- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
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, 1994
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 20, 1994, 19,124,000 shares of M.D.C. Holdings, Inc. common stock
were outstanding.
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M.D.C. HOLDINGS, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of September 30, 1994
(Unaudited) and December 31, 1993 . . . . . . . . 1
Statements of Income for the three and nine
months ended September 30, 1994 and 1993
(Unaudited) . . . . . . . . . . . . . . . . . . . 3
Statements of Cash Flows for the nine months
ended September 30, 1994 and 1993 (Unaudited) . . 4
Notes to Financial Statements (Unaudited). . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . 22
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . 40
Item 4. Submission of Matters to a Vote of Stockholders. . 40
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 41
(i)
M.D.C. HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
(UNAUDITED)
ASSETS
Corporate
Cash and cash equivalents. . . . . . . . $ 30,184 $ 42,443
Investments and marketable securities,
net . . . . . . . . . . . . . . . . . 889 765
Property and equipment, net. . . . . . . 10,048 10,432
Deferred income taxes. . . . . . . . . . 11,498 8,100
Deferred issue costs, net. . . . . . . . 10,781 11,233
Other assets, net. . . . . . . . . . . . 2,734 3,200
--------- ---------
66,134 76,173
--------- ---------
Home Building
Cash and cash equivalents. . . . . . . . 10,520 18,479
Home sales and other accounts
receivable . . . . . . . . . . . . . . 17,040 5,423
Investment in metropolitan district
bonds. . . . . . . . . . . . . . . . . -- 13,795
Investments and marketable securities,
net . . . . . . . . . . . . . . . . . 10,073 --
Inventories, net
Housing completed or under
construction . . . . . . . . . . . . 303,438 201,023
Land and land under development. . . . 181,349 192,881
Prepaid expenses and other assets, net . 43,532 48,863
--------- ---------
565,952 480,464
--------- ---------
Mortgage Lending
Cash and cash equivalents. . . . . . . . 6,537 1,505
Restricted cash. . . . . . . . . . . . . 3,400 3,400
Accrued interest and other assets, net . 1,555 2,571
Mortgage loans held in inventory, net. . 37,768 68,065
--------- ---------
49,260 75,541
--------- ---------
Asset Management
Cash and cash equivalents. . . . . . . . 568 576
Mortgage Collateral, net, and assets
related to CMO bonds and related
liabilities. . . . . . . . . . . . . . 68,607 134,166
Equity CMO Interests, net. . . . . . . . 3,722 6,427
Other loans and assets, net. . . . . . . 2,874 3,519
--------- ---------
75,771 144,688
--------- ---------
Total Assets . . . . . . . . . . . . . . . $757,117 $776,866
--------- ---------
--------- ---------
(continued)
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,
1994 1993
------------- ------------
(UNAUDITED)
LIABILITIES
Corporate
Accounts payable and accrued expenses. . . . $ 31,684 $ 20,846
Income taxes payable . . . . . . . . . . . . 20,188 28,711
Notes payable. . . . . . . . . . . . . . . . 3,593 3,624
Senior Notes, net. . . . . . . . . . . . . . 187,312 187,199
Subordinated Notes, net. . . . . . . . . . . 38,216 38,213
--------- ---------
280,993 278,593
--------- ---------
Home Building
Accounts payable and accrued expenses. . . . 80,048 70,741
Lines of credit. . . . . . . . . . . . . . . 73,581 24,645
Notes payable. . . . . . . . . . . . . . . . 38,037 62,495
--------- ---------
191,666 157,881
--------- ---------
Mortgage Lending
Accounts payable and accrued expenses. . . . 3,921 8,487
Line of credit . . . . . . . . . . . . . . . 24,999 29,500
--------- ---------
28,920 37,987
--------- ---------
Asset Management
Accounts payable and accrued expenses. . . . 1,174 3,051
CMO bonds, net, and related liabilities,
recourse solely to applicable subsidiary
assets . . . . . . . . . . . . . . . . . . . 65,405 123,500
--------- ---------
66,579 126,551
--------- ---------
Total Liabilities. . . . . . . . . . . . . . 568,158 601,012
--------- ---------
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; 21,737,000 and 20,914,000
shares issued, respectively, at
September 30, 1994 and December 31, 1993 . . 217 209
Additional paid-in capital . . . . . . . . . . 133,690 133,455
Retained earnings. . . . . . . . . . . . . . . 70,757 57,879
--------- ---------
204,664 191,543
Less treasury stock, at cost; 2,667,000 and
2,664,000 shares, respectively, at
September 30, 1994 and
December 31, 1993 . . . . . . . . . . . . . (15,705) (15,689)
--------- ---------
Total Stockholders' Equity . . . . . . . . 188,959 175,854
--------- ---------
Total Liabilities and Stockholders'
Equity. . . . . . . . . . . . . . . . . . . $ 757,117 $ 776,866
--------- ---------
--------- ---------
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,
------------------- -------------------
1994 1993 1994 1993
-------- -------- -------- --------
REVENUES:
Home Building . . . . . . $208,571 $178,522 $557,406 $422,524
Mortgage Lending . . . . 2,537 5,924 11,927 15,402
Asset Management . . . . 2,808 5,919 10,410 26,965
Corporate . . . . . . . . 333 826 970 1,842
-------- -------- -------- --------
Total Revenues . . . 214,249 191,191 580,713 466,733
-------- -------- -------- --------
COSTS AND EXPENSES:
Home Building . . . . . . 195,624 170,784 522,820 407,100
Mortgage Lending . . . . 1,964 3,375 6,812 9,081
Asset Management . . . . 2,069 5,153 7,866 19,848
Corporate general and
administrative . . . . 4,160 4,018 12,059 11,401
Corporate and home
building interest
(Note E) . . . . . . 1,905 2,784 6,912 8,672
-------- -------- -------- --------
Total Expenses . . . 205,722 186,114 556,469 456,102
-------- -------- -------- --------
Income before income taxes 8,527 5,077 24,244 10,631
Provision for income taxes 3,107 1,854 9,314 3,479
-------- -------- -------- --------
Net Income . . . . . . . . $5,420 $3,223 $14,930 $7,152
-------- -------- -------- --------
-------- -------- -------- --------
EARNINGS PER SHARE
Primary . . . . . . . . . $.26 $.14 $.73 $.32
-------- -------- -------- --------
-------- -------- -------- --------
Fully-diluted . . . . . . $.24 $.14 $.67 $.32
-------- -------- -------- --------
-------- -------- -------- --------
WEIGHTED-AVERAGE SHARES
OUTSTANDING
Primary . . . . . . . . . 20,499 22,338 20,435 22,333
-------- -------- -------- --------
-------- -------- -------- --------
Fully-diluted . . . . . . 24,112 22,431 24,099 22,463
-------- -------- -------- --------
-------- -------- -------- --------
DIVIDENDS DECLARED PER SHARE $ .02 $ -- $ .04 $ --
-------- -------- -------- --------
-------- -------- -------- --------
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,
-------------------------------
1994 1993
------------- -------------
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . $ 14,930 $ 7,152
Adjustments To Reconcile Net Income To
Net Cash Used In Operating
Activities:
Gains on sales of mortgage-related
assets . . . . . . . . . . . . . . . . (295) (6,227)
Depreciation and amortization. . . . . . 6,592 5,596
Deferred income taxes. . . . . . . . . . (3,398) (1,847)
Equity CMO Interest valuation
adjustments. . . . . . . . . . . . . . -- 3,100
Net Changes In Assets and Liabilities
Mortgage loans held in inventory . . . . 30,668 (16,611)
Home building inventories. . . . . . . . (93,807) (35,244)
Receivables. . . . . . . . . . . . . . . (10,427) (3,277)
Accounts payable and accrued expenses. . 13,076 23,669
Income taxes payable . . . . . . . . . . (8,523) (218)
Other, net . . . . . . . . . . . . . . . 3,236 (7,125)
--------- ---------
Net Cash Used In Operating Activities. . . . . (47,948) (31,032)
--------- ---------
INVESTING ACTIVITIES:
Mortgage Collateral and other loans
Principal payments and prepayments . . . . 32,324 69,407
Sales . . . . . . . . . . . . . . . . . 19,526 30,403
Distributions of capital from Equity
CMO Interests. . . . . . . . . . . . . . . 2,705 5,963
CMO Bond principal payments. . . . . . . . . -- 5,057
Redemption of metropolitan district
bonds . . . . . . . . . . . . . . . . . 16,395 --
Changes in investments and marketable
securities, net. . . . . . . . . . . . . . (10,073) 12,000
Changes in restricted cash, net. . . . . . . 12,365 14,816
Other, net . . . . . . . . . . . . . . . . . (744) (977)
--------- ---------
Net Cash Provided By Investing Activities. . . 72,498 136,669
--------- ---------
See notes to condensed consolidated financial statements.
-4-
M.D.C. HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1994 1993
------------ --------------
FINANCING ACTIVITIES:
CMO bonds - Principal payments . . . . . . $ (57,494) $ (102,731)
Lines of credit
Advances . . . . . . . . . . . . . . . . 448,337 212,149
Principal payments . . . . . . . . . . . (405,876) (203,454)
Subordinated Note payments . . . . . . . . -- (1,690)
Notes payable
Borrowings . . . . . . . . . . . . . . . 13,561 59,489
Principal payments . . . . . . . . . . . (37,659) (66,515)
Dividend payments. . . . . . . . . . . . . (760) --
Other, net . . . . . . . . . . . . . . . . 147 224
---------- ----------
Net Cash Used In Financing Activities. . . . (39,744) (102,528)
---------- ----------
Net Increase (Decrease) In Cash and Cash
Equivalents . . . . . . . . . . . . . . . . (15,194) 3,109
Cash and Cash Equivalents
Beginning Of Period. . . . . . . . . . . . 63,003 61,028
---------- ----------
End Of Period. . . . . . . . . . . . . . . $ 47,809 $ 64,137
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest, net of amounts capitalized . . . $ 6,020 $ 20,260
Income taxes . . . . . . . . . . . . . . . 20,326 5,249
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Home building inventory purchases
financed by seller . . . . . . . . . . . . $ 3,759 $ 12,397
Home building land inventory sales
financed by MDC. . . . . . . . . . . . . . 1,219 1,553
Disposition of land inventories
collateralized by notes payable
Inventories. . . . . . . . . . . . . . . 2,864 --
Notes payable. . . . . . . . . . . . . . 2,176 --
Accrued interest and other liabilities . 688 --
Long-term investment valuation allowance . . -- 151
See notes to condensed consolidated financial statements.
-5-
M.D.C. HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. PRESENTATION OF FINANCIAL STATEMENTS
The condensed consolidated financial statements of M.D.C. Holdings, Inc.
("MDC" or the "Company," which, unless otherwise indicated, refers to M.D.C.
Holdings, Inc. and its consolidated subsidiaries) have been prepared by MDC,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. These statements reflect all adjustments (including all
normal recurring accruals) which, in the opinion of management, are necessary to
present fairly the financial position, results of operations and cash flows of
MDC as of September 30, 1994 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, 1993, as amended.
Price Waterhouse LLP has made a review, and not an audit, of the unaudited
condensed consolidated financial statements of the Company for the three-month
and nine-month periods ended September 30, 1994 and 1993 (based on procedures
adopted by the American Institute of Certified Public Accountants) as set forth
in their separate report dated November 1, 1994, which is included as an exhibit
to this Form 10-Q. This report is not a "report" within the meaning of Sections
7 and 11 of the Securities Act of 1933, and the independent accountant's
liability under Section 11 does not extend to it.
Certain reclassifications have been made in the 1993 financial statements
to conform to the classifications used in the current year.
-6-
B. INFORMATION ON BUSINESS SEGMENTS
The Company operates in three business segments: home building, mortgage
lending and asset management. A summary of the Company's segment information is
shown below (in thousands).
