-----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, PcLL92UzMGn+B0Ahh2vYngovw7TP/agVwb44Dg46zMhA4tiIKqPgcXBudxTacmUv XMxyN2vDW5p1nTHa2pupUA== 0000912057-94-002674.txt : 19940816 0000912057-94-002674.hdr.sgml : 19940816 ACCESSION NUMBER: 0000912057-94-002674 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940815 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: 94543887 BUSINESS ADDRESS: STREET 1: 3600 S YOSEMITE ST STE 900 CITY: DENVER STATE: CO ZIP: 80237 BUSINESS PHONE: 3037731100 10-Q 1 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 June 30, 1994 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-8951 M.D.C. HOLDINGS, INC. (Exact name of Registrant as specified in its charter) Delaware 84-0622967 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 3600 South Yosemite Street, Suite 900 80237 Denver, Colorado (Zip code) (Address of principal executive offices) (303) 773-1100 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of July 21, 1994, 19,039,000 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 June 30, 1994 (Unaudited) and December 31, 1993 . . . . . . . . . . . . . . . . . . 1 Statements of Income for the three and six months ended June 30, 1994 and 1993 (Unaudited). . . . . . . . . . 3 Statements of Cash Flows for the six months ended June 30, 1994 and 1993 (Unaudited). . . . . . . . . . 4 Notes to Financial Statements (Unaudited) . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . 21 Part II. Other Information: Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 39 Item 4. Submission of Matters to a Vote of Stockholders . . . . 40 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 40 -i- M.D.C. HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, DECEMBER 31, 1994 1993 ----------- ------------ (UNAUDITED) ASSETS Corporate Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 27,782 $ 42,443 Investments and marketable securities, net . . . . . . . . . 983 765 Property and equipment, net. . . . . . . . . . . . . . . . . 10,181 10,432 Deferred income taxes. . . . . . . . . . . . . . . . . . . . 10,648 8,100 Deferred issue costs, net. . . . . . . . . . . . . . . . . . 10,936 11,233 Other assets, net. . . . . . . . . . . . . . . . . . . . . . 1,453 3,200 --------- --------- 61,983 76,173 --------- --------- Home Building Cash and cash equivalents. . . . . . . . . . . . . . . . . . 13,868 18,479 Home sales and other accounts receivable . . . . . . . . . . 15,441 5,423 Investment in metropolitan district bonds. . . . . . . . . . 16,395 13,795 Inventories, net Housing completed or under construction. . . . . . . . . . 275,887 201,023 Land and land under development. . . . . . . . . . . . . . 176,448 192,881 Prepaid expenses and other assets, net . . . . . . . . . . . 53,092 48,863 --------- --------- 551,131 480,464 --------- --------- Mortgage Lending Cash and cash equivalents. . . . . . . . . . . . . . . . . . 1,760 1,505 Restricted cash. . . . . . . . . . . . . . . . . . . . . . . 3,400 3,400 Accrued interest and other assets, net . . . . . . . . . . . 1,655 2,571 Mortgage loans held in inventory, net. . . . . . . . . . . . 42,452 68,065 --------- --------- 49,267 75,541 --------- --------- Asset Management Cash and cash equivalents. . . . . . . . . . . . . . . . . . 563 576 Mortgage Collateral, net, and assets related to CMO bonds and related liabilities. . . . . . . . . . . . . . . . . . 81,338 134,166 Equity CMO Interests, net. . . . . . . . . . . . . . . . . . 4,375 6,427 Other loans and assets, net. . . . . . . . . . . . . . . . . 2,861 3,519 --------- --------- 89,137 144,688 --------- --------- Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . $751,518 $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)
JUNE 30, DECEMBER 31, 1994 1993 ----------- ------------ (UNAUDITED) LIABILITIES Corporate Accounts payable and accrued expenses. . . . . . . . . . . . $ 22,043 $ 20,846 Income taxes payable . . . . . . . . . . . . . . . . . . . . 19,668 28,711 Notes payable. . . . . . . . . . . . . . . . . . . . . . . . 3,604 3,624 Senior Notes, net. . . . . . . . . . . . . . . . . . . . . . 187,284 187,199 Subordinated Notes, net. . . . . . . . . . . . . . . . . . . 38,204 38,213 --------- --------- 270,803 278,593 --------- --------- Home Building Accounts payable and accrued expenses. . . . . . . . . . . . 80,926 70,741 Lines of credit. . . . . . . . . . . . . . . . . . . . . . . 67,468 24,645 Notes payable. . . . . . . . . . . . . . . . . . . . . . . . 49,053 62,495 --------- --------- 197,447 157,881 --------- --------- Mortgage Lending Accounts payable and accrued expenses. . . . . . . . . . . . 4,344 8,487 Line of credit . . . . . . . . . . . . . . . . . . . . . . . 16,685 29,500 --------- --------- 21,029 37,987 --------- --------- Asset Management Accounts payable and accrued expenses. . . . . . . . . . . . 1,740 3,051 CMO bonds, net, and related liabilities, recourse solely to applicable subsidiary assets. . . . . . . . . . . . . . 76,651 123,500 --------- --------- 78,391 126,551 --------- --------- Total Liabilities. . . . . . . . . . . . . . . . . . . . . 567,670 601,012 --------- --------- COMMITMENTS AND CONTINGENCIES. . . . . . . . . . . . . . . . . . -- -- --------- --------- STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 25,000,000 shares authorized; none issued. . . . . . . . . . . . . . . . . . . . . . . . . -- -- Common Stock, $.01 par value; 100,000,000 shares authorized; 21,706,000 and 20,914,000 shares issued, respectively, at June 30, 1994 and December 31, 1993. . . . . . . . . . . . . 217 209 Additional paid-in capital . . . . . . . . . . . . . . . . . . 133,664 133,455 Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 65,672 57,879 --------- --------- 199,553 191,543 Less treasury stock, at cost; 2,667,000 and 2,664,000 shares, respectively, at June 30, 1994 and December 31, 1993 . . . . (15,705) (15,689) --------- --------- Total Stockholders' Equity . . . . . . . . . . . . . . . . 183,848 175,854 --------- --------- Total Liabilities and Stockholders' Equity . . . . . . . . . . . $ 751,518 $ 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 SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------------ ------------------------ 1994 1993 1994 1993 --------- --------- --------- --------- REVENUES: Home Building. . . . . . . . . . . . . . . . . . . . $ 190,257 $ 145,280 $ 348,835 $ 244,002 Mortgage Lending . . . . . . . . . . . . . . . . . . 3,903 6,042 9,390 9,478 Asset Management . . . . . . . . . . . . . . . . . . 3,336 7,877 7,6022 1,046 Corporate. . . . . . . . . . . . . . . . . . . . . . 275 458 637 1,016 --------- --------- --------- --------- Total Revenues. . . . . . . . . . . . . . . . . . 197,771 159,657 366,464 275,542 --------- --------- --------- --------- COSTS AND EXPENSES: Home Building. . . . . . . . . . . . . . . . . . . . 177,931 139,453 327,196 236,316 Mortgage Lending . . . . . . . . . . . . . . . . . . 2,265 3,111 4,848 5,706 Asset Management . . . . . . . . . . . . . . . . . . 2,553 6,194 5,7971 4,695 Corporate general and administrative . . . . . . . . 3,966 3,809 7,899 7,383 Corporate and home building interest (Note E). . . . 2,051 2,671 5,007 5,888 --------- --------- --------- --------- Total Expenses. . . . . . . . . . . . . . . . . . 188,766 155,238 350,747 269,988 --------- --------- --------- --------- Income before income taxes . . . . . . . . . . . . . . 9,005 4,419 15,717 5,554 Provision for income taxes . . . . . . . . . . . . . . 3,301 1,405 6,207 1,625 --------- --------- --------- --------- Net Income . . . . . . . . . . . . . . . . . . . . . . $ 5,704 $ 3,014 $ 9,510 $ 3,929 --------- --------- --------- --------- --------- --------- --------- --------- EARNINGS PER SHARE Primary. . . . . . . . . . . . . . . . . . . . . . . $ .28 $ .14 $ .47 $ .18 --------- --------- --------- --------- --------- --------- --------- --------- Fully-diluted. . . . . . . . . . . . . . . . . . . . $ .25 $ .14 $ .43 $ .18 --------- --------- --------- --------- --------- --------- --------- --------- WEIGHTED-AVERAGE SHARES OUTSTANDING Primary. . . . . . . . . . . . . . . . . . . . . . . 20,480 22,337 20,403 22,284 --------- --------- --------- --------- --------- --------- --------- --------- Fully-diluted. . . . . . . . . . . . . . . . . . . . 24,094 22,399 24,045 22,399 --------- --------- --------- --------- --------- --------- --------- --------- DIVIDENDS DECLARED PER SHARE . . . . . . . . . . . . . $ .02 $ -- $ .02 $ -- --------- --------- --------- --------- --------- --------- --------- ---------
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, ------------------------- 1994 1993 ---------- ---------- OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,510 $ 3,929 Adjustments To Reconcile Net Income To Net Cash Used In Operating Activities: Gains on sales of mortgage-related assets. . . . . . . . . . (358) (5,982) Depreciation and amortization. . . . . . . . . . . . . . . . 4,411 3,435 Equity CMO Interest valuation adjustments. . . . . . . . . . -- 2,600 Net Changes In Assets and Liabilities Mortgage loans held in inventory . . . . . . . . . . . . . . 25,839 (25,062) Home building inventories. . . . . . . . . . . . . . . . . . (61,050) (49,358) Receivables. . . . . . . . . . . . . . . . . . . . . . . . . (9,526) (3,849) Accounts payable and accrued expenses. . . . . . . . . . . . (2,912) 24,125 Deferred income taxes. . . . . . . . . . . . . . . . . . . . (2,548) 622 Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (4,301) (7,913) ---------- ---------- Net Cash Used In Operating Activities. . . . . . . . . . . . . . (40,935) (57,453) ---------- ---------- INVESTING ACTIVITIES: Mortgage Collateral and other loans Principal payments and prepayments . . . . . . . . . . . . . 28,891 47,528 Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,173 23,263 Distributions of capital from Equity CMO Interests. . . . . . 2,052 4,247 CMO Bond principal payments. . . . . . . . . . . . . . . . . . -- 2,576 Changes in investments and marketable securities, net. . . . . -- 12,000 Changes in restricted cash, net. . . . . . . . . . . . . . . . 5,522 (2,589) Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . (505) (378) ---------- ---------- Net Cash Provided By Investing Activities. . . . . . . . . . . . 53,133 86,647 ---------- ----------
See notes to condensed consolidated financial statements. -4- M.D.C. HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 1994 1993 ---------- ---------- FINANCING ACTIVITIES: CMO bonds - Principal payments . . . . . . . . . . . . . . . . $ (46,378) $ (60,858) Lines of credit Advances . . . . . . . . . . . . . . . . . . . . . . . . . . 301,805 144,384 Principal payments . . . . . . . . . . . . . . . . . . . . . (271,797) (119,803) Subordinated Note payments . . . . . . . . . . . . . . . . . . -- (1,690) Notes payable Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . 11,070 44,768 Principal payments . . . . . . . . . . . . . . . . . . . . . (26,049) (35,485) Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . 121 202 ---------- ---------- Net Cash Used In Financing Activities. . . . . . . . . . . . . . (31,228) (28,482) ---------- ---------- Net Increase (Decrease) In Cash and Cash Equivalents . . . . . . (19,030) 712 Cash and Cash Equivalents Beginning Of Period. . . . . . . . . . . . . . . . . . . . . . 63,003 61,028 ---------- ---------- End Of Period. . . . . . . . . . . . . . . . . . . . . . . . . $43,973 $61,740 ---------- ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest, net of amounts capitalized . . . . . . . . . . . . . $8,951 $15,121 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 16,864 3,237 SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS Home building inventory purchases financed by seller . . . . . $ 3,693 $ 4,407 Home building land inventory sales financed by MDC . . . . . . 848 1,385 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 June 30, 1994 and for all of the periods presented. These statements are condensed and do not include all of the information required by generally accepted accounting principles in a full set of financial statements. These statements should be read in conjunction with MDC's financial statements and notes thereto included in MDC's Annual Report on Form 10-K for its fiscal year ended December 31, 1993, as amended. Price Waterhouse LLP has made a review, and not an audit, of the unaudited condensed consolidated financial statements of the Company for the three-month and six-month periods ended June 30, 1994 and 1993 (based on procedures adopted by the American Institute of Certified Public Accountants) as set forth in their separate report dated July 26, 1994, which is included as an exhibit to this Form 10-Q. This report is not a "report" within the meaning of Sections 7 and 11 of the Securities Act of 1933 and the independent accountant's liability under Section 11 does not extend to it. Certain reclassifications have been made in the 1993 financial statements to conform to the classifications used in the current year. -6- B. INFORMATION ON BUSINESS SEGMENTS The Company operates in three business segments: home building, mortgage lending and asset management. A summary of the Company's segment information is shown below (in thousands).
