
48,804 38,141
Total Liabilities..................................................... 481,614 392,177
----------- -----------
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; 23,958,000
and 23,691,000 shares issued, respectively, at June 30, 1998 and
December 31, 1997......................................................... 240 237
Additional paid-in capital.................................................. 144,886 142,429
Retained earnings........................................................... 129,868 125,613
Accumulated comprehensive income............................................ 2,276 881
----------- -----------
277,270 269,160
Less treasury stock, at cost; 5,876,000 and 5,903,000 shares, respectively,
at June 30, 1998 and December 31, 1997.................................... (39,384) (39,567)
----------- -----------
Total Stockholders' Equity............................................ 237,886 229,593
----------- -----------
Total Liabilities and Stockholders' Equity............................ $ 719,500 $ 621,770
=========== ===========
See notes to condensed consolidated financial statements.
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M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
REVENUES
Homebuilding.......................................... $ 293,420 $ 233,542 $ 532,017 $ 422,691
Financial Services.................................... 10,149 3,449 14,820 7,680
Corporate............................................. 310 294 543 733
----------- ----------- ----------- -----------
Total Revenues.................................... 303,879 237,285 547,380 431,104
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding.......................................... 276,513 223,704 500,966 405,398
Financial Services.................................... 2,987 2,045 5,633 4,396
Corporate general and administrative.................. 4,040 3,254 7,552 6,500
Corporate and homebuilding interest................... - - - - - - 761
----------- ----------- ----------- -----------
Total Expenses.................................... 283,540 229,003 514,151 417,055
----------- ----------- ----------- -----------
Income before income taxes and extraordinary
item.................................................. 20,339 8,282 33,229 14,049
Provision for income taxes............................... (7,758) (3,148) (12,720) (5,329)
----------- ----------- ----------- -----------
Income before extraordinary item......................... 12,581 5,134 20,509 8,720
Extraordinary loss from early extinguishments of debt,
net of income tax benefit of $9,587 for 1998 and
$1,336 for 1997....................................... - - - - (15,314) (2,179)
----------- ----------- ----------- -----------
NET INCOME............................................... 12,581 5,134 5,195 6,541
Unrealized holding gains on securities arising during the
period, net........................................... 314 545 1,395 337
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME..................................... $ 12,895 $ 5,679 $ 6,590 $ 6,878
=========== =========== =========== ===========
EARNINGS PER SHARE
Basic
Income before extraordinary item.................. $ .70 $ .29 $ 1.14 $ .49
=========== =========== =========== ===========
Net Income........................................ $ .70 $ .29 $ .29 $ .37
=========== =========== =========== ===========
Diluted
Income before extraordinary item.................. $ .58 $ .26 $ .95 $ .44
=========== =========== =========== ===========
Net Income........................................ $ .58 $ .26 $ .27 $ .34
=========== =========== =========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic................................................. 18,042 17,463 17,981 17,671
=========== =========== =========== ===========
Diluted............................................... 22,469 21,583 22,472 21,839
=========== =========== =========== ===========
DIVIDENDS PER SHARE...................................... $ .04 $ .03 $ .07 $ .06
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
-3-
M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six months
Ended June 30,
--------------------------
1998 1997
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OPERATING ACTIVITIES
Net Income........................................................... $ 5,195 $ 6,541
Adjustments To Reconcile Net Income To Net Cash Used In Operating
Activities:
Loss from the early extinguishments of debt.................... 24,901 3,515
Depreciation and amortization.................................. 9,107 6,536
Homebuilding asset impairment charges.......................... 3,000 2,350
Deferred income taxes.......................................... (3,824) 1,042
Gains on sales of mortgage-related assets...................... (4,509) (55)
Net changes in assets and liabilities:
Home sales and other accounts receivable.................. (13,837) (8,349)
Homebuilding inventories.................................. (56,117) (19,216)
Mortgage loans held in inventory.......................... (24,165) 807
Accounts payable and accrued expenses and income taxes
payable................................................. 36,821 (12,205)
Prepaid expenses and other assets......................... (11,584) (4,033)
Other, net..................................................... (2,885) 788
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Net Cash Used In Operating Activities................................ (37,897) (22,279)
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INVESTING ACTIVITIES
Net Proceeds from Sale of Office Building............................ 13,250 - -
Net Proceeds from Mortgage-Related Assets and Liabilities............ 4,636 1,558
Other, net........................................................... (2,524) (152)
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Net Cash Provided By Investing Activities............................ 15,362 1,406
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FINANCING ACTIVITIES
Lines of Credit
Advances....................................................... 579,235 495,186
Principal payments............................................. (532,254) (427,056)
Notes Payable
Principal payments............................................. (12,614) (66)
Senior Notes
Proceeds from issuance......................................... 171,541 - -
Repurchase and defeasance...................................... (152,000) (38,000)
Premium on repurchase and defeasance........................... (17,592) (1,520)
Retirement of Subordinated Notes..................................... (10,230) - -
Stock Repurchases.................................................... - - (7,349)
Dividend Payments.................................................... (1,258) (1,072)
Other, net........................................................... 1,414 909
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Net Cash Provided By Financing Activities............................ 26,242 21,032
----------- -----------
Net Increase In Cash and Cash Equivalents............................ 3,707 159
Cash and Cash Equivalents
Beginning of Period............................................ 11,678 11,304
----------- -----------
End of Period.................................................. $ 15,385 $ 11,463
=========== ===========
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 June
30, 1998 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, 1997.