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ -------------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
Home Building
Home sales . . . . . . . . . . . . . . . . $207,098 $175,862 $548,711 $415,606
Land sales . . . . . . . . . . . . . . . . 1,001 2,177 7,712 5,504
Other revenues . . . . . . . . . . . . . . 472 483 983 1,414
---------- ---------- ---------- ----------
208,571 178,522 557,406 422,524
---------- ---------- ---------- ----------
Home cost of sales . . . . . . . . . . . . 176,125 151,252 463,523 356,224
Land cost of sales . . . . . . . . . . . . 1,263 2,142 7,418 5,861
Marketing. . . . . . . . . . . . . . . . . 11,373 9,683 31,300 24,835
General and administrative . . . . . . . . 6,863 7,707 20,579 20,180
---------- ---------- ---------- ----------
195,624 170,784 522,820 407,100
---------- ---------- ---------- ----------
Operating Profit . . . . . . . . . . . . 12,947 7,738 34,586 15,424
---------- ---------- ---------- ----------
Mortgage Lending
Interest revenues. . . . . . . . . . . . . 725 1,347 2,185 3,574
Origination fees . . . . . . . . . . . . . 1,110 1,728 3,491 4,370
Gains on sale of mortgage
servicing. . . . . . . . . . . . . . . . 398 1,382 5,166 3,968
Gains (losses) on sales of
mortgage loans, net. . . . . . . . . . . (166) 990 (347) 2,344
Mortgage servicing and other . . . . . . . 470 477 1,432 1,146
---------- ---------- ---------- ----------
2,537 5,924 11,927 15,402
---------- ---------- ---------- ----------
Interest expense . . . . . . . . . . . . . -- 482 248 1,242
General and administrative . . . . . . . . 1,964 2,893 6,564 7,839
---------- ---------- ---------- ----------
1,964 3,375 6,812 9,081
---------- ---------- ---------- ----------
Operating Profit . . . . . . . . . . . 573 2,549 5,115 6,321
---------- ---------- ---------- ----------
Asset Management
Interest revenues. . . . . . . . . . . . . 2,003 4,876 7,346 17,875
Gains (losses) on sales of
mortgage-related assets. . . . . . . . . (63) 245 295 6,227
Management fees and other. . . . . . . . . 1,154 1,084 3,620 3,714
---------- ---------- ---------- ----------
3,094 6,205 11,261 27,816
---------- ---------- ---------- ----------
Interest expense . . . . . . . . . . . . . 1,606 4,075 6,120 14,803
Equity in losses of Equity
CMO Interests, net . . . . . . . . . . . -- 500 -- 3,100
General and administrative . . . . . . . . 463 578 1,746 1,945
---------- ---------- ---------- ----------
2,069 5,153 7,866 19,848
---------- ---------- ---------- ----------
Operating Profit . . . . . . . . . . . 1,025 1,052 3,395 7,968
---------- ---------- ---------- ----------
-7-
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1994 1993 1994 1993
------- ------- ------- -------
Corporate
Other revenues.............. $ 333 $ 826 $ 970 $ 1,842
------- ------- ------- -------
Interest expense............ 2,191 3,070 7,763 9,523
General and administrative.. 4,160 4,018 12,059 11,401
------- ------- ------- -------
6,351 7,088 19,822 20,924
------- ------- ------- -------
Net Corporate Expenses... (6,018) (6,262) (18,852) (19,082)
------- ------- ------- -------
Intersegment Eliminations
Asset management interest
revenues................... (286) (286) (851) (851)
------- ------- ------- -------
Corporate interest expense.. (286) (286) (851) (851)
------- ------- ------- -------
-- -- -- --
------- ------- ------- -------
Income Before Income Taxes..... $ 8,527 $ 5,077 $24,244 $10,631
------- ------- ------- -------
------- ------- ------- -------
C. ACQUISITION OF ADDITIONAL SHARES OF RICHMOND HOMES
Prior to February 2, 1994, Messrs. Larry A. Mizel (Chairman of the Board
and Chief Executive Officer of the Company) and David D. Mandarich (Executive
Vice President - Real Estate, Co-Chief Operating Officer and a director of the
Company) owned 35% of the outstanding shares of Richmond Homes, Inc. I
("Richmond Homes") common stock. Richmond Homes and its subsidiaries conduct
the Company's Colorado home building operations. In furtherance of the
Company's desire to own all of the outstanding shares of Richmond Homes common
stock, in December 1993, a special committee of the Board of Directors of the
Company (the "Special Committee") negotiated on behalf of the Company terms of
an option agreement with Messrs. Mizel and Mandarich to purchase the shares of
Richmond Homes common stock owned by them for a purchase price of up to
$3,500,000 in the aggregate. The purchase price for the shares of Richmond
Homes common stock was to be paid in additional shares of common stock of MDC
("MDC Common Stock") valued at $5.75 per share, the closing price of MDC Common
Stock on the date of the option agreement. The Special Committee engaged a
financial advisor to perform a business enterprise valuation of Richmond Homes.
In February 1994, based on the results of the valuation, the maximum of
$3,500,000 was paid by issuing an aggregate of 608,695 shares of MDC Common
Stock to Messrs. Mizel and Mandarich.
As the transaction was between related parties, the issuance of the MDC
Common Stock was recorded based on the net book value of Richmond Homes, which
had approximately zero common stockholders' equity at the date of the
acquisition. Accordingly, the value of the shares of MDC Common Stock issued to
Messrs. Mizel and Mandarich was recorded at zero.
-8-
D. ACCOUNTING CHANGE - ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES
Effective January 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which supersedes SFAS No. 12. The
adoption of SFAS No. 115 had no effect on Net Income and had an immaterial
effect on Stockholders' Equity.
E. CORPORATE AND HOME BUILDING INTEREST ACTIVITY
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1994 1993 1994 1993
--------- -------- -------- ----------
(IN THOUSANDS) (IN THOUSANDS)
Interest capitalized in home
building inventory,
beginning of period..........$ 42,522 $ 46,430 $ 42,681 $ 48,440
Corporate and home building
interest incurred............ 9,114 6,535 26,361 18,821
Corporate and home building
interest expensed............ (1,905) (2,784) (6,912) (8,672)
Previously capitalized home
building interest included
in cost of sales............. (6,918) (5,586) (19,317) (13,994)
-------- -------- -------- --------
Interest capitalized in home
building inventory, end of
period.......................$ 42,813 $ 44,595 $ 42,813 $ 44,595
-------- -------- -------- --------
-------- -------- -------- --------
Home building inventories,
end of period................$484,787 $384,325 $484,787 $384,325
-------- -------- -------- --------
-------- -------- -------- --------
-9-
F. EARNINGS PER SHARE
Primary earnings per share are based on the weighted-average number of
common and common equivalent shares outstanding during each period. In 1994,
the computation of fully-diluted earnings per share also assumes the conversion
into MDC Common Stock of all of the $28,000,000 outstanding principal amount of
the 8 3/4% convertible subordinated notes due December 2005 (the "Convertible
Notes") at a conversion price of $7.75 per share of MDC Common Stock. The
primary and fully-diluted earnings per share calculations are shown below (in
thousands, except per share amounts).
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1994 1993 1994 1993
------- ------- ------- -------
Primary Earnings Per Share
Calculation:
Net Income . . . . . . . . . . . . . . $ 5,420 $ 3,223 $14,930 $ 7,152
------- ------- ------- -------
------- ------- ------- -------
Weighted-average shares outstanding . . 19,044 20,448 18,938 20,449
Dilutive stock options . . . . . . . . 1,455 1,890 1,497 1,884
------- ------- ------- -------
Total Weighted-Average Shares . . . . 20,499 22,338 20,435 22,333
------- ------- ------- -------
------- ------- ------- -------
Primary Earnings Per Share . . . . . . $.26 $.14 $.73 $.32
------- ------- ------- -------
------- ------- ------- -------
Fully-Diluted Earnings Per Share
Calculation:
Net Income . . . . . . . . . . . . . . $5,420 $3,223 $14,930 $7,152
Adjustment for interest on Convertible
Notes, net of income tax benefit;
conversion assumed . . . . . . . . . 384 -- 1,152 --
------- ------- ------- -------
Adjusted Net Income . . . . . . . . . $5,804 $3,223 $16,082 $7,152
------- ------- ------- -------
------- ------- ------- -------
Weighted-average shares outstanding . . 19,044 20,448 18,938 20,449
Dilutive stock options . . . . . . . . 1,455 1,983 1,548 2,014
Shares issuable upon conversion of
Convertible Notes; conversion
assumed . . . . . . . . . . . . . . . 3,613 -- 3,613 --
------- ------- ------- -------
Total Weighted-Average Shares . . . 24,112 22,431 24,099 22,463
------- ------- ------- -------
------- ------- ------- -------
Fully-Diluted Earnings Per Share . . . $.24 $.14 $.67 $.32
------- ------- ------- -------
------- ------- ------- -------
-10-
G. EQUITY CMO INTERESTS
MDC owns a 49.999% ownership interest in seven collateralized mortgage
obligation ("CMO") issuances which are accounted for on the equity method
(collectively, "Equity CMO Interests"). The unaudited condensed financial
information of the Equity CMO Interests is set forth below. The information
provided includes 100% of the gross assets and liabilities and operating results
comprising these interests (in thousands).
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
Condensed Combined Summarized
Financial Condition (100%)
Assets . . . . . . . . . . . . . . . . . . $ 275,932 $ 422,338
Liabilities. . . . . . . . . . . . . . . . . 260,312 398,048
--------- ---------
Net Assets . . . . . . . . . . . . . . . . . $ 15,620 $ 24,290
--------- ---------
--------- ---------
MDC's Share of Net Assets (Net of
Valuation Allowances of $4,088 and
$5,718, respectively, at
September 30, 1994 and December 31, 1993). . . $ 3,722 $ 6,427
--------- ---------
--------- ---------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
1994 1993 1994 1993
-------- -------- -------- --------
Condensed Combined Operating
Results (100%)
Earnings before
premium/discount
amortization
Interest and other
revenues . . . . . . . . . . . . . . . $ 6,670 $ 11,558 $ 22,854 $ 40,220
Interest and other
expenses . . . . . . . . . . . . . . . 5,735 9,104 18,865 31,400
-------- -------- -------- --------
935 2,454 3,989 8,820
-------- -------- -------- --------
Premium/discount amortization. . . . . . . . . . (1,393) (3,564) (7,249) (15,610)
-------- -------- -------- --------
Net Loss (100%). . . . . . . . . . . . . . . . . $ (458) $ (1,110) $ (3,260) $ (6,790)
-------- -------- -------- --------
-------- -------- -------- --------
Equity in losses of Equity CMO
Interests before valuation
adjustments. . . . . . . . . . . . . . . . . . $ -- $ -- $ -- $ --
Valuation adjustments. . . . . . . . . . . . . . -- (500) -- (3,100)
-------- -------- -------- --------
Equity in losses of Equity CMO
Interests, net of valuation
adjustments. . . . . . . . . . . . . . . . . . $ -- $ (500) $ -- $ (3,100)
-------- -------- -------- --------
-------- -------- -------- --------
MDC's share of net losses for the three and nine months ended September 30,
1994 was $229,000 and $1,630,000, respectively, and for the three and nine
months ended September 30, 1993 was $555,000 and $3,395,000, respectively, all
of which was charged against valuation allowances.
-11-
H. INVESTMENT IN METROPOLITAN DISTRICT BONDS
On August 4, 1994, Superior Metropolitan District No. 1 ("District No. 1")
and Superior Metropolitan District No. 2 ("District No. 2") (collectively, the
"Districts") issued $35,730,000 principal amount of bonds (the "Bonds"). The
Districts were organized and are operated to provide, among other things, water
and sanitary sewer services, street improvements and park and recreation
facilities for inhabitants of a master-planned community located northwest of
Denver (the "Project"). A significant portion of the Project served by the
Districts is owned and is being developed by the Company. $16,395,000 of the
proceeds of the Bond issuances were paid to the Company to redeem in full, at
par value, the Districts' outstanding bonds. Additionally, proceeds totaling
approximately $11,000,000 were paid to the Company by District No. 1 to purchase
certain interests in a water supply project (the "Water Project") and to
reimburse the Company for prepaid water taps and for certain other funds
previously advanced to District No. 1.
In connection with the issuance of the Bonds, MDC has guaranteed payment of
principal and interest on $27,500,000 principal amount of District No. 1 Bonds
and has entered into certain agreements with District No. 1 to purchase certain
water and sewer taps and pay certain storm drainage fees (collectively, the
"Fees") in connection with the Company's home building operations within the
Project. In connection with the guarantee, MDC was required to deposit
$10,000,000 into a trust account. Of the funds in the trust account, $4,000,000
will be released upon the earlier of (i) the completion of the Water Project; or
(ii) the resolution (to the extent provided in the Indenture executed in
connection with the issuance of the Bonds) of certain litigation seeking, among
other things, to delay the Water Project's completion. The $6,000,000 balance
will be released in $1,000,000 increments as certain levels of completed homes
are achieved in the Project, provided that if the Water Project is not completed
by January 1, 1997 or if the Water Project is enjoined and such injunction is
not lifted, no withdrawals may occur. In addition, MDC has guaranteed payment
of principal and interest on $2,580,000 principal amount of District No. 2
Bonds.
