-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C6fleB0erER+mr6ZajieIjuiH7uLpkKfL9rLO8HCoHbvO1wuDpHRQVAjhB1xWCYL pGxxEhXDaWcJhfFovMNA1Q== 0000773141-96-000010.txt : 19961118 0000773141-96-000010.hdr.sgml : 19961118 ACCESSION NUMBER: 0000773141-96-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MDC HOLDINGS INC CENTRAL INDEX KEY: 0000773141 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 840622967 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08951 FILM NUMBER: 96662728 BUSINESS ADDRESS: STREET 1: 3600 S YOSEMITE ST STE 900 CITY: DENVER STATE: CO ZIP: 80237 BUSINESS PHONE: 3037731100 MAIL ADDRESS: STREET 1: 3600 S YOSEMITE STREET STREET 2: SUITE 900 CITY: DENVER STATE: CO ZIP: 80237 10-Q 1 ================================================================================ 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, 1996 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-8951 M.D.C. HOLDINGS, INC. (Exact name of Registrant as specified in its charter) Delaware 84-0622967 (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification no.) 3600 South Yosemite Street, Suite 900 80237 Denver, Colorado (Zip code) (Address of principal executive offices) (303) 773-1100 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of October 31, 1996, 17,936,000 shares of M.D.C. Holdings, Inc. Common Stock were outstanding. ================================================================================ M.D.C. HOLDINGS, INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996 INDEX Page No. ---- Part I. Financial Information: Item 1. Condensed Consolidated Financial Statements: Balance Sheets as of September 30, 1996 (Unaudited) and December 31, 1995............................... 1 Statements of Income (Unaudited) for the three and nine months ended September 30, 1996 and 1995....... 3 Statements of Cash Flows (Unaudited) for the nine months ended September 30, 1996 and 1995............ 4 Notes to Financial Statements (Unaudited)............ 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 17 Part II. Other Information: Item 1. Legal Proceedings.................................... 30 Item 4. Submission of Matters to a Vote of Shareowners....... 31 Item 6. Exhibits and Reports on Form 8-K..................... 31 (i)
M.D.C. HOLDINGS, INC. Condensed Consolidated Balance Sheets (In thousands) September 30, December 31, 1996 1995 ----------- ----------- ASSETS (Unaudited) Corporate Cash and cash equivalents...................... $ 11,244 $ 10,290 Property and equipment, net.................... 9,505 9,550 Deferred income taxes.......................... 10,532 13,730 Deferred debt issue costs, net................. 9,358 9,931 Other assets, net.............................. 9,916 3,830 ---------- ----------- 50,555 47,331 Homebuilding Cash and cash equivalents...................... 4,122 5,096 Home sales and other accounts receivable....... 16,228 26,192 Investments and marketable securities, net..... 5,076 6,481 Inventories, net Housing completed or under construction...... 281,295 265,205 Land and land under development.............. 177,388 176,960 Prepaid expenses and other assets, net......... 37,119 42,111 ---------- ----------- 521,228 522,045 Financial Services Cash and cash equivalents...................... 2,177 5,409 Accrued interest and other assets, net......... 5,212 3,129 Mortgage loans held in inventory, net.......... 46,269 53,153 Mortgage Collateral, net of mortgage-backed bonds, and related assets and liabilities.... 1,934 3,744 ---------- ----------- 55,592 65,435 Total Assets............................. $ 627,375 $ 634,811 ========== ===========
See notes to condensed consolidated financial statements -1-
M.D.C. HOLDINGS, INC. Condensed Consolidated Balance Sheets (In thousands, except share amounts) September 30, December 31, 1996 1995 ----------- ----------- LIABILITIES (Unaudited) Corporate Accounts payable and accrued expenses........... $ 21,580 $ 18,258 Income taxes payable............................ 14,059 11,930 Note payable.................................... 3,500 3,537 Senior Notes, net............................... 187,670 187,525 Subordinated notes, net......................... 38,224 38,221 ----------- ----------- 265,033 259,471 Homebuilding Accounts payable and accrued expenses........... 92,756 82,164 Lines of credit................................. 28,431 43,490 Notes payable................................... 6,506 10,571 ----------- ----------- 127,693 136,225 Financial Services Accounts payable and accrued expenses........... 11,675 12,092 Line of credit.................................. 14,150 21,990 ----------- ----------- 25,825 34,082 Total Liabilities......................... 418,551 429,778 ----------- ----------- COMMITMENTS AND CONTINGENCIES...................... - - - - ----------- ----------- STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 25,000,000 shares authorized; none issued................. - - - - Common Stock, $.01 par value; 100,000,000 shares authorized; 22,660,000 and 22,606,000 shares issued, respectively, at September 30, 1996 and December 31, 1995..................... 227 226 Additional paid-in capital...................... 136,518 136,022 Retained earnings............................... 100,511 87,476 ----------- ----------- 237,256 223,724 Less treasury stock, at cost; 4,564,000 and 3,157,000 shares, respectively, at September 30, 1996 and December 31, 1995.................... (28,432) (18,691) ----------- ----------- Total Stockholders' Equity................ 208,824 205,033 ----------- ----------- Total Liabilities and Stockholders' Equity. $ 627,375 $ 634,811 =========== ===========
See notes to condensed consolidated financial statements -2-
M.D.C. HOLDINGS, INC. Condensed Consolidated Statements of Income (In thousands, except per share amounts) (Unaudited) Three Months Nine Months Ended September 30, Ended September 30, ------------------------- ------------------------- 1996 1995 1996 1995 ----------- ----------- ----------- ----------- REVENUES Homebuilding.......... $ 222,734 $ 226,815 $ 644,339 $ 618,683 Financial Services.... 10,346 6,297 25,034 18,803 Corporate............. 227 359 956 1,196 ----------- ----------- ----------- ----------- Total Revenues... 233,307 233,471 670,329 638,682 ----------- ----------- ----------- ----------- COSTS AND EXPENSES Homebuilding......... 217,828 217,493 626,356 593,287 Financial Services... 3,245 2,778 9,335 7,865 Corporate general and administrative..... 2,920 3,185 8,501 9,794 Corporate and homebuilding interest (Note C).. 486 1,584 3,364 6,313 ----------- ----------- ----------- ----------- Total Expenses... 224,479 225,040 647,556 617,259 ----------- ----------- ----------- ----------- Income before income taxes and extraordinary item.... 8,828 8,431 22,773 21,423 Provision for income taxes................. (3,225) (2,886) (8,314) (7,479) ----------- ----------- ----------- ----------- Income before extraordinary item.... 5,603 5,545 14,459 13,944 Extraordinary loss from early extinguishment of debt, net of income tax benefit of $242....... - - - - (421) - - ----------- ----------- ----------- ----------- Net Income....... $ 5,603 $ 5,545 $ 14,038 $ 13,944 =========== =========== =========== =========== EARNINGS PER SHARE Primary Income before extraordinary item.. $ .30 $ .28 $ .75 $ .69 =========== =========== =========== =========== Net Income.......... $ .30 $ .28 $ .73 $ .69 =========== =========== =========== =========== Fully diluted Income before extraordinary item.. $ .27 $ .25 $ .68 $ .63 =========== =========== =========== =========== Net Income.......... $ .27 $ .25 $ .66 $ .63 =========== =========== =========== =========== WEIGHTED-AVERAGE SHARES OUTSTANDING Primary.............. 18,849 20,052 19,352 20,161 =========== =========== =========== =========== Fully diluted........ 22,462 23,736 22,965 24,113 =========== =========== =========== =========== DIVIDENDS PER SHARE..... $ .03 $ .03 $ .09 $ .08 =========== =========== =========== ===========
See notes to condensed consolidated financial statements -3-
M.D.C. HOLDINGS, INC. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Nine months Ended September 30, ------------------------- 1996 1995 ----------- ----------- OPERATING ACTIVITIES Net Income........................................ $ 14,038 $ 13,944 Adjustments To Reconcile Net Income To Net Cash Provided By (Used In) Operating Activities: Depreciation and amortization................ 8,770 7,237 Homebuilding asset impairment charges........ 7,208 2,100 Deferred income taxes........................ 3,198 (1,985) Gain on sale of FAMC, net.................... (4,042) - - Net Changes In Assets and Liabilities Mortgage loans held in inventory............. 6,884 (3,954) Homebuilding inventories..................... (18,073) 9,056 Home sales and other accounts receivable..... 9,964 (1,877) Prepaid expenses and other assets............ (2,778) (7,648) Accounts payable and accrued expenses........ 13,370 6,522 Other, net................................... (2,888) (888) ----------- ----------- Net Cash Provided By Operating Activities.......... 35,651 22,507 ----------- ----------- INVESTING ACTIVITIES Net Proceeds From Mortgage-Related Assets and Liabilities..................................... 2,858 4,397 Other, net........................................ 1,826 3,963 ----------- ----------- Net Cash Provided By Investing Activities.......... 4,684 8,360 ----------- ----------- FINANCING ACTIVITIES Lines of Credit Advances...................................... 743,462 534,484 Principal payments............................ (766,361) (561,187) Notes Payable Borrowings.................................... 480 1,075 Principal payments............................ (10,441) (24,695) Dividend Payments.................................. (1,684) (1,568) Treasury Stock Repurchases......................... (10,075) (5,321) Other, net......................................... 1,032 (54) ----------- ----------- Net Cash Used In Financing Activities.............. (43,587) (57,266) ----------- ----------- Net Decrease In Cash and Cash Equivalents.......... (3,252) (26,399) Cash and Cash Equivalents Beginning Of Period........................... 20,795 43,564 ----------- ----------- End Of Period................................. $ 17,543 $ 17,165 =========== ===========
See notes to condensed consolidated financial statements -4- M.D.C. HOLDINGS, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) A. Presentation of Financial Statements The condensed consolidated financial statements of M.D.C. Holdings, Inc. ("MDC" or the "Company," which, unless otherwise indicated, refers to M.D.C. Holdings, Inc. and its subsidiaries) have been prepared by MDC, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These statements reflect all adjustments (including all normal recurring accruals) which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC as of September 30, 1996 and for all of the periods presented. These statements are condensed and do not include all of the information required by generally accepted accounting principles in a full set of financial statements. These statements should be read in conjunction with MDC's financial statements and notes thereto included in MDC's Annual Report on Form 10-K for its fiscal year ended December 31, 1995 and Legal Proceedings within Part II of MDC's Form 10-Q for the quarterly period ended September 30, 1996. Certain reclassifications have been made in the 1995 financial statements to conform to the classifications used in the current year. B. Information on Business Segments The Company operates in two business segments: homebuilding and financial services (which consists of mortgage lending and asset management operations). A summary of the Company's segment information is shown below (in thousands).
Three Months Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 Homebuilding ----------- ----------- ----------- ----------- Home sales.................................. $ 220,443 $ 220,770 $ 635,472 $ 608,690 Land sales.................................. 2,099 4,954 8,345 7,778 Other revenues.............................. 192 1,091 522 2,215 ----------- ----------- ----------- ----------- 222,734 226,815 644,339 618,683 ----------- ----------- ----------- ----------- Home cost of sales.......................... 190,056 191,164 548,974 527,080 Land cost of sales.......................... 1,830 5,034 7,785 7,445 Asset impairment charges.................... 4,338 1,200 7,208 2,100 Marketing................................... 14,420 13,108 40,667 36,735 General and administrative.................. 7,184 6,987 21,722 19,927 ----------- ----------- ----------- ----------- 217,828 217,493 626,356 593,287 ----------- ----------- ----------- ----------- Homebuilding Operating Profit........... 4,906 9,322 17,983 25,396 ----------- ----------- ----------- -----------
-5-
Three Months Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Financial Services Mortgage Lending Revenues Interest revenues........................... 944 869 2,618 2,539 Origination fees............................ 1,528 1,501 4,487 3,831 Gains on sales of mortgage servicing........ 1,593 2,001 5,746 6,643 Gains (losses) on sale of mortgage loans, net 1,545 (405) 3,238 (845) Mortgage servicing and other................ 288 441 1,196 1,456 Asset Management Revenues Gain on sale of FAMC, net................... 4,042 - - 4,042 - - Management fees and other................... 406 1,890 3,707 5,179 ----------- ----------- ----------- ----------- 10,346 6,297 25,034 18,803 ----------- ----------- ----------- ----------- General and Administrative Expenses Mortgage Lending............................ 2,518 2,140 7,139 6,066 Asset Management............................ 727 638 2,196 1,799 ----------- ----------- ----------- ----------- 3,245 2,778 9,335 7,865 ----------- ----------- ----------- ----------- Financial Services Operating Profit 7,101 3,519 15,699 10,938 ----------- ----------- ----------- ----------- Total Operating Profit........................... 12,007 12,841 33,682 36,334 ----------- ----------- ----------- ----------- Corporate Other revenues.............................. 227 359 956 1,196 Interest expense............................ (486) (1,584) (3,364) (6,313) General and administrative expenses......... (2,920) (3,185) (8,501) (9,794) ----------- ----------- ----------- ----------- Net Corporate Expenses ................. (3,179) (4,410) (10,909) (14,911) ----------- ----------- ----------- ----------- Income Before Income Taxes and Extraordinary Item.. $ 8,828 $ 8,431 $ 22,773 $ 21,423 =========== =========== =========== ===========
C. Corporate and Homebuilding Interest Activity (In thousands)
Three Months Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Interest capitalized in homebuilding inventory, beginning of period........................... $ 39,839 $ 41,559 $ 40,217 $ 42,478 Interest incurred................................ 7,582 8,337 22,961 25,809 Interest expensed................................ (486) (1,584) (3,364) (6,313) Previously capitalized interest included in cost of sales...................................... (6,066) (7,426) (18,945) (21,088) ----------- ----------- ----------- ----------- Interest capitalized in homebuilding inventory, end of period................................. $ 40,869 $ 40,886 $ 40,869 $ 40,886 =========== =========== =========== ===========
-6- D. Stockholders' Equity During 1995, the Company repurchased 865,600 shares of MDC common stock ("Common Stock") pursuant to a program authorized by MDC's Board of Directors (the "Directors") to repurchase up to 1,100,000 shares of Common Stock. In January 1996, the Company substantially completed the program authorized in 1995. On July 25, 1996, and October 8, 1996, respectively, the Directors authorized additional programs to repurchase up to 1,000,000 shares of Common Stock under each program. As of November 1, 1996, the Company had completed the program authorized on July 25 and had repurchased approximately 109,000 shares of Common Stock pursuant to the program authorized on October 8. Repurchases under the 1995 and 1996 programs have been made at per share prices ranging from $5.88 to $7.13, with an average cost, including commissions, of $6.64 per share. In April 1996, the Company repurchased 473,000 shares of Common Stock for $7.13 per share from Spencer I. Browne (former President, Co-Chief Operating Officer and a director of the Company) pursuant to an agreement between Mr. Browne and the Company. E. Gain on Sale of FAMC In September 1996, the Company sold its 80% interest in Financial Asset Management LLC ("FAMC"), the asset manager of two publicly traded real estate investment trusts, for $11,450,000. The sales proceeds consisted of $6,000,000 cash, received on October 2, and $5,450,000 of subordinated notes which are payable at specified dates during the next 10 years and are convertible, under certain circumstances, into as much as a 47.6% ownership interest in FAMC. The sale resulted in the recognition of a gain, net of related expenses, of $4,042,000. A gain of $5,450,000 attributable to the notes has been deferred and may be recognized, in whole or in part, in future periods based upon a number of factors, including collection of the notes' principal and the expiration of the conversion features. F. Extraordinary Item In April 1996, the Company entered into a $150,000,000 unsecured revolving credit agreement and used proceeds therefrom to retire borrowings under certain bank lines of credit and project loans collateralized by homebuilding inventories that the Company cancelled after entering into the unsecured revolving credit agreement. The Company recognized an extraordinary loss of $421,000, net of an income tax benefit of $242,000, during the second quarter and the nine months ended September 30, 1996, due to the write-off of unamortized discounts and deferred financing costs in connection with the cancellation of these secured lines of credit and project loans. G. Earnings Per Share Primary earnings per share are based on the weighted-average number of common and common equivalent shares outstanding during each period. The computation of fully diluted earnings per share also assumes the conversion into Common Stock of all of the $28,000,000 outstanding principal amount of the 8 3/4% convertible subordinated notes due December 2005 (the "Convertible Notes") at a conversion price of $7.75 per share of Common Stock. The primary and fully diluted earnings per share calculations are shown below (in thousands, except per share amounts). -7-
Three Months Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Primary Calculation Income before extraordinary item............................. $ 5,603 $ 5,545 $ 14,459 $ 13,944 Extraordinary loss, net of income tax benefit of $242........ - - - - (421) - - ----------- ----------- ----------- ----------- Net Income.............................................. $ 5,603 $ 5,545 $ 14,038 $ 13,944 =========== =========== =========== =========== Weighted-average shares outstanding.......................... 18,358 19,310 18,821 19,345 Dilutive stock options....................................... 491 742 531 816 ----------- ----------- ----------- ----------- Total Weighted-Average Shares........................... 18,849 20,052 19,352 20,161 =========== =========== =========== =========== Primary Earnings Per Share Income before extraordinary item........................ $ .30 $ .28 $ .75 $ .69 =========== ============= =========== =========== Net Income.............................................. $ .30 $ .28 $ .73 $ .69 =========== =========== =========== =========== Fully Diluted Calculation Income before extraordinary item............................. $ 5,603 $ 5,545 $ 14,459 $ 13,944 Adjustment for interest on Convertible Notes, net of income tax benefit; conversion assumed........................... 402 391 1,206 1,173 ----------- ----------- ----------- ----------- Adjusted income before extraordinary item.................... 6,005 5,936 15,665 15,117 Extraordinary loss, net of income tax benefit of $242........ - - - - (421) - - ----------- ----------- ----------- ----------- Adjusted Net Income..................................... $ 6,005 $ 5,936 $ 15,244 $ 15,117 =========== =========== =========== =========== Weighted-average shares outstanding.......................... 18,358 19,310 18,821 19,345 Dilutive stock options....................................... 491 813 531 1,155 Shares issuable upon conversion of Convertible Notes; conversion assumed........................................ 3,613 3,613 3,613 3,613 ----------- ----------- ----------- ----------- Total Weighted-Average Shares........................... 22,462 23,736 22,965 24,113 =========== =========== =========== =========== Fully Diluted Earnings Per Share Income before extraordinary item........................ $ .27 $ .25 $ .68 $ .63 =========== =========== =========== =========== Net Income.............................................. $ .27 $ .25 $ .66 $ .63 =========== ========== =========== ===========
H. Supplemental Cash Flow Information (In thousands)
Nine Months Ended September 30, 1996 1995 ----------- ---------- Cash paid during the period for: Interest, net of amounts capitalized.......................... $ 1,791 $ 2,486 Income taxes.................................................. $ 4,278 $ 7,130 Homebuilding inventory purchases financed by seller................ $ 5,858 $ 3,705
