-----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, DOj4aZ1nXmESlbpLId1VxUt4TLU23+14j1zjFcymAJLHnu19+h+z6Kyu5zg8iMRN Vv73drVY/bd1DM1Vksy0Og== 0000773141-97-000005.txt : 19970808 0000773141-97-000005.hdr.sgml : 19970808 ACCESSION NUMBER: 0000773141-97-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970807 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: 97653326 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 ST 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 June 30, 1997 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-8951 M.D.C. HOLDINGS, INC. (Exact name of Registrant as specified in its charter) Delaware 84-0622967 (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification no.) 3600 South Yosemite Street, Suite 900 80237 Denver, Colorado (Zip code) (Address of principal executive offices) (303) 773-1100 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of August 1, 1997, 17,591,000 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 JUNE 30, 1997 INDEX Page No. Part I. Financial Information: Item 1. Condensed Consolidated Financial Statements: Balance Sheets as of June 30, 1997 (Unaudited) and December 31, 1996......................... 1 Statements of Income (Unaudited) for the three and six months ended June 30, 1997 and 1996... 3 Statements of Cash Flows (Unaudited) for the six months ended June 30, 1997 and 1996....... 4 Notes to Financial Statements (Unaudited)...... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 15 Part II. Other Information: Item 1. Legal Proceedings.............................. 26 Item 4. Submission of Matters to a Vote of Shareowners. 26 Item 5. Other Information.............................. 26 Item 6. Exhibits and Reports on Form 8-K............... 26 (i)
M.D.C. HOLDINGS, INC. Condensed Consolidated Balance Sheets (In thousands) June 30, December 31, 1997 1996 ----------- ------------ ASSETS (Unaudited) Corporate Cash and cash equivalents...................... $ 6,892 $ 7,235 Property and equipment, net.................... 9,445 9,411 Deferred income taxes.......................... 9,762 10,804 Deferred debt issue costs, net................. 7,221 9,155 Other assets, net.............................. 2,799 3,557 ---------- ----------- 36,119 40,162 ---------- ----------- Homebuilding Cash and cash equivalents...................... 3,746 3,393 Home sales and other accounts receivable....... 18,567 10,218 Investments and marketable securities, net..... 4,020 5,159 Inventories, net Housing completed or under construction...... 271,362 251,885 Land and land under development.............. 181,003 182,927 Prepaid expenses and other assets, net......... 56,642 57,722 ---------- ----------- 535,340 511,304 ---------- ----------- Financial Services Cash and cash equivalents...................... 825 676 Accrued interest and other assets, net......... 5,538 6,419 Mortgage loans held in inventory, net.......... 57,935 58,742 ---------- ----------- 64,298 65,837 ---------- ----------- Total Assets............................. $ 635,757 $ 617,303 ========== ===========
See notes to condensed consolidated financial statements. -1-
M.D.C. HOLDINGS, INC. Condensed Consolidated Balance Sheets (In thousands, except share amounts) June 30, December 31, 1997 1996 ----------- ------------ LIABILITIES (Unaudited) Corporate Accounts payable and accrued expenses.......... $ 11,504 $ 13,519 Income taxes payable........................... 9,069 11,434 Note payable................................... 3,460 3,487 Senior Notes, net.............................. 150,262 187,721 Subordinated notes, net........................ 38,227 38,225 ----------- ----------- 212,522 254,386 ---------- ----------- Homebuilding Accounts payable and accrued expenses.......... 107,873 114,794 Line of credit................................. 70,576 11,832 Notes payable.................................. 2,926 3,063 ----------- ----------- 181,375 129,689 ---------- ----------- Financial Services Accounts payable and accrued expenses.......... 9,322 10,363 Line of credit................................. 18,404 9,018 ----------- ----------- 27,726 19,381 Total Liabilities........................ 421,623 403,456 ----------- ----------- COMMITMENTS AND CONTINGENCIES..................... - - - - ----------- ----------- STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 25,000,000 shares authorized; none issued................ - - - - Common Stock, $.01 par value; 100,000,000 shares authorized; 23,394,000 and 23,050,000 shares issued, respectively, at June 30, 1997 and December 31, 1996........................ 234 231 Additional paid-in capital..................... 141,218 138,705 Retained earnings.............................. 112,249 106,189 ----------- ----------- 253,701 245,125 Less treasury stock, at cost; 5,903,000 and 4,966,000 shares, respectively, at June 30, 1997 and December 31, 1996.......... (39,567) (31,278) ----------- ----------- Total Stockholders' Equity............... 214,134 213,847 ----------- ----------- Total Liabilities and Stockholders' Equity $ 635,757 $ 617,303 =========== ===========
See notes to condensed consolidated financial statements. -2-
M.D.C. HOLDINGS, INC. Condensed Consolidated Statements of Income (In thousands, except per share amounts) (Unaudited) Three Months Six Months Ended June 30, Ended June 30, 1997 1996 1997 1996 ----------- ----------- ----------- ----------- REVENUES Homebuilding..................... $ 233,542 $ 230,329 $ 422,691 $ 421,605 Financial Services............... 3,449 6,950 7,680 14,688 Corporate........................ 294 497 733 729 ----------- ----------- ----------- ----------- Total Revenues............... 237,285 237,776 431,104 437,022 ----------- ----------- ----------- ----------- COSTS AND EXPENSES Homebuilding...................... 223,704 223,286 405,398 408,528 Financial Services................ 2,045 3,348 4,396 6,090 Corporate general and administrative................... 3,254 2,980 6,500 5,581 Corporate and homebuilding interest......................... - - 1,027 761 2,878 ----------- ----------- ----------- ----------- Total Expenses................ 229,003 230,641 417,055 423,077 ----------- ----------- ----------- ----------- Income before income taxes and extraordinary item................. 8,282 7,135 14,049 13,945 Provision for income taxes........... (3,148) (2,603) (5,329) (5,089) ----------- ----------- ----------- ----------- Income before extraordinary item..... 5,134 4,532 8,720 8,856 Extraordinary losses from early extinguishments of debt, net of income tax benefit of $1,336 for 1997 and $242 for 1996............. - - (421) (2,179) (421) ----------- ----------- ----------- ----------- Net Income........................... $ 5,134 $ 4,111 $ 6,541 $ 8,435 =========== =========== =========== =========== EARNINGS PER SHARE Primary Income before extraordinary item. $ .29 $ .23 $ .48 $ .45 =========== =========== =========== =========== Net Income....................... $ .29 $ .21 $ .36 $ .43 =========== =========== =========== =========== Fully diluted Income before extraordinary item. $ .26 $ .21 $ .44 $ .42 =========== =========== =========== =========== Net Income....................... $ .26 $ .20 $ .34 $ .40 =========== =========== =========== =========== WEIGHTED-AVERAGE SHARES OUTSTANDING Primary............................ 17,970 19,365 18,226 19,612 =========== =========== =========== =========== Fully diluted...................... 21,614 22,978 21,850 23,225 =========== =========== =========== =========== DIVIDENDS PER SHARE................... $ .03 $ .03 $ .06 $ .06 =========== =========== =========== ===========
See notes to condensed consolidated financial statements. -3-
M.D.C. HOLDINGS, INC. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Six months Ended June 30, 1997 1996 ----------- ----------- OPERATING ACTIVITIES Net Income................................... $ 6,541 $ 8,435 Adjustments To Reconcile Net Income To Net Cash Provided By (Used In) Operating Activities: Depreciation and amortization.......... 6,536 5,744 Homebuilding asset impairment charges.. 2,350 2,870 Deferred income taxes.................. 1,042 4,779 Gains on sales of mortgage-related assets............................... (55) (1,007) Net changes in assets and liabilities Home sales and other accounts receivable....................... (8,349) 3,282 Homebuilding inventories........... (19,216) (13,723) Mortgage loans held in inventory... 807 2,465 Other assets and liabilities, net.. (13,454) (4,631) ----------- ----------- Net Cash Provided By (Used In) Operating Activities................................. (23,798) 8,214 ----------- ----------- INVESTING ACTIVITIES Net Proceeds From Mortgage-Related Assets and Liabilities............................ 1,558 1,991 Other, net................................... (152) 1,843 ----------- ----------- Net Cash Provided By Investing Activities.... 1,406 3,834 ----------- ----------- FINANCING ACTIVITIES Lines of Credit Advances............................... 495,186 487,062 Principal payments..................... (427,056) (482,023) Notes Payable Borrowings............................. 98 480 Principal payments..................... (38,164) (10,071) Stock Repurchases............................ (7,349) (5,016) Dividend Payments............................ (1,072) (1,141) Other, net................................... 908 1,434 ----------- ----------- Net Cash Provided By (Used In) Financing Activities................................. 22,551 (9,275) ----------- ----------- Net Increase In Cash and Cash Equivalents.... 159 2,773 Cash and Cash Equivalents Beginning of Period..................... 11,304 20,795 ----------- ----------- End of Period........................... $ 11,463 $ 23,568 =========== ===========
See notes to condensed consolidated financial statements. -4- M.D.C. HOLDINGS, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) A. Presentation of Financial Statements The condensed consolidated financial statements of M.D.C. Holdings, Inc. ("MDC" or the "Company," which, unless otherwise indicated, refers to M.D.C. Holdings, Inc. and its subsidiaries) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These statements reflect all adjustments (including all normal recurring accruals) which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC as of June 30, 1997 and for all of the periods presented. These statements are condensed and do not include all of the information required by generally accepted accounting principles in a full set of financial statements. These statements should be read in conjunction with MDC's financial statements and notes thereto included in MDC's Annual Report on Form 10-K for its fiscal year ended December 31, 1996. Certain reclassifications have been made in the 1996 financial statements to conform to the classifications used in the current year. B. Information on Business Segments The Company operates in two business segments: homebuilding and financial services. A summary of the Company's segment information is shown below (in thousands).