I. 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, Inc., Richmond Homes, Inc. I and Richmond Homes,
Inc. II (collectively, the "Guarantors"). The Guaranties are subordinated to
all Guarantor Senior Indebtedness (as defined in the Senior Notes Indenture).
In June 1994, MDC (Parent Company) exchanged three notes receivable from a
Guarantor subsidiary with a carrying amount of $104,350,000 for a new note
receivable from the same Guarantor
-12-
subsidiary with a principal amount of $69,731,000. Because the exchange was
between parties under common control, the difference between the principal
amounts of the notes exchanged, net of income taxes, was recorded as an
additional investment in the Guarantor subsidiary by the Parent and as
additional paid-in-capital by the Guarantor subsidiary.
Supplemental combining financial information follows.
-13-
SUPPLEMENTAL COMBINING BALANCE SHEET
SEPTEMBER 30, 1994
(IN THOUSANDS)
UNCONSOLIDATED
--------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
ASSETS MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------ ----------- ------------
Corporate
Cash and cash equivalents. . . . . . . $ 30,180 $ -- $ 4 $ -- $ 30,184
Investments and marketable
securities, net. . . . . . . . . . . 885 -- 4 -- 889
Investments in subsidiaries. . . . . . 248,527 25,469 17,435 (291,431) --
Advances and notes receivable -
Parent and subsidiaries. . . . . . . 245,275 -- 80,245 (325,520) --
Property and equipment, net. . . . . . 10,048 -- -- -- 10,048
Deferred income taxes. . . . . . . . . 11,498 -- -- -- 11,498
Deferred issue costs, net. . . . . . . 10,781 -- -- -- 10,781
Other assets, net. . . . . . . . . . . 2,554 -- 180 -- 2,734
--------- --------- --------- --------- ---------
559,748 25,469 97,868 (616,951) 66,134
--------- --------- --------- --------- ---------
Home Building
Cash and cash equivalents. . . . . . . 5 9,748 767 -- 10,520
Trade and other accounts
receivable . . . . . . . . . . . . . -- 24,851 268 (8,079) 17,040
Investments and marketable
securities, net. . . . . . . . . . . 10,073 -- -- -- 10,073
Inventories, net
Housing completed or under
construction . . . . . . . . . . . -- 286,788 16,650 -- 303,438
Land and land under development. . . -- 147,152 34,809 (612) 181,349
Prepaid expenses and other assets,
net . . . . . . . . . . . . . . . 3,382 35,392 4,758 -- 43,532
--------- --------- --------- --------- ---------
13,460 503,931 57,252 (8,691) 565,952
--------- --------- --------- --------- ---------
Mortgage Lending
Cash and cash equivalents. . . . . . . -- -- 6,537 -- 6,537
Restricted cash. . . . . . . . . . . . -- -- 3,400 -- 3,400
Accrued interest and other assets,
net . . . . . . . . . . . . . . . -- -- 1,555 -- 1,555
Mortgage loans held in inventory,
net . . . . . . . . . . . . . . . -- -- 37,768 -- 37,768
--------- --------- --------- --------- ---------
-- -- 49,260 -- 49,260
--------- --------- --------- --------- ---------
Asset Management
Cash and cash equivalents. . . . . . . -- -- 568 -- 568
Mortgage Collateral, net, and
assets related to CMO bonds and
related liabilities. . . . . . . . . -- -- 68,607 -- 68,607
Equity CMO Interests, net. . . . . . . -- -- 3,722 -- 3,722
Other loans and assets, net. . . . . . -- -- 2,874 -- 2,874
--------- --------- --------- --------- ---------
-- -- 75,771 -- 75,771
--------- --------- --------- --------- ---------
Total Assets . . . . . . . . . . . $ 573,208 $ 529,400 $ 280,151 $(625,642) $ 757,117
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
-14-
SUPPLEMENTAL COMBINING BALANCE SHEET
SEPTEMBER 30, 1994
(IN THOUSANDS)
UNCONSOLIDATED
-------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
LIABILITIES MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------ ------------- ------------
Corporate
Accounts payable and accrued
expenses . . . . . . . . . . . . . . . . $31,380 $-- $304 $-- $31,684
Advances and notes payable -
Parent and subsidiaries. . . . . . . . . 96,513 191,031 57,063 (344,607) --
Income taxes payable . . . . . . . . . . . 20,188 -- -- -- 20,188
Notes payable. . . . . . . . . . . . . . . 3,593 -- -- -- 3,593
Senior Notes, net. . . . . . . . . . . . . 187,312 -- -- -- 187,312
Subordinated Notes, net. . . . . . . . . . 38,216 -- -- -- 38,216
--------- --------- --------- --------- ---------
377,202 191,031 57,367 (344,607) 280,993
--------- --------- --------- --------- ---------
Home Building
Accounts payable and accrued
expenses . . . . . . . . . . . . . . . 1,315 69,660 8,815 258 80,048
Lines of credit. . . . . . . . . . . . . . -- 73,581 -- -- 73,581
Notes payable. . . . . . . . . . . . . . . 5,760 21,592 10,685 -- 38,037
--------- --------- --------- --------- ---------
7,075 164,833 19,500 258 191,666
--------- --------- --------- --------- ---------
Mortgage Lending
Accounts payable and accrued
expenses . . . . . . . . . . . . . . . . -- -- 12,000 (8,079) 3,921
Line of credit . . . . . . . . . . . . . . -- -- 24,999 -- 24,999
--------- --------- --------- --------- ---------
-- -- 36,999 (8,079) 28,920
--------- --------- --------- --------- ---------
Asset Management
Accounts payable and accrued
expenses . . . . . . . . . . . . . . . . -- -- 1,174 -- 1,174
CMO bonds, net, and related
liabilities, recourse solely to
applicable subsidiary assets . . . . . . -- -- 65,405 -- 65,405
--------- --------- --------- --------- ---------
-- -- 66,579 -- 66,579
--------- --------- --------- --------- ---------
Total Liabilities . . . . . . . . . . 384,277 355,864 180,445 (352,428) 568,158
--------- --------- --------- --------- ---------
STOCKHOLDERS' EQUITY
Preferred stock. . . . . . . . . . . . . . -- -- 10 (10) --
Common Stock . . . . . . . . . . . . . . . 225 18 124 (150) 217
Additional paid-in capital . . . . . . . . 133,684 144,756 152,854 (297,604) 133,690
Retained earnings. . . . . . . . . . . . . 70,727 28,762 (53,273) 24,541 70,757
Less treasury stock. . . . . . . . . . . . (15,705) -- (9) 9 (15,705)
--------- --------- --------- --------- ---------
Total Stockholders' Equity . . . . . . 188,931 173,536 99,706 (273,214) 188,959
--------- --------- --------- --------- ---------
Total Liabilities and
Stockholders' Equity . . . . . . . . $573,208 $529,400 $280,151 $(625,642) $757,117
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
-15-
SUPPLEMENTAL COMBINING BALANCE SHEET
DECEMBER 31, 1993
(IN THOUSANDS)
UNCONSOLIDATED
--------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
ASSETS MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------ ----------- ------------
Corporate
Cash and cash equivalents. . . . . . . . . $42,443 $ -- $ -- $ -- $ 42,443
Investments and marketable
securities, net. . . . . . . . . . . . . 761 -- 4 -- 765
Investments in subsidiaries. . . . . . . . 191,462 23,009 15,030 (229,501) --
Advances receivable - Parent and
subsidiaries . . . . . . . . . . . . . . 260,931 37 91,348 (352,316) --
Property and equipment, net. . . . . . . . 10,432 -- -- -- 10,432
Deferred income taxes. . . . . . . . . . . -- 8,100 -- -- 8,100
Deferred issue costs, net. . . . . . . . . 11,233 -- -- -- 11,233
Other assets, net. . . . . . . . . . . . . 2,715 -- 485 -- 3,200
--------- --------- --------- --------- ---------
519,977 31,146 106,867 (581,817) 76,173
--------- --------- --------- --------- ---------
Home Building
Cash and cash equivalents. . . . . . . . . -- 17,792 687 -- 18,479
Trade and other accounts
receivable . . . . . . . . . . . . . . . 41 9,059 213 (3,890) 5,423
Investment in metropolitan
district bonds . . . . . . . . . . . . . 11,400 2,395 -- -- 13,795
Inventories, net
Housing completed or under
construction . . . . . . . . . . . . . -- 187,796 13,227 -- 201,023
Land and land under development. . . . . (1,530) 153,068 40,252 1,091 192,881
Prepaid expenses and other assets,
net . . . . . . . . . . . . . . . . . 1,312 39,728 5,400 2,423 48,863
--------- --------- --------- --------- ---------
11,223 409,838 59,779 (376) 480,464
--------- --------- --------- --------- ---------
Mortgage Lending
Cash and cash equivalents. . . . . . . . . -- -- 1,505 -- 1,505
Restricted cash. . . . . . . . . . . . . . -- -- 3,400 -- 3,400
Accrued interest and other assets,
net . . . . . . . . . . . . . . . . . -- -- 2,571 -- 2,571
Mortgage loans held in inventory,
net . . . . . . . . . . . . . . . . . -- -- 68,065 -- 68,065
--------- --------- --------- --------- ---------
-- -- 75,541 -- 75,541
--------- --------- --------- --------- ---------
Asset Management
Cash and cash equivalents. . . . . . . . . -- -- 576 -- 576
Mortgage Collateral, net, and
assets related to CMO bonds and
related liabilities. . . . . . . . . . . -- -- 134,166 -- 134,166
Equity CMO Interests, net. . . . . . . . . -- -- 6,427 -- 6,427
Other loans and assets, net. . . . . . . . -- -- 3,519 -- 3,519
--------- --------- --------- --------- ---------
-- -- 144,688 -- 144,688
--------- --------- --------- --------- ---------
Total Assets . . . . . . . . . . . . . $531,200 $440,984 $386,875 $(582,193) $776,866
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
-16-
SUPPLEMENTAL COMBINING BALANCE SHEET
DECEMBER 31, 1993
(IN THOUSANDS)
UNCONSOLIDATED
------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
LIABILITIES MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------ ------------- ------------
Corporate
Accounts payable and accrued
expenses . . . . . . . . . . . . . . . . $ 20,564 $ -- $ 282 $ -- $ 20,846
Advances and notes payable -
Parent and subsidiaries. . . . . . . . . 68,342 176,576 120,800 (365,718) --
Income taxes payable . . . . . . . . . . . 26,635 2,076 -- -- 28,711
Notes payable. . . . . . . . . . . . . . . 3,624 -- -- -- 3,624
Senior Notes, net. . . . . . . . . . . . . 187,199 -- -- -- 187,199
Subordinated Notes, net. . . . . . . . . . 38,213 -- -- -- 38,213
--------- --------- --------- --------- ---------
344,577 178,652 121,082 (365,718) 278,593
--------- --------- --------- --------- ---------
Home Building
Accounts payable and accrued
expenses . . . . . . . . . . . . . . . . 864 62,768 6,800 309 70,741
Lines of credit. . . . . . . . . . . . . . -- 24,645 -- -- 24,645
Notes payable. . . . . . . . . . . . . . . 9,905 40,548 12,042 -- 62,495
--------- --------- --------- --------- ---------
10,769 127,961 18,842 309 157,881
--------- --------- --------- --------- ---------
Mortgage Lending
Accounts payable and accrued
expenses . . . . . . . . . . . . . . . . -- -- 12,375 (3,888) 8,487
Line of credit . . . . . . . . . . . . . . -- -- 29,500 -- 29,500
--------- --------- --------- --------- ---------
-- -- 41,875 (3,888) 37,987
--------- --------- --------- --------- ---------
Asset Management
Accounts payable and accrued
expenses . . . . . . . . . . . . . . . . -- -- 3,051 -- 3,051
CMO bonds, net, and related
liabilities, recourse solely to
applicable subsidiary assets . . . . . . -- -- 123,500 -- 123,500
--------- --------- --------- --------- ---------
-- -- 126,551 -- 126,551
--------- --------- --------- --------- ---------
Total Liabilities. . . . . . . . . 355,346 306,613 308,350 (369,297) 601,012
--------- --------- --------- --------- ---------
STOCKHOLDERS' EQUITY
Preferred stock. . . . . . . . . . . . . . -- 20,475 10 (20,485) --
Common Stock . . . . . . . . . . . . . . . 209 19 124 (143) 209
Additional paid-in capital . . . . . . . . 133,455 99,725 116,590 (216,315) 133,455
Retained earnings. . . . . . . . . . . . . 57,879 14,152 (38,190) 24,038 57,879
Less treasury stock. . . . . . . . . . . . (15,689) -- (9) 9 (15,689)
--------- --------- --------- --------- ---------
Total Stockholders' Equity . . . . 175,854 134,371 78,525 (212,896) 175,854
--------- --------- --------- --------- ---------
Total Liabilities and
Stockholders' Equity . . . . . . $531,200 $440,984 $386,875 $(582,193) $776,866
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
-17-
SUPPLEMENTAL COMBINING STATEMENTS OF INCOME
(IN THOUSANDS)
UNCONSOLIDATED
-----------------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------- ------------- ------------
THREE MONTHS ENDED SEPTEMBER 30, 1994
REVENUES:
Home Building . . . . . . . . . . . . $ 78 $191,122 $18,027 $ (656) $208,571
Mortgage Lending . . . . . . . . . . -- -- 2,537 -- 2,537
Asset Management . . . . . . . . . . -- -- 3,094 (286) 2,808
Corporate . . . . . . . . . . . . . . 330 -- 3 -- 333
Equity in earnings of subsidiaries . 9,925 1,978 -- (11,903) --
--------- --------- --------- --------- ---------
Total Revenues . . . . . . . . . 10,333 193,100 23,661 (12,845) 214,249
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Home Building . . . . . . . . . . . . 344 179,417 15,943 (80) 195,624
Mortgage Lending . . . . . . . . . . -- -- 1,964 -- 1,964
Asset Management . . . . . . . . . . -- -- 2,069 -- 2,069
Corporate general and administrative. 3,977 -- 183 -- 4,160
Corporate and home building interest. (2,515) 4,278 894 (752) 1,905
--------- --------- --------- --------- ---------
Total Expenses . . . . . . . . . 1,806 183,695 21,053 (832) 205,722
--------- --------- --------- --------- ---------
Income before income taxes . . . . . . 8,527 9,405 2,608 (12,013) 8,527
Provision for income taxes . . . . . . 3,107 3,664 800 (4,464) 3,107
--------- --------- --------- --------- ---------
NET INCOME . . . . . . . . . . . . . . $ 5,420 $ 5,741 $ 1,808 $ (7,549) $ 5,420
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
THREE MONTHS ENDED SEPTEMBER 30, 1993
REVENUES:
Home Building . . . . . . . . . . . . $60 $172,659 $11,184 $(5,381) $178,522
Mortgage Lending . . . . . . . . . . -- -- 5,924 -- 5,924
Asset Management . . . . . . . . . . -- -- 6,205 (286) 5,919
Corporate . . . . . . . . . . . . . . 503 -- 323 -- 826
Equity in earnings of subsidiaries . 8,106 1,368 -- (9,474) --
--------- --------- --------- --------- ---------
Total Revenues . . . . . . . . . 8,669 174,027 23,636 (15,141) 191,191
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Home Building . . . . . . . . . . . . (488) 167,022 9,820 (5,570) 170,784
Mortgage Lending . . . . . . . . . . -- -- 3,375 -- 3,375
Asset Management . . . . . . . . . . -- -- 5,153 -- 5,153
Corporate general and administrative.