I. Supplemental Guarantor Information The $190,000,000 principal amount of 11 1/8% senior notes due 2003 (the "Senior Notes") are guaranteed unconditionally on an unsecured subordinated basis, jointly and severally (the "Guaranties"), by Richmond American Homes of California, Inc., Richmond American Homes of Maryland, Inc., Richmond American Homes of Nevada, Inc., Richmond American Homes of Virginia, Inc., Richmond American Homes, Inc., Richmond Homes, Inc. I and Richmond Homes, Inc. II (collectively, the "Guarantors"). The Guaranties are subordinated to all Guarantor Senior Indebtedness (as defined in the Senior Notes Indenture). Supplemental combining financial information follows. -8-
Supplemental Combining Balance Sheet September 30, 1996 (In thousands) Unconsolidated --------------------------------------- Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ----------- ----------- ----------- ----------- ----------- ASSETS Corporate Cash and cash equivalents............... $ 11,244 $ - - $ - - $ - - $ 11,244 Investments in subsidiaries............. 215,940 - - 17,434 (233,374) - - Advances and notes receivable - Parent and subsidiaries...................... 232,952 1 26,877 (259,830) - - Property and equipment, net............. 9,505 - - - - - - 9,505 Deferred income taxes................... 10,532 - - - - - - 10,532 Deferred debt issue costs, net.......... 9,358 - - - - - - 9,358 Other assets, net....................... 3,820 - - 6,096 - - 9,916 ----------- ----------- ----------- ----------- ----------- 493,351 1 50,407 (493,204) 50,555 ----------- ----------- ----------- ----------- ----------- Homebuilding Cash and cash equivalents............... - - 4,121 1 - - 4,122 Home sales and other accounts receivable - - 24,852 - - (8,624) 16,228 Investments and marketable securities, net................................... 5,076 - - - - - - 5,076 Inventories, net Housing completed or under construction - - 281,295 - - - - 281,295 Land and land under development....... - - 154,485 24,375 (1,472) 177,388 Prepaid expenses and other assets, net.. 2,416 34,703 - - - - 37,119 ----------- ----------- ----------- ----------- ----------- 7,492 499,456 24,376 (10,096) 521,228 ----------- ----------- ----------- ----------- ----------- Financial Services Cash and cash equivalents............... - - - - 2,177 - - 2,177 Accrued interest and other assets....... - - - - 5,212 - - 5,212 Mortgage loans held in inventory........ - - - - 46,269 - - 46,269 Mortgage Collateral, net of mortgage-backed bonds, and related assets and liabilities................ - - - - 1,934 - - 1,934 ----------- ----------- ----------- ----------- ----------- - - - - 55,592 - - 55,592 ----------- ----------- ----------- ----------- ----------- Total Assets...................... $ 500,843 $ 499,457 $ 130,375 $ (503,300) $ 627,375 =========== =========== =========== =========== ===========
-9- Supplemental Combining Balance Sheet September 30, 1996 (In thousands) (continued)
Unconsolidated --------------------------------------- Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ----------- ----------- ----------- ------------ ----------- LIABILITIES Corporate Accounts payable and accrued expenses... $ 21,138 $ - - $ 442 $ - - $ 21,580 Advances and notes payable - Parent and subsidiaries.......................... 22,652 217,344 28,464 (268,460) - - Income taxes payable.................... 14,059 - - - - - - 14,059 Note payable............................ 3,500 - - - - - - 3,500 Senior Notes, net....................... 187,670 - - - - - - 187,670 Subordinated notes, net................. 38,224 - - - - - - 38,224 ----------- ----------- ----------- ------------ ----------- 287,243 217,344 28,906 (268,460) 265,033 ----------- ----------- ----------- ------------ ----------- Homebuilding Accounts payable and accrued expenses... 4,776 87,141 839 - - 92,756 Line of credit.......................... - - 28,431 - - - - 28,431 Notes payable........................... - - 6,506 - - - - 6,506 ----------- ----------- ----------- ------------ ----------- 4,776 122,078 839 - - 127,693 ----------- ----------- ----------- ------------ ----------- Financial Services Accounts payable and accrued expenses... - - - - 20,299 (8,624) 11,675 Line of credit.......................... - - - - 14,150 - - 14,150 ----------- ----------- ----------- ------------ ----------- - - - - 34,449 (8,624) 25,825 ----------- ----------- ----------- ------------ ----------- Total Liabilities................. 292,019 339,422 64,194 (277,084) 418,551 ----------- ----------- ----------- ------------ ----------- STOCKHOLDERS' EQUITY Preferred stock......................... - - - - 10 (10) - - Common Stock............................ 227 19 81 (100) 227 Additional paid-in capital.............. 136,518 144,756 224,914 (369,670) 136,518 Retained earnings....................... 100,511 15,260 (158,815) 143,555 100,511 Less treasury stock..................... (28,432) - - (9) 9 (28,432) ----------- ----------- ----------- ------------ ----------- Total Stockholders' Equity........ 208,824 160,035 66,181 (226,216) 208,824 ----------- ----------- ----------- ------------ ----------- Total Liabilities and Stockholders' Equity............ $ 500,843 $ 499,457 $ 130,375 $ (503,300) $ 627,375 =========== =========== =========== ============ ===========
-10-
Supplemental Combining Balance Sheet December 31, 1995 (In thousands) Unconsolidated --------------------------------------- Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ASSETS ----------- ----------- ----------- ------------ ----------- Corporate Cash and cash equivalents.............. $ 10,290 $ - - $ - - $ - - $ 10,290 Investments in subsidiaries............ 303,694 - - 17,434 (321,128) - - Advances and notes receivable - Parent and subsidiaries..................... 210,656 33 21,550 (232,239) - - Property and equipment, net............ 9,550 - - - - - - 9,550 Deferred income taxes.................. 13,730 - - - - - - 13,730 Deferred debt issue costs, net......... 9,931 - - - - - - 9,931 Other assets, net...................... 3,730 - - 100 - - 3,830 ---------- ---------- ---------- ------------ ---------- 561,581 33 39,084 (553,367) 47,331 ---------- ---------- ---------- ------------ ---------- Homebuilding Cash and cash equivalents.............. 6 5,054 36 - - 5,096 Home sales and other accounts receivable........................... - - 37,726 - - (11,534) 26,192 Investments and marketable securities, net.................................. 6,481 - - - - - - 6,481 Inventories, net Housing completed or under construction....................... - - 265,205 - - - - 265,205 Land and land under development...... - - 150,531 27,676 (1,247) 176,960 Prepaid expenses and other assets, net. 3,633 38,453 25 - - 42,111 ---------- ---------- ---------- ------------ ---------- 10,120 496,969 27,737 (12,781) 522,045 ---------- ---------- ---------- ------------ ---------- Financial Services Cash and cash equivalents.............. - - - - 5,409 - - 5,409 Accrued interest and other assets...... - - - - 3,129 - - 3,129 Mortgage loans held in inventory....... - - - - 53,153 - - 53,153 Mortgage Collateral, net of mortgage-backed bonds, and related assets and liabilities............... - - - - 3,744 - - 3,744 ---------- ---------- ---------- ------------ ---------- - - - - 65,435 - - 65,435 ---------- ---------- ---------- ------------ ---------- Total Assets..................... $ 571,701 $ 497,002 $ 132,256 $ (566,148) $ 634,811 ========== ========== ========== ============ ==========
-11-
Supplemental Combining Balance Sheet December 31, 1995 (In thousands) (continued) Unconsolidated --------------------------------------- Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ----------- ----------- ----------- ------------ ----------- LIABILITIES Corporate Accounts payable and accrued expenses.... $ 17,897 $ - - $ 361 $ - - $ 18,258 Advances and notes payable - Parent and subsidiaries........................... 98,525 210,754 20,434 (329,713) - - Income taxes payable..................... 11,930 - - - - - - 11,930 Note payable............................. 3,537 - - - - - - 3,537 Senior Notes, net........................ 187,525 - - - - - - 187,525 Subordinated notes, net.................. 38,221 - - - - - - 38,221 ----------- ----------- ----------- ------------ ----------- 357,635 210,754 20,795 (329,713) 259,471 ----------- ----------- ----------- ------------ ----------- Homebuilding Accounts payable and accrued expenses.... 5,403 75,831 924 6 82,164 Lines of credit.......................... - - 43,490 - - - - 43,490 Notes payable............................ 3,630 3,192 3,749 - - 10,571 ----------- ----------- ----------- ------------ ----------- 9,033 122,513 4,673 6 136,225 ----------- ----------- ----------- ------------ ----------- Financial Services Accounts payable and accrued expenses.... - - - - 23,655 (11,563) 12,092 Line of credit........................... - - - - 21,990 - - 21,990 ----------- ----------- ----------- ------------ ----------- - - - - 45,645 (11,563) 34,082 ----------- ----------- ----------- ------------ ----------- Total Liabilities.................. 366,668 333,267 71,113 (341,270) 429,778 ----------- ----------- ----------- ------------ ----------- STOCKHOLDERS' EQUITY Preferred stock.......................... - - - - 10 (10) - - Common Stock............................. 226 19 82 (101) 226 Additional paid-in capital............... 136,022 144,756 224,914 (369,670) 136,022 Retained earnings........................ 87,476 18,960 (163,854) 144,894 87,476 Less treasury stock...................... (18,691) - - (9) 9 (18,691) ----------- ----------- ----------- ------------ ----------- Total Stockholders' Equity......... 205,033 163,735 61,143 (224,878) 205,033 ----------- ----------- ----------- ------------ ----------- Total Liabilities and Stockholders' Equity............. $ 571,701 $ 497,002 $132,256 $ (566,148) $ 634,811 =========== =========== ======== ============ ===========
-12-
Supplemental Combining Statements of Income (In thousands) Unconsolidated --------------------------------------- Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ----------- ----------- ----------- ------------ ----------- THREE MONTHS ENDED SEPTEMBER 30, 1996 REVENUES Homebuilding............................. $ 46 $ 222,596 $ 92 $ - - $ 222,734 Financial Services....................... - - - - 10,346 - - 10,346 Corporate................................ 227 - - - - - - 227 Equity in earnings of subsidiaries....... 7,181 - - - - (7,181) - - ----------- ----------- ----------- ----------- ----------- Total Revenues..................... 7,454 222,596 10,438 (7,181) 233,307 ----------- ----------- ----------- ----------- ----------- COSTS AND EXPENSES Homebuilding............................. 155 217,423 175 75 217,828 Financial Services....................... - - - - 3,245 - - 3,245 Corporate general and administrative......................... 2,912 - - 8 - - 2,920 Corporate and homebuilding interest..... (4,441) 4,159 726 42 486 ----------- ----------- ----------- ----------- ----------- Total (1,374) 221,582 4,154 117 224,479 ----------- ----------- ----------- ----------- ----------- Expenses.......................... Income before income taxes............... 8,828 1,014 6,284 (7,298) 8,828 Provision for income taxes............... (3,225) (385) (2,388) 2,773 (3,225) ----------- ----------- ----------- ----------- ----------- NET INCOME.................................. $ 5,603 $ 629 $ 3,896 $ (4,525) $ 5,603 =========== =========== =========== =========== ===========
THREE MONTHS ENDED SEPTEMBER 30, 1995 REVENUES Homebuilding............................. $ 88 $ 226,688 $ 39 $ - - $ 226,815 Financial Services....................... - - - - 6,297 - - 6,297 Corporate................................ 359 - - - - - - 359 Equity in earnings of subsidiaries....... 7,629 - - - - (7,629) - - ----------- ----------- ----------- ----------- ----------- Total Revenues..................... 8,076 226,688 6,336 (7,629) 233,471 ----------- ----------- ----------- ----------- ----------- COSTS AND EXPENSES Homebuilding............................. 88 217,111 294 - - 217,493 Financial Services....................... - - - - 2,778 - - 2,778 Corporate general and administrative..... 3,172 - - 13 - - 3,185 Corporate and homebuilding interest..... (3,615) 4,852 347 - - 1,584 ----------- ----------- ----------- ----------- ----------- Total Expenses..................... (355) 221,963 3,432 - - 225,040 ----------- ----------- ----------- ----------- ----------- Income before income taxes............... 8,431 4,725 2,904 (7,629) 8,431 Provision for income taxes............... (2,886) (1,796) (842) 2,638 (2,886) ----------- ----------- ----------- ----------- ----------- NET INCOME.................................. $ 5,545 $ 2,929 $ 2,062 $ (4,991) $ 5,545 =========== =========== =========== =========== ===========
-13-
Supplemental Combining Statements of Income (In thousands) Unconsolidated --------------------------------------- Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ----------- ----------- ----------- ------------ ----------- NINE MONTHS ENDED SEPTEMBER 30, 1996 REVENUES Homebuilding............................ $ 189 $ 644,046 $ 104 $ - - $ 644,339 Financial Services...................... - - - - 25,034 - - 25,034 Corporate............................... 932 13 11 - - 956 Equity in earnings of subsidiaries...... 18,176 - - - - (18,176) - - ----------- ----------- ----------- ----------- ----------- Total Revenues.................... 19,297 644,059 25,149 (18,176) 670,329 ----------- ----------- ----------- ----------- ----------- COSTS AND EXPENSES Homebuilding............................ 603 625,089 439 225 626,356 Financial Services...................... - - - - 9,335 - - 9,335 Corporate general and administrative.... 8,478 - - 23 - - 8,501 Corporate and homebuilding interest.... (12,557) 13,734 2,071 116 3,364 ----------- ----------- ----------- ----------- ----------- Total Expenses.................... (3,476) 638,823 11,868 341 647,556 ----------- ----------- ----------- ----------- ----------- Income before income taxes and extraordinary item.................... 22,773 5,236 13,281 (18,517) 22,773 Provision for income taxes.............. (8,314) (1,979) (5,258) 7,237 (8,314) ----------- ----------- ----------- ----------- ----------- Income before extraordinary item........ 14,459 3,257 8,023 (11,280) 14,459 Extraordinary loss, net of income tax benefit of $242....................... (421) - - - - - - (421) ----------- ----------- ----------- ----------- ----------- NET INCOME................................. $ 14,038 $ 3,257 $ 8,023 $ (11,280) $ 14,038 =========== =========== =========== =========== ===========
NINE MONTHS ENDED SEPTEMBER 30, 1995 REVENUES Homebuilding............................ $ 299 $ 618,221 $ 163 $ - - $ 618,683 Financial Services...................... - - - - 18,803 - - 18,803 Corporate............................... 1,196 - - - - - - 1,196 Equity in earnings of subsidiaries...... 19,303 - - - - (19,303) - - ----------- ----------- ----------- ----------- ----------- Total Revenues.................... 20,798 618,221 18,966 (19,303) 638,682 ----------- ----------- ----------- ----------- ----------- COSTS AND EXPENSES Homebuilding............................ 586 592,085 616 - - 593,287 Financial Services...................... - - - - 7,865 - - 7,865 Corporate general and administrative.... 9,740 - - 54 - - 9,794 Corporate and homebuilding interest..... (10,951) 15,500 1,764 - - 6,313 ----------- ----------- ----------- ----------- ----------- Total Expenses.................... (625) 607,585 10,299 - - 617,259 ----------- ----------- ----------- ----------- ----------- Income before income taxes.............. 21,423 10,636 8,667 (19,303) 21,423 Provision for income taxes.............. (7,479) (4,042) (2,821) 6,863 (7,479) ----------- ----------- ----------- ----------- ----------- NET INCOME................................. $ 13,944 $ 6,594 $ 5,846 $ (12,440) $ 13,944 =========== =========== =========== =========== ===========
-14-
Supplemental Combining Statement of Cash Flows Nine Months Ended September 30, 1996 (In thousands) Unconsolidated --------------------------------------- Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ----------- ----------- ----------- ------------ ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES... $ 112,289 $ 17,169 $ (4,963) $ (88,844) $ 35,651 ----------- ----------- ----------- ----------- ----------- INVESTING ACTIVITIES Net (Increase) Reduction in Notes and Advances Receivable From Parent and Subsidiaries............................. (22,296) 32 (5,327) 27,591 - - Net Proceeds From Mortgage-Related Assets and Liabilities.......................... - - - - 2,858 - - 2,858 Other, net.................................. 1,223 719 (116) - - 1,826 ----------- ----------- ----------- ----------- ----------- Net Cash Provided By (Used In) Investing Activities............................... (21,073) 751 (2,585) 27,591 4,684 ----------- ----------- ----------- ----------- ----------- FINANCING ACTIVITIES Net Increase (Reduction) in Borrowings From Parent and Subsidiaries.................. (75,873) 6,590 8,030 61,253 - - Lines of Credit Advances............................... - - 743,462 - - - - 743,462 Principal payments..................... - - (766,361) - - (766,361) Notes Payable Borrowings............................. - - 480 - - - - 480 Principal payments..................... (3,668) (3,024) (3,749) - - (10,441) Dividend Payments........................... (1,684) - - - - - - (1,684) Treasury Stock Repurchases.................. (10,075) - - - - - - (10,075) Other, net.................................. 1,032 - - - - - - 1,032 ----------- ----------- ----------- ----------- ----------- Net Cash Provided By (Used In) Financing Activities............................... (90,268) (18,853) 4,281 61,253 (43,587) ----------- ----------- ----------- ----------- ----------- Net Increase (Decrease) In Cash and Cash Equivalents.............................. 948 (933) (3,267) - - (3,252) Cash and Cash Equivalents Beginning Of Period...................... 10,296 5,054 5,445 - - 20,795 ----------- ----------- ----------- ----------- ----------- End Of Period............................ $ 11,244 $ 4,121 $ 2,178 $ - - $ 17,543 =========== =========== =========== =========== ===========
-15-
Supplemental Combining Statement of Cash Flows Nine Months Ended September 30, 1995 (In thousands) Unconsolidated --------------------------------------- Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ----------- ----------- ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............................... $ 39,856 $ (894) $ (10,095) $ (6,360) $ 22,507 ----------- ----------- ----------- ----------- ----------- INVESTING ACTIVITIES Net Increase in Notes and Advances Receivable From Parent and Subsidiaries.. (72,138) (13) (8,202) 80,353 - - Net Proceeds From Mortgage-Related Assets and Liabilities.......................... - - - - 4,397 - - 4,397 Other, net.................................. (890) 1,241 3,612 - - 3,963 ----------- ----------- ----------- ----------- ----------- Net Cash Provided By (Used In) Investing Activities............................... (73,028) 1,228 (193) 80,353 8,360 ----------- ----------- ----------- ----------- ----------- FINANCING ACTIVITIES Net Increase in Borrowings From Parent and Subsidiaries............................. 18,193 42,631 13,169 (73,993) - - Lines of credit Advances............................... - - 534,484 - - - - 534,484 Principal payments..................... - - (558,623) (2,564) - - (561,187) Notes Payable Borrowings............................. - - 1,075 - - - - 1,075 Principal payments..................... (34) (23,264) (1,397) - - (24,695) Dividend Payments........................... (1,568) - - - - - - (1,568) Treasury Stock Repurchases.................. (5,321) - - - - - - (5,321) Other, net.................................. (54) - - - - - - (54) ----------- ----------- ----------- ----------- ----------- Net Cash Provided By (Used In) Financing Activities............................... 11,216 (3,697) 9,208 (73,993) (57,266) ----------- ----------- ----------- ----------- ----------- Net Decrease In Cash and Cash Equivalents... (21,956) (3,363) (1,080) - - (26,399) Cash and Cash Equivalents Beginning Of Period...................... 31,210 9,656 2,698 - - 43,564 ----------- ----------- ----------- ----------- ----------- End Of Period............................ $ 9,254 $ 6,293 $ 1,618 $ - - $ 17,165 =========== =========== =========== =========== ===========
-16- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. INTRODUCTION MDC is a major regional homebuilder and ranks as the seventh largest homebuilder in the United States, based on homebuilding revenues. The Company operates in two segments: homebuilding and financial services. In its homebuilding segment, MDC is engaged in the construction and sale of residential housing in (i) metropolitan Denver and Colorado Springs, Colorado; (ii) northern Virginia and suburban Maryland (the "Mid-Atlantic"); (iii) Northern and Southern California; (iv) Phoenix and Tucson, Arizona; and (v) Las Vegas, Nevada. In its financial services segment, (i) HomeAmerican Mortgage Corporation (a wholly owned subsidiary of M.D.C. Holdings, Inc., "HomeAmerican") provides mortgage loans primarily to the Company's home buyers and, to a lesser extent, to others (the mortgage lending operations); and (ii) through September 30, 1996, Financial Asset Management LLC (an indirect subsidiary of M.D.C. Holdings, Inc., "FAMC") managed, by contract, the operations of two publicly traded real estate investment trusts (each, a "REIT") (the asset management operations). RESULTS OF OPERATIONS The table below summarizes MDC's results of operations during each of the periods presented (in thousands, except per share amounts).
