Item 3. Legal Proceedings.
Expansive Soils Cases.
On October 21, 1994, a complaint was served on several of the Company's subsidiaries in an action initiated by six homeowners in Highlands Ranch, Colorado. On January 26, 1995, counsel for the Company accepted service of two additional complaints by a homeowner in the Stonegate subdivision in Douglas County, Colorado and by a homeowner in the Rock Creek development located in Boulder County, Colorado. On September 12, 1995, the Company was served with a similar complaint relating to homeowners in Douglas County, Colorado. The complaints, each of which seek certification of a class action, purport to allege substantially identical claims relating to the construction of homes on lots with expansive soils, including negligence, breach of express and implied warranties, violation of the Colorado Consumer Protection Act, non-disclosure and a claim for exemplary damages. The homeowners in each complaint seek, individually and on behalf of the alleged class, recovery in unspecified amounts including actual damages, statutory damages, exemplary damages and treble damages. The Company has filed a response to each of the complaints and to initial discovery requests in the first filed case. The ultimate outcome of the cases is uncertain at this time; however, management does not believe that the outcome of these matters will have a material adverse effect on the financial condition or results of operations of the Company.
The Company has notified its insurance carriers of these complaints and currently is reviewing with the carriers how the Company will proceed. The insurance carriers providing primary coverage have agreed to defend the Company in the cases subject to reservations of rights.
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. Because of the nature of the homebuilding business, and in the ordinary course of the Company's operations, the Company from time to time may be subject to product liability claims, including claims similar to those discussed under the description of the Expansive Soils Cases, above. In the opinion of management, the outcome of these matters will not have a material adverse effect upon the financial condition or results of operations of the Company.
The Company is not aware of any litigation, matter or pending claim against the Company which would result in material contingent liabilities related to environmental hazards or asbestos.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No meetings of the Company's shareowners were held during the fourth quarter of 1995.
- -------------------------- [FN] Colescott, et al vs. Richmond Homes Limited, et al. in the District Court, Douglas County, State of Colorado, Civil Action No. 94 CV 352, Division 2. Moore vs. Richmond Homes Limited, et al. in the District Court, Douglas County, State of Colorado, Civil Action No. 95 CV 321, Division 2. Constantini vs. Richmond Homes Limited, et al. in the District Court, Boulder County, State of Colorado, Civil Action No. 95 CV 1052, Division 3. Rodenburg vs. Richmond Homes Limited, et al. in the District Court, Douglas County, State of Colorado, Civil Action No. 95 CV 298, Division 1.
PART II
Item 5.
Item 5. Market Price of Common Stock and Related Security Holder Matters.
The shares of MDC Common Stock are traded on the New York and the Pacific Stock Exchanges. The following table sets forth, for the quarterly periods indicated, the high and low sale prices of the shares of MDC Common Stock as reported on the Composite Tape.
High Low
First quarter.................. $ 7.88 $ 5.38 Second quarter................. 6.00 5.00 Third quarter.................. 6.63 5.00 Fourth quarter................. 5.38 4.50
First quarter.................. $ 5.88 $ 4.88 Second quarter................. 6.50 5.00 Third quarter.................. 8.13 6.13 Fourth quarter................. 8.13 6.13
The Company has declared dividends of three cents per share for each quarter in the year ended December 31, 1995 and two cents per share for each quarter in the year ended December 31, 1994. Prior to 1994, no dividends had been declared on the MDC Common Stock since 1988.
In connection with the declaration and payment of dividends, as well as the purchase, redemption or other acquisition of shares of MDC Common Stock, the Company is required to comply with certain covenants contained in the Senior Notes indenture (the "Senior Notes Indenture"). The Senior Notes Indenture allows the Company to pay dividends on its Common Stock in an amount, on a cumulative basis, not to exceed 50% of its Consolidated Net Income, as defined, after December 31, 1993, subject to certain other adjustments such as the value of MDC Common Stock issued after such date. Pursuant to the Senior Notes Indenture, the Company had a permitted capacity of approximately $20,473,000 for the payment of dividends at December 31, 1995.
On March 7, 1996, MDC had approximately 1,734 shareowners of record.
Item 6.
Item 6. Selected Financial and Other Data.
The data in this table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and the notes thereto presented elsewhere herein (dollars in thousands, except per share amounts).
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
Consolidated Results.
1995 Compared With 1994. MDC's revenues increased 6% for 1995 compared with 1994 primarily as a result of a 9% increase in home closings which more than offset a $5,700 decrease in the average selling price per housing unit. MDC's 1995 revenues of $865,856,000 represent the highest level of revenues in the Company's history.
Income before income taxes was lower for 1995 compared with 1994 primarily as a result of lower homebuilding segment operating profits, partially offset by higher mortgage lending and asset management segment operating profits, lower corporate and homebuilding interest expense and lower corporate general and administrative expenses. The reduction in homebuilding operating profits primarily resulted from a 13% decline in Home Gross Margins. The decline in Home Gross Margins largely was due to increased incentives offered to home buyers in order to counter weakening demand due to higher mortgage interest rates, particularly during the second half of 1994 and the first quarter of 1995, and increased competition in MDC's homebuilding markets.
During 1995, the Company continued to strengthen its balance sheet and improve the efficiency of its operations. MDC reduced its homebuilding inventories significantly in 1995. Land and land under development inventories were $6,878,000 and $15,921,000, respectively, lower than the levels at December 31, 1994 and 1993. Land and land under development inventories at December 31, 1995 represented 21.4% of 1995 home sales revenues, the lowest ratio of land to home sales revenues in more than twelve years. The Company also reduced the level of its investment in unsold homes under construction to approximately $95,000,000 at December 31, 1995, an 18% improvement from the level of unsold homes under construction at December 31, 1994. In addition, the Company reduced its aggregate indebtedness in 1995 to $305,344,000, a reduction of 12%, from year-end 1994, and the lowest year-end debt level since 1984. All of these improvements contributed to a reduction in the Company's debt-to-equity ratio at December 31, 1995 to 1.49 to 1, its lowest year-end level since 1979.
1994 Compared With 1993. MDC's revenues increased during 1994 compared with 1993 primarily as a result of a 26% increase in home closings and an $11,000 higher average selling price per housing unit.
The Company's income before income taxes and extraordinary gains increased in 1994 compared with 1993 due principally to (i) increased homebuilding segment operating profits from significantly higher home closings and higher Home Gross Margins; and (ii) lower corporate and homebuilding interest expense. These positive income effects partially were offset by lower operating profit from the asset management segment resulting primarily from lower mortgage interest rates in 1993 that enabled the Company to sell certain of its mortgage-related assets at a profit in 1993.
During 1993, the Company recognized net extraordinary gains of $15,823,000, net of income taxes of $9,967,000, substantially all of which resulted from the early extinguishment of the Restructured Notes Payable with a portion of the net proceeds received in the 1993 Offering. No extraordinary gains or losses were recognized by the Company in 1994.
Impact of Mortgage Interest Rates.
The Company's homebuilding and mortgage lending operations are dependent upon the availability and cost of mortgage financing. Increases in home mortgage interest rates (i) may reduce the demand for homes and home mortgages; and (ii) generally will reduce home mortgage refinancing activity.
In October 1993, home mortgage interest rates reached their lowest levels in 25 years, dropping to an average of 6.7% on a 30-year, fixed-rate mortgage. From October 1993 to December 1994, home mortgage interest rates increased to as high as 9.25%. During this period of rising interest rates, the Company experienced a general weakening in demand for new homes in most of its markets. This weakened demand, along with a general buildup in unsold homes under construction by the Company and other homebuilders, adversely affected the Company's home sales and Home Gross Margins in 1995, particularly in the first quarter. Since December 1994, home
mortgage interest rates generally declined to 7.2% in December 1995 and to as low as 6.9% in February 1996. The decline during 1995 and early 1996, among other things, led to improved home sales levels in the last three quarters of 1995 and the first two months of 1996 compared with the same periods in the prior year. However, Home Gross Margins have not recovered as quickly, as the Company and other homebuilders in the Company's markets have continued to offer increased incentives to sell homes, especially unsold homes under construction.
Mortgage interest rates have recently increased to 8%. The Company is unable to predict the extent to which recent or future increases in home mortgage rates will affect adversely the Company's operating activities and results of operations.
Homebuilding Segment.
The table below sets forth certain information with respect to the Company's homebuilding segment during each of the periods presented and at the end of such periods (dollars in thousands).
Homebuilding Activities - 1995 Compared With 1994.
Home Sales Revenues, Home Sales and Homes Closed and Delivered. Home sales revenues increased in 1995 compared with 1994 primarily as a result of increases in home closings, partially offset by an overall decrease in the average selling price per home closed, as discussed below. Home sales and closings increased in 1995 in (i) Arizona, primarily due to a significant expansion of the Company's operations in Phoenix where the Company has increased the number of active subdivisions to 16 at December 31, 1995 from nine at December 31, 1994;
(ii) California, primarily due to the Company's acquisition and opening of several new subdivisions in Southern California after December 31, 1994 and the July 1995 acquisition of five active subdivisions in Paloma del Sol, a master-planned community in the city of Temecula, Riverside County; and (iii) Colorado due to, among other things, efforts to reduce the level of unsold homes under construction and a continuing emphasis on offering more affordable homes.
In its Mid-Atlantic market, the Company experienced lower home sales and closings per active subdivision in 1995 compared with 1994. The impact of lower home sales per active subdivision was partially offset by an increase in the number of the Company's active subdivisions in that market at December 31, 1995 compared with December 31, 1994. The lower home sales and closing levels per active subdivision were primarily the result of the Mid-Atlantic market, overall, experiencing (i) an increase in active subdivisions due to aggressive competition in this market; (ii) reduced consumer confidence due to reductions in the number of federal employees and government shutdowns, and the potential for further reductions in the number of federal employees as a result of deficit reduction plans; and (iii) a decline in total market home sales.
The Company's home sales in January and February 1996 increased by 38% (61% in February alone) to a total of 1,045 homes, compared with sales of 757 homes in the same two-month period in 1995. The Company is unable to predict if this trend of higher comparable sales from 1996 compared with 1995 will continue in the future, particularly in view of recent increases in mortgage interest rates.
