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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-8951
M.D.C. HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 84-0622967
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
3600 South Yosemite Street, Suite 900 80237
Denver, Colorado (Zip code)
(Address of principal executive offices)
(303) 773-1100
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of August 2, 2002, 26,677,000 shares of M.D.C. Holdings, Inc.
common stock were outstanding.
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M.D.C. HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of June 30, 2002 (Unaudited)
and December 31, 2001....................... 1
Statements of Income and Other Comprehensive
Income (Unaudited) for the three and
six months ended June 30, 2002 and 2001..... 3
Statements of Cash Flows (Unaudited) for the
six months ended June 30, 2002 and 2001..... 4
Notes to Financial Statements (Unaudited)...... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................. 23
Part II. Other Information:
Item 1. Legal Proceedings.............................. 24
Item 4. Submission of Matters to a Vote of Shareowners. 24
Item 5. Other Information.............................. 24
Item 6. Exhibits and Reports on Form 8-K............... 24
(i)
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands)
June 30, December 31,
2002 2001
-------------- --------------
ASSETS (Unaudited)
Corporate
Cash and cash equivalents................................................... $ 16,150 $ 31,322
Property and equipment, net................................................. 9,770 2,723
Deferred income taxes....................................................... 29,669 30,081
Deferred debt issue costs, net.............................................. 1,822 1,947
Other assets, net........................................................... 6,016 7,597
-------------- --------------
63,427 73,670
-------------- --------------
Homebuilding
Cash and cash equivalents................................................... 5,776 4,760
Home sales and other accounts receivable.................................... 11,700 2,621
Inventories, net
Housing completed or under construction................................... 587,568 456,752
Land and land under development........................................... 582,385 450,502
Prepaid expenses and other assets, net...................................... 57,186 49,544
-------------- --------------
1,244,615 964,179
-------------- --------------
Financial Services
Cash and cash equivalents................................................... 695 518
Mortgage loans held in inventory............................................ 104,103 144,971
Other assets, net........................................................... 4,073 7,618
-------------- --------------
108,871 153,107
-------------- --------------
Total Assets.......................................................... $ 1,416,913 $ 1,190,956
============== ==============
See notes to condensed consolidated financial statements.
- 1 -
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
June 30, December 31,
2002 2001
-------------- --------------
LIABILITIES (Unaudited)
Corporate
Accounts payable and accrued expenses........................................ $ 50,972 $ 61,135
Income taxes payable......................................................... 11,248 9,953
Senior Notes, net............................................................ 174,535 174,503
-------------- --------------
236,755 245,591
-------------- --------------
Homebuilding
Accounts payable and accrued expenses........................................ 207,058 174,955
Line of credit............................................................... 165,000 - -
-------------- --------------
372,058 174,955
-------------- --------------
Financial Services
Accounts payable and accrued expenses........................................ 26,823 16,937
Line of credit............................................................... 50,949 99,642
-------------- --------------
77,772 116,579
-------------- --------------
Total Liabilities...................................................... 686,585 537,125
-------------- --------------
COMMITMENTS AND CONTINGENCIES................................................... - - - -
-------------- --------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 25,000,000 shares authorized; none issued... - - - -
Common stock, $.01 par value; 100,000,000 shares authorized; 31,765,000 and
31,395,000 shares issued, respectively, at June 30, 2002 and
December 31, 2001.......................................................... 318 314
Additional paid-in capital................................................... 370,030 357,037
Retained earnings............................................................ 405,126 342,485
Unearned restricted stock.................................................... (412) (412)
Accumulated other comprehensive loss......................................... (135) (163)
-------------- --------------
774,927 699,261
Less treasury stock, at cost; 4,721,000 and 4,809,000 shares, respectively,
at June 30, 2002 and December 31, 2001..................................... (44,599) (45,430)
-------------- --------------
Total Stockholders' Equity............................................. 730,328 653,831
-------------- --------------
Total Liabilities and Stockholders' Equity............................. $ 1,416,913 $ 1,190,956
============== ==============
See notes to condensed consolidated financial statements.
- 2 -
M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Income and Other Comprehensive Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
REVENUES
Homebuilding.......................................... $ 499,171 $ 499,010 $ 945,932 $ 910,106
Financial services.................................... 9,896 8,998 19,277 17,339
Corporate............................................. 363 227 595 512
----------- ----------- ----------- -----------
Total Revenues.................................... 509,430 508,235 965,804 927,957
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding.......................................... 437,956 429,024 826,873 786,189
Financial services.................................... 4,711 4,272 9,062 8,409
Corporate general and administrative.................. 10,434 11,510 20,494 21,916
----------- ----------- ----------- -----------
Total Costs and Expenses.......................... 453,101 444,806 856,429 816,514
----------- ----------- ----------- -----------
Income before income taxes............................... 56,329 63,429 109,375 111,443
Provision for income taxes............................... (21,993) (24,586) (42,703) (43,317)
----------- ----------- ----------- -----------
NET INCOME............................................... 34,336 38,843 66,672 68,126
Unrealized holding (losses) gains on securities arising
during the period..................................... (18) 126 100 (241)
Less reclassification adjustment for (gains) losses
included in net income................................ (38) 171 (72) 107
----------- ----------- ----------- -----------
Net (losses) gains recognized in other comprehensive
income during the period, net of deferred income tax
expenses.............................................. (56) 297 28 (134)
----------- ----------- ----------- -----------
OTHER COMPREHENSIVE INCOME............................... $ 34,280 $ 39,140 $ 66,700 $ 67,992
=========== =========== =========== ===========
EARNINGS PER SHARE
Basic................................................. $ 1.27 $ 1.47 $ 2.48 $ 2.60
=========== =========== =========== ===========
Diluted............................................... $ 1.22 $ 1.42 $ 2.39 $ 2.51
=========== =========== =========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic................................................. 27,001 26,468 26,858 26,202
=========== =========== =========== ===========
Diluted............................................... 28,102 27,316 27,949 27,132
=========== =========== =========== ===========
DIVIDENDS PAID PER SHARE................................. $ .08 $ .07 $ .15 $ .13
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
- 3 -
M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months
Ended June 30,
2002 2001
----------- -----------
OPERATING ACTIVITIES
Net income........................................................... $ 66,672 $ 68,126
Adjustments to reconcile net income to net cash used in operating
activities
Depreciation and amortization.................................. 10,818 11,541
Deferred income taxes.......................................... 412 (3,818)
Net changes in assets and liabilities
Home sales and other accounts receivable.................. (9,079) (2,957)
Homebuilding inventories.................................. (262,699) (128,342)
Prepaid expenses and other assets......................... (14,566) (8,368)
Mortgage loans held in inventory.......................... 40,868 (9,065)
Accounts payable and accrued expenses .................... 41,098 29,448
Other, net..................................................... 3,159 6,347
------------ -----------
Net cash used in operating activities................................ (123,317) (37,088)
------------ -----------
INVESTING ACTIVITIES
Net purchase of property and equipment............................... (8,789) (1,497)
------------ ------------
Net cash used in investing activities................................ (8,789) (1,497)
------------ -----------
FINANCING ACTIVITIES
Lines of credit
Advances....................................................... 1,167,200 895,000
Principal payments............................................. (1,050,893) (842,652)
Dividend payments.................................................... (4,031) (3,001)
Proceeds from exercise of stock options.............................. 5,851 6,711
------------ -----------
Net cash provided by financing activities............................ 118,127 56,058
------------ -----------
Net increase (decrease) in cash and cash equivalents................. (13,979) 17,473
Cash and cash equivalents
Beginning of period............................................ 36,600 14,115
------------ -----------
End of period.................................................. $ 22,621 $ 31,588
============ ===========
See notes to condensed consolidated financial statements.