Three Months Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Revenues.......................................... $ 233,307 $ 233,471 $ 670,329 $ 638,682 Income before income taxes and extraordinary item. $ 8,828 $ 8,431 $ 22,773 $ 21,423 Net Income........................................ $ 5,603 $ 5,545 $ 14,038 $ 13,944 Earnings Per Share: Primary........................................ $ .30 $ .28 $ .73 $ .69 Fully diluted.................................. $ .27 $ .25 $ .66 $ .63
Revenues for the nine months ended September 30, 1996 were the highest in the Company's history, representing a 5% increase from the same period in 1995. Increased revenues were primarily due to an increase in homes closed. The Company closed 3,606 homes during the nine months ended September 30, 1996, representing a 7% increase over the 3,364 homes closed in the same period in 1995. The revenue impact of increased unit closings was partially offset by a 3% decrease in the average selling price per home closed. Income before income taxes and extraordinary item was higher in the third quarter and first nine months of 1996, compared with the same periods in 1995, primarily as a result of (i) higher operating profit from the Company's financial services segment, primarily resulting from a $4,042,000 gain, net of related expenses, recognized on the sale of FAMC and higher gains on sales of mortgage loans; (ii) lower interest expense; and (iii) lower corporate general and administrative expenses. These increases in income partially were offset by decreases in operating profits from the Company's homebuilding operations in the third quarter and first nine months of 1996, compared with the same periods for 1995. These decreases were caused by (i) increased homebuilding asset impairment charges, primarily in the -17- Mid-Atlantic region due to weakened conditions in that market; (ii) lower average selling prices on homes closed; and (iii) increased marketing and general and administrative expenses incurred in support of the Company's expanding homebuilding operations, which more than offset the positive affects of increased home closings and Home Gross Margins (as hereinafter defined). Impact of Home Mortgage Interest Rates The Company's homebuilding and mortgage lending operations are dependent upon the availability and cost of mortgage financing. Increases in home mortgage interest rates may reduce the demand for homes and home mortgages and, generally, will reduce home mortgage refinancing activity. In October 1993, home mortgage interest rates reached their lowest levels in 25 years, dropping to an average of 6.7% on a 30-year, fixed-rate mortgage. From October 1993 to December 1994, home mortgage interest rates increased to a high of 9.25%. During this period of rising interest rates, the Company experienced a general weakening in demand for new homes in most of its markets, which adversely affected the Company's (i) home sales in the last three quarters of 1994 and the first quarter of 1995; and (ii) Home Gross Margins throughout most of 1995. From December 1994 through February 1996, home mortgage interest rates generally declined to a low of 6.9% which, among other things, led to improved home sales in the last three quarters of 1995 and the first four months of 1996, compared with the same periods in 1994 and 1995. Since February 1996, home mortgage interest rates generally increased to a high of 8.4%, although rates recently have declined to 7.8%. While current mortgage interest rates are low compared with historical rates, increases in mortgage interest rates, such as those occurring during the second and third quarters of 1996 when rates generally were above 8.0%, have affected adversely and may continue to affect adversely in the future, the Company's homebuilding and mortgage lending operations. The Company is unable to predict the extent to which recent or future changes in home mortgage interest rates will affect the Company's operating activities and results of operations. See "Forward-Looking Statements" below. -18- Homebuilding Segment The table below sets forth certain information with respect to the Company's homes sold, closed and delivered during each of the periods presented, as well as units sold under a contract but not delivered ("Backlog") at each date shown (dollars in thousands).
Three Months Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Home sales revenues................................ $ 220,443 $ 220,770 $ 635,472 $ 608,690 Operating profits before asset impairment charges.. $ 9,244 $ 10,522 $ 25,191 $ 27,496 Operating profits.................................. $ 4,906 $ 9,322 $ 17,983 $ 25,396 Average selling price per housing unit............. $ 175.1 $ 178.8 $ 176.2 $ 180.9 Home Gross Margins................................. 13.8% 13.4% 13.6% 13.4% Homes (units) Sales contracted, net Colorado.................................. 405 483 1,483 1,562 Mid-Atlantic.............................. 246 205 898 852 California................................ 185 231 634 609 Arizona................................... 237 231 843 606 Nevada.................................... 61 15 182 50 ----------- ----------- ----------- ----------- Total................................ 1,134 1,165 4,040 3,679 =========== =========== =========== =========== Closed and delivered Colorado.................................. 465 493 1,400 1,453 Mid-Atlantic.............................. 262 288 657 734 California................................ 191 232 594 528 Arizona................................... 261 201 764 586 Nevada.................................... 80 21 191 63 ----------- ----------- ----------- ----------- Total................................ 1,259 1,235 3,606 3,364 =========== =========== =========== ===========
September 30, December 31, September 30, 1996 1995 1995 ----------- ------------ -------- Backlog (units) Colorado.................................. 741 658 719 Mid-Atlantic.............................. 516 275 455 California................................ 215 175 237 Arizona................................... 313 234 277 Nevada.................................... 60 13 16 ----------- ------------ ----------- Total................................. 1,845 1,355 1,704 =========== ============ =========== Backlog (estimated sales value)............... $ 326,000 $ 243,000 $ 305,000 =========== =========== =========== Active Subdivisions (units) Colorado.................................. 50 49 53 Mid-Atlantic.............................. 51 48 45 California................................ 21 23 25 Arizona................................... 22 22 22 Nevada.................................... 5 2 2 ----------- ------------ ----------- Total................................. 149 144 147 =========== ============ ===========
-19- Home Sales Revenues and Homes Closed and Delivered. Home sales revenues in the first nine months of 1996 exceeded all comparable periods in the Company's history, increasing 4% from home sales revenues for the same period in 1995. The increase primarily resulted from increased home closings, partially offset by an overall decrease in the average selling price per home closed as discussed below. Home closings increased in the first nine months of 1996 compared with 1995 in (i) Arizona, due to a significant expansion of the Company's operations in Phoenix, where the Company has increased the number of active subdivisions from nine at December 31, 1994 to 14 at September 30, 1996; (ii) California, due to the Company's acquisition and opening of several new subdivisions in Southern California, including subdivisions in Riverside County acquired from Mesa Homes in July 1995; and (iii) Nevada, due to the closing of homes in subdivisions acquired from Longford Homes in February 1996. Home sales revenues in the third quarter of 1996 were approximately the same as home sales revenues for the third quarter of 1995, as the impact of slightly increased home closings was offset by the decrease in the average selling price. The Company's Mid-Atlantic operations closed fewer homes in the third quarter and first nine months of 1996 than were closed during the same periods in 1995, primarily as a result of adverse weather conditions throughout most of the first nine months of 1996 which delayed construction and development activities and the delivery of certain homes. Average Selling Price Per Housing Unit. The decrease in the average selling price per housing unit in the third quarter and first nine months of 1996, compared with the same periods in 1995, reflects the impact of the Company's continuing emphasis on offering lower-priced, more affordable homes primarily marketed to first-time and first-time move-up home buyers. This strategy resulted in lower average sales prices in the first nine months of 1996 compared with 1995 in (i) Arizona; (ii) Las Vegas, as the Company closed affordably priced homes in subdivisions acquired from Longford Homes; and (iii) the Mid-Atlantic region, as the Company has opened a number of new affordable townhome projects in this market. Home Gross Margins. Gross margins (home sales revenues less cost of goods sold, which primarily includes land and construction costs, capitalized interest, a reserve for warranty expense and financing costs) as a percent of home sales revenue ("Home Gross Margins") increased during the third quarter and first nine months of 1996, compared with the same periods in 1995. These increases largely were due to increased margins in (i) Colorado, as the favorable impact of lower interest rates during late 1995 and early 1996 resulted in stronger market conditions which reduced the level of incentives required for Company home buyers during such period; (ii) Las Vegas, due to increased profits from homes sold in subdivisions acquired from Longford Homes; and (iii) Northern California, due to the impact of increased home closings in certain of the Company's more profitable subdivisions in that market. These increases partially were offset by Home Gross Margin decreases in the Mid-Atlantic, where the Company continues to offer incentives to reduce the Company's inventory of older unsold homes under construction and in response to weakened market conditions and strong competition. During the third quarter of 1996, Home Gross Margins increased compared with the third quarter of 1995 in (i) Phoenix, due to the favorable impact of closings in successful projects opened in late 1995 and early 1996; and (ii) Southern California, due to the adverse impact on 1995 third quarter margins of closings from underperforming projects which have since been substantially completed. For the nine-month period ended September 30, 1996, Home Gross Margins decreased compared with the comparable period in 1995 in Phoenix and Southern California as third quarter 1996 Home Gross Margins increases were more than offset by decreases during the first six months of 1996. These six-month decreases were due to the adverse affects in 1996 of increased incentives offered to home buyers and higher land prices resulting from increased competition in these markets. -20- The Company believes that future growth in Home Gross Margins will be adversely impacted by the increased incentives offered to home buyers to stimulate sales and counter increased competition in each of its markets. In addition, increases in, among other things, the costs of subcontracted labor, finished lots and building materials, particularly the recently announced increases in lumber prices, may affect adversely future Home Gross Margins to the extent that market conditions prevent the recovery of increased costs through higher sales prices. See "Forward-Looking Statements" below. Home Sales and Backlog. Although home sales in the third quarter of 1996 were consistent with the third quarter of 1995, home sales for the first nine months of 1996 were 10% higher than home sales for the same period in 1995. The increase in 1996 primarily was the result of increased home sales in Arizona, Southern California and Las Vegas due to the Company's continued expansion in these markets, as previously discussed. As a result of these increased home sales, the Company's Backlog at September 30, 1996 increased to 1,845 units, a 36% increase from the 1,355 units at December 31, 1995, and an 8% increase from the 1,704 units at September 30, 1995. The Company expects approximately 70% of its September 30, 1996 Backlog to close under existing sales contracts during the fourth quarter of 1996 and the first quarter of 1997, assuming no significant change in mortgage interest rates. See "Forward-Looking Statements" below. The Company's home sales in October 1996 totalled 366 units, representing an 8% increase from the 337 homes sold in October 1995. Marketing. Marketing expenses (which include, among other things, amortization of deferred marketing costs, model home expenses and sales commissions) totalled $14,420,000 and $40,667,000, respectively, for the third quarter and first nine months of 1996, compared with $13,108,000 and $36,735,000, respectively, for the same periods in 1995. The 10% and 11% increases during the third quarter and first nine months of 1996 compared with 1995, respectively, principally resulted from (i) variable cost increases due to increased home sales revenues; and (ii) additional marketing-related salary, sales commission and model home operating expenses incurred to support the Company's expanded operations and to stimulate sales in response to increased competition in its markets. General and Administrative. General and administrative expenses totalled $7,184,000 and $21,722,000, respectively, during the third quarter and first nine months of 1996, compared with $6,987,000 and $19,927,000, respectively, for the same periods in 1995. General and administrative expenses increased in 1996 primarily due to additional costs incurred in support of the Company's expanded operations in Southern California and Las Vegas. -21- Land Inventory The table below shows the carrying value of MDC's land and land under development in each of its homebuilding markets (in thousands).
September 30, December 31, September 30, 1996 1995 1995 ----------- ----------- ------------ Finished or currently under development Colorado................................ $ 32,116 $ 34,331 $ 38,717 Mid-Atlantic............................ 49,186 47,247 40,307 California.............................. 20,535 26,694 28,688 Arizona................................. 28,508 20,586 19,193 Nevada.................................. 15,675 4,559 5,238 ----------- ----------- ----------- Total............................... 146,020 133,417 132,143 Held for future development or sale*......... 31,368 43,543 45,787 ----------- ----------- ----------- Total............................... $ 177,388 $ 176,960 $ 177,930 =========== =========== ===========
*A substantial majority of the land held for future development or sale consists of unfinished lots located in Colorado which generally are in close proximity to projects currently being developed. In addition to its land inventory, the Company controls a portion of the land it will require for its homebuilding operations in future periods utilizing option contracts, normally on a "rolling" basis. Generally, in a rolling option contract, the Company obtains the right to purchase finished lots in consideration for an option deposit (generally $50,000 to $200,000 per contract). In the event the Company elects not to purchase the finished lots within a specified period of time (generally, 5 to 20 lots per project per calendar quarter), the agreements normally limit the Company's loss to the option deposit, thereby limiting the Company's risk while preserving its liquidity. At September 30, 1996, approximately 6,800 lots were controlled under option agreements with $5,450,000 in option deposits. Because of increased demand for finished lots in certain of the markets where the Company builds homes, the Company's ability to acquire lots using rolling options has been reduced or has become more expensive. Asset Impairment Charges Operating results during the third quarter and first nine months of 1996 were impacted adversely by asset impairment charges totalling $4,338,000 and $7,208,000, respectively, primarily related to certain of the Company's homebuilding assets in the Mid-Atlantic region as a result of continued weakened conditions and strong competition in that market. The Mid-Atlantic asset impairment charges resulted from (i) the write-down to fair market value of a single-family detached home subdivision in which the Company currently intends to sell the majority of the remaining lots in bulk; (ii) the recognition of losses anticipated from the closing of certain homes in Backlog and from the offering of increased incentives to stimulate sales of certain completed unsold homes in inventory; (iii) the write-off of capitalized costs, primarily deferred marketing and option deposits, related to certain low-margin projects which the Company is considering closing out; and (iv) for the nine-month period, the write-down to fair market value in the second quarter of 1996, pursuant to the requirements of SFAS 121 (as hereinafter defined), of a single-family detached home subdivision which began to experience extremely slow sales and negative Home Gross Margins during such period. While intending to maintain its market share in the Mid-Atlantic region, the Company is strategically eliminating lower-margin projects -22- in that market and redeploying capital to more profitable operations, including Southern California, Phoenix and Las Vegas. See "Forward-Looking Statements" below. Asset impairment charges for the third quarter and first nine months of 1996 also included charges with respect to certain of the Company's homebuilding assets in Northern California as a result of increased incentives and sales price reductions offered to potential home buyers in connection with the Company's efforts to exit certain underperforming subdivisions in the Sacramento area. Operating results during the three and nine months ended September 30, 1995 were impacted adversely by $1,200,000 and $2,100,000, respectively, in asset impairment charges. These charges primarily were related to certain underperforming projects in Arizona, Northern California and the Mid-Atlantic region. Financial Services Segment Mortgage Lending Operations The table below sets forth certain information with respect to HomeAmerican's operations during each of the periods presented, as well as its servicing portfolio at each date shown (in thousands).
Three Months Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Gains from sales of mortgage servicing: Bulk........................................... $ 1,418 $ 1,528 $ 5,209 $ 5,262 Other.......................................... $ 175 $ 473 $ 537 $ 1,381 Gains (losses) on mortgage loan sales, net........ $ 1,545 $ (405) $ 3,238 $ (845) Operating profit.................................. $ 3,380 $ 2,267 $ 10,146 $ 7,558 Principal amount of originations and purchases: MDC home buyers.............................. $ 119,584 $ 114,642 $ 343,066 $ 295,121 Spot......................................... 8,280 12,423 34,056 26,254 Correspondent................................ 15,690 20,031 42,203 48,909 ----------- ----------- ----------- ----------- Total.................................... $ 143,554 $ 147,096 $ 419,325 $ 370,284 =========== =========== =========== =========== Capture Rate...................................... 65% 62% 66% 59% =========== =========== =========== ===========
-23-
September 30, December 31, September 30, 1996 1995 1995 ----------- ----------- ----------- Composition of Servicing Portfolio FHA insured/VA guaranteed.................... $ 81,054 $ 85,002 $ 141,589 Conventional................................. 259,803* 401,809 444,072 ----------- ----------- ----------- Total servicing portfolio......................... $340,857 $ 486,811 $ 585,661 =========== =========== =========== Salable portion of servicing portfolio............ $ 226,880** $ 429,328 $442,817 =========== =========== ===========
*Includes servicing of $62,181 sold in August 1996, serviced by HomeAmerican under a subservicing arrangement until transfer to the purchaser in October and November 1996. **Substantially all originated subsequent to the adoption of SFAS 122 (as hereinafter defined). HomeAmerican's operating profits for the third quarter and first nine months of 1996 exceeded the operating profits for the same periods in 1995 primarily because of gains on sales of mortgage loans totalling $1,545,000 and $3,238,000, respectively, in the third quarter and first nine months of 1996, compared with losses totalling $405,000 and $845,000, respectively, for the same periods in 1995. These gains are in large measure attributable to the Company's required adoption in 1996 of SFAS 122. SFAS 122 requires the Company to allocate the cost of mortgage loans originated by HomeAmerican after January 1, 1996 between the mortgage loans and the right to service the mortgage loans, based on their relative values. Prior to 1996, the cost of mortgage loans originated by HomeAmerican was assigned to the mortgage loans, with no cost assigned to the servicing rights. Assuming that all other factors remain unchanged, the net effect of the adoption of SFAS 122 will be higher gains (or lower losses) on sales of mortgage loans originated by HomeAmerican after January 1, 1996 and lower gains on sales of the related servicing rights, compared with gains on sales of mortgage loans and related servicing rights originated by HomeAmerican prior to January 1, 1996. The Company's adoption of SFAS 122 resulted in additional gains in the third quarter and first nine months of 1996 of approximately $1,765,000 and $4,382,000, respectively, on the sale of mortgage loans which were originated and sold by HomeAmerican during such periods. Gains from the sale of mortgage servicing rights in the third quarter and first nine months of 1996 were reduced by $1,106,000 and $2,078,000, respectively, due to the allocation of mortgage loan costs to the sold servicing rights which were originated in 1996 in accordance with the requirements of SFAS 122. During the nine months ended September 30, 1996, the Company recorded gains of approximately $5,100,000 related to bulk sales of approximately $400,000,000 principal amount of mortgage servicing rights held prior to the adoption of SFAS 122 on January 1, 1996. The substantial majority of these mortgage servicing rights were related to mortgage loans originated by the Company and, as a result, had no costs assigned to such servicing rights. Gains from sales of mortgage servicing in the fourth quarter of 1996 and thereafter will be significantly lower than prior comparable periods as the Company sold substantially all of its pre-1996 servicing portfolio prior to September 30, 1996. See "Forward-Looking Statements" below. HomeAmerican's loan originations and purchases increased by 13% in the first nine months of 1996, compared with the same periods in 1995, primarily due to increases in (i) the Company's home closings; (ii) HomeAmerican's "Capture Rate", or the number of mortgage loans originated for Company home buyers as a percentage of total Company home closings; and (iii) the dollar amount of spot -24- originations resulting from increased refinancing activity stimulated by lower mortgage interest rates during the first four months of 1996 compared with the same period in 1995. HomeAmerican opened origination facilities in Southern California and Nevada in late 1995 and February 1996, respectively, which favorably affected HomeAmerican's total originations and Capture Rate. HomeAmerican continues to benefit from the Company's homebuilding growth as Company home buyers were the source of more than 80% of the principal amount of mortgage loans originated and purchased by HomeAmerican in 1996 and throughout 1995. Forward Sales Commitments. HomeAmerican's operations are affected by, among other things, changes in mortgage interest rates. HomeAmerican utilizes forward mortgage securities contracts to manage the interest rate risk on its fixed-rate mortgage loans owned and rate-locked mortgage loans which are subject to processing and origination. Such contracts are the only significant financial derivative instrument utilized by MDC. Asset Management Operations The following table sets forth certain information with respect to the results of the asset management operations during each of the periods presented (in thousands).