Certain reclassifications have been made in the 1997 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 Six Months
Ended June 30, Ended June 30,
-------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Homebuilding
Home sales......................... $ 291,752 $ 229,769 $ 524,515 $ 416,954
Land sales......................... 1,276 3,555 6,803 5,245
Other revenues..................... 392 218 699 492
----------- ----------- ----------- -----------
293,420 233,542 532,017 422,691
----------- ----------- ----------- -----------
Home cost of sales................. 243,253 196,224 439,522 355,947
Land cost of sales................. 1,179 3,132 4,285 4,455
Asset impairment charges........... 3,000 1,100 3,000 2,350
Marketing.......................... 18,146 15,585 33,396 28,100
General and administrative......... 10,935 7,663 20,763 14,546
----------- ----------- ----------- -----------
276,513 223,704 500,966 405,398
----------- ----------- ----------- -----------
Homebuilding Operating Profit.. 16,907 9,838 31,051 17,293
----------- ----------- ----------- -----------
-5-
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ------------ -----------
Financial Services
Mortgage Lending Revenues
Interest revenues.................. $ 502 $ 279 $ 1,033 $ 946
Origination fees................... 2,275 1,554 4,140 3,016
Gains on sales of mortgage
servicing........................ 692 213 927 551
Gains on sales of mortgage loans,
net.............................. 2,012 1,177 4,016 2,492
Mortgage servicing and other....... 72 151 102 279
Asset Management Revenues............ 4,596 75 4,602 396
----------- ----------- ----------- -----------
10,149 3,449 14,820 7,680
General and Administrative Expenses.. 2,987 2,045 5,633 4,396
----------- ----------- ----------- -----------
Financial Services Operating
Profit....................... 7,162 1,404 9,187 3,284
----------- ----------- ----------- -----------
Total Operating Profit................. 24,069 11,242 40,238 20,577
----------- ----------- ----------- -----------
Corporate
Interest and other revenues........ 310 294 543 733
Interest expense................... - - - - - - (761)
General and administrative......... (4,040) (3,254) (7,552) (6,500)
----------- ----------- ----------- -----------
Net Corporate Expenses......... (3,730) (2,960) (7,009) (6,528)
----------- ----------- ----------- -----------
Income Before Income Taxes and
Extraordinary Item................... $ 20,339 $ 8,282 $ 33,229 $ 14,049
=========== =========== =========== ===========
C. Corporate and Homebuilding Interest Activity (in thousands)
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Interest capitalized in homebuilding
inventory, beginning of period....... $ 35,546 $ 41,162 $ 37,991 $ 40,745
Interest incurred....................... 5,727 6,579 11,499 13,503
Interest expensed....................... - - - - - - (761)
Previously capitalized interest included
in cost of sales..................... (7,957) (7,082) (16,174) (12,828)
----------- ----------- ----------- -----------
Interest capitalized in homebuilding
inventory, end of period............. $ 33,316 $ 40,659 $ 33,316 $ 40,659
=========== =========== =========== ===========
-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. Extraordinary Item
On January 28, 1998, the Company sold $175,000,000 principal amount of
8 3/8% Senior Notes due 2008 (the "8 3/8% Senior Notes") at an issue price of
99.598%. The Company used the proceeds of the sale of the 8 3/8% Senior Notes to
repurchase $61,181,000 principal amount of MDC's 11 1/8% Senior Notes due 2003
(the "11 1/8% Senior Notes"), to defease the remaining $90,819,000 principal
amount of 11 1/8% Senior Notes outstanding and for general corporate purposes.