- 4 -
M.D.C. HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A. Presentation of Financial Statements
The condensed consolidated financial statements of M.D.C. Holdings,
Inc. ("MDC" or the "Company," which refers to M.D.C. Holdings, Inc. and its
subsidiaries) have been prepared, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. These statements reflect
all adjustments (including all normal recurring accruals), which, in the opinion
of management, are necessary to present fairly the financial position, results
of operations and cash flows of MDC as of June 30, 2002 and for all of the
periods presented. These statements are condensed and do not include all of the
information required by generally accepted accounting principles in a full set
of financial statements. These statements should be read in conjunction with
MDC's financial statements and notes thereto included in MDC's Annual Report on
Form 10-K for its fiscal year ended December 31, 2001. Certain reclassifications
have been made in the 2001 financial statements to conform to the
classifications used in the current year.
B. Corporate and Homebuilding Interest Activity (in thousands)
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Interest capitalized in homebuilding
inventory, beginning of period....... $ 16,937 $ 19,770 $ 17,358 $ 19,417
Interest incurred....................... 4,915 5,727 8,956 11,759
Interest expensed....................... - - - - - - - -
Previously capitalized interest included
in cost of sales..................... (4,248) (5,994) (8,710) (11,673)
----------- ----------- ----------- -----------
Interest capitalized in homebuilding
inventory, end of period............. $ 17,604 $ 19,503 $ 17,604 $ 19,503
=========== =========== =========== ===========
C. Earnings Per Share
The basic and diluted earnings per share calculations are shown below
(in thousands, except per share amounts).
Three Months Six Months
Ended June 30, Ended June 30,
------------------------ -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Basic Earnings Per Share
Net income....................................... $ 34,336 $ 38,843 $ 66,672 $ 68,126
=========== =========== =========== ===========
Basic weighted-average shares outstanding........ 27,001 26,468 26,858 26,202
=========== =========== =========== ===========
Per share amounts................................ $ 1.27 $ 1.47 $ 2.48 $ 2.60
=========== =========== =========== ===========
Diluted Earnings Per Share
Net income....................................... $ 34,336 $ 38,843 $ 66,672 $ 68,126
=========== =========== =========== ===========
Basic weighted-average shares outstanding........ 27,001 26,468 26,858 26,202
Stock options, net............................... 1,101 848 1,091 930
----------- ----------- ----------- -----------
Diluted weighted-average shares outstanding...... 28,102 27,316 27,949 27,132
=========== =========== =========== ===========
Per share amounts................................ $ 1.22 $ 1.42 $ 2.39 $ 2.51
=========== =========== =========== ===========
-5-
D. Information on Business Segments
The Company operates in two business segments: homebuilding and
financial services. A summary of the Company's segment information is shown
below (in thousands).
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Homebuilding
Home sales......................... $ 496,862 $ 497,406 $ 942,029 $ 907,126
Land sales......................... 746 413 746 759
Other revenues..................... 1,563 1,191 3,157 2,221
----------- ----------- ----------- -----------
499,171 499,010 945,932 910,106
----------- ----------- ----------- -----------
Home cost of sales................. 385,053 379,572 726,114 694,009
Land cost of sales................. 504 194 504 457
Marketing expenses................. 27,682 27,064 53,345 49,917
General and administrative expenses 24,717 22,194 46,910 41,806
----------- ----------- ----------- -----------
437,956 429,024 826,873 786,189
----------- ----------- ----------- -----------
Homebuilding Operating Profit.. 61,215 69,986 119,059 123,917
----------- ----------- ----------- -----------
Financial Services
Mortgage Lending Revenues
Interest........................... 941 914 1,949 1,455
Origination fees................... 3,992 4,467 8,221 8,152
Gains on sales of mortgage servicing 481 719 952 2,402
Gains on sales of mortgage loans, net 4,280 2,936 7,741 5,510
Mortgage servicing and other....... 202 (38) 414 (180)
----------- ----------- ----------- -----------
9,896 8,998 19,277 17,339
General and Administrative Expenses.. 4,711 4,272 9,062 8,409
----------- ----------- ----------- -----------
Financial Services Operating
Profit....................... 5,185 4,726 10,215 8,930
----------- ----------- ----------- -----------
Total Operating Profit................. 66,400 74,712 129,274 132,847
----------- ----------- ----------- -----------
Corporate
Interest and other revenues........ 363 227 595 512
General and administrative expenses (10,434) (11,510) (20,494) (21,916)
----------- ----------- ----------- -----------
Net Corporate Expenses......... (10,071) (11,283) (19,899) (21,404)
----------- ----------- ----------- -----------
Income Before Income Taxes.............. $ 56,329 $ 63,429 $ 109,375 $ 111,443
=========== =========== =========== ===========
-6-
E. Supplemental Disclosure of Cash Flow Information (in thousands)
Six Months
Ended June 30,
2002 2001
------------ ------------
Cash paid during the period for
Interest............................ $ 8,615 $ 11,365
Income taxes........................ $ 32,804 $ 45,126
F. Stockholders' Equity
Stock Repurchase Programs - On January 24, 2000, the MDC board of
directors authorized the repurchase of up to 1,000,000 shares of MDC common
stock. On February 21, 2000, the MDC board of directors authorized the
repurchase of up to 2,000,000 additional shares of MDC common stock. The Company
repurchased a total of 2,064,300 shares of MDC common stock under these programs
through June 30, 2002. The per share prices, including commissions, for these
repurchases ranged from $13.53 to $29.02 with an average cost of $16.80. At June
30, 2002, the Company held 4,721,000 shares of treasury stock with an average
purchase price of $9.45. No shares were repurchased during the three and six
months ended June 30, 2002 and 2001.
Stock Dividends - On January 22, 2001, MDC's Board of Directors
approved a 10% stock dividend that was distributed on February 16, 2001 to
shareowners of record on February 5, 2001. On December 6, 2001, MDC's Board of
Directors approved another 10% stock dividend that was distributed on December
28, 2001 to shareowners of record on December 17, 2001. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," basic and diluted net income per share amounts and weighted-average
shares outstanding have been restated for the quarter and six months ended June
30, 2001 to reflect the effect of the December 2001 stock dividend. No stock
dividends were declared or paid in the six months ended June 30, 2002.
Stock Contributions - In the second quarter and first half of 2001, the
Company committed to contribute $1,000,000 and $2,000,000, respectively, to the
M.D.C. Holdings, Inc. Charitable Foundation (the "Foundation"), a Delaware
not-for-profit corporation that was incorporated on September 30, 1999. Pursuant
to this commitment, in April and June 2001, respectively, 27,817 and 29,744
shares of MDC common stock valued at a total of $2,000,000 were transferred to
the Foundation. No contributions to the Foundation were made in the first half
of 2002. The Foundation is a charitable organization with the primary purpose of
supporting non-profit charities in communities where the Company conducts its
business. Certain directors and officers of the Company are the trustees and
officers of the Foundation.
G. Lines of Credit
Homebuilding - The Company has an unsecured revolving line of credit
with a group of lenders for support of its homebuilding operations (the
"Homebuilding Line"). The maturity date of the Homebuilding Line was September
30, 2004 and the maximum amount available was $450,000,000 at June 30, 2002.
Commitments under the Homebuilding Line increased from $413,000,000 at March 31,
2001 to $438,000,000 in April 2001 and to $450,000,000 in June 2001. Pursuant to
the terms of the Homebuilding Line agreement, a term-out of this credit could
have commenced prior to September 30, 2004 under certain circumstances. At June
30, 2002, $165,000,000 was borrowed and $17,090,000 in letters of credit were
outstanding under the Homebuilding Line.
On July 30, 2002, the terms of the Homebuilding Line were amended and
restated (the "Second Amended and Restated Credit Agreement") to extend the
maturity date to July 29, 2006, and increase the maximum amount available from
$450,000,000 to $600,000,000 upon the Company's request, subject to additional
commitments from existing or additional participant lenders. Lender commitments
under the
-7-
Homebuilding Line increased from $450,000,000 to $538,000,000 in July 2002 with
the addition of two new banks to the lending group and additional commitments
from existing banks.