Three Months Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Gain on sale of FAMC, net.......................... $ 4,042 $ - - $ 4,042 $ - - Management fees from REITs......................... $ 775 $ 778 $ 2,373 $ 2,143 Operating profit................................... $ 3,721 $ 1,252 $ 5,553 $ 3,380
The increased operating profits in the third quarter and first nine months of 1996 primarily were due to the $4,042,000 gain, net of related expenses, on the September 1996 sale of FAMC. The sales proceeds of $11,450,000 included $6,000,000 of cash, received on October 2, 1996, and $5,450,000 of subordinated convertible notes, which are payable at specified dates during the next 10 years and are convertible, under certain circumstances, into as much as a 47.6% ownership interest in FAMC. A gain of $5,450,000 attributable to the notes has been deferred and may be recognized, in whole or in part, in future periods based upon a number of factors, including collection of the notes' principal and the expiration of the conversion features. This increase partially was offset by a $533,000 charge to income to reduce the Company's collateralized mortgage obligations to their net realizable value. Due to the sale of FAMC and the fact that the Company does not anticipate making additional mortgage-related investments, future operating profit from the asset management operations will be immaterial. See "Forward-Looking Statements" below. Other Operating Results Interest Expense. Corporate and homebuilding interest incurred decreased by 9% and 11% to $7,582,000 and $22,961,000, respectively, for the third quarter and first nine months of 1996, compared with $8,337,000 and $25,809,000, respectively, for the same periods in 1995. The decreases in 1996 primarily were due to (i) lower effective interest rates with respect to the Company's variable-rate debt in 1996; and (ii) lower average outstanding borrowings, as the Company maintained lower average levels of cash and homebuilding inventories in the first nine months of 1996. -25- The portion of corporate and homebuilding interest which was capitalized (the Company capitalizes interest on its homebuilding inventories during the period of active development and through the completion of construction) totalled $7,096,000 and $19,597,000, respectively, in the third quarter and first nine months of 1996, compared with $6,753,000 and $19,496,000, respectively, for the same periods in 1995. Corporate and homebuilding interest incurred but not capitalized is reflected as interest expense and totalled $486,000 and $3,364,000, respectively, for the third quarter and first nine months of 1996, compared with $1,584,000 and $6,313,000, respectively, for the same periods of 1995. For a reconciliation of interest incurred, capitalized and expensed, see Note C to the Company's Condensed Consolidated Financial Statements. Corporate General and Administrative Expenses. Corporate general and administrative expenses totalled $2,920,000 and $8,501,000, respectively, during the third quarter and first nine months of 1996, compared with $3,185,000 and $9,794,000, respectively, for the same periods of 1995. The decreases in 1996 primarily resulted from (i) reduced commitment fees, appraisal costs and other related costs as a result of the Company's replacement of its secured homebuilding lines of credit and certain project loans with the $150,000,000 unsecured line of credit in April 1996; and (ii) for the nine-month period, an insurance settlement of $1,250,000 received in the first quarter of 1996 related to the recovery of certain homebuilding expenditures which were previously expensed. Income Taxes. M.D.C. Holdings, Inc. and its wholly owned subsidiaries file a consolidated federal income tax return (an "MDC Consolidated Return"). Richmond Homes and its wholly owned subsidiaries filed a separate consolidated federal income tax return (each a "Richmond Homes Consolidated Return") from its inception (December 28, 1989) through February 2, 1994, the date Richmond Homes became a wholly owned subsidiary of MDC. MDC's overall effective income tax rate during the third quarter and first nine months of 1996 was 36.5%, compared with 34.2% and 34.9%, respectively, during the same periods in 1995. These effective income tax rates differed from the federal statutory rate of 35% due to, among other things, (i) the impact of state income taxes; and (ii) in 1995, the realization of non-taxable income for financial reporting purposes for which no tax liability was recorded. The IRS has completed its examination of the MDC Consolidated Returns for the years 1986 through 1990 and has proposed adjustments that would shift the recognition of certain items of income and expense from one year to another ("Timing Adjustments"). To the extent taxable income in a prior year is increased by proposed Timing Adjustments, taxable income may be reduced by a corresponding amount in other years; however, the Company would incur an interest charge as a result of such adjustment. The Company currently is protesting many of these proposed adjustments through the IRS appeals process. In the opinion of management, adequate provision has been made for any additional income taxes and interest which may result from the proposed adjustments; however, it is reasonably possible that the ultimate resolution could result in amounts which differ materially in the near-term from amounts provided. See "Forward-Looking Statements" below. The IRS currently is examining the MDC and Richmond Homes Consolidated Returns for the years 1991, 1992 and 1993. No reports have been issued by the IRS in connection with these examinations. In the opinion of management, adequate provision has been made for additional income taxes and interest, if any, which may result from these examinations; however, it is reasonably possible that the ultimate resolution could result in amounts which differ materially in the near term from amounts provided. See "Forward-Looking Statements" below. -26- LIQUIDITY AND CAPITAL RESOURCES MDC uses its liquidity and capital resources to, among other things, (i) support its operations, including its inventories of homes, home sites and land; (ii) provide working capital; and (iii) provide mortgage loans for its home buyers. Liquidity and capital resources are generated internally from operations and from external sources. Capital Resources The Company's capital structure is a combination of (i) permanent financing, represented by Stockholders' Equity; (ii) long-term financing, represented by publicly traded Senior Notes and subordinated notes, the substantial majority of which are due in 2003 and 2005, respectively; and (iii) current financing, primarily lines of credit, as discussed below. The Company believes that its current financial condition is both balanced to fit its current operational structure and adequate to satisfy its current and near-term capital requirements. See "Forward-Looking Statements" below. The Company's debt-to-equity ratio improved to 1.33 to 1 at September 30, 1996, compared with 1.49 to 1 at December 31, 1995 and September 30, 1995. The improvement resulted from (i) the earnings of the Company, which contributed to the increase in the Company's Stockholders' Equity at September 30, 1996; and (ii) the use of internally generated cash flow to reduce debt. Based upon its current business plan, MDC anticipates the acquisition of various parcels of land in various stages of completion and finished lots for use in its future homebuilding operations during the remainder of 1996 and 1997. The Company currently intends to acquire a portion of the land inventories required in future periods through takedowns of lots subject to "rolling" options entered into in prior periods and under new "rolling" options. The use of "rolling" options lessens the Company's land-related risk and preserves liquidity. See "Forward-Looking Statements" below. Based upon its current capital resources and additional liquidity available under existing credit relationships, MDC anticipates that it has adequate financial resources to satisfy its current and near-term capital requirements. The Company believes that it can meet its long-term capital needs (including, meeting future debt payments and refinancing or paying off other long-term debt as it becomes due) from operations and external financing sources, assuming that no significant adverse changes in the Company's business occur as a result of the various risk factors described elsewhere herein, in particular, increases in interest rates. See "Forward-Looking Statements" below. Lines of Credit Homebuilding. In April 1996, the Company entered into an agreement with a group of banks for a $150,000,000 unsecured revolving line of credit maturing June 30, 2000, although a term-out may commence earlier under certain circumstances. Some of the initial advances at closing of this credit agreement were used to retire the borrowings under cancelled bank lines of credit and project loans collateralized by homebuilding inventories. At September 30, 1996, $28,431,000 was borrowed under this unsecured revolving line of credit. Financial Services. To provide funds to originate and purchase mortgage loans and to finance these mortgage loans on a short-term basis, HomeAmerican utilizes its mortgage lending bank line of credit (the "Mortgage Line"). These mortgage loans are normally sold within 25 to 60 days after origination or purchase. During the first nine months of 1996 and 1995, HomeAmerican sold -27- $426,265,000 and $366,455,000, respectively, principal amount of mortgage loans and mortgage certificates. The aggregate amount available under the Mortgage Line at September 30, 1996 was $51,000,000. Borrowings under the Mortgage Line are collateralized by mortgage loans and mortgage-backed certificates and are limited to the value of "eligible collateral" (as defined in the credit agreement). At September 30, 1996, $14,150,000 was borrowed and an additional $18,614,000 was collateralized and available to be borrowed under the Mortgage Line. HomeAmerican also has additional borrowing capability with available repurchase agreements. General. The Company's lines of credit and notes payable require compliance with certain covenants, representations and warranties. Currently, the Company believes that it is in compliance with these covenants, representations and warranties. In the event that MDC's lines of credit are not renewed as they become due or are renewed at substantially lower levels, the Company believes that it could meet its financing requirements through a combination of internally generated funds and new borrowings. See "Forward-Looking Statements" below. Consolidated Cash Flow During the first nine months of 1996, the Company generated $40,335,000 in cash from its operating and investing activities. The Company used this cash and other internally generated funds to reduce outstanding lines of credit and notes payable by $32,860,000 and to repurchase 1,463,000 shares of MDC Common Stock for $10,075,000. During the first nine months of 1995, the Company generated $30,867,000 in cash from its operating and investing activities. The Company used these funds and $24,777,000 of existing cash balances to reduce outstanding lines of credit and notes payable by $50,323,000 and to repurchase 843,600 shares of MDC Common Stock for $5,321,000. ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). The Company's adoption of SFAS 121 on January 1, 1996 did not have a material impact on the results of operations or financial condition of the Company. In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing Rights an Amendment of FASB Statement No. 65" ("SFAS 122"). As previously discussed, the Company adopted this statement effective January 1, 1996. In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). The Company's adoption of SFAS 125, beginning in 1997, is not anticipated to have a material adverse impact on the results of operations or financial condition of the Company. See "Forward-Looking Statements" below. -28- FORWARD-LOOKING STATEMENTS Some of the statements in this Form 10-Q Quarterly Report, as well as statements made by the Company in periodic press releases, oral statements made by the Company's officials to analysts and shareowners in the course of presentations about the Company and conference calls following quarterly earnings releases, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, (i) general economic and business conditions; (ii) interest rate changes; (iii) competition; (iv) the availability and cost of land and other raw materials used by the Company in its homebuilding operations; (v) unanticipated demographic changes; (vi) shortages of labor; (vii) weather related slowdowns; (viii) slow growth initiatives; (ix) building moratoria; (x) governmental regulation including interpretations of income tax and environmental laws; and (xi) other factors over which the Company has little or no control. -29- M.D.C. HOLDINGS, INC. FORM 10-Q PART II ITEM 1. LEGAL PROCEEDINGS Expansive Soils Cases On October 21, 1994, a complaint was served on several of the Company's subsidiaries in an action initiated by six homeowners in Highlands Ranch, Colorado. On January 26, 1995, counsel for the Company accepted service of two additional complaints by a homeowner in the Stonegate subdivision in Douglas County, Colorado and by a homeowner in the Rock Creek development located in Boulder County, Colorado. On September 12, 1995, the Company was served with a similar complaint relating to homeowners in Douglas County, Colorado. The complaints (the "Expansive Soils Cases"), each of which sought certification of a class action, alleged substantially identical claims relating to the construction of homes on lots with expansive soils, including negligence, breach of express and implied warranties, violation of the Colorado Consumer Protection Act and non-disclosures. The homeowners in each complaint sought, individually and on behalf of the alleged class, recovery in unspecified amounts including actual damages, statutory damages, exemplary damages and treble damages. The Company filed a response to each of the complaints and to initial discovery requests in the first filed case. On June 11, 1996, representative plaintiffs and the Company's Colorado homebuilding subsidiaries jointly filed with the Douglas County District Court an agreement to settle the Expansive Soils Cases. On June 13, 1996, the Douglas County District Court granted preliminary approval of the settlement. The settlement provides for the creation of a warranty program for eligible owners of homes located in Colorado which were built by the Company's homebuilding subsidiaries since June 1986. The settlement provides for a settlement class, including the purported classes in the Expansive Soils Cases, to be certified and all pending claims to be dismissed. Indemnity payments for funding the settlement are to be provided by participating insurance carriers. On October 11, 1996 the Court approved the settlement which, in the absence of the filing of an appeal, will become final 45 days after the Court's approval of the settlement. Management does not believe that these matters are likely to have a material adverse effect on the financial condition, results of operations or cash flows of the Company. Other The Company and certain of its subsidiaries and affiliates have been named as defendants in various other claims, complaints and legal actions arising in the normal course of business. In the opinion of management, the outcome of these matters will not have a material adverse effect upon the financial condition, results of operations or cash flows of the Company. Because of the nature of the homebuilding business, and in the ordinary course of the Company's operations, the Company from time - -------- Colescott, et al vs. Richmond Homes Limited, et al (now entitled Morello et al. vs. Richmond Homes Limited, et al) in the District Court, Douglas County, State of Colorado, Civil Action No. 94 CV 352, Division 2. Moore vs. Richmond Homes Limited, et al in the District Court, Douglas County, State of Colorado, Civil Action No. 95 CV 321, Division 2. Costantini vs. Richmond Homes Limited, et al in the District Court, Boulder County, State of Colorado, Civil Action No. 95 CV 1052, Division 3. Rodenburg vs. Richmond Homes Limited, et al in the District Court, Douglas County, State of Colorado, Civil Action No. 95 CV 298, Division 1. -30- to time may be subject to product liability claims, including claims similar to those discussed under the description of the Expansive Soils Cases, above. The Company is not aware of any litigation, matter or pending claim against the Company which would result in material contingent liabilities related to environmental hazards or asbestos. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREOWNERS No matters were submitted to shareowners during the third quarter of 1996. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit: 10.1 Acquisition Agreement by and among FAM Acquisitions LLC and M.D.C. Holdings, Inc., Financial Asset Management Corporation and M.D.C. Residual Holdings, Inc. dated as of September 6, 1996 (the "Acquisition Agreement"). 10.2 Amendment No. 1 to Acquisition Agreement dated as of September 30, 1996. 10.3 Closing Agreement dated as of September 30, 1996 between M.D.C. Holdings, Inc. and Spencer I. Browne. 27 Financial Data Schedule. (b) Reports on Form 8-K: No Current Reports on Form 8-K were filed by the Registrant during the period covered by this Quarterly Report on Form 10-Q. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 13, 1996 M.D.C. HOLDINGS, INC. ----------------- (Registrant) By: /s/ Paris G. Reece III ---------------------------- Paris G. Reece III, Senior Vice President, Chief Financial Officer and Principal Accounting Officer -31- EX-10.1 2 ACQUISITION AGREEMENT by and among FAM ACQUISITION LLC and M.D.C. HOLDINGS, INC., FINANCIAL ASSET MANAGEMENT CORPORATION and M.D.C. RESIDUAL HOLDINGS, INC. dated as of September 6, 1996 ACQUISITION AGREEMENT AGREEMENT made as of the 6th day of September, 1996, by and among: (i) FAM Acquisition LLC, a Colorado limited liability company, having its principal place of business at 1873 South Bellaire, 17th Floor, Denver, Colorado 80222 ("CLLC"); (ii) M.D.C. Holdings, Inc., a Delaware corporation, having its principal place of business at 3600 South Yosemite, Suite 900, Denver, Colorado 80237 ("MDC"); (iii) Financial Asset Management Corporation, a Delaware corporation ("Old FAMC"); and (iv) M.D.C. Residual Holdings, Inc., a Colorado corporation ("MDC Sub"). WITNESSETH: WHEREAS, Old FAMC and MDC Sub respectively own 79% and 1% membership interests (the "Interests") in Financial Asset Management LLC, a Colorado limited liability company ("FAMC") and Spencer I. Browne ("Browne") owns a 20% membership interest in FAMC which shall be purchased by FAMC at the Closing; and WHEREAS, FAMC provides real estate and bond advisory services to institutional clients (the "Business"); and WHEREAS, based upon the representations, agreements and warranties herein made by Old FAMC, MDC Sub and MDC and subject to the terms and conditions contained in this Agreement, CLLC desires to acquire the Interests from Old FAMC and MDC Sub; and WHEREAS, based upon the representations, agreements and warranties herein made by CLLC and subject to the terms and conditions contained in this Agreement, Old FAMC and MDC Sub wish to transfer and sell the Interests to CLLC; NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties hereto, intending to be legally bound, do hereby agree as follows: - 2 - ARTICLE 1. PURCHASE AND SALE 1.1 Sale of Interests. Subject to the terms and conditions set forth herein, as of the Closing Date (as defined in Article 2) CLLC shall purchase from Old FAMC and MDC Sub and Old FAMC and MDC Sub shall cause to be conveyed, transferred, set over, assigned and delivered to CLLC, free and clear of all liens, attachments, charges, lis pendens, and encumbrances of any nature (except as may otherwise expressly be permitted by this Agreement), all of the Interests. 1.2 Purchase Price. The purchase price for the Interests shall be Seven Million Dollars ($7,000,000) in cash plus the amount of the Note, as defined below (the "Purchase Price"). The cash portion of the Purchase Price shall be payable on the Closing Date as follows: (a) A credit by Old FAMC and MDC Sub of the Two Hundred Fifty Thousand Dollars ($250,000) earnest money deposit (the "Deposit") entrusted to Old FAMC and MDC Sub by CLLC pursuant to Section 7.7 and subject to Section 12.3 hereof, upon the execution of this Agreement. (b) A credit by Old FAMC and MDC Sub of the Fifty Thousand Dollars ($50,000) which represents the Expense Fund paid to Old FAMC and MDC Sub by CLLC pursuant to Section 7.6. (c) To Old FAMC and MDC Sub, cash in the amount of Six Million Seven Hundred Thousand Dollars ($6,700,000). The cash portion of the Purchase Price shall be paid by wire transfer pursuant to instructions given to CLLC at least three (3) days prior to the Closing Date. 1.3 Note. At the Closing, CLLC shall cause FAMC to deliver to Old FAMC and MDC Sub a Four Million Four Hundred Fifty Thousand Dollars ($4,450,000) Senior Subordinated Convertible Note (the "Note") containing substantially the terms set forth in Exhibit 1.3. 