Average Selling Price Per Housing Unit. The decrease in the average selling price per housing unit in 1995 compared with 1994 is the result of management's decision to increase the Company's emphasis on lower-priced, more affordable homes primarily marketed to first-time and first-time move-up home buyers. This strategic change in market mix resulted in lower average sales prices compared with prices in 1994 (i) in Colorado, Maryland and Tucson; and (ii) beginning in the third quarter of 1995, in Southern California as the Company began offering homes ranging in price from $105,000 to $170,000 in the Riverside County subdivisions acquired in July 1995. The Company anticipates that its average selling price will be lower in 1996 than in 1995.
Home Gross Margins. Gross margins (home sales revenues less cost of goods sold, which primarily includes land and construction costs, capitalized interest, a reserve for warranty expense and financing costs) as a percent of home sales revenue ("Home Gross Margins") decreased to 13.4% in 1995 from 15.4% in 1994. This decline was due to (i) increased incentives offered to home buyers in order to counter weakening demand due to higher mortgage interest rates, particularly during the second half of 1994 and the first quarter of 1995; (ii) increased incentives used to reduce the Company's inventory of unsold homes under construction; and (iii) increased competition in MDC's homebuilding markets. Based on its estimated Home Gross Margins in Backlog at December 31, 1995, the Company believes that its average Home Gross Margins in the first quarter of 1996 will be comparable to the Company's average achieved in the year ended December 31, 1995. In addition, increases in, among other things, the costs of subcontracted labor, finished lots and building materials have affected adversely, and may affect adversely in the future, Home Gross Margins to the extent that market conditions prevent the recovery of increased costs through higher sales prices.
Inventory Valuation Reserves. Operating results during the year ended December 31, 1995 were impacted adversely by $3,677,000 in net realizable value adjustments. The adjustments primarily were related to certain under-performing projects in California, Arizona and the Mid-Atlantic region.
Marketing. Marketing expenses (which include, among other things, amortization of deferred marketing costs, model home expenses and sales commissions) totalled $49,938,000 for 1995, compared with $44,588,000 for 1994. The increases reflect the impact of significant additional marketing-related salary, sales commission and model home operating expenses incurred to support the Company's expanded operations. Additionally, the Company has increased its marketing efforts in its markets to stimulate sales.
General and Administrative. General and administrative expenses totalled $26,694,000 in 1995 compared with $29,215,000 for 1994. General and administrative expenses as a percentage of home sales revenues decreased to 3.2% in 1995, compared with 3.7% in 1994 as the Company was able to deliver more homes in 1995 with a reduced level of overhead.
Homebuilding Activities - 1994 Compared With 1993.
Home Sales Revenues, Home Sales and Homes Closed and Delivered. Home sales revenues for 1994 were 33% higher than home sales revenues for 1993. This increase primarily was the result of increases in home closings in (i) Colorado, due to strong market conditions resulting from low interest rates in the second half of 1993 and the first quarter of 1994; (ii) Arizona, due to a significant expansion of the Company's operations, and continued strong demand for homes, in the Tucson and Phoenix markets; (iii) California, due to the Company's acquisition and opening of several new subdivisions, particularly in Southern California; and (iv) the Company's Mid-Atlantic market, due to improved market conditions in the first quarter of 1994 and an increase in the number of active subdivisions. The Company also realized an $11,000 increase in the average selling price per housing unit.
Sales increased in the year ended December 31, 1994 compared with 1993 in (i) Arizona (an increase of 82%) due to improved market conditions and an expansion of the Company's operations in the Phoenix and Tucson markets; and (ii) California (an increase of 49%) due to an expansion of the Company's operations in Northern California and the Company's re-entry into the Southern California market which began in the second half of 1993 and continued through 1994. Sales declined in the year ended December 31, 1994 compared with 1993 in (i) Colorado (a decline of 3%) as, among other things, new competitors entered the market and increased mortgage interest rates during the last three quarters of 1994 affected adversely the demand for new homes; and (ii) the Mid-Atlantic region (a decline of 7%) due to an overall slowing in this market which began in the second quarter of 1994 (the overall Mid-Atlantic market declined by approximately 10% in 1994 compared with 1993).
Average Selling Price Per Housing Unit. The increase in the average selling price per housing unit in 1994 compared with 1993 primarily was due to increases in average selling prices in all of the Company's markets except Phoenix and Northern California. The increases in selling prices principally were due to (i) the mix of homes closed; (ii) general price increases in most of the Company's markets to, among other things, offset increases in costs; and (iii) in certain markets, improved market conditions. These increases partially were offset by lower average selling prices in (i) Northern California primarily due to the introduction of more affordable homes during the latter part of 1993 in response to continuing consumer demand for lower-priced housing and softness in consumer demand for new homes; and (ii) Phoenix primarily due to the opening of new subdivisions which targeted the first-time and first-time move-up buyer.
Home Gross Margins. The Company achieved higher Home Gross Margins in 1994 compared with 1993 in its Colorado, Southern California and Arizona markets primarily due to improved market conditions primarily resulting from lower interest rates. Home Gross Margins also were higher in the Company's Mid-Atlantic market in 1994 compared with 1993 due to improved market conditions through the first quarter of 1994 combined with home closings from a more profitable mix of subdivisions in 1994 compared with 1993. The increases partially were offset by lower Home Gross Margins in Northern California as the Company's profitability in this area was affected adversely by softness in consumer demand for new homes. To a substantially lesser extent, Home Gross Margins also were impacted negatively by builder competition in Nevada.
Inventory Valuation Reserves. Operating results during the fourth quarter of 1994 were impacted adversely by $4,000,000 in net realizable value adjustments related to, among other factors, several projects in Northern California which experienced significant slowing in sales and reduced selling prices during the fourth quarter due to softness in consumer demand which led to a general decline in home sales activity in this market.
Marketing. Marketing expenses totalled $44,588,000 for 1994 compared with $34,820,000 for 1993. This 28% increase during 1994 principally was due to the 33% increase in home sales revenue and expanded operations in all of the Company's major regions.
General and Administrative. General and administrative expenses totalled $29,215,000 during 1994 compared with $27,497,000 in 1993. General and administrative expenses during 1993 were affected adversely by non-recurring charges totalling approximately $2,500,000. While general and administrative expenses increased in the aggregate primarily due to salary expense for the additional personnel needed for the Company's expanded operations, general and administrative expenses as a percentage of home sales revenues decreased to 3.7% for 1994 compared with 4.7% in 1993 because the Company was able to deliver more homes without a proportionate increase in overhead.
Land Sales.
Revenue from land sales totalled $10,396,000, $8,296,000 and $7,441,000, respectively, for the years 1995, 1994 and 1993. The land sales primarily were in Colorado and, to a lesser extent, in California. Gross profits (losses) from these land sales were $220,000, $319,000 and $(423,000), respectively, for the years 1995, 1994 and 1993.
Included in the 1995 land sales was a sale of 45 acres of inactive land in its Rock Creek Ranch development in Colorado ("Rock Creek") for approximately $4,400,000, which was approximately equal to its book value. In accordance with the development plans of the metropolitan districts serving Rock Creek, the purchaser pre-paid approximately $3,400,000 of development fees to these districts. In connection with the sale, the purchaser acquired an option from the Company for the purchase of two adjacent parcels also served by the districts.
Land Inventory.
The table below shows (in thousands) the carrying value of MDC's land and land under development in each of its homebuilding markets at December 31, 1995, 1994 and 1993.
The Company's net income, cash flow and returns on assets and stockholders' equity are affected adversely by the carrying costs (e.g., interest and property taxes) associated with land inventories held for future development or sale (inactive land inventories) and because the inventories do not earn any return. The decreases in inactive land inventories are due to the commencement of development and construction activity in certain subdivisions as well as land sales or other dispositions.
Carrying costs on inactive land inventories are expensed, not capitalized. The Company is actively pursuing opportunities to further reduce, through sales, homebuilding activities, or other means, its inactive land inventories.
Mortgage Lending Segment.
The table below summarizes the results of HomeAmerican's operations during each of the periods presented (in thousands).
The table below sets forth certain information regarding HomeAmerican's portfolio of mortgage loans serviced (in thousands).
1995 Compared With 1994. HomeAmerican's loan originations and purchases increased by 12% in 1995 compared with 1994 primarily due to an increase in the Company's home closings and an increase in the percentage of mortgage originations for buyers of the Company's homes, partially offset by a 48% decrease in the dollar amount of spot originations. HomeAmerican originated mortgages for 61% of MDC's home buyers in 1995 compared with 52% in 1994. HomeAmerican continues to benefit from the Company's home sales growth as MDC home buyers were the source of more than 80% of the principal amount of mortgage loans originated or purchased by HomeAmerican in 1995. By originating a mortgage loan for an MDC home buyer, the Company is able to recover a portion of the cost of the incentives provided by the Company to its home buyers through the future sale of the related mortgage servicing. During late 1995, HomeAmerican opened an origination facility in Southern California, and in February 1996, HomeAmerican opened an origination facility in Las Vegas, both of which positively will affect the percentage of HomeAmerican's originations for MDC's home buyers in 1996.
Spot and correspondent originations mainly result from refinancings. Increased mortgage interest rates, particularly during the second half of 1994 and the first quarter of 1995, significantly decreased refinancing activity market-wide and resulted in a decrease in the Company's spot and correspondent originations in 1995 compared with 1994. However, during the second half of 1995, spot and correspondent originations and purchases increased compared with the same period in 1994, as interest rates in the second half of 1995 averaged approximately 131 basis points lower than in the second half of 1994.
HomeAmerican's operating profit in 1995 was higher than in 1994 principally due to gains from sales of mortgage servicing totalling $8,336,000 in 1995 compared with gains totalling $6,770,000 in 1994. The Company sold approximately the same principal amount of servicing in 1995 as in 1994, but received approximately 10% more revenues on the sales in 1995 than in 1994 as, among other things, stronger market demand for mortgage servicing during 1995 resulted in more favorable prices than in 1994. Gains from mortgage servicing sales other than bulk sales comprised a larger percentage of total gains (24% for 1995 compared with 15% for 1994) primarily due to increased originations and purchases of adjustable rate mortgages, which generally are sold "servicing released."
1994 Compared With 1993. HomeAmerican's loan originations and purchases decreased by 35% in 1994 compared with 1993 primarily due to increased mortgage interest rates which resulted in lower mortgage loan originations market wide. The decrease partially was offset by a 5% increase in the dollar amount of originations for MDC's home buyers principally due to increased closings by MDC's homebuilding segment. HomeAmerican originated mortgages for 52% of MDC's home buyers in 1994 compared with 63% in 1993. The decline in the percentage of mortgages originated for MDC's home buyers was the result of, among other things, increased competition for mortgage loan originations and increases in closings in Southern California where HomeAmerican did not have an origination facility.