Three Months Six Months Ended June 30, Ended June 30, 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Homebuilding Home sales......................... $ 229,769 $ 229,006 $ 416,954 $ 415,029 Land sales......................... 3,555 1,087 5,245 6,246 Other revenues..................... 218 236 492 330 ----------- ----------- ----------- ----------- 233,542 230,329 422,691 421,605 ----------- ----------- ----------- ----------- Home cost of sales................. 196,224 198,102 355,947 358,918 Land cost of sales................. 3,132 1,023 4,455 5,955 Asset impairment charges........... 1,100 2,870 2,350 2,870 Marketing.......................... 15,585 14,265 28,100 26,247 General and administrative......... 7,663 7,026 14,546 14,538 ----------- ----------- ----------- ----------- 223,704 223,286 405,398 408,528 ----------- ----------- ----------- ----------- Homebuilding Operating Profit.. 9,838 7,043 17,293 13,077 ----------- ----------- ----------- -----------
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Three Months Six Months Ended June 30, Ended June 30, 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Financial Services Mortgage Lending Revenues Interest revenues.................. $ 279 $ 869 $ 946 $ 1,674 Origination fees................... 1,554 1,570 3,016 2,959 Gains on sales of mortgage servicing 213 1,531 551 4,153 Gains on sales of mortgage loans, net.............................. 1,177 1,151 2,492 1,693 Mortgage servicing and other....... 151 522 279 908 Asset Management Revenues Management fees and other.......... 75 1,307 396 3,301 ----------- ----------- ----------- ----------- 3,449 6,950 7,680 14,688 ----------- ----------- ----------- ----------- General and Administrative Expenses Mortgage Lending................... 2,033 2,499 4,369 4,621 Asset Management................... 12 849 27 1,469 ----------- ----------- ----------- ----------- 2,045 3,348 4,396 6,090 ----------- ----------- ----------- ----------- Financial Services Operating Profit....................... 1,404 3,602 3,284 8,598 ----------- ----------- ----------- ----------- Total Operating Profit................. 11,242 10,645 20,577 21,675 ----------- ----------- ----------- ----------- Corporate Interest and other revenues........ 294 497 733 729 Interest expense................... - - (1,027) (761) (2,878) General and administrative......... (3,254) (2,980) (6,500) (5,581) ----------- ----------- ----------- ----------- Net Corporate Expenses......... (2,960) (3,510) (6,528) (7,730) ----------- ----------- ----------- ----------- Income Before Income Taxes and Extraordinary Item................... $ 8,282 $ 7,135 $ 14,049 $ 13,945 =========== =========== =========== ===========
C. Corporate and Homebuilding Interest Activity (in thousands)
Three Months Six Months Ended June 30, Ended June 30, 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Interest capitalized in homebuilding inventory, beginning of period....... $ 41,162 $ 40,342 $ 40,745 $ 40,217 Interest incurred....................... 6,579 7,605 13,503 15,379 Interest expensed....................... - - (1,027) (761) (2,878) Previously capitalized interest included in cost of sales..................... (7,082) (7,081) (12,828) (12,879) ----------- ----------- ----------- ----------- Interest capitalized in homebuilding inventory, end of period............. $ 40,659 $ 39,839 $ 40,659 $ 39,839 =========== =========== =========== ===========
-6- D. Stockholders' Equity On February 26, 1997, the Company repurchased 838,000 shares of MDC Common Stock at $8.77 per share, including commissions, completing a program authorized by the MDC Board of Directors in October 1996 to repurchase up to 1,000,000 shares of MDC Common Stock. E. Extraordinary Item On March 31, 1997, the Company repurchased $38,000,000 principal amount of its 11 1/8% Senior Notes due 2003 (the "Senior Notes") for $39,520,000. The Company recognized an extraordinary loss of $2,179,000, net of an income tax benefit of $1,336,000, due to the repurchase of the Senior Notes at a price which exceeded their carrying value and the write-off of related unamortized issuance costs. The Company recognized an extraordinary loss of $421,000, net of an income tax benefit of $242,000, during the three and six months ended June 30, 1996, due to the write-off of unamortized discounts and deferred financing costs in connection with the April 1996 retirement of certain secured bank lines of credit and project loans with proceeds from the Company's unsecured revolving line of credit. -7- F. Earnings Per Share Primary earnings per share are based on the weighted-average number of common and common equivalent shares outstanding during each period. The computation of fully diluted earnings per share also assumes the conversion into Common Stock of all of the $28,000,000 outstanding principal amount of the 8 3/4% Convertible Subordinated Notes due December 2005 (the "Convertible Subordinated Notes") at a conversion price of $7.75 per share. The primary and fully diluted earnings per share calculations are shown below (in thousands, except per share amounts).