3,814 -- 29 175 4,018
Corporate and home building interest.
266 2,394 844 (720) 2,784
--------- --------- --------- --------- ---------
Total Expenses . . . . . . . . . 3,592 169,416 19,221 (6,115) 186,114
--------- --------- --------- --------- ---------
Income before income taxes . . . . . . 5,077 4,611 4,415 (9,026) 5,077
Provision for income taxes . . . . . . 1,854 1,888 1,528 (3,416) 1,854
--------- --------- --------- --------- ---------
NET INCOME . . . . . . . . . . . . . . $ 3,223 $ 2,723 $ 2,887 $ (5,610) $ 3,223
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
-18-
SUPPLEMENTAL COMBINING STATEMENTS OF INCOME
(IN THOUSANDS)
UNCONSOLIDATED
-----------------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------- ------------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 1994
REVENUES:
Home Building . . . . . . . . . . . . . $ 78 $ 516,389 $43,119 $ (2,180) $557,406
Mortgage Lending . . . . . . . . . . . -- -- 11,927 -- 11,927
Asset Management . . . . . . . . . . . -- -- 11,261 (851) 10,410
Corporate . . . . . . . . . . . . . . . 930 -- 40 -- 970
Equity in earnings of subsidiaries . . 29,697 4,490 -- (34,187) --
--------- --------- --------- --------- --------
Total Revenues . . . . . . . . . . 30,705 520,879 66,347 (37,218) 580,713
--------- --------- --------- --------- --------
COSTS AND EXPENSES:
Home Building . . . . . . . . . . . . . 1,075 484,206 38,128 (589) 522,820
Mortgage Lending . . . . . . . . . . . -- -- 6,812 -- 6,812
Asset Management . . . . . . . . . . . -- -- 7,866 -- 7,866
Corporate general and administrative . 11,825 -- 234 -- 12,059
Corporate and home building interest . (6,439) 12,713 2,871 (2,233) 6,912
--------- --------- --------- --------- --------
Total Expenses . . . . . . . . . . 6,461 496,919 55,911 (2,822) 556,469
--------- --------- --------- --------- --------
Income before income taxes . . . . . . 24,244 23,960 10,436 (34,396) 24,244
Provision for income taxes . . . . . . 9,314 9,353 3,420 (12,773) 9,314
--------- --------- --------- --------- --------
NET INCOME . . . . . . . . . . . . . . $14,930 $14,607 $7,016 $(21,623) $14,930
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
NINE MONTHS ENDED SEPTEMBER 30, 1993
REVENUES:
Home Building . . . . . . . . . . . . . $ 182 $ 405,313 $ 27,997 $ (10,968) $422,524
Mortgage Lending . . . . . . . . . . . -- -- 15,402 -- 15,402
Asset Management . . . . . . . . . . . -- -- 27,816 (851) 26,965
Corporate . . . . . . . . . . . . . . . 1,546 -- 279 17 1,842
Equity in earnings of subsidiaries . . 19,349 3,917 -- (23,266) --
--------- --------- --------- --------- --------
Total Revenues . . . . . . . . . . 21,077 409,230 71,494 (35,068) 466,733
--------- --------- --------- --------- --------
COSTS AND EXPENSES:
Home Building . . . . . . . . . . . . . (1,520) 392,872 24,046 (8,298) 407,100
Mortgage Lending . . . . . . . . . . . -- -- 9,081 -- 9,081
Asset Management . . . . . . . . . . . -- -- 19,848 -- 19,848
Corporate general and administrative . 10,967 -- 60 374 11,401
Corporate and home building interest . 999 6,940 2,935 (2,202) 8,672
--------- --------- --------- --------- --------
Total Expenses . . . . . . . . . . . . 10,446 399,812 55,970 (10,126) 456,102
--------- --------- --------- --------- --------
Income before income taxes . . . . . . 10,631 9,418 15,524 (24,942) 10,631
Provision for income taxes . . . . . . 3,479 3,688 5,409 (9,097) 3,479
--------- --------- --------- --------- --------
NET INCOME . . . . . . . . . . . . $ 7,152 $ 5,730 $ 10,115 $ (15,845) $ 7,152
--------- --------- --------- --------- --------
--------- --------- --------- --------- ---------
-19-
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1994
(In thousands)
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------ ---------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES . . . . . . . . . . . $(13,313) $(58,124) $ 10,749 $ 12,740 $(47,948)
--------- -------- --------- --------- ---------
INVESTING ACTIVITIES:
Mortgage Collateral
Principal payments and
prepayments. . . . . . . . . . . . . . -- 1,093 31,231 -- 32,324
Sales . . . . . . . . . . . . . . . . . -- -- 19,526 -- 19,526
Distributions of capital from
Equity CMO Interests . . . . . . . . . . -- -- 2,705 -- 2,705
Redemption of metropolitan
district bonds . . . . . . . . . . . . . 14,000 2,395 -- -- 16,395
Changes in investments and
marketable securities, net . . . . . . . (10,073) -- -- -- (10,073)
Changes in restricted cash, net. . . . . . -- -- 12,365 -- 12,365
Affiliate notes receivable . . . . . . . . 13,282 -- 4,053 (17,335) --
Other, net . . . . . . . . . . . . . . . . (189) (309) (246) -- (744)
--------- -------- --------- --------- ---------
Net Cash Provided By (Used In)
Investing Activities . . . . . . . . . . . 17,020 3,179 69,634 (17,335) 72,498
--------- -------- --------- --------- ---------
FINANCING ACTIVITIES:
Net increase (reduction) in
borrowings from Parent and
subsidiaries . . . . . . . . . . . . . . (11,146) 35,839 (11,923) (12,770) --
CMO bonds - principal payments . . . . . . -- -- (57,494) -- (57,494)
Lines of Credit
Advances . . . . . . . . . . . . . . . . -- 448,337 -- -- 448,337
Principal payments . . . . . . . . . . . -- (401,375) (4,501) -- (405,876)
Notes payable
Borrowings . . . . . . . . . . . . . . . -- 13,561 -- -- 13,561
Principal payments . . . . . . . . . . . (4,176) (32,126) (1,357) -- (37,659)
Affiliate notes payable. . . . . . . . . . -- (17,335) -- 17,335 --
Dividend payments. . . . . . . . . . . . . (790) -- -- 30 (760)
Other, net . . . . . . . . . . . . . . . . 147 -- -- -- 147
--------- -------- --------- --------- ---------
Net Cash Provided By (Used In)
Financing Activities . . . . . . . . . . . (15,965) 46,901 (75,275) 4,595 (39,744)
--------- -------- --------- --------- ---------
Net Increase (Decrease) In Cash And
Cash Equivalents . . . . . . . . . . . . . (12,258) (8,044) 5,108 -- (15,194)
Cash And Cash Equivalents
Beginning Of Period. . . . . . . . . . . . 42,443 17,792 2,768 -- 63,003
--------- -------- --------- --------- ---------
End Of Period. . . . . . . . . . . . . . . $ 30,185 $ 9,748 $ 7,876 $ -- $ 47,809
--------- -------- --------- --------- ---------
--------- -------- --------- --------- ---------
-20-
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1993
(In thousands)
UNCONSOLIDATED
---------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------ ---------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES . . . . . . . . . . . $ 8,300 $(18,829) $ (9,104) $ (11,399) $ (31,032)
--------- -------- --------- --------- ---------
INVESTING ACTIVITIES:
Mortgage Collateral
Principal payments and
prepayments. . . . . . . . . . . . . . -- 2,242 67,165 -- 69,407
Sales . . . . . . . . . . . . . . . . . -- -- 30,403 -- 30,403
Distributions of capital from
Equity CMO Interests . . . . . . . . . . -- -- 5,963 -- 5,963
CMO Bond principal payments. . . . . . . . -- -- 5,057 -- 5,057
Changes in investments and
marketable securities, net . . . . . . . 12,000 -- -- -- 12,000
Changes in restricted cash, net. . . . . . -- -- 14,816 -- 14,816
Proceeds from affiliate debt
maturity -- 20 1,750 (1,770) --
Affiliate notes receivable . . . . . . . . 1,353 -- 2,693 (4,046) --
Other, net . . . . . . . . . . . . . . . . (489) (697) 209 -- (977)
--------- -------- --------- --------- ---------
Net Cash Provided By (Used
In) Investing Activities . . . . . . . . . 12,864 1,565 128,056 (5,816) 136,669
--------- -------- --------- --------- ---------
FINANCING ACTIVITIES:
Net increase (reduction) in
borrowings from Parent and
subsidiaries . . . . . . . . . . . . . . (3,365) 9,261 (17,295) 11,399 --
CMO bonds - principal payments . . . . . . -- -- (102,731) -- (102,731)
Lines of Credit
Advances . . . . . . . . . . . . . . . . 2,887 203,532 5,730 -- 212,149
Principal payments . . . . . . . . . . . (4,921) (196,255) (2,278) -- (203,454)
Subordinated Note payments . . . . . . . . (1,690) -- -- -- (1,690)
Notes payable
Borrowings . . . . . . . . . . . . . . . -- 57,086 2,403 -- 59,489
Principal payments . . . . . . . . . . . (4,970) (57,575) (3,970) -- (66,515)
Maturity of affiliate-owned debt . . . . . (1,770) -- -- 1,770 --
Affiliate notes payable. . . . . . . . . . -- (4,046) -- 4,046 --
Other, net . . . . . . . . . . . . . . . . 224 -- -- -- 224
--------- -------- --------- --------- ---------
Net Cash Provided By (Used In)
Financing Activities . . . . . . . . . . . (13,605) 12,003 (118,141) 17,215 (102,528)
--------- -------- --------- --------- ---------
Net Increase (Decrease) In Cash And
Cash Equivalents . . . . . . . . . . . . . 7,559 (5,261) 811 -- 3,109
Cash And Cash Equivalents
Beginning Of Period. . . . . . . . . . . . 35,993 22,502 2,533 -- 61,028
--------- -------- --------- --------- ---------
End Of Period. . . . . . . . . . . . . . . $ 43,552 $ 17,241 $ 3,344 $ -- $ 64,137
--------- -------- --------- --------- ---------
--------- -------- --------- --------- ---------
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTION
MDC is a national home builder with operations in (i) metropolitan Denver
and, to a lesser extent, Colorado Springs, Colorado (collectively, "Colorado");
(ii) northern Virginia and suburban Maryland (collectively, "Mid-Atlantic");
(iii) Northern and Southern California (collectively, "California"); (iv)
Phoenix and Tucson, Arizona (collectively, "Arizona"); and (v) Las Vegas, Nevada
("Nevada").