HomeAmerican's operating profit of $6,951,000 during 1994 was lower than the operating profit of $7,508,000 for 1993 principally due to losses from sales of mortgage loans totalling $585,000 in 1994 (when mortgage rates were increasing) compared with gains totalling $2,864,000 in 1993 (when mortgage rates were decreasing), partially offset by higher gains from bulk sales of mortgage servicing in 1994. While loan origination fees were lower in 1994 compared with 1993, this reduction was offset by a decrease in general and administrative expenses as HomeAmerican was able to reduce its general and administrative costs in response to the decline in its mortgage lending operations.
Asset Management Segment.
The table below summarizes the results of the asset management segment operations during each of the periods presented (in thousands).
During the three years ended December 31, 1995, the Company has experienced a significant decrease in the amount of assets in its asset management segment primarily from (i) refinancing of mortgages by homeowners; (ii) the sale by the Company of mortgage-related assets; (iii) writedowns of mortgage-related assets due to
prepayments; and (iv) certain investments reaching the end of their economic lives. As a result, future income from the asset management segment primarily will be dependent on management fees earned by FAMC from two publicly traded REITs, net of general and administrative costs. FAMC earned management fees from the REITs totalling $3,324,000, $2,780,000 and $2,180,000, respectively, in the years ending December 31, 1995, 1994 and 1993. See Note A - Summary of Significant Accounting Policies - Asset Management to the Company's Consolidated Financial Statements.
At December 31, 1995, FAMC had approximately $150 million in assets under management for the REITs.
Other Operating Results.
Interest Expense. Corporate and homebuilding interest incurred decreased by 5% to $33,909,000 in 1995 compared with $35,799,000 in 1994 primarily due to (i) lower average effective interest rates with respect to the Company's variable-rate bank lines of credit and project loans resulting from a decrease in the prime rate in 1995; and (ii) lower levels of borrowings resulting from the Company's reduction in homebuilding inventories and the increased usage of internally generated funds. Corporate and homebuilding interest incurred increased by 40% to $35,799,000 for 1994 compared with $25,505,000 for 1993 due to (i) higher average effective interest rates associated with the 11 1/8% Senior Notes due 2003 (in part due to the repayment, in December 1993 and January 1994, of $132,496,000 of Restructured Notes Payable for approximately $100,701,000) compared with the debt outstanding for 1993; (ii) higher average effective interest rates with respect to the Company's variable-rate bank lines of credit and project loans due to an increase in the prime rate in 1994; and (iii) higher levels of borrowings resulting from the Company's expanded homebuilding operations.
The portion of corporate and homebuilding interest which was capitalized (the Company capitalizes interest on its homebuilding inventories during the period of active development and through the completion of construction) during 1995 totalled $26,136,000 compared with $26,345,000 and $14,051,000, respectively, during 1994 and 1993. The increase in interest capitalized for 1994 compared with 1993 primarily was due to (i) increased levels of active homebuilding inventories resulting from expanded operations; and (ii) higher capitalization rates resulting from higher average effective interest rates on the Company's debt, particularly with respect to Colorado.
Corporate and homebuilding interest incurred but not capitalized is reflected as interest expense and totalled $7,773,000 for 1995 compared with $9,454,000 and $11,454,000, respectively, for 1994 and 1993. In addition to the factors discussed above, the declines in interest expense were attributable to the decreases in inactive land inventories.
For a reconciliation of interest incurred, capitalized and expensed, see Note H to the Company's Consolidated Financial Statements.
Corporate General and Administrative Expenses. Corporate general and administrative expenses totalled $13,478,000 for 1995 compared with $15,132,000 and $14,890,000, respectively, for 1994 and 1993. The 11% decrease in 1995 compared with 1994 primarily was due to a reduction in insurance, legal expenses and professional fees, partially offset by an increase in salary expense and financing costs associated with the Company's expanded operations in 1995.
Income Taxes. M.D.C. Holdings, Inc. and its wholly owned subsidiaries file a consolidated federal income tax return (an "MDC Consolidated Return"). Richmond Homes and its wholly owned subsidiaries filed a separate consolidated federal income tax return (each a "Richmond Homes Consolidated Return") from its inception (December 28, 1989) through February 2, 1994, the date Richmond Homes became a wholly owned subsidiary of MDC.
MDC's overall effective income tax rates of 35.3%, 37.9% and 36.6%, respectively, for 1995, 1994, and 1993, differed from the federal statutory rate of 35% 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 of prior years' income taxes.
At December 31, 1995, the Company had a net deferred tax asset of $13,730,000, net of a valuation allowance of $3,000,000. Given present economic trends, particularly in the homebuilding industry, as evidenced by recent improvements in the Company's results of operations, management believes the net deferred tax asset to
be recoverable from future earnings. The valuation allowance has been provided to offset the related deferred income tax assets due to the uncertainty of realizing the benefit of certain future tax deductions. See Note I to the Company's Consolidated Financial Statements.
In April 1995, the Company and the Internal Revenue Service (the "IRS") reached final agreement on the IRS examinations of (i) the MDC Consolidated Returns for the years 1984 and 1985; and (ii) the Richmond Homes Consolidated Returns for the years 1989 and 1990. These agreements had no material impact upon the Company's financial position or results of operations.
The IRS has completed its examination of the MDC Consolidated Returns for the years 1986 through 1990 and has proposed adjustments that would shift the recognition of certain items of income and expense from one year to another ("Timing Adjustments"). To the extent taxable income in a prior year is increased by proposed Timing Adjustments, taxable income may be reduced by a corresponding amount in other years; however, the Company would incur an interest charge as a result of such adjustment. The Company currently is protesting many of these proposed adjustments through the IRS appeals process. In the opinion of management, adequate provision has been made for any additional income taxes and interest which may result from the proposed adjustments.
The IRS currently is examining the MDC and Richmond Homes Consolidated Returns for the years 1991, 1992 and 1993. No reports have been issued by the IRS in connection with these examinations. In the opinion of management, adequate provision has been made for additional income taxes and interest, if any, which may result from these examinations.
LIQUIDITY AND CAPITAL RESOURCES
MDC uses its liquidity and capital resources to, among other things, (i) support its operations, including its inventories of homes, home sites and land; (ii) provide working capital; and (iii) provide mortgage loans for its home buyers. Liquidity and capital resources are generated internally from operations and from external sources.
Capital Resources.
The Company's capital structure is a combination of (i) permanent financing, represented by Stockholders' Equity; (ii) long-term financing, represented by publicly traded Senior Notes and subordinated notes due primarily in 2003 and 2005, respectively; and (iii) current financing, primarily lines of credit, as discussed below. The Company believes that its current financial condition is both balanced to fit its current operational structure and adequate to satisfy its current and near-term capital requirements.
The Company's debt to equity ratio improved to 1.49 to 1 at December 31, 1995 compared with 1.97 to 1 at December 31, 1993 and 1.81 to 1 at December 31, 1994. The improvement is primarily a result of (i) the earnings of the Company, which contributed to the increase in the Company's Stockholders' Equity to $205,033,000 at December 31, 1995; and (ii) the use of internally generated cash flow to reduce debt.
Based upon its current business plan, MDC anticipates the acquisition of various parcels of finished lots and partially developed land for use in its future homebuilding operations during 1996. The Company currently intends to acquire a portion of the land inventories required in future periods through takedowns of lots subject to "rolling" options entered into in prior periods and under new "rolling" options. The use of "rolling" options lessens the Company's land-related risk and improves liquidity.
Based upon its current capital resources and additional liquidity available under existing credit relationships, MDC anticipates that it has adequate financial resources to satisfy its current and near-term capital requirements. The Company believes that it can meet its long-term capital needs (including, among other things, meeting future debt payments and refinancing or paying off other long-term debt as it becomes due) from operations and external financing sources, assuming that no significant adverse changes in the Company's business occur as a result of the various risk factors described elsewhere herein, in particular, changes in interest rates.
Lines of Credit and Notes Payable.
Homebuilding. MDC's homebuilding bank line of credit facilities at December 31, 1995 were $158,149,000 in the aggregate, a substantial increase over the $65,000,000 of similar facilities at December 31, 1993. Agreements governing significant portions of the present facilities were entered into during 1994 and 1995, and generally provide for final maturities from four to five years, including scheduled term-out periods (although the term-out periods may commence earlier under certain circumstances). The Company has expanded its bank lines of credit to, among other things, reduce the levels of its secured project financing, the cost of which is generally higher than the cost of bank lines of credit. Borrowings under the bank lines of credit are collateralized by homebuilding inventories and are limited to the value of "eligible collateral" (as defined in the credit agreements). At December 31, 1995, $43,490,000 was borrowed and an additional $112,693,000 was collateralized and available to be borrowed under the bank lines of credit.
In 1995, the Company modified and extended $105,000,000 in bank line of credit facilities. The modified agreements include, among other things, lower interest margins, lower fees and extensions of the final maturities.
Mortgage Lending. To provide funds to originate and purchase mortgage loans and to finance these mortgage loans on a short-term basis, HomeAmerican utilizes its mortgage lending bank line of credit (the "Mortgage Line"). These mortgage loans are pooled into GNMA, FNMA and FHLMC pools or retained as whole loans and subsequently are sold in the open market on a "spot" basis or pursuant to mortgage loan sale commitments. During 1995, 1994 and 1993, HomeAmerican sold $504,109,000, $480,485,000 and $695,635,000, respectively, principal amount of mortgage loans and mortgage certificates to unaffiliated purchasers.
The aggregate amount available under the Mortgage Line at December 31, 1995 was $51,000,000. Borrowings under the Mortgage Line are collateralized by mortgage loans and mortgage-backed certificates and are limited to the value of "eligible collateral" (as defined in the credit agreement). At December 31, 1995, $21,990,000 was borrowed and an additional $16,580,000 was collateralized and available to be borrowed under the Mortgage Line. The Company also has additional borrowing capability with available repurchase agreements.
General. The Company's lines of credit and notes payable require compliance with certain covenants, representations and warranties. Currently, the Company believes that it is in compliance with these covenants, representations and warranties.
Consolidated Cash Flow.