Three Months Six Months Ended June 30, Ended June 30, 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Primary Calculation Income before extraordinary item................... $ 5,134 $ 4,532 $ 8,720 $ 8,856 Extraordinary loss, net............................ - - (421) (2,179) (421) ----------- ----------- ----------- ----------- Net Income................................ $ 5,134 $ 4,111 $ 6,541 $ 8,435 =========== =========== =========== =========== Weighted-average shares outstanding................ 17,463 18,831 17,671 19,055 Common Stock equivalents - stock options........... 507 534 555 557 ----------- ----------- ----------- ----------- Total Weighted-Average Shares............. 17,970 19,365 18,226 19,612 =========== =========== =========== =========== Primary Earnings Per Share Income before extraordinary item.......... $ .29 $ .23 $ .48 $ .45 =========== =========== =========== =========== Net Income................................ $ .29 $ .21 $ .36 $ .43 =========== =========== =========== =========== Fully Diluted Calculation Income before extraordinary item................... $ 5,134 $ 4,532 $ 8,720 $ 8,856 Adjustment for interest on Convertible Subordinated Notes, net of income tax benefit; conversion assumed............................... 394 402 787 804 ----------- ----------- ----------- ----------- Adjusted income before extraordinary item. 5,528 4,934 9,507 9,660 Extraordinary loss, net............................ - - (421) (2,179) (421) ----------- ----------- ----------- ----------- Adjusted Net Income....................... $ 5,528 $ 4,513 $ 7,328 $ 9,239 =========== =========== =========== =========== Weighted-average shares outstanding................ 17,463 18,831 17,671 19,055 Common Stock equivalents - stock options........... 538 534 566 557 Shares issuable upon conversion of Convertible Subordinated Notes; conversion assumed........... 3,613 3,613 3,613 3,613 ----------- ----------- ----------- ----------- Total Weighted-Average Shares............. 21,614 22,978 21,850 23,225 =========== =========== =========== =========== Fully Diluted Earnings Per Share Income before extraordinary item.......... $ .26 $ .21 $ .44 $ .42 =========== =========== =========== =========== Net Income................................ $ .26 $ .20 $ .34 $ .40 =========== =========== =========== ===========
In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). The Company's adoption of SFAS 128, which is required on December 31, 1997, will result in the restatement of the Company's primary earnings per share calculations to "basic" earnings per share. Basic earnings per share, based on income before extraordinary item, would have been $.29 and $.24 for the second quarter of 1997 and 1996, respectively, and $.49 and $.46 for the first half of 1997 and 1996, respectively. Basic earnings per share, based on net income, would have been $.29 and $.22 for the second quarter of 1997 and 1996, -8- respectively, and $.37 and $.44 for the first half of 1997 and 1996, respectively. SFAS 128 also will require the presentation of "diluted" earnings per share, which is computed similarly to fully diluted earnings per share. Diluted earnings per share would have been unchanged from fully diluted earnings per share for the second quarter and first half of 1997 and 1996. G. Supplemental Disclosure of Cash Flow Information (in thousands)
Six Months Ended June 30, 1997 1996 ----------- ----------- Cash paid during the period for: Interest, net of amounts capitalized...................... $ 3,159 $ 5,481 Income taxes.............................................. $ 4,656 $ 3,836 Non-cash transactions: Homebuilding land inventory sales financed by MDC......... $ 538 $ 206 Homebuilding inventory purchases financed by seller....... $ - - $ 5,858
H. Supplemental Guarantor Information The Senior Notes are guaranteed unconditionally on an unsecured subordinated basis, jointly and severally (the "Guaranties"), by Richmond American Homes of California, Inc., Richmond American Homes of Maryland, Inc., Richmond American Homes of Nevada, Inc., Richmond American Homes of Virginia, Inc., Richmond American Homes of Arizona, Inc. and Richmond American Homes of Colorado, Inc. (collectively, the "Guarantors"). The Guaranties are subordinated to all Guarantor Senior Indebtedness (as defined in the Senior Notes Indenture). Supplemental combining financial information follows. -9-
M.D.C. Holdings, Inc. Supplemental Combining Balance Sheet June 30, 1997 (In thousands) Unconsolidated Non- Guarantor Guarantor Eliminating Consolidated ASSETS MDC Subsidiaries Subsidiaries Entries MDC ----------- ----------- ----------- ----------- ----------- Corporate Cash and cash equivalents............... $ 6,892 $ - - $ - - $ - - $ 6,892 Investments in subsidiaries............. 183,581 - - 17,422 (201,003) - - Advances and notes receivable - Parent and subsidiaries...................... 207,280 35 6,895 (214,210) - - Other assets............................ 29,091 - - 136 - - 29,227 ----------- ----------- ----------- ----------- ----------- 426,844 35 24,453 (415,213) 36,119 ----------- ----------- ----------- ----------- ----------- Homebuilding Cash and cash equivalents............... - - 3,713 33 - - 3,746 Inventories, net Housing completed or under construction 73 271,289 - - - - 271,362 Land and land under development....... - - 160,477 21,317 (791) 181,003 Other assets............................ 6,310 66,127 21,602 (14,810) 79,229 ----------- ----------- ----------- ----------- ----------- 6,383 501,606 42,952 (15,601) 535,340 ----------- ----------- ----------- ----------- ----------- Financial Services......................... - - - - 64,298 - - 64,298 ----------- ----------- ----------- ----------- ----------- Total Assets...................... $ 433,227 $ 501,641 $ 131,703 $ (430,814) $ 635,757 =========== =========== =========== =========== =========== LIABILITIES Corporate Accounts payable and accrued expenses... $ 11,123 $ - - $ 381 $ - - $ 11,504 Advances and notes payable - Parent and subsidiaries.......................... 3,211 191,107 27,912 (222,230) - - Income taxes payable.................... 9,069 - - - - - - 9,069 Note payable............................ 3,460 - - - - - - 3,460 Senior Notes, net....................... 150,262 - - - - - - 150,262 Subordinated notes, net................. 38,227 - - - - - - 38,227 ----------- ----------- ----------- ------------ ----------- 215,352 191,107 28,293 (222,230) 212,522 ----------- ----------- ----------- ------------ ----------- Homebuilding Accounts payable and accrued expenses... 3,741 82,442 21,690 - - 107,873 Line of credit and notes payable........ - - 73,502 - - - - 73,502 ----------- ----------- ----------- ------------ ----------- 3,741 155,944 21,690 - - 181,375 ----------- ----------- ----------- ------------ ----------- Financial Services......................... - - - - 41,996 (14,270) 27,726 ----------- ----------- ----------- ------------ ----------- Total Liabilities................. 219,093 347,051 91,979 (236,500) 421,623 ----------- ----------- ----------- ------------ ----------- STOCKHOLDERS' EQUITY....................... 214,134 154,590 39,724 (194,314) 214,134 ----------- ----------- ----------- ------------ ----------- Total Liabilities and Stockholders' Equity............ $ 433,227 $ 501,641 $ 131,703 $ (430,814) $ 635,757 =========== =========== =========== ============ ===========
