-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, U3jd4LCDhBOyyoTM1lk979lsegUVvaylkd9awZFRskVXMC11thHyihWtcaGiBDMb wwAmfgfct6HYfFoZQmiGyA== 0000912057-94-001739.txt : 19940517 0000912057-94-001739.hdr.sgml : 19940517 ACCESSION NUMBER: 0000912057-94-001739 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MDC HOLDINGS INC CENTRAL INDEX KEY: 0000773141 STANDARD INDUSTRIAL CLASSIFICATION: 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: 94528580 BUSINESS ADDRESS: STREET 1: 3600 S YOSEMITE ST STE 900 CITY: DENVER STATE: CO ZIP: 80237 BUSINESS PHONE: 3037731100 10-Q 1 FORM 10-Q =============================================================================== 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 MARCH 31, 1994 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO. 1-8951 M.D.C. HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 84-0622967 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 3600 SOUTH YOSEMITE STREET, SUITE 900 80237 DENVER, COLORADO (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (303) 773-1100 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ----- ----- AS OF APRIL 20, 1994, 19,020,000 SHARES OF M.D.C. HOLDINGS, INC. COMMON STOCK WERE OUTSTANDING. =============================================================================== M.D.C. HOLDINGS, INC. AND SUBSIDIARIES INDEX Page ---- Part I. Financial Information: Item 1. Condensed Consolidated Financial Statements: Balance Sheets as of March 31, 1994 (Unaudited) and December 31, 1993. . . . . . . . . . 1 Statements of Income for the three months ended March 31, 1994 and 1993 (Unaudited). . . . . . 3 Statements of Cash Flows for the three months ended March 31, 1994 and 1993 (Unaudited). . . . . . 4 Notes to Financial Statements (Unaudited). . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation. . . . 18 Part II. Other Information: Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . 33 Item 4. Submission of Matters to a Vote of Securityholders. . . . . . . . . . . . . . . . . . . 34 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 34 -i- M.D.C. HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
March 31, December 31, 1994 1993 ----------- ------------ ASSETS (Unaudited) Corporate Cash and cash equivalents $ 25,787 $ 42,443 Investments and marketable securities, net 805 765 Property and equipment, net 10,380 10,432 Deferred income tax asset, net 8,851 8,100 Deferred issue costs, net 11,087 11,233 Other assets, net 2,425 3,200 -------- -------- 59,335 76,173 -------- -------- Home Building Cash and cash equivalents 15,143 18,479 Home sales and other accounts receivable 8,560 5,423 Investment in metropolitan district bonds 16,395 13,795 Inventories, net Housing completed or under construction 226,825 201,023 Land and land under development 186,511 192,881 Prepaid expenses and other assets, net 51,870 48,863 -------- -------- 505,304 480,464 -------- -------- Mortgage Lending Cash and cash equivalents 1,072 1,505 Restricted cash 3,400 3,400 Accrued interest and other assets, net 2,674 2,571 Mortgage loans held in inventory, net 48,865 68,065 -------- -------- 56,011 75,541 -------- -------- Asset Management Cash and cash equivalents 570 576 Mortgage Collateral, net, and related assets 103,553 134,166 Equity CMO Interests, net 5,265 6,427 Other loans and assets, net 3,186 3,519 -------- -------- 112,574 144,688 -------- -------- Total Assets $733,224 $776,866 -------- -------- -------- --------
(continued) See notes to condensed consolidated financial statements. -1- M.D.C. HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 31, December 31, 1994 1993 ----------- ------------ LIABILITIES (Unaudited) Corporate Accounts payable and accrued expenses $ 25,432 $ 20,846 Income taxes payable 18,659 28,711 Notes payable 3,614 3,624 Senior Notes, net 187,235 187,199 Subordinated Notes, net 38,215 38,213 -------- -------- 273,155 278,593 -------- -------- Home Building Accounts payable and accrued expenses 74,335 70,741 Lines of credit 38,800 24,645 Notes payable 48,856 62,495 -------- -------- 161,991 157,881 -------- -------- Mortgage Lending Accounts payable and accrued expenses 7,647 8,487 Line of credit 12,850 29,500 -------- -------- 20,497 37,987 -------- -------- Asset Management Accounts payable and accrued expenses 2,509 3,051 CMO bonds, net, and related liabilities 96,802 123,500 -------- -------- 99,311 126,551 -------- -------- COMMITMENTS AND CONTINGENCIES -- -- -------- -------- Total Liabilities 554,954 601,012 -------- -------- STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 25,000,000 shares authorized; none issued -- -- Common stock, $.01 par value; 100,000,000 shares authorized; 21,684,000 and 20,914,000 shares issued, respectively, at March 31, 1994 and December 31, 1993 217 209 Additional paid-in capital 133,635 133,455 Retained earnings 60,107 57,879 -------- -------- 193,959 191,543 Less treasury stock, at cost; 2,664,000 shares (15,689) (15,689) -------- -------- Total Stockholders' Equity 178,270 175,854 -------- -------- Total Liabilities and Stockholders' Equity $733,224 $776,866 -------- -------- -------- --------
See notes to condensed consolidated financial statements. -2- M.D.C. HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended March 31, ---------------------------- 1994 1993 ---------- ---------- REVENUES: Home Building $158,578 $ 98,722 Mortgage Lending 5,487 3,436 Asset Management 4,266 13,169 Corporate 362 558 -------- -------- Total Revenues 168,693 115,885 -------- -------- COSTS AND EXPENSES: Home Building 149,265 96,863 Mortgage Lending 2,583 2,595 Asset Management 3,244 8,501 Corporate general and administrative 3,933 3,574 Corporate and home building interest (Note E) 2,956 3,217 -------- -------- Total Expenses 161,981 114,750 -------- -------- Income before income taxes 6,712 1,135 Provision for income taxes 2,906 220 -------- -------- Net Income $ 3,806 $ 915 -------- -------- -------- -------- EARNINGS PER SHARE Primary $ .19 $ .04 -------- -------- -------- -------- Fully-diluted $ .18 $ .04 -------- -------- -------- -------- WEIGHTED-AVERAGE SHARES OUTSTANDING Primary 20,326 22,231 -------- -------- -------- -------- Fully-diluted 23,939 22,231 -------- -------- -------- --------
See notes to condensed consolidated financial statements. -3- M.D.C. HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Three Months Ended March 31, ---------------------------- 1994 1993 ---------- ---------- OPERATING ACTIVITIES: Net Income $ 3,806 $ 915 Adjustments To Reconcile Net Income To Net Cash Used In Operating Activities: Gains on sales of mortgage-related assets (313) (5,181) Depreciation and amortization 1,871 1,538 Equity CMO Interest valuation adjustments -- 2,000 Net Changes In Assets and Liabilities Mortgage loans held in inventory 19,236 (20,909) Home building inventories (22,304) (14,783) Receivables (3,606) (5,002) Accounts payable and accrued expenses (1,961) 19,585 Deferred income taxes (751) 153 Other, net (2,993) (1,451) --------- --------- Net Cash Used In Operating Activities (7,015) (23,135) --------- --------- INVESTING ACTIVITIES: Mortgage Collateral and other loans Principal payments and prepayments 17,670 19,718 Sales 4,910 4,923 Distributions of capital from Equity CMO Interests 1,162 2,265 CMO Bond principal payments -- 491 Changes in investments and marketable securities, net -- 12,000 Changes in restricted cash, net 6,363 11,532 Other, net (262) (508) --------- --------- Net Cash Provided By Investing Activities 29,843 50,421 --------- ---------
(Continued) See notes to condensed consolidated financial statements. -4- M.D.C. HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Three Months Ended March 31, ---------------------------- 1994 1993 ---------- ---------- FINANCING ACTIVITIES: CMO bonds - Principal payments $ (26,350) $ (34,049) Lines of credit Advances 171,804 48,924 Principal payments (174,299) (39,505) Notes payable Borrowings 497 11,070 Principal payments (15,019) (11,980) Subordinated Note payments -- (355) Other, net 108 45 --------- --------- Net Cash Used In Financing Activities (43,259) (25,850) --------- --------- Net Increase (Decrease) In Cash and Cash Equivalents (20,431) 1,436 Cash and Cash Equivalents Beginning Of Period 63,003 61,028 --------- --------- End Of Period $ 42,572 $ 62,464 --------- --------- --------- --------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest, net of amounts capitalized $ 533 $ 6,792 Income taxes 12,620 515 SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS Home building inventory purchases financed by seller 3,049 -- Home building land inventory sales financed by MDC 457 503 Disposition of land inventories collateralized by notes payable Inventories 2,864 -- Notes payable 2,176 -- Accrued interest and other liabilities 688 --
See notes to condensed consolidated financial statements. -5- M.D.C. HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. PRESENTATION OF FINANCIAL STATEMENTS The condensed consolidated financial statements of M.D.C. Holdings, Inc. ("MDC" or the "Company," which, unless otherwise indicated, refers to M.D.C. Holdings, Inc. and its consolidated subsidiaries) have been prepared by MDC, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These statements reflect all adjustments (including all normal recurring accruals) which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC as of March 31, 1994 and for all of the periods presented. These statements are condensed and do not include all of the information required by generally accepted accounting principles in a full set of financial statements. These statements should be read in conjunction with MDC's financial statements and notes thereto included in MDC's Annual Report on Form 10-K for its fiscal year ended December 31, 1993. Certain reclassifications have been made in the 1993 financial statements to conform to the classifications used in the current year. B. INFORMATION ON BUSINESS SEGMENTS The Company operates in three business segments: home building, mortgage lending and asset management. A summary of the Company's segment information is shown below (in thousands).