The repurchase and subsequent cancellation and defeasance of the 11 1/8% Senior
Notes resulted in an extraordinary charge to income (including the recognition
of unamortized debt discount and write-off of deferred debt issue costs) of
$15,314,000, net of an income tax benefit of $9,587,000, in the first six months
of 1998.
Net income for the first six 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 principal amount of the
11 1/8% Senior Notes. The loss resulted from the repurchase of the 11 1/8%
Senior Notes at a price above their carrying value and the write-off of
unamortized deferred debt issue costs.
-7-
F. Earnings Per Share
The computation of diluted earnings per share takes into account the
effect of dilutive stock options and 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 (the "Convertible Subordinated Notes") at a
conversion price of $7.75 per share of MDC common stock. On July 31, 1998, the
price of MDC's common stock closed at $20.5625 on the New York Stock Exchange.
The Convertible Subordinated Notes may be called for redemption by MDC beginning
on December 15, 1998. The basic and diluted earnings per share calculations are
shown below (in thousands, except per share amounts).
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Basic Earnings Per Share
Income before extraordinary item................. $ 12,581 $ 5,134 $ 20,509 $ 8,720
Extraordinary loss, net of taxes................. - - - - (15,314) (2,179)
----------- ----------- ----------- -----------
Net Income.................................. $ 12,581 $ 5,134 $ 5,195 $ 6,541
=========== =========== =========== ===========
Weighted-Average Shares Outstanding.............. 18,042 17,463 17,981 17,671
=========== =========== =========== ===========
Per Share Amounts
Income before extraordinary item............ $ .70 $ .29 $ 1.14 $ .49
=========== =========== =========== ===========
Net Income.................................. $ .70 $ .29 $ .29 $ .37
=========== =========== =========== ===========
Diluted Earnings Per Share
Income before extraordinary item................. $ 12,581 $ 5,134 $ 20,509 $ 8,720
Conversion of Convertible Subordinated Notes..... 392 394 783 787
----------- ----------- ----------- -----------
Adjusted income before extraordinary item........ 12,973 5,528 21,292 9,507
Extraordinary loss, net of taxes................. - - - - (15,314) (2,179)
----------- ----------- ----------- -----------
Adjusted Net Income......................... $ 12,973 $ 5,528 $ 5,978 $ 7,328
=========== =========== =========== ===========
Weighted-Average Shares Outstanding.............. 18,042 17,463 17,981 17,671
Stock Options, net............................... 814 507 878 555
Conversion of Convertible Subordinated Notes..... 3,613 3,613 3,613 3,613
----------- ----------- ----------- -----------
Diluted Weighted-Average Shares Outstanding. 22,469 21,583 22,472 21,839
=========== =========== =========== ===========
Per Share Amounts
Income before extraordinary item............ $ .58 $ .26 $ .95 $ .44
=========== =========== =========== ===========
Net Income.................................. $ .58 $ .26 $ .27 $ .34
=========== =========== =========== ===========
G. Supplemental Disclosure of Cash Flow Information (in thousands)
Six Months
Ended June 30,
----------------------------
1998 1997
------------ ------------
Cash paid during the period for:
Interest, net of amounts capitalized...................... $ 5,750 $ 3,159
Income taxes.............................................. $ 5,189 $ 4,656
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS.
------------------------------------
INTRODUCTION
MDC is a major regional homebuilder and one of the largest homebuilders
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; (iii) suburban Maryland; (iv)
Northern and Southern California; (v) Phoenix and Tucson, Arizona; and (vi) Las
Vegas, Nevada. The Company's financial services segment consists principally of
HomeAmerican Mortgage Corporation (a wholly owned subsidiary of M.D.C. Holdings,
Inc., "HomeAmerican"), which provides mortgage loans primarily to the Company's
home buyers.
RESULTS OF OPERATIONS
---------------------
The table below summarizes MDC's results of operations (in thousands,
except per share amounts).