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M.D.C. Holdings, Inc. Supplemental Combining Balance Sheet December 31, 1996 (In thousands) Unconsolidated Non- Guarantor Guarantor Eliminating Consolidated ASSETS MDC Subsidiaries Subsidiaries Entries MDC ----------- ----------- ----------- ------------ ----------- Corporate Cash and cash equivalents............... $ 7,235 $ - - $ - - $ - - $ 7,235 Investments in subsidiaries............. 219,387 - - 17,434 (236,821) - - Advances and notes receivable - Parent and subsidiaries...................... 207,946 4 787 (208,737) - - Other assets............................ 32,780 - - 147 - - 32,927 ------------ ------------ ------------ ------------ ------------ 467,348 4 18,368 (445,558) 40,162 ------------ ------------ ------------ ------------ ------------ Homebuilding Cash and cash equivalents............... 1 3,391 1 - - 3,393 Inventories, net Housing completed or under construction - - 251,885 - - - - 251,885 Land and land under development......................... - - 159,871 24,031 (975) 182,927 Other assets ........................... 7,582 48,737 20,775 (3,995) 73,099 ------------ ------------ ------------ ------------ ------------ 7,583 463,884 44,807 (4,970) 511,304 ------------ ------------ ------------ ------------ ------------ Financial Services......................... - - - - 65,837 - - 65,837 ------------ ------------ ------------ ------------ ------------ Total Assets...................... $ 474,931 $ 463,888 $ 129,012 $ (450,528) $ 617,303 ============ ============ ============ ============= ============ LIABILITIES Corporate Accounts payable and accrued expenses... $ 13,086 $ - - $ 433 $ - - $ 13,519 Advances and notes payable - Parent and subsidiaries...................... 2,085 197,448 36,119 (235,652) - - Income taxes payable.................... 11,434 - - - - - - 11,434 Note payable............................ 3,487 - - - - - - 3,487 Senior Notes, net....................... 187,721 - - - - - - 187,721 Subordinated notes, net................. 38,225 - - - - - - 38,225 ------------ ------------ ------------ ------------ ------------ 256,038 197,448 36,552 (235,652) 254,386 ------------ ------------ ------------ ------------ ------------ Homebuilding Accounts payable and accrued expenses... 5,046 88,240 21,508 - - 114,794 Lines of credit and notes payable....... - - 14,895 - - - - 14,895 ------------ ------------ ------------ ------------ ------------ 5,046 103,135 21,508 - - 129,689 ------------ ------------ ------------ ------------ ------------ Financial Services......................... - - - - 23,376 (3,995) 19,381 ------------ ------------ ------------ ------------ ------------ Total Liabilities................. 261,084 300,583 81,436 (239,647) 403,456 ------------ ------------ ------------ ------------ ------------ STOCKHOLDERS' EQUITY....................... 213,847 163,305 47,576 (210,881) 213,847 ------------ ------------ ------------ ------------ ------------ Total Liabilities and Stockholders' Equity............ $ 474,931 $ 463,888 $ 129,012 $ (450,528) $ 617,303 ============ ============ ============ ============= ============
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M.D.C. Holdings, Inc. Supplemental Combining Statements of Income (In thousands) Three Months Ended June 30, 1997 Unconsolidated Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ----------- ----------- ----------- ----------- ----------- REVENUES Homebuilding............................. $ 65 $ 233,098 $ 379 $ - - $ 233,542 Financial Services....................... - - - - 3,449 - - 3,449 Corporate................................ 278 3 13 - - 294 Equity in earnings of subsidiaries....... 6,137 - - - - (6,137) - - ----------- ----------- ----------- ----------- ----------- Total Revenues..................... 6,480 233,101 3,841 (6,137) 237,285 ----------- ----------- ----------- ----------- ----------- COSTS AND EXPENSES Homebuilding............................. 30 223,225 373 76 223,704 Financial Services....................... - - - - 2,045 - - 2,045 Corporate general and administrative..... 3,246 - - 8 - - 3,254 Corporate and homebuilding interest..... (5,037) 4,386 596 55 - - ----------- ----------- ----------- ----------- ----------- Total Expenses...................... (1,761) 227,611 3,022 131 229,003 ----------- ----------- ----------- ----------- ----------- Income before income taxes............... 8,241 5,490 819 (6,268) 8,282 Provision for income taxes............... (3,109) (2,472) (295) 2,728 (3,148) ----------- ----------- ----------- ----------- ----------- NET INCOME.................................. $ 5,132 $ 3,018 $ 524 $ (3,540) $ 5,134 =========== =========== =========== =========== =========== Three Months Ended June 30, 1996 REVENUES Homebuilding............................. $ 64 $ 230,256 $ 9 $ - - $ 230,329 Financial Services....................... - - - - 6,950 - - 6,950 Corporate................................ 488 7 2 - - 497 Equity in earnings of subsidiaries....... 5,404 - - - - (5,404) - - ----------- ----------- ----------- ----------- ----------- Total Revenues..................... 5,956 230,263 6,961 (5,404) 237,776 ----------- ----------- ----------- ----------- ----------- COSTS AND EXPENSES Homebuilding............................. 30 223,085 96 75 223,286 Financial Services....................... - - - - 3,348 - - 3,348 Corporate general and administrative..... 2,972 - - 8 - - 2,980 Corporate and homebuilding interest..... (4,181) 4,527 642 39 1,027 ----------- ----------- ----------- ----------- ----------- Total Expenses...................... (1,179) 227,612 4,094 114 230,641 ----------- ----------- ----------- ----------- ----------- Income before income taxes and extraordinary item..................... 7,135 2,651 2,867 (5,518) 7,135 Provision for income taxes............... (2,603) (968) (1,192) 2,160 (2,603) ----------- ----------- ----------- ----------- ----------- Income before extraordinary item......... 4,532 1,683 1,675 (3,358) 4,532 Extraordinary loss, net of income tax benefit of $242....................... (421) - - - - - - (421) ----------- ----------- ----------- ----------- ----------- NET INCOME.................................. $ 4,111 $ 1,683 $ 1,675 $ (3,358) $ 4,111 =========== =========== =========== =========== ===========
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M.D.C. Holdings, Inc. Supplemental Combining Statements of Income (In thousands) Six Months Ended June 30, 1997 Unconsolidated Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ----------- ----------- ----------- ----------- ----------- REVENUES Homebuilding.............................. $ 107 $ 422,065 $ 519 $ - - $ 422,691 Financial Services........................ - - - - 7,680 - - 7,680 Corporate................................. 519 3 211 - - 733 Equity in earnings of subsidiaries........ 10,021 - - - - (10,021) - - ----------- ----------- ----------- ----------- ----------- Total Revenues...................... 10,647 422,068 8,410 (10,021) 431,104 ----------- ----------- ----------- ----------- ----------- COSTS AND EXPENSES Homebuilding.............................. 87 404,523 637 151 405,398 Financial Services........................ - - - - 4,396 - - 4,396 Corporate general and administrative...... 6,492 - - 8 - - 6,500 Corporate and homebuilding interest....... (9,940) 9,339 1,242 120 761 ----------- ----------- ----------- ----------- ----------- Total Expenses...................... (3,361) 413,862 6,283 271 417,055 ----------- ----------- ----------- ----------- ----------- Income before income taxes and extraordinary item.................................... 14,008 8,206 2,127 (10,292) 14,049 Provision for income taxes................ (5,290) (3,506) (751) 4,218 (5,329) ----------- ----------- ----------- ----------- ----------- Income before extraordinary item.......... 8,718 4,700 1,376 (6,074) 8,720 Extraordinary loss, net of income tax benefit of $1,336....................... (2,179) - - - - - - (2,179) ----------- ----------- ----------- ----------- ----------- NET INCOME................................... $ 6,539 $ 4,700 $ 1,376 $ (6,074) $ 6,541 =========== =========== =========== =========== =========== Six Months Ended June 30, 1996 REVENUES Homebuilding.............................. $ 143 $ 421,450 $ 12 $ - - $ 421,605 Financial Services........................ - - - - 14,688 - - 14,688 Corporate................................. 705 13 11 - - 729 Equity in earnings of subsidiaries........ 10,995 - - - - (10,995) - - ----------- ----------- ----------- ----------- ----------- Total Revenues...................... 