Three Months Ended March 31, ---------------------------- 1994 1993 ---------- ---------- Home Building Home sales $156,735 $ 97,608 Land sales 1,750 1,056 Other revenues 93 58 -------- -------- 158,578 98,722 -------- -------- Home cost of sales 131,479 83,195 Land cost of sales 2,037 1,096 Marketing 9,002 6,356 General and administrative 6,747 6,216 -------- -------- 149,265 96,863 -------- -------- Operating Profit 9,313 1,859 -------- --------
(Continued) -6-
Three Months Ended March 31, ---------------------------- 1994 1993 ---------- ---------- Mortgage Lending Interest revenues $ 765 $ 898 Origination fees 1,236 1,085 Gains on sale of mortgage servicing 2,872 772 Gains on sales of mortgage loans, net 99 364 Mortgage servicing and other 515 317 -------- -------- 5,487 3,436 -------- -------- Interest expense 194 255 General and administrative 2,389 2,340 -------- -------- 2,583 2,595 -------- -------- Operating Profit 2,904 841 -------- -------- Asset Management Interest revenues 2,927 6,928 Gains on sales of mortgage-related assets 313 5,181 Management fees and other 1,307 1,341 -------- -------- 4,547 13,450 -------- -------- Interest expense 2,554 5,788 Equity in losses of Equity CMO Interests, net -- 2,000 General and administrative 690 713 -------- -------- 3,244 8,501 -------- -------- Operating Profit 1,303 4,949 -------- -------- Corporate Other revenues 362 558 -------- -------- Interest expense 3,237 3,498 General and administrative 3,933 3,574 -------- -------- 7,170 7,072 -------- -------- Net Corporate Expenses (6,808) (6,514) -------- -------- Intersegment Eliminations Asset management interest revenues (281) (281) -------- -------- Corporate interest expense (281) (281) -------- -------- -- -- -------- -------- Income Before Income Taxes $ 6,712 $ 1,135 -------- -------- -------- --------
C. ACQUISITION OF ADDITIONAL SHARES OF RICHMOND HOMES On February 2, 1994, MDC acquired the balance (35%) of the outstanding shares of Richmond Homes, Inc. I ("Richmond Homes") common stock which it did not own from Messrs. Larry A. Mizel (Chairman of the Board and Chief Executive Officer of the Company) and David D. Mandarich (Executive Vice President - Real Estate and a director of the Company). Richmond Homes and its subsidiaries conduct the -7- Company's Colorado home building operations. In exchange for these shares of Richmond Homes common stock, Messrs. Mizel and Mandarich were issued an aggregate of 608,695 shares of Common Stock of MDC. As the transaction was between related parties, the issuance of the MDC Common Stock was recorded based on the net book value of Richmond Homes, which had approximately zero common shareholders' equity at the date of the acquisition. Accordingly, the value of the shares of MDC Common Stock issued to Messrs. Mizel and Mandarich was recorded at zero. D. ACCOUNTING CHANGE - ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES Effective as of January 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which supersedes SFAS No. 12. The adoption of SFAS No. 115 had no effect on Net Income and had an immaterial effect on Stockholders' Equity. E. INTEREST ACTIVITY
Three Months Ended March 31, ---------------------------- 1994 1993 ---------- ---------- (In Thousands) Interest capitalized in home building inventory, beginning of period $ 42,681 $ 48,440 Interest incurred Corporate and home building 8,364 6,056 Mortgage lending 194 255 Asset management 2,554 5,788 Interest expense Corporate and home building (2,956) (3,217) Mortgage lending (194) (255) Asset management (2,554) (5,788) Previously capitalized home building interest included in cost of sales (6,208) (3,761) -------- -------- Interest capitalized in home building inventory, end of period $ 41,881 $ 47,518 -------- -------- -------- -------- Home building inventories, end of period $413,336 $351,661 -------- -------- -------- --------
F. EARNINGS PER SHARE Primary earnings per share are based on the weighted-average number of common and common equivalent shares outstanding during each period. In 1994, the computation of fully-diluted earnings per share further assumes the conversion into MDC Common Stock of all of the $28,000,000 outstanding principal amount of the 8 3/4% convertible subordinated notes due December 2005. -8- G. EQUITY CMO INTERESTS MDC owns a 49.999% ownership interest in seven collateralized mortgage obligation ("CMO") issuances which are accounted for on the equity method (collectively, "Equity CMO Interests"). The unaudited condensed financial information of the Equity CMO Interests is set forth below. The information provided includes 100% of the gross assets and liabilities comprising these interests (in thousands).
March 31, December 31, 1994 1993 ---------- ------------ Condensed Combined Summarized Financial Condition (100%) Assets $356,892 $422,338 Liabilities 336,242 398,048 -------- -------- Net Assets $ 20,650 $ 24,290 -------- -------- -------- -------- MDC's Share of Net Assets (Net of Valuation Allowances of $5,060 and $5,718, respectively, at March 31, 1994 and December 31, 1993) $ 5,265 $ 6,427 -------- -------- -------- -------- Three Months Ended March 31, ---------------------------- 1994 1993 ---------- ---------- Condensed Combined Operating Results (100%) Earnings before premium/discount amortization Interest and other revenues $ 8,817 $ 15,528 Interest and other expenses 6,868 12,163 -------- -------- 1,949 3,365 Premium/discount amortization (3,265) (7,621) -------- -------- Net Loss (100%) $ (1,316) $ (4,256) -------- -------- -------- -------- Equity in losses of Equity CMO Interests before valuation adjustments $ -- $ -- Valuation adjustments -- (2,000) -------- -------- Equity in losses of Equity CMO Interests, net of valuation adjustments $ -- $ (2,000) -------- -------- -------- --------
MDC's share of net losses for the three months ended March 31, 1994 and 1993 was $658,000 and $2,128,000, respectively, all of which was charged against valuation allowances. 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 -9- American Homes of Virginia, Inc., Richmond American Homes, Inc., Richmond Homes 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. SUPPLEMENTAL COMBINING BALANCE SHEET MARCH 31, 1994 (IN THOUSANDS)
UNCONSOLIDATED --------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC --------- ------------ ------------ ----------- ----------- ASSETS Corporate Cash and cash equivalents $ 25,787 $ -- $ -- $ -- $ 25,787 Investments and marketable securities, net 801 -- 4 -- 805 Investments in subsidiaries 210,246 23,549 -- (233,795) -- Advances and notes receivable - Parent and subsidiaries 254,894 52 92,695 (347,641) -- Property and equipment, net 10,380 -- -- -- 10,380 Deferred income taxes (349) 9,200 -- -- 8,851 Deferred issue costs, net 11,087 -- -- -- 11,087 Other assets, net 2,110 -- 315 -- 2,425 -------- -------- -------- --------- -------- 514,956 32,801 93,014 (581,436) 59,335 -------- -------- -------- --------- -------- Home Building Cash and cash equivalents -- 14,205 938 -- 15,143 Trade and other accounts receivable 305 16,482 285 (8,512) 8,560 Investment in metropolitan district bonds 14,000 2,395 -- -- 16,395 Inventories, net Housing completed or under construction -- 212,794 14,031 -- 226,825 Land and land under development (1,530) 149,300 37,702 1,039 186,511 Prepaid expenses and other assets, net 1,225 39,652 8,589 2,404 51,870 -------- -------- -------- --------- -------- 14,000 434,828 61,545 (5,069) 505,304 -------- -------- -------- --------- -------- Mortgage Lending Cash and cash equivalents -- -- 1,072 -- 1,072 Restricted cash -- -- 3,400 -- 3,400 Other assets, net -- -- 2,674 -- 2,674 Mortgage loans held in inventory, net -- -- 48,865 -- 48,865 -------- -------- -------- --------- -------- -- -- 56,011 -- 56,011 -------- -------- -------- --------- -------- Asset Management Cash and cash equivalents -- -- 570 -- 570 Mortgage Collateral, net, and related assets -- -- 103,553 -- 103,553 Equity CMO Interests, net -- -- 5,265 -- 5,265 Other loans and assets, net -- -- 3,186 -- 3,186 -------- -------- -------- --------- -------- -- -- 112,574 -- 112,574 -------- -------- -------- --------- -------- Total Assets $528,956 $467,629 $323,144 $(586,505) $733,224 -------- -------- -------- --------- -------- -------- -------- -------- --------- --------
(continued) -10- SUPPLEMENTAL COMBINING BALANCE SHEET MARCH 31, 1994 (IN THOUSANDS)