During 1995, the Company generated $28,687,000 in cash from operating activities. The Company used this cash, other internally generated funds and $22,769,000 of cash on hand to pay down lines of credit and notes payable by $46,639,000 and to repurchase, for $5,466,000, 865,600 shares of MDC Common Stock (at prices ranging from $5.88 to $6.50). The stock repurchases were made pursuant to an announced program to repurchase up to 1,100,000 shares of MDC Common Stock and up to 1% of the principal amount of each of its outstanding Senior Notes and Convertible Subordinated Notes.
MDC used $19,439,000 of cash in 1994 principally due to increases in homebuilding inventories as a result of significantly increased levels of homebuilding activity, offset partially by a reduction in mortgage loans held in inventory and net increases in debt (primarily lines of credit) necessary to finance the substantial increases in homebuilding activities.
In 1993, cash generated of $1,975,000 principally was due to net cash provided by (i) net proceeds from borrowings in excess of payments made on notes; (ii) increases in accounts payable and accrued expenses; and (iii) proceeds from Investments and Marketable Securities, which was partially offset by cash used to increase homebuilding inventories and mortgage loans held in inventory and to repurchase MDC Common Stock.
IMPACT OF INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS
Real estate and residential housing prices are affected by inflation, which can cause increases in the price of land, raw materials and subcontracted labor. Unless costs are recovered through higher sales prices, Home Gross Margins can decrease. If interest rates increase, construction and financing costs, as well as the cost of borrowings, also increase, which can result in lower Home Gross Margins. Increases in home mortgage interest rates make it more difficult for MDC's customers to qualify for home mortgage loans, potentially decreasing home sales volume. Increases in interest rates also may affect adversely the volume of mortgage loan originations.
The volatility of interest rates could have an adverse effect on MDC's future operations and liquidity. Among other things, these conditions may (i) affect adversely the demand for housing and the availability of mortgage financing; and (ii) reduce the credit facilities offered to MDC by banks, investment bankers and mortgage bankers.
MDC's business also is affected significantly by, among other things, general economic conditions and particularly the demand for new homes in the areas in which it builds.
ISSUANCE OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). The Company's adoption of SFAS 121 in the first quarter of 1996 is not anticipated to have a material impact on the results of operations or financial position of the Company upon adoption.
In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing Rights an Amendment of FASB Statement No. 65" ("SFAS 122"). The Company's adoption of SFAS 122 in the first quarter of 1996 is not anticipated to have a material adverse impact on the results of operations or financial position of the Company upon adoption.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", which establishes a fair value based method of accounting for stock-based compensation plans. The statement allows companies to continue to use the intrinsic value based approach, supplemented by footnote disclosure of the pro forma net income and earnings per share of the fair value based approach. The Company intends to follow this latter method and, as a result, adoption of this pronouncement in 1996 will have no effect on the Company's financial statements.
OTHER
Forward-Looking Statements.
Certain statements in this Form 10-K Annual Report, the Company's Summary Annual Report to Shareowners, as well as statements made by the Company in periodic press releases, oral statements made by the Company's officials to analysts and shareowners in the course of presentations about the Company and conference calls following quarterly earnings releases, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, (i) general economic and business conditions; (ii) interest rate changes; (iii) competition; (iv) the availability and cost of land and other raw materials used by the Company in its homebuilding operations; (v) unanticipated demographic changes; (vi) shortages of labor; (vii) weather related slowdowns; (viii) slow growth initiatives; (ix) building moratoria; (x) governmental regulation including environmental laws; and (xi) other factors over which the Company has little or no control.
Proposed Tax Plans.
Congressional considerations of major reform to the federal tax system have been increasing over the past year. Proposed tax plans currently being sponsored by various members of Congress, include variations of a consumption tax (sales tax) and flat tax. Under the current tax system, deductions are allowed for mortgage interest and property taxes. Tax reform may reduce or eliminate these deductions. The likelihood of major tax reform and the impact such reform would have on, among other things (i) the demand for, and the value of, new as well as existing homes; and (ii) the Company's financial position or results of operations, are not determinable.
Reorganization of FAMC.
In March 1996, M.D.C. Holdings, Inc.("Holdings"), Mr. Spencer I. Browne (previously President, Co-Chief Operating Officer and a director of Holdings), M.D.C. Residual Holdings, Inc., a wholly owned subsidiary of Holdings ("Residual"), and Financial Asset Management Corporation ("Management Corporation") entered into an agreement (the "Agreement") effective as of April 1, 1996, pursuant to which Mr. Browne, Residual and Management Corporation formed FAMC. Mr. Browne owns 20% of FAMC, and Management Company and Residual own the remaining 80% of FAMC.
Pursuant to the Agreement, (i) Mr. Browne resigned as President, Co-Chief Operating Officer and a director of Holdings; (ii) Mr. Browne and Holdings entered into an employment agreement (the "Employment Agreement"); (iii) Mr. Browne was appointed President and Chief Executive Officer of FAMC; and (iv) FAMC assumed Management Corporation's business operations of managing Asset Investors and Commercial Assets and performing certain other asset management functions.
Also pursuant to the Agreement, Mr. Browne sold 473,142 shares of Holdings' Common Stock to the Company for $7.125 per share for a total of $3,371,137. A portion of the proceeds of this sale was used by Mr. Browne to repay all outstanding principal and interest borrowed from the Company pursuant to a Company option purchase program.
Mr. Browne acquired his 20% interest from FAMC by contributing to FAMC $400,000 cash and a $2,100,000 promissory note (the "Promissory Note"). The Promissory Note (i) has a maturity date of December 31, 1998; (ii) bears interest at Holdings' corporate borrowing rate (not to exceed 13% per annum); (iii) requires principal payments on April 1 of each year as specified in the Promissory Note; and (iv) is secured by a pledge of Mr. Browne's interest in FAMC.
The Agreement further provides that from January 1, 1997 through December 31, 1998, Mr. Browne shall have the right to cause FAMC to purchase his interest in FAMC at the "Put/Call Price" as defined below. Similarly, at all times on and after January 1, 1997, FAMC shall have the right to purchase Mr. Browne's interest in FAMC at the Put/Call Price. The Put/Call Price shall equal the amount paid by Mr. Browne for his interest in FAMC increased by Mr. Browne's share of FAMC's earnings subsequent to March 31, 1996 and decreased by (i) Mr. Browne's share of FAMC's losses during the same period; (ii) all distributions to Mr. Browne in respect of his interest in FAMC during the same period; and (iii) the outstanding principal amount of, and accrued interest on, the Promissory Note described above.
The Employment Agreement provides that Mr. Browne remains an employee of Holdings. The term of the Employment Agreement is April 1, 1996 through December 31, 1998, unless terminated earlier, subject to annual renewals thereafter. The Employment Agreement provides (i) for Mr. Browne's compensation in the form of a base salary, annual incentive compensation primarily based on FAMC's pre-tax net income, subject to an annual limitation, and certain fringe benefits; (ii) severance payments in the event Mr. Browne's employment with the Company is terminated; and (iii) certain benefits in the event of a "change in control" as defined in the Employment Agreement.
ITEM 8.
ITEM 8. Financial Statements.
M.D.C. HOLDINGS, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page ---- Consolidated Financial Statements: Report of Independent Accountants ................................ Consolidated Balance Sheets as of December 31, 1995 and December 31, 1994......................................... Consolidated Statements of Income for the Three Years Ended December 31, 1995........................... Consolidated Statements of Stockholders' Equity for the Three Years Ended December 31, 1995........................... Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1995........................... Notes to Consolidated Financial Statements........................
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREOWNERS OF M.D.C. HOLDINGS, INC.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders' equity and of cash flows present fairly, in all material respects, the financial position of M.D.C. Holdings, Inc. and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP - ------------------------ PRICE WATERHOUSE LLP
Los Angeles, California
February 20, 1996
M.D.C. HOLDINGS, INC. Consolidated Balance Sheets (In thousands)
See notes to consolidated financial statements.
M.D.C. HOLDINGS, INC. Consolidated Balance Sheets (In thousands, except share amounts)
See notes to consolidated financial statements.
M.D.C. HOLDINGS, INC. Consolidated Statements of Income (In thousands, except per share amounts)
See notes to consolidated financial statements.
M.D.C. HOLDINGS, INC. Consolidated Statements of Stockholders' Equity (In thousands)
See notes to consolidated financial statements.
M.D.C. HOLDINGS, INC. Consolidated Statements of Cash Flows (In thousands)
See notes to consolidated financial statements.
M.D.C. HOLDINGS, INC. Consolidated Statements of Cash Flows (In thousands) (Continued)
See notes to consolidated financial statements.
M.D.C. HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements of M.D.C. Holdings, Inc. ("MDC" or the "Company", which, unless otherwise indicated, refers to M.D.C. Holdings, Inc. and its subsidiaries) include the accounts of MDC and its wholly owned and majority-owned subsidiaries. Investments in 50% or less owned limited partnerships, joint ventures and ownership interests in trusts are accounted for using the equity method. All significant intercompany balances and transactions have been eliminated in consolidation.
General. In the homebuilding segment of its operations, the Company (i) principally acquires finished lots and, to a lesser extent, acquires land and develops it for use in its homebuilding activities; and (ii) designs, constructs and sells single-family residential homes. The Company conducts its homebuilding operations in (i) metropolitan Denver and Colorado Springs, Colorado; (ii) northern Virginia and suburban Maryland; (iii) Northern and Southern California; (iv) Phoenix and Tucson, Arizona; and (v) Las Vegas, Nevada. Such operations are financed primarily with publicly traded Senior Notes (as hereinafter defined) and subordinated notes, bank lines of credit, internally-generated funds and, to a lesser extent, promissory notes and project loans.
MDC's mortgage lending operations are conducted by HomeAmerican Mortgage Corporation ("HomeAmerican"), which primarily provides mortgage loans for MDC home buyers and, to a lesser extent, for others. Substantially all of the mortgage loans originated by HomeAmerican, as well as mortgage loans purchased from unaffiliated loan correspondents, subsequently are sold to private investors. Additionally, HomeAmerican sells mortgage loan servicing.
In MDC's asset management segment, Financial Asset Management LLC (an indirect subsidiary of M.D.C. Holdings, Inc., and the successor as of April 1, 1996 to Financial Asset Management Corporation, "FAMC") manages the operations of two publicly traded real estate investment trusts (each a "REIT"). MDC also owns other mortgage-related interests.
Homebuilding.