11,843 421,463 14,711 (10,995) 437,022 ----------- ----------- ----------- ----------- ----------- COSTS AND EXPENSES Homebuilding.............................. 448 407,666 264 150 408,528 Financial Services........................ - - - - 6,090 - - 6,090 Corporate general and administrative...... 5,566 - - 15 - - 5,581 Corporate and homebuilding interest....... (8,116) 9,575 1,345 74 2,878 ----------- ----------- ----------- ----------- ----------- Total Expenses...................... (2,102) 417,241 7,714 224 423,077 ----------- ----------- ----------- ----------- ----------- Income before income taxes and extraordinary item.................................... 13,945 4,222 6,997 (11,219) 13,945 Provision for income taxes................ (5,089) (1,594) (2,870) 4,464 (5,089) ----------- ----------- ----------- ----------- ----------- Income before extraordinary item.......... 8,856 2,628 4,127 (6,755) 8,856 Extraordinary loss, net of income tax benefit of $242......................... (421) - - - - - - (421) ----------- ----------- ----------- ----------- ----------- NET INCOME................................... $ 8,435 $ 2,628 $ 4,127 $ (6,755) $ 8,435 =========== =========== =========== =========== ===========
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M.D.C. Holdings, Inc. Supplemental Combining Statement of Cash Flows (In thousands) Six Months Ended June 30, 1997 Unconsolidated Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ----------- ----------- ----------- ----------- ----------- Net Cash Provided By (Used In) Operating Activities............................... $ 42,874 $ (51,427) $ 3,650 $ (18,895) $ (23,798) ----------- ----------- ----------- ----------- ----------- Net Cash Provided By (Used In) Investing Activities............................... 1,097 (484) (4,680) 5,473 1,406 ----------- ----------- ----------- ----------- ----------- Financing Activities Net Increase (Reduction) in Borrowings From Parent and Subsidiaries.................. 1,126 (6,341) (8,207) 13,422 - - Lines of Credit Advances............................... - - 485,800 9,386 - - 495,186 Principal payments..................... - - (427,056) - - - - (427,056) Notes Payable............................... (37,929) (137) - - - - (38,066) Other, net.................................. (7,513) - - - - - - (7,513) ----------- ----------- ----------- ----------- ----------- Net Cash Provided By (Used In) Financing Activities............................... (44,316) 52,266 1,179 13,422 22,551 ----------- ----------- ----------- ----------- ----------- Net Increase (Decrease) In Cash And Cash Equivalents.............................. (345) 355 149 - - 159 Cash And Cash Equivalents Beginning Of Period...................... 7,236 3,391 677 - - 11,304 ----------- ----------- ----------- ----------- ----------- End Of Period............................ $ 6,891 $ 3,746 $ 826 $ - - $ 11,463 =========== =========== =========== =========== =========== Six Months Ended June 30, 1996 Net Cash Provided By (Used In) Operating Activities............................... $ 105,651 $ (12,791) $ 4,214 $ (88,860) $ 8,214 ----------- ----------- ----------- ----------- ----------- Net Cash Provided By (Used In) Investing Activities............................... (9,198) 958 (1,017) 13,091 3,834 ----------- ----------- ----------- ----------- ----------- Financing Activities Net Increase (Reduction) in Borrowings From Parent and Subsidiaries.................. (84,016) 210 8,037 75,769 - - Lines of Credit Advances............................... - - 487,062 - - - - 487,062 Principal payments..................... - - (473,052) (8,971) - - (482,023) Other, net.................................. (8,281) (2,284) (3,749) - - (14,314) ----------- ----------- ----------- ----------- ----------- Net Cash Provided By (Used In) Financing Activities............................... (92,297) 11,936 (4,683) 75,769 (9,275) ----------- ----------- ----------- ----------- ----------- Net Increase (Decrease) In Cash And Cash Equivalents.............................. 4,156 103 (1,486) - - 2,773 Cash And Cash Equivalents Beginning Of Period...................... 10,296 5,054 5,445 - - 20,795 ----------- ----------- ----------- ----------- ----------- End Of Period............................ $ 14,452 $ 5,157 $ 3,959 $ - - $ 23,568 =========== =========== =========== =========== ===========
-14- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. INTRODUCTION MDC is a major regional homebuilder and is the ninth largest homebuilder in the United States. The Company operates in two segments: homebuilding and financial services. In its homebuilding segment, MDC builds and sells homes under the name "Richmond American Homes" in (i) metropolitan Denver and Colorado Springs, Colorado; (ii) Northern Virginia and Suburban Maryland (the "Mid-Atlantic"); (iii) Northern and Southern California; (iv) Phoenix and Tucson, Arizona; and (v) Las Vegas, Nevada. In its financial services segment, (i) HomeAmerican Mortgage Corporation (a wholly owned subsidiary of M.D.C. Holdings, Inc. "HomeAmerican") provides mortgage loans primarily to the Company's home buyers (the mortgage lending operations); and (ii) through September 30, 1996, Financial Asset Management LLC (a former indirect subsidiary of M.D.C. Holdings, Inc., "FAMC") managed, by contract, the operations of two publicly traded real estate investment trusts (each, a "REIT") (the asset management operations). RESULTS OF OPERATIONS The table below summarizes MDC's results of operations (in thousands, except per share amounts).
Three Months Six Months Ended June 30, Ended June 30, 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Revenues................ $ 237,285 $ 237,776 $ 431,104 $ 437,022 Income before income taxes and extraordinary item.................. $ 8,282 $ 7,135 $ 14,049 $ 13,945 Net Income.............. $ 5,134 $ 4,111 $ 6,541 $ 8,435 Earnings Per Share: Primary Income before extraordinary item. $ .29 $ .23 $ .48 $ .45 Net Income.......... $ .29 $ .21 $ .36 $ .43 Fully Diluted Income before extraordinary item. $ .26 $ .21 $ .44 $ .42 Net Income.......... $ .26 $ .20 $ .34 $ .40
Income before income taxes and extraordinary item increased in the second quarter and first half of 1997, compared with the same periods in 1996. These increases resulted from (i) higher operating profits from the Company's homebuilding operations in the second quarter and first half of 1997, primarily due to a 110 basis point increase in the Company's Home Gross Margins (as hereinafter defined); and (ii) decreased interest expense. These improvements to income in 1997 partially were offset by lower operating profits from the Company's financial services segment, primarily due to (i) net increases to income in the second quarter and first half of 1996 totalling approximately $1,600,000 and $3,400,000, respectively, which will not recur as a result of the September 1996 sale of FAMC and a -15- required change in accounting principle regarding mortgage loans and mortgage loan servicing rights; and (ii) lower gains from sales of mortgage-related assets in the second quarter and first half of 1997. Net income for the first half of 1997 included an extraordinary loss of $2,179,000, net of an income tax benefit of $1,336,000, recognized in connection with the Company's repurchase of $38,000,000 face value (20% of the outstanding amount) of its Senior Notes. The loss resulted from the repurchase of the Senior Notes above their carrying value and the write-off of related unamortized issuance costs. Net income for the three and six months ended June 30, 1996 included an extraordinary loss of $421,000, net of an income tax benefit of $242,000, due to the write-off of unamortized discounts and deferred financing costs in connection with the cancellation of secured lines of credit and project loans. -16- Homebuilding Segment The tables below set forth information relating to the Company's homebuilding segment (dollars in thousands).