UNCONSOLIDATED --------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC --------- ------------ ------------ ----------- ----------- LIABILITIES Corporate Accounts payable and accrued expenses $ 25,191 $ -- $ 241 $ -- $ 25,432 Advances and notes payable - Parent and subsidiaries 73,822 192,887 96,113 (362,822) -- Income taxes payable 15,589 3,070 -- -- 18,659 Notes payable 3,614 -- -- -- 3,614 Senior Notes, net 187,235 -- -- -- 187,235 Subordinated Notes, net 38,215 -- -- -- 38,215 -------- -------- -------- --------- -------- 343,666 195,957 96,354 (362,822) 273,155 -------- -------- -------- --------- -------- Home Building Accounts payable and accrued expenses 736 63,386 9,890 323 74,335 Lines of credit -- 38,800 -- -- 38,800 Notes payable 6,284 31,457 11,115 -- 48,856 -------- -------- -------- --------- -------- 7,020 133,643 21,005 323 161,991 -------- -------- -------- --------- -------- Mortgage Lending Accounts payable and accrued expenses -- -- 16,206 (8,559) 7,647 Line of credit -- -- 12,850 -- 12,850 -------- -------- -------- --------- -------- -- -- 29,056 (8,559) 20,497 -------- -------- -------- --------- -------- Asset Management Accounts payable and accrued expenses -- -- 2,509 -- 2,509 CMO bonds, net, and related liabilities -- -- 96,802 -- 96,802 -------- -------- -------- --------- -------- -- -- 99,311 -- 99,311 -------- -------- -------- --------- -------- Total Liabilities 350,686 329,600 245,726 (371,058) 554,954 -------- -------- -------- --------- -------- STOCKHOLDERS' EQUITY Preferred stock -- -- 10 (10) -- Common Stock 217 18 124 (142) 217 Additional paid-in capital 133,635 120,200 116,589 (236,789) 133,635 Retained earnings 60,107 17,811 (39,296) 21,485 60,107 Less treasury stock (15,689) -- (9) 9 (15,689) -------- -------- -------- --------- -------- Total Stockholders' Equity 178,270 138,029 77,418 (215,447) 178,270 -------- -------- -------- --------- -------- Total Liabilities and Stockholders' Equity $528,956 $467,629 $323,144 $(586,505) $733,224 -------- -------- -------- --------- -------- -------- -------- -------- --------- --------
(continued) -11- SUPPLEMENTAL COMBINING BALANCE SHEET DECEMBER 31, 1993 (IN THOUSANDS)
UNCONSOLIDATED --------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC --------- ------------ ------------ ----------- ----------- ASSETS Corporate Cash and cash equivalents $ 42,443 $ -- $ -- $ -- $ 42,443 Investments and marketable securities, net 761 -- 4 -- 765 Investments in subsidiaries 191,462 23,009 15,030 (229,501) -- Advances receivable - Parent and subsidiaries 260,931 37 91,348 (352,316) -- Property and equipment, net 10,432 -- -- -- 10,432 Deferred income taxes -- 8,100 -- -- 8,100 Deferred issue costs, net 11,233 -- -- -- 11,233 Other assets, net 2,715 485 3,200 -------- -------- -------- --------- -------- 519,977 31,146 106,867 (581,817) 76,173 -------- -------- -------- --------- -------- Home Building Cash and cash equivalents -- 17,792 687 -- 18,479 Trade and other accounts receivable 41 9,059 213 (3,890) 5,423 Investment in metropolitan district bonds 11,400 2,395 -- -- 13,795 Inventories, net Housing completed or under construction -- 187,796 13,227 -- 201,023 Land and land under development (1,530) 153,068 40,252 1,091 192,881 Prepaid expenses and other assets, net 1,312 39,728 5,400 2,423 48,863 -------- -------- -------- --------- -------- 11,223 409,838 59,779 (376) 480,464 -------- -------- -------- --------- -------- Mortgage Lending Cash and cash equivalents -- -- 1,505 -- 1,505 Restricted cash -- -- 3,400 -- 3,400 Accrued interest and other assets, net -- -- 2,571 -- 2,571 Mortgage loans held in inventory, net -- -- 68,065 -- 68,065 -------- -------- -------- --------- -------- -- -- 75,541 -- 75,541 -------- -------- -------- --------- -------- Asset Management Cash and cash equivalents -- -- 576 -- 576 Mortgage Collateral, net, and related assets -- -- 134,166 -- 134,166 Equity CMO Interests, net -- -- 6,427 -- 6,427 Other loans and assets, net -- -- 3,519 -- 3,519 -------- -------- -------- --------- -------- -- -- 144,688 -- 144,688 -------- -------- -------- --------- -------- Total Assets $531,200 $440,984 $386,875 $(582,193) $776,866 -------- -------- -------- --------- -------- -------- -------- -------- --------- --------
(continued) -12 SUPPLEMENTAL COMBINING BALANCE SHEET DECEMBER 31, 1993 (IN THOUSANDS)
UNCONSOLIDATED --------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC --------- ------------ ------------ ----------- ----------- LIABILITIES Corporate Accounts payable and accrued expenses $ 20,564 $ -- $ 282 $ -- $ 20,846 Advances payable - Parent and subsidiaries 68,342 176,576 120,800 (365,718) -- Income taxes payable 26,635 2,076 -- -- 28,711 Notes payable 3,624 -- -- -- 3,624 Senior Notes, net 187,199 -- -- -- 187,199 Subordinated Notes, net 38,213 -- -- -- 38,213 --------- --------- --------- --------- --------- 344,577 178,652 121,082 (365,718) 278,593 --------- --------- --------- --------- --------- Home Building Accounts payable and accrued expenses 864 62,768 6,800 309 70,741 Lines of credit -- 24,645 -- -- 24,645 Notes payable 9,905 40,548 12,042 -- 62,495 --------- --------- --------- --------- --------- 10,769 127,961 18,842 309 157,881 --------- --------- --------- --------- --------- Mortgage Lending Accounts payable and accrued expenses -- -- 12,375 (3,888) 8,487 Line of credit -- -- 29,500 -- 29,500 --------- --------- --------- --------- --------- -- -- 41,875 (3,888) 37,987 --------- --------- --------- --------- --------- Asset Management Accounts payable and accrued expenses -- -- 3,051 -- 3,051 CMO bonds, net, and related liabilities -- -- 123,500 -- 123,500 --------- --------- --------- --------- --------- -- -- 126,551 -- 126,551 --------- --------- --------- --------- --------- Total Liabilities 355,346 306,613 308,350 (369,297) 601,012 --------- --------- --------- --------- --------- STOCKHOLDERS' EQUITY Preferred stock -- 20,475 10 (20,485) -- Common Stock 209 19 124 (143) 209 Additional paid-in capital 133,455 99,725 116,590 (216,315) 133,455 Retained earnings 57,879 14,152 (38,190) 24,038 57,879 Less treasury stock (15,689) -- (9) 9 (15,689) --------- --------- --------- --------- --------- Total Stockholders' Equity 175,854 134,371 78,525 (212,896) 175,854 --------- --------- --------- --------- --------- Total Liabilities and Stockholders' Equity $ 531,200 $ 440,984 $ 386,875 $(582,193) $776,866 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
-13- SUPPLEMENTAL COMBINING STATEMENTS OF INCOME THREE MONTHS ENDED MARCH 31, 1994 (IN THOUSANDS)
UNCONSOLIDATED --------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC --------- ------------ ------------ ----------- ----------- REVENUES: Home Building $ -- $147,681 $11,656 $ (759) $158,578 Mortgage Lending -- -- 5,487 -- 5,487 Asset Management -- -- 4,547 (281) 4,266 Corporate other revenues 342 -- 20 -- 362 Equity in earnings of subsidiaries 9,169 999 -- (10,168) -- ------- -------- ------- -------- -------- Total Revenues 9,511 148,680 21,710 (11,208) 168,693 ------- -------- ------- -------- -------- COSTS AND EXPENSES: Home Building 364 138,543 10,563 (205) 149,265 Mortgage Lending -- -- 2,583 -- 2,583 Asset Management -- -- 3,244 -- 3,244 Corporate general and administrative 3,902 -- 31 -- 3,933 Corporate and home building interest (1,467) 4,127 1,032 (736) 2,956 ------- -------- ------- -------- -------- Total Expenses 2,799 142,670 17,453 (941) 161,981 ------- -------- ------- -------- -------- Income before income taxes 6,712 6,010 4,257 (10,267) 6,712 Provision for income taxes 2,906 2,348 1,445 (3,793) 2,906 ------- -------- ------- -------- -------- NET INCOME $ 3,806 $ 3,662 $ 2,812 $ (6,474) $ 3,806 ------- -------- ------- -------- -------- ------- -------- ------- -------- --------
-14- SUPPLEMENTAL COMBINING STATEMENTS OF INCOME THREE MONTHS ENDED MARCH 31, 1993 (IN THOUSANDS)
UNCONSOLIDATED --------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC --------- ------------ ------------ ----------- ----------- REVENUES: Home Building $ 14 $93,346 $ 8,741 $ (3,379) $ 98,722 Mortgage Lending -- -- 3,436 -- 3,436 Asset Management -- -- 13,450 (281) 13,169 Corporate other revenues 590 -- (4) (28) 558 Equity in earnings of subsidiaries 4,770 1,141 -- (5,911) -- ------ ------- ------- -------- -------- Total Revenues 5,374 94,487 25,623 (9,599) 115,885 ------ ------- ------- -------- -------- COSTS AND EXPENSES: Home Building 1 90,267 8,088 (1,493) 96,863 Mortgage Lending -- -- 2,595 -- 2,595 Asset Management -- -- 8,501 -- 8,501 Corporate general and administrative 3,591 -- 3 (20) 3,574 Corporate and home building interest 647 2,240 1,092 (762) 3,217 ------ ------- ------- -------- -------- Total Expenses 4,239 92,507 20,279 (2,275) 114,750 ------ ------- ------- -------- -------- Income before income taxes 1,135 1,980 5,344 (7,324) 1,135 Provision for income taxes 220 733 2,167 (2,900) 220 ------ ------- ------- -------- -------- NET INCOME $ 915 $ 1,247 $ 3,177 $ (4,424) $ 915 ------ ------- ------- -------- -------- ------ ------- ------- -------- --------