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------------- ----------------------- 1994 1993 1994 1993 -------- -------- -------- -------- Home Building Home sales. . . . . . . . . . . . . . . . . . . . . . . $184,878 $142,136 $341,613 $239,744 Land sales. . . . . . . . . . . . . . . . . . . . . . . 4,961 2,271 6,711 3,327 Other revenues. . . . . . . . . . . . . . . . . . . . . 418 873 511 931 -------- -------- -------- -------- 190,257 145,280 348,835 244,002 -------- -------- -------- -------- Home cost of sales. . . . . . . . . . . . . . . . . . . 155,919 121,777 287,398 204,972 Land cost of sales. . . . . . . . . . . . . . . . . . . 4,118 2,623 6,155 3,719 Marketing . . . . . . . . . . . . . . . . . . . . . . . 10,925 8,796 19,927 15,152 General and administrative. . . . . . . . . . . . . . . 6,969 6,257 13,716 12,473 -------- -------- -------- -------- 177,931 139,453 327,196 236,316 -------- -------- -------- -------- Operating Profit. . . . . . . . . . . . . . . . . . 12,326 5,827 21,639 7,686 -------- -------- -------- -------- Mortgage Lending Interest revenues . . . . . . . . . . . . . . . . . . . $695 $1,329 $1,460 $2,227 Origination fees. . . . . . . . . . . . . . . . . . . . 1,145 1,557 2,381 2,642 Gains on sale of mortgage servicing . . . . . . . . . . 1,896 1,814 4,768 2,586 Gains (losses) on sales of mortgage loans, net. . . . . (280) 990 (181) 1,354 Mortgage servicing and other. . . . . . . . . . . . . . 447 352 962 669 -------- -------- -------- -------- 3,903 6,042 9,390 9,478 -------- -------- -------- -------- Interest expense. . . . . . . . . . . . . . . . . . . . 56 505 250 760 General and administrative. . . . . . . . . . . . . . . 2,209 2,606 4,598 4,946 -------- -------- -------- -------- 2,265 3,111 4,848 5,706 -------- -------- -------- -------- Operating Profit. . . . . . . . . . . . . . . . . . 1,638 2,931 4,542 3,772 -------- -------- -------- -------- Asset Management Interest revenues . . . . . . . . . . . . . . . . . . . 2,416 6,071 5,343 12,999 Gains on sales of mortgage-related assets . . . . . . . 45 801 358 5,982 Management fees and other . . . . . . . . . . . . . . . 1,159 1,289 2,466 2,630 -------- -------- -------- -------- 3,620 8,161 8,167 21,611 -------- -------- -------- -------- Interest expense. . . . . . . . . . . . . . . . . . . . 1,960 4,940 4,514 10,728 Equity in losses of Equity CMO Interests, net . . . . . -- 600 -- 2,600 General and administrative. . . . . . . . . . . . . . . 593 654 1,283 1,367 -------- -------- -------- -------- 2,553 6,194 5,797 14,695 -------- -------- -------- -------- Operating Profit. . . . . . . . . . . . . . . . . . 1,067 1,967 2,370 6,916 -------- -------- -------- --------
-7-
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------------- ----------------------- 1994 1993 1994 1993 -------- -------- -------- -------- Corporate Other revenues. . . . . . . . . . . . . . . . . . . . . 275 458 637 1,016 -------- -------- -------- -------- Interest expense. . . . . . . . . . . . . . . . . . . . 2,335 2,955 5,572 6,453 General and administrative. . . . . . . . . . . . . . . 3,966 3,809 7,899 7,383 -------- -------- -------- -------- 6,301 6,764 13,471 13,836 -------- -------- -------- -------- Net Corporate Expenses . . . . . . . . . . . . . . . (6,026) (6,306) (12,834) (12,820) -------- -------- -------- -------- Intersegment Eliminations Asset management interest revenues. . . . . . . . . . . (284) (284) (565) (565) -------- -------- -------- -------- Corporate interest expense. . . . . . . . . . . . . . . (284) (284) (565) (565) -------- -------- -------- -------- -- -- -- -- -------- -------- -------- -------- Income Before Income Taxes . . . . . . . . . . . . . . . . $ 9,005 $ 4,419 $ 15,717 $ 5,554 -------- -------- -------- -------- -------- -------- -------- --------
C. ACQUISITION OF ADDITIONAL SHARES OF RICHMOND HOMES Prior to February 2, 1994, Messrs. Larry A. Mizel (Chairman of the Board and Chief Executive Officer of the Company) and David D. Mandarich (Executive Vice President - Real Estate and a director of the Company) owned 35% of the outstanding shares of Richmond Homes, Inc. I ("Richmond Homes") common stock. Richmond Homes and its subsidiaries conduct the Company's Colorado home building operations. In furtherance of the Company's desire to own all of the outstanding shares of Richmond Homes common stock, in December 1993 a special committee of the Board of Directors of the Company (the "Special Committee") negotiated on behalf of the Company terms of an option agreement with Messrs. Mizel and Mandarich to purchase the shares of Richmond Homes common stock owned by them for a purchase price of up to $3,500,000 in the aggregate. The purchase price for the shares of Richmond Homes common stock was to be paid in additional shares of common stock of MDC ("MDC Common Stock") valued at $5.75 per share, which was the closing price of MDC Common Stock on the date of the option agreement. The Special Committee engaged a financial advisor to perform a business enterprise evaluation of Richmond Homes. In February 1994, based on the results of the evaluation, the maximum of $3,500,000 was paid by issuing an aggregate of 608,695 shares of MDC Common Stock to Messrs. Mizel and Mandarich. As the transaction was between related parties, the issuance of the MDC Common Stock was recorded based on the net book value of Richmond Homes, which had approximately zero common stockholders' equity at the date of the acquisition. Accordingly, the value of the shares of MDC Common Stock issued to Messrs. Mizel and Mandarich was recorded at zero. D. ACCOUNTING CHANGE - ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES Effective January 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which supersedes SFAS No. 12. The adoption of SFAS No. 115 had no effect on Net Income and had an immaterial effect on Stockholders' Equity. -8- E. CORPORATE AND HOME BUILDING INTEREST ACTIVITY
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------------- ----------------------- 1994 1993 1994 1993 -------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) Interest capitalized in home building inventory, beginning of period. . . . . . . . . . . . . . . . . . . $ 41,881 $ 47,518 $ 42,681 $ 48,440 Corporate and home building interest incurred. . . . . . . 8,883 6,230 17,247 12,286 Corporate and home building interest expensed. . . . . . . (2,051) (2,671) (5,007) (5,888) Previously capitalized home building interest included in cost of sales. . . . . . . . . . . . . . . . . . . . . . (6,191) (4,647) (12,399) (8,408) -------- -------- -------- -------- Interest capitalized in home building inventory, end of period . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,522 $ 46,430 $ 42,522 $ 46,430 -------- -------- -------- -------- -------- -------- -------- -------- Home building inventories, end of period . . . . . . . . . $452,335 $390,546 $452,335 $390,546 -------- -------- -------- -------- -------- -------- -------- --------
-9- F. EARNINGS PER SHARE Primary earnings per share are based on the weighted-average number of common and common equivalent shares outstanding during each period. In 1994, the computation of fully-diluted earnings per share also assumes the conversion into MDC Common Stock of all of the $28,000,000 outstanding principal amount of the 8 3/4% convertible subordinated notes due December 2005 (the "Convertible Notes") at a conversion price of $7.75 per share of MDC Common Stock. The primary and fully-diluted earnings per share calculations are shown below (in thousands except per share amounts).