Inventories - Inventories are stated at the lower of cost or net realizable value and include interest capitalized during the period of active development through the completion of construction. Construction-related overhead and salaries are capitalized and allocated proportionately to projects actively being developed. Land and related costs are transferred to housing inventory when construction commences.
Net realizable value is based on the Company's plans for development and build-out of each project using estimated sales prices less estimated total costs of the project, which includes interest anticipated to be capitalized during development and anticipated costs to sell the project. Net realizable value does not represent, for a specific project, the current sales price that the Company could obtain from third parties for such properties and projects at their current stage of development. Management believes that its assumptions as to projected demand are reasonable based on present economic conditions and that financing will be available to enable the Company to realize the carrying value of its homebuilding inventories consistent with its plans for build-out and development. Depending upon, among other things, conditions in the Company's markets, it is reasonably possible that the amounts the Company will ultimately realize could differ materially in the near term from the amounts estimated to be realizable at December 31, 1995.
Revenue Recognition - Revenues from real estate sales are recognized when a sufficient down payment has been received, financing has been arranged, title, possession and other attributes of ownership have been transferred to the buyer and the Company is not obligated to perform significant additional activities after sale and delivery.
Warranty Costs - The Company's homes are sold with limited ten-year warranties from independent entities. Home buyer claims under these warranties generally are subject to a deductible payable by the Company.
Reserves, which are included in home cost of sales, are established by the Company on a per-house basis to cover anticipated costs of repairs during the Company's warranty period and a portion of the supplemental warranty deductible.
Mortgage Lending.
Mortgage Loans Held in Inventory - The Company generally purchases forward commitments to deliver mortgage loans held for sale. Mortgage loans held in inventory are stated at the lower of aggregate cost or market based upon such commitments for loans to be delivered into such commitments or prevailing market for uncommitted loans. Substantially all of the loans originated or purchased by the Company are sold to private investors within 45 days of origination or purchase. Gains or losses on mortgage loans held in inventory are realized when the loans are sold.
Revenue Recognition - Loan origination fees in excess of origination costs incurred and loan commitment fees are deferred until the related loans are sold. Loan servicing fees are recorded as revenue when the mortgage loan payments are received. Revenues from the sale of mortgage loan servicing are recognized when title and all risks and rewards of ownership have irrevocably passed to the buyer and there are no significant unresolved contingencies.
Asset Management.
Restricted Cash - Restricted cash represents mortgage loan principal and interest receipts held pending distribution to holders of mortgage-backed bonds.
Mortgage Collateral and Mortgage-Backed Bonds - In prior periods, certain of the Company's ownership interests in Mortgage Collateral (as hereinafter defined) and the related mortgage-backed bonds were presented on a gross basis on the balance sheets and statements of income. Accordingly, the book values of the Mortgage Collateral and mortgage-backed bonds were presented separately as assets and liabilities, respectively, on the balance sheets, and interest income on Mortgage Collateral and interest expense on the related mortgage-backed bonds were presented separately as income and expenses, respectively, on the statements of income. Substantially all of such interests are at, or are nearing, the ends of their economic lives. Accordingly, the Company does not anticipate that such net assets will generate significant amounts of income or cash flow in the future. Beginning in the fourth quarter of 1995, the Company's balance sheets for all periods presented reflect its ownership interests in Mortgage Collateral net of the related mortgage-backed bonds, and the statements of income for all periods presented reflect earnings from such interests net of the related interest expense.
General.
Cash and Cash Equivalents - The Company periodically invests funds not immediately required for operating purposes in highly liquid, short-term investments with an original maturity of 90 days or less such as commercial paper and repurchase agreements which are included in cash and cash equivalents in the Consolidated Balance Sheet and Consolidated Statement of Cash Flows.
Property and Equipment - Property and equipment is carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets.
Earnings Per Share - Primary earnings per share are based on the weighted-average number of common and common equivalent shares outstanding during each period. For the years ended December 31, 1995 and 1994, fully diluted earnings per share also assumes the conversion into MDC Common Stock of all of the outstanding Convertible Subordinated Notes (as hereinafter defined) at the stated conversion price.
Estimates in Financial Statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications - Certain amounts in the 1994 and 1993 consolidated financial statements have been reclassified to conform to the 1995 presentation.
B. Information on Business Segments
The Company operates in three business segments: homebuilding, mortgage lending and asset management. A summary of the Company's segment information is shown below (in thousands).
Corporate general and administrative expenses consist principally of salaries and other administrative expenses which are not identifiable to a specific segment. Transfers between segments are recorded at cost. Capital
expenditures and related depreciation and amortization for the years ended December 31, 1995, 1994 and 1993 were not material. Identifiable segment assets are shown on the face of the Consolidated Balance Sheet.
C. Mortgage Loans Held in Inventory
Mortgage loans held in inventory consist of (in thousands):
Mortgage loans held in inventory consist primarily of loans collateralized by first mortgages and deeds of trust due over periods of up to 30 years. The weighted-average effective yield on mortgage loans held in inventory was approximately 7.4% and 8.4%, respectively, at December 31, 1995 and 1994.
D. Mortgage Collateral, net of Mortgage-Backed Bonds, and Related Assets and Liabilities
In the past, mortgage-backed bonds were issued by limited-purpose subsidiaries of the asset management segment and other non-related entities. Payments are made on the bonds on a periodic basis as a result of, and in amounts related to, corresponding payments received on the underlying mortgage collateral (the "Mortgage Collateral"). Mortgage Collateral for mortgage-backed bonds payable consists of fixed-rate mortgage loans and mortgage-backed securities secured by first liens on single-family residential housing. Mortgage-backed securities consist of Government National Mortgage Association ("GNMA") certificates, Federal National Mortgage Association ("FNMA") mortgage pass-through certificates and conventional mortgage loans. All of the Mortgage Collateral and related assets are held by a trustee. All principal and interest on the collateral is remitted directly to a trustee and is available for payment on the bonds, all of which are rated "AAA" by Standard and Poor's Corporation or other national credit rating agencies. The Company has not guaranteed, nor is it otherwise obligated with respect to, these mortgage-backed bond issues.
The following assets and liabilities are held by trustees (in thousands):
The weighted-average effective yield on the Mortgage Collateral was approximately 9.4% and 9.5% at December 31, 1995 and 1994. Mortgage-backed bonds mature through 2019 and bear interest at weighted-average rates of 9.8% and 9.9%, respectively, at December 31, 1995 and 1994. The negative difference between the effective yield on the Mortgage Collateral and interest rates on the mortgage-backed bonds primarily is covered by the overcollateralization of the bonds.
Because the mortgage-backed bond indentures prohibit liquidation of the Mortgage Collateral, the Mortgage Collateral cannot be sold unless the corresponding mortgage-backed bonds payable are redeemed. The mortgage-backed bonds can be redeemed before maturity by the Company only under certain prescribed conditions. If those conditions are met, and the Company redeems the mortgage-backed bonds, the mortgage-backed bonds would be redeemed at par and any market appreciation or depreciation on the related Mortgage Collateral would accrue to the Company.
In 1995, 1994 and 1993, MDC sold, at a premium, Mortgage Collateral totalling $9,618,000, $19,088,000 and $44,735,000, respectively. The proceeds from these sales were utilized to redeem in full the related outstanding mortgage-backed bonds which totalled $8,547,000, $19,109,000 and $44,375,000, respectively. These sales, net of redemptions, resulted in pre-tax gains totalling $305,000, $295,000 and $2,129,000, respectively.
E. Lines of Credit
Homebuilding - The aggregate amount of MDC's homebuilding bank lines of credit at December 31, 1995 was $158,149,000 compared with $153,000,000 at December 31, 1994. Available borrowings under these bank lines of credit are collateralized by homebuilding inventories and are limited to the value of "eligible collateral" (as defined in the credit agreements). At December 31, 1995, $43,490,000 was borrowed and an additional $112,693,000 was collateralized and available to be borrowed. At December 31, 1995, the weighted-average interest rate of the lines of credit was 8.3%.
Mortgage Lending - The aggregate amount available under MDC's mortgage lending bank line of credit at December 31, 1995, was $51,000,000. Available borrowings under this bank line of credit are collateralized by mortgage loans and mortgage-backed certificates and are limited to the value of "eligible collateral" (as defined in
the credit agreement). At December 31, 1995, $21,990,000 was borrowed and an additional $16,580,000 was collateralized and available to be borrowed. The mortgage lending line of credit is cancellable upon 90 days' notice. At December 31, 1995, the weighted-average interest rate of the line was 6.9%.
General - The agreements for the Company's bank lines of credit include representations, warranties and covenants, the most restrictive of which require that the Company maintain certain minimum defined stockholders' equity. Currently, the Company believes that it is in compliance with these covenants, representations and warranties.
F. Notes Payable
Senior Notes and Subordinated Notes - The Senior Notes (as hereinafter defined) and the subordinated notes consist of (in thousands):
In December 1993, the Company completed an offering (the "1993 Offering") of $190,000,000 principal amount of 11 1/8% senior notes due 2003 (the "Senior Notes") and $28,000,000 principal amount of 8 3/4% convertible subordinated notes due 2005 (the "Convertible Subordinated Notes"). The Senior Notes were sold at 98.525% of par value. The Convertible Subordinated Notes were sold at par value and are convertible into MDC Common Stock at an initial conversion price of $7.75 per share, subject to adjustment upon certain events. A portion of the proceeds of the 1993 Offering was utilized to redeem $51,816,000 principal amount of 11 1/4% senior subordinated notes due May 1996 at par value, resulting in an extraordinary loss on the early extinguishment of debt of $885,000, net of an income tax benefit of $559,000. A portion of the proceeds of the 1993 Offering was also used to repurchase certain notes payable resulting in an extraordinary gain on the early extinguishment of debt in 1993 of $16,708,000, net of income taxes of $10,526,000.
The Senior Notes are guaranteed, fully and unconditionally, and jointly and severally on an unsecured subordinated basis (the "Guaranties") by most of the Company's homebuilding segment subsidiaries (the "Guarantors"). The Guaranties are subordinated to all Guarantor Senior Indebtedness as defined in the indenture pursuant to which the Senior Notes are issued (the "Senior Notes Indenture"). In addition, the Senior Notes are secured by a first priority pledge of the capital stock of most of the Guarantors plus the capital stock of HomeAmerican. The Senior Notes Indenture contains certain covenants which, among other things, limit (i) the incurrence of additional Indebtedness (as defined) by the Company and Restricted Subsidiaries (as defined); (ii) the payment of dividends; (iii) the repurchase of capital stock or subordinated indebtedness; and (iv) the ability to enter into transactions with Affiliates (as defined) or merge, consolidate or transfer substantially all of the Company's or a Guarantor's assets. At December 31, 1995, the Company was in compliance with all covenants.