-15- SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1994 (IN THOUSANDS)
UNCONSOLIDATED --------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC --------- ------------ ------------ ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (9,952) $ (20,598) $ 21,786 $ 1,749 $ (7,015) -------- --------- -------- -------- --------- INVESTING ACTIVITIES: Mortgage Collateral Principal payments and prepayments -- 211 17,459 -- 17,670 Sales -- -- 4,910 -- 4,910 Distributions of capital from Equity CMO Interests -- -- 1,162 -- 1,162 Changes in restricted cash -- -- 6,363 -- 6,363 Affiliate notes receivable 2,108 -- 3,053 (5,161) -- Other, net 22 (110) (174) -- (262) -------- --------- -------- -------- --------- Net Cash Provided By (Used In) Investing Activities 2,130 101 32,773 (5,161) 29,843 -------- --------- -------- -------- --------- FINANCING ACTIVITIES: Net increase (reduction) in borrowings from Parent and subsidiaries (5,311) 17,880 (10,820) (1,749) -- CMO bonds - principal payments -- -- (26,350) -- (26,350) Lines of Credit -- -- -- -- -- Advances -- 171,804 -- -- 171,804 Principal payments -- (157,649) (16,650) -- (174,299) Notes payable Borrowings -- 497 -- -- 497 Principal payments (3,631) (10,461) (927) -- (15,019) Affiliate notes payable -- (5,161) -- 5,161 -- Other, net 108 -- -- -- 108 -------- --------- -------- -------- --------- Net Cash Provided By (Used In) Financing Activities (8,834) 16,910 (54,747) 3,412 (43,259) -------- --------- -------- -------- --------- Net Decrease In Cash And Cash Equivalents (16,656) (3,587) (188) -- (20,431) Cash And Cash Equivalents Beginning Of Period 42,443 17,792 2,768 -- 63,003 -------- --------- -------- -------- --------- End Of Period $ 25,787 $ 14,205 $ 2,580 $ -- $ 42,572 -------- --------- -------- -------- --------- -------- --------- -------- -------- ---------
-16- SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1993 (IN THOUSANDS)
UNCONSOLIDATED --------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC --------- ------------ ------------ ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 926 $(18,041) $(6,616) $ 596 $(23,135) ------- -------- ------- --------- -------- INVESTING ACTIVITIES: Mortgage Collateral Principal payments and prepayments -- 14 19,704 -- 19,718 Sales -- -- 4,923 -- 4,923 Distributions of capital from Equity CMO Interests -- -- 2,265 -- 2,265 CMO Bond principal payments -- -- 491 -- 491 Changes in investments and marketable securities, net 12,000 -- -- -- 12,000 Affiliate notes receivable 479 -- 393 (872) -- Changes in restricted cash -- -- 11,532 -- 11,532 Other, net (139) (164) (205) -- (508) ------- -------- ------- --------- -------- Net Cash Provided By (Used In) Investing Activities 12,340 (150) 39,103 (872) 50,421 ------- -------- ------- --------- -------- FINANCING ACTIVITIES: Net increase (reduction) in borrowings from Parent and subsidiaries (2,147) 6,675 (3,932) (596) -- CMO bonds - principal payments -- -- (34,049) -- (34,049) Lines of credit Advances 1,540 41,010 6,374 -- 48,924 Principal payments (1,887) (37,618) -- -- (39,505) Senior and Subordinated Notes - payments (355) -- -- -- (355) Notes payable Borrowings -- 11,070 -- -- 11,070 Principal payments (2,892) (8,189) (899) -- (11,980) Affiliate notes payable -- (872) -- 872 -- Other, net 45 -- -- -- 45 ------- -------- ------- --------- -------- Net Cash Provided By (Used In) Financing Activities (5,696) 12,076 (32,506) 276 (25,850) ------- -------- ------- --------- -------- Net Increase (Decrease) In Cash And Cash Equivalents 7,570 (6,115) (19) -- 1,436 Cash And Cash Equivalents Beginning Of Period 35,993 22,502 2,533 -- 61,028 ------- -------- ------- --------- -------- End Of Period $43,563 $ 16,387 $ 2,514 $ -- $ 62,464 ------- -------- ------- --------- -------- ------- -------- ------- --------- --------
-17- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. INTRODUCTION MDC is a national home builder with major operations in (i) metropolitan Denver and, to a lesser extent, Colorado Springs, Colorado (collectively, "Colorado"); (ii) northern Virginia and suburban Maryland (collectively, "Mid- Atlantic"); (iii) northern California and, to a lesser extent, southern California (collectively, "California"); (iv) Phoenix and Tucson, Arizona (collectively, "Arizona"); and (v) Las Vegas, Nevada ("Nevada"). In its home building operations, the Company is engaged in the construction and sale of residential housing (collectively, the "home building segment") and mortgage origination, purchase and sale activities (collectively, the "mortgage lending segment"). MDC's mortgage lending segment enables MDC to provide mortgage loans to its home buyers and to others. The Company's asset management operations (collectively, the "asset management segment"), among other things, enable MDC to (i) manage the day-to- day operations of Asset Investors Corporation ("Asset Investors"), a New York Stock Exchange-listed real estate investment trust ("REIT") which generates income primarily through a portfolio of ownership interests ("CMO Ownership Interests") in issuances of collateralized mortgage obligations ("CMO bonds"); (ii) manage the day-to-day operations of Commercial Assets, Inc. ("Commercial Assets"), an American Stock Exchange-listed REIT formed in August 1993 which generates income by acquiring and managing a portfolio of ownership interests in commercial securitizations; (iii) own CMO Ownership Interests; and (iv) own interests in various other investments. On February 2, 1994, MDC acquired the balance (35%) of the outstanding shares of Richmond Homes, Inc. I ("Richmond Homes") common stock which it did not own from Messrs. Larry A. Mizel (Chairman of the Board and Chief Executive Officer of the Company) and David D. Mandarich (Executive Vice President - Real Estate and a director of the Company). Richmond Homes and its subsidiaries conduct the Company's Colorado home building operations. In exchange for these shares of Richmond Homes common stock, Messrs. Mizel and Mandarich were issued an aggregate of 608,695 shares of Common Stock of MDC. -18- 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 Ended March 31, ---------------------------- 1994 1993 ---------- ---------- Revenues $168,693 $115,885 Income before income taxes 6,712 1,135 Net Income 3,806 915 Primary Earnings Per Share .19 .04
MDC's revenues increased during the first three months of 1994 compared with the same period in 1993 primarily as a result of a 45% increase in home closings and an $18,100 increase in the average selling price per housing unit. These increases partially were offset by an $8,903,000 reduction in revenues of the asset management segment due principally to continued high levels of prepayments on, and sales of mortgage loans, including the mortgage loans underlying the Company's mortgage pass-through certificates which are the collateral for the Company's CMO bonds (mortgage loans or mortgage certificate collateral for CMO bonds hereafter is referred to as "Mortgage Collateral"). Prepayments on, and sales of, Mortgage Collateral have reduced the amount of the Company's Mortgage Collateral and mortgage-related assets, the asset management segment's principal interest earning assets, by more than $171,000,000 from January 1, 1993 through March 31, 1994. The Company's income increased for the three months ended March 31, 1994 compared with the same period in 1993 due principally to (i) increased home building operating profit from significantly higher home closings primarily due to the opening of new subdivisions in each of the Company's markets and higher Home Gross Margins (as hereafter defined); and (ii) increased mortgage lending operating profit primarily due to increased gains from sales of mortgage loan servicing. These increases partially were offset by higher marketing and general and administrative expenses due principally to the higher level of home closings. Operating income in the first quarter of 1993 was impacted positively by $5,200,000 in one-time gains resulting from sales of Mortgage Collateral, partially offset by $2,000,000 in valuation adjustments with respect to the Company's Equity CMO Interests (defined below) during the same period. IMPACT OF HOME MORTGAGE INTEREST RATES. Beginning in 1992 through October 1993, home mortgage interest rates declined to their lowest levels in 25 years to an average of 6.7% on a 30-year, fixed-rate mortgage. From October 1993 to May 1994, these interest rates have increased to as high as 9%. -19- Increases in mortgage interest rates adversely affect the Company's home building and mortgage lending segments. Higher mortgage interest rates (i) may reduce the demand for homes and home mortgages; and (ii) generally will reduce home mortgage refinancing activity. With the recent increases in mortgage interest rates relative to levels in 1993, the Company, consistent with the rest of the industry in general, has experienced a major decline in refinancing activity in its mortgage lending operations. These events have affected adversely the spot mortgage loan originations and the amount of mortgage loans purchased through correspondents by the Company's mortgage lending segment, although increased originations from the Company's home building operations have offset to a significant degree these declines. The Company is unable to predict the extent to which current or future increases in mortgage interest rates will adversely affect the Company's operating activities and results of operations. HOME BUILDING SEGMENT. The table below sets forth certain information with respect to the Company's homes sold, closed and delivered during each of the periods presented as well as units sold under a contract but not delivered ("Backlog") at each date shown (dollars in thousands).