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------------- ----------------------- 1994 1993 1994 1993 -------- -------- -------- -------- Primary Earnings Per Share Calculation: Net Income . . . . . . . . . . . . . . . . . . . . . . . . $ 5,704 $ 3,014 $ 9,510 $ 3,929 -------- -------- -------- -------- -------- -------- -------- -------- Weighted-average shares outstanding. . . . . . . . . . . . 19,021 20,448 18,885 20,394 Dilutive stock options . . . . . . . . . . . . . . . . . . 1,459 1,889 1,518 1,890 -------- -------- -------- -------- Total Weighted-Average Shares. . . . . . . . . . . . . . 20,480 22,337 20,403 22,284 -------- -------- -------- -------- -------- -------- -------- -------- Primary Earnings Per Share . . . . . . . . . . . . . . . . $ .28 $ .14 $ .47 $ .18 -------- -------- -------- -------- -------- -------- -------- -------- Fully-Diluted Earnings Per Share Calculation: Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 5,704 $ 3,014 $ 9,510 $ 3,929 Adjustment for interest on Convertible Notes, net of income tax benefit; conversion assumed . . . . . . . . . 384 -- 768 -- -------- -------- -------- -------- Adjusted Net Income. . . . . . . . . . . . . . . . . . $ 6,088 $ 3,014 $ 10,278 $ 3,929 -------- -------- -------- -------- -------- -------- -------- -------- Weighted-average shares outstanding. . . . . . . . . . . . 19,021 20,448 18,885 20,394 Dilutive stock options . . . . . . . . . . . . . . . . . . 1,460 1,951 1,547 2,005 Shares issuable upon conversion of Convertible Notes; conversion assumed . . . . . . . . . . . . . . . . . . . 3,613 -- 3,613 -- -------- -------- -------- -------- Total Weighted-Average Shares. . . . . . . . . . . . . 24,094 22,399 24,045 22,399 -------- -------- -------- -------- -------- -------- -------- -------- Fully-Diluted Earnings Per Share . . . . . . . . . . . . . $ .25 $ .14 $ .43 $ .18 -------- -------- -------- -------- -------- -------- -------- --------
-10- G. EQUITY CMO INTERESTS MDC owns a 49.999% ownership interest in seven collateralized mortgage obligation ("CMO") issuances which are accounted for on the equity method (collectively, "Equity CMO Interests"). The unaudited condensed financial information of the Equity CMO Interests is set forth below. The information provided includes 100% of the gross assets and liabilities and operating results comprising these interests (in thousands).
JUNE 30, DECEMBER 31, 1994 1993 ----------- ------------ Condensed Combined Summarized Financial Condition (100%) Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 305,622 $ 422,338 Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288,238 398,048 ---------- ---------- Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,384 $ 24,290 ---------- ---------- ---------- ---------- MDC's Share of Net Assets (Net of Valuation Allowances of $4,317 and $5,718, respectively, at June 30, 1994 and December 31, 1993). . . . $ 4,375 $ 6,427 ---------- ---------- ---------- ----------
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------------- ----------------------- 1994 1993 1994 1993 -------- -------- -------- -------- Condensed Combined Operating Results (100%) Earnings before premium/discount amortization Interest and other revenues. . . . . . . . . . . . . . $ 7,367 $ 13,134 $ 16,184 $ 28,662 Interest and other expenses. . . . . . . . . . . . . . 6,262 10,133 13,130 22,296 -------- -------- -------- -------- 1,105 3,001 3,054 6,366 -------- -------- -------- -------- Premium/discount amortization. . . . . . . . . . . . . . (2,591) (4,425) (5,856) (12,046) -------- -------- -------- -------- Net Loss (100%). . . . . . . . . . . . . . . . . . . . . . $ (1,486) $ (1,424) $ (2,802) $ (5,680) -------- -------- -------- -------- -------- -------- -------- -------- Equity in losses of Equity CMO Interests before valuation adjustments. . . . . . . . . . . . . . . . . . $ -- $ -- $ -- $ -- Valuation adjustments. . . . . . . . . . . . . . . . . . . -- (600) -- (2,600) -------- -------- -------- -------- Equity in losses of Equity CMO Interests, net of valuation adjustments. . . . . . . . . . . . . . . . . . $ -- $ (600) $ -- $ (2,600) -------- -------- -------- -------- -------- -------- -------- --------
MDC's share of net losses for the three and six months ended June 30, 1994 was $743,000 and $1,401,000, respectively, and for the three and six months ended June 30, 1993 was $712,000 and $2,840,000, respectively, all of which was charged against valuation allowances. -11- H. SUBSEQUENT EVENT On August 4, 1994, Superior Metropolitan District No. 1 ("District No. 1") and Superior Metropolitan District No. 2 ("District No. 2") (collectively, the "Districts") issued $35,730,000 principal amount of bonds (the "Bonds"). The Districts were organized and are operated to provide, among other things, water and sanitary sewer services, street improvements and park and recreation facilities for inhabitants of a master-planned community located northwest of Denver (the "Project"). A significant portion of the Project served by such Districts is owned and is being developed by the Company. Part of the proceeds of the offering were utilized to redeem in full, at par value, all of the outstanding bonds of the Districts, totaling $16,395,000, all of which were owned by the Company. Additionally, proceeds totaling approximately $11,000,000 were paid to the Company by District No. 1 to purchase certain interests in a water supply project (the "Water Project") and to reimburse the Company for prepaid water taps and for certain other funds previously advanced to District No. 1. In connection with the issuance of the Bonds, MDC has guaranteed payment of principal and interest on $27,500,000 principal amount of District No. 1 Bonds and has entered into certain agreements with District No. 1 to purchase certain water and sewer tap fees and storm drainage fees (collectively, the "Fees") in connection with the Companys home building operations within the Project. In connection with the guarantee, MDC was required to deposit $10,000,000 into a trust account. Of the funds in the trust account, $6,000,000 will be released in $1,000,000 increments as certain levels of completed homes are achieved in the Project, provided that if the Water Project is not completed by January 1, 1997 or if the Water Project is enjoined and such injunction is not lifted, no withdrawals may occur. The $4,000,000 balance will be released upon the earlier of (i) the completion of the Water Project; or (ii) the resolution (to the extent provided in the Indenture executed in connection with the issuance of the Bonds) of certain litigation seeking, among other things, to delay the Water Project's completion. In addition, MDC has guaranteed payment of principal and interest on $2,580,000 principal amount of District No. 2 Bonds. I. SUPPLEMENTAL GUARANTOR INFORMATION The Senior Notes are guaranteed unconditionally on an unsecured subordinated basis, jointly and severally, (the "Guaranties") by Richmond American Homes of California, Inc., Richmond American Homes of Maryland, Inc., Richmond American Homes of Nevada, Inc., Richmond American Homes of Virginia, Inc., Richmond American Homes, Inc., Richmond Homes, Inc. I and Richmond Homes, Inc. II (collectively, the "Guarantors"). The Guaranties are subordinated to all Guarantor Senior Indebtedness (as defined in the Senior Notes Indenture). In June 1994, MDC (Parent Company) exchanged three notes receivable from a Guarantor subsidiary with a principal amount of $104,350,000 for a new note receivable from the same Guarantor subsidiary with a principal amount of $69,731,000. Because the exchange was between parties under common control, the difference between the principal amounts of the notes exchanged, net of taxes, was recorded as an additional investment in the Guarantor subsidiary by the Parent and as additional paid-in-capital by the Guarantor subsidiary. Supplemental combining financial information follows. -12- SUPPLEMENTAL COMBINING BALANCE SHEET JUNE 30, 1994 (IN THOUSANDS)
UNCONSOLIDATED --------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC --------- ------------ ------------ ----------- ------------ ASSETS Corporate Cash and cash equivalents. . . . . . . . . . . . $ 27,779 $ -- $ 3 $ -- $ 27,782 Investments and marketable securities, net . . . 979 -- 4 -- 983 Investments in subsidiaries. . . . . . . . . . . 234,942 24,365 -- (259,307) -- Advances and notes receivable - Parent and subsidiaries. . . . . . . . . . . . 234,945 -- 77,307 (312,252) -- Property and equipment, net. . . . . . . . . . . 10,181 -- -- -- 10,181 Deferred income taxes. . . . . . . . . . . . . . 10,648 -- -- -- 10,648 Deferred issue costs, net. . . . . . . . . . . . 10,936 -- -- -- 10,936 Other assets, net. . . . . . . . . . . . . . . . 1,274 -- 179 -- 1,453 --------- --------- --------- --------- --------- 531,684 24,365 77,493 (571,559) 61,983 --------- --------- --------- --------- --------- Home Building Cash and cash equivalents. . . . . . . . . . . . -- 12,939 929 -- 13,868 Trade and other accounts receivable. . . . . . . 500 23,803 301 (9,163) 15,441 Investment in metropolitan district bonds. . . . 14,000 2,395 -- -- 16,395 Inventories, net Housing completed or under construction. . . . -- 258,080 17,807 -- 275,887 Land and land under development. . . . . . . . (1,530) 143,501 33,500 977 176,448 Prepaid expenses and other assets, net . . . . . 3,499 41,200 8,393 -- 53,092 --------- --------- --------- --------- --------- 16,469 481,918 60,930 (8,186) 551,131 --------- --------- --------- --------- --------- Mortgage Lending Cash and cash equivalents. . . . . . . . . . . . -- -- 1,760 -- 1,760 Restricted cash. . . . . . . . . . . . . . . . . -- -- 3,400 -- 3,400 Other assets, net. . . . . . . . . . . . . . . . -- -- 42,452 -- 42,452 Mortgage loans held in inventory, net. . . . . . -- -- 1,655 -- 1,655 --------- --------- --------- --------- --------- -- -- 49,267 -- 49,267 --------- --------- --------- --------- --------- Asset Management Cash and cash equivalents. . . . . . . . . . . . -- -- 563 -- 563 Mortgage Collateral, net, and assets related to CMO bonds and related liabilities . . . . . -- -- 81,338 -- 81,338 Equity CMO Interests, net. . . . . . . . . . . . -- -- 4,375 -- 4,375 Other loans and assets, net. . . . . . . . . . . -- -- 2,861 -- 2,861 --------- --------- --------- --------- --------- -- -- 89,137 -- 89,137 --------- --------- --------- --------- --------- Total Assets . . . . . . . . . . . . . . . $ 548,153 $ 506,283 $ 276,827 $(579,745) $ 751,518 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