Other Notes Payable - Notes payable other than the notes discussed above consist principally of loans collateralized by real estate. These notes bear interest at rates ranging from 8.0% to 11.0%. The aggregate net carrying value of the assets collateralizing the other notes payable totalled approximately $20,000,000 at December 31, 1995.
General - The following table sets forth the scheduled principal payments on the Senior Notes, subordinated notes and notes payable at December 31, 1995 (in thousands).
1996............. $ 3,758 1997............. 4,074 1998............. 10,740 1999............. 516 2000............. 523 Thereafter....... 222,728
G. Stockholders' Equity
Stock Option Plans - In 1993, the Company adopted incentive plans (the "Plans") to replace the 1983 Incentive Stock Option Plan and the 1983 Non-Qualified Stock Option Plan, each of which expired in January 1993. A summary of the Plans follows:
Employee Equity Incentive Plan - The Employee Equity Incentive Plan (the "Employee Plan") provides for an initial authorization of 2,100,000 shares of MDC Common Stock for issuance thereunder plus an additional annual authorization equal to 10% of the then authorized shares of MDC Common Stock under the Employee Plan as of each succeeding annual anniversary of the effective date of the Employee Plan. Under the Employee Plan, the Company may grant awards of restricted stock, incentive and non-statutory stock options and dividend equivalents, or any combination thereof, to officers and employees of the Company or any of its subsidiaries. The incentive stock options granted under this plan are exercisable at prices greater than or equal to the market value on the date of grant over periods of up to six years. Non-statutory options granted under this plan have discretionary exercise prices and are exercisable over periods of up to six years.
Director Equity Incentive Plan - Under the Director Equity Incentive Plan (the "Director Plan"), non-employee directors of the Company will be entitled to receive stock options. The Director Plan provides for an initial authorization of 300,000 shares of MDC Common Stock for issuance thereunder plus an additional annual authorization of shares equal to 10% of the then authorized shares of MDC Common Stock under the Director Plan. Each option granted under the Director Plan will expire five years from the date of grant. The option exercise price must be equal to 100% of the fair market value of the MDC Common Stock on the date of grant of the option.
A summary of the changes in options during each of the three years ended December 31, 1995 is as follows (in shares of MDC Common Stock):
Outstanding - January 1, 1993 2,598,437 Exercised at prices ranging from $.28 to $1.88............. (489,938) Granted at prices ranging from $3.88 to $6.60.............. 1,185,000 Cancelled.................................................. (92,125) -----------
Outstanding - December 31, 1993............................... 3,201,374 Exercised at prices ranging from $.28 to $1.88............. (271,974) Granted at prices ranging from $4.75 to $6.38.............. 635,000 Cancelled.................................................. (3,000) -----------
Outstanding - December 31, 1994............................... 3,561,400
Exercised at prices ranging from $.28 to $3.125............ (1,418,900) Granted at prices ranging from $6.63 to $6.75.............. 105,000 Cancelled.................................................. (100,000) -----------
Outstanding - December 31, 1995............................... 2,147,500 ===========
Exercise prices of outstanding options at December 31, 1995... $3.00 to $6.75 ===========
Exercisable at December 31, 1995.............................. 888,327 ===========
Reserved for issuance at December 31, 1995.................... 1,029,000 ===========
Executive Option Purchase Program - Pursuant to the terms of the Executive Option Purchase Program (the "Option Purchase Program"), which was authorized by the MDC Board of Directors, the Company is authorized to lend eligible executives of the Company up to two-thirds of the aggregate exercise price and state and federal taxes payable in connection with their exercise of stock purchase options, subject to certain maximum amounts as set forth under the Option Purchase Program. During 1995, certain eligible executives of the Company exercised options to purchase 824,414 shares of MDC Common Stock and borrowed $1,361,000 in the aggregate under the Option Purchase Program. Notes receivable under the Option Purchase Program are recourse and secured by 100% of the shares of MDC Common Stock issued in connection with options exercised. The $1,361,000 in notes receivable are deducted from stockholders' equity.
Common Stock Repurchase Plan - During 1995, the Company repurchased 865,600 shares of MDC Common Stock at prices ranging from $5.88 to $6.50 ($6.32 average, including commissions) pursuant to a program authorized by the MDC Board of Directors to repurchase up to 1,100,000 shares of MDC Common Stock and up to 1% of the principal amount of each of its outstanding Senior Notes and Convertible Subordinated Notes. On January 19, 1996, the Company repurchased an additional 230,000 shares at $7.13 pursuant to such repurchase plan.
Exchange of Common Stock - Prior to February 2, 1994, Larry A. Mizel (Chairman of the Board, Chief Executive Officer and President of the Company) and David D. Mandarich (Executive Vice President-Real Estate, Chief Operating Officer and a director of the Company) owned 35% of the outstanding shares of Richmond Homes, Inc. I (the Company's consolidated subsidiary which conducts substantially all of the Company's home building activities in Colorado, "Richmond Homes") common stock. 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 negotiated on behalf of the Company terms of an option agreement with Messrs. Mizel and Mandarich to acquire the shares of Richmond Homes common stock owned by them in exchange for MDC Common Stock with a value of up to $3,500,000 in the aggregate. For purposes of the exchange, the shares of MDC Common Stock were valued at $5.75 per share, the closing price of MDC Common Stock on the date of the option agreement. The special committee engaged a financial advisor to perform a business enterprise valuation of
Richmond Homes. In February 1994, based on the results of the valuation, the maximum value of $3,500,000 of MDC Common Stock (an aggregate of 608,695 shares) was issued to Messrs. Mizel and Mandarich in exchange for their shares of Richmond Homes common stock. As of February 2, 1994, MDC owns 100% of the equity of Richmond Homes.
As the transaction with Messrs. Mizel and Mandarich 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.
H. Interest
Interest activity is set forth below (in thousands):
I. Income Taxes
Total income taxes has been allocated as follows (in thousands):
The significant components of income tax expense on income before income taxes and extraordinary gain consist of the following (in thousands):
The provision for income tax expense differs from the amount which would be computed by applying the statutory federal income tax rate of 35% to pre-tax income before extraordinary gain as a result of the following (in thousands):
The tax effects of the temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands).
M.D.C. Holdings, Inc. and its wholly owned subsidiaries file a consolidated federal income tax return (an "MDC Consolidated Return"). Richmond Homes and its wholly owned subsidiaries filed a separate consolidated federal income tax return (each a "Richmond Homes Consolidated Return") from its inception (December 28, 1989) through February 2, 1994, the date Richmond Homes became a wholly owned subsidiary of MDC.
In April 1995, the Company and the Internal Revenue Service (the "IRS") reached final agreement on the IRS examinations of (i) the MDC Consolidated Returns for the years 1984 and 1985; and (ii) the Richmond Homes Consolidated Returns for the years 1989 and 1990. These agreements had no material impact upon the Company's financial position or results of operations.
The IRS has completed its examination of the MDC Consolidated Returns for the years 1986 through 1990 and has proposed adjustments to taxable income reflected in such returns which 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 certain of these proposed adjustments through the IRS appeals process. In the opinion of management, adequate provision has been made for the additional income taxes and interest which may result from the proposed adjustments; however, it is reasonably possible that the ultimate resolution could result in amounts which differ materially in the near term from amounts provided.
The IRS currently is examining the MDC and Richmond Homes Consolidated Returns for the years 1991, 1992 and 1993. No reports have been issued by the IRS in connection with these examinations. In the opinion of management, adequate provision has been made for additional income taxes and interest, if any, which may result
from these examinations; however, it is reasonably possible that the ultimate resolution could result in amounts which differ materially in the near term from amounts provided.
J. 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 1995 and 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 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).
K. Legal Proceedings
Expansive Soils Cases.
On October 21, 1994, a complaint was served on several of the Company's subsidiaries in an action initiated by six homeowners in Highlands Ranch, Colorado. On January 26, 1995, counsel for the Company accepted service of two additional complaints by a homeowner in the Stonegate subdivision in Douglas County, Colorado and by a homeowner in the Rock Creek development located in Boulder County, Colorado. On September 12, 1995, the Company was served with a similar complaint relating to homeowners in Douglas County, Colorado. The complaints, each of which seek certification of a class action, purport to allege substantially identical claims relating to the construction of homes on lots with expansive soils, including negligence, breach of express and implied warranties, violation of the Colorado Consumer Protection Act, non-disclosure and a claim for exemplary damages. The homeowners in each complaint seek, individually and on behalf of the alleged class, recovery in unspecified amounts including actual damages, statutory damages, exemplary damages and treble damages. The Company has filed a response to each of the complaints and to initial discovery requests in the first filed case. The ultimate outcome of the cases is uncertain at this time; however, management does not believe that the outcome of these matters will have a material adverse effect on the financial condition or results of operations of the Company.
The Company has notified its insurance carriers of these complaints and currently is reviewing with the carriers how the Company will proceed. The insurance carriers providing primary coverage have agreed to defend the Company in the cases subject to reservations of rights.
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. Because of the nature of the homebuilding business, and in the ordinary course of the Company's operations, the Company from time to time may be subject to product liability claims, including claims similar to those discussed under the description of the Expansive Soils Cases, above. In the opinion of management, the outcome of these matters will not have a material adverse effect upon the financial condition or results of operations of the Company.
The Company is not aware of any litigation, matter or pending claim against the Company which would result in material contingent liabilities related to environmental hazards or asbestos.
L. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value.
Cash and Cash Equivalents - For cash and cash equivalents, the carrying value is a reasonable estimate of fair value.
Investments and Marketable Securities, Net - Investments in marketable equity securities are carried on the balance sheet at cost, which approximates market value. Accordingly, the carrying value of the investments is a reasonable estimate of the fair value.
Mortgage Loans Held in Inventory - The Company generally purchases forward commitments to deliver mortgage loans held for sale. For loans which have no forward commitments, loans in inventory are stated at the lower of cost or market. Accordingly, the carrying value is a reasonable estimate of fair value.