In its home building operations, the Company is engaged in the construction
and sale of residential housing (collectively, the "home building segment") and
mortgage origination, purchase and sale activities (collectively, the "mortgage
lending segment"). MDC's mortgage lending segment enables MDC to provide
mortgage loans to its home buyers and to others.
The Company's asset management operations (collectively, the "asset
management segment") primarily enable MDC to (i) manage, by contract, the
operations of two publicly-traded real estate investment trusts (each, a
"REIT"); and (ii) own interests ("CMO Ownership Interests") in issuances of
collateralized mortgage obligations ("CMO bonds").
RESULTS OF OPERATIONS
The table below summarizes MDC's results of operations during each of the
periods presented (in thousands, except per share amounts).
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
1994 1993 1994 1993
-------- -------- -------- --------
Revenues . . . . . . . . . . . . . . . . . . $214,249 $191,191 $580,713 $466,733
Income before income taxes . . . . . . . . . 8,527 5,077 24,244 10,631
Net Income . . . . . . . . . . . . . . . . . 5,420 3,223 14,930 7,152
Primary Earnings Per Share . . . . . . . . . .26 .14 .73 .32
MDC's revenues increased during the three and nine months ended September
30, 1994 compared with the same periods in 1993 primarily as a result of 12% and
23% increases, respectively, in home closings and $9,400 and $13,400 increases,
respectively, in the average selling price per housing unit. These increases
partially were offset by reductions in revenues of the asset management segment
of $3,111,000 and $16,555,000, respectively, principally due to prepayments on,
and sales of, mortgage loans, including the mortgage loans underlying the
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC")
mortgage pass-through certificates which are the collateral for the Company's
CMO bonds
-22-
(mortgage loans and mortgage certificate collateral for CMO bonds hereafter are
referred to as "Mortgage Collateral"). Principal payments and prepayments on,
and sales of, Mortgage Collateral have reduced the amount of the Company's
Mortgage Collateral and mortgage-related assets, the asset management segment's
principal interest earning assets, by $206,860,000 from January 1, 1993 through
September 30, 1994.
The Company's net income increased for the three and nine months ended
September 30, 1994 compared with the same periods in 1993 principally due to
increased home building operating profit from (i) significantly higher home
closings, primarily due to the opening of new subdivisions in each of the
Company's markets; and (ii) higher Home Gross Margins (as hereafter defined).
These increases partially were offset by (i) for the nine months ended September
30, 1994, lower operating profit from the asset management segment as operating
income in the first nine months of 1993 was impacted positively by $6,227,000 in
one-time gains resulting from sales of Mortgage Collateral, which partially was
offset by $3,100,000 in valuation adjustments with respect to the Company's
Equity CMO Interests (defined below) during the same period; and (ii) lower
operating profit from the mortgage lending segment primarily due to losses from
sales of mortgage loans in the three and nine months ended September 30, 1994
compared with substantial gains during the same periods in 1993.
IMPACT OF HOME MORTGAGE INTEREST RATES.
Beginning in 1992 through October 1993, home mortgage interest rates
declined to their lowest levels in 25 years to an average of 6.7% on a 30-year,
fixed-rate mortgage. From October 1993 through October 1994, these interest
rates have increased to as high as 9%.
Increases in mortgage interest rates adversely affect the Company's home
building and mortgage lending segments. Higher mortgage interest rates (i) may
reduce the demand for homes and home mortgages; and (ii) generally will reduce
home mortgage refinancing activity. With the recent increases in mortgage
interest rates relative to levels in 1993, (i) the Company believes its sale of
new homes and Home Gross Margins have been affected adversely and may be
affected adversely in the future; and (ii) the Company's mortgage lending
operations, consistent with the rest of the industry in general, have
experienced a major decline in refinancing activity. These events have affected
adversely the spot mortgage loan originations and the amount of mortgage loans
purchased through correspondents by the Company's mortgage lending segment. The
Company is unable to predict the extent to which current or future increases in
mortgage interest rates will adversely affect the Company's operating activities
and results of operations.
-23-
HOME BUILDING SEGMENT.
The table below sets forth certain information with respect to the
Company's homes sold, closed and delivered during each of the periods presented
as well as units sold under a contract but not delivered ("Backlog") at each
date shown (dollars in thousands).
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- ----------------------
1994 1993 1994 1993
-------- -------- -------- --------
Home sales revenues. . . . . . . . . . . . . $207,098 $175,862 $548,711 $415,606
Average selling price per housing
unit . . . . . . . . . . . . . . . . . . . 188.1 178.7 187.1 173.7
Home Gross Margins . . . . . . . . . . . . . 15.0% 14.0% 15.5% 14.3%
Homes - units
Sales contracted, net
Colorado . . . . . . . . . . . . . . . 340 416 1,531 1,488
Mid-Atlantic . . . . . . . . . . . . . 211 230 897 945
California . . . . . . . . . . . . . . 144 53 454 263
Arizona. . . . . . . . . . . . . . . . 207 115 494 249
Nevada . . . . . . . . . . . . . . . . 25 27 87 108
-------- -------- -------- --------
Total . . . . . . . . . . . . . . . 927 841 3,463 3,053
-------- -------- -------- --------
-------- -------- -------- --------
Closed and delivered
Colorado . . . . . . . . . . . . . . . 510 453 1,375 1,235
Mid-Atlantic . . . . . . . . . . . . . 251 290 757 655
California . . . . . . . . . . . . . . 156 122 390 220
Arizona. . . . . . . . . . . . . . . . 146 60 334 151
Nevada . . . . . . . . . . . . . . . . 38 59 77 131
-------- -------- -------- --------
Total. . . . . . . . . . . . . . . . 1,101 984 2,933 2,392
-------- -------- -------- --------
-------- -------- -------- --------
September 30, December 31, September 30,
1994 1993 1993
-------------- ------------ -------------
Backlog
Units
Colorado . . . . . . . . . . . . . . . 816 660 726
Mid-Atlantic . . . . . . . . . . . . . 565 425 487
California . . . . . . . . . . . . . . 162 98 91
Arizona. . . . . . . . . . . . . . . . 307 147 146
Nevada . . . . . . . . . . . . . . . . 37 27 37
-------- ------- -------
Total. . . . . . . . . . . . . . . . 1,887 1,357 1,487
-------- ------- -------
-------- ------- -------
Sales value. . . . . . . . . . . . . . $ 355,835 $ 250,530 $ 265,800
---------- ---------- ----------
---------- ---------- ----------
HOME SALES REVENUES AND HOMES CLOSED AND DELIVERED. Home sales revenues
increased 18% and 32%, respectively, for the three and nine-month periods ended
September 30, 1994 compared with the same periods in 1993 primarily as a result
of (i) increases in home closings in Colorado due to strong market conditions
which continued through the first half of 1994; (ii) significant increases in
home closings in Arizona due to the large expansion of the Company's operations
and
-24-
continued strong demand for homes in the Tucson and Phoenix markets; (iii)
significant increases in home closings in Southern California due to the
Company's acquisition and opening of several new subdivisions in this market;
(iv) in the nine months ended September 30, 1994, significant increases in homes
closed in the Company's Mid-Atlantic market due to expansion of the Company's
operations in this market; and (v) an increase in the average selling price per
housing unit. Partially offsetting the increase in the three-month period ended
September 30, 1994 were decreased home closings in the Mid-Atlantic market
primarily due to delays by third parties in delivering contracted finished lots
in certain communities.
AVERAGE SELLING PRICE PER HOUSING UNIT. The increase in the average
selling price per housing unit for the three and nine months ended September
30, 1994 compared with the same periods in 1993 primarily was due to increases
in average selling prices in all of the Company's markets except Northern
California. The increases in selling prices were due principally to (i) the mix
of homes closed; (ii) general price increases in most of the Company's markets
to, among other things, offset increases in costs; and (iii) in certain markets,
improved market conditions. These increases partially were offset by lower
average selling prices in Northern California primarily due to the introduction
of more affordable homes in response to consumer demand for lower-priced housing
and softness in consumer demand for new homes.
HOME GROSS MARGINS. Overall, gross profits (which have been reduced for,
among other things, capitalized interest, a reserve for warranty expenses and
financing costs) as a percent of home sales ("Home Gross Margins") increased
substantially during the three and nine months ended September 30, 1994 compared
with the same periods in 1993. The Company achieved higher Home Gross Margins
in the three and nine months ended September 30, 1994 compared with the same
periods in 1993 in its Colorado, Southern California and Arizona markets
primarily due to improved market conditions. In its Mid-Atlantic market, the
Company achieved higher Home Gross Margins in the nine months ended
September 30, 1994 and achieved approximately the same Home Gross Margins in the
three months ended September 30, 1994 compared with the same period in 1993.
The increases partially were offset by lower Home Gross Margins in Northern
California as the Company's profitability in this area continues to be affected
adversely by softness in consumer demand for new homes. To a lesser extent,
Home Gross Margins also were impacted negatively by builder competition and
product shifts in Nevada.
Increases in, among other things, the costs of subcontracted labor,
finished lots and building materials, have affected adversely, and may affect
adversely in the future, Home Gross Margins to the extent that market conditions
prevent the recovery of increased costs through higher sales prices. In
addition, increased home building activities in several of the Company's
markets, particularly Colorado, the Mid-Atlantic area and Arizona, have caused
shortages of subcontracted labor that have increased the period of time required
for completing construction and delivery of homes. Longer delivery
-25-
periods increase interest costs capitalized during the construction period,
which have affected adversely, and may affect adversely in the future, Home
Gross Margins.
HOME SALES AND BACKLOG. Overall, year-to-date home sales for the nine
months ended September 30, 1994 reached their highest level since 1988 and
Backlog reached its highest third quarter-end level since 1986. "Sales
contracted, net" increased 10% and 13%, respectively, during the three and nine
months ended September 30, 1994 compared with the same periods in 1993. Backlog
at September 30, 1994 increased 39% from December 31, 1993 and 27% from
September 30, 1993.
Sales increased in the three and nine months ended September 30, 1994
compared with the same periods in 1993 in (i) Arizona (increases of 80% and 98%,
respectively) due to improved market conditions and an expansion of the
Company's operations in the Phoenix and Tucson markets; and (ii) California
(increases of 172% and 73%, respectively) due to an expansion of the Company's
operations in Northern California and the Company's re-entry into the Southern
California market on a selective basis which began in the second half of 1993
and has continued during 1994.