Mortgage Lending - In June 2002, the Company received an additional
$25,000,000 commitment from a participant bank on its mortgage lending bank line
of credit (the "Mortgage Line"), increasing the borrowing limit to $125,000,000.
At June 30, 2001, the borrowing limit was $125,000,000, which included a
$25,000,000 temporary increase received from a participant bank. Available
borrowings under the Mortgage Line are collateralized by mortgage loans and
mortgage-backed certificates and are limited to the value of eligible collateral
as defined. At June 30, 2002, $50,949,000 was borrowed and an additional
$22,170,000 was collateralized and available to be borrowed. The Mortgage Line
was cancelable upon 90 days' notice.
In August 2002, the terms of the Mortgage Line were amended to allow
for a $50,000,000 temporary increase in the borrowing limit to a maximum of
$175,000,000, subject to concurrence by the participating banks. The Mortgage
Line is now cancelable upon 120 days' notice.
H. Derivative Instruments and Hedging Activities
The Company's mortgage lending operations are affected by, among other
things, changes in mortgage interest rates. The Company accounts for derivative
instruments and hedging activities in accordance with SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting
for Certain Derivative Instruments and Hedging Activities, an Amendment of SFAS
No. 133." Derivative instruments utilized in the normal course of business by
HomeAmerican Mortgage Corporation, the Company's wholly owned mortgage lending
subsidiary ("HomeAmerican"), include forward sales securities commitments,
private investor sales commitments and commitments to originate mortgage loans.
The Company utilizes these commitments to manage the price risk on fluctuations
in interest rates on its mortgage loans owned and commitments to originate
mortgage loans. Such contracts are the only significant financial derivative
instruments utilized by MDC. Gains or losses related to ineffectiveness in the
hedging relationship and gains or losses on derivative instruments that do not
qualify for hedge accounting are recognized immediately.
I. Supplemental Guarantor Information
The Company's publicly traded 8 3/8% senior notes due 2008 (the
"Senior Notes") are unconditionally guaranteed on an unsecured 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 of Arizona, Inc. and
Richmond American Homes of Colorado, Inc. (collectively, the "Guarantor
Subsidiaries"). Non-guarantor subsidiaries primarily consist of HomeAmerican,
American Home Title and Escrow Company, American Home Insurance Agency, Inc. and
Lion Insurance Company (collectively, the "Non-Guarantor Subsidiaries"). The
Company has determined that separate, full financial statements of the Guarantor
Subsidiaries would not be material to investors and, accordingly, supplemental
financial information for the Guarantor Subsidiaries is presented. Consolidating
statements of cash flows are not presented because cash flows for the
Non-Guarantor Subsidiaries were not significant for any of the periods
presented.
On July 30, 2002, the Company added M.D.C. Land Corporation,
Richmond American Construction, Inc., Richmond American Homes of West Virginia,
Inc., Richmond American Homes of California (Inland Empire), Inc., Richmond
American Homes of Utah, Inc., Richmond American Homes of Texas, Inc., RAH of
Texas, LP and RAH Texas Holdings, LLC as Senior Note guarantors.
-8-
M.D.C. Holdings, Inc.
Supplemental Combining Balance Sheet
June 30, 2002
(In thousands)
(Unaudited)
Non-
Guarantor Guarantor Eliminating
MDC Subsidiaries Subsidiaries Entries Total
----------- ----------- ----------- ----------- -----------
ASSETS
Corporate
Cash and cash equivalents............... $ 16,150 $ - - $ - - $ - - $ 16,150
Investments in and advances to parent
and subsidiaries...................... 230,082 360 6,019 (236,461) - -
Other assets............................ 48,978 - - (1,701) - - 47,277
----------- ----------- ----------- ----------- -----------
295,210 360 4,318 (236,461) 63,427
----------- ----------- ----------- ----------- -----------
Homebuilding
Cash and cash equivalents............... - - 5,377 399 - - 5,776
Home sales and other accounts receivable - - 16,319 340 (4,959) 11,700
Inventories, net
Housing completed or under construction - - 580,997 6,571 - - 587,568
Land and land under development....... - - 566,927 15,458 - - 582,385
Other assets............................ - - 36,803 20,383 - - 57,186
----------- ----------- ----------- ----------- -----------
- - 1,206,423 43,151 (4,959) 1,244,615
----------- ----------- ----------- ----------- -----------
Financial Services - - - - 108,871 - - 108,871
----------- ----------- ----------- ----------- -----------
Total Assets...................... $ 295,210 $ 1,206,783 $ 156,340 $ (241,420) $ 1,416,913
=========== =========== =========== =========== ===========
LIABILITIES
Corporate
Accounts payable and accrued
expenses.............................. $ 49,272 $ - - $ 1,700 $ - - $ 50,972
Advances and notes payable - Parent
and subsidiaries...................... (783,518) 749,787 33,731 - - - -
Income taxes payable.................... (34,322) 42,987 2,583 - - 11,248
Senior Notes, net....................... 174,535 - - - - - - 174,535
----------- ----------- ----------- ----------- -----------
(594,033) 792,774 38,014 - - 236,755
----------- ----------- ----------- ----------- -----------
Homebuilding
Accounts payable and accrued
expenses.............................. - - 200,334 6,724 - - 207,058
Line of credit.......................... 165,000 - - - - - - 165,000
----------- ----------- ----------- ----------- -----------
165,000 200,334 6,724 - - 372,058
----------- ----------- ----------- ----------- -----------
Financial Services - - - - 82,736 (4,964) 77,772
----------- ----------- ----------- ----------- -----------
Total Liabilities................. (429,033) 993,108 127,474 (4,964) 686,585
----------- ----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY....................... 724,243 213,675 28,866 (236,456) 730,328
----------- ----------- ----------- ----------- -----------
Total Liabilities and
Stockholders' Equity............ $ 295,210 $ 1,206,783 $ 156,340 $ (241,420) $ 1,416,913
=========== =========== =========== =========== ===========
-9-
M.D.C. Holdings, Inc.
Supplemental Combining Balance Sheet
December 31, 2001
(In thousands)
Non-
Guarantor Guarantor Eliminating
MDC Subsidiaries Subsidiaries Entries Total
----------- ----------- ----------- ----------- ------------
ASSETS
Corporate
Cash and cash equivalents............... $ 31,322 $ - - $ - - $ - - $ 31,322
Investments in and advances to parent
and subsidiaries...................... 330,944 465 (1,951) (329,458) - -
Other assets ........................... 42,869 - - (521) - - 42,348
----------- ----------- ----------- ----------- ------------
405,135 465 (2,472) (329,458) 73,670
----------- ----------- ----------- ----------- ------------
Homebuilding
Cash and cash equivalents............... - - 4,352 408 - - 4,760
Home sales and other accounts receivable - - 3,744 169 (1,292) 2,621
Inventories, net
Housing completed or under construction - - 456,752 - - - - 456,752
Land and land under development....... - - 441,004 9,498 - - 450,502
Other assets............................ - - 32,063 17,481 - - 49,544
----------- ----------- ----------- ----------- ------------
- - 937,915 27,556 (1,292) 964,179
----------- ----------- ----------- ----------- ------------
Financial Services - - - - 153,107 - - 153,107
----------- ----------- ----------- ----------- ------------
Total Assets...................... $ 405,135 $ 938,380 $ 178,191 $ (330,750) $ 1,190,956
=========== =========== =========== =========== ============
LIABILITIES
Corporate
Accounts payable and accrued
expenses.............................. $ 60,684 $ - - $ 443 $ 8 $ 61,135
Advances and notes payable - Parent
and subsidiaries...................... (375,290) 358,751 16,539 - - - -
Income taxes payable.................... (100,585) 102,494 8,044 - - 9,953
Senior Notes, net....................... 174,503 - - - - - - 174,503
----------- ----------- ----------- ----------- ------------
(240,688) 461,245 25,026 8 245,591
----------- ----------- ----------- ----------- ------------
Homebuilding
Accounts payable and accrued
expenses.............................. - - 168,247 6,708 - - 174,955
Line of credit.......................... - - - - - - - - - -
----------- ----------- ----------- ----------- ------------
- - 168,247 6,708 - - 174,955
----------- ----------- ----------- ----------- ------------
Financial Services - - - - 117,878 (1,299) 116,579
----------- ----------- ----------- ----------- ------------
Total Liabilities................. (240,688) 629,492 149,612 (1,291) 537,125
----------- ----------- ----------- ----------- ------------
STOCKHOLDERS' EQUITY....................... 645,823 308,888 28,579 (329,459) 653,831
----------- ----------- ----------- ----------- ------------
Total Liabilities and
Stockholders' Equity............ $ 405,135 $ 938,380 $ 178,191 $ (330,750) $ 1,190,956
=========== =========== =========== =========== ============
-10-
M.D.C. Holdings, Inc.