Three Months Ended March 31, ---------------------------- 1994 1993 ---------- ---------- Home sales revenues $156,735 $97,608 Average selling price per housing unit $183.5 $ 165.4 Home Gross Margins 16.1% 14.8% Homes - units Sales contracted, net Colorado 750 606 Mid-Atlantic 412 370 California 146 107 Arizona 154 53 Nevada 30 51 -------- -------- Total 1,492 1,187 -------- -------- -------- -------- Closed and delivered Colorado 392 338 Mid-Atlantic 252 163 California 107 23 Arizona 86 43 Nevada 17 23 -------- -------- Total 854 590 -------- -------- -------- --------
(continued) -20-
March 31, December 31, March 31, 1994 1993 1993 --------- ------------ --------- Backlog Units Colorado 1,018 660 741 Mid-Atlantic 585 425 404 California 137 98 132 Arizona 215 147 58 Nevada 40 27 88 -------- -------- -------- Total 1,995 1,357 1,423 -------- -------- -------- -------- -------- -------- Sales value $363,270 $250,530 $248,600 -------- -------- -------- -------- -------- --------
Home sales revenues increased 61% for the three months ended March 31, 1994 compared with the same period in 1993 primarily as a result of (i) significant increases in home closings in all of the Company's markets except Nevada due to improved market conditions and the expansion of the Company's operations in each of its markets; and (ii) an increase in the average selling price per housing unit. The increase in the average selling price per housing unit for the three months ended March 31, 1994 compared with the same period in 1993 primarily was due to increases in average selling prices in all of the Company's markets except northern California. The increases in selling prices were due principally to (i) the mix of homes closed; (ii) general price increases in most of the Company's markets to, among other things, offset increases in costs; and (iii) improved market conditions. These increases partially were offset by lower average selling prices in northern California due primarily to the introduction of more affordable homes in response to consumer demand for lower- priced housing. Overall, gross profits (which have been reduced for, among other things, capitalized interest, a reserve for warranty expenses on a per home basis and financing costs) as a percent of home sales ("Home Gross Margins") increased substantially during the three months ended March 31, 1994 compared with the same period in 1993. The Company achieved higher Home Gross Margins in the first quarter of 1994 in its Colorado, Mid-Atlantic and Arizona markets primarily due to improved market conditions. These increases partially were offset by lower Home Gross Margins in northern California as the Company's profitability in this area continues to be affected adversely by softness in consumer demand for new homes. To a lesser extent, Home Gross Margins also were impacted negatively by builder competition and product shifts in Nevada. Increases in, among other things, the costs of subcontracted labor, finished lots and building materials, particularly lumber, have affected adversely, and may affect adversely in the future, Home Gross Margins to the extent that market conditions prevent the recovery of increased costs through higher sales prices. In addition, increased home building activities in several of the Company's markets, particularly Colorado and Arizona, have further extended the available labor force such that the period of time required for completing construction of homes has increased. Such -21- increased time periods result in increased interest costs during the construction period which have affected adversely, and may affect adversely in the future, Home Gross Margins. Assisted by improved market conditions and expanded operations in most of the Company's markets, year-to-date home sales and Backlog at March 31, 1994 reached their highest first quarter levels since 1988 and 1987, respectively. "Sales contracted, net" increased 26% during the three months ended March 31, 1994 compared with the same period in 1993. Backlog at March 31, 1994 increased 47% from December 31, 1993 and 40% from March 31, 1993. These increases principally were due to significant increases in sales in (i) Colorado (increase of 24%) and Arizona (increase of 191%) due to improved market conditions and expansions of the Company's operations in these markets; (ii) the Mid-Atlantic region (increase of 11%) due to efforts to increase the Company's market share through expansion of its operations in that region; and (iii) in California (increase of 36%) due to expansions of the Company's operations in this market. Marketing expenses (which include, among other things, deferred marketing, model home expenses and commissions) totalled $9,002,000 during the three months ended March 31, 1994 compared with $6,356,000 during the same period in 1993. The 42% increase during 1994 principally was due to the 45% increase in home closings and expanded operations in many of the regions in which the Company operates. As a result of these increased operations, significant additional marketing-related salary, commission and model home operation expenses were incurred. However, marketing expenses as a percentage of home building sales revenues decreased by more than 10% in 1994, relative to 1993, due primarily to increased efficiencies in the Company's marketing activities relative to the level of expansion in its existing markets. General and administrative expenses totalled $6,747,000 during the three months ended March 31, 1994 compared with $6,216,000 during the same period in 1993. The 9% increase during 1994 partially was due to increased salary, office and other expenses in response to increased operations. General and administrative expenses during the first quarter of 1993 also were affected adversely by non-recurring charges totalling $900,000. General and administrative expenses as a percentage of home building sales revenues during the three months ended March 31, 1994 decreased compared with the same period in 1993 due to the Company's ability to build more homes without adding substantially to existing administrative staffing and overhead. INACTIVE LAND INVENTORY. Since 1988, MDC has implemented a program to reduce its inventory of land and land under development in order to, among other things, maximize and preserve liquidity and reduce the risks inherent in holding, at any point in time, substantially greater amounts of land than are necessary to meet the projected requirements of MDC's home building operations over the succeeding 24 months. As a result, MDC has reduced its land inventory from $411,500,000 at December 31, 1988 to $186,511,000 at March 31, 1994, while increasing significantly the number of lots it controls under rolling options. -22- The Company continues to pursue opportunities to reduce its inactive land inventories. Although the Company has been able to reduce significantly its inventory of land, the Company's net income and cash flow continue to be affected adversely by the carrying costs (e.g., property taxes and interest) associated with inactive land inventories, which were approximately one-half of the Company's total land and land under development at March 31, 1994. Most of the inactive land was acquired prior to 1991, and is held principally in Colorado. Carrying costs on inactive land inventories are expensed, not capitalized. The following table shows the carrying value of the land and land under development owned by MDC in each of its home building markets at March 31, 1994 segregated by the years in which such property was acquired or optioned (in thousands).