-13- SUPPLEMENTAL COMBINING BALANCE SHEET JUNE 30, 1994 (IN THOUSANDS)
UNCONSOLIDATED --------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC --------- ------------ ------------ ----------- ------------ LIABILITIES Corporate Accounts payable and accrued expenses. . . . . . $ 21,874 $ -- $ 185 $ (16) $ 22,043 Advances and notes payable - Parent and subsidiaries. . . . . . . . . . . . 86,770 167,661 69,149 (323,580) -- Income taxes payable . . . . . . . . . . . . . . 19,668 -- -- -- 19,668 Notes payable. . . . . . . . . . . . . . . . . . 3,604 -- -- -- 3,604 Senior Notes, net. . . . . . . . . . . . . . . . 187,284 -- -- -- 187,284 Subordinated Notes, net. . . . . . . . . . . . . 38,204 -- -- -- 38,204 --------- --------- --------- --------- --------- 357,404 167,661 69,334 (323,596) 270,803 --------- --------- --------- --------- --------- Home Building Accounts payable and accrued expenses. . . . . . 1,029 71,534 8,106 257 80,926 Lines of credit. . . . . . . . . . . . . . . . . -- 67,468 -- -- 67,468 Notes payable. . . . . . . . . . . . . . . . . . 5,888 32,325 10,840 -- 49,053 --------- --------- --------- --------- --------- 6,917 171,327 18,946 257 197,447 --------- --------- --------- --------- --------- Mortgage Lending Accounts payable and accrued expenses. . . . . . -- -- 13,507 (9,163) 4,344 Line of credit . . . . . . . . . . . . . . . . . -- -- 16,685 -- 16,685 --------- --------- --------- --------- --------- -- -- 30,192 (9,163) 21,029 --------- --------- --------- --------- --------- Asset Management Accounts payable and accrued expenses. . . . . . -- -- 1,740 -- 1,740 CMO bonds, net, and related liabilities, recourse solely to applicable subsidiary assets . . . . . . . . . . . . . . . . . . . . -- -- 76,651 -- 76,651 --------- --------- --------- --------- --------- -- -- 78,391 -- 78,391 --------- --------- --------- --------- --------- Total Liabilities. . . . . . . . . . . . . 364,321 338,988 196,863 (332,502) 567,670 --------- --------- --------- --------- --------- STOCKHOLDERS' EQUITY Preferred stock. . . . . . . . . . . . . . . . . -- -- 10 (10) -- Common Stock . . . . . . . . . . . . . . . . . . 225 18 124 (150) 217 Additional paid-in capital . . . . . . . . . . . 133,656 144,257 116,610 (260,859) 133,664 Retained earnings. . . . . . . . . . . . . . . . 65,656 23,020 (36,771) 13,767 65,672 Less treasury stock. . . . . . . . . . . . . . . (15,705) -- (9) 9 (15,705) --------- --------- --------- --------- --------- Total Stockholders' Equity . . . . . . . . 183,832 167,295 79,964 (247,243) 183,848 --------- --------- --------- --------- --------- Total Liabilities and Stockholders' Equity . . . . . . . . . . $ 548,153 $ 506,283 $ 276,827 $(579,745) $ 751,518 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
-14- 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 assets related to CMO bonds and related liabilities. . . . . . . -- -- 134,166 -- 134,166 Equity CMO Interests, net. . . . . . . . . . . . -- -- 6,427 -- 6,427 Other loans and assets, net. . . . . . . . . . . -- -- 3,519 -- 3,519 --------- --------- --------- --------- --------- -- -- 144,688 -- 144,688 --------- --------- --------- --------- --------- Total Assets . . . . . . . . . . . . . . $ 531,200 $ 440,984 $ 386,875 $(582,193) $ 776,866 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
-15- 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, recourse solely to applicable subsidiary assets . . . . . . . . . . . . . . . . . . . . -- -- 123,500 -- 123,500 --------- --------- --------- --------- --------- -- -- 126,551 -- 126,551 --------- --------- --------- --------- --------- Total Liabilities. . . . . . . . . . . . . 355,346 306,613 308,350 (369,297) 601,012 --------- --------- --------- --------- --------- STOCKHOLDERS' EQUITY Preferred stock. . . . . . . . . . . . . . . . . -- 20,475 10 (20,485) -- Common Stock . . . . . . . . . . . . . . . . . . 209 19 124 (143) 209 Additional paid-in capital . . . . . . . . . . . 133,455 99,725 116,590 (216,315) 133,455 Retained earnings. . . . . . . . . . . . . . . . 57,879 14,152 (38,190) 24,038 57,879 Less treasury stock. . . . . . . . . . . . . . . (15,689) -- (9) 9 (15,689) --------- --------- --------- --------- --------- Total Stockholders' Equity . . . . . . . . 175,854 134,371 78,525 (212,896) 175,854 --------- --------- --------- --------- --------- Total Liabilities and Stockholders' Equity . . . . . . . . . . $ 531,200 $ 440,984 $ 386,875 $(582,193) $ 776,866 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
-16- SUPPLEMENTAL COMBINING STATEMENTS OF INCOME (IN THOUSANDS)
UNCONSOLIDATED --------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC --------- ------------ ------------ ----------- ------------ THREE MONTHS ENDED JUNE 30, 1994 REVENUES: Home Building. . . . . . . . . . . . . . . . . . $ -- $ 177,586 $ 13,436 $ (765) $ 190,257 Mortgage Lending . . . . . . . . . . . . . . . . -- -- 3,903 -- 3,903 Asset Management . . . . . . . . . . . . . . . . -- -- 3,620 (284) 3,336 Corporate other revenues . . . . . . . . . . . . 258 -- 17 -- 275 Equity in earnings of subsidiaries . . . . . . . 10,603 1,513 -- (12,116) -- --------- --------- --------- --------- --------- Total Revenues . . . . . . . . . . . . . . 10,861 179,099 20,976 (13,165) 197,771 --------- --------- --------- --------- --------- COSTS AND EXPENSES: Home Building. . . . . . . . . . . . . . . . . . 367 166,246 11,622 (304) 177,931 Mortgage Lending . . . . . . . . . . . . . . . . -- -- 2,265 -- 2,265 Asset Management . . . . . . . . . . . . . . . . -- -- 2,553 -- 2,553 Corporate general and administrative . . . . . . 3,946 -- 20 -- 3,966 Corporate and home building interest . . . . . . (2,457) 4,308 945 (745) 2,051 --------- --------- --------- --------- --------- Total Expenses . . . . . . . . . . . . . . 1,856 170,554 17,405 (1,049) 188,766 --------- --------- --------- --------- --------- Income before income taxes . . . . . . . . . . . . 9,005 8,545 3,571 (12,116) 9,005 Provision for income taxes . . . . . . . . . . . . 3,301 3,341 1,175 (4,516) 3,301 --------- --------- --------- --------- --------- NET INCOME . . . . . . . . . . . . . . . . . . . . $5,704 $5,204 $2,396 $(7,600) $5,704 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- THREE MONTHS ENDED JUNE 30, 1993 REVENUES: Home Building. . . . . . . . . . . . . . . . . . $ 108 $ 139,308 $ 8,072 $ (2,208) $ 145,280 Mortgage Lending . . . . . . . . . . . . . . . . -- -- 6,042 -- 6,042 Asset Management . . . . . . . . . . . . . . . . -- -- 8,161 (284) 7,877 Corporate other revenues . . . . . . . . . . . . 453 -- (40) 45 458 Equity in earnings of subsidiaries . . . . . . . 6,473 1,408 -- (7,881) -- --------- --------- --------- --------- --------- Total Revenues . . . . . . . . . . . . . . 7,034 140,716 22,235 (10,328) 159,657 --------- --------- --------- --------- --------- COSTS AND EXPENSES: Home Building. . . . . . . . . . . . . . . . . . (1,033) 135,583 6,138 (1,235) 139,453 Mortgage Lending . . . . . . . . . . . . . . . . -- -- 3,111 -- 3,111 Asset Management . . . . . . . . . . . . . . . . -- -- 6,194 -- 6,194 Corporate general and administrative . . . . . . 3,562 -- 28 219 3,809 Corporate and home building interest . . . . . . 86 2,306 999 (720) 2,671 --------- --------- --------- --------- --------- Total Expenses . . . . . . . . . . . . . . 2,615 137,889 16,470 (1,736) 155,238 --------- --------- --------- --------- --------- Income before income taxes . . . . . . . . . . . 4,419 2,827 5,765 (8,592) 4,419 Provision for income taxes . . . . . . . . . . . 1,405 1,067 1,714 (2,781) 1,405 --------- --------- --------- --------- --------- NET INCOME . . . . . . . . . . . . . . . . . . . . $ 3,014 $ 1,760 $ 4,051 $ (5,811) $ 3,014 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
-17- SUPPLEMENTAL COMBINING STATEMENTS OF INCOME (IN THOUSANDS)