Supplemental Combining Statements of Income
(In thousands)
(Unaudited)
Three Months Ended June 30, 2002
Non-
Guarantor Guarantor Eliminating
MDC Subsidiaries Subsidiaries Entries Total
----------- ----------- ----------- ----------- ------------
REVENUES
Homebuilding............................. $ - - $ 493,065 $ 6,182 $ (76) $ 499,171
Financial Services....................... - - - - 9,896 - - 9,896
Corporate................................ 309 - - 54 - - 363
Equity in earnings of subsidiaries....... 38,201 - - - - (38,201) - -
----------- ----------- ----------- ----------- ------------
Total Revenues..................... 38,510 493,065 16,132 (38,277) 509,430
----------- ----------- ----------- ----------- ------------
COSTS AND EXPENSES
Homebuilding............................. 175 437,639 4,995 (4,853) 437,956
Financial Services....................... - - - - 4,711 - - 4,711
Corporate general and administrative..... 10,399 - - 35 - - 10,434
Corporate and homebuilding interest...... (4,853) - - - - 4,853 - -
----------- ----------- ----------- ----------- ------------
Total Expenses...................... 5,721 437,639 9,741 - - 453,101
----------- ----------- ----------- ----------- ------------
Income before income taxes............... 32,789 55,426 6,391 (38,277) 56,329
Provision for income taxes............... 2,700 (22,211) (2,482) - - (21,993)
----------- ----------- ----------- ----------- ------------
NET INCOME.................................. $ 35,489 $ 33,215 $ 3,909 $ (38,277) $ 34,336
=========== =========== =========== =========== ============
Three Months Ended June 30, 2001
Non-
Guarantor Guarantor Eliminating
MDC Subsidiaries Subsidiaries Entries Total
----------- ----------- ----------- ----------- ------------
REVENUES
Homebuilding............................. $ - - $ 498,158 $ 912 $ (60) $ 499,010
Financial Services....................... - - - - 8,998 - - 8,998
Corporate................................ 214 - - 13 - - 227
Equity in earnings of subsidiaries....... 43,373 - - - - (43,373) - -
----------- ----------- ----------- ----------- ------------
Total Revenues..................... 43,587 498,158 9,923 (43,433) 508,235
----------- ----------- ----------- ----------- ------------
COSTS AND EXPENSES
Homebuilding............................. 9 433,702 60 (4,747) 429,024
Financial Services....................... - - - - 4,272 - - 4,272
Corporate general and administrative..... 11,510 - - - - - - 11,510
Corporate and homebuilding interest...... (4,747) - - - - 4,747 - -
----------- ----------- ----------- ----------- ------------
Total Expenses..................... 6,772 433,702 4,332 - - 444,806
----------- ----------- ----------- ----------- ------------
Income before income taxes............... 36,815 64,456 5,591 (43,433) 63,429
Provision for income taxes............... 3,292 (25,775) (2,103) - - (24,586)
----------- ----------- ----------- ----------- ------------
NET INCOME.................................. $ 40,107 $ 38,681 $ 3,488 $ (43,433) $ 38,843
=========== =========== =========== =========== ============
-11-
M.D.C. Holdings, Inc.
Supplemental Combining Statements of Income
(In thousands)
(Unaudited)
Six Months Ended June 30, 2002
Non-
Guarantor Guarantor Eliminating
MDC Subsidiaries Subsidiaries Entries Total
----------- ----------- ----------- ----------- ------------
REVENUES
Homebuilding............................. $ - - $ 938,781 $ 7,293 $ (142) $ 945,932
Financial Services....................... - - - - 19,277 - - 19,277
Corporate................................ 497 - - 98 - - 595
Equity in earnings of subsidiaries....... 73,953 - - - - (73,953) - -
----------- ----------- ----------- ----------- ------------
Total Revenues..................... 74,450 938,781 26,668 (74,095) 965,804
----------- ----------- ----------- ----------- ------------
COSTS AND EXPENSES
Homebuilding............................. 107 831,237 5,267 (9,738) 826,873
Financial Services....................... - - - - 9,062 - - 9,062
Corporate general and administrative..... 20,423 - - 71 - - 20,494
Corporate and homebuilding interest...... (9,738) - - - - 9,738 - -
----------- ----------- ----------- ----------- ------------
Total Expenses...................... 10,792 831,237 14,400 - - 856,429
----------- ----------- ----------- ----------- ------------
Income before income taxes............... 63,658 107,544 12,268 (74,095) 109,375
Provision for income taxes............... 5,054 (42,987) (4,770) - - (42,703)
----------- ----------- ----------- ----------- ------------
NET INCOME.................................. $ 68,712 $ 64,557 $ 7,498 $ (74,095) $ 66,672
=========== =========== =========== =========== ============
Six Months Ended June 30, 2001
Non-
Guarantor Guarantor Eliminating
MDC Subsidiaries Subsidiaries Entries Total
----------- ----------- ----------- ----------- ------------
REVENUES
Homebuilding............................. $ - - $ 908,493 $ 1,721 $ (108) $ 910,106
Financial Services....................... - - - - 17,339 - - 17,339
Corporate................................ 482 - - 30 - - 512
Equity in earnings of subsidiaries....... 76,859 - - - - (76,859) - -
----------- ----------- ----------- ----------- ------------
Total Revenues..................... 77,341 908,493 19,090 (76,967) 927,957
----------- ----------- ----------- ----------- ------------
COSTS AND EXPENSES
Homebuilding............................. 105 794,206 136 (8,258) 786,189
Financial Services....................... - - - - 8,409 - - 8,409
Corporate general and administrative..... 21,916 - - - - - - 21,916
Corporate and homebuilding interest...... (8,258) - - - - 8,258 - -
----------- ----------- ----------- ----------- ------------
Total Expenses..................... 13,763 794,206 8,545 - - 816,514
----------- ----------- ----------- ----------- ------------
Income before income taxes............... 63,578 114,287 10,545 (76,967) 111,443
Provision for income taxes............... 6,099 (45,410) (4,006) - - (43,317)
----------- ----------- ----------- ----------- ------------
NET INCOME.................................. $ 69,677 $ 68,877 $ 6,539 $ (76,967) $ 68,126
=========== =========== =========== =========== ============
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
M.D.C. Holdings, Inc. is a Delaware Corporation. We refer to M.D.C.
Holdings, Inc. as the "Company" or as "MDC" in this Form 10-Q. The "Company" or
"MDC" includes our subsidiaries unless we state otherwise. MDC's primary
business is owning and managing subsidiary companies that build and sell homes
under the name "Richmond American Homes." We also own and manage HomeAmerican
Mortgage Corporation ("HomeAmerican"), which originates mortgage loans primarily
for MDC's home buyers. In addition, MDC provides title agency services through
American Home Title and Escrow Company ("American Home Title") and offers
insurance through American Home Insurance Agency, Inc. ("American Home
Insurance") to MDC's home buyers.