1.4 Working Capital Adjustment. CLLC shall cause FAMC to retain at its expense independent public accountants acceptable to Old FAMC and MDC Sub to determine, in accordance with generally accepted accounting principles ("GAAP"), within sixty (60) days of the Closing Date, the current assets and current liabilities of FAMC immediately prior to the Closing (the "Determination Time"). For purposes of this determination, current assets and current liabilities shall not include the amount of cash that is paid or current assets or current liabilities that are eliminated in connection with the transactions contemplated by Section 1.6. The result obtained by subtracting current liabilities (as so determined) from current assets (as so determined) is referred to herein as "Working Capital". If Working Capital is a negative amount, Old FAMC and MDC Sub shall pay such amount to FAMC in cash. If Working Capital is a positive amount, CLLC shall - 3 - cause FAMC to pay to Old FAMC and MDC Sub, such amount in cash. Such payment shall be made on the earlier of (i) completion of the working capital audit and receipt by FAMC of the management fees accrued as of September 30, 1996, or (ii) sixty (60) days after the Closing Date. 1.5 Personal Property. At the Closing, MDC shall assign or otherwise transfer to FAMC, all software and other personal property owned, leased or licensed by MDC that is used by FAMC in connection with the Business as of the date of this Agreement; provided, however, that after Closing FAMC shall not have access to MDC's mainframe computer system or related network. 1.6 Browne Interests. At the Closing, Old FAMC and MDC Sub shall cause FAMC to purchase all of the membership interests of FAMC owned by Browne in accordance with Sections 4(c) and (d) of that certain Agreement dated as of April 1, 1996 among MDC, MDC Sub, Old FAMC, FAMC and Browne. ARTICLE 2. THE CLOSING The closing (the "Closing") of the transactions contemplated hereby will take place at 10:00 a.m. at the offices of the CLLC's counsel on September 30, 1996, or at such other later time and place as the parties hereto may mutually agree upon (the "Closing Date"). ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF MDC, OLD FAMC AND MDC SUB As a material inducement to CLLC to enter into and perform this Agreement, MDC, Old FAMC and MDC Sub jointly and severally represent, warrant, covenant and agree that: 3.1 Organization and Authority. Each is a corporation duly organized, validly existing and is in good standing under the laws of its respective jurisdiction of incorporation, with full power and authority to own or lease and use its properties and assets and to carry on its business as such business is now conducted, to execute and deliver this Agreement, and to consummate the transactions contemplated hereby. FAMC is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Colorado with full power and authority to own or lease and use its properties and assets, to carry on its business as such business is now conducted. At the Closing, this Agreement will have been duly authorized, executed and delivered by MDC, Old FAMC and MDC Sub and will constitute the valid and legally binding obligation of each of them enforceable in accordance with their respective terms. The copy of the Operating Agreement of FAMC and minutes of meetings of members (or consents in lieu thereof) of FAMC - 4 - certified by a member of FAMC and to be furnished to CLLC is true, correct and complete and conforms to the original thereof. 3.2 No Violation. At the Closing, neither the execution and delivery by MDC, Old FAMC or MDC Sub of this Agreement nor consummation of the transactions herein or therein contemplated, nor compliance with the terms, conditions and provisions hereof or thereof will conflict with or violate any provision of law or the charter documents, or By-Laws of MDC, Old FAMC, MDC Sub or FAMC, as the case may be, or result in a violation or default in any provision of any regulation, order, writ, injunction or decree of any court or governmental agency or authority or of any agreement or instrument to which MDC, Old FAMC, MDC Sub or FAMC is a party or by which MDC, Old FAMC, MDC Sub or FAMC is bound or to which MDC, Old FAMC, MDC Sub or FAMC is subject, or constitute a default thereunder or result in the imposition of any lien, charge, encumbrance or security interest of any nature whatsoever upon any of the Interests pursuant to the terms of any such agreement or instrument. 3.3 Ownership of Interests. Old FAMC or MDC Sub have good and valid title to all of the Interests, free and clear of all claims, liens, pledges, mortgages, security interests, encumbrances, charges, options, defaults, equities or restrictions or other matters, if any, affecting their title to or ownership of the Interests (collectively, "Encumbrances"). 3.4 Financial Statements. FAMC has delivered to CLLC the unaudited balance sheets of the Business as of the end of the two most recent fiscal years of the Business, together with related unaudited statements of income, equity and cash flow for each of the three most recent fiscal years of the Business are collectively called the "Annual Financials." FAMC has delivered to CLLC the unaudited balance sheets of the Business as of March 31, 1996 and June 30, 1996, together with related statements of income, equity and cash flow for the periods then ended, all of which balance sheets and financial statements are referred to collectively as the "Unaudited Financials." The Annual Financials and the Unaudited Financials are hereinafter sometimes collectively referred to as the "Financial Statements." The Financial Statements, when delivered in accordance with this Section, will fairly present the financial position and results of operations of the Business on the dates and for the fiscal periods then ended and are in accordance with GAAP except as disclosed in Schedule 3.4. The Financial Statements reflect or provide for all claims against and all debts and liabilities of the Business. Schedule 3.4 hereto lists all material claims against and all material debts and material liabilities of FAMC, absolute, accrued, contingent or otherwise, whether or not required by GAAP to be disclosed, including all material bonuses payable, or paid since June 30, 1996, otherwise not reflected in the Financial Statements, and Taxes (as defined in Section 3.6) due as at the date hereof, and as of the Closing Date. Neither the Business nor FAMC has any material liability of any nature, whether accrued, absolute, contingent or otherwise, which is not fully reflected or reserved against - 5 - in the Unaudited Financials or, if not required to be disclosed on such Financial Statements, listed in Schedule 3.4. 3.5 No Adverse Change. Except as set forth in Schedule 3.5, since June 30, 1996, there has been no change in the financial condition, results of operation, assets, liabilities or business of the Business which has had or may be reasonably probable of having, together with all other such changes a material adverse effect on the financial condition, results of operations, assets, liabilities or business of the Business. 3.6 Taxes. Within the times and in the manner prescribed by law, FAMC has correctly and completely prepared in all material respects and filed or caused to be filed all tax returns, declarations reports, schedules, claims for refund, or information returns, including any attachments and/or amendments thereof (collectively, "Tax Returns"), for income, sales, use, real property, personal property, payroll, and other taxes, including, without limitation, those relating to the Business, required to be filed by it with any Governmental Authority (as hereinafter defined), and has paid in full all taxes (and any other associated assessments, judgments, costs, interest and penalties) owing to or assessed by each such governmental Authority, whether or not reported on such Tax Returns (collectively, "Taxes"). Except as set forth in Schedule 3.6, (a) FAMC is not currently the beneficiary of any extension of time within which to file any Tax Returns, (b) to the knowledge of MDC, Old FAMC and MDC Sub, no claim has been made by any Governmental Authority in any jurisdiction in which FAMC does not file Tax Returns claiming that FAMC is or may be subject to any Taxes within that jurisdiction, (c) no ongoing audits are being conducted against FAMC or any members of FAMC with respect to FAMC by any Governmental Authority, nor has FAMC received any notice from any Governmental Authority that any such audit will be conducted, (d) FAMC has not waived any statute of limitations or agreed to any extension of time with respect to the review of any Tax Returns or Taxes thereby imposed, (e) no security interests have been filed, perfected or otherwise claimed on any of the assets of FAMC in connection with the failure to pay any Taxes, (f) FAMC has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid for or owing to any member, employee, independent contractor, creditor, stockholder or other third party, and (g) FAMC is not a party to any tax allocation or sharing agreement with any third party and has not assumed the liability of any other person under contract with respect to Taxes. The term "Governmental Authority" shall mean any United States, state or local governmental entity or municipality of subdivision thereof or any authority, department, commission, board, bureau, agency, court or instrumentality. 3.7 Real Property Interests. The Business is conducted in space rented from MDC described in Schedule 3.7 pursuant to that certain Service Agreement dated as of April 1, 1996 between MDC and FAMC (the "Service Agreement"), a copy of which has been provided to CLLC. FAMC does not own or lease any other interests in real estate. 3.8 Personal Property. Set forth on Schedule 3.8 is a list or description of all material personal property and tangible assets (including, without limitation, office equipment, computer equipment and software, leasehold improvements, fixtures, furniture, furnishings, other equipment - 6 - and supplies) leased by FAMC and used in connection with the Business, together with all encumbrances thereon. The personal property is fit to be used for its intended purposes (except for ordinary wear and tear), and FAMC has available to it by ownership, lease or otherwise (including, without limitation, under the Service Agreement) all assets that are reasonably necessary in order to conduct the Business as it is now being conducted. 3.9 Accounts Receivable. The accounts receivable reflected in the Unaudited Financials arose in the ordinary course of business and have been collected in full or, to the knowledge of MDC, Old FAMC and MDC Sub, are fully collectible or, if not fully collectible, have been written off or have had adequate reserves established therefor in accordance with generally accepted accounting principles. Set forth on Schedule 3.9 hereto is a list of all accounts receivable of the Business which were billed as of June 30, 1996, showing the name of each debtor, the amount due on each account, any write-off or reserve against each account, and the date when the account became due. Such accounts receivable are likewise fully collectible, unless otherwise indicated. Except as disclosed on Schedule 3.9 hereto, no agreements have been in effect during the past year or are now proposed which would require any delay in payment of any fees payable under the institutional real estate advisory agreements of the Business ("Advisory Agreements"). 3.10 Advisory and Management Agreements. Schedule 3.10 contains a true, complete and accurate list of all the Advisory Agreements and bond administration contracts (collectively, the "Management Agreements") and the other advisory and bond administration clients of the Business as of the date hereof. Except as provided in Schedule 3.10, the Management Agreements do not require any consent or other approval in connection with the transactions contemplated hereby. Each client listed on Schedule 3.10 is being served by the Business and neither MDC, Old FAMC nor MDC Sub has any knowledge of any prospective termination by any such client of its Management Agreement or withdrawal of assets from management by the Business or proposed reduction in any fee rate under any such contract except as set forth in such Schedule. True, correct and complete copies of all Management Agreements have been provided to CLLC. Each of the Management Agreements is a legal, valid and binding obligation of FAMC enforceable against FAMC in accordance with its terms and, to the knowledge of MDC, Old FAMC and MDC Sub, each of such agreements is a legal, valid and binding obligation of the other parties hereto and is enforceable against such party in accordance with its terms. FAMC is not in breach, violation or default under any such agreement and has not collected fees under such agreements in excess of the amounts called for in such agreements. 3.11 Other Contracts. All written contracts (other than Management Agreements) (i) to which FAMC is a party or by which it is bound and which relate to the Business and (ii) which are not identified on any other Schedule hereto, are listed on Schedule 3.11 hereto. FAMC is not in default under (nor is FAMC aware of any fact or event which with the lapse of time or the giving of notice or both would constitute a default under) any contract or obligation which would result in a liability that would materially adversely affect the Business. - 7 - 3.12 Bank Accounts and Money Market Funds. Set forth on Schedule 3.12 hereto is the name and location of each bank, brokerage and money market fund in which FAMC has an account or accounts or safe deposit boxes or that FAMC has with respect to the Business, the name and number of each account or box, the names of persons authorized to draw thereon or having access thereto, and the balance of each account and the contents of each box as of a date within ten (10) days of the date hereof. Also set forth on Schedule 3.12 is a list of bank and brokerage accounts which the Business maintains on behalf of its clients, which includes each bank and brokerage house and the name and number of each account. Schedule 3.12 shall be up-dated as of the Closing Date. 3.13 Litigation. Except as set forth in Schedule 3.13 hereto, there are no actions, suits, proceedings or investigations of any kind ("Actions") pending, or, to the knowledge of MDC, Old FAMC or MDC Sub, threatened before any court, commission, agency or other administrative authority relating to the Business, FAMC or any of the properties which are the subject of any Management Agreement. FAMC is not the subject of any order or decree of a Governmental Authority. 3.14 Finder's Fee. None of MDC, Old FAMC, MDC Sub or FAMC has incurred any obligation of any kind whatsoever to any party for a finder's, investment banking or other similar fee in connection with the transactions contemplated by this Agreement. 3.15 Disclosure. The representations and warranties made by MDC, Old FAMC and MDC Sub in this Agreement and any statements by any of them made in any of the Exhibits or Schedules hereto do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make any such representation, warranty or statement, in the light of the circumstances under which they were made, not misleading. Except as set forth in Schedule 3.15 hereto and except for matters generally known in the real estate industry, there is no fact or condition particularly related to the Business which is known to MDC, Old FAMC or MDC Sub which it reasonably believes might adversely affect in a material fashion the business, property, condition (financial or otherwise), or results of operations of the Business, AIC or CAI and which has not been set forth in this Agreement or in an Exhibit or Schedule hereto. 3.16 Approvals. No approval, authorization, order, license or consent of or registration, qualification or filing with any Governmental Authority and no approval or consent by any other person or entity is required in connection with the execution, delivery or performance by MDC, Old FAMC and MDC Sub of this Agreement other than as set forth in Schedule 3.16 hereto. 3.17 Government Regulation. FAMC has all governmental licenses and permits, the absence of which would have a material adverse effect on the Business. FAMC is in compliance with all federal and state laws requiring (i) registration, (ii) licensing or (iii) qualification as an investment adviser. - 8 - FAMC is not an "investment adviser" requiring registration as such under the Investment Advisers Act of 1940. FAMC is not an "investment company," within the meaning of the Investment Company Act of 1940, which is required to be registered under the Act, or is controlled by an "investment company" required to be so registered. FAMC is not a "broker" or "dealer" within the meaning of the Securities Exchange Act of 1934. FAMC is not required to disclose any information to clients under SEC Rule 206(4)-4 promulgated under the Investment Advisers Act of 1940. 3.18 No Violation of Law. Neither Old FAMC nor FAMC has engaged in or is now engaging in any act, conspiracy or course of conduct in violation of any applicable federal, state or local laws, regulations, rules or orders (including, without limitation, federal and state securities laws) which would result in a materially adverse change in the financial condition, results of operation, assets, liabilities or business of the Business, AIC or CAI and has not received any notice, claim or protest that it is now or has heretofore been so engaged. 3.19 Transfer of Interests. Except as set forth on Schedule 3.19 attached hereto, the instruments of transfer and assignment delivered by MDC, Old FAMC and MDC Sub on the Closing Date will be adequate to convey all rights (direct and indirect) of Old FAMC and MDC Sub in the Interests to CLLC, free and clear in each case of all Encumbrances. 3.20 Conduct of Business. Except as set forth in Schedule 3.20 attached hereto, no part of the Business is conducted through any entity other than FAMC, and FAMC conducts no other business other than the Business. 3.21 SEC Reports. FAMC has heretofore delivered to CLLC, in the form filed with the SEC (including any amendments thereto), (i) the reports on Forms 10-Q and 10-K of AIC and CAI for each of the fiscal years ended December 31, 1994 and 1995, (ii) all definitive proxy statements relating to the meetings of shareholders of AIC and CAI (whether annual or special) held since January 1, 1994, (iii) all reports on Form 8-K filed by AIC or CAI with the SEC since January 1, 1994 and (iv) all registration statements in the form declared effective by the SEC that have been filed by AIC and CAI with the SEC since January 1, 1994 (collectively, the "SEC Reports"). To the knowledge of MDC, Old FAMC and MDC Sub, none of the SEC Reports, including, without limitation, any financial statements or schedules included or incorporated by reference therein, contained, when filed, any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.22 REIT Status. To the knowledge of MDC, Old FAMC and MDC Sub, each of AIC and CAI (i) has made a valid election in its federal income tax return to be taxed as a real estate investment trust ("REIT") within the meaning of Section 856 of the Internal Revenue Code of 1986, as amended (the "Code"), and such election is still in effect; and (ii) has at all times since the beginning of the taxable year for which its REIT election was first effective operated (and MDC, Old FAMC and MDC Sub know of no reason why each of AIC and CAI will not continue to - 9 - operate) in accordance with all applicable provisions of the Code regarding qualification of AIC or CAI, as the case may be, as a REIT, including, without limitation, the organizational requirements that determine an entity's eligibility for REIT status, the requirements regarding the nature of a REIT's assets and sources of its income, the shareholder demand and all other record keeping requirements of Treasury Regulation Section 1.857-8, and the distribution requirements necessary to maintain REIT qualification. No challenge to AIC's or CAI's, as the case may be, status as a REIT is pending or, to the knowledge of MDC, Old FAMC and MDC Sub, threatened. 3.23 Employees. FAMC has never had employees. 3.24 Responsibility for SEC Reports. MDC, Old FAMC, MDC Sub and FAMC have had no role or responsibility with respect to AIC and CAI except that FAMC and Old FAMC have acted as the manager of AIC and CAI under the Advisory Agreements. MDC, Old FAMC and MDC Sub shall have the same responsibility to CLLC for the SEC Reports as Old FAMC or FAMC, as manager of AIC or CAI, would have to a purchaser or seller of AIC or CAI securities. ARTICLE 4. INDEMNIFICATION 4.1 Indemnification by MDC, Old FAMC and MDC Sub. Subject to all of the limitations and provisions of this Article 4, MDC, Old FAMC and MDC Sub, jointly and severally (together, the "Indemnitors" and individually, an "Indemnitor") agree to indemnify, defend with counsel reasonably satisfactory to CLLC, save and hold CLLC, its affiliates and its directors, officers, members and employees harmless from and against and compensate them for any and all demands, claims, actions, causes of action, assessments, damages, liabilities, losses, expenses, fees, judgments or deficiencies of any nature whatsoever (including, without limitation, any unpaid taxes due from FAMC and reasonable attorneys' fees and other costs and expenses incident to any suit, action or proceeding including those incurred in connection with the enforcement of this Agreement) ("Losses") received, incurred or sustained by them, or any of them, or to be received, incurred or sustained by them, or any of them, to the extent to which they arise out of or result from (i) any breach of any representation, warranty (including without limitation those set forth in Article 3 hereof) or non-fulfillment of any covenant of MDC, Old FAMC, or MDC Sub hereunder or under any Schedule or Exhibit or (ii) any liability from acts or omissions of FAMC or Old FAMC (solely with respect to the Business) prior to Closing that either were unknown or were not disclosed as required by this Agreement. Notwithstanding the foregoing, the Indemnitors shall have no liability under this Article 4 to indemnify CLLC for any Loss unless and until the aggregate amount of all Losses to CLLC exceeds One Hundred Thousand Dollars ($100,000), in which event CLLC shall be entitled to indemnification with respect to the full amounts of such Losses determined without reference to such limitation. Notwithstanding anything contained in this Article 4, the Indemnitors' aggregate liability - 10 - under this Article 4 shall not exceed the total amount of the Purchase Price paid pursuant to this Agreement. 