UNCONSOLIDATED --------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC --------- ------------ ------------ ----------- ------------ SIX MONTHS ENDED JUNE 30, 1994 REVENUES: Home Building. . . . . . . . . . . . . . . . . . $ -- $ 325,267 $ 25,092 $ (1,524) $ 348,835 Mortgage Lending . . . . . . . . . . . . . . . . -- -- 9,390 -- 9,390 Asset Management . . . . . . . . . . . . . . . . -- -- 8,167 (565) 7,602 Corporate other revenues . . . . . . . . . . . . 600 -- 37 -- 637 Equity in earnings of subsidiaries . . . . . . . 19,772 2,512 -- (22,284) -- --------- --------- --------- --------- --------- Total Revenues . . . . . . . . . . . . . . 20,372 327,779 42,686 (24,373) 366,464 --------- --------- --------- --------- --------- COSTS AND EXPENSES: Home Building. . . . . . . . . . . . . . . . . . 731 304,789 22,185 (509) 327,196 Mortgage Lending . . . . . . . . . . . . . . . . -- -- 4,848 -- 4,848 Asset Management . . . . . . . . . . . . . . . . -- -- 5,797 -- 5,797 Corporate general and administrative . . . . . . 7,848 -- 51 -- 7,899 Corporate and home building interest . . . . . . (3,924) 8,435 1,977 (1,481) 5,007 --------- --------- --------- --------- --------- Total Expenses . . . . . . . . . . . . . . 4,655 313,224 34,858 (1,990) 350,747 --------- --------- --------- --------- --------- Income before income taxes . . . . . . . . . . . . 15,717 14,555 7,828 (22,383) 15,717 Provision for income taxes . . . . . . . . . . . . 6,207 5,689 2,620 (8,309) 6,207 --------- --------- --------- --------- --------- NET INCOME . . . . . . . . . . . . . . . . . . . . $ 9,510 $ 8,866 $ 5,208 $ (14,074) $ 9,510 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- SIX MONTHS ENDED JUNE 30, 1993 REVENUES: Home Building. . . . . . . . . . . . . . . . . . $ 122 $ 232,654 $ 16,813 $ (5,587) $ 244,002 Mortgage Lending . . . . . . . . . . . . . . . . -- -- 9,478 -- 9,478 Asset Management . . . . . . . . . . . . . . . . -- -- 21,611 (565) 21,046 Corporate other revenues . . . . . . . . . . . . 1,043 -- (44) 17 1,016 Equity in earnings of subsidiaries . . . . . . . 11,243 2,549 -- (13,792) -- --------- --------- --------- --------- --------- Total Revenues . . . . . . . . . . . . . . 12,408 235,203 47,858 (19,927) 275,542 --------- --------- --------- --------- --------- COSTS AND EXPENSES: Home Building. . . . . . . . . . . . . . . . . . (1,032) 225,850 14,226 (2,728) 236,316 Mortgage Lending . . . . . . . . . . . . . . . . -- -- 5,706 -- 5,706 Asset Management . . . . . . . . . . . . . . . . -- -- 14,695 -- 14,695 Corporate general and administrative . . . . . . 7,153 -- 31 199 7,383 Corporate and home building interest . . . . . . 733 4,546 2,091 (1,482) 5,888 --------- --------- --------- --------- --------- Total Expenses . . . . . . . . . . . . . . 6,854 230,396 36,749 (4,011) 269,988 --------- --------- --------- --------- --------- Income before income taxes . . . . . . . . . . . . 5,554 4,807 11,109 (15,916) 5,554 Provision for income taxes . . . . . . . . . . . . 1,625 1,800 3,881 (5,681) 1,625 --------- --------- --------- --------- --------- NET INCOME . . . . . . . . . . . . . . . . . . . . $ 3,929 $ 3,007 $ 7,228 $ (10,235) $ 3,929 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
-18- SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1994 (IN THOUSANDS)
UNCONSOLIDATED --------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC --------- ------------ ------------ ----------- ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . $ (18,479) $ (36,360) $ 5,599 $ 8,305 $ (40,935) --------- --------- --------- --------- --------- INVESTING ACTIVITIES: Mortgage Collateral Principal payments and prepayments . . . . . . -- 615 28,276 -- 28,891 Sales. . . . . . . . . . . . . . . . . . . . . -- -- 17,173 -- 17,173 Distributions of capital from Equity CMO Interests. . . . . . . . . . . . . . . . . . . -- -- 2,052 -- 2,052 Changes in restricted cash . . . . . . . . . . . -- -- 5,522 -- 5,522 Affiliate notes receivable . . . . . . . . . . . 13,282 -- 4,053 (17,335) -- Other, net . . . . . . . . . . . . . . . . . . . (65) (215) (225) -- (505) --------- --------- --------- --------- --------- Net Cash Provided By (Used In) Investing Activities . . . . . . . . . . . . . . . . . . . 13,217 400 56,851 (17,335) 53,133 --------- --------- --------- --------- --------- FINANCING ACTIVITIES: Net increase (reduction) in borrowings from Parent and subsidiaries. . . . . . . . . . . . (5,486) 15,359 (1,568) (8,305) -- CMO bonds - principal payments . . . . . . . . . -- -- (46,378) -- (46,378) Lines of Credit Advances . . . . . . . . . . . . . . . . . . . -- 301,805 -- -- 301,805 Principal payments . . . . . . . . . . . . . . -- (258,982) (12,815) -- (271,797) Notes payable Borrowings . . . . . . . . . . . . . . . . . . -- 11,070 -- -- 11,070 Principal payments . . . . . . . . . . . . . . (4,037) (20,810) (1,202) -- (26,049) Affiliate notes payable. . . . . . . . . . . . . -- (17,335) -- 17,335 -- Other, net . . . . . . . . . . . . . . . . . . . 121 -- -- -- 121 --------- --------- --------- --------- --------- Net Cash Provided By (Used In) Financing Activities . . . . . . . . . . . . . . . . . . . (9,402) 31,107 (61,963) 9,030 (31,228) --------- --------- --------- --------- --------- Net Increase (Decrease) In Cash And Cash Equivalents. . . . . . . . . . . . . . . . . . . (14,664) (4,853) 487 -- (19,030) Cash And Cash Equivalents Beginning Of Period. . . . . . . . . . . . . . . 42,443 17,792 2,768 -- 63,003 --------- --------- --------- --------- --------- End Of Period. . . . . . . . . . . . . . . . . . $ 27,779 $ 12,939 $ 3,255 $ -- $ 43,973 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
-19- SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1993 (IN THOUSANDS)
UNCONSOLIDATED --------------------------------------- NON- GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC --------- ------------ ------------ ----------- ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . $ 3,626 $ (39,438) $ (15,440) $ (6,201) $ (57,453) --------- --------- --------- --------- --------- INVESTING ACTIVITIES: Mortgage Collateral Principal payments and prepayments . . . . . . -- 2,001 45,527 -- 47,528 Sales. . . . . . . . . . . . . . . . . . . . . -- -- 23,263 -- 23,263 Distributions of capital from Equity CMO Interests. . . . . . . . . . . . . . . . . . . -- -- 4,247 -- 4,247 CMO Bond principal payments. . . . . . . . . . . -- -- 2,576 -- 2,576 Changes in investments and marketable securities, net. . . . . . . . . . . . . . . . 12,000 -- -- -- 12,000 Changes in restricted cash . . . . . . . . . . . -- -- (2,589) -- (2,589) Proceeds from affiliate debt maturity. . . . . . -- 20 1,750 (1,770) -- Affiliate notes receivable . . . . . . . . . . . 801 -- 2,303 (3,104) -- Other, net . . . . . . . . . . . . . . . . . . . (287) (421) 330 -- (378) --------- --------- --------- --------- --------- Net Cash Provided By Investing Activities. . . . . 12,514 1,600 77,407 (4,874) 86,647 --------- --------- --------- --------- --------- FINANCING ACTIVITIES: Net increase (reduction) in borrowings from Parent and subsidiaries. . . . . . . . . . . . (1,023) 13,275 (18,453) 6,201 -- CMO bonds - principal payments . . . . . . . . . -- -- (60,858) -- (60,858) Lines of Credit Advances . . . . . . . . . . . . . . . . . . . 2,571 122,730 19,083 -- 144,384 Principal payments . . . . . . . . . . . . . . (3,653) (116,150) -- -- (119,803) Subordinated Notes - payments. . . . . . . . . . (1,690) -- -- -- (1,690) Notes payable Borrowings . . . . . . . . . . . . . . . . . . -- 43,836 932 -- 44,768 Principal payments . . . . . . . . . . . . . . (3,814) (30,048) (1,623) -- (35,485) Maturity of affiliate-owned debt . . . . . . . . (1,770) -- -- 1,770 -- Affiliate notes payable. . . . . . . . . . . . . -- (3,104) -- 3,104 -- Other, net . . . . . . . . . . . . . . . . . . . 202 -- -- -- 202 --------- --------- --------- --------- --------- Net Cash Provided By (Used In) Financing Activities . . . . . . . . . . . . . . . . . . . (9,177) 30,539 (60,919) 11,075 (28,482) --------- --------- --------- --------- --------- Net Decrease In Cash And Cash Equivalents. . . . . 6,963 (7,299) 1,048 -- 712 Cash And Cash Equivalents Beginning Of Period. . . . . . . . . . . . . . . 35,993 22,502 2,533 -- 61,028 --------- --------- --------- --------- --------- End Of Period. . . . . . . . . . . . . . . . . . $ 42,956 $ 15,203 $ 3,581 $ -- $ 61,740 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
-20- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. INTRODUCTION MDC is a national home builder with operations in (i) metropolitan Denver and, to a lesser extent, Colorado Springs, Colorado (collectively, "Colorado"); (ii) northern Virginia and suburban Maryland (collectively, "Mid-Atlantic"); (iii) northern and southern California (collectively, "California"); (iv) Phoenix and Tucson, Arizona (collectively, "Arizona"); and (v) Las Vegas, Nevada ("Nevada"). In its home building operations, the Company is engaged in the construction and sale of residential housing (collectively, the "home building segment") and mortgage origination, purchase and sale activities (collectively, the "mortgage lending segment"). MDC's mortgage lending segment enables MDC to provide mortgage loans to its home buyers and to others. The Company's asset management operations (collectively, the "asset management segment") primarily enable MDC to (i) manage, by contract, the operations of two publicly-traded real estate investment trusts (each a "REIT"); and (ii) own interests ("CMO Ownership Interests") in issuances of collateralized mortgage obligations ("CMO bonds"). RESULTS OF OPERATIONS The table below summarizes MDC's results of operations during each of the periods presented (in thousands, except per share amounts).