RESULTS OF OPERATIONS
The table below summarizes MDC's results of operations (in thousands,
except per share amounts).
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues.................................... $ 509,430 $ 508,235 $ 965,804 $ 927,957
Income Before Income Taxes.................. $ 56,329 $ 63,429 $ 109,375 $ 111,443
Net Income.................................. $ 34,336 $ 38,843 $ 66,672 $ 68,126
Earnings Per Share
Basic.................................. $ 1.27 $ 1.47 $ 2.48 $ 2.60
Diluted................................ $ 1.22 $ 1.42 $ 2.39 $ 2.51
Revenues for the first six months of 2002 increased by $37,847,000,
compared with the first half of 2001, primarily due to increased homebuilding
revenues resulting from a significantly higher average selling price per home
closed.
Income before income taxes in the second quarter and first half of 2002
were lower than for the same periods in 2001, primarily due to lower operating
profits from the Company's homebuilding segment. The decreases in homebuilding
segment profits primarily resulted from lower Home Gross Margins (as defined
below) in the second quarter and first half of 2002, compared with the same
periods in 2001. These profit decreases partially were offset by increases in
operating profits from the Company's financial services segment for the quarter
and six months ended June 30, 2002 of $459,000 and $1,285,000, respectively, as
well as decreases in net corporate expenses of $1,212,000 and $1,505,000,
respectively, compared with the same periods in 2001.
-13-
Homebuilding Segment
The table below sets forth information relating to the Company's
homebuilding segment (dollars in thousands).
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Home Sales Revenues........................... $ 496,862 $ 497,406 $ 942,029 $ 907,126
Operating Profit.............................. $ 61,215 $ 69,986 $ 119,059 $ 123,917
Average Selling Price Per Home Closed......... $ 254.0 $ 258.5 $ 259.5 $ 246.3
Home Gross Margins............................ 22.5% 23.7% 22.9% 23.5%
Excluding Interest in Home Cost of Sales... 23.4% 24.9% 23.8% 24.8%
Orders For Homes, net (units)
Colorado............................... 757 639 1,758 1,607
Utah................................... 31 - - 31 - -
California............................. 633 414 1,224 855
Arizona................................ 671 534 1,341 1,266
Nevada................................. 411 162 618 430
Virginia............................... 176 144 418 364
Maryland............................... 74 80 139 178
------------- ------------- ------------- -------------
Total.............................. 2,753 1,973 5,529 4,700
============= ============= ============= =============
Homes Closed (units)
Colorado............................... 706 671 1,315 1,300
Utah................................... 25 - - 25 - -
California............................. 362 375 654 615
Arizona................................ 446 513 884 1,011
Nevada................................. 247 169 388 328
Virginia............................... 104 136 234 306
Maryland............................... 66 60 130 123
------------- ------------- ------------- -------------
Total.............................. 1,956 1,924 3,630 3,683
============= ============= ============= =============
June 30, December 31, June 30,
2002 2001 2001
------------- ------------- -------------
Backlog (units)
Colorado............................... 1,638 1,195 1,692
Utah................................... 47 - - - -
California............................. 1,060 490 748
Arizona................................ 1,082 625 1,065
Nevada................................. 524 181 300
Virginia............................... 418 234 386
Maryland............................... 166 157 181
------------- ------------- -------------
Total.............................. 4,935 2,882 4,372
============= ============= =============
Backlog Estimated Sales Value................. $ 1,300,000 $ 760,000 $ 1,110,000
============= ============= =============
-14-
June 30, December 31, June 30,
2002 2001 2001
------------- ------------- -------------
Active Subdivisions
Colorado............................... 63 61 61
Utah................................... 4 - - - -
California............................. 27 26 25
Arizona................................ 34 27 29
Nevada................................. 15 7 7
Virginia............................... 16 11 11
Maryland............................... 6 5 4
------------- ------------- -------------
Total.............................. 165 137 137
============= ============= =============
Home Sales Revenues and Homes Closed - Home sales revenues in the first
half of 2002 were higher than home sales revenues for the same period in 2001,
primarily due to a 5% increase in the average selling price per home closed
during the period.
Home closings in the second quarter and first half of 2002 were
comparable to home closings for the same periods in 2001. Home closings in the
three and six months ended June 30, 2002 particularly were strong in Tucson
(increases of 41% and 44%, respectively) and Nevada (increases of 46% and 18%,
respectively), as a result of the continued strong demand for new homes in these
markets. MDC closed fewer homes in both the second quarter and first six months
of 2002 in Phoenix and Virginia, because of lower home orders in these markets
in the latter half of 2001, compared with the same period in 2000. These lower
home orders primarily resulted from fewer active subdivisions in Phoenix and a
significant number of active subdivisions approaching close-out during that time
in both Phoenix and Virginia.
Average Selling Price Per Home Closed - The average selling price per
home closed in the 2002 second quarter decreased $4,500, compared with the same
period in 2001. The decrease primarily was due to (1) a greater number of homes
closed in relatively lower-priced subdivisions in Southern California, Tucson
and Colorado, where the Company has focused on selling more affordable homes;
and (2) 83 homes closed in Las Vegas and Salt Lake City that were acquired from
W.L. Homes LLC (d/b/a John Laing Homes), which had selling prices significantly
lower than the Company average. Average selling prices in the second quarter of
2002 increased in Virginia and Maryland, where the Company closed a greater
number of homes in relatively higher-priced subdivisions. For the six months
ended June 30, 2002, the average selling price per home closed increased
$13,200, compared with the same period in 2001. The increase primarily was due
to (1) selling price increases in Virginia, Maryland and Phoenix, due to the
strong demand for new homes in these markets; (2) a greater number of homes
closed in relatively higher-priced subdivisions in Northern California, Nevada,
Virginia and Maryland; and (3) a higher proportion of detached homes closed in
Virginia, which generally have higher selling prices than townhomes.
Home Gross Margins - We define "Home Gross Margins" to mean home sales
revenues less cost of goods sold (which primarily includes land and construction
costs, capitalized interest, financing costs, and a reserve for warranty
expense) as a percent of home sales revenues. Home Gross Margins for the second
quarter and six months ended June 30, 2002 decreased, compared with the same
periods in 2001, primarily due to (1) higher incentives offered and minimal
selling price increases in most of the Company's markets in the latter half of
2001, as a result of the difficult economic conditions that existed during that
time; (2) homes closed in Salt Lake City and Las Vegas that were acquired from
John Laing Homes with a lower Home Gross Margin than the Company average due, in
large part, to purchase
-15-
accounting adjustments; (3) increased warranty costs in Colorado and Northern
California; and (4) the continued rising cost of land in most of the Company's
markets.
Future Home Gross Margins may be impacted adversely by (1) competition;
(2) increases in the costs of subcontracted labor, finished lots, building
materials and other resources, to the extent that market conditions prevent the
recovery of increased costs through higher selling prices; (3) adverse weather;
and (4) shortages of subcontractor labor, finished lots and other resources. See
"Forward-Looking Statements" below.
Orders for Homes and Backlog - Orders for homes increased 40% and 18%,
respectively, in the three and six months ended June 30, 2002, compared with the
same periods in 2001. The Company increased the number of active subdivisions to
165 at June 30, 2002 from 137 at December 31, 2001, including an additional
eight in Nevada and seven in Arizona. These additional subdivisions contributed
to year-over-year increases in second quarter home orders of over 150% in Nevada
and 26% in Arizona. Second quarter 2002 home orders increased a combined 53% in
Southern and Northern California, compared with the 2001 second quarter,
primarily resulting from the strong demand for new homes in these markets. In
addition, the Company opened 36 new model homes in the first six months of 2002
in Colorado, contributing to the 18% increase in second quarter 2002 home orders
in this market, compared with the same period in 2001.