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Revenues.................................... $ 303,879 $ 237,285 $ 547,380 $ 431,104
Income before income taxes and extraordinary
item...................................... $ 20,339 $ 8,282 $ 33,229 $ 14,049
Income before extraordinary item............. $ 12,581 $ 5,134 $ 20,509 $ 8,720
Net Income.................................. $ 12,581 $ 5,134 $ 5,195 $ 6,541
Earnings Per Share:
Basic
Income before extraordinary item....... $ .70 $ .29 $ 1.14 $ .49
Net Income............................. $ .70 $ .29 $ .29 $ .37
Diluted
Income before extraordinary item....... $ .58 $ .26 $ .95 $ .44
Net Income............................. $ .58 $ .26 $ .27 $ .34
Revenues for the second quarter and first half of 1998 increased 28%
and 27%, respectively, compared with the same periods in 1997, primarily due to
(i) higher home sales revenues resulting from increases in home closings and
average selling prices per home closed; and (ii) increased revenues from the
Company's financial services segment, as discussed below.
Income before income taxes and extraordinary item increased in the
second quarter and first half of 1998, compared with the same periods in 1997.
These increases primarily were a result of (i) higher operating profits from the
Company's homebuilding segment, due to increased home closings, average selling
prices per home closed and Home Gross Margins (as hereinafter defined); and (ii)
higher
-9-
operating profits from the Company's financial services segment, primarily due
to increased mortgage lending profits and a $4,450,000 gain resulting from
receipt of the final payments related to the September 1996 sale of the
Company's asset management business.
Net income for the first six months of 1998 included an extraordinary
after-tax loss of $15,314,000, or $.68 per share, recognized in connection with
the January 1998 refinancing of MDC's senior debt. The 1997 first half net
income included an extraordinary after-tax loss of $2,179,000, or $.10 per
share, from the repurchase of $38 million of the then outstanding 11 1/8% Senior
Notes.
Homebuilding Segment
- --------------------
The tables below set forth information relating to the Company's
homebuilding segment (dollars in thousands).
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Home Sales Revenues......................... $ 291,752 $ 229,769 $ 524,515 $ 416,954
Operating Profits........................... $ 16,907 $ 9,838 $ 31,051 $ 17,293
Average Selling Price Per Home Closed..... $ 186.8 $ 178.9 $ 185.2 $ 177.0
Home Gross Margins.......................... 16.6% 14.6% 16.2% 14.6%
Orders For Homes, net (units)
Colorado............................. 687 502 1,597 1,075
California........................... 310 259 620 493
Arizona.............................. 430 300 951 615
Nevada............................... 163 151 305 230
Virginia............................. 163 176 427 368
Maryland............................. 96 113 225 248
----------- ----------- ----------- -----------
Total........................... 1,849 1,501 4,125 3,029
=========== =========== =========== ===========
Homes Closed (units)
Colorado............................. 631 399 1,111 790
California........................... 194 198 375 373
Arizona.............................. 365 283 691 510
Nevada............................... 106 97 196 179
Virginia............................. 163 184 285 302
Maryland............................. 103 123 174 202
----------- ----------- ----------- -----------
Total........................... 1,562 1,284 2,832 2,356
=========== =========== =========== ===========
-10-
June 30, December 31, June 30,
1998 1997 1997
----------- ------------ -----------
Backlog (units)
Colorado............................. 1,366 880 861
California........................... 515 270 280
Arizona.............................. 653 393 336
Nevada............................... 204 95 149
Virginia............................. 353 211 269
Maryland............................. 234 183 264
----------- ----------- -----------
Total........................... 3,325 2,032 2,159
=========== =========== ===========
Backlog Estimated Sales Value............... $ 640,000 $ 380,000 $ 392,000
=========== =========== ===========
Active Subdivisions
Colorado............................. 46 48 53
California........................... 16 12 14
Arizona.............................. 27 29 23
Nevada............................... 9 6 9
Virginia............................. 20 23 27
Maryland............................. 14 19 24
----------- ----------- -----------
Total........................... 132 137 150
=========== =========== ===========
Home Sales Revenues and Homes Closed - Home sales revenues in the
second quarter and first half of 1998 represented the highest levels for
comparable periods in the Company's history and were 27% and 26% higher,
respectively, than home sales revenues for the same periods in 1997. The
improved revenues were a result of increased home closings and higher average
selling prices per home closed, as further discussed below.