4.2 Survival of Representations and Warranties. The representations and warranties of MDC, Old FAMC and MDC Sub set forth in this Agreement and the indemnification referred to in Section 4.1 above shall survive the Closing until April 1, 1998 (except that the representations and warranties set forth in Section 3.6 (Taxes) of this Agreement and any indemnification therefor shall survive the closing for seven years) notwithstanding the establishment of a short period by any applicable statute of limitations, the provisions of which are hereby waived, provided that liability with respect to any representation or warranty as to which a claim is made within such periods, as applicable, shall continue until finally determined and paid. The representations and warranties of CLLC set forth in this Agreement and the Indemnification referred to in Section 4.4 shall survive the Closing until April 1, 1998 notwithstanding the establishment of a shorter period by any applicable statute of limitations, the provisions of which are hereby waived, provided that liability with respect to any representation, warranty, covenant or obligation as to which a claim is made within such period shall continue until finally determined and paid. 4.3 Third-Party Claims. Should any claim be made or suit or proceeding be instituted against a party entitled to indemnification hereunder (an "Indemnified Party") which, if valid or prosecuted successfully, would be a matter for which they are entitled to be defended, saved harmless or indemnified under this Agreement (a "Third-Party Claim"), the Indemnified Party shall notify the parties responsible for such indemnification (the "Indemnifying Party") in writing concerning the same promptly after the assertion or commencement thereof. The Indemnifying Parties shall control the defense of any Third-Party Claim, with counsel reasonably satisfactory to the Indemnified Parties, and the Indemnifying Parties shall use their best efforts to defeat or minimize any loss resulting from such Third-Party Claim. The Indemnified Parties shall use their best efforts to minimize any Loss resulting from any such Third Party Claim, provided, however, that the provisions of this sentence shall not require any Indemnified Party to take any action which might interfere with its relationship with a client. The Indemnifying Parties shall provide the Indemnified Parties with such information and opportunity for consultation as may reasonably be requested by the Indemnified Parties, and either they or any of them shall be entitled to participate in the defense of a Third-Party Claim and to engage counsel for such purpose at the expense of such Indemnified Party. The Indemnifying Parties shall have the right to settle Third- Party Claims against the Indemnified Parties on terms which are judged reasonable by the Indemnified Parties and such settlements shall be binding upon the Indemnified Parties and the Indemnifying Parties have been held harmless against or indemnified for amounts agreed to be paid or amounts paid in such settlement. No Indemnified Party shall have the right to settle any Third-Party Claim against it except with the consent of the Indemnifying Parties, which consent shall not be unreasonably withheld where the settlement of such claim does not involve the payment of money damages or the admission of any liability or guilt on the party of the Indemnifying Party. - 11 - The Indemnified Parties shall in any event render all such assistance as the Indemnifying Parties shall reasonably request in the defense of any Third-Party Claim. All costs and expenses incurred by the Indemnifying Parties and the Indemnified Parties in connection with the defense of a Third-Party Claim shall upon demand be paid by the Indemnifying Parties. 4.4 Indemnification by CLLC. CLLC agrees to indemnify, defend with counsel reasonably satisfactory to MDC, Old FAMC and MDC Sub, save and hold MDC, Old FAMC, MDC Sub and their respective directors, officers, employees, agents, affiliates and controlling persons harmless from and against and compensate them for all Losses received, incurred or sustained by any of them or to be received, incurred or sustained by them, or any of them, to the extent that they shall arise out of or result from (i) any breach of any representation, warranty or covenant (including without limitation those set forth in Article 5 hereof), or non-fulfillment of any obligation of CLLC under this Agreement or any exhibit, schedule or certificate or other document furnished in connection herewith or (ii) any liability from acts or omissions of FAMC after the Closing. Notwithstanding the foregoing, CLLC shall have no liability under this Article 4 to indemnify any of MDC, Old FAMC and MDC Sub for any Loss unless and until the aggregate amount of all Losses exceeds One Hundred Thousand Dollars ($100,000), in which event MDC, Old FAMC and MDC Sub shall be entitled to indemnification with respect to the full amounts of such Losses determined without reference to such limitation. 4.5 Claims. Each claim for indemnification pursuant to this Article 4 shall be made in writing and shall set forth specifically the facts claimed to give rise to indemnification and the representations, warranties, covenants or agreements claimed to be inaccurate or to have been breached, and the damages claimed as result of such breach. ARTICLE 5. REPRESENTATIONS OF CLLC As a material inducement to MDC, Old FAMC and MDC Sub to enter into and perform this Agreement, CLLC represents, warrants, covenants and agrees, that: 5.1 Organization of CLLC and Corporate Authority. CLLC is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Colorado, with full power and authority to own or lease and use its properties and assets, to carry on its business as such business is now conducted, to execute and deliver this Agreement and to consummate the transactions contemplated hereby. 5.2 No Violation. Neither the execution and delivery by CLLC of this Agreement to which CLLC may be a party, nor consummation of the transactions herein or therein contemplated, nor compliance with the terms, conditions and provisions hereof or thereof will conflict with or - 12 - violate any provision of law or the Operating Agreement of CLLC, or result in a violation or default in any provision of any regulation, order, writ, injunction or decree of any court or governmental agency or authority or of any agreement or instrument to which CLLC is a party or by which CLLC is bound or to which CLLC is subject, or constitute a default thereunder or result in the imposition of any lien, charge, encumbrance or security interest of any nature whatsoever upon any of CLLC's assets pursuant to the terms of any such agreement or instrument. 5.3 Finder's Fee. CLLC has not incurred any obligation of any kind whatsoever to any party for a finder's, investment banking or similar fee in connection with the transactions contemplated by this Agreement. 5.4 Operating Agreement and Resolutions. The copies of the Operating Agreement of CLLC, and resolutions of CLLC's members relating to the transactions contemplated by this Agreement, in each case certified by CLLC and to be furnished by CLLC to MDC, Old FAMC and MDC Sub, are true, correct and complete and conform to the originals thereof. 5.5 Disclosure. The representations and warranties made by CLLC in this Agreement and any statements made by it in any of the Exhibits or Schedules hereto do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make such representation, warranty or statement, in light of the circumstances under which it was made, not misleading. There is no fact or condition particularly related to the business of CLLC which is known to CLLC and which CLLC reasonably believes might adversely affect in a material fashion the business, property, condition (financial or otherwise) or results of operations of CLLC and which has not been set forth in this Agreement or an Exhibit or Schedule hereto. 5.6 CLLC's Authority. CLLC has full right, power and authority to execute, deliver and perform this Agreement, all proper actions authorizing the execution, delivery and performance hereof and thereof having been taken. This Agreement has been duly executed and delivered by CLLC and constitutes, and, when executed and delivered, will constitute, valid and legally binding obligations of CLLC, enforceable in accordance with their respective terms. 5.7 Approvals. No approval, authorization, order, license or consent of or registration, qualification or filing with any governmental authority and no approval or consent by any other person or entity is required in connection with the execution, delivery or performance by CLLC of this Agreement. 5.8 Ownership of AIC and CAI. CLLC and its affiliates own, beneficially or of record, the shares of Common Stock or other securities of AIC and CAI set forth on Schedule 5.8 hereto. 5.9 Representations re AIC and CAI. Except as otherwise set forth herein, neither MDC, Old FAMC nor MDC Sub has made any representation or warranty regarding AIC or CAI and CLLC is relying solely on public information relating to AIC and CAI in connection with the transactions contemplated hereby. - 13 - ARTICLE 6. TAX MATTERS 6.1 Tax Returns. CLLC, on the one hand, and MDC, Old FAMC and MDC Sub, on the other hand, shall cooperate with one another to prepare and file, or to cause to be prepared and filed, all requisite federal, state and local Tax Returns disclosing the consummation of the transactions contemplated hereunder, in a manner consistent with appropriate law, as a taxable transaction under the Code. 6.2 Transfer Taxes on Sale. All transfer, excise or other transfer taxes payable by reason of the purchase and sale of the Interests hereunder shall be borne by MDC, Old FAMC and MDC Sub. 6.3 Old FAMC and MDC Sub Responsibility for Tax Liabilities. Old FAMC and MDC Sub shall pay all Taxes of the Business for all periods prior to and including the Closing Date and CLLC shall be responsible for all Taxes of the Business for all periods after the Closing Date. ARTICLE 7. AGREEMENTS AND PRE-CLOSING COVENANTS 7.1 Confidentiality. CLLC will cause all information obtained from MDC, Old FAMC and MDC Sub in connection with the transactions contemplated by this Agreement which is not in the public domain to be held confidential. CLLC will cause all documents obtained from MDC, Old FAMC and MDC Sub to be returned promptly to MDC, Old FAMC and MDC Sub in the event of the termination of this Agreement. CLLC will use such information only for the purpose of analyzing the transactions contemplated by this Agreement. 7.2 Non-Disclosure. CLLC, on the one hand, and MDC, Old FAMC and MDC Sub, on the other hand, agree that no public disclosure of the negotiation or execution of this Agreement or the transactions contemplated hereby shall be made in advance of the publication of a joint release on such matters, except in order to comply with federal securities laws and the rules of any applicable stock exchange. 7.3 Filings. Prior to or on the Closing Date, MDC, Old FAMC and MDC Sub shall prepare and file all documents and forms and amendments to forms which are or will be required to be filed under applicable federal and state laws and regulations promulgated thereunder, including, without limitation, Forms 8-K to be filed by CAI and AIC, as a result of the consummation of the transaction contemplated by this Agreement. - 14 - 7.4 Closing Conditions. MDC, Old FAMC and MDC Sub shall use their reasonable best efforts to cause the satisfaction of all conditions precedent to CLLC's obligations hereunder set forth in Article 9. CLLC shall use its reasonable best efforts to cause the satisfaction of all conditions precedent to obligations of MDC, Old FAMC and MDC Sub hereunder set forth in Article 10. 7.5 Third Party Discussions. MDC, Old FAMC and MDC Sub each covenant and agree that, following the execution and delivery of this Agreement and at all times prior to the Closing or termination of this Agreement, it shall not provide any material non-public information concerning the Interests or FAMC to anyone other than in the ordinary course of business and other than to CLLC's lending banks or the equity investors in CLLC, nor meet, discuss or negotiate with anyone other than CLLC with respect to the acquisition of all or any part of the Interests or FAMC whether by purchase or business combination. 7.6 Expense Fund. Upon the execution of this Agreement, CLLC shall deliver to Old FAMC and MDC Sub by wire transfer pursuant to instructions given to CLLC Fifty Thousand Dollars ($50,000) (the "Expense Fund") to pay out-of-pocket expenses of MDC, Old FAMC and MDC Sub (including, without limitation, lawyers' fees of outside counsel billed at their normal hourly rates) incurred in connection with the drafting and negotiation of this Agreement and the consummation of the transactions contemplated herein. 7.7 Deposit. Upon the execution of this Agreement, CLLC will deposit with MDC by wire transfer pursuant to instructions given to CLLC Two Hundred Fifty Thousand Dollars ($250,000) representing an earnest money deposit to be credited toward the Purchase Price on the Closing Date as provided in Section 1.2 hereof or returned to CLLC as described in Section 12.3 hereof. 7.8 Employees. Following satisfaction of the conditions in Sections 9.12 and 10.6, MDC, Old FAMC and MDC Sub shall cooperate with CLLC and give it reasonable access to employee information and assistance with employee communications in connection with CLLC's possible employment of the current employees of the Business at such times prior to the Closing as MDC, Old FAMC and MDC Sub may determine. 7.9 Sale or Acquisition of MDC, AIC and CAI Securities. CLLC agrees that, from the date hereof to the Closing Date or, if this Agreement is terminated for six (6) months from the date of termination, neither it nor its affiliates will sell or otherwise dispose, agree to sell or dispose, acquire or agree to acquire, directly or indirectly, any securities of MDC, AIC or CAI except pursuant to dividend reinvestment plans in existence on the date hereof. - 15 - ARTICLE 8. CONDUCT OF THE BUSINESS PRIOR TO THE CLOSING DATE MDC, Old FAMC and MDC Sub agree that, from the date hereof to the Closing Date, except as set forth on Schedule 8 or as otherwise consented to or approved by CLLC in writing or required by this Agreement: (a) No change shall be made in the Articles of Organization or the Operating Agreement of FAMC. (b) The Business shall be conducted in the ordinary course. MDC, Old FAMC and MDC Sub shall cause the Business to meet all of its obligations as they become due, including but not limited to, closing bond acquisitions that have been agreed to, and to offer advisory services in the ordinary course of business subject to obligations imposed upon FAMC by this Agreement, to maintain its corporate records, to keep the receivables current consistent with past practice, to use their best efforts to (i) preserve the business organization and properties of the Business intact, and (ii) to preserve the goodwill of the Business's clients, suppliers, and others with whom business relationships exist. (c) Following satisfaction of the conditions in Sections 9.12 and 10.6, MDC, Old FAMC and MDC Sub shall afford to CLLC and its representatives free access to the properties and records of the Business during normal business hours and upon reasonable notice in order that CLLC may have full opportunity to make such investigation as they shall desire of the Business's affairs for purposes consistent with this Agreement. CLLC will cause all documents obtained from MDC, Old FAMC and MDC Sub to be returned promptly to MDC, Old FAMC and MDC Sub in the event of the termination of this Agreement. (d) MDC, Old FAMC and MDC Sub shall cause FAMC not to amend, assign or modify the Management Agreements. (e) MDC, Old FAMC and MDC Sub shall cause FAMC to operate the Business so that the Business will not violate any federal, state, local or foreign laws, regulations or orders. (f) MDC, Old FAMC and MDC Sub shall not take any action or permit FAMC to take any action which would require any of FAMC, AIC or CAI to register under the Investment Company Act of 1940 or the Investment Advisers Act of 1940. - 16 - ARTICLE 9. CONDITIONS PRECEDENT TO CLLC'S OBLIGATIONS All obligations of CLLC under this Agreement are subject to the fulfillment and satisfaction, prior to or at the Closing, of each of the following conditions, any one or more of which may be waived by CLLC. 9.1 Delivery of Documents of Transfer. MDC, Old FAMC and MDC Sub shall have delivered to CLLC all such documents of transfer, assignment or assumption as CLLC or its counsel may reasonably require in order to consummate the purchase and sale of the Interests hereunder. 9.2 Representations and Warranties True At the Closing Date. The representations and warranties of MDC, Old FAMC and MDC Sub contained in this Agreement shall be true and correct at and as of the Closing Date as though newly made at and as of that time. MDC, Old FAMC and MDC Sub shall have delivered to CLLC a certificate, dated as of the Closing Date and signed by each of their President and Chief Financial Officer (unless any of such entities has no Chief Financial Officer in which case only the President shall so certify) certifying as to the truth and accuracy of the representations and warranties and the performance of the obligations in all material respects required to be performed by each of them, under this Agreement. 9.3 Bring Down Certificate. MDC, Old FAMC and MDC Sub shall have delivered a certificate, dated as of the date of the Closing, certifying that since the delivery of FAMC's Articles of Organization and Operating Agreement pursuant hereto, there have been no amendments or other modifications thereof, that true, complete and accurate copies of the minutes of meetings of the Board of Directors (or consents in lieu thereof) of Old FAMC and of the members of FAMC have been delivered to CLLC; that attached to the certificate are true and complete copies of a resolution of the Board of Directors of MDC, Old FAMC and MDC Sub authorizing the transactions contemplated hereby; and that the officers of MDC, Old FAMC and MDC Sub are those persons named in the certificate. 9.4 Approvals. Any consent, approval, authorization or order of any court, governmental agency, administrative body or other person or entity (including without limitation consents of lessors of any property leased by the Business) required for the consummation of the transactions contemplated by this Agreement shall have been obtained and shall be in effect on the Closing Date. 9.5 Opinion of Counsel for MDC, Old FAMC and MDC Sub. MDC, Old FAMC and MDC Sub shall have delivered to CLLC an opinion from Parcel, Mauro, Hultin & Spaanstra, P.C., counsel for MDC, Old FAMC and MDC Sub, in substantially the form attached hereto as Exhibit 9.5. - 17 - 9.6 Performance of MDC, Old FAMC and MDC Sub. Each of the obligations of MDC, Old FAMC and MDC Sub to be performed on or before the Closing Date pursuant to the terms of this Agreement shall have been duly performed on or before the Closing Date. 9.7 Conduct of the Business Prior to the Closing Date. The Business shall have been conducted in all material respects in accordance with the provisions of Article 8. 9.8 Approval of Documentation. The form and substance of all opinions, certificates, and other documents hereunder shall be reasonably satisfactory in all respects to CLLC and its counsel. 9.9 Examination of Books and Records. For purposes of compliance with and performance of this Agreement, CLLC, acting through its own management and personnel or through counsel, accountants, or other representatives designated by them, shall have been afforded during normal business hours and upon reasonable notice full and complete opportunity to examine and investigate all aspects of the Business's affairs, assets and liabilities, including without limitation, financial books and records, the workpapers of the Business' independent public accountants, the Management Contracts, titles and leases to properties, the condition of its facilities and equipment, and the collectibility of accounts receivable. Following satisfaction of the conditions in Sections 9.12 and 10.6, CLLC shall also have been afforded the opportunity to confer with the Business's advisory clients, if deemed necessary by CLLC, provided, however, that a representative of the Business shall be permitted on reasonable notice to participate in such discussions or conferences. 9.10 Financing. CLLC shall have entered into definitive agreements with financing sources satisfactory to CLLC, and pursuant thereto shall have obtained such debt and/or equity capitalization as is necessary to consummate the transaction contemplated hereby. 9.11 Resignations of Directors and Officers. FAMC shall have obtained and delivered to CLLC the resignations (to be effective simultaneous with the Closing) of each person affiliated with MDC who is serving as a Director or Officer of AIC or CAI (including, without limitation, Messrs. Larry Mizel and Spencer Browne) from such positions with AIC and CAI. Mr. Terry Considine and Mr. Thomas Rhodes shall have been duly appointed by the Directors of AIC and CAI, simultaneously with the consummation of the Closing, to fill the vacancies as Directors and Officers created by the resignations of Messrs. Mizel and Browne which will become effective upon the Closing. 9.12 Management Agreements. The majority of the Unaffiliated Directors (as that term is defined in the applicable Advisory Agreement) of the Boards of Directors of AIC and CAI and the majority of all the Directors of each such entity shall have duly and validly consented to in writing or approved the sale of the Interests and the change of control of FAMC. 9.13 Purchase of Browne Interests. Simultaneously with Closing, the membership interests of FAMC owned by Browne shall have been purchased pursuant to Section 1.6. - 18 - 9.14 Accountants' Letter. CLLC shall have received a letter reasonably satisfactory to CLLC with respect to the financial statements contained in the SEC Reports. ARTICLE 10. CONDITIONS PRECEDENT TO THE OBLIGATION OF MDC, OLD FAMC AND MDC SUB All obligations of MDC, Old FAMC and MDC Sub under this Agreement are subject to the fulfillment and satisfaction, prior to or on the Closing Date, of each of the following conditions, any one or more of which may be waived by MDC, Old FAMC and MDC Sub. 10.1 Opinion of CLLC's Counsel. CLLC shall have furnished to MDC, Old FAMC and MDC Sub an opinion dated as of the Closing Date of Gibson, Dunn & Crutcher LLP, counsel to CLLC, in substantially the form attached hereto as Exhibit 10.1. 