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------ ------------------ 1994 1993 1994 1993 --------- -------- -------- -------- Revenues . . . . . . . . . . . . . $197,771 $159,657 $366,464 $275,542 Income before income taxes . . . . 9,00 54,419 15,717 5,554 Net Income . . . . . . . . . . . . 5,704 3,014 9,510 3,929 Primary Earnings Per Share . . . . .28 .14 .47 .18
-21- MDC's revenues increased during the three and six months ended June 30, 1994 compared with the same periods in 1993 primarily as a result of 20% and 30% increases, respectively, in home closings and $15,200 and $16,200 increases, respectively, in the average selling price per housing unit. These increases partially were offset by reductions in revenues of the asset management segment of $4,541,000 and $13,444,000, respectively, principally due 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 $194,000,000 from January 1, 1993 through June 30, 1994. The Company's net income increased for the three and six months ended June 30, 1994 compared with the same periods 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) in the six months ended June 30, 1994, increased mortgage lending operating profit primarily due to increased gains from sales of mortgage loan servicing. These increases partially were offset by (i) lower operating profit from the asset management segment as operating income in the first six months of 1993 was impacted positively by $5,982,000 in one-time gains resulting from sales of Mortgage Collateral, which was partially offset by $2,600,000 in valuation adjustments with respect to the Company's Equity CMO Interests (defined below) during the same period; and (ii) in the three months ended June 30, 1994, by lower operating profit from the mortgage lending segment primarily due to lower gains from sales of mortgage loans. IMPACT OF HOME MORTGAGE INTEREST RATES. Beginning in 1992 through October 1993, home mortgage interest rates declined to their lowest levels in 25 years to an average of 6.7% on a 30-year, fixed-rate mortgage. From October 1993 through July 1994, these interest rates have increased to as high as 9%. Increases in mortgage interest rates adversely affect the Company's home building and mortgage lending segments. Higher mortgage interest rates (i) may reduce the demand for homes and home mortgages; and (ii) generally will reduce home mortgage refinancing activity. With the recent increases in mortgage interest rates relative to levels in 1993, the Company's mortgage lending operations, consistent with the rest of the industry in general, have experienced a major decline in refinancing activity. These events have affected adversely the spot mortgage loan originations and the amount of mortgage loans purchased through correspondents by the Company's mortgage lending segment, although increased originations from the Company's home building operations have offset to some 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. -22- 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 SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------ ------------------ 1994 1993 1994 1993 --------- -------- -------- -------- Home sales revenues. . . . . . . . $184,878 $142,136 $341,613 $239,744 -------- -------- -------- -------- Average selling price per housing unit . . . . . . . . . . . . . . $189.0 $173.8 $186.5 $170.3 Home Gross Margins . . . . . . . . 15.7% 14.3% 15.9% 14.5% Homes - units Sales contracted, net Colorado . . . . . . . . . 441 466 1,191 1,072 Mid-Atlantic . . . . . . . 274 345 686 715 California . . . . . . . . 164 103 310 210 Arizona. . . . . . . . . . 133 81 287 134 Nevada . . . . . . . . . . 32 30 62 81 -------- -------- -------- -------- Total. . . . . . . . . 1,044 1,025 2,536 2,212 -------- -------- -------- -------- -------- -------- -------- -------- Closed and delivered Colorado . . . . . . . . . 473 444 865 782 Mid-Atlantic . . . . . . . 254 202 506 365 California . . . . . . . . 127 75 234 98 Arizona. . . . . . . . . . 102 48 188 91 Nevada . . . . . . . . . . 22 49 39 72 -------- -------- -------- -------- Total. . . . . . . . . 978 818 1,832 1,408 -------- -------- -------- -------- -------- -------- -------- -------- JUNE 30, DECEMBER 31, JUNE 30, 1994 1993 1993 -------- ------------ -------- Backlog Units Colorado . . . . . . . . . 986 660 763 Mid-Atlantic . . . . . . . 605 425 547 California . . . . . . . . 174 98 160 Arizona. . . . . . . . . . 246 147 91 Nevada . . . . . . . . . . 50 27 69 -------- -------- -------- Total. . . . . . . . . 2,061 1,357 1,630 -------- -------- -------- -------- -------- -------- Sales value. . . . . . . . $390,500 $250,530 $283,200 -------- -------- -------- -------- -------- --------
Home sales revenues increased 30% and 42%, respectively, for the three and six month periods ended June 30, 1994 compared with the same periods 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 -23- 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 and six months ended June 30, 1994 compared with the same periods in 1993 primarily was due to increases in average selling prices in all of the Company's markets except northern California. The increases in selling prices were due principally to (i) the mix of homes closed; (ii) general price increases in most of the Company's markets to, among other things, offset increases in costs; and (iii) improved market conditions. These increases partially were offset by lower average selling prices in northern California primarily due to the introduction of more affordable homes in response to consumer demand for lower- priced housing. 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 and six months ended June 30, 1994 compared with the same periods in 1993. The Company achieved higher Home Gross Margins in the first six months 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, the Mid-Atlantic area and Arizona, have caused shortages of labor that have increased the period of time required for completing construction and delivery of homes. Such increased time periods have increased interest costs capitalized during the construction period which have affected adversely, and may affect adversely in the future, Home Gross Margins. Overall, year-to-date home sales at June 30, 1994 reached their highest second quarter and six month levels since 1988 and Backlog reached its highest quarter-end level since 1987. "Sales contracted, net" increased 2% and 15%, respectively, during the three and six months ended June 30, 1994 compared with the same periods in 1993. Backlog at June 30, 1994 increased 52% from December 31, 1993 and 26% from June 30, 1993. While sales in Colorado increased by 24% in the first quarter of 1994 compared with the first quarter of 1993, sales declined by 5% in the second quarter of 1994 compared with the same period in 1993 as, among other things, the increase in mortgage interest rates affected adversely the demand for homes. In the Mid-Atlantic market, sales increased by 11% in the first quarter of 1994 compared with the same period in 1993 but declined 21% in the second quarter of 1994 compared with the same period in 1993 due to, among -24- other things, (i) increases in mortgage interest rates; (ii) a slight decline in new home sales in this market; and (iii) extended delivery times for new homes and delays in bringing certain start-up communities to an active sales status caused by delays in construction and land development resulting from unusually harsh weather in the Mid-Atlantic region during the first quarter of 1994. Sales increased in the three and six months ended June 30, 1994 compared with the same periods in 1993 in (i) Arizona (increases of 64% and 114%, respectively) due to improved market conditions and an expansion of the Company's operations in the Phoenix and Tucson markets; and (ii) California (increases of 59% and 48%, respectively) due to an expansion of the Company's operations in northern California and the Company's re-entry into the southern California market on a selective basis which began in the second half of 1993 and has continued in the first half of 1994. Marketing expenses (which include, among other things, deferred marketing, model home expenses and commissions) totaled $10,925,000 and $19,927,000, respectively, during the three and six months ended June 30, 1994 compared with $8,796,000 and $15,152,000, respectively, during the same periods in 1993. The 24% and 32% increases, respectively, during 1994 principally were due to the 20% and 30% increases, respectively, 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 sales revenues decreased by 4% and 8%, respectively, in the three and six months ended June 30, 1994, relative to 1993, primarily due to increased efficiencies in the Company's marketing activities relative to the level of expansion in its existing markets. General and administrative expenses totaled $6,969,000 and $13,716,000, respectively, during the three and six months ended June 30, 1994 compared with $6,257,000 and $12,473,000, respectively, during the same periods in 1993. The increases during 1994 partially were due to increased salary, office and other expenses in response to increased operations. General and administrative expenses during the first six months of 1993 also were affected adversely by non-recurring charges totaling approximately $1,100,000. General and administrative expenses as a percentage of home sales revenues during the three and six months ended June 30, 1994 decreased compared with the same periods in 1993 due to the Company's ability to build more homes without adding substantially to existing administrative staffing and overhead. LAND INVENTORY. Since 1988, MDC has implemented a program to reduce its inventory of land and land under development in order to, among other things, maximize and preserve liquidity and reduce the risks inherent in holding, at any point in time, substantially greater amounts of land than are necessary to meet the projected requirements of MDC's home building operations over the succeeding 24 months. As a result, MDC has reduced its land inventory from $411,460,000 at December 31, 1988 to $176,448,000 at June 30, 1994, while increasing significantly the number of lots it controls under -25- rolling options. The Company continues to pursue opportunities to reduce its land inventories. The following table shows the total carrying value of the land and land under development owned by MDC in each of its home building markets at June 30, 1994, segregated by the years in which such property was acquired or optioned (in thousands).
DIVISION 1994 1993 1992 1991 PRE-1991 TOTAL - -------- ------ ------ ------ ------ -------- -------- Colorado . . . . . . $1,640 $3,372 $3,378 $7,545 $74,484 $90,419 Mid-Atlantic . . . . 6,711 9,572 1,146 -- 15,677 33,106 California . . . . . 14,733 10,342 1,482 -- 5,956 32,513 Arizona. . . . . . . 9,143 2,336 -- -- 4,465 15,944 Nevada . . . . . . . -- 4,466 -- -- -- 4,466 ------- ------- ------ ------ -------- -------- Totals. . . . . . $32,227 $30,088 $6,006 $7,545 $100,582 $176,448 ------- ------- ------ ------ -------- -------- ------- ------- ------ ------ -------- --------
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 35% of the Company's total land and land under development at June 30, 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 total carrying value of the amounts of inactive land inventories included in the table above owned by MDC in each of its home building markets at June 30, 1994, segregated by the years each such property was acquired (in thousands).
DIVISION 1992 1991 PRE-1991 TOTAL -------- ------ ------ -------- --------- Colorado. . . . . . . . . . . $1,868 $2,164 $48,082 $52,114 Mid-Atlantic. . . . . . . . . -- -- 5,189 5,189 California. . . . . . . . . . -- -- 2,880 2,880 Arizona . . . . . . . . . . . -- -- 628 628 ------ ------ ------- ------- Totals . . . . . . . . . . $1,868 $2,164 $56,779 $60,811 ------ ------ ------- ------- ------ ------ ------- -------
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") -26- 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; 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 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 SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------ ------------------ 1994 1993 1994 1993 --------- -------- -------- -------- Gains from sales of mortgage servicing: Bulk . . . . . . . . . . . . . . $ 1,729 $ 1,683 $ 4,314 $ 2,268 Other. . . . . . . . . . . . . . 167 131 454 318 Net interest income. . . . . . . . 639 824 1,210 1,467 Origination fees . . . . . . . . . 1,145 1,557 2,381 2,642 Gains (losses) on sales of mortgage loans . . . . . . . . . (280) 990 (181) 1,354 Mortgage servicing and other income . . . . . . . . . . . . . 447 352 962 669 General and administrative expenses . . . . . . . . . . . . (2,209) (2,606) (4,598) (4,946) -------- -------- -------- -------- Operating profit . . . . . . . . . $ 1,638 $ 2,931 $ 4,542 $ 3,772 -------- -------- -------- -------- -------- -------- -------- -------- Principal amount of originations and purchases: Company home buyers. . . . . . $ 75,270 $ 74,773 $151,530 $127,875 Spot . . . . . . . . . . . . . 17,121 66,879 48,409 120,851 Correspondent. . . . . . . . . 17,645 48,010 43,897 77,908 -------- -------- -------- -------- Total . . . . . . . . . . . $110,036 $189,662 $243,836 $326,634 -------- -------- -------- -------- -------- -------- -------- -------- JUNE 30, DECEMBER 31, JUNE 30, 1994 1993 1993 -------- ------------ -------- Composition of Servicing Portfolio at End of Period: FHA insured/VA guaranteed. . . . . $240,868 $373,716 $224,378 Conventional . . . . . . . . . . . 252,527 279,615 260,140 -------- -------- -------- Total Servicing Portfolio. . . $493,395 $653,331 $484,518 -------- -------- -------- -------- -------- -------- Portion of Servicing Portfolio Available for Sale . . . . . . . . . $425,363 $574,088 $384,361 -------- -------- -------- -------- -------- --------