DIVISION 1994 1993 1992 1991 PRE-1991 TOTAL - -------- -------- -------- -------- -------- -------- -------- Colorado $ 283 $ 2,891 $4,275 $9,067 $ 77,804 $ 94,320 Mid-Atlantic 7,307 11,850 3,060 -- 20,222 42,439 California 7,453 14,004 2,146 -- 6,326 29,929 Arizona 6,949 1,829 48 -- 4,724 13,550 Nevada -- 6,273 -- -- -- 6,273 ------- ------- ------ ------ -------- -------- Totals $21,992 $36,847 $9,529 $9,067 $109,076 $186,511 ------- ------- ------ ------ -------- -------- ------- ------- ------ ------ -------- --------
MORTGAGE LENDING SEGMENT. OVERVIEW. HomeAmerican Mortgage Corporation ("HomeAmerican") is a full- service mortgage lender originating mortgage loans for MDC's home buyers and for others on a "spot" basis through offices located in each of MDC's markets (except southern California). As HomeAmerican is the principal originator of mortgage loans for MDC's home buyers, it is an integral part of MDC's home building operations. MDC sells its homes to customers who generally finance their purchases through Federal Housing Administration ("FHA") insured mortgage loans, Veterans Administration ("VA") guaranteed mortgage loans and conventional mortgage loans. HomeAmerican is an FHA, VA, Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") authorized mortgage loan originator. HomeAmerican also is an authorized loan servicer for FNMA, FHLMC and the Government National Mortgage Association ("GNMA") and, as such, is subject to the rules and regulations of such organizations. Through correspondents, HomeAmerican purchases loans. The origination fees are retained by the correspondents on these loans while, by purchasing these loans, HomeAmerican acquires the servicing rights. HomeAmerican's operations are affected by, among other things, changes in mortgage interest rates. HomeAmerican attempts to reduce its exposure to mortgage interest rate changes by (i) offering mortgage loans at market rates; (ii) purchasing forward commitments to deliver closed loans held for sale; and (iii) to a substantially -23- lesser extent, using other hedging techniques in connection with its pipeline of mortgage loan applications. The table below summarizes the results of HomeAmerican's operations during each of the periods presented (in thousands).
Three Months Ended March 31, ---------------------------- 1994 1993 ---------- ---------- Gains from sales of mortgage servicing: Bulk $ 2,585 $ 585 Other 287 187 Net interest income 571 643 Origination fees 1,236 1,085 Gains on sales of mortgage loans 99 364 Mortgage servicing and other income 515 317 General and administrative expenses (2,389) (2,340) -------- -------- Operating profit $ 2,904 $ 841 -------- -------- -------- -------- Principal amount of originations and purchases: Company home buyers $ 76,260 $ 53,102 Spot 31,288 53,972 Correspondent 26,252 29,898 -------- -------- Total $133,800 $136,972 -------- -------- -------- -------- March 31, December 31, March 31, 1994 1993 1993 --------- ------------ --------- Composition of Servicing Portfolio at End of Period: FHA insured/VA guaranteed $410,057 $373,716 $229,247 Conventional 344,297 279,615 318,529 -------- -------- -------- Total Servicing Portfolio $754,354 $653,331 $547,776 -------- -------- -------- -------- -------- -------- Portion of Servicing Portfolio Available for Sale $487,331 $574,088 $332,913 -------- -------- -------- -------- -------- --------
Included in the total servicing portfolio (but excluded from the portion available for sale) were loans totalling (i) at March 31, 1994, $195,830,000 which were being serviced under an agreement which expired on May 1, 1994; and (ii) at March 31, 1993, $106,171,000 which were being serviced under an agreement which expired on April 1, 1993. HomeAmerican's loan originations decreased by 2% for the three months ended March 31, 1994 compared with the same period in 1993 primarily as a result of lower spot originations due primarily to increased mortgage interest rates which resulted in lower mortgage loan refinancings. These decreases were partially offset by higher originations for MDC home buyers principally due to increased closings by MDC's home building segment. HomeAmerican originated mortgages for -24- 59% of MDC's total homes closed during the three months ended March 31, 1994 compared with 67% during the same period in 1993. HomeAmerican's operating profit of $2,904,000 during the three months ended March 31, 1994 was higher than the operating profit of $841,000 for the same period in 1993 principally due to increased gains from bulk servicing sales. During the three months ended March 31, 1994, HomeAmerican sold bulk mortgage loan servicing on approximately $195,830,000 of mortgage loans which resulted in pre-tax gains of $2,585,000. During the three months ended March 31, 1993, HomeAmerican had no bulk sales of servicing; however, $585,000 of income relating to a December 1992 bulk servicing sale was recognized as the related mortgage loans, totalling approximately $40,400,000, were certified for sale in such period. At March 31, 1994, approximately $487,331,000 of conforming mortgage loan (i.e., loans that meet the securitization standards of GNMA, FNMA or FHLMC) servicing was available for sale, which represents a 15% decrease compared with the $574,088,000 in conforming mortgage loan servicing available for sale at December 31, 1993 and a 46% increase above the $332,913,000 in conforming mortgage loan servicing available for sale at March 31, 1993. ASSET MANAGEMENT SEGMENT. The following table summarizes the results of the asset management segment operations during each of the periods presented (in thousands).