Home closings increased 22% and 20%, respectively, in the second
quarter and first half of 1998, compared with the same periods in 1997. These
increases primarily were due to higher home closings in Colorado (increases of
58% and 41%, respectively) and Arizona (increases of 29% and 35%, respectively),
as a result of the strong demand for homes in these markets and Backlog (as
hereinafter defined) levels throughout the first six months of 1998 which were
substantially higher than during the first half of 1997. Home closings decreased
in the second quarter and first half of 1998, compared with the same periods in
1997, in (i) Virginia and Maryland, primarily due to decreases in the number of
active subdivisions in these markets in connection with the Company's strategy
over the past eighteen months to eliminate lower-margin subdivisions and
redeploy capital to more profitable projects within and outside these markets;
and (ii) Northern California, because the Company has exited the Sacramento
market and its new subdivisions in the San Francisco Bay area are not yet
active.
While the Company anticipates that it will deliver a higher number of
home closings in the third quarter of 1998 than in the third quarter of 1997,
the 1998 third quarter home closings should represent a lower percentage of June
30 Backlog than in 1997, due to a number of factors. These factors include (i) a
34% reduction in the number of unsold homes under construction at June 30, 1998,
compared with June 30, 1997; (ii) a 78% increase in the number of homes in
Backlog which have not been started as of June 30, 1998, compared with June 30,
1997; and (iii) shortages of subcontractor labor in California, Arizona, Nevada
and Virginia, which have delayed the development of lots and extended the
-11-
construction period for a number of homes in these markets. See "Forward-Looking
Statements" below.
Average Selling Price Per Home Closed - The increases in the average
selling prices per home closed of $7,900 and $8,200, respectively, in the second
quarter and first half of 1998, compared with the same periods in 1997, reflect
the impact of (i) a greater number of homes closed in higher-priced subdivisions
in Southern California and Phoenix; (ii) a higher proportion of detached homes
closed in Virginia and Maryland, which generally have higher selling prices than
townhomes; and (iii) selling price increases in most of the Company's markets,
particularly in Southern California and Colorado.
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 200 and 160 basis
points, respectively, during the second quarter and first half of 1998, compared
with the same periods in 1997. Home Gross Margins increased significantly in the
second quarter and first half of 1998 in Colorado, Southern California and
Arizona, largely as a result of (i) in Southern California and Colorado, selling
price increases and reduced incentives offered to home buyers due to the
increased demand for new homes in these markets; (ii) the favorable impact of a
number of home closings in certain highly profitable subdivisions; (iii) an
increased level of volume discounts received from suppliers and manufacturers in
connection with certain national purchasing contracts; and (iv) initiatives
implemented in each of the Company's markets designed to improve operating
efficiency, control costs and increase rates of return.
Looking forward, the Company believes that Home Gross Margins for the
third and fourth quarters in 1998 will exceed margins for comparable quarters in
1997 by more than 100 basis points, as experienced by the Company in the first
two quarters of 1998. Future growth in Home Gross Margins may be impacted
adversely by (i) increased competition in most of the Company's markets; (ii)
increases in, among other things, the costs of subcontracted labor, finished
lots and building materials to the extent that market conditions prevent the
recovery of increased costs through higher selling prices; and (iii) increases
in carrying costs due to lengthened construction periods resulting from
shortages of subcontractor labor, as discussed above. See "Forward Looking
Statements" below.
Orders for Homes and Backlog - Orders for homes in the second quarter
and first half of 1998 increased 23% and 36%, respectively, compared with the
same periods in 1997, despite a decrease in the number of active subdivisions to
132 at June 30, 1998, compared with 150 at June 30, 1997. These home order
increases resulted from comparatively strong home orders in all of the Company's
markets except Northern California, Virginia and Maryland in response to a
robust national economy marked by low unemployment, low mortgage rates, high
consumer confidence and home affordability and low inventories of new homes.
Second quarter 1998 home orders, compared with the same period in 1997,
particularly were strong in Arizona, Colorado and Southern California, which
increased 43%, 37% and 27%, respectively, due to (i) significant increases in
the number of monthly home orders per active subdivision as a result of the
strength of the demand for new homes in these markets; and (ii) in Arizona and
Southern California, an increase in the number of active subdivisions as a
result of the Company's continuing expansion in these markets.