While sales in Colorado increased by 24% in the first quarter of 1994
compared with the first quarter of 1993, sales declined in both the second and
the third quarters of 1994 compared with the same periods in 1993 as, among
other things, new competitors entered the market and mortgage rates increased
which affected adversely the demand for homes. The overall Denver market also
began to slow during the second quarter of 1994 which continued during the third
quarter of 1994.
In the Mid-Atlantic market, sales increased by 11% in the first quarter of
1994 compared with the same period in 1993 but declined in both the second and
the third quarters of 1994 compared with the same periods in 1993. In northern
Virginia, (which comprises approximately two-thirds of the Company's Mid-
Atlantic operations), the Company had slight increases in sales in the three and
nine months ended September 30, 1994. However, the overall market in northern
Virginia remained flat in the first nine months of 1994 compared with 1993 and
declined approximately 10% in the three months ended September 30, 1994 compared
with the same period in 1993. The increase in the Company's sales in northern
Virginia largely is attributable to increases in the number of active
subdivisions in the first nine months of 1994 compared with the same period in
1993. Sales per active subdivision have slowed, however, consistent with the
slowing in the northern Virginia market. In suburban Maryland, the Company
experienced a decrease in sales of 40% and 23%, respectively, in the three and
nine months ended September 30, 1994 compared with the same periods in 1993.
The Company's sales declines are due to, among other things, (i) delays by third
parties in delivering contracted finished lots in certain communities; (ii) a
change in available product which resulted in a temporary shift in mix from
townhomes to single-family homes; and (iii) the overall sales decline in the
suburban Maryland market which has decreased by
-26-
approximately 17% and 23%, respectively, in the three and nine months ended
September 30, 1994 compared with the same periods in 1993.
MARKETING. Marketing expenses (which include, among other things, deferred
marketing, model home expenses and sales commissions) totaled $11,373,000 and
$31,300,000, respectively, during the three and nine months ended September 30,
1994 compared with $9,683,000 and $24,835,000, respectively, during the same
periods in 1993. The 17% and 26% increases, respectively, during 1994
principally were due to the 18% and 32% increases, respectively, in home sales
revenue and expanded operations in many of the regions in which the Company
operates. As a result of these increased operations, significant additional
marketing-related salary, sales commission and model home operation expenses
were incurred. However, marketing expenses as a percentage of home sales
revenues decreased slightly in the three and nine months ended September 30,
1994, compared with the same periods in 1993, primarily due to increased
efficiencies in the Company's marketing activities relative to the level of
expansion in its existing markets.
GENERAL AND ADMINISTRATIVE. General and administrative expenses totaled
$6,863,000 and $20,579,000, respectively, during the three and nine months ended
September 30, 1994 compared with $7,707,000 and $20,180,000, respectively,
during the same periods in 1993. General and administrative expenses during the
three and nine months ended September 30, 1993 were affected adversely by non-
recurring charges totaling approximately $700,000 and $2,000,000, respectively.
General and administrative expenses as a percentage of home sales revenues
during the three and nine months ended September 30, 1994 decreased compared
with the same periods in 1993 due to the Company's ability to build more homes
without adding substantially to existing administrative staffing and overhead.
LAND INVENTORY. Since 1988, MDC has implemented a program to reduce its
inventory of land and land under development in order to, among other things,
maximize and preserve liquidity and reduce the risks inherent in holding, at any
point in time, substantially greater amounts of land than are necessary to meet
the projected requirements of MDC's home building operations over the succeeding
24 months. As a result, MDC has reduced its land inventory from $411,460,000 at
December 31, 1988 to $181,349,000 at September 30, 1994, while increasing
significantly the number of lots it controls under rolling options. The Company
continues to pursue opportunities to reduce its land inventories, particularly
those acquired prior to 1991.
-27-
The following table shows the total carrying value of the land and land
under development owned by MDC in each of its home building markets at September
30, 1994, segregated by the years in which such property was acquired or
optioned (in thousands).
Division 1994 1993 1992 1991 Pre-1991 Total
- - -------- -------- -------- -------- -------- --------- --------
Colorado . . . . . . .. . . . $ 3,412 $ 3,307 $ 3,261 $ 7,282 $ 73,507 $ 90,769
Mid-Atlantic . . . . . . .. . 10,651 4,229 284 -- 14,479 29,643
California . . . . . . .. . . 18,990 8,080 630 -- 4,582 32,282
Arizona . . . . .. . . . . . 15,545 3,023 -- -- 5,299 23,867
Nevada . . . . . . .. . . . . -- 4,788 -- -- -- 4,788
-------- -------- -------- -------- -------- --------
Totals . . . . . . . . . . . 48,598 23,427 4,175 7,282 97,867 $181,349
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Although the Company has been able to reduce significantly its inventory of
land, the Company's net income and cash flow continue to be affected adversely
by the carrying costs (e.g., property taxes and interest) associated with
inactive land inventories, which were approximately 33% of the Company's total
land and land under development at September 30, 1994. Carrying costs on
inactive land inventories are expensed, not capitalized.
The following table shows the total carrying value of the amounts of
inactive land inventories included in the table above owned by MDC in each of
its home building markets at September 30, 1994, segregated by the years each
such property was acquired (in thousands).
DIVISION 1992 1991 PRE-1991 TOTAL
- - -------- -------- -------- --------- --------
COLORADO . . . . . . . . $ 1,868 $ 2,164 $ 47,821 $ 51,853
MID-ATLANTIC . . . . . . -- -- 5,189 5,189
CALIFORNIA . . . . . . . -- -- 1,493 1,493
ARIZONA. . . . . . . . . -- -- 628 628
-------- --------- -------- --------
TOTALS . . . . . . . . . $ 1,868 $ 2,164 $ 55,131 $ 59,163
-------- --------- -------- --------
-------- --------- -------- --------
MORTGAGE LENDING SEGMENT.
OVERVIEW. HomeAmerican Mortgage Corporation ("HomeAmerican") is a full-service
mortgage lender originating mortgage loans for MDC's home buyers and for others
on a "spot" basis through offices located in each of MDC's markets (except
Southern California). As HomeAmerican is the principal originator of mortgage
loans for MDC's home buyers, it is an integral part of MDC's home building
operations. MDC sells its homes to customers who generally finance their
purchases through Federal Housing Administration ("FHA") insured mortgage loans,
Veterans Administration ("VA") guaranteed mortgage loans and conventional
mortgage loans.
HomeAmerican is an FHA, VA, FNMA and FHLMC authorized mortgage loan originator.
HomeAmerican also is an authorized loan servicer for FNMA, FHLMC and GNMA and,
as such, is subject to the rules and regulations of such organizations. Through
correspondents, HomeAmerican purchases loans. The origination fees are retained
by the correspondents; HomeAmerican acquires the servicing rights.
-28-
HomeAmerican's operations are affected by, among other things, changes in
mortgage interest rates. HomeAmerican attempts to reduce its exposure to
mortgage interest rate changes by (i) offering mortgage loans at market rates;
(ii) purchasing forward commitments to deliver closed loans held for sale; and
(iii) to a substantially lesser extent, using other hedging techniques in
connection with its pipeline of mortgage loan applications.
The table below summarizes the results of HomeAmerican's operations during each
of the periods presented (in thousands).
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- -----------------------
1994 1993 1994 1993
-------- -------- -------- --------
Gains from sales of mortgage
servicing:
Bulk . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 162 $ 1,160 $ 4,476 $ 3,428
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 236 222 690 540
Net interest income. . . . . . . . . . . . . . . . . . . . . 727 865 1,937 2,332
Origination fees . . . . . . . . . . . . . . . . . . . . . . 1,110 1,728 3,491 4,370
Gains (losses) on sales of mortgage loans. . . . . . . . . . (166) 990 (347) 2,344
Mortgage servicing and other
income . . . . . . . . . . . . . . . . . . . . . . . . . . 470 477 1,432 1,146
General and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . . . (1,966) (2,893) (6,564) (7,839)
-------- -------- -------- --------
Operating profit . . . . . . . . . . . . . . . . . . . . . . $ 573 $ 2,549 $ 5,115 $ 6,321
-------- -------- -------- --------
-------- -------- -------- --------
Principal amount of originations
and purchases:
Company home buyers . . . . . . . . . . . . . . . . . . . $80,905 $91,921 $232,435 $219,796
Spot. . . . . . . . . . . . . . . . . . . . . . . . . . . 11,259 61,934 59,668 182,785
Correspondent . . . . . . . . . . . . . . . . . . . . . . 15,063 36,293 58,960 114,201
-------- -------- -------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $107,227 $190,148 $351,063 $516,782
-------- -------- -------- --------
-------- -------- -------- --------
September 30, December 31, September 30,
1994 1993 1993
------------- ------------ -------------
Composition of Servicing Portfolio at
End of Period:
FHA insured/VA guaranteed. . . . . . . . . . . . . . . . . $264,046 $373,716 $307,990
Conventional . . . . . . . . . . . . . . . . . . . . . . . 306,860 279,615 316,080
-------- -------- --------
Total Servicing Portfolio. . . . . . . . . . . . . . . $570,906 $653,331 $624,070
-------- -------- --------
-------- -------- --------
Portion of Servicing Portfolio
Available for Sale . . . . . . . . . . . . . . . . . . . . $502,783 $574,088 $427,426
-------- -------- --------
-------- -------- --------
HomeAmerican's loan originations decreased by 44% and 32%, respectively, for the
three and nine-month periods ended September 30, 1994 compared with the same
periods in 1993 primarily as a result of (i) lower spot originations and
purchases of loans from correspondents primarily due to increased mortgage
interest
-29-
rates which resulted in lower mortgage loan refinancings; and (ii) in the three
months ended September 30, 1994, lower originations for MDC home buyers. In the
nine months ended September 30, 1994, the decreases partially were offset by
higher originations for MDC home buyers, despite a lower percentage of mortgages
originated for MDC home buyers in 1994 compared with the same period in 1993,
principally due to increased closings by MDC's home building segment.
HomeAmerican originated mortgages for 50% and 53%, respectively, of MDC's total
homes closed during the three and nine months ended September 30, 1994, compared
with 64% and 65%, respectively, during the same periods in 1993. The decline in
the percentage of mortgages originated for MDC home buyers was the result of
increased competition for mortgage loan originations.
HomeAmerican's operating profit of $573,000 during the three months ended
September 30, 1994 was lower than the operating profit of $2,549,000 for the
same period in 1993 principally due to (i) losses from sales of mortgage loans
totaling $166,000 in the three months ended September 30, 1994 compared with
gains totaling $990,000 in the same period in 1993; and (ii) lower gains from
bulk sales of mortgage loan servicing. HomeAmerican's operating profit of
$5,115,000 during the nine months ended September 30, 1994 was lower than the
operating profit of $6,321,000 for the same period in 1993 principally due to
losses from sales of mortgage loans totaling $347,000 in the nine months ended
September 30, 1994 compared with gains from sales of mortgage loans totaling
$2,344,000 in the nine months ended September 30, 1993, partially offset by
higher gains from bulk sales of mortgage servicing. While loan origination fees
were lower for the three and nine-month periods ended September 30, 1994
compared with the same periods in 1993, this reduction was offset by a decrease
in general and administrative expenses as HomeAmerican has reduced its general
and administrative costs in response to the decline in its mortgage lending
operations.
No bulk mortgage loan sales of servicing were made during the three months ended
September 30, 1994. During the nine months ended September 30, 1994,
HomeAmerican sold in bulk mortgage loan servicing on approximately $349,237,000
of mortgage loans which resulted in pre-tax gains of $4,476,000. During the
three and nine months ended September 30, 1993, HomeAmerican sold in bulk
mortgage loan servicing on approximately $107,600,000 and $228,000,000,
respectively, of mortgage loans which resulted in pre-tax gains of $1,160,000
and $2,537,000, respectively. Additionally, during the nine months ended
September 30, 1993, $891,000 of income relating to a December 1992 bulk
servicing sale was recognized as the related mortgage loans totaling
approximately $59,600,000 were certified for sale in such period.
At September 30, 1994, approximately $502,783,000 of conforming mortgage loan
(i.e., loans that meet the securitization standards of GNMA, FNMA or FHLMC)
servicing was available for sale, which represents an 18% increase above the
$427,426,000 in conforming mortgage loan servicing available for sale at
September 30, 1993.
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ASSET MANAGEMENT SEGMENT.
The following table summarizes the results of the asset management segment
operations during each of the periods presented (in thousands).