Three Months Ended March 31, ---------------------------- 1994 1993 ---------- ---------- Management fees from Asset Investors and Commercial Assets $ 754 $ 635 Equity in losses of Equity CMO Interests, net of valuation adjustments -- (2,000) Gains on sales of Mortgage Collateral 313 5,181 Interest income from CMO Bond and other, net 236 1,133 ------ ------ Operating profit $1,303 $4,949 ------ ------ ------ ------
The decrease in the Company's asset management segment operating profit for the three months ended March 31, 1994 compared with the same period in 1993 is due principally to lower gains on sales of Mortgage Collateral, partially offset by valuation adjustments recorded in 1993 related to the Equity CMO Interests (as hereafter defined) which were not required in 1994. MANAGEMENT OF ASSET INVESTORS. The Company advises Asset Investors on various facets of Asset Investors' business. Asset Investors generates substantially all of its income through a portfolio of CMO Ownership Interests in residential mortgage loan securitizations. -25- MDC has a management agreement (the "Asset Investors Management Agreement") with Asset Investors which is currently in the process of being extended through 1994, subject to the possible amendment of certain of the terms on a prospective basis. The current Asset Investors Management Agreement may be terminated by the Company or by Asset Investors with or without cause at any time upon 60 days' written notice. MDC, pursuant to the Asset Investors Management Agreement, receives compensation for CMO administration and other management services. MDC also is entitled to receive an incentive fee (the "Asset Investors Incentive Fee") which is based primarily on the level of Asset Investors dividend distributions. The high level of prepayments on Asset Investors' portfolio of home- mortgage related assets in 1992 and 1993 affected adversely the CMO Ownership Interests owned by Asset Investors and its income, which reduced substantially, relative to prior years, the management fees earned by the Company from Asset Investors in 1993 and the first three months of 1994. The Company earned $434,000 in management fees in the three months ended March 31, 1994 compared with $635,000 in the same period in 1993. No Asset Investors Incentive Fees were earned by the Company in the three months ended March 31, 1994 or in the same period in 1993. MANAGEMENT OF COMMERCIAL ASSETS. In August 1993, Asset Investors formed Commercial Assets to acquire and manage a portfolio of ownership interests in commercial mortgage securitizations. In October 1993, Asset Investors distributed approximately 70% of the shares of Commercial Assets to its stockholders as a dividend. MDC has a management agreement (the "Commercial Assets Management Agreement") with Commercial Assets which is currently in the process of being extended through 1994, subject to the possible amendment of certain of the terms on a prospective basis. Pursuant to the Commercial Assets Management Agreement, MDC receives (i) compensation based on the level of Commercial Assets income, as determined under applicable provisions of the Internal Revenue Code of 1986, as amended; (ii) acquisition fees; (iii) administration fees; and (iv) fees for other management services. The Commercial Assets Management Agreement may be terminated by the Company or by Commercial Assets with or without cause at any time upon 60 days' written notice. During the three months ended March 31, 1994, MDC earned fees totalling $320,000 from Commercial Assets. EQUITY CMO INTERESTS. During the three months ended March 31, 1993 MDC recorded $2,000,000 in valuation adjustments related to its 49.999% ownership interest in seven CMO Ownership Interests (these seven interests are referred to herein as "Equity CMO Interests") related to permanent declines in the value of the undiscounted projected cash flow of such Equity CMO Interests resulting from higher actual and projected prepayments caused by low interest rates. During the three months ended March 31, 1994, higher mortgage interest rates have slowed both the actual and expected prepayment speeds and, accordingly, no valuation adjustments were necessary. -26- If the Mortgage Collateral underlying the Equity CMO Interests prepays or is projected to prepay at higher than current expected rates and/or if short- term interest rates increase significantly from their present rates, the Company, in the future, may recognize additional valuation adjustments. INVESTMENT IN A CMO BOND. On July 31, 1992, MDC purchased a $7,823,000 principal amount CMO bond (the "CMO Bond") for $7,367,000. For the three months ended March 31, 1993, the CMO Bond earned $583,000 in interest. The CMO Bond was fully paid at December 31, 1993. SALES OF MORTGAGE-RELATED ASSETS. In January 1993, MDC completed a sale of mortgage-related assets which resulted in a pre-tax gain totalling $5,011,000. In addition, MDC completed various other sales of mortgage-related assets which resulted in net gains totalling $313,000 and $170,000, respectively, for the three months ended March 31, 1994 and 1993. GENERAL. Higher short-term interest rates and/or continued high or higher levels of mortgage loan prepayments would affect adversely in future periods (i) the management fees earned from Asset Investors and Commercial Assets; and (ii) the current value of, and income from, the Company's CMO Ownership Interests. The Company currently does not expect to acquire additional CMO Ownership Interests in the future except to the extent attractive opportunities may be identified. As a result, future income from the asset management segment primarily will be dependent on management fees. OTHER OPERATING RESULTS. CORPORATE AND HOME BUILDING INTEREST. Corporate and home building interest incurred increased by 38% to $8,364,000 in the first quarter of 1994 compared with $6,056,000 during the same period in 1993 due to (i) higher interest rates associated with the 11 1/8% Senior Notes due 2003 compared with the debt outstanding for the three months ended March 31, 1993; and (ii) higher levels of borrowings resulting from the Company's expanded home building operations. The portion of this corporate and home building interest capitalized (the Company capitalizes interest on its home building inventories during the period of active development and through the completion of construction) during the three months ended March 31, 1994 and 1993 totalled $5,408,000 and $2,839,000, respectively. The increase in interest capitalized for the three months ended March 31, 1994 was due primarily to (i) increased levels of home building inventories resulting from increased operations; (ii) higher capitalization rates related to the higher average effective interest rates on applicable debt, particularly with respect to Colorado; and (iii) the extended period of time for completing homes under construction in certain of the Company's markets, which increased the period of time over which interest on such construction is capitalized. The corporate and home building interest incurred which was not capitalized was reflected as interest expense totalling $2,956,000 and $3,217,000 for the three -27- months ended March 31, 1994 and 1993, respectively. For a reconciliation of interest incurred, capitalized, expensed and previously capitalized included in cost of sales, see Note E to the Company's Condensed Consolidated Financial Statements. CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and administrative expenses totalled $3,933,000 during the three months ended March 31, 1994 compared with $3,574,000 during the same period in 1993. The increase in the first three months of 1994 primarily was due to an increase in salary, professional fees and insurance expense resulting from the Company's expanded operations. INCOME TAXES. M.D.C. Holdings, Inc. and its wholly-owned subsidiaries file a consolidated federal income tax return (the "MDC Consolidated Return"). Richmond Homes filed (or will file) a separate consolidated federal income tax return (each a "Richmond Homes Consolidated Return") from its inception (December 28, 1989) through the date Richmond Homes became a wholly-owned subsidiary of MDC (February 2, 1994). MDC's overall effective income tax rate during the three months ended March 31, 1994 was 43% compared with 19% during the same period in 1993. The effective income tax rates differed from the 35% federal statutory rate due primarily to, among other things, (i) the impact of state income taxes; (ii) the realization of non-taxable income for financial reporting purposes for which no tax liability was recorded; and (iii) in 1994, adjustments to prior years' income taxes. The Company has recorded a net deferred income tax asset of $8,851,000, net of a valuation allowance of $2,939,000, at March 31, 1994. The valuation allowance has been provided to offset the related deferred income tax assets due to the uncertainty of realizing the benefit of future tax deductions. The Internal Revenue Service (the "IRS") has completed its examination of the MDC Consolidated Returns for the years 1984 through 1987 and has proposed certain adjustments to the taxable income reflected in such returns. A substantial portion of the proposed adjustments relate to the characterization of $22,000,000 in gains on sales of property held for investment, which were reported as capital gains. Certain of the other proposed adjustments would shift the recognition of certain items of income and expense from one year to another ("Timing Adjustments"). To the extent taxable income is increased by proposed Timing Adjustments, taxable income may be reduced by a corresponding amount in other years; however, the Company would incur an interest charge as a result of such adjustment. The Company currently is protesting many of these proposed adjustments through the IRS appeals process and believes that the amount of these adjustments will be reduced as a result. In the opinion of management, adequate provision has been made for the additional income taxes and interest which may arise as a result of the proposed adjustments. The IRS currently is examining the MDC Consolidated Returns for the years 1988 through 1990 and the Richmond Homes Consolidated Returns for the years 1989 and 1990. No reports have been issued by -28- the IRS in connection with these examinations. In the opinion of management, adequate provision has been made for any additional income taxes and interest which may arise as a result of these examinations. LIQUIDITY AND CAPITAL RESOURCES MDC uses its capital resources to, among other things, (i) support its operations, including its inventories of homes, home sites and land; (ii) provide working capital; and (iii) provide mortgage loans for its home buyers. Capital resources are generated internally from operations and from external sources. Based upon its current financial condition and credit relationships, MDC believes that it has, or can obtain, adequate financial resources to satisfy its current and near-term capital requirements. The Company believes that it can meet its long-term capital needs (including, among other things, meeting future debt payments and refinancing or paying off other long-term debt as it becomes due) from operations and external financing sources. CONSOLIDATED CASH FLOW. For the three months ended March 31, 1994, MDC used $3,414,000 in cash exclusive of $17,017,000 in cash used to reduce amounts outstanding under lines of credit and notes payable from amounts outstanding at December 31, 1993. At March 31, 1994, the Company had $42,572,000 available in cash and cash equivalents. MDC's Operating Activities during the first three months of 1994 used net cash of $7,015,000 compared with net cash used of $23,135,000 