The increased orders for homes in the second quarter and first half of
1998 contributed to a 54% increase in the Company's homes under contract but not
yet delivered ("Backlog") at June 30, 1998 to 3,325 units, compared with a
Backlog of 2,159 units at June 30, 1997. Assuming no significant change in
market conditions or mortgage interest rates, the Company expects approximately
70% of its
-12-
June 30, 1998 Backlog to close under existing sales contracts during the second
half of 1998 and first quarter of 1999. The remaining 30% of the homes in
Backlog are not expected to close due to cancellations. See "Forward-Looking
Statements" below.
The Company received approximately 525 orders for homes in July 1998,
compared with 447 orders for July 1997. The July 1998 year-over-year increase is
attributable to improved home orders in most of the Company's markets, with
particular strength in Arizona and Nevada (both up over 45%), as well as
Colorado (up 15%). The Company is unable to predict if higher year-over-year
home orders in 1998, compared with 1997, will continue in the future. See
"Forward-Looking Statements" below.
Marketing - Marketing expenses (which include, among other things,
amortization of deferred marketing, model home expenses and sales commissions)
totalled $18,146,000 and $33,396,000, respectively, for the second quarter and
first half of 1998, compared with $15,585,000 and $28,100,000, respectively, for
the same periods in 1997. The increases in 1998 resulted from higher (i)
marketing-related salaries, benefits and sales commissions incurred and deferred
marketing costs amortized in connection with the increased number of home
closings; and (ii) product advertising and other costs incurred in connection
with the Company's expanded operations, particularly in Colorado and Southern
California.
General and Administrative - General and administrative expenses
increased to $10,935,000 and $20,763,000, respectively, during the second
quarter and first half of 1998, compared with $7,663,000 and $14,546,000,
respectively, for the same periods in 1997, primarily due to (i) increased
compensation costs resulting from expanded operations in each of the Company's
markets except Northern California and Maryland; (ii) the write-off of due
diligence costs and deposits with respect to certain proposed homebuilding
projects which were not acquired; and (iii) additional costs associated with new
branch offices in Southern California and design centers in Southern California
and Phoenix.
Asset Impairment Charges
Operating results during the second quarter and first half of 1998 were
reduced by asset impairment charges of $3,000,000, compared with impairment
charges of $1,100,000 and $2,350,000, respectively, for the same periods in
1997, related to certain of the Company's homebuilding assets primarily in
suburban Maryland. The asset impairment charges resulted from (i) the
recognition of losses anticipated from the closing of certain homes in Backlog
and from the reduction of selling prices and the offering of increased
incentives to stimulate sales of certain completed unsold homes in inventory;
(ii) in 1998, the write-down to fair value of certain subdivisions which have
experienced slow sales and negative Home Gross Margins; and (iii) in 1997, the
write-off of capitalized costs, primarily deferred marketing and option
deposits, related to several low-margin projects.
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Land Inventory
The table below shows the carrying value of land and land under
development, by market, the total number of lots owned and lots controlled under
option agreements, and total option deposits (dollars in thousands).
June 30, December 31, June 30,
1998 1997 1997
----------- ----------- -----------
Colorado................................ $ 47,986 $ 62,093 $ 61,683
California.............................. 53,304 44,423 22,255
Arizona................................. 27,068 32,067 36,323
Nevada.................................. 19,722 17,342 14,937
Virginia................................ 14,032 21,081 23,407
Maryland................................ 10,788 16,006 22,398
----------- ----------- -----------
Total.............................. $ 172,900 $ 193,012 $ 181,003
=========== =========== ===========
Total Lots Owned........................ 8,358 9,466 10,043
Total Lots Controlled Under Option...... 6,198 5,730 5,642
----------- ----------- -----------
Total Lots Owned and Controlled... 14,556 15,196 15,685
=========== =========== ===========
Total Option Deposits................... $ 8,770 $ 7,545 $ 5,538
=========== =========== ===========
Financial Services Segment
- --------------------------
Operating profit from the financial services segment was $7,162,000 and
$9,187,000, respectively, for the second quarter and first half of 1998,
compared with $1,404,000 and $3,284,000, respectively, for the same periods in
1997. The operating profit increases in both the second quarter and the first
half of 1998 primarily were due to (i) the recognition of a $4,450,000
previously deferred gain resulting from receipt of the final payments related to
the September 1996 sale of the Company's asset management business; and (ii)
increases of 92% and 58%, respectively, in profits from HomeAmerican's mortgage
lending operations, primarily resulting from significantly higher mortgage
origination volume.