Homes under contract but not yet delivered ("Backlog") at June 30, 2002
was 4,935 units with an estimated sales value of $1,300,000,000, compared with a
Backlog of 4,372 units with an estimated sales value of $1,110,000,000 at June
30, 2001. Assuming no significant change in market conditions or mortgage
interest rates, the Company expects approximately 70% to 75% of its June 30,
2002 Backlog to close under existing sales contracts during the second half of
2002 and first quarter of 2003. The remaining 25% to 30% of the homes in Backlog
are not expected to close under existing contracts due to cancellations. See
"Forward-Looking Statements" below.
Marketing - Marketing expenses (which include sales commissions,
advertising, amortization of deferred marketing costs, model home expenses and
other costs) totaled $27,682,000 and $53,345,000, respectively, for the quarter
and six months ended June 30, 2002, compared with $27,064,000 and $49,917,000,
respectively, for the same periods in 2001. The increases in 2002 primarily were
due to (1) higher product advertising and deferred marketing amortization,
primarily as a result of the increased number of active subdivisions during the
second quarter and first six months of 2002, compared with the same periods in
2001; and (2) increased sales overhead resulting from the Company's expanding
home sales activities.
General and Administrative - General and administrative expenses
increased to $24,717,000 and $46,910,000, respectively, during the second
quarter and first half of 2002, compared with $22,194,000 and $41,806,000,
respectively, for the same periods in 2001, primarily due to increased
compensation costs associated with the expanding operations in certain of the
Company's markets, most notably Phoenix, Nevada, Virginia, Southern California
and Northern California. General and administrative expenses also increased in
Utah and Nevada as a result of the Company's acquisition of most of the
homebuilding assets, and the hiring of former employees, of John Laing Homes
in these markets.
-16-
Land Inventory
The table below shows the carrying value of land and land under
development, by market, the total number of lots owned and lots controlled under
option agreements, and total cash option deposits (dollars in thousands).
June 30, December 31, June 30,
2002 2001 2001
----------- ----------- -----------
Colorado................................... $ 141,696 $ 165,228 $ 155,508
Utah....................................... 9,744 - - - -
California................................. 125,737 110,010 110,528
Arizona.................................... 97,311 70,602 57,195
Nevada..................................... 109,302 44,103 32,454
Virginia................................... 79,094 49,929 34,401
Maryland................................... 19,501 10,630 7,618
----------- ----------- -----------
Total................................. $ 582,385 $ 450,502 $ 397,704
=========== =========== ===========
Lots Owned (excluding lots in
work-in-process)......................... 16,773 13,524 12,439
Lots Controlled Under Option............... 6,403 6,059 7,746
----------- ----------- -----------
Total Lots Owned and Controlled
(excluding lots in work-in-process).... 23,176 19,583 20,185
=========== =========== ===========
Total Cash Option Deposits................. $ 16,034 $ 14,520 $ 14,651
=========== =========== ===========
New Homebuilding Divisions
In February 2002, the Company announced its intent to expand into the
Dallas/Fort Worth market by hiring a division president to manage the start-up
operation. During the 2002 second quarter the Company acquired control of
approximately 300 lots in three subdivisions in this market.
In mid-April 2002, an MDC subsidiary acquired most of the homebuilding
assets, and hired former employees, of John Laing Homes in Salt Lake City,
marking the Company's entry into this market. The assets acquired included
approximately 750 lots and 24 homes under construction in five subdivisions, as
well as options to acquire an additional 150 lots.
-17-
Financial Services Segment
The table below sets forth information relating to HomeAmerican's
operations (in thousands).
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Loan Origination Fees....................... $ 3,992 $ 4,467 $ 8,221 $ 8,152
Gains on Sales of Mortgage Servicing, net... $ 481 $ 719 $ 952 $ 2,402
Gains on Sales of Mortgage Loans, net....... $ 4,280 $ 2,936 $ 7,741 $ 5,510
Operating Profit............................ $ 5,185 $ 4,726 $ 10,215 $ 8,930
Principal Amount of Loan Originations
MDC home buyers.......................... $ 270,566 $ 288,875 $ 521,454 $ 519,164
Spot..................................... 6,034 19,226 15,564 28,430
----------- ----------- ----------- -----------
Total.............................. $ 276,600 $ 308,101 $ 537,018 $ 547,594
=========== =========== =========== ===========
Principal Amount of Loans Brokered
MDC home buyers.......................... $ 59,697 $ 57,296 $ 103,299 $ 110,858
Spot..................................... 1,510 3,839 3,118 7,094
----------- ----------- ----------- -----------
Total.............................. $ 61,207 $ 61,135 $ 106,417 $ 117,952
=========== =========== =========== ===========
Capture Rate................................ 69% 74% 71% 73%
=========== =========== =========== ===========
Including brokered loans................. 81% 86% 82% 85%
=========== =========== =========== ===========
HomeAmerican's operating profit for the second quarter and first half
of 2002 increased, compared with the same periods in 2001, primarily due to
higher gains on sales of mortgage loans, partially offset by lower gains on
sales of mortgage loan servicing. The principal amounts of originated and
brokered loans were $337,807,000 and $643,435,000, respectively, in the second
quarter and first half of 2002, compared with $369,236,000 and $665,546,000,
respectively, for the same periods in 2001. The reductions in the 2002 periods
primarily were due to (1) decreases in loans originated for borrowers other than
MDC home buyers; and (2) lower HomeAmerican Capture Rates (as defined below).
MDC home buyers were the source of approximately 98% and 97%, respectively, of
the principal amount of mortgage loans originated and brokered by HomeAmerican
in the second quarter and first half of 2002.
Mortgage loans originated by HomeAmerican for MDC home buyers as a
percentage of total MDC home closings ("Capture Rate") were 69% and 71%,
respectively, for the quarter and six months ended June 30, 2002, compared with
74% and 73%, respectively, for the same periods in 2001. HomeAmerican also
brokers mortgage loans originated by outside lending institutions for MDC home
buyers. These brokered loans, for which HomeAmerican receives a fee, have been
excluded from the computation of the Capture Rate. If brokered loans were
included, the Capture Rate would have been 81% and 82%, respectively, for the
second quarter and first half of 2002, compared with 86% and 85%, respectively,
for the same periods in 2001. The decreases in Capture Rate in the 2002 periods
primarily were due to homes closed in Las Vegas and Salt Lake City that were
purchased from John Laing Homes with mortgage loans already contracted.
Forward Sales Commitments - HomeAmerican's operations are affected by
changes in mortgage interest rates. HomeAmerican utilizes forward mortgage
securities contracts to manage price risk related
-18-
to fluctuations in interest rates on its fixed-rate mortgage loans owned and
rate-locked mortgage loans in the pipeline.
Other Operating Results
Interest Expense - The Company capitalizes interest on its homebuilding
inventories during the period of active development and through the completion
of construction. Corporate and homebuilding interest incurred but not
capitalized is reported as interest expense and totaled zero for the second
quarter and first half of both 2002 and 2001.
For a reconciliation of interest incurred, capitalized and expensed,
see Note B to the Company's Condensed Consolidated Financial Statements.
Corporate General and Administrative Expenses - Corporate general and
administrative expenses decreased to $10,434,000 and $20,494,000, respectively,
during the second quarter and first half of 2002, from $11,510,000 and
$21,916,000, respectively, for the same periods of 2001. The decreases in the
2002 periods primarily were due to contributions of $1,000,000 and $2,000,000 to
the M.D.C. Holdings, Inc. Charitable Foundation in the second quarter and first
six months of 2001, respectively.