during the same period in 1993. The net cash used in Operating Activities during the first three months of 1994 principally was due to increases in home building inventories as a result of significantly increased levels of home building activity, offset partially by a reduction in mortgage loans held in inventory. The net cash used by Operating Activities during the first three months of 1993 principally was due to increases in mortgage loans held in inventory, housing inventories and accounts receivable resulting from increased mortgage lending and home building activities in such period. Net cash provided by Investing Activities during the first three months of 1994 and 1993 totalled $29,843,000 and $50,421,000, respectively, and primarily was generated by (i) principal payments and prepayments on, and sales of, Mortgage Collateral; and (ii) in 1993, sales of marketable preferred shares used by the Company in its cash management activities. A substantial portion of the cash flow generated by these reductions was used to make required principal payments on the CMO bonds collateralized by these assets, which principally resulted in the net use of cash in Financing Activities in the first three months of 1994 and 1993 of $43,259,000 and $25,850,000, respectively. In 1994, cash used in Financing Activities was increased by net paydowns of notes payable and lines of credit. The net cash used in Financing Activities in the first three months of 1993 was partially offset by net advances on lines of credit. -29- NOTES PAYABLE, LINES OF CREDIT AND SUBORDINATED NOTES. HOME BUILDING. The aggregate amount of MDC's home building bank lines of credit at March 31, 1994 was $70,000,000. Borrowings under the bank lines of credit are collateralized by home building inventories and are limited to the value of "eligible collateral" (as defined in the credit agreements). At March 31, 1994, $38,800,000 was borrowed and an additional $26,651,000 was collateralized and available to be borrowed under the bank lines of credit. As discussed above, the Company, during 1993 and the first three months of 1994, significantly expanded its home building operations and is planning to continue to expand its home building activities during the remainder of 1994 depending on economic conditions and the availability of attractive opportunities. The Company intends to finance this expansion primarily with increased bank lines of credit and through internal sources. However, when necessary, as has been the case in prior years, MDC may replace or supplement its bank lines of credit with secured project financing. The cost of secured project financing generally is higher than the cost of the Company's bank lines of credit. MORTGAGE LENDING. The aggregate amount available under MDC's mortgage lending bank line of credit (the "Mortgage Line") at March 31, 1994 was $75,000,000. 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 agreements). At March 31, 1994, $12,850,000 was borrowed and an additional $16,840,000 was collateralized and available to be borrowed under the Mortgage Line. To provide funds for mortgage loan financing for MDC's home buyers and others on a spot basis, HomeAmerican utilizes its Mortgage Line to finance these mortgage loans on a short-term basis. These mortgage loans are pooled into GNMA, FNMA and FHLMC pools or retained as whole loans and subsequently are sold in the open market on a "spot" basis and pursuant to mortgage loan sale commitments. During the three months ended March 31, 1994 and 1993, HomeAmerican sold $153,884,000 and $116,190,000, respectively, principal amount of mortgage loans and mortgage certificates to unaffiliated purchasers. GENERAL. In the event that MDC's lines of credit are not renewed, or are renewed as they become due at substantially lower levels, the Company believes that it could meet its business plan through a combination of internally- generated funds and new borrowings. Required repayments of its lines of credit have in the past been, and could in the future be, repaid with, among other things, (i) available cash and/or the proceeds from the liquidation of available short-term investments; and/or (ii) the proceeds from the sale or liquidation of certain other of the Company's home building, mortgage and other assets. The sale or liquidation of assets could be at prices that are less than the carrying value of such assets and may affect adversely the Company's future financial condition and results of operations. -30- ASSET MANAGEMENT SEGMENT ASSETS AND LIABILITIES. Throughout 1993 and the first three months of 1994, the asset management segment continued to experience a net liquidation of assets and related reduction of liabilities. Mortgage Collateral, net, and related assets, has declined from $275,467,000 at January 1, 1993 to $134,166,000 at December 31, 1993 and to $103,553,000 at March 31, 1994. The proceeds from these reductions were used primarily to reduce the related CMO bonds, net, and related liabilities from $256,347,000 at January 1, 1993 to $123,500,000 at December 31, 1993 and to $96,802,000 at March 31, 1994. These asset and liability reductions substantially were the result of (i) the high rate of prepayments on the Mortgage Collateral; and (ii) sales of Mortgage Collateral and related assets at a premium to face value and related redemptions of CMO bonds. The Company's Mortgage Collateral and related CMO bonds will continue to decrease as payments and prepayments are received or Mortgage Collateral is sold. The Company's Equity CMO Interests also have declined from $16,930,000 at January 1, 1993 to $6,427,000 at December 31, 1993 and to $5,265,000 at March 31, 1994 due to the receipt of distributions of capital and, in 1993, valuation adjustments. MATERIAL CHANGES IN OTHER ASSETS AND LIABILITIES. HOME BUILDING RECEIVABLES. Home building receivables consist principally of receivables from home sales (representing the proceeds from home closings not yet disbursed by unrelated settlement agents), which usually are collected within seven days after the sale is closed, and certain other receivables. Such receivables totalled $8,560,000 at March 31, 1994 compared with $5,423,000 at December 31, 1993. The increase at March 31, 1994 is due to increased closings and the timing of such closings. HOUSING COMPLETED OR UNDER CONSTRUCTION. Housing completed or under construction increased to $226,825,000 at March 31, 1994 compared with $201,023,000 at December 31, 1993 principally due to an increase in Backlog under construction. LAND AND LAND UNDER DEVELOPMENT. Land and land under development totalled $186,511,000 at March 31, 1994 compared with $192,881,000 at December 31, 1993. The decline in land inventories is due principally to (i) increased home construction activity; (ii) the continued use of "rolling" options, with periodic takedowns of lots, to acquire new land inventories for use in the Company's home building activities; and (iii) sales and other dispositions of land. Based upon its current business plan, MDC anticipates the acquisition, during the balance of 1994, of various parcels of finished lots and partially- developed land for use in its future home building operations. The Company currently intends to acquire a significant portion of the land inventories required in future periods through take downs of lots subject to rolling options entered into in prior periods and under new rolling option agreements. The use of rolling options lessens the Company's risk and improves liquidity. -31- MORTGAGE LOANS HELD IN INVENTORY. Mortgage loans held in inventory decreased to $48,865,000 at March 31, 1994 compared with $68,065,000 at December 31, 1993, due to the decreased mortgage loan originations in the first quarter of 1994 compared with the fourth quarter of 1993. -32- M.D.C. HOLDINGS, INC. FORM 10-Q PART II ITEM 1. LEGAL PROCEEDINGS. SETTLEMENT OF WESTERN SAVINGS CIVIL MATTERS. In December 1993, the Resolution Trust Corporation (the "RTC"), acting in its corporate capacity and as receiver for Western Savings and Loan Association ("Western"), gave its final administrative approval to an agreement-in-principle executed between MDC and the RTC in February 1993 which provides for a settlement and mutual release of all potential claims between the parties and related persons relating to any of the Company's past transactions with Western. Under the terms of the approved agreement-in-principle, MDC would (i) pay to the RTC approximately $3,700,000 in cash plus certain interest thereon; and (ii) release its related potential claims against the RTC and Western. MDC had fully reserved for this settlement as of December 31, 1992 and does not anticipate any adverse effect on the Company's operations or financial position. The settlement remains subject to the negotiation of formal settlement documents acceptable to both MDC and the RTC and a court order determining that the settlement precludes the filing of cross-claims against MDC by various third parties. THRIFT INDUSTRY INVESTIGATIONS. The Company understands that investigations are being conducted by Federal grand juries and other government agencies in various states with regard to the failures of a number of thrifts with which MDC had business transactions during the period of 1983 through mid-1988. The Company and its affiliates have received and responded to subpoenas requesting documents and information in connection with certain investigations and may in the future receive additional inquiries or subpoenas. No indictments or charges have been brought against the Company or any of its officials by any grand jury investigating the failure of any savings and loan institutions. Although the Company believes there is no basis for the imposition against the Company or its officials of criminal or civil liability in connection therewith, were any indictment or charge to be brought against the Company, there could be a material adverse effect upon the Company's financial position and liquidity. 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 of the Company. -33- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS. No matters were submitted to securityholders during the first quarter of 1994. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibit: 28 Form of Independent Accountants' Review Report dated April 26, 1994. (b) Reports on Form 8-K: On March 28, 1994, a Form 8-K was filed for certain Item 5 events thereunder. 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: May 16, 1994 M.D.C. HOLDINGS, INC. (Registrant) By: /s/Paris G. Reece III --------------------- Paris G. Reece III, Vice President, Chief Financial Officer and Principal Accounting Officer -34- EXHIBIT INDEX Exhibit No. Description Page # - ----------- ----------- ------ 28 Form of Independent Accountants' Review Report dated April 26, 1994. 36 -35- EX-28 2 EXHIBIT 28 EXHIBIT 28 INDEPENDENT ACCOUNTANTS' REVIEW REPORT To the Board of Directors and Stockholders of M.D.C. Holdings, Inc. We have reviewed the accompanying condensed consolidated balance sheet of M.D.C. Holdings, Inc. and subsidiaries (the "Company") as of March 31, 1994, and the related condensed consolidated statements of income and of cash flows for the three-month periods ended March 31, 1994 and 1993. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We previously audited in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1993, and the related consolidated statements of income, of stockholders' equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 10, 1994 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1993, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ Price Waterhouse - -------------------------- PRICE WATERHOUSE Los Angeles, California April 26, 1994 -36- -----END PRIVACY-ENHANCED MESSAGE-----