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
1994 1993 1994 1993
--------- --------- --------- ---------
Management fees from Asset
Investors and Commercial Assets . . . . . . . . . . . . . $ 591 $ 487 $ 1,929 $ 1,725
Equity in losses of Equity CMO
Interests, net of valuation
adjustments. . . . . . . . . . . . . . . . . . . . . . . . -- (500) -- (3,100)
Gains (losses) on sales of
Mortgage Collateral. . . . . . . . . . . . . . . . . . . . (63) 245 295 6,227
Interest income from CMO Bond and
other, net . . . . . . . . . . . . . . . . . . . . . . . . 497 820 1,171 3,116
--------- --------- --------- ---------
Operating profit . . . . . . . . . . . . . . . . . . . . . . $ 1,025 $ 1,052 $ 3,395 $ 7,968
--------- --------- --------- ---------
--------- --------- --------- ---------
The decrease in the Company's asset management segment operating profit for the
nine months ended September 30, 1994 compared with the same period in 1993 is
due principally to lower gains on sales of Mortgage Collateral, partially offset
by valuation adjustments recorded in 1993 related to the Equity CMO Interests
(as hereafter defined) which were not required in 1994. Also in the nine months
ended September 30, 1993, the Company earned $1,396,000 in interest on the CMO
Bond (as hereafter defined). The CMO Bond was fully paid at December 31, 1993.
MANAGEMENT OF ASSET INVESTORS. The Company advises Asset Investors Corporation
("Asset Investors"), a New York Stock Exchange-listed REIT, on various facets of
Asset Investors' business. Asset Investors generates substantially all of its
income through a portfolio of CMO Ownership Interests in residential mortgage
loan securitizations and unrated subordinated interests in residential mortgage
loan securitizations collateralized by pools of non-conforming (non-agency
guaranteed) single-family mortgage loans.
MDC has a management agreement (the "Asset Investors Management Agreement") with
Asset Investors which is currently in the process of being extended through
1994, subject to amendment of certain of the terms on a prospective basis. The
current Asset Investors Management Agreement may be terminated by the Company or
by Asset Investors with or without cause at any time upon 60 days' written
notice. Pursuant to the Asset Investors Management Agreement, MDC receives
compensation for CMO administration and other management services. MDC also is
entitled to receive an incentive fee (the "Asset Investors Incentive Fee") which
is based primarily on the level of Asset Investors dividend distributions.
The high level of prepayments on Asset Investors' portfolio of home mortgage-
related assets in 1992 and 1993 affected adversely the CMO Ownership Interests
owned by Asset Investors and its income,
-31-
which reduced substantially, relative to prior years, the management fees earned
by the Company from Asset Investors in 1993 and the first nine months of 1994.
The Company earned $418,000 and $1,250,000, respectively, in management fees in
the three and nine months ended September 30, 1994 compared with $487,000 and
$1,725,000, respectively, in the same periods in 1993. No Asset Investors
Incentive Fees were earned by the Company in the three and nine months ended
September 30, 1994 or in the same periods in 1993.
MANAGEMENT OF COMMERCIAL ASSETS. In August 1993, Asset Investors formed
Commercial Assets, Inc. ("Commercial Assets"), an American Stock Exchange-listed
REIT, to acquire and manage a portfolio of ownership interests in commercial
mortgage loan securitizations. In October 1993, Asset Investors distributed
approximately 70% of the shares of Commercial Assets to its stockholders as a
dividend.
MDC has a management agreement (the "Commercial Assets Management Agreement")
with Commercial Assets through 1994. Pursuant to the Commercial Assets
Management Agreement, MDC receives (i) compensation based on the level of
Commercial Assets income, as determined under applicable provisions of the
Internal Revenue Code of 1986, as amended; (ii) acquisition fees; (iii)
administration fees; and (iv) fees for other management services. The
Commercial Assets Management Agreement may be terminated by the Company or by
Commercial Assets with or without cause at any time upon 60 days' written
notice.
During the three and nine months ended September 30, 1994, MDC earned fees
totaling $173,000 and $679,000, respectively, from Commercial Assets.
EQUITY CMO INTERESTS. During the three and nine months ended
September 30, 1993, MDC recorded $500,000 and $3,100,000, respectively, in
valuation adjustments related to its 49.999% ownership interest in seven CMO
Ownership Interests (these seven interests are referred to herein as "Equity CMO
Interests") related to permanent declines in the value of the undiscounted
projected cash flow of such Equity CMO Interests resulting from higher actual
and projected prepayments caused by low interest rates. During the three and
nine months ended September 30, 1994, higher mortgage interest rates have slowed
both the actual and expected prepayment speeds and, accordingly, no valuation
adjustments were necessary.
If the Mortgage Collateral underlying the Equity CMO Interests prepays or is
projected to prepay at higher than current expected rates and/or if short-term
interest rates increase significantly from their present rates, the Company, in
the future, may recognize additional valuation adjustments.
INVESTMENT IN A CMO BOND. On July 31, 1992, MDC purchased a $7,823,000
principal amount CMO bond (the "CMO Bond") for $7,367,000. For the three and
nine months ended September 30, 1993, the CMO Bond earned interest totaling
$302,000 and $1,396,000, respectively. The CMO Bond was fully paid at
December 31, 1993.
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SALES OF MORTGAGE-RELATED ASSETS. MDC completed various sales of mortgage-
related assets which resulted in net losses totaling $63,000 and net gains
totaling $295,000, respectively, for the three and nine months ended
September 30, 1994 compared with net gains totaling $245,000 and $6,227,000,
respectively, during the same periods in 1993.
GENERAL. The Company currently does not expect to acquire additional CMO
Ownership Interests in the future except to the extent attractive opportunities
may be identified. As a result, future income from the asset management segment
primarily will be dependent on management fees.
OTHER OPERATING RESULTS.
CORPORATE AND HOME BUILDING INTEREST. Corporate and home building interest
incurred increased by 39% and 40%, respectively, to $9,114,000 and $26,361,000,
respectively, in the three and nine months ended September 30, 1994 compared
with $6,535,000 and $18,821,000, respectively, during the same periods in 1993
due to (i) higher interest rates associated with the 11 1/8% Senior Notes due
2003 compared with the debt outstanding for the three and nine months ended
September 30, 1993; and (ii) higher levels of borrowings resulting from the
Company's expanded home building operations. The portion of this corporate and
home building interest capitalized (the Company capitalizes interest on its home
building inventories during the period of active development and through the
completion of construction) during the three and nine months ended
September 30, 1994 totaled $7,209,000 and $19,449,000, respectively, compared
with $3,751,000 and $10,149,000, respectively, during the same periods in 1993.
The increase in interest capitalized for the three and nine months ended
September 30, 1994 was due primarily to (i) increased levels of active home
building inventories resulting from expanded operations; (ii) higher
capitalization rates related to the higher average effective interest rates on
applicable debt, particularly with respect to Colorado; and (iii) the extended
period of time for completing homes under construction in certain of the
Company's markets, which increased the period of time over which interest on
related construction and land costs is capitalized. The corporate and home
building interest incurred which was not capitalized was reflected as interest
expense and totaled $1,905,000 and $6,912,000, respectively, for the three and
nine months ended September 30, 1994 compared with $2,784,000 and $8,672,000,
respectively, for the same periods in 1993. For a reconciliation of interest
incurred, capitalized, expensed and previously capitalized included in cost of
sales, see Note E to the Company's Condensed Consolidated Financial Statements.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and
administrative expenses totaled $4,160,000 and $12,059,000, respectively, during
the three and nine months ended September 30, 1994 compared with $4,018,000 and
$11,401,000, respectively, during the same periods in 1993. The increase in the
first nine months of 1994 primarily was due to an increase in
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employee compensation, professional fees and insurance expense resulting from
the Company's expanded operations.
INCOME TAXES. M.D.C. Holdings, Inc. and its wholly-owned subsidiaries file a
consolidated federal income tax return (the "MDC Consolidated Return").
Richmond Homes and its wholly-owned subsidiaries filed (or will file) a separate
consolidated federal income tax return (each, a "Richmond Homes Consolidated
Return") from its inception (December 28, 1989) through the date Richmond Homes
became a wholly-owned subsidiary of MDC (February 2, 1994).
MDC's overall effective income tax rate during the three and nine-month periods
ended September 30, 1994 was 36% and 38%, respectively, compared with 37% and
33%, respectively, during the same periods in 1993. The effective income tax
rates differed from the 35% federal statutory rate primarily due to, among other
things, (i) the impact of state income taxes; (ii) the realization of non-
taxable income for financial reporting purposes for which no tax liability was
recorded; and (iii) in 1994, adjustments to prior years' income taxes. The
Company has recorded a net deferred income tax asset of $11,498,000, net of a
valuation allowance of $3,000,000, at September 30, 1994. The valuation
allowance has been provided to offset the related deferred income tax assets due
to the uncertainty of realizing the benefit of future tax deductions.
The Internal Revenue Service (the "IRS") has completed its examination of the
MDC Consolidated Returns for the years 1984 through 1987 and has proposed
certain adjustments to the taxable income reflected in such returns. A
substantial portion of the proposed adjustments relate to the characterization
of $22,000,000 in gains on sales of property held for investment, which were
reported as capital gains. Certain of the other proposed adjustments would
shift the recognition of certain items of income and expense from one year to
another ("Timing Adjustments"). To the extent taxable income in a prior year is
increased by proposed Timing Adjustments, taxable income may be reduced by a
corresponding amount in other years; however, the Company would incur an
interest charge as a result of such adjustment. The Company currently is
protesting many of these proposed adjustments through the IRS appeals process
and believes that the amount of these adjustments will be reduced as a result.
In the opinion of management, adequate provision has been made for the
additional income taxes and interest which may arise as a result of the proposed
adjustments.
The IRS currently is examining the MDC Consolidated Returns for the years 1988
through 1990 and the Richmond Homes Consolidated Returns for the years 1989 and
1990. No reports have been issued by the IRS in connection with these
examinations. In the opinion of management, adequate provision has been made
for any additional income taxes and interest which may arise as a result of
these examinations.
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LIQUIDITY AND CAPITAL RESOURCES
MDC uses its 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.
Capital resources are generated internally from operations and from external
sources.
Based upon its current financial condition and credit relationships, MDC
believes that it has, or can obtain, adequate financial resources to satisfy its
current and near-term capital requirements. The Company believes that it can
meet its long-term capital needs (including, 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.
CONSOLIDATED CASH FLOW.
For the nine months ended September 30, 1994, MDC used $15,194,000 in cash. At
September 30, 1994, the Company had $47,809,000 available in cash and cash
equivalents.
MDC's Operating Activities during the first nine months of 1994 used net cash of
$47,948,000 compared with net cash used of $31,032,000 during the same period in
1993. The net cash used in Operating Activities during the first nine months of
1994 principally was due to increases in home building inventories as a result
of significantly increased levels of home building activity, partially offset by
a reduction in mortgage loans held in inventory. The net cash used by Operating
Activities during the first nine months of 1993 principally was due to increases
in mortgage loans held in inventory and housing inventories resulting from
increased mortgage lending and home building activities in such period.
As the Company has expanded and continues to expand its home building operations
(which involves primarily land purchases and increased sales and Backlog, which
increase housing inventories), the resulting effect has been and will be the net
use of cash in Operating Activities to the extent that the cash required for
expansion exceeds net income. Because the Company intends to continue
aggressively to expand the home building segment in the near future, cash flows
from Operating Activities likely will continue to be negative. The Company
generally funds these negative cash flows through increased bank lines of credit
and other financing and through net cash inflows from the asset management
segment.
Net cash provided by Investing Activities during the first nine months of 1994
and 1993 totaled $72,498,000 and $136,669,000, respectively, and primarily was
generated by (i) principal payments and prepayments on, and sales of, Mortgage
Collateral; (ii) in 1994, the redemption of metropolitan district bonds which
was partially offset by the deposit of $10,000,000 into a trust account required
in connection with a guarantee of certain new bonds issued by certain
metropolitan districts (see Note H to the Company's Condensed
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Consolidated Financial Statements); and (iii) in 1993, sales of marketable
preferred shares used by the Company in its cash management activities. A
substantial portion of the cash flow generated by these reductions was used to
make required principal payments on the CMO bonds collateralized by these
assets, which principally resulted in the net use of cash in Financing
Activities in the first nine months of 1994 and 1993 of $39,744,000 and
$102,528,000, respectively. Also increasing this use of cash for the nine
months ended September 30, 1994 were net payments of $24,098,000 on notes
payable as the Company has begun shifting away from higher-cost project loans
and other notes payable to the use of its increased lines of credit to finance a
larger portion of its expanding home building operations. In the first nine
months of 1994 and 1993, cash used in Financing Activities was decreased by net
advances under its lines of credit totaling $42,461,000 and $8,695,000,
respectively, and in the first nine months of 1993 was increased by net
borrowings on notes payable totaling $7,026,000. The resulting net increases in
debt were necessary to finance the substantial increases in home building
activities in the first nine months of both 1994 and 1993 and, in the first nine
months of 1993, to finance the substantial increase in mortgage lending
activities.