Three Months Six Months Ended June 30, Ended June 30, ------------------------- --------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ------------ Home Sales Revenues......................... $ 229,769 $ 229,006 $ 416,954 $ 415,029 Operating Profits Before Asset Impairment Charges................................... $ 10,938 $ 9,913 $ 19,643 $ 15,947 Operating Profits........................... $ 9,838 $ 7,043 $ 17,293 $ 13,077 Average Selling Price Per Home Closed..... $ 178.9 $ 176.7 $ 177.0 $ 176.8 Home Gross Margins.......................... 14.6% 13.5% 14.6% 13.5% Orders For Homes, net (units) Colorado............................. 502 410 1,075 1,078 Mid-Atlantic......................... 289 225 616 652 California........................... 259 200 493 449 Arizona.............................. 300 280 615 606 Nevada............................... 151 70 230 121 ----------- ----------- ----------- ----------- Total........................... 1,501 1,185 3,029 2,906 =========== =========== =========== =========== Homes Closed (units) Colorado............................. 399 498 790 935 Mid-Atlantic......................... 307 238 504 395 California........................... 198 208 373 403 Arizona.............................. 283 287 510 503 Nevada............................... 97 65 179 111 ----------- ----------- ----------- ----------- Total........................... 1,284 1,296 2,356 2,347 =========== =========== =========== =========== June 30, December 31, June 30, 1997 1996 1996 ----------- ------------ -------- Backlog (units) Colorado............................. 861 576 801 Mid-Atlantic......................... 533 421 532 California........................... 280 160 221 Arizona.............................. 336 231 337 Nevada............................... 149 98 79 ----------- ----------- ----------- Total........................... 2,159 1,486 1,970 =========== =========== =========== Estimated Sales Value........... $ 392,000 $ 261,000 $ 349,000 =========== =========== =========== Active Subdivisions Colorado............................. 53 51 48 Mid-Atlantic......................... 51 53 49 California........................... 14 20 20 Arizona.............................. 23 23 24 Nevada............................... 9 5 3 ----------- ----------- ----------- Total........................... 150 152 144 =========== =========== ===========
-17- Home Sales Revenues and Homes Closed - Home sales revenues in the second quarter and first half of 1997 were (i) higher than home sales revenues for the same periods in 1996, notwithstanding approximately the same levels of total home closings, primarily due to increases in the average selling price per home closed (as discussed below); and (ii) the highest for all comparable periods in the Company's history, marking the fourth consecutive year of record first half home sales revenues. Home closings increased in the second quarter and first half of 1997, compared with the same periods in 1996, (i) by 49% and 61%, respectively, in Nevada, where the Company has increased the number of active subdivisions to nine from two at the beginning of 1996; (ii) by 29% and 28%, respectively, in the Mid-Atlantic market, due to a Backlog (as hereinafter defined) level at the beginning of 1997 that was more than 50% greater than Backlog at the beginning of 1996, as well as weather-related delays in the completion and delivery of homes during the first half of 1996; and (iii) by 14% in Southern California, resulting from the Company's increased operations in that market. Home closings decreased in the second quarter and first half of 1997, compared with the same periods in 1996, (i) in Colorado, due to lower levels of Backlog at the beginning of each of the 1997 periods compared with Backlog at comparable dates in 1996; and (ii) in Northern California, where the Company has reduced the number of active subdivisions to two from 13 at the beginning of 1996 in connection with the Company's continued reduction of its presence in the Sacramento market. Average Selling Price Per Home Closed - The higher average selling prices per home closed in the second quarter and first half of 1997, compared with the same periods in 1996, resulted from increases in average selling prices in Colorado and California, principally due to the impact of closing a greater number of homes in higher-priced subdivisions during the 1997 periods. These increases partially were offset by lower average selling prices in the second quarter and first half of 1997 in the Mid-Atlantic region, Arizona and Nevada, reflecting the impact of the Company's continuing emphasis on offering lower-priced, more affordable homes primarily marketed to the first-time move-up home buyers in these markets. Home Gross Margins - Gross margins (home sales revenues less cost of goods sold, which primarily includes land and construction costs, capitalized interest, a reserve for warranty expense and financing costs) as a percent of home sales revenues ("Home Gross Margins") increased by 110 basis points during the second quarter and first half of 1997, compared with the second quarter and first half of 1996. The increases largely were due to (i) initiatives implemented in each of the Company's markets designed to improve operating efficiency, control costs and increase rates of return; (ii) the favorable impact of a large number of home closings in certain highly profitable subdivisions, particularly in Phoenix and Southern California; (iii) in Nevada, the completion of several underperforming subdivisions during the second half of 1996, the closing of homes in four new higher-margin subdivisions in the first half of 1997; and (iv) the receipt of a $783,000 refund of school impact fees in Colorado that were previously included in cost of sales. Orders for Homes and Backlog - Orders for homes in the second quarter and first half of 1997 reached ten-year highs, increasing 27% and 4%, respectively, over the comparable periods in 1996. These increases primarily were due to comparatively strong home orders experienced in the second quarter of 1997 in all of the Company's regions except Northern California in response to an improving national economy stimulated by decreasing mortgage interest rates, low unemployment and high levels of consumer confidence. Second quarter 1997 home orders particularly were strong in (i) Nevada and Southern California, which increased 116% and 52%, respectively, as a result of the Company's continuing expansion in those markets; (ii) the Mid-Atlantic region, which increased 28%, primarily due -18- to the Company's efforts to reduce the level of unsold homes under construction in that market; and (iii) Colorado, which increased 22%. The Company's home orders in July 1997 increased 25% to 447 units, compared with 357 home orders in July 1996. The Company is unable to predict if higher year-over-year home orders in 1997, compared with 1996, will continue in the future. See "Forward-Looking Statements" below. As a result of the increased orders for homes in the second quarter of 1997, the Company's homes under contract but not yet delivered ("Backlog") at June 30, 1997 increased 10% from June 30, 1996, to the highest June 30 level in more than ten years. Assuming no significant change in market conditions or mortgage interest rates, the Company expects approximately 70% of its June 30, 1997 Backlog to close under existing sales contracts during the remainder of 1997. The remaining 30% of the homes in Backlog are not expected to close due to cancellations. See "Forward-Looking Statements" below. Marketing - Marketing expenses (which include, among other things, amortization of deferred marketing costs, model home and advertising expenses and sales commissions) totalled $15,585,000 and $28,100,000, respectively, for the second quarter and first half of 1997, compared with $14,265,000 and $26,247,000, respectively, for the same periods in 1996. The increases in 1997 primarily resulted from (i) additional advertising and model home expenses incurred to stimulate sales in response to market conditions and increased competition in Colorado, Arizona and the Mid-Atlantic; and (ii) cost increases incurred in connection with the Company's expanded operations in Southern California and Nevada. General and Administrative - General and administrative expenses totalled $7,663,000 and $14,546,000, respectively, during the second quarter and first half of 1997, compared with $7,026,000 and $14,538,000, respectively, for the same periods in 1996. The 9% increase in the second quarter of 1997, compared with the same period in 1996, primarily was due to increased administrative costs incurred in support of the Company's expanded operations in Southern California and Phoenix. Asset Impairment Charges Operating results during the second quarter and first half of 1997 were reduced by asset impairment charges totalling $1,100,000 and $2,350,000, respectively, related to certain of the Company's homebuilding assets in the Mid-Atlantic region, primarily in suburban Maryland, as a result of continued weakened market conditions and competitive pressures in that market. The asset impairment charges resulted from (i) the recognition of losses anticipated from the closing of certain homes in Backlog and from the offering of increased incentives to stimulate sales of certain completed unsold homes in inventory; and (ii) the write-off of certain capitalized costs, primarily deferred marketing and option deposits, related to a number of underperforming projects which are being closed out. While intending to maintain its market share in the Mid-Atlantic region, the Company has continued to eliminate lower-margin projects and redeploy capital to more profitable operations within and outside that market, including California, Arizona and Nevada. -19- Land Inventory The table below shows the carrying value of land and land under development, by market, as well as the total number of lots owned, lots controlled under option agreements and total option deposits (dollars in thousands).
June 30, December 31, June 30, 1997 1996 1996 ----------- ----------- ----------- Colorado................................ $ 61,683 $ 66,529 $ 61,725 Mid-Atlantic............................ 45,805 46,124 49,377 California.............................. 22,255 23,733 34,767 Arizona................................. 36,323 32,129 28,176 Nevada.................................. 14,937 14,412 10,564 ----------- ----------- ----------- Total.............................. $ 181,003 $ 182,927 $ 184,609 =========== =========== =========== Total Lots Owned........................ 10,043 10,523 9,833 =========== =========== =========== Total Lots Controlled Under Option...... 5,642 6,698 8,388 =========== =========== =========== Total Option Deposits................... $ 5,538 $ 5,951 $ 7,382 =========== =========== ===========
Financial Services Segment Mortgage Lending Operations The tables below set forth information relating to HomeAmerican's operations (dollars in thousands).