Notes Payable and Lines of Credit - The Company's notes payable and lines of credit are at floating rates or at fixed rates which approximate current market rates and have relatively short-term maturities. Accordingly, the carrying value is a reasonable estimate of fair value.
Senior Notes and Subordinated Notes - Senior Notes and subordinated notes are valued based on dealer quotes.
The estimated fair values of the Company's financial instruments are as follows (in thousands):
M. Commitments and Contingencies
To reduce exposure to fluctuations in interest rates, HomeAmerican makes commitments to originate (buy) and sell loans and mortgage-backed securities. At December 31, 1995, commitments by HomeAmerican to originate mortgage loans totalled $25,808,000, at market rates of interest. At December 31, 1995, unexpired forward commitments to sell loans totalled $52,448,000.
MDC leases office space, equipment and certain of its model show homes under noncancellable operating leases. Future minimum rental payments for leases with initial terms in excess of one year total $1,476,000 in 1996, $1,080,000 in 1997, $940,000 in 1998, $451,000 in 1999 and $183,000 in 2000. Rent expense under cancellable and noncancellable leases totalled $2,662,000, $3,250,000 and $2,956,000 in 1995, 1994 and 1993, respectively.
MDC has entered into agreements to guarantee payment of principal and interest on $30,080,000 principal amount of bonds issued by municipal agencies to fund the development of project infrastructure for a master-planned community in Colorado.
N. Supplemental Guarantor Information
The Senior Notes are unconditionally guaranteed on an unsecured subordinated basis, jointly and severally, by Richmond American Homes of California, Inc., Richmond American Homes of Maryland, Inc., Richmond American Homes of Nevada, Inc., Richmond American Homes of Virginia, Inc., Richmond American Homes, Inc., Richmond Homes, Inc. I and Richmond Homes, Inc. II (collectively, the "Guarantors"). The Guaranties are subordinated to all Guarantor Senior Indebtedness (as defined in the Senior Notes Indenture).
Supplemental combining financial information follows.
Supplemental Combining Balance Sheet December 31, 1995 (In thousands)
Supplemental Combining Balance Sheet December 31, 1995 (In thousands)
(continued)
Supplemental Combining Balance Sheet December 31, 1994 (In thousands)
Supplemental Combining Balance Sheet December 31, 1994 (In thousands)
(continued)
Supplemental Combining Statements of Income (In thousands)
Year Ended December 31, 1995
Supplemental Combining Statements of Income (In thousands)
Supplemental Combining Statement of Cash Flows Year Ended December 31, 1995 (In thousands)
Supplemental Combining Statement of Cash Flows Year Ended December 31, 1994 (In thousands)
Supplemental Combining Statement of Cash Flows Year Ended December 31, 1993 (In thousands)
Summary of Significant Accounting Policies:
Investments in subsidiaries are accounted for on the equity method for purposes of the supplemental information. The Guarantors follow the accounting policies set forth in Note A.
Related Parties. The Guarantors are members of a group of affiliated companies and have transactions and relationships with members of the group.
MDC charges the Guarantors for a share of its general and administrative expenses, which amounted to $4,332,000, $3,926,000 and $2,654,000, respectively, in 1995, 1994 and 1993.
MDC pays costs associated with certain litigation and other significant claims against the Guarantors which it considers to be general corporate expenses. Amounts paid by MDC on behalf of the Guarantors amounted to approximately $270,000, $769,000, and $3,481,000, respectively, in 1995, 1994 and 1993. In 1995, MDC recovered a portion of such payments.
Advances and notes receivable/payable - Parent (M.D.C. Holdings, Inc.) and subsidiaries consists, among other things, of ongoing activities relating to the Guarantors' participation in MDC's cash management system and current and deferred income taxes.
Income taxes. The Guarantors report their results of operations as if they were separate taxpayers. The current tax liabilities and deferred income tax assets and liabilities of the Guarantors are reported in the financial statements in the Advances and notes receivable/payable -Parent and subsidiaries accounts.
O. Related Party Transactions
MDC has transacted business with related or affiliated companies and with certain officers and directors of the Company.
FAMC has agreements with Asset Investors Corporation and Commercial Assets, Inc., each a publicly-traded REIT, to advise them on various facets of their business and to manage their day-to-day operations subject to the supervision of their respective boards of directors. FAMC earned fees from management and administration, including from acquisitions and incentives from these agreements which are included in asset management revenues of $3,324,000, $2,780,000 and $2,180,000 during 1995, 1994 and 1993 respectively.
The Company acquired certain assets from Messrs. Mizel and Mandarich in February 1994. See Note G.
On December 28, 1989, MDC granted loans to Messrs. Mizel and Mandarich for purposes of purchasing shares of common stock of Richmond Homes. On February 2, 1994, in conjunction with MDC's acquisition of Richmond Homes common stock from Messrs. Mizel and Mandarich as discussed in Note G, MDC exchanged these loans for new loans of equal amount. Each of the notes evidencing the new loans now provides that, upon sale of any of the MDC Common Stock acquired by Messrs. Mizel and Mandarich in exchange for their respective Richmond Homes common stock, the cash proceeds shall be remitted to the Company in payment of accrued interest and principal under the notes. The new loans, which mature in 1999, bear interest at 8.0% and are unsecured. At both December 31, 1995 and 1994, $840,000 of such loans were outstanding. Interest income of $67,200 was recognized on these loans in each of 1995, 1994 and 1993.
During 1995, certain eligible executives of the Company exercised options to purchase 824,414 shares of MDC Common Stock and borrowed $1,361,000 in aggregate under the Option Purchase Program. See Note G.
The Company utilizes the services of companies owned by two former employees of the Company, one of whom is the brother-in-law of a current officer and director of the Company. During 1995, 1994 and 1993, the Company paid $7,372,000, $11,880,000 and $11,557,000, respectively, for plumbing, door and millwork services provided by these companies.
The Company leases office space and furniture to certain organizations in which certain officers and/or directors of the Company have an ownership interest. The rental revenue from those leases totalled $320,000 $250,000 and $259,000, respectively, in 1995, 1994 and 1993.
The Company utilizes in the ordinary course of business the services of a marketing and communications firm which is owned by the brother-in-law of an officer and director of the Company. Total fees paid for advertising and marketing design services were $188,000, $275,000 and $246,000, respectively, in 1995, 1994 and 1993.
P. Summarized Quarterly Consolidated Financial Information (Unaudited)
Unaudited summarized quarterly consolidated financial information for the two years ended December 31, 1995 is as follows (in thousands, except per share amounts):
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Registrant.
Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, from the Company's Proxy Statement for its 1996 Annual Meeting of Shareowners to be held on or about May 3, 1996.
ITEM 11.
ITEM 11. Executive Compensation.
Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, from the Company's Proxy Statement for its 1996 Annual Meeting of Shareowners to be held on or about May 3, 1996.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, from the Company's Proxy Statement for its 1996 Annual Meeting of Shareowners to be held on or about May 3, 1996.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions.
Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, from the Company's Proxy Statement for its 1996 Annual Meeting of Shareowners to be held on or about May 3, 1996.
PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements.
The following consolidated financial statements of the Company and its subsidiaries are included in Part II, Item 8:
Page ---- M.D.C. Holdings, Inc. and Subsidiaries Report of Independent Accountants............................... Consolidated Balance Sheets as of December 31, 1995 and 1994.... Consolidated Statements of Income for the Three Years Ended December 31, 1995............................................. Consolidated Statements of Stockholders' Equity for the Three Years Ended December 31, 1995........................... Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1995....................................... Notes to Consolidated Financial Statements......................
All schedules are omitted because they are not applicable, not material, not required or the required information is included in the applicable financial statements or notes thereto.
Financial statements for certain unconsolidated partnerships and joint ventures owned 50% or less by the Company or its subsidiaries, which are accounted for on the equity method, have been omitted because they do not, individually, or in the aggregate, constitute a significant subsidiary.
(a) 3. Exhibits.