10.2 Representations and Warranties True at the Closing Date. Except as expressly contemplated by this Agreement, the representations and warranties of CLLC contained in this Agreement shall be true and correct in all respects at and as of the Closing Date as though newly made at and as of that time. CLLC shall have delivered to MDC, Old FAMC and MDC Sub a certificate, dated as of the Closing Date and signed by Terry Considine, certifying as to the truth and accuracy of the representations and warranties and the performance of all of the obligations required to be performed by CLLC, under this Agreement. 10.3 Performance of CLLC. All of the obligations of CLLC to be performed on or before the Closing Date pursuant to the terms of this Agreement shall have been duly performed in all material respects on or before the Closing Date. 10.4 Authority of CLLC. All corporate action required to be taken by or on the part of CLLC to authorize the execution, delivery and performance of this Agreement by CLLC and the consummation of the transactions contemplated hereunder shall have been duly and validly taken and CLLC shall have provided to MDC, Old FAMC and MDC Sub copies of resolutions and consents of its Board of Directors evidencing such action, certified by its secretary or assistant secretary. 10.5 Approval of Documentation. The form and substance of all opinions, certificates and other documents hereunder shall be reasonably satisfactory in all respects to FAMC and its counsel. 10.6 Approvals. Any consents, approval, authorization or order of any court, governmental agency, administrative body or other person or entity (including without limitation consents of the Asset Management Committee of MDC and the Boards of Directors of MDC, AIC - 19 - and CAI) required for the consummation of the transactions contemplated by this Agreement shall have been obtained and shall be in effect on the Closing Date. 10.7 Management Agreements. The majority of the Unaffiliated Directors (as that term is defined in the applicable Advisory Agreement) of the Boards of Directors of AIC and CAI and the majority of all the Directors of each such entity shall have duly and validly consented to in writing or approved the sale of the Interests and the change of control of FAMC. ARTICLE 11. POST-CLOSING COVENANTS 11.1 Confidentiality. From and after the Closing and for a period of five (5) years thereafter, the parties shall cause all information obtained from each other in connection with the transactions contemplated by this Agreement which is not in the public domain to be held confidential unless (a) such information becomes publicly available through no fault of such party, (b) the use of such information is necessary in making any filing or obtaining any consent or approval required for the consummation of the transactions contemplated by this Agreement, or (c) the furnishing or use of such information is required by legal proceedings and the other party or parties are notified of the requirement to make such disclosure at least five (5) business days in advance of such disclosure. 11.2 Further Assurances. From time to time after the Closing at the request of CLLC and without further consideration, MDC, Old FAMC and MDC Sub shall execute and deliver or cause to be executed and delivered any further instruments and take such other action as CLLC may reasonably require to consummate the transactions contemplated hereby. Nothing in this section shall be deemed a waiver by CLLC of its rights under Article 9 of this Agreement or a waiver by MDC, Old FAMC and MDC Sub of their rights under Article 10 of this Agreement. In addition, from time to time after the Closing at the reasonable request of MDC, Old FAMC and MDC Sub, CLLC shall execute and deliver, or cause to be executed and delivered, any further instruments and take such other action as MDC, Old FAMC and MDC Sub may reasonably require to consummate the transactions contemplated hereby. 11.3 Additional Covenants. For 10 years after Closing, CLLC shall maintain in good condition all presently existing files, books, records and documents of the Business, and shall make the same available to MDC, Old FAMC and MDC Sub or its designee upon their reasonable request. 11.4 Payments With Respect to Residual Fee Calculations. The parties hereby acknowledge that the Management Agreements contain provisions calling for adjustment of the fees previously paid under such agreements. To the extent (i) there has been, in addition to such adjustment provisions, an error in the amount paid to FAMC, Old FAMC and MDC Sub pursuant - 20 - to the Management Agreements, and (ii) any such provisions result in liability to a client of the Business attributable to any period prior to and including the Closing Date or payment by any such client of additional fees attributable to any period prior to and including the Closing Date, the parties agree that the annual net amount of any such errors, liabilities or fees shall be payable by Old FAMC and MDC Sub to CLLC (if liabilities exceed fees) within 10 days of receipt of notice from CLLC, or by CLLC to Old FAMC and MDC Sub (if fees exceed liabilities) in cash within 10 days after receipt by FAMC or CLLC. For purposes of this Section 11.4, unless any such fee adjustment can be attributed to a period prior to or after the Closing Date, such adjustment shall be prorated based on the number of days prior to and after the Closing Date that apply to such adjustment. CLLC covenants that it will pay to the appropriate client the amount of any liability arising from the contractual provisions described above which is actually paid by Old FAMC and MDC Sub to CLLC. CLLC agrees that any error identified and paid pursuant to this Section 11.4 shall not constitute a breach of any other provision of this Agreement. 11.5 Covenant Not to Compete. For a period of five (5) years from Closing, so long as no Event of Default (as defined in the Note) has occurred, none of MDC, Old FAMC, MDC Sub or any of their respective affiliates shall, directly or indirectly, (i) seek to manage AIC or CAI, (ii) manage or otherwise interfere with FAMC's bond administration business or (iii) solicit any employees of the Business who are retained by FAMC or CLLC after the Closing; provided, however that MDC may engage in the ownership, servicing, management and sale of collateralized mortgage obligations and related obligations owned by it as of the date hereof. 11.6 Space Lease. MDC shall make available to FAMC, on a month-to-month basis for a period of six (6) months from the Closing Date and on the same terms as are in effect on the date of this Agreement, the space that is used by FAMC in connection with the Business as of the date of this Agreement. ARTICLE 12. TERMINATION 12.1 Termination. This Agreement may be terminated at any time on or prior to the Closing Date: (a) With the mutual written consent of CLLC, MDC, Old FAMC and MDC Sub; (b) By written notice from MDC, Old FAMC, MDC Sub or CLLC to the other, if the Closing shall not have taken place on or before September 30, 1996; (c) By written notice from MDC, Old FAMC, MDC Sub or CLLC to the other, if any court of competent jurisdiction or other governmental body shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the - 21 - transactions contemplated hereby and such order, decree, ruling or other action shall have become final and nonappealable; (d) By written notice from CLLC to MDC, Old FAMC and MDC Sub if any of the conditions set forth in Article 9 hereof shall have become incapable of fulfillment; or (e) By written notice from MDC, Old FAMC and MDC Sub to CLLC if any of the conditions set forth in Article 10 hereof shall have become incapable of fulfillment; provided, however, that the party seeking termination pursuant to clause (b), (d) or (e) is not in breach of any of its representations, warrants, covenants or agreements contained in this Agreement. 12.2 Effect of Termination. If this Agreement is terminated pursuant to Section 12.1, all obligations of the parties hereunder, except for the obligations set forth in Sections 7.1, 11.1, 12.3 and 13.5, which shall survive the termination of this Agreement, shall terminate without liability of any party (or any stockholder, partner, affiliate, director, officer, employee, agent, consultant or representative of such party) to any other party, except as specifically provided in Section 12.3. 12.3 Termination Remedies. In the event of termination by MDC, Old FAMC, MDC Sub or CLLC pursuant to this Section 12, written notice thereof shall forthwith be given to the other party and the transactions contemplated by this Agreement shall be terminated, without further action by either party. If the transactions contemplated by this Agreement are not consummated as provided herein, Old FAMC and MDC Sub shall return the Deposit and the unused balance of the Expense Fund; provided, however, that Old FAMC and MDC Sub shall not be required to return the Deposit or the unused balance of the Expense Fund if MDC is ready, willing and able to close the transactions contemplated by this Agreement and CLLC fails to close the transactions contemplated by this Agreement notwithstanding that the conditions set forth in Article 9 have been satisfied or waived. Such termination shall not result in any liability to or by CLLC, MDC, Old FAMC and MDC Sub, and CLLC, MDC, Old FAMC and MDC Sub shall have no other rights or remedies against each other with respect to this Agreement or the transactions contemplated herein. ARTICLE 13. GENERAL 13.1 Entire Agreement. All Exhibits and Schedules hereto shall be deemed to be incorporated into and made part of this Agreement. This Agreement, together with the Exhibits and Schedules hereto, contains the entire agreement among the parties and there are no agreements, representations, or warranties by any of the parties hereto which are not set forth herein. This Agreement may not be amended or revised except by a writing signed by all parties hereto. - 22 - 13.2 Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, this Agreement and all rights hereunder may not be assigned by MDC, Old FAMC or MDC Sub except by prior written consent of CLLC, or by CLLC, except to an affiliate of CLLC or by prior written consent of MDC, Old FAMC or MDC Sub. 13.3 Separate Counterparts. This Agreement may be executed in several identical counterparts, all of which when taken together shall constitute but one instrument, and it shall not be necessary in any court of law to introduce more than one fully executed counterpart in proving this Agreement. 13.4 Representations and Warranties. The parties hereto acknowledge that MDC, Old FAMC or MDC Sub may have no actual knowledge as to the representations and warranties contained in Article 3 of this Agreement. The parties hereto agree that such representations and warranties, together with the indemnification provisions contained in Article 4, are intended to allocate risk and economic cost as between CLLC, on the one hand, and MDC, Old FAMC and MDC Sub, on the other hand, in the event such representations and warranties are breached. In no event, however, has either of MDC, Old FAMC or MDC Sub given any representation or warranty which it actually knows to be inaccurate. 13.5 Transaction Costs. Except as may be otherwise expressly set forth herein, each party to this Agreement shall be responsible for its own legal, accounting and other expenses, if any, attendant to the negotiation and drafting of this Agreement and to the transactions contemplated by this Agreement. 13.6 Notices. All notices hereunder shall be in writing and shall be delivered or mailed by registered or certified mail, postage and fees prepaid, to the party to be notified at the party's address shown below. Notices which are hand delivered shall be effective on delivery. Notices which are mailed shall be effective on the third day after mailing. (i) If to CLLC: FAM Acquisition LLC 1873 South Bellaire, Suite 1700 Denver, Colorado 80222 Attention: Terry Considine with a copy to (which shall not constitute notice): Gibson, Dunn & Crutcher LLP 1801 California Street, Suite 4100 Denver, Colorado 80202 Attention: Richard M. Russo, Esq. - 23 - (ii) If to MDC, OLD FAMC OR MDC SUB: M.D.C. Holdings, Inc. 3600 South Yosemite, Suite 900 Denver, Colorado 80237 Attention: General Counsel with a copy to (which shall not constitute notice): Parcel, Mauro, Hultin & Spaanstra, P.C. 1801 California Street, Suite 3600 Denver, Colorado 80202 Attention: Douglas R. Wright, Esq. unless and until notice of another or different address shall be given as provided herein. 13.7 Severability. The provisions of this Agreement are severable and the invalidity of any provision shall not affect the validity of any other provision. 13.8 Captions. The captions herein have been inserted solely for convenience of reference and in no way define, limit or describe the scope or substance of any provision of this Agreement. 13.9 Gender. All pronouns used herein shall include the masculine, feminine and neuter gender, as the context requires. 13.10 Governing Law. The execution, interpretation, and performance of this Agreement shall be governed by the laws of the State of Colorado which apply to contracts executed and performed solely in Colorado. The parties hereto hereby consent to the non-exclusive jurisdiction of any state or federal court located within the City and County of Denver. - 24 - IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. FAM ACQUISITION LLC By: ------------------------------- Name: ------------------------------- Title: ------------------------------- M.D.C. HOLDINGS, INC. By: ------------------------------- Name: Paris G. Reece III ------------------------------- Title: Senior Vice President ------------------------------- FINANCIAL ASSET MANAGEMENT CORPORATION By: ------------------------------- Name: Paris G. Reece III ------------------------------- Title: President ------------------------------- M.D.C. RESIDUAL HOLDINGS, INC. By: ------------------------------- Name: Paris G. Reece III ------------------------------- Title: President ------------------------------- - 25 - EX-10.2 3 AMENDMENT NO. 1 TO ACQUISITION AGREEMENT AMENDMENT NO. 1, dated as of September 30, 1996 (this "Amendment No. 1"), to the Acquisition Agreement, dated as of September 6, 1996 (the "Acquisition Agreement"), among FAM Acquisition LLC, FAMAQH BETA HOLDINGS LLC, M.D.C. Holdings, Inc., Financial Asset Management Corporation, and M.D.C. Residual Holdings, Inc. WHEREAS, the parties to the Acquisition Agreement desire to effect an amendment to the Acquisition Agreement as provided in this Amendment No. 1. NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. Capitalized terms used in this Amendment No. 1 and not otherwise defined shall have the meanings ascribed in the Acquisition Agreement, as amended by this Amendment No. 1. 2. The Acquisition Agreement is amended by adding FAMAQH BETA HOLDINGS LLC, a Colorado limited liability company, as a party thereto. 3. Clause (i) of the Preamble to the Acquisition Agreement is amended by deleting such clause in its entirety and replacing in its stead the following: (i) FAM Acquisition LLC, a Colorado limited liability company, and FAMAQH BETA HOLDINGS LLC, a Colorado limited liability company, having their principal place of business at 1873 South Bellaire, 17th Floor, Denver, Colorado 80222 (together, "CLLC");. 4. Section 1.1 to the Acquisition Agreement is amended by adding the following parenthetical to the end of Section 1.1: (with 99.5% of the Interests conveyed to FAM Acquisition LLC and 0.5% of the Interests conveyed to FAMAQH BETA HOLDINGS LLC). 5. Section 1.2 of the Acquisition Agreement is amended by deleting the following sentence: The purchase price for the Interests shall be Seven Million Dollars ($7,000,000) in cash plus the amount of the Note, as defined below (the "Purchase Price"). and replacing in its stead the following sentence: The purchase price for the Interests shall be Six Million Dollars ($6,000,000) in cash, plus the amount of the Notes, as defined below (the "Purchase Price"). 6. Section 1.2(c) of the Acquisition Agreement is further amended by deleting Subsection 1.2(c) in its entirety and replacing in its stead the following: (c) To Old FAMC and MDC Sub, cash in the amount of Five Million Seven Hundred Thousand Dollars ($5,700,000). 7. Section 1.3 of the Acquisition Agreement is amended by deleting such Section in its entirety and replacing in its stead the following: 1.3 Notes. At the Closing, FAM Acquisition LLC shall deliver to Old FAMC and MDC Sub the following: (a) one or more Secured, Senior-Subordinated, Convertible Promissory Notes in the aggregate principal amount of Four Million Four Hundred Fifty Thousand Dollars ($4,450,000) in the form attached hereto as Exhibit 1.3(a) (collectively, the "$4.45 Million Notes"), and (b) a Secured, Senior-Subordinated Promissory Note in the principal amount of One Million Dollars ($1,000,000), personally guaranteed by Mr. Terry Considine, in the form attached hereto as Exhibit 1.3(b) (the "$1.0 Million Note," and together with the $4.45 Million Notes, the "Notes"). 8. Section 7.4 of the Acquisition Agreement is amended by deleting the term "CLLC" from the second sentence thereof and replacing in its stead the term "FAM Acquisition LLC". 9. With respect to Section 9.4 of the Acquisition Agreement, CLLC hereby waives as a condition to Closing under Article 9 of the Acquisition Agreement receipt of the consents of (a) bond administration clients to the assignment of the bond administration contracts to FAMC and (b) licensors to the assignment of certain software licenses to FAMC; provided, however, (i) MDC, Old FAMC and MDC Sub agree to use their best efforts to obtain such consents as soon as practicable following Closing, (ii) MDC, Old FAMC and MDC Sub agree to pay to FAMC all amounts received with respect to services rendered under such contracts and amounts received with respect to such licenses after the Closing Date, and (iii) any Loss incurred by CLLC as a result of the failure to obtain such consents shall be subject to indemnification pursuant to Section 4.1; provided, however, that the One Hundred Thousand Dollar ($100,000.00) limitation on liability set forth in Section 4.1 shall not apply. - 2 - 10. Section 10.4 of the Acquisition Agreement is amended by deleting such Section in its entirety and replacing in its stead the following: 10.4 Authority of CLLC. All action required to be taken by or on the part of CLLC to authorize the execution, delivery and performance of this Agreement by CLLC and the consummation of the transactions contemplated hereunder shall have been duly and validly taken, and FAM Acquisition LLC shall have provided to MDC, Old FAMC, and MDC Sub copies of resolutions and consents of its General Manager evidencing such action, certified by a duly authorized member or manager of FAM Acquisition LLC. 11. Section 10.6 of the Acquisition Agreement is amended by deleting the phrase "the Asset Management Committee of" from the third line thereof. 12. Section 11.5 of the Acquisition Agreement is amended by deleting clause (i) thereof and replacing in its stead the following clause: "(i) seek to manage AIC or CAI or compete, directly or indirectly, with the businesses of AIC or CAI as they exist on the Closing Date,". 13. Section 11.6 of the Acquisition Agreement is amended by adding the following sentence at the end thereof: The lease shall be for Suite 350, 3600 South Yosemite, Denver, Colorado 80237, comprising approximately 5,199 square feet, at a rate of $12.75 per square foot. 14. Article 11 of the Acquisition Agreement is amended by adding the following Sections immediately after Section 11.6: 11.7 Transition Cooperation. For a period not to exceed the period of time MDC leases space to FAMC pursuant to Section 11.6, MDC, FAMC and CLLC shall cooperate with each other and provide to each other certain transition services (other than tax and legal services) as are reasonably acceptable to such parties, at rates and fees for such services as are reasonably acceptable to the parties. No party shall be liable to any other party in connection with the provision of such transition services. MDC, Old FAMC, MDC Sub and FAMC shall terminate the Services Agreement dated as of April 1, 1996. 11.8 Merger of FAMC. Immediately after the Closing, in accordance with the Colorado Limited Liability Company Act (and any other applicable state law), FAM Acquisition LLC shall be merged with and into FAMC, with FAMC as the surviving entity. As of the effective time of such - 3 - merger, the identity, existence, organization, purposes, powers, objects, franchises, privileges, rights, and immunities of FAM Acquisition LLC shall be merged with and into FAMC, and FAMC shall, as the surviving entity, (a) be fully vested therewith and (b) assume all of the liabilities and obligations of FAM Acquisition LLC. The separate existence and the organization of FAM Acquisition LLC, except insofar as they may continue by statute, shall cease as of the effective time of such merger. Notwithstanding any other provision of this Agreement to the contrary, such merger shall not constitute a breach of any representation, warranty, covenant, or agreement contained in this Agreement, or an Event of Default under any of the Notes. 15. The Acquisition Agreement is amended by deleting all other references to "Note" in the Acquisition Agreement, including the reference in Section 11.5, but excluding any references in Exhibit 1.3(a) and Exhibit 1.3(b) hereto, and replacing in its stead the term "Notes". 