Three Months Six Months Ended June 30, Ended June 30, 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Gains on Sales of Mortgage Servicing........ $ 213 $ 1,531 $ 551 $ 4,153 Gains on Sales of Mortgage Loans, net....... $ 1,177 $ 1,151 $ 2,492 $ 1,693 Operating Profits........................... $ 1,341 $ 3,144 $ 2,915 $ 6,766 Principal Amount of Originations and Purchases MDC home buyers.......................... $ 124,916 $ 124,082 $ 232,250 $ 223,483 Spot..................................... 7,643 12,443 14,563 25,776 Correspondent............................ 15,164 15,545 30,607 26,512 ----------- ----------- ----------- ----------- Total.............................. $ 147,723 $ 152,070 $ 277,420 $ 275,771 =========== =========== =========== =========== Capture Rate................................ 66% 66% 67% 66% =========== =========== =========== ===========
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June 30, December 31, June 30, 1997 1996 1996 ------------ ------------ ------------ Composition of Servicing Portfolio FHA insured/VA guaranteed...................... $ 147,204 $ 117,681 $ 129,066 Conventional................................... 317,742 277,217 338,656 ------------ ------------ ------------ Total Servicing Portfolio......................... $ 464,946 $ 394,898 $ 467,722 ============ ============ ============ Salable Portion of Servicing Portfolio............ $ 368,132(1) $ 292,428$ 260,925 ============ ============ ============ Substantially all originated subsequent to the adoption of SFAS 122 (as hereinafter defined). Included servicing originated prior to 1996 of approximately $65,000,000.
HomeAmerican's operating profits for the second quarter and first half of 1997 decreased, compared with the same periods in 1996, primarily due to decreases in gains from sales of mortgage servicing which, for the first half of 1997, partially were offset by an increase in gains from sales of mortgage loans. These differences principally resulted from sales of mortgage loans and mortgage loan servicing in the second quarter and first half of 1996 which were originated prior to the Company's required adoption, on January 1, 1996, of Statement of Accounting Standards No. 122 "Accounting for Mortgage Servicing Rights an Amendment of FASB Statement No. 65" ("SFAS 122"), which was superseded by SFAS 125 (as hereinafter defined) on January 1, 1997. SFAS 125 requires the Company to allocate the costs of mortgage loans originated by HomeAmerican between the mortgage loans and the right to service the mortgage loans, based on their relative values. For mortgage loans originated by HomeAmerican prior to 1996, the costs of such loans were assigned to the mortgage loans, with no costs assigned to the servicing rights. Assuming that all other factors remain unchanged, SFAS 125 results in higher gains (or lower losses) on sales of mortgage loans originated by HomeAmerican after January 1, 1996 and, correspondingly, lower gains on sales of the related servicing rights, compared with gains or losses on sales of mortgage loans and related servicing rights originated by HomeAmerican prior to January 1, 1996. Similar to the first two quarters of 1997, gains from sales of mortgage servicing in the third quarter of 1997 will be significantly lower than during the comparable period in 1996, as the Company sold its pre-1996 servicing portfolio throughout the first three quarters of 1996. Because the Company sold substantially all of its remaining pre-1996 mortgage loans during the first quarter of 1996, the comparability of gains (or losses) on mortgage loan sales in the second quarter of 1997 was not, and in future quarters will not be, impacted by the application of SFAS 125. See "Forward-Looking Statements" below. Forward Sales Commitments - HomeAmerican's operations are affected by, among other things, changes in mortgage interest rates. HomeAmerican utilizes forward mortgage securities contracts to manage the interest rate risk on its fixed-rate mortgage loans owned and rate-locked mortgage loans in the pipeline. Such contracts are the only significant financial derivative instrument utilized by MDC. -21- Asset Management Operations The following table summarizes the results of the asset management operations (in thousands).
Three Months Six Months Ended June 30, Ended June 30, 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Gains (Losses) on Sales of Mortgage-Related Assets...................................... $ (43) $ 72 $ 55 $ 1,007 Management Fees from REITs.................... $ - - $ 802 $ - - $ 1,598 Operating Profits............................. $ 63 $ 458 $ 369 $ 1,832
Due to the sale of FAMC in September 1996 and the fact that the Company does not anticipate making additional mortgage-related investments, future operating results of the asset management operations are expected to be immaterial. See "Forward-Looking Statements" below. Other Operating Results Interest Expense - The Company capitalizes interest on its homebuilding inventories during the period of active development and through the completion of construction. Corporate and homebuilding interest incurred which is not capitalized is reflected as interest expense and totalled $761,000 for the first half of 1997, compared with $2,878,000 for the same period in 1996. During the second quarter of 1997, the Company capitalized all interest incurred, thereby resulting in no interest expense for such period, compared with $1,027,000 of interest expense in the second quarter of 1996. Corporate and homebuilding interest incurred decreased by more than 12% to $6,579,000 and $13,503,000, respectively, for the second quarter and first half of 1997, compared with $7,605,000 and $15,379,000, respectively, for the same periods in 1996, primarily due to (i) lower average outstanding borrowings during the first half of 1997, compared with the first half of 1996, as a result of reduced homebuilding inventories and the increased use of internally generated funds; and (ii) lower average effective interest rates with respect to the Company's variable-rate debt in 1997. For a reconciliation of interest incurred, capitalized and expensed, see Note C to the Company's Condensed Consolidated Financial Statements. Corporate General and Administrative Expenses - Corporate general and administrative expenses totalled $3,254,000 and $6,500,000, respectively, during the second quarter and first half of 1997, compared with $2,980,000 and $5,581,000, respectively, for the same periods of 1996. The increase in the first half of 1997 primarily resulted from an insurance settlement of $1,250,000 received in the first half of 1996 related to the recovery of certain homebuilding expenditures that were previously expensed, which more than offset the favorable impact of reduced debt-related fixed charges, insurance costs and legal expenses in the first half of 1997. The Company is modifying its computer systems to accurately process information including the year 2000 date and beyond (the "Year 2000 Project"). Pursuant to current accounting rules, the cost of the Year 2000 Project must be expensed as incurred. Management believes that these costs, expected to be incurred over the next 18 months, will not have a material adverse effect to the Company's results of operations or financial position. See "Forward-Looking Statements" below. -22- Income Taxes - M.D.C. Holdings, Inc. and its wholly owned subsidiaries file a consolidated federal income tax return (an "MDC Consolidated Return"). Richmond American Homes of Colorado, Inc. (formerly Richmond Homes, Inc. I) and its wholly owned subsidiaries filed a separate consolidated federal income tax return (each a "Richmond Homes Consolidated Return") from its inception (December 28, 1989) through February 2, 1994, the date Richmond American Homes of Colorado, Inc. became a wholly owned subsidiary of MDC. In June 1997, the Company and the Internal Revenue Service (the "IRS") reached final agreement on the examinations of the MDC Consolidated Returns for the years 1986 through 1990. In July 1997, the Company and the IRS reached final agreement on the examinations of the Richmond Homes Consolidated Returns for the years 1991 through 1993. These agreements resulted in no material impact to the Company's financial position or results of operations. The IRS currently is examining the MDC Consolidated Returns for the years 1991 through 1995 and the Richmond Homes Consolidated Return for the period ended February 2, 1994. No audit reports have been issued by the IRS in connection with these examinations. In the opinion of management, adequate provision has been made for additional income taxes and interest, if any, which may result from these examinations; however, it is reasonably possible that the ultimate resolution could result in amounts which differ materially in the near term from amounts provided. See "Forward-Looking Statements" below. LIQUIDITY AND CAPITAL RESOURCES MDC uses its liquidity and capital resources to, among other things, (i) support its operations, including its inventories of homes, home sites and land; (ii) provide working capital; and (iii) provide mortgage loans for its home buyers. Liquidity and capital resources are generated internally from operations and from external