The table below summarizes the results of HomeAmerican's operations (in
thousands).
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Gains on Sales of Mortgage Loans, net....... $ 2,012 $ 1,177 $ 4,016 $ 2,492
Operating Profits........................... $ 2,572 $ 1,341 $ 4,596 $ 2,915
Principal Amount of Originations and
Purchases
MDC home buyers.......................... $ 173,205 $ 124,916 $ 314,329 $ 232,250
Spot..................................... 16,563 7,643 28,553 14,563
Correspondent............................ 35,997 15,164 76,674 30,607
----------- ----------- ----------- -----------
Total.............................. $ 225,765 $ 147,723 $ 419,556 $ 277,420
=========== =========== =========== ===========
Capture Rate................................ 71% 66% 72% 67%
=========== =========== =========== ===========
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HomeAmerican's operating profits for the second quarter and first half
of 1998 increased, compared with the same periods in 1997, primarily due to (i)
$721,000 and $1,124,000 increases, respectively, in origination fees; and (ii)
$835,000 and $1,524,000 increases, respectively, in gains from sales of mortgage
loans. These increases partially were offset by higher general and
administrative expenses resulting from the increased mortgage lending activity.
HomeAmerican's loan originations and purchases increased 53% and 51%,
respectively, in the second quarter and first half of 1998, compared with the
same periods in 1997. These increases primarily were due to a higher number of
(i) Company home closings; (ii) mortgage loans originated by HomeAmerican for
MDC home buyers as a percentage of total MDC home closings ("Capture Rate"); and
(iii) loans purchased from correspondents. HomeAmerican continues to benefit
from the Company's homebuilding growth, as MDC home buyers were the source of
approximately 75% of the principal amount of mortgage loans originated and
purchased by HomeAmerican in the second quarter and first half of 1998.
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.
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 but not
capitalized is reflected as interest expense. No interest expense was recorded
in the first half of 1998, compared with $761,000 for the same period in 1997.
Corporate and homebuilding interest incurred decreased to $5,727,000
and $11,499,000, respectively, for the second quarter and first half of 1998,
compared with $6,579,000 and $13,503,000, respectively, for the same periods in
1997, primarily due to lower effective interest rates on the Company's
outstanding debt.
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 $4,040,000 and $7,552,000, respectively, during
the second quarter and first half of 1998, compared with $3,254,000 and
$6,500,000, respectively, for the same periods in 1997. These increases
primarily resulted from higher compensation expenses related to the Company's
expanding operations.
The Company has substantially completed the modification and testing of
its computer systems to accurately process information which includes the Year
2000 date and beyond ("Year 2000 Compliant"). Pursuant to current accounting
rules, the cost of such modification and testing has been expensed as incurred.
The Company is in the process of surveying certain of its significant vendors
and suppliers to determine whether they are Year 2000 Compliant. The Company has
little or no control over whether its vendors and suppliers will be Year 2000
Compliant on a timely basis. The Company does not believe that the failure of
its significant vendors and suppliers to be Year 2000 Compliant would
-15-
have a material adverse effect upon the financial condition, results of
operations or cash flows of the Company. 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. 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.
MDC's overall effective income tax rates of 38.1% and 38.3%,
respectively, for the second quarter and first half of 1998, differed from the
federal statutory rate of 35% primarily due to the impact of state income taxes.
The Internal Revenue Service (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.
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 8 3/8% Senior Notes and Convertible Subordinated
Notes due in 2008 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 1998. 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 to the extent market conditions permit 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.
-16-
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 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 June 1998, the Company modified its agreement with a
group of banks for its unsecured revolving line of credit (the "Homebuilding
Line"). Under the modified terms, the available borrowings have been increased
to $300,000,000 from $175,000,000, and the maturity date of the agreement has
been extended for two years to June 30, 2003, although, pursuant to the terms of
the related credit agreement, a term-out of this credit may commence earlier
under certain circumstances. At June 30, 1998, $65,000,000 was borrowed and
$4,849,000 in letters of credit were outstanding under the Homebuilding Line.