Income Taxes - MDC's overall effective income tax rate of 39% for the
second quarter and first half of 2002, compared with 38.8% and 38.9%,
respectively, for the same periods in 2001, differed from the federal statutory
rate of 35%, primarily due to the impact of state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
MDC uses its liquidity and capital resources to (1) support its
operations, including its inventories of homes, home sites and land; (2) provide
working capital; and (3) provide mortgage loans for its home buyers. Liquidity
and capital resources are generated internally from operations and from external
sources. The Company previously filed a shelf registration statement that would
allow the Company to issue up to $300,000,000 of equity, debt or hybrid
securities.
Capital Resources
The Company's capital structure is a combination of (1) permanent
financing, represented by stockholders' equity; (2) long-term financing,
represented by its publicly traded 8 3/8% senior notes due 2008 (the "Senior
Notes") and its homebuilding line of credit (the "Homebuilding Line"); and (3)
current financing, primarily its mortgage lending line of credit (the "Mortgage
Line"). Based upon its current capital resources and additional liquidity
available under existing credit agreements, the Company believes that its
current financial condition is both balanced to fit its current operating
structure and adequate to satisfy its current and near-term capital
requirements, including the acquisition of land. The Company believes that it
can meet its long-term capital needs (including meeting future debt payments and
refinancing or paying off other long-term debt as it becomes due) from
operations and external financing sources, assuming that no significant adverse
changes in the Company's business or in the capital and credit markets occur as
a result of the various risk factors described elsewhere in this report. See
"Forward-Looking Statements" below.
-19-
Lines of Credit and Other
Homebuilding - The maturity date of the Homebuilding Line was September
30, 2004 and the maximum amount available was $450,000,000 at June 30, 2002.
Commitments under the Homebuilding Line increased from $413,000,000 at March 31,
2001 to $438,000,000 in April 2001 and to $450,000,000 in June 2001. Pursuant to
the terms of the Homebuilding Line agreement, a term-out of this credit could
have commenced prior to September 30, 2004 under certain circumstances. At June
30, 2002, $165,000,000 was borrowed and $17,090,000 in letters of credit were
outstanding under the Homebuilding Line.
On July 30, 2002, the terms of the Homebuilding Line were amended and
restated (the "Second Amended and Restated Credit Agreement") to extend the
maturity date to July 29, 2006, and increase the maximum amount available from
$450,000,000 to $600,000,000 upon the Company's request, subject to additional
commitments from existing or additional participant lenders. Lender commitments
under the Homebuilding Line increased from $450,000,000 to $538,000,000 in July
2002 with the addition of two new banks to the lending group and additional
commitments from existing banks.
Mortgage Lending - In June 2002, the Company received an additional
$25,000,000 commitment from a participant bank on its mortgage lending bank line
of credit (the "Mortgage Line"), increasing the borrowing limit to $125,000,000.
At June 30, 2001, the borrowing limit was $125,000,000, which included a
$25,000,000 temporary increase received from a participant bank. Available
borrowings under the Mortgage Line are collateralized by mortgage loans and
mortgage-backed certificates and are limited to the value of eligible collateral
as defined. At June 30, 2002, $50,949,000 was borrowed and an additional
$22,170,000 was collateralized and available to be borrowed. The Mortgage Line
was cancelable upon 90 days' notice.
In August 2002, the terms of the Mortgage Line were amended to allow
for a $50,000,000 temporary increase in the borrowing limit to a maximum of
$175,000,000, subject to concurrence by the participating banks. The Mortgage
Line is now cancelable upon 120 days' notice.
General - The agreements for the Company's Senior Notes and bank lines
of credit require compliance with certain representations, warranties and
covenants. The Company believes that it is in compliance with these
representations, warranties and covenants. The agreements containing these
representations, warranties and covenants for the Senior Notes are on file with
the Securities and Exchange Commission and are listed in the Exhibit Table in
Part IV of MDC's Annual Report on Form 10-K for its fiscal year ended December
31, 2001. The Second Amended and Restated Credit Agreement for the Homebuilding
Line is filed with this report.
The financial covenants contained in the Homebuilding Line agreement,
as modified by the Second Amended and Restated Credit Agreement, include a
leverage test and a consolidated tangible net worth test. Under the leverage
test, generally, MDC's consolidated indebtedness is not permitted to exceed 2.15
(subject to downward adjustment in certain circumstances) times MDC's "adjusted
consolidated tangible net worth," as defined. Under the adjusted consolidated
tangible net worth test, MDC's "adjusted consolidated tangible net worth," as
defined, must not be less than the sum of $491,382,000 and 50% of "consolidated
net income," as defined, of the "borrower," as defined, and the "guarantors," as
defined, after December 31, 2001. In addition, "adjusted consolidated tangible
net worth," as defined, must not be less than $307,114,000.
-20-
The Company's Senior Notes indenture does not contain financial
covenants. However, there are covenants that limit transactions with affiliates,
limit the amount of additional indebtedness that MDC may incur, restrict certain
payments on, or the redemptions of, the Company's securities, restrict certain
sales of assets and limit incurring liens. In addition, under certain
circumstances, in the event of a change of control (generally a sale, transfer,
merger or acquisition of MDC or substantially all of its assets), MDC may be
required to offer to repurchase the Senior Notes. The Senior Notes are not
secured, but are unconditionally guaranteed on an unsecured basis, jointly and
severally, by most of the Company's homebuilding segment subsidiaries. See Note
I to the Condensed Consolidated Financial Statements.
MDC Common Stock Repurchase Programs
On January 24, 2000, the MDC board of directors authorized the
repurchase of up to 1,000,000 shares of MDC common stock. On February 21, 2000,
the MDC board of directors authorized the repurchase of up to 2,000,000
additional shares of MDC common stock. The Company repurchased a total of
2,064,300 shares of MDC common stock under these programs through June 30, 2002,
leaving 935,700 shares available to be repurchased as of such date under these
programs. The per share prices, including commissions, for these repurchases
ranged from $13.53 to $29.02 with an average cost of $16.80. At June 30, 2002,
the Company held 4,721,000 shares of treasury stock with an average purchase
price of $9.45. No shares were repurchased during the three and six months ended
June 30, 2002 and 2001.
Consolidated Cash Flow
During the first six months of 2002, the Company used $123,317,000 of
cash in its operating activities. Cash provided by net income for the period,
the sale of mortgage loans and an increase in accounts payable and accrued
expenses, collectively, was more than offset by cash used to build homebuilding
inventories in support of the Company's expanding homebuilding activities. The
Company financed these operating cash requirements primarily through borrowings
on its bank lines of credit.
During the first six months of 2001, the Company used $37,088,000 of
cash in its operating activities. Cash provided by net income for the period and
an increase in accounts payable and accrued expenses was more than offset by an
increase in homebuilding inventories in support of the Company's expanding
homebuilding activities. The Company financed these operating cash requirements
primarily through borrowings on its bank lines of credit.
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 these increased costs are recovered through higher sales prices,
Home Gross Margins would decrease. If interest rates increase, construction and
financing costs, as well as the cost of borrowings, also would 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 revenue. Increases in interest rates
also may affect adversely the volume of mortgage loan originations.
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The volatility of interest rates could have an adverse effect on MDC's
future operations and liquidity. An increase in interest rates may affect
adversely the demand for housing and the availability of mortgage financing and
may reduce the credit facilities offered to MDC by banks, investment bankers and
mortgage bankers. See "Forward-Looking Statements" below.
MDC's business also is affected significantly by general economic
conditions and, particularly, the demand for new homes in the markets in which
it builds.
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies are those related to (1)
homebuilding inventory valuation; (2) estimates to complete land development and
home construction; (3) warranty costs; and (4) litigation reserves. These
policies are more fully described in the notes to the Company's consolidated
financial statements in MDC's Annual Report on Form 10-K for its fiscal year
ended December 31, 2001.