LINES OF CREDIT AND NOTES PAYABLE.
HOME BUILDING. The aggregate amount of MDC's home building bank lines of credit
at September 30, 1994 was $138,000,000 compared with $45,000,000 at September
30, 1993. Borrowings under the bank lines of credit are collateralized by home
building inventories and are limited to the value of "eligible collateral" (as
defined in the credit agreements). At September 30, 1994, $73,581,000 was
borrowed and an additional $37,457,000 was collateralized and available to be
borrowed under the bank lines of credit.
In August 1994, MDC consummated a $35,000,000 line of credit (the "$35,000,000
Line") with a bank. The $35,000,000 Line is available for acquisition and
development of land and for the construction of homes. The term of the line of
credit agreement is 24 months with a 24-month term-out period.
A bank has advised the Company that it will replace an existing $15,000,000 line
of credit of an affiliated bank with a new $30,000,000 line of credit. The
Company would be required to pay any amounts outstanding under the replaced line
with proceeds from this new line of credit. Such amounts totaled $5,489,000 at
September 30, 1994. The Company believes this new line of credit will be
consummated; however, there can be no assurance that this new line of credit
will be consummated or, if consummated, at what levels or terms.
Additionally, another bank has advised the Company that it will expand an
existing $13,000,000 line of credit with an amended $28,000,000 credit facility.
The Company believes that it will be successful in amending this credit
facility;
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however, there can be no assurance that this credit facility will be amended or,
if amended, at what levels or terms.
As discussed above, the Company, during 1993 and the first nine months of 1994,
significantly expanded its home building operations and is planning to continue
to expand its home building activities during the remainder of 1994 and in 1995
depending on economic conditions and the availability of attractive business
opportunities. The Company intends to finance this expansion primarily with
increased bank lines of credit and through internal sources. However, when
necessary, as has been the case in prior years, MDC may replace or supplement
its bank lines of credit with secured project financing. The cost of secured
project financing generally is higher than the cost of the Company's bank lines
of credit.
MORTGAGE LENDING. In August 1994, the aggregate amount available under MDC's
mortgage lending bank line of credit (the "Mortgage Line") was reduced from
$75,000,000 to $51,000,000 due to the lower level of mortgage lending activity,
and to, among other things, lower its related cost. Borrowings under the
Mortgage Line are collateralized by mortgage loans and mortgage-backed
certificates and are limited to the value of "eligible collateral" (as defined
in the credit agreement). At September 30, 1994, $24,999,000 was borrowed and
an additional $5,812,000 was collateralized and available to be borrowed under
the Mortgage Line.
To provide funds for mortgage loan financing for MDC's home buyers and others on
a spot basis, HomeAmerican utilizes its Mortgage Line to finance these mortgage
loans on a short-term basis. These mortgage loans are pooled into GNMA, FNMA
and FHLMC pools or retained as whole loans and subsequently are sold in the open
market on a "spot" basis and pursuant to mortgage loan sale commitments. During
the nine months ended September 30, 1994 and 1993, HomeAmerican sold
$382,327,000 and $497,903,000, respectively, principal amount of mortgage loans
and mortgage certificates to unaffiliated purchasers.
GENERAL. The Company's lines of credit and notes payable contain certain
covenants, representations and warranties. Currently, the Company is in
compliance with these covenants, representations and warranties.
In the event that MDC's lines of credit are not renewed, or are renewed as they
become due at substantially lower levels, the Company believes that it could
meet its business plan through a combination of internally-generated funds and
new borrowings. Required repayments of its lines of credit have in the past,
and in the future could be, repaid with, among other things, (i) available cash
and/or the proceeds from the liquidation of available short-term investments;
and/or (ii) the proceeds from the sale or liquidation of certain other of the
Company's home building, mortgage and other assets. The sale or liquidation of
assets could be at prices that are less than the carrying value of such assets
and may affect adversely the Company's future financial condition and results of
operations.
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ASSET MANAGEMENT SEGMENT ASSETS AND LIABILITIES.
Throughout 1993 and the first nine months of 1994, the asset management segment
continued to experience a net liquidation of assets and related reduction of
liabilities. Mortgage Collateral, net, and related assets, have declined from
$275,467,000 at January 1, 1993 to $134,166,000 at December 31, 1993 and to
$68,607,000 at September 30, 1994. The proceeds from these reductions were used
primarily to reduce the related CMO bonds, net, and related liabilities from
$256,347,000 at January 1, 1993 to $123,500,000 at December 31, 1993 and to
$65,405,000 at September 30, 1994. These asset and liability reductions
substantially were the result of (i) the high rate of prepayments on the
Mortgage Collateral; and (ii) sales of Mortgage Collateral and related assets
and related redemptions of CMO bonds. The Company's Mortgage Collateral and
related CMO bonds will continue to decrease as payments and prepayments are
received or Mortgage Collateral is sold.
The Company's Equity CMO Interests also have declined from $16,930,000 at
January 1, 1993 to $6,427,000 at December 31, 1993 and to $3,722,000 at
September 30, 1994 due to the receipt of distributions of capital and, in 1993,
valuation adjustments.
MATERIAL CHANGES IN OTHER ASSETS AND LIABILITIES.
HOME BUILDING RECEIVABLES. Home building receivables consist principally of
receivables from home sales (representing the proceeds from home closings not
yet disbursed by unrelated settlement agents), which usually are collected
within seven days after the sale is closed, and certain other receivables. Such
receivables totaled $17,040,000 at September 30, 1994 compared with $5,423,000
at December 31, 1993. The increase at September 30, 1994 is due to increased
closings and the timing of such closings.
HOUSING COMPLETED OR UNDER CONSTRUCTION. Housing completed or under
construction increased to $303,438,000 at September 30, 1994 compared with
$201,023,000 at December 31, 1993 principally due to an increase in Backlog and
spec homes under construction.
LAND AND LAND UNDER DEVELOPMENT. Land and land under development totaled
$181,349,000 at September 30, 1994 compared with $192,881,000 at December 31,
1993. The net decline in land inventories is due principally to (i) increased
home construction activity; (ii) the continued use of "rolling" options, with
periodic takedowns of lots, to acquire new land inventories for use in the
Company's home building activities; and (iii) sales and other dispositions of
land.
Based upon its current business plan, MDC anticipates the acquisition, during
the balance of 1994, of various parcels of finished lots and partially-developed
land for use in its future home building operations. The Company currently
intends to acquire a portion of the land inventories required in future periods
through takedowns of lots subject to rolling options entered into in prior
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periods and under new rolling option agreements. The use of rolling options
lessens the Company's risk and improves liquidity.
MORTGAGE LOANS HELD IN INVENTORY. Mortgage loans held in inventory decreased to
$37,768,000 at September 30, 1994 compared with $68,065,000 at December 31,
1993, due to the decreased mortgage loan originations in the third quarter of
1994 compared with the fourth quarter of 1993.
OTHER
1994 RICHMOND COMMON STOCK ACQUISITION. In December 1993, the Company sold
$190,000,000 principal amount of Senior Notes and $28,000,000 principal amount
of Convertible Subordinated Notes (the "1993 Offering"). Based on advice of
the Company's financial advisor, the Company believes that the success of the
1993 Offering was dependent on MDC's ability to acquire the 54.9% of the common
stock of Richmond Homes (the "Richmond Common Stock") that it did not own. A
portion of the net proceeds of the 1993 Offering was used to acquire 19.9% of
the Richmond Common Stock from an unrelated institutional investor.
In connection with an agreement entered into as part of the 1993 Offering and in
furtherance of the Company's desire to own all of the outstanding shares of
Richmond Common Stock, in December 1993, a special committee of the Board of
Directors of the Company (the "Special Committee") negotiated on behalf of the
Company terms of an option agreement with Messrs. Mizel and Mandarich to
purchase the shares of Richmond Common Stock owned by them for a purchase price
of up to $3,500,000 in the aggregate. The purchase price for the Richmond
Common Stock was to be paid in shares of MDC common stock (the "MDC Common
Stock") valued at $5.75 per share, which was the closing price of the MDC Common
Stock on the date of the option agreement. The Special Committee engaged a
financial advisor to perform a business enterprise valuation of Richmond Homes.
In February 1994, based on the results of the valuation, the maximum of
$3,500,000 was paid by issuing an aggregate of 608,695 shares of MDC Common
Stock to Messrs. Mizel and Mandarich.
The Company believes that increasing to 100% its ownership of Richmond Homes
(which, among other things, generated 46% of MDC's revenues on a consolidated
basis in 1993) has increased MDC's financial flexibility and has simplified
MDC's corporate structure.
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M.D.C. HOLDINGS, INC.
FORM 10-Q
PART II
ITEM 1. LEGAL PROCEEDINGS.
SETTLEMENT OF WESTERN SAVINGS CIVIL MATTERS.
In December 1993, the Resolution Trust Corporation (the "RTC"), acting in its
corporate capacity and as receiver for Western Savings and Loan Association
("Western"), gave its final administrative approval to an agreement-in-principle
executed between MDC and the RTC in February 1993 which provides for a
settlement and mutual release of all potential claims between the parties and
related persons relating to any of the Company's past transactions with Western.
Under the terms of the approved agreement-in-principle, MDC would (i) pay to the
RTC approximately $3,700,000 in cash plus certain interest thereon; and (ii)
release its related potential claims against the RTC and Western. MDC had fully
reserved for this settlement as of December 31, 1992 and does not anticipate any
adverse effect on the Company's operations or financial position. The
settlement remains subject to the negotiation of formal settlement documents
acceptable to both MDC and the RTC and a court order determining that the
settlement precludes the filing of cross-claims against MDC by various third
parties.
OTHER.
On October 12, 1994, a complaint was served on the Company's Colorado home
building subsidiaries in an action initiated by six homeowners in Highlands
Ranch, Colorado. The complaint alleges, among other things, that as a result of
expansive soils, the homeowners incurred unspecified damages and seeks
certification of a class action. The Company presently is analyzing the
complaint.
The Company and certain of its subsidiaries and affiliates have been
named as defendants in various other claims, complaints and legal actions
arising in the normal course of business. In the opinion of management, the
outcome of these matters will not have a material adverse effect upon the
financial condition or results of operations of the Company.
The Company is not aware of any litigation matter or pending claim against the
Company which would result in material contingent liabilities related to
environmental hazards or asbestos.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS.
No matters were submitted to stockholders during the third quarter of 1994.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit:
10.1 Guaranty Agreement between M.D.C. Holdings as
guarantor and Bank One, Denver, N.A., not in its
individual capacity but solely as Trustee, dated as
of June 1, 1994.
10.2 Guaranty Agreement between M.D.C. Holdings, Inc. as
guarantor and Bank One, Denver, N.A., not in its
individual capacity but solely as Trustee, under that
Indenture of Trust, dated as of June 1, 1994.
15 Letter regarding unaudited interim financial
information.
27 Financial Data Schedule
28 Form of Independent Accountants' Review Report dated
November 1, 1994.
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the Registrant
during the period covered by this Quarterly Report on Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 1994 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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EXHIBIT INDEX
Exhibit No. Description Page #
- - ----------- ----------- ------
10.1 Guaranty Agreement between M.D.C. Holdings as
guarantor and Bank One, Denver, N.A., not in its
individual capacity but solely as Trustee, dated as
of June 1, 1994. 43
10.2 Guaranty Agreement between M.D.C. Holdings, Inc.
as guarantor and Bank One, Denver, N.A., not in
its individual capacity but solely as Trustee, under
that Indenture of Trust, dated as of June 1, 1994. __
15 Letter regarding unaudited interim financial information. __
27 Financial Data Schedule __
28 Form of Independent Accountants' Review Report dated
November 1, 1994. __
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