16. Exhibit 1.3 to the Acquisition Agreement is amended by deleting such Exhibit in its entirety and replacing in its stead Exhibit 1.3(a) and Exhibit 1.3(b) hereto. 17. Exhibit 3.5, Exhibit 3.8, and Exhibit 3.12 to the Acquisition Agreement are amended by deleting such Exhibits in their entirety and replacing in their stead Exhibit 3.5, Exhibit 3.8, and Exhibit 3.12 hereto. 18. Except as expressly set forth above, the provisions of the Acquisition Agreement shall remain in full force and effect. 19. All Exhibits hereto shall be deemed to be incorporated into and made part of this Amendment No. 1. This Amendment No. 1, together with the Acquisition Agreement and Exhibits and Schedules hereto and thereto, contains the entire agreement among the parties and there are no agreements, representations, or warranties by any of the parties hereto which are not set forth herein. 20. This Amendment No. 1 may be executed in several identical counterparts, all of which when taken together shall constitute but one instrument, and it shall not be necessary in any court of law to introduce more than one fully executed counterpart in proving this Amendment No. 1. 21. The provisions of this Amendment No. 1 are severable and the invalidity of any provision shall not affect the validity of any other provision. - 4 - 22. The execution, interpretation, and performance of this Amendment No. 1 shall be governed by the laws of the State of Colorado which apply to contracts executed and performed solely in Colorado. The remainder of this page is blank. - 5 - IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment No. 1 as of the date first above written. FAM ACQUISITION LLC By: Name: Terry Considine Title: General Manager FAMAQH BETA HOLDINGS LLC By: ------------------------- Name: Terry Considine Title: General Manager M.D.C. HOLDINGS, INC. By: ------------------------- Name: Title: FINANCIAL ASSET MANAGEMENT CORPORATION By: ------------------------- Name: Title: M.D.C. RESIDUAL HOLDINGS, INC. By: ------------------------- Name: Title: EX-10.3 4 CLOSING AGREEMENT This Closing Agreement is entered into as of the 30th day of September, 1996, between M.D.C. Holdings, Inc., a Delaware corporation (the "Company"), and Spencer I. Browne ("Browne"). RECITALS 1. The Company, MDC Sub, Old FAMC, FAMC and Browne entered into an Agreement dated as of April 1, 1996 (the "Agreement") pertaining to the formation of FAMC and the contribution of property and cash to FAMC in exchange for membership interests therein, the purchase by the Company from Browne of certain shares of Common Stock of the Company, and certain other matters. Unless otherwise defined or specified herein, capitalized terms have the meanings ascribed to such terms in the Agreement. 2. In connection with the Agreement, Browne entered into an Employment Agreement dated as of April 1, 1996 with the Company (the "Employment Agreement") pursuant to which Browne agreed to serve as President and Chief Executive Officer of FAMC. 3. Under the Agreement, the Company holds an option to purchase from Browne all of the FAMC Interest at the Put/Call Price upon a Change in Control (as defined in the Employment Agreement). 4. Effective as of September 6, 1996, FAM Acquisition LLC ("CLLC"), MDC, Old FAMC and MDC Sub entered into an Acquisition Agreement (the "Acquisition Agreement"). Pursuant to the Acquisition Agreement, Old FAMC and MDC Sub agreed, among other things, to convey to CLLC all of their equity interest in FAMC, and to cause FAMC to acquire Browne's 20% equity interest in FAMC pursuant to certain put/call provisions of the Agreement. 5. As of the date of this Agreement, a Change in Control of FAMC has occurred. As a result of the Change in Control, the Employment Agreement is terminated effective as of the date hereof (the "Termination Date"), and the parties desire to confirm the obligations of the Company to Browne and the rights of Browne under the Employment Agreement in connection with such termination. 6. The Company, in connection with the termination of Browne's employment under the Employment Agreement, has agreed to afford Browne the right to cause the Company to purchase from Browne 147,500 shares of the Company's common stock, $.01 par value ("Common Stock"), owned by Browne and, if permitted by the terms of the MDC Employees' 401(k) Plan (the "401(k) Plan") and applicable law, 5,681 shares of Common Stock held by or for the account of Browne in the 401(k) Plan (collectively, the "MDC Shares"). 7. The Company has agreed to afford Browne the right to cause the Company to acquire all of the options which, upon a Change in Control of FAMC, may be exercised into 500,000 shares of Common Stock to the extent not previously exercised by Browne (the "Options") held by him under the Company's Non-Qualified Stock Option Plan and Employee Equity Incentive Plan (the "Plans"), subject to the terms and conditions set forth herein. 8. The parties further desire to enter into certain additional agreements and to enter into mutual releases. AGREEMENT NOW, THEREFORE, the parties hereto agree as follows: 1. Closing. The closing of the transactions contemplated by thi Closing Agreement (the "Closing") shall take place on September 30, 1996 at 9:00 a.m. at the office of the Company on 3600 South Yosemite Street, Suite 900, Denver, Colorado 80237 (the "Closing Date"), or at such other date and time as may be agreed to by the parties. At the Closing: (a) Browne, at his option, may elect, by notice given to the Company at the Closing, to sell and the Company shall purchase, the MDC Shares at a purchase price per share equal to the average closing sale price of the Common Stock during the ten trading days ending on the trading day immediately preceding the Closing Date less $.25 per share (the "MDC Stock Purchase Price"). Payment for the MDC Shares shall be made against delivery of such shares on or before the close of business on the third business day following the Closing Date; (b) The Company shall pay Browne his Base Salary (as defined in Section 3(b) of the Employment Agreement) through the Termination Date; (c) The Company shall pay Browne a lump sum payment of $1,220,000 pursuant to Section 4(f)(i) of the Employment Agreement; (d) The Company shall pay Browne $5,000 in connection with tax planning and/or tax preparation services pursuant to Section 3(h)(ii) of the Employment Agreement; (e) The Company shall pay Browne $1,000 for an annual physical exam pursuant to Section 3(h)(iii) of the Employment Agreement; (f) The Company shall pay Browne $25,000, representing four weeks' vacation pay, in lieu of the four weeks' vacation allotted to Browne pursuant to Section 3(h)(vii) of the Employment Agreement; (g) The Company shall pay Browne all expense reimbursements through Termination to which Browne is entitled under Section 3(f) of the Employment Agreement net of unpaid expenses owed by Browne to the Company. If such amounts cannot be determined - 2 - finally by September 30, 1996, the expense reimbursement shall be paid to Browne within ten days after they are so determined; and (h) Browne will sell and MDC will cause FAMC to purchase Browne's 20% equity interest in FAMC in accordance with the terms of Sections 4(c) and 4(d) of the Agreement. The Note and Pledge Agreement shall be canceled and returned to Browne, FAMC will pay Browne $400,000 less accrued interest on the Note plus the estimated balance on the Put/Call Price, and final adjustments to the Put/Call Price will be paid to Browne by FAMC or paid by Browne to FAMC on or before November 30, 1996. 2. Continuation of Medical Insurance Benefits. From the Termination Date through September 30, 1998, the Company shall pay for and make available to Browne and his dependents medical insurance which provides coverage and benefits that are comparable to coverage that the Company provides as of the Termination Date; provided that such coverage is available and the cost of such coverage does not exceed the cost currently paid by the Company plus 20%. 3. Executive Officer Performance Based Compensation Plan Bonus. The Company shall pay Browne twenty-five percent (25%) of the amount of the bonus determined to be payable to a Covered Employee (as defined in the Company's Executive Officer Performance Based Compensation Plan) in accordance with such plan for the 1996 calendar year at such time as such bonus is paid to other Covered Employees, not later than April 1, 1997. 4. Annual Incentive Compensation. The Company shall pay Browne at the Closing an estimate of an amount equal to 15% of the Pre-Tax Net Income (as defined in Section 3(c) of the Employment Agreement) of FAMC for the period beginning on April 1, 1996 and ending on the Termination Date, with final adjustment of such amount to be paid to Browne by the Company, or paid by Browne to the Company, on or prior to November 30, 1996. 5. Pre-Tax Net Income. The Company shall pay Browne, as soon as practicable after the Closing and prior to October 31, 1996, an amount equal to ten percent (10%) of the Pre-Tax Net Income from the remaining CMO subsidiaries of the Company, earned from April 1, 1996 through the Termination Date. 6. Acquisition of Options. On or before October 31, 1996, Browne shall have the right to cause the Company to acquire all, but not less than all, of the Options. The acquisition price for such Options shall be equal to the difference between the MDC Stock Purchase Price and the exercise price of each Option. The Company shall pay the aggregate acquisition price to Browne on or before the close of business on the third business day following receipt by the Company of notice of Browne's election to cause the Company to acquire his Options pursuant to this paragraph, and Browne shall deliver to the Company an assignment or such other documents as the Company may require to evidence assignment and surrender of the Options. If Browne does not elect to exercise his right under this paragraph, the Options shall be deemed to be vested and his rights with respect to the Options shall continue to be governed by the plans and agreements with respect thereto. - 3 - 7. Withholding Requirements. All of the payments to Browne hereunder shall be net of applicable withholding taxes that are required by law to be withheld. 8. Indemnification. (a) The Company has indemnified and shall continue to indemnify Browne for and hold him harmless from any action, demand, claims, liabilities or damages and associated expenses (including attorneys' fees) arising out of or in connection with his conduct, acts or omissions in his capacity as an officer, director and/or employee of the Company, including its subsidiaries and affiliates, and any other entity for which Browne serves or has served in such capacity for the benefit of or at the request of the Company through the Termination Date, and shall advance or pay on a current basis defense expenses (including attorneys' fees and costs) reasonably incurred by Browne in connection with any such action, demand, claims, liabilities or damages, all to the fullest extent permitted by applicable law. (b) The Company shall continue to procure insurance policies which continue executive liability and indemnification insurance coverage for Browne to the same extent and providing limited liability, deductibles and exclusions as are provided for the Company's principal executive officers and outside directors. The covenants contained in this clause (b) shall continue in effect through September 30, 2003. 9. Turnover of Records. On or before October 31, 1996, Browne shall deliver to the Company all Company records, materials and information in his possession, custody or control (or which he has provided to his representatives), including all copies thereof, which relate to the business of the Company, FAMC, AIC or CAI, except copies of Forms 10-K, 10-Q, proxies, annual and quarterly reports to stockholders and other publicly available documents and reports filed with public agencies. In the event Browne locates or otherwise comes into possession of Company information on property after the date of this Agreement, he shall promptly deliver such information promptly. 10. Employment Agreement Covenants. The covenants of Browne contained in Section 5 of the Employment Agreement are incorporated herein by reference verbatim and shall survive termination of the Employment Agreement in accordance with the terms of this Closing Agreement. 11. Mutual Releases. At the Closing, the Company and Browne shall execute mutual releases in the forms attached to this Closing Agreement (the "Releases"). 12. Conditions to Post-Termination Payments. Payments to Browne of any amounts due him after the Closing Date in accordance with this Closing Agreement (including without limitation payments under Sections 3, 4 and 5 hereof) shall be subject to the condition that Browne is not in breach of (i) any of the provisions of this Closing Agreement or his Release. - 4 - 13. Representations and Warranties of the Company. The Company represents and warrants to Browne as follows: (a) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power to execute, carry out and perform the provisions of the transactions set forth in this Agreement and the Release; (b) The execution, delivery and performance by the Company of this Agreement and the Release have been duly authorized by the Company as evidenced by the execution of this Agreement and the Release by an officer of the Company; (c) Neither the execution, delivery, performance of, or compliance with, this Agreement and the Release will result in any breach or violation of, or be in conflict with or constitute a default under, any mortgage, indenture, contract, agreement, lease, instrument, judgment, decree, order, statute, rule, regulation or restriction by which the Company is bound or affected; (d) No consent, authorization, approval, permit, order of, or registration or filing by, the Company with any governmental or regulatory authority or any other person will be required in connection with the execution and delivery of this Agreement and the performance of the transactions contemplated hereby, except for routine filings or notifications with the United States Securities and Exchange Commission (the "Commission") and/or the New York Stock Exchange, Inc. and The Pacific Stock Exchange Incorporated; (e) No person, as a result of any action by the Company in connection with the transactions set forth in this Agreement, has or will have, to the best of the Company's knowledge, any right, interest or claim against or upon the Company or Browne for any commission, fee or any other compensation as a finder or broker or for acting in any similar capacity; (f) The Company, as the issuer of the MDC Shares and the Options, has available to it all information which it deems necessary and advisable in connection with its decision to purchase the MDC Shares and the Options and has no intention of disposing of the MDC Shares or the Options except in accordance with applicable law; (g) The Company has not omitted to disclose to Browne or misrepresented to Browne any material fact known to its senior management relating to its purchase of the MDC Shares or the Options or the transactions contemplated by this Agreement; and (h) The Company has no reason to believe that any of the representations and warranties of Browne herein are inaccurate. - 5 - 14. Representations and Warranties of Browne. Browne represents and warrants to the Company as follows: (a) Browne has all requisite power and authority to enter into this Agreement and the Release to sell the MDC Shares and the Options; (b) This Agreement and the Release have been duly executed and delivered by Browne; (c) Neither the execution, delivery, performance of, or compliance with, this Agreement or the Release will result in any breach or violation of, or be in conflict with or constitute a default under, any mortgage, indenture, contract, agreement, lease, instrument, judgment, decree, order, statute, rule, regulation or restriction by which Browne is bound or affected; (d) No consent, authorization, approval, permit, order of, or registration or filing by Browne with any governmental regulatory authority or any other person who is or will be required in connection with the execution and delivery of this Agreement or the Release, or the sale to the Company of the MDC Shares or the Options except for routine filings with the commission and/or the New York Stock Exchange, Inc. and the Pacific Stock Exchange Incorporated; (e) At the time of sale to the Company of the MDC Shares and the Options, Browne will have good and marketable title to the MDC Shares and the Options which are sold, free and clear of any liens, charges, encumbrances or claims of any nature whatsoever, and upon consummation of the transactions referenced in Section 1(a) or 6, the Company shall receive good and marketable title to the MDC Shares or Options, as the case may be, free and clear of any liens, charges, encumbrances or claims of any nature whatsoever; (f) No person, as a result of any action by Browne, in connection with the transactions set forth in this Agreement, has or will have, to the best of Browne's knowledge, any right, interest or claim against or upon the Company for any commission, fee or other compensation as a finder or broker, or for acting in any similar capacity; (g) By reason of Browne's employment relationship with the Company and its affiliates and his experience in financial and business matters in general, he is capable of evaluating the transactions regarding the MDC Shares and the Options contemplated hereby; (h) If Browne elects to sell the MDC Shares or the Options, Browne acknowledges that he has been furnished with all information relating to the Company and its prospects as he has requested, and has had the opportunity to ask all questions and receive all answers as he has requested; (i) If Browne elects to sell the MDC Shares or the Options, Browne acknowledges that he has been afforded access to all documents, books, accounts and records - 6 - relating to the Company and has performed all investigations, which he has deemed necessary and advisable in connection with his decision to elect whether to sell to the Company the MDC Shares and the Options; (j) Browne has not omitted to disclose or misrepresented any material fact known to him relating to his sale of the MDC Shares and the Options; and (k) Browne has no reason to believe that any of the representations and warranties of the Company herein are inaccurate. 15. Survival. The respective representations, warranties and agreements of the parties contained in this Closing Agreement shall survive the Closing and shall remain in full force and effect until September 30, 1998; provided that (a) the agreements of the Company contained in Section 8(a) shall survive indefinitely and (b) the agreements of the Company contained in Section 8(b) shall survive until September 30, 2003. 16. Miscellaneous. (a) This Closing Agreement and the attached Releases supersede all prior agreements and understandings between the parties with respect to the subject matter hereof, including the Employment Agreement, except as otherwise specifically set forth herein and except for Browne's notes and pledge agreements delivered to the Company in connection with the Company's Executive Option Purchase Program, which notes and pledge agreements shall remain in full force and effect; and (b) No modification, termination or attempted waiver shall be valid unless in writing signed by the party against whom the same is sought to be enforced. 17. Notices. Any notice, consent or other communication made given in connection with this Closing Agreement shall be in writing and shall be deemed to have been duly given when delivery by hand or by United States registered or certified mail, return receipt requested, to the parties at the following addresses or at such other address as a party may specify by notice to the other. TO BROWNE: Spencer I. Browne 1660 Holly Street Denver, CO 80220 TO THE COMPANY: M.D.C. Holdings, Inc. 3600 South Yosemite Street, Suite 900 - 7 - Denver, Colorado 80237 Attention: General Counsel 18. Governing Law. This Closing Agreement shall be governed by and construed according to the laws of the State of Colorado. Any controversy or claim arising out of or relating to this Agreement or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association in accordance with the Commercial Arbitration Rules, and judgment on the award rendered by the Arbitrator may be entered in any court having jurisdiction thereof. All parties expressly agree that costs and attorneys' fees related to any such arbitration shall be awarded to the prevailing party. Any arbitration commenced pursuant to this paragraph shall be conducted in the Denver metropolitan area, State of Colorado. 19. Captions and Paragraph Headings. Captions and paragraph headings used herein are for the convenience of the parties, are not a part of this Closing Agreement and shall not be used in construing it. 20. Gender; Plural. Where necessary or appropriate the meaning thereof, the use of the singular and plural shall be deemed to include each other, and the use of any gender shall be deemed to include any other gender where appropriate to the meaning hereof. IN WITNESS WHEREOF the parties have executed this Closing Agreement on the day and year first set forth above. M.D.C. HOLDINGS, INC. By: ------------------------------- Michael Touff, Vice President ------------------------------- Spencer I. Browne - 8 - EX-27 5
5 This schedule contains summary financial information extracted from MDC Holdings, Inc. consolidated financial statements included in its Form 10-Q for the quarter ended September 30, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 17,543 5,076 16,228 0 458,683 0 9,505 0 627,375 0 278,481 0 0 227 208,597 627,375 644,339 670,329 (626,356) (647,556) 0 0 (3,364) 22,773 (8,314) 14,459 0 (421) 0 14,038 .73 .66
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