sources. Capital Resources The Company's capital structure is a combination of (i) permanent financing, represented by Stockholders' Equity; (ii) long-term financing, represented by publicly traded Senior Notes and subordinated notes due primarily in 2003 and 2005, respectively; and (iii) current financing, primarily lines of credit, as discussed below. The Company believes that its current financial condition is both balanced to fit its current operating structure and adequate to satisfy its current and near-term capital requirements. See "Forward-Looking Statements" below. MDC anticipates acquiring finished lots and partially developed land for use in its future homebuilding operations during the remainder of 1997. The Company currently intends to acquire a portion of the land inventories required in future periods through takedowns of lots subject to option contracts entered into in prior periods and under new option contracts. The use of option contracts lessens the Company's land-related risk and improves liquidity. Because of increased demand for partially developed and finished lots in certain of the markets where the Company builds homes, the Company's ability to acquire lots using option contracts has been reduced or has become more expensive. See "Forward-Looking Statements" below. The Company anticipates that it has adequate financial resources to satisfy its current and near-term capital requirements based on its current capital resources and additional liquidity available under existing credit agreements. The Company believes that it can meet its long-term capital needs -23- (including, among other things, meeting future debt payments and refinancing or paying off other long-term debt as it becomes due) from operations and external financing sources, assuming that no significant adverse changes in the Company's business occur as a result of the various risk factors described elsewhere herein, in particular, increases in interest rates. See "Forward-Looking Statements" below. Lines of Credit and Notes Payable Homebuilding - In March 1997, the Company modified its agreement with a group of banks for its unsecured revolving line of credit. Under the modified terms, the available borrowings have been increased to $175,000,000 from $150,000,000, and the maturity date of the agreement has been extended for one year to June 30, 2001, although a term-out of this credit may commence earlier under certain circumstances. At June 30, 1997, $70,576,000 was borrowed under this line of credit. Mortgage Lending - To provide funds to originate and purchase mortgage loans and to finance these mortgage loans on a short-term basis, HomeAmerican utilizes its mortgage lending bank line of credit (the "Mortgage Line"). These mortgage loans are normally sold within 25 to 60 days after origination. During the first half of 1997 and 1996, HomeAmerican sold $279,000,000 and $277,788,000, respectively, principal amount of mortgage loans and mortgage certificates. Available borrowings under the Mortgage Line are collateralized by mortgage loans and mortgage-backed certificates and are limited to the value of eligible collateral, as defined. The aggregate amount available under the Mortgage Line at June 30, 1997 was $51,000,000. At June 30, 1997, $18,404,000 was borrowed and an additional $17,533,000 was collateralized and available to be borrowed. The Mortgage Line is cancelable upon 90 days notice. General - The agreements for the Company's Senior Notes, subordinated notes and bank lines of credit require compliance with certain representations, warranties and covenants. The Company believes that it is in compliance with these representations, warranties and covenants. Consolidated Cash Flow During the first six months of 1997, the Company used $7,349,000 and $39,520,000 of cash to repurchase 838,000 shares of MDC Common Stock and $38,000,000 of Senior Notes, respectively. The Company also used $23,798,000 of cash in its operating activities. The Company financed these activities primarily with internally generated funds and line of credit borrowings. During the first half of 1996, the Company generated $8,214,000 in cash from its operating activities. The Company used this cash and other internally generated funds to (i) pay down lines of credit and notes payable by $4,552,000; and (ii) repurchase 703,000 shares of MDC Common Stock for $5,016,000. ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS In June 1996, the FASB issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS -24- 125"). The Company's adoption of SFAS 125 on January 1, 1997 did not have a material adverse impact on the results of operations or financial condition of the Company. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). The Company's adoption of SFAS 128, which is required on December 31, 1997, will result in the restatement of the Company's primary earnings per share calculations to "basic" earnings per share. Basic earnings per share, based on income before extraordinary item, would have been $.29 and $.24 for the second quarter of 1997 and 1996, respectively, and $.49 and $.46 for the first half of 1997 and 1996, respectively. Basic earnings per share, based on net income, would have been $.29 and $.22 for the second quarter of 1997 and 1996, respectively, and $.37 and $.44 for the first half of 1997 and 1996, respectively. SFAS 128 also will require the presentation of "diluted" earnings per share, which is computed similarly to fully diluted earnings per share. Diluted earnings per share would have been unchanged from fully diluted earnings per share for the second quarter and first half of 1997 and 1996. OTHER Forward-Looking Statements Certain statements in this Quarterly Report on Form 10-Q, as well as statements made by the Company in periodic press releases, oral statements made by the Company's officials to analysts and shareowners in the course of presentations about the Company and conference calls following quarterly earnings releases, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, (i) general economic and business conditions; (ii) interest rate changes; (iii) competition; (iv) the availability and cost of land and other raw materials used by the Company in its homebuilding operations; (v) demographic changes; (vi) shortages and the cost of labor; (vii) weather-related slowdowns; (viii) slow growth initiatives; (ix) building moratoria; (x) governmental regulation, including the interpretation of tax, labor and environmental laws; (xi) changes in consumer confidence; (xii) required accounting changes; and (xiii) other factors over which the Company has little or no control. -25- M.D.C. HOLDINGS, INC. FORM 10-Q PART II ITEM 1. LEGAL PROCEEDINGS. The Company and certain of its subsidiaries and affiliates have been named as defendants in various claims, complaints and other legal actions arising in the normal course of business. In the opinion of management, the outcome of these matters will not have a material adverse effect upon the financial condition, results of operations or cash flows of the Company. Because of the nature of the homebuilding business, and in the ordinary course of its operations, the Company from time to time may be subject to product liability claims, including claims for damages as a result of expansive soils. The Company is not aware of any litigation, matter or pending claim against the Company which would result in material contingent liabilities related to environmental hazards or asbestos. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREOWNERS. No matters were submitted to shareowners during the second quarter of 1997. ITEM 5. OTHER INFORMATION. The Company's 1997 Proxy Statement and notes to the financial statements in its Annual Report on Form 10-K for the fiscal year ended December 31, 1996 disclosed that, during 1996, the Company paid $11,489,000 for plumbing, door and millwork services provided by companies owned by two former employees of the Company, one of whom is the brother-in-law of a current officer and director of the Company. The actual amount paid in 1996 to these companies for these services was $3,586,000. In addition, it was disclosed that total fees in 1996 for advertising and marketing design services paid to a marketing and communications firm owned by the brother-in-law of an officer and director of the Company were $305,000. The actual amount paid to this firm in 1996 was $499,000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibit: 27 Financial Data Schedule. -26- (b) Reports on Form 8-K: No Current Reports on Form 8-K were filed by the Registrant during the period covered by this Quarterly Report on Form 10-Q. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 7, 1997 M.D.C. HOLDINGS, INC. -------------- (Registrant) By: /s/ Paris G. Reece III -------------------------- Paris G. Reece III, Senior Vice President, Chief Financial Officer and Principal Accounting Officer -27- EX-27 2
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 June 30, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 11,463 4,020 18,567 0 452,365 0 9,445 0 635,757 0 283,855 0 0 234 213,900 635,757 422,691 431,104 405,398 417,055 0 0 (761) 14,049 (5,329) 8,720 0 (2,179) 0 6,541 .36 .34
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