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 normally are sold within 35 days after origination or purchase.
During the first half of 1998 and 1997, HomeAmerican sold $395,152,000 and
$279,000,000, 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 is $51,000,000. At June 30, 1998, $29,729,000 was borrowed and an
additional $21,271,000 was collateralized and available to be borrowed. The
Mortgage Line is cancelable upon 90 days' notice.
Convertible Subordinated Notes - The $28,000,000 principal amount of
Convertible Subordinated Notes are convertible at the option of the holders
thereof into shares of MDC common stock at a conversion price of $7.75 per
share. On July 31, 1998, the price of MDC's common stock closed at $20.5625 on
the New York Stock Exchange. The Convertible Subordinated Notes may be called
for redemption by MDC beginning on December 15, 1998.
General - The agreements for the Company's 8 3/8% Senior Notes,
Convertible Subordinated Notes and bank lines of credit include representations,
warranties and covenants. The Company believes that it is in compliance with
these representations, warranties and covenants.
Consolidated Cash Flow
During the first six months of 1998, the Company used $37,897,000 of
cash in its operating activities, primarily due to increases in homebuilding and
mortgage loan inventories in conjunction with its expanded homebuilding
operations. The Company financed these operating cash requirements primarily
through borrowings on its lines of credit, as well as the $13,250,000 proceeds
from the sale of
-17-
the Company's headquarters office building and the collection of $4,450,000 in
notes receivable with respect to the September 1996 sale of the Company's asset
management business.
During the first six months of 1997, the Company used $46,869,000 of
cash to repurchase 838,000 shares of MDC Common Stock and $38,000,000 of 11 1/8%
Senior Notes. The Company also used $22,279,000 of cash in its operating
activities. The Company financed these activities primarily with internally
generated funds and line of credit borrowings.
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. 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) the relative stability of debt and equity markets; (iv)
competition; (v) the availability and cost of land and other raw materials used
by the Company in its homebuilding operations; (vi) demographic changes; (vii)
shortages and the cost of labor; (viii) weather related slowdowns; (ix) slow
growth initiatives; (x) building moratoria; (xi) governmental regulation,
including the interpretation of tax, labor and environmental laws; (xii) changes
in consumer confidence; (xiii) required accounting changes; and (xiv) other
factors over which the Company has little or no control.
-18-
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.
The Company is not aware of any litigation, matter or pending claim
against the Company which would result in material contingent liabilities
related to environmental hazards or asbestos.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREOWNERS.
- ------ ----------------------------------------------
MDC held its Annual Meeting of Shareowners (the "Meeting") on May 18,
1998. At the Meeting, (i) Larry A. Mizel and Herbert T. Buchwald were elected as
Class I Directors for three-year terms, expiring in 2001; and (ii) a proposal
submitted by a shareowner to provide for cumulative voting in the election of
directors was not approved.
ITEM 5. OTHER INFORMATION.
- ------ -----------------
On July 24, 1998, the Company's board of directors declared a dividend
of four cents per share for the quarter ended June 30, 1998, payable August 14,
1998, to shareowners of record on July 31, 1998. Future dividend payments are
subject to the discretion of the Company's board of directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ --------------------------------
(a) Exhibit:
4.1 Third Modification Agreement as of
June 2, 1998 among Richmond American
Homes of California, Inc., Richmond
American Homes of Maryland, Inc.,
Richmond American Homes of Nevada,
Inc., Richmond American Homes of
Virginia, Inc., Richmond American
Homes of Arizona, Inc., Richmond
-19-
American Homes of Colorado, Inc., and
Richmond Homes, Inc. II and Bank One,
Arizona, NA, as Agent.
4.2 Form of Promissory Note of Richmond
American Homes of California, Inc.,
Richmond American Homes of Maryland,
Inc., Richmond American Homes of
Nevada, Inc., Richmond American Homes
of Virginia, Inc., Richmond American
Homes of Arizona, Inc., and Richmond
American Homes of Colorado, Inc. as
Makers dated June 2, 1998.
4.3 Second Amendment to M.D.C. Holdings,
Inc. Director Equity Incentive Plan.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the
Registrant during the period covered by this
Quarterly Report on Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 4, 1998 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
-20-