OTHER
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, the Company's
Annual Report on Form 10-K for its fiscal year ended December 31, 2001, as well
as statements made by the Company in periodic press releases, oral statements
made by the Company's officials to analysts and shareowners in the course of
presentations about the Company and conference calls following quarterly
earnings releases, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. Such factors include,
among other things, (1) general economic and business conditions; (2) interest
rate changes; (3) the relative stability of debt and equity markets; (4)
competition; (5) the availability and cost of land and other raw materials used
by the Company in its homebuilding operations; (6) the availability and cost of
insurance covering risks associated with our business; (7) shortages and the
cost of labor; (8) weather related slowdowns; (9) slow growth initiatives; (10)
building moratoria; (11) governmental regulation, including the interpretation
of tax, labor and environmental laws; (12) changes in consumer confidence and
preferences; (13) required accounting changes; (14) terrorist acts and other
acts of war; and (15) other factors over which the Company has little or no
control.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risks related to fluctuations in
interest rates on mortgage loans receivable and debt. Derivative instruments
utilized in the normal course of business by HomeAmerican include forward sales
securities commitments, private investor sales commitments and commitments to
originate mortgage loans. The Company utilizes these commitments to manage the
price risk on fluctuations in interest rates on its mortgage loans owned and
commitments to originate mortgage loans. Such contracts are the only significant
financial derivative instruments utilized by MDC.
HomeAmerican provides mortgage loans that generally are sold forward
and subsequently delivered to a third-party purchaser within approximately 40
days from origination. Forward commitments are used for non-trading purposes to
sell mortgage loans and hedge price risk due to fluctuations in interest rates
on rate-locked mortgage loans-in-process that have not closed. Due to this
hedging philosophy, the market risk associated with these mortgages is limited.
The Company utilizes both short-term and long-term debt in its
financing strategy. For fixed rate debt, changes in interest rates generally
affect the fair value of the debt instrument, but not the Company's earnings or
cash flows. Conversely, for variable rate debt, changes in interest rates
generally do not impact the fair value of the debt instrument, but may affect
the Company's future earnings and cash flows. The Company does not have an
obligation to prepay fixed rate debt prior to maturity and, as a result,
interest rate risk and changes in fair value should not have a significant
impact on the fixed rate debt until the Company would be required to pay off or
refinance such debt.
As of June 30, 2002, short-term debt was $50,949,000, which consisted
of amounts outstanding on MDC's Mortgage Line. The Mortgage Line is
collateralized by residential mortgage loans. The Company borrows on a
short-term basis from banks under committed lines of credit, which bear interest
at the prevailing market rates. Long-term debt obligations outstanding, their
maturities and estimated fair values at June 30, 2002 are as follows (in
thousands).
Maturities through December 31,
--------------------------------------------------------------- Estimated
2002 2003 2004 2005 2006 Thereafter Total Fair Value
------------------------------------------------------------------------------------
Fixed Rate Debt............ $ - - $ - - $ - - $ - - $ - - $ 175,000 $ 175,000 $ 180,023
Average Interest Rate... - - - - - - - - - - 8.38% 8.38%
Variable Rate Debt......... $ - - $ - - $ 165,000 $ - - $ - - $ - - $ 165,000 $ 165,000
Average Interest Rate... - - - - 3.1% - - - - - - 3.1%
The Company believes that its overall balance sheet structure has
repricing and cash flow characteristics that mitigate the impact of interest
rate changes.
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M.D.C. HOLDINGS, INC.
FORM 10-Q
PART II
ITEM 1. LEGAL PROCEEDINGS.
- ------ -----------------
The Company and certain of its subsidiaries and affiliates have been
named as defendants in various claims, complaints and other legal actions
arising in the normal course of business. In the opinion of management, the
outcome of these matters will not have a material adverse effect upon the
financial condition, results of operations or cash flows of the Company.
Because of the nature of the homebuilding business, and in the ordinary
course of its operations, the Company from time to time may be subject to
product liability claims.
The Company is not aware of any litigation, matter or pending claim
against the Company that would result in material contingent liabilities related
to environmental hazards or asbestos.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREOWNERS.
- ------ ----------------------------------------------
MDC held its Annual Meeting of Shareowners (the "Meeting") on April 25,
2002. At the Meeting, Gilbert Goldstein and William B. Kemper were re-elected as
Class II Directors for three-year terms, expiring in 2005.
ITEM 5. OTHER INFORMATION.
- ------ -----------------
On July 22, 2002, the Company's board of directors declared a dividend
of eight cents per share for the quarter ended June 30, 2002, payable August 21,
2002 to shareowners of record on August 7, 2002. Future dividend payments are
subject to the discretion of the Company's board of directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ --------------------------------
(a) Exhibits:
4.1 Second Amended and Restated Credit Agreement
dated as of July 30, 2002 among M.D.C.
Holdings, Inc. as Borrower and The Banks
Named therein and Bank One, NA as
Administrative Agent, Washington Mutual
Bank, FA as Syndication Agent, KeyBank
National Association as Documentation Agent,
and BNP Paribas, Guaranty Bank and Wachovia
Bank, N.A. as Co-Agents.
4.2 Form of Guaranty agreement dated as of July
30, 2002 by certain subsidiaries of M.D.C.
Holdings, Inc., including RICHMOND AMERICAN
HOMES OF CALIFORNIA, INC., RICHMOND
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AMERICAN HOMES OF MARYLAND, INC., RICHMOND
AMERICAN HOMES OF NEVADA, INC., RICHMOND
AMERICAN HOMES OF VIRGINIA, INC., RICHMOND
AMERICAN HOMES OF ARIZONA, INC., RICHMOND
AMERICAN HOMES OF COLORADO, INC., RICHMOND
AMERICAN HOMES OF WEST VIRGINIA, INC.,
RICHMOND AMERICAN HOMES OF CALIFORNIA
(INLAND EMPIRE), INC., RICHMOND AMERICAN
HOMES OF UTAH, INC., RICHMOND AMERICAN HOMES
OF TEXAS, INC., M.D.C. LAND CORPORATION,
RICHMOND AMERICAN CONSTRUCTION, INC., RAH
TEXAS HOLDINGS, LLC, and RAH OF TEXAS, LP.
4.3 Form of Promissory Note of M.D.C. Holdings,
Inc. as Maker dated as of July 30, 2002
payable to each of the Banks named in the
Second Amended and Restated Credit Agreement
dated as of July 30, 2002 among M.D.C.
Holdings, Inc. as Borrower and The Banks
Named therein and Bank One, NA as
Administrative Agent, Washington Mutual
Bank, FA as Syndication Agent, KeyBank
National Association as Documentation Agent,
and BNP Paribas, Guaranty Bank and Wachovia
Bank, N.A. as Co-Agents.
4.4 Second Supplemental Indenture, dated as of
July 30, 2002 by and among M.D.C. Holdings,
Inc., a Delaware corporation (the
"Company"), U.S. Bank National Association,
as Trustee (the "Trustee"), and each of the
following wholly owned subsidiaries of the
Company (collectively, the "Additional
Guarantors"): M.D.C. Land Corporation, RAH
of Texas, LP, RAH Texas Holdings, LLC,
Richmond American Construction, Inc.,
Richmond American Homes of California
(Inland Empire), Inc., Richmond American
Homes of Texas, Inc., Richmond American
Homes of Utah, Inc., and Richmond American
Homes of West Virginia, Inc., including the
Form of Guaranty executed by each Additional
Guarantor.
99.1 Certification by Larry A. Mizel, Chief
Executive Officer, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification by Paris G. Reece III, Chief
Financial Officer, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the
Registrant during the period covered by this
Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 7, 2002 M.D.C. HOLDINGS, INC.
-------------- (Registrant)
By: /s/ Paris G. Reece III
-----------------------------
Paris G. Reece III
Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer
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