3.1(a) Form of Amendment to the Certificate of Incorporation of M.D.C. Holdings, Inc. (hereinafter sometimes referred to as "MDC", the "Company" or the "Registrant") regarding director liability, filed with the Delaware Secretary of State on July 1, 1987 (incorporated by reference to Exhibit 3.1(a) of the Company's Quarterly Report on Form 10-Q dated June 30, 1987). *
3.1(b) Form of Certificate of Incorporation of MDC, as amended (incorporated herein by reference to Exhibit 3.1(b) of the Company's Quarterly Report on Form 10-Q dated June 30, 1987).*
3.2(a) Form of Amendment to the Bylaws of MDC regarding indemnification adopted by its Board of Directors and effective as of March 20, 1987 (incorporated herein by reference to Exhibit 3.2(a) of the Company's Quarterly Report on Form 10-Q dated June 30, 1987). *
3.2(b) Form of Bylaws of MDC, as amended (incorporated herein by reference to Exhibit 3.2(b) of the Company's Quarterly Report on Form 10-Q dated June 30, 1987). *
4.1 Form of Certificate for shares of the Company's common stock (incorporated herein by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-3, Registration No. 33-426). *
4.2(a) Form of Indenture, dated as of June 15, 1984, between the Company and The Royal Bank and Trust Company, with respect to the Company's Subordinated Exchangeable Variable Rate Notes (the "1984 RBTC Indenture") (incorporated herein by reference to Exhibit 4.3 of the Company's Registration Statement on Form S-2, Registration No. 2-90744). *
4.2(b) First Supplemental Indenture, dated as of June 20, 1985, to the 1984 RBTC Indenture (incorporated herein by reference to Exhibit 4.13(a) of the Company's Registration Statement on Form S-3, Registration No. 33-426). *
4.2(c) Form of the Company's Subordinated Exchangeable Variable Rate Notes (filed as Exhibits A and B to Exhibit 4.13 and incorporated herein by reference to Exhibit 4.3 of the Company's Registration Statement on Form S-2, Registration No. 2-90744). *
4.3(a) Form of Senior Notes Indenture, dated as of December 15, 1993, by and among the Company, the Guarantors and Pledgors named therein and First Bank National Association, a National Association, as Trustee, with respect to the Company's 11 1/8% Senior Notes due 2003, including form of Senior Note (the "Senior Notes Indenture") (incorporated herein by reference to Exhibit 4.1 of the Company's Form 8-K dated January 11, 1994). *
4.3(b) First Supplemental Indenture, dated as of February 2, 1994, to the Senior Notes Indenture (incorporated herein by reference to Exhibit 4.4(b) of the Company's Annual Report on Form 10-K for the year ended December 31, 1993). *
4.4 Form of Convertible Notes Indenture, dated as of December 15, 1993, by and between the Company and First Bank National Association, a National Association, as Trustee, with respect to the Company's 8 3/4% Convertible Subordinated Notes due 2005, including form of Convertible Note (incorporated herein by reference to Exhibit 4.2 of the Company's Form 8-K dated January 11, 1994). *
4.5 Loan Agreement and related Promissory Note between Richmond American Homes, Inc., Richmond American Homes of California, Inc., Richmond Homes, Inc. I, Richmond Homes, Inc. II and Richmond American Homes of Nevada, Inc., all wholly owned subsidiaries of the Company and Bank One, Arizona, N.A. ("Bank One") dated June 13, 1994 (incorporated herein by reference to Exhibit 4.5 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994).*
4.6 Guaranty of Payment between the Company and Bank One dated June 13, 1994 (incorporated herein by reference to Exhibit 4.6 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994).*
4.9 Guaranty Agreement between the Company as guarantor and Bank One, Denver, N.A., as Trustee under Indenture of Trust dated as of June 1, 1994 between it and Superior Metropolitan District No. 1 dated as of June 1, 1994 (incorporated herein by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q dated September 30, 1994). *
4.10 Guaranty Agreement between the Company as guarantor and Bank One, Denver, N.A., as Trustee under Indenture of Trust dated as of June 1, 1994 between it and Superior Metropolitan District No. 2, dated as of June 1, 1994 (incorporated herein by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q dated September 30, 1994). *
10.1(a) The Company's 1983 Incentive Stock Option Plan (incorporated herein by reference to Exhibit 10.4 of the Company's Annual Report on Form 10-K for the year ended December 31, 1982). *
10.1(b) 1987 Amendments to the Incentive Stock Option Plan of MDC (incorporated herein by reference to Exhibit 10.1(a) of the Company's Annual Report on Form 10-K for the year ended December 31, 1986). *
10.1(c) 1988 Amendment to the 1983 Incentive Stock Option Plan of MDC (incorporated herein by reference to Exhibit 19.3(a) of the Company's Quarterly Report on Form 10-Q dated June 30, 1988).*
10.2(a) The Company's 1983 Non-Qualified Stock Option Plan (incorporated herein by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the year ended December 31, 1983). *
10.2(b) 1988 Amendment to the 1983 Non-Qualified Stock Option Plan of MDC (incorporated herein by reference to Exhibit 10.2(b) of the Company's Quarterly Report on Form 10-Q dated June 30, 1988). *
10.3 The Company's Employee Equity Incentive Plan (incorporated herein by reference to Exhibit A of the Company's Proxy Statement dated May 14, 1993 relating to the 1993 Annual Meeting of Stockholders).*
10.4 The Company's Director Equity Incentive Plan (incorporated herein by reference to Exhibit B of the Company's Proxy Statement dated May 14, 1993 relating to the 1993 Annual Meeting of Stockholders).*
10.5(a) Amended Management Agreement between Asset Investors Corporation ("AIC") and Financial Asset Management Corporation ("FAMC") dated as of January 1, 1990 (incorporated herein by reference to Exhibit 10.8(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989). *
10.5(b) Amended Management Agreement between AIC and FAMC dated as of January 1, 1991 (incorporated herein by reference to Exhibit 19 of the Company's Quarterly Report on Form 10-Q dated June 30, 1991). *
10.5(c) Amended Management Agreement between AIC and FAMC dated as of January 1, 1992 (incorporated herein by reference to Exhibit 10.3(c) of the Company's Annual Report on Form 10-K for the year ended December 31, 1991). *
10.5(d) Management Agreement between AIC and FAMC dated as of January 1, 1993 (incorporated herein by reference to Exhibit 10.5(d) of the Company's Annual Report on Form 10-K for the year ended December 31, 1994).*
10.5(e) Amendment to Management Agreement dated as of January 1, 1993 between AIC and FAMC dated as of October 12, 1993 (incorporated herein by reference to Exhibit 10.5(e) of the Company's Annual Report on Form 10-K for the year ended December 31, 1994).*
10.5(f) Management Agreement between AIC and FAMC dated as of January 1, 1994 (incorporated herein by reference to Exhibit 10.5(f) of the Company's Annual Report on Form 10-K for the year ended December 31, 1994).*
10.5(g) Management Agreement between Commercial Assets, Inc. ("CAI") and FAMC dated as of August __, 1993 (incorporated herein by reference to Exhibit 10.5(g) of the Company's Annual Report on Form 10-K for the year ended December 31, 1994).*
10.5(h) Management Agreement between CAI and FAMC dated as of October 12, 1993 (incorporated herein by reference to Exhibit 10.5(h) of the Company's Annual Report on Form 10-K for the year ended December 31, 1994).*
10.5(i) Management Agreement Amendment between AIC and FAMC dated as of January 1, 1996.
10.5(j) Management Agreement Amendment between CAI and FAMC dated as of January 1, 1996.
10.6 CMO Participation Agreement among the Company, M.D.C. Asset Investors, Inc. and Yosemite Financial, Inc. (incorporated herein by reference to Exhibit 10.6 of M.D.C. Asset Investors, Inc.'s Registration Statement on Form S-11, Registration No. 33-9557). *
10.7(a) Form of Indemnity Agreement entered into between the Registrant and each member of its Board of Directors as of March 20, 1987 (incorporated herein by reference to Exhibit 19.1 of the Company's Quarterly Report on Form 10-Q dated June 30, 1987). *
10.7(b) Form of Indemnity Agreement entered into between the Registrant and certain officers of the Registrant on various dates during 1988 and early 1989 (incorporated herein by reference to Exhibit 10.18(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988). *
10.7(c) Form of Indemnity Agreement entered into between the Registrant and John J. Heaney dated as of May 12, 1989 (incorporated herein by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). *
10.7(d) Form of Agreement, relating to the advancement of expenses and indemnification, entered into between the Registrant and each of its current and former officers and directors named in certain securities litigation (incorporated herein by reference to Exhibit 10.18(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988). *
10.8 Indemnification Agreement by and among the Company and Larry A. Mizel ("Mizel") and David D. Mandarich ("Mandarich") dated December 21, 1989 (incorporated herein by reference to Exhibit 9 of the Company's Form 8-K dated December 28, 1989). *
10.9 Promissory Note in the amount of $559,920 from Mizel to the Company dated February 2, 1994 (incorporated herein by reference to Exhibit 10.9 of the Company's Annual Report on Form 10-K for the year ended December 31, 1993). *
10.10 Promissory Note in the amount of $280,080 from Mandarich to the Company February 2, 1994 (incorporated herein by reference to Exhibit 10.10 of the Company's Annual Report on Form 10-K for the year ended December 31, 1993). *
10.11 Fifth Amendment to Piney Creek Development Co. Joint Venture Agreement dated June 13, 1991 by and between Commercial Federal Bank and Land (incorporated herein by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991). *
10.12 Letter Agreement effective October 1, 1994 by and between Gilbert Goldstein, P.C. and the Company (incorporated herein by reference to Exhibit 10.12 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994).*
10.13 MDC 401(k) Savings Plan (incorporated herein by reference to Exhibit 10.31(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992).* 10.16 M.D.C. Holdings, Inc. Executive Officer Performance-Based Compensation Plan (incorporated herein by reference to Exhibit A to the Company's Proxy Statement dated May 25, 1994 related to the 1994 Meeting of Shareowners). *
10.17 Employment Agreement between the Company and Michael Touff dated December 31, 1994 (incorporated herein by reference to Exhibit 10.17 of the Company's Form 10-K for the year ended December 31, 1994).*
10.18 M.D.C. Holdings, Inc. Executive Option Purchase Program, including form of Promissory Note and Pledge Agreement (incorporated herein by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q dated March 31, 1995).*
10.19 (a) Agreement effective April 1, 1996 between M.D.C. Holdings, Inc., M.D.C. Residual Holdings, Inc., Financial Asset Management Corporation, Financial Asset Management LLC and Spencer I. Browne.
10.19 (b) Employment Agreement effective April 1, 1996 between M.D.C. Holdings, Inc. and Spencer I. Browne.
10.19 (c) Non-Negotiable Promissory Note of Spencer I. Browne payable to Financial Asset Management LLC dated April 1, 1996.
10.19 (d) Pledge Agreement effective April 1, 1996 between Financial Asset Management LLC and Spencer I. Browne.
21 Subsidiaries of the Company.
23 Consent of Price Waterhouse LLP.
27 Financial Data Schedule.
- -------------------
* Incorporated herein by reference.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the year ended December 31, 1995.
` SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on this 27th day of March, 1996 on its behalf by the undersigned, thereunto duly authorized. M.D.C. HOLDINGS, INC. (Registrant)
By: /s/ LARRY A. MIZEL ------------------------- Larry A. Mizel Chief Executive Officer
By: /s/ PARIS G. REECE III ------------------------- Paris G. Reece III Senior Vice President, Chief Financial Officer and Principal Accounting Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and/or directors of the Registrant, by virtue of their signatures to this report, appearing below, hereby constitute and appoint Larry A. Mizel, Spencer I. Browne and Paris G. Reece III, or any one of them, with full power of substitution, as attorneys-in-fact in their names, places and steads to execute any and all amendments to this report in the capacities set forth opposite their names and hereby ratify all that said attorneys-in-fact do by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ LARRY A. MIZEL Chairman of the Board of Directors March 27, 1996 - ------------------------ and Chief Executive Officer Larry A. Mizel
/s/ SPENCER I. BROWNE Director, President and March 27, 1996 - ------------------------ Co-Chief Operating Officer Spencer I. Browne
/s/ DAVID D. MANDARICH Director, Executive Vice March 27, 1996 - ------------------------ President - Real Estate and David D. Mandarich Co-Chief Operating Officer
/s/ STEVEN J. BORICK Director March 27, 1996 - ------------------------ Steven J. Borick
/s/ GILBERT GOLDSTEIN Director March 27, 1996 - ------------------------ Gilbert Goldstein
/s/ WILLIAM B. KEMPER Director March 27, 1996 - ------------------------ William B. Kemper
/s/ HERBERT T. BUCHWALD Director March 27, 1996 - ------------------------ Herbert T. Buchwald
(A Majority of the Board of Directors)