-27- HomeAmerican's loan originations decreased by 42% and 25%, respectively, for the three and six month periods ended June 30, 1994 compared with the same periods in 1993 primarily as a result of lower spot originations and purchases of loans from correspondents primarily due to increased mortgage interest rates which resulted in lower mortgage loan refinancings. These decreases partially were offset by higher originations for MDC home buyers, despite a lower percentage of mortgages originated for MDC home buyers in 1994 compared with the same period in 1993, principally due to increased closings by MDC's home building segment. HomeAmerican originated mortgages for 52% and 55%, respectively, of MDC's total homes closed during the three and six months ended June 30, 1994, compared with 65% during each of the same periods in 1993. The decline in the percentage of mortgages originated for MDC home buyers was the result of increased competition for mortgage loan originations. HomeAmerican's operating profit of $1,638,000 during the three months ended June 30, 1994 was lower than the operating profit of $2,931,000 for the same period in 1993 principally due to losses from sales of mortgage loans totaling $280,000 in the three months ended June 30, 1994 compared with gains totaling $990,000 in the same period in 1993. HomeAmerican's operating profit of $4,542,000 during the six months ended June 30, 1994 was higher than the operating profit of $3,772,000 for the same period in 1993 principally due to higher gains from sales of mortgage servicing partially offset by losses from sales of mortgage loans totaling $181,000 in the six months ended June 30, 1994 compared with gains from sale of mortgage loans totaling $1,354,000 in the six months ended June 30, 1993. While loan origination fees were lower for the three and six month periods ended June 30, 1994 compared with the same periods in 1993, general and administrative costs were lower by approximately the same amounts as HomeAmerican has reduced its general and administrative costs as originations of loans have declined. During the three and six months ended June 30, 1994, HomeAmerican sold bulk mortgage loan servicing on approximately $153,407,000 and $349,237,000, respectively, of mortgage loans which resulted in pre-tax gains of $1,729,000 and $4,314,000, respectively. During the second quarter of 1993, HomeAmerican sold mortgage loan servicing on approximately $120,400,000 of mortgage loans which resulted in pre-tax gains of $1,377,000. Additionally, during the three and six months ended June 30, 1993, $306,000 and $891,000, respectively, of income relating to a December 1992 bulk servicing sale were recognized as the related mortgage loans totaling approximately $19,200,000 and $59,600,000, respectively, were certified for sale in such periods. At June 30, 1994, approximately $425,363,000 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 26% decrease compared with the $574,088,000 in conforming mortgage loan servicing available for sale at December 31, 1993 and a 11% increase above the $384,361,000 in -28- conforming mortgage loan servicing available for sale at June 30, 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 SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------ ------------------ 1994 1993 1994 1993 --------- -------- -------- -------- Management fees from Asset Investors and Commercial Assets. $ 597 $ 603 $ 1,351 $ 1,238 Equity in losses of Equity CMO Interests, net of valuation adjustments. . . . . . . . . . . -- (600) -- (2,600) Gains on sales of Mortgage Collateral . . . . . . . . . . . 45 801 358 5,982 Interest income from CMO Bond and other, net . . . . . . . . . . . 425 1,163 661 2,296 ------- ------- ------- ------- Operating profit . . . . . . . . . $ 1,067 $ 1,967 $ 2,370 $ 6,916 ------- ------- ------- ------- ------- ------- ------- -------
The decrease in the Company's asset management segment operating profit for the three and six month periods ended June 30, 1994 compared with the same periods 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 Corporation ("Asset Investors"), a New York Stock Exchange-listed REIT, on various facets of Asset Investors' business. Asset Investors generates substantially all of its income through a portfolio of CMO Ownership Interests in residential mortgage loan securitizations and unrated subordinated interests in residential mortgage loan securitizations collateralized by pools of non- conforming (non-agency guaranteed) single family mortgage loans. MDC has a management agreement (the "Asset Investors Management Agreement") with Asset Investors which is currently in the process of being extended through 1994, subject to 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. Pursuant to the Asset Investors Management Agreement, MDC receives compensation for CMO administration and other management services. MDC also is entitled to receive an incentive fee (the "Asset Investors Incentive Fee") which is based primarily on the level of Asset Investors dividend distributions. The high level of prepayments on Asset Investors' portfolio of home- mortgage related assets in 1992 and 1993 affected adversely the CMO Ownership Interests owned by Asset Investors and its income, -30- which reduced substantially, relative to prior years, the management fees earned by the Company from Asset Investors in 1993 and the first six months of 1994. The Company earned $405,000 and $839,000, respectively, in management fees in the three and six months ended June 30, 1994 compared with $603,000 and $1,238,000, respectively, in the same periods in 1993. No Asset Investors Incentive Fees were earned by the Company in the three and six months ended June 30, 1994 or in the same periods in 1993. MANAGEMENT OF COMMERCIAL ASSETS. In August 1993, Asset Investors formed Commercial Assets, Inc. ("Commercial Assets"), an American Stock Exchange-listed REIT, to acquire and manage a portfolio of ownership interests in commercial mortgage loan securitizations. In October 1993, Asset Investors distributed approximately 70% of the shares of Commercial Assets to its stockholders as a dividend. MDC has a management agreement (the "Commercial Assets Management Agreement") with Commercial Assets 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 and six months ended June 30, 1994, MDC earned fees totaling $192,000 and $512,000, respectively, from Commercial Assets. EQUITY CMO INTERESTS. During the three and six months ended June 30, 1993, MDC recorded $600,000 and $2,600,000, respectively, in valuation adjustments related to its 49.999% ownership interest in seven CMO Ownership Interests (these seven interests are referred to herein as "Equity CMO Interests") related to permanent declines in the value of the undiscounted projected cash flow of such Equity CMO Interests resulting from higher actual and projected prepayments caused by low interest rates. During the three and six months ended June 30, 1994, higher mortgage interest rates have slowed both the actual and expected prepayment speeds and, accordingly, no valuation adjustments were necessary. If the Mortgage Collateral underlying the Equity CMO Interests prepays or is projected to prepay at higher than current expected rates and/or if short- term interest rates increase significantly from their present rates, the Company, in the future, may recognize additional valuation adjustments. INVESTMENT IN A CMO BOND. On July 31, 1992, MDC purchased a $7,823,000 principal amount CMO bond (the "CMO Bond") for $7,367,000. For the three and six months ended June 30, 1993, the CMO Bond earned interest totaling $511,000 and $1,094,000, respectively. The CMO Bond was fully paid at December 31, 1993. -31- SALES OF MORTGAGE-RELATED ASSETS. MDC completed various sales of mortgage- related assets which resulted in net gains totaling $45,000 and $358,000, respectively, for the three and six months ended June 30, 1994 compared with $801,000 and $5,982,000, respectively, during the same periods in 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 43% and 40%, respectively, to $8,883,000 and $17,247,000, respectively, in the three and six months ended June 30, 1994 compared with $6,230,000 and $12,286,000, respectively, during the same periods in 1993 due to (i) higher interest rates associated with the 11 1/8% Senior Notes due 2003 compared with the debt outstanding for the six months ended June 30, 1993; and (ii) higher levels of borrowings resulting from the Company's expanded home building operations. The portion of this corporate and home building interest capitalized (the Company capitalizes interest on its home building inventories during the period of active development and through the completion of construction) during the three and six months ended June 30, 1994 totaled $6,832,000 and $12,240,000, respectively, compared with $3,559,000 and $6,398,000, respectively, during the same periods in 1993. The increase in interest capitalized for the three and six months ended June 30, 1994 was due primarily to (i) increased levels of active 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 related construction and land costs is capitalized. The corporate and home building interest incurred which was not capitalized was reflected as interest expense and totaled $2,051,000 and $5,007,000, respectively, for the three and six months ended June 30, 1994 compared with $2,671,000 and $5,888,000, respectively, for the same periods in 1993. For a reconciliation of interest incurred, capitalized, expensed and previously capitalized included in cost of sales, see Note E to the Company's Condensed Consolidated Financial Statements. CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and administrative expenses totaled $3,966,000 and $7,899,000, -32- respectively, during the three and six months ended June 30, 1994 compared with $3,809,000 and $7,383,000, respectively, during the same periods in 1993. The increase in the first six months of 1994 primarily was due to an increase in salaries, professional fees and insurance expense resulting from the Company's expanded operations. INCOME TAXES. M.D.C. Holdings, Inc. and its wholly-owned subsidiaries file a consolidated federal income tax return (the "MDC Consolidated Return"). Richmond Homes and its wholly-owned subsidiaries filed (or will file) a separate consolidated federal income tax return (each, a "Richmond Homes Consolidated Return") from its inception (December 28, 1989) through the date Richmond Homes became a wholly-owned subsidiary of MDC (February 2, 1994). MDC's overall effective income tax rate during the three and six month periods ended June 30, 1994 was 37% and 39%, respectively, compared with 32% and 29%, respectively, during the same periods in 1993. The effective income tax rates differed from the 35% federal statutory rate primarily due to, among other things, (i) the impact of state income taxes; (ii) the realization of non- taxable income for financial reporting purposes for which no tax liability was recorded; and (iii) in 1994, adjustments to prior years' income taxes. The Company has recorded a net deferred income tax asset of $10,648,000, net of a valuation allowance of $3,000,000, at June 30, 1994. The valuation allowance has been provided to offset the related deferred income tax assets due to the uncertainty of realizing the benefit of future tax deductions. The Internal Revenue Service (the "IRS") has completed its examination of the MDC Consolidated Returns for the years 1984 through 1987 and has proposed certain adjustments to the taxable income reflected in such returns. A substantial portion of the proposed adjustments relate to the characterization of $22,000,000 in gains on sales of property held for investment, which were reported as capital gains. Certain of the other proposed adjustments would shift the recognition of certain items of income and expense from one year to another ("Timing Adjustments"). To the extent taxable income in a prior year is increased by proposed Timing Adjustments, taxable income may be reduced by a corresponding amount in other years; however, the Company would incur an interest charge as a result of such adjustment. The Company currently is protesting many of these proposed adjustments through the IRS appeals process and believes that the amount of these adjustments will be reduced as a result. In the opinion of management, adequate provision has been made for the additional income taxes and interest which may arise as a result of the proposed adjustments. The IRS currently is examining the MDC Consolidated Returns for the years 1988 through 1990 and the Richmond Homes Consolidated Returns for the years 1989 and 1990. No reports have been issued by the IRS in connection with these examinations. In the opinion of management, adequate provision has been made for any additional income taxes and interest which may arise as a result of these examinations. -33- 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 six months ended June 30, 1994, MDC used $19,030,000 in cash. At June 30, 1994, the Company had $43,973,000 available in cash and cash equivalents. MDC's Operating Activities during the first six months of 1994 used net cash of $40,935,000 compared with net cash used of $57,453,000 during the same period in 1993. The net cash used in Operating Activities during the first six 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 six months of 1993 principally was due to increases in mortgage loans held in inventory and housing inventories resulting from increased mortgage lending and home building activities in such period. Net cash provided by Investing Activities during the first six months of 1994 and 1993 totaled $53,133,000 and $86,647,000, 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 six months of 1994 and 1993 of $31,228,000 and $28,482,000, respectively. Also increasing the use of cash for the six months ended June 30, 1994 were net payments of $14,979,000 on notes payable as the Company has begun shifting away from higher- cost project loans and other notes payable to the use of its increased lines of credit to finance a larger portion of its expanding home building operations. In the first six months of 1994 and 1993, cash used in Financing Activities was decreased by net advances pursuant to lines of credit totaling $30,008,000 and $24,581,000, respectively, and in the first six months of 1993 was decreased by net borrowings on notes payable totaling $9,283,000. The resulting -34- net increases in debt were necessary to finance the substantial increases in home building activities in the first six months of both 1994 and 1993 and, in the first six months of 1993, to finance the substantial increase in mortgage lending activities. LINES OF CREDIT AND NOTES PAYABLE. HOME BUILDING. The aggregate amount of MDC's home building bank lines of credit at June 30, 1994 was $105,000,000. 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 June 30, 1994, $67,468,000 was borrowed and an additional $33,472,000 was collateralized and available to be borrowed under the bank lines of credit. In June 1994, MDC consummated a $75,000,000 line of credit (the "$75,000,000 Line") with a bank which replaced four separate divisional lines of credit with the same bank which totaled $40,000,000. The $75,000,000 Line is available for acquisition and development of land and for the construction of homes. The term of the line of credit agreement is 12 months with a 36-month term-out period or, under certain circumstances, a 24-month term-out period. A 36-month term-out period could commence at any time at the option of the bank. As discussed above, the Company, during 1993 and the first six 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 business opportunities. The Company intends to finance this expansion primarily with increased bank lines of credit and through internal sources. However, when necessary, as has been the case in prior years, MDC may replace or supplement its bank lines of credit with secured project financing. The cost of secured project financing generally is higher than the cost of the Company's bank lines of credit. MORTGAGE LENDING. The aggregate amount available under MDC's mortgage lending bank line of credit (the "Mortgage Line") at June 30, 1994 was $75,000,000. In August 1994, due to the lower level of mortgage lending activity, the Company has reduced its Mortgage Line to $51,000,000 to, among other things, lower its related cost. Borrowings under the Mortgage Line are collateralized by mortgage loans and mortgage-backed certificates and are limited to the value of "eligible collateral" (as defined in the credit agreements). At June 30, 1994, $16,685,000 was borrowed and an additional $11,488,000 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 -35- as whole loans and subsequently are sold in the open market on a "spot" basis and pursuant to mortgage loan sale commitments. During the six months ended June 30, 1994 and 1993, HomeAmerican sold $269,439,000 and $298,190,000, respectively, principal amount of mortgage loans and mortgage certificates to unaffiliated purchasers. GENERAL. The Company's lines of credit and notes payable contain certain covenants, representations and warranties. The Company currently is in compliance with such covenants, representations and warranties. In the event that MDC's lines of credit are not renewed, or are renewed as they become due at substantially lower levels, the Company believes that it could meet its business plan through a combination of internally-generated funds and new borrowings. Required repayments of its lines of credit have in the past, and in the future could be, repaid with, among other things, (i) available cash and/or the proceeds from the liquidation of available short-term investments; and/or (ii) the proceeds from the sale or liquidation of certain other of the Company's home building, mortgage and other assets. The sale or liquidation of assets could be at prices that are less than the carrying value of such assets and may affect adversely the Company's future financial condition and results of operations. ASSET MANAGEMENT SEGMENT ASSETS AND LIABILITIES. Throughout 1993 and the first six months of 1994, the asset management segment continued to experience a net liquidation of assets and related reduction of liabilities. Mortgage Collateral, net, and related assets, have declined from $275,467,000 at January 1, 1993 to $134,166,000 at December 31, 1993 and to $81,338,000 at June 30, 1994. The proceeds from these reductions were used primarily to reduce the related CMO bonds, net, and related liabilities from $256,347,000 at January 1, 1993 to $123,500,000 at December 31, 1993 and to $76,651,000 at June 30, 1994. These asset and liability reductions substantially were the result of (i) the high rate of prepayments on the Mortgage Collateral; and (ii) sales of Mortgage Collateral and related assets and related redemptions of CMO bonds. The Company's Mortgage Collateral and related CMO bonds will continue to decrease as payments and prepayments are received or Mortgage Collateral is sold. The Company's Equity CMO Interests also have declined from $16,930,000 at January 1, 1993 to $6,427,000 at December 31, 1993 and to $4,375,000 at June 30, 1994 due to the receipt of distributions of capital and, in 1993, valuation adjustments. MATERIAL CHANGES IN OTHER ASSETS AND LIABILITIES. HOME BUILDING RECEIVABLES. Home building receivables consist principally of receivables from home sales (representing the proceeds from home closings not yet disbursed by unrelated settlement agents), which usually are collected within seven days after the sale is -36- closed, and certain other receivables. Such receivables totaled $15,441,000 at June 30, 1994 compared with $5,423,000 at December 31, 1993. The increase at June 30, 1994 is due to increased closings and the timing of such closings. HOUSING COMPLETED OR UNDER CONSTRUCTION. Housing completed or under construction increased to $275,887,000 at June 30, 1994 compared with $201,023,000 at December 31, 1993 principally due to an increase in Backlog and spec homes under construction. LAND AND LAND UNDER DEVELOPMENT. Land and land under development totaled $176,448,000 at June 30, 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 takedowns 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. MORTGAGE LOANS HELD IN INVENTORY. Mortgage loans held in inventory decreased to $42,452,000 at June 30, 1994 compared with $68,065,000 at December 31, 1993, due to the decreased mortgage loan originations in the second quarter of 1994 compared with the fourth quarter of 1993. OTHER 1994 RICHMOND COMMON STOCK ACQUISITION. In December 1993 the Company sold $190,000,000 principal amount of Senior Notes and $28,000,000 principal amount of Convertible Subordinated Notes (the "1993 Offering"). Based on advice of the Company's financial advisor, the Company believes that the success of the 1993 Offering was dependent on MDC's ability to acquire the 54.9% of the common stock of Richmond Homes (the "Richmond Common Stock") that it did not own. A portion of the net proceeds of the 1993 Offering was used to acquire 19.9% of the Richmond Common Stock from an unrelated institutional investor. -37- In connection with an agreement entered into as part of the 1993 Offering and in furtherance of the Company's desire to own all of the outstanding shares of Richmond Common Stock, in December 1993 a special committee of the Board of Directors of the Company (the "Special Committee") negotiated on behalf of the Company terms of an option agreement with Messrs. Mizel and Mandarich to purchase the shares of Richmond Common Stock owned by them for a purchase price of up to $3,500,000 in the aggregate. The purchase price for the Richmond Common Stock was to be paid in shares of MDC common stock (the "MDC Common Stock") valued at $5.75 per share, which was the closing price of the MDC Common Stock on the date of the option agreement. The Special Committee engaged a financial advisor to perform a business enterprise evaluation of Richmond Homes. In February 1994, based on the results of the evaluation, the maximum of $3,500,000 was paid by issuing an aggregate of 608,695 shares of MDC Common Stock to Messrs. Mizel and Mandarich. The Company believes that increasing to 100% its ownership of Richmond Homes (which, among other things, generated 46% of MDC's revenues on a consolidated basis in 1993), will increase MDC's financial flexibility and has simplified greatly MDC's corporate structure. SUBSEQUENT EVENT. On August 4, 1994, Superior Metropolitan District No. 1 ("District No. 1") and Superior Metropolitan District No. 2 ("District No. 2") (collectively, the Districts) issued $35,730,000 principal amount of bonds (the "Bonds"). The Districts were organized and are operated to provide, among other things, water and sanitary sewer services, street improvements and park and recreation facilities for inhabitants of a master-planned community located northwest of Denver (the "Project"). A significant portion of the Project served by such Districts is owned and is being developed by the Company. Part of the proceeds of the offering were utilized to redeem in full, at par value, all of the outstanding bonds of the Districts, totaling $16,395,000, all of which were owned by the Company. Additionally, proceeds totaling approximately $11,000,000 were paid to the Company by District No. 1 to purchase certain interests in a water supply project (the "Water Project") and to reimburse the Company for prepaid water taps and for certain other funds previously advanced to District No. 1. In connection with the issuance of the Bonds, MDC has guaranteed payment of principal and interest on $27,500,000 principal amount of District No. 1 Bonds and has entered into certain agreements with District No. 1 to purchase certain water and sewer tap fees and storm drainage fees (collectively, the "Fees") in connection with the Companys home building operations within the Project. In connection with the guarantee, MDC was required to deposit $10,000,000 into a trust account. Of the funds in the trust account, $6,000,000 will be released in $1,000,000 increments as certain levels of completed homes are achieved in the Project, provided that if the Water Project is not completed by January 1, 1997 or if the Water Project is enjoined and such injunction is not lifted, no withdrawals may occur. The $4,000,000 balance will be released upon the earlier of (i) the completion of the Water Project; or (ii) the resolution (to the extent provided in the Indenture executed in connection with the issuance of the Bonds) of certain litigation seeking, among other things, to delay the Water Project's completion. In addition, MDC has guaranteed payment of principal and interest on $2,580,000 principal amount of District No. 2 Bonds. -38- 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 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 -39- material adverse effect upon the financial condition or results of operations of the Company. The Company is not aware of any litigation matter or pending claim against the Company which would result in material contingent liabilities related to environmental hazards or asbestos. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS. MDC held its Annual Meeting of Stockholders (the "Meeting") on June 24, 1994. At the Meeting, three nominees, Messrs. Steven J. Borick, David D. Mandarich and Larry A. Mizel were elected as Class III Directors to three- year terms expiring in 1997. In addition, the Executive Officer Performance-Based Compensation Plan was approved and the selection of Price Waterhouse LLP as the Company's independent accountants for 1994 was ratified at the Meeting. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibit: 15 Letter regarding unaudited interim financial information. 28 Form of Independent Accountants' Review Report dated July 26, 1994. (b) Reports on Form 8-K: No Current Reports on Form 8-K were filed by the Registrant during the period covered by this Quarterly Report on Form 10-Q. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 15, 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 -40- EXHIBIT INDEX Exhibit No. Description Page # - ----------- ----------- ------ 15 Letter regarding unaudited interim financial information. 42 28 Form of Independent Accountants' Review Report dated July 26, 1994. 43 -41- EX-15 2 EXHIBIT 15 EXHIBIT NO. 15 July 26, 1994 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 We are aware that M.D.C. Holdings, Inc. has included our report dated July 26, 1994 (issued pursuant to the provisions of Statement on Auditing Standards No. 71) in its Registration Statements on Forms S-8 filed on or about March 15, 1985 and July 1, 1994, Forms S-3 filed on or about May 19, 1994 and June 7, 1994, and Form S-4 filed on or about May 19, 1994. We are also aware of our responsibilities under the Securities Act of 1933. Yours very truly, /s/ Price Waterhouse LLP - ------------------------ Price Waterhouse LLP -42- EX-28 3 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 June 30, 1994, and the related condensed consolidated statements of income for the three-month and six- month periods ended June 30, 1994 and 1993 and of cash flows for the six-month periods ended June 30, 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 LLP - ------------------------ PRICE WATERHOUSE LLP Los Angeles, California July 26, 1994 -43- -----END PRIVACY-ENHANCED MESSAGE-----