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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 March 31, 2003
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
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
As of May 2, 2003, approximately 25,950,000 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 MARCH 31, 2003
INDEX
Page
No.
----
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Balance Sheets as of March 31, 2003
(Unaudited) and December 31, 2002............. 1
Statements of Income (Unaudited) for the three
months ended March 31, 2003 and 2002.......... 3
Statements of Cash Flows (Unaudited) for the
three months ended March 31, 2003 and 2002.... 4
Notes to Condensed Consolidated Financial
Statements (Unaudited)........................ 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...................................23
Item 4. Controls and Procedures.........................24
Part II. Other Information
Item 1. Legal Proceedings...............................25
Item 4. Submission of Matters to a Vote of Shareowners..25
Item 5. Other Information...............................25
Item 6. Exhibits and Reports on Form 8-K................25
Signatures...................................................26
Certifications...............................................27
(a)
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands)
March 31, December 31,
2003 2002
------------- -------------
ASSETS (Unaudited)
Corporate
Cash and cash equivalents................................................... $ 51,832 $ 23,164
Property and equipment, net................................................. 10,683 10,851
Deferred income taxes....................................................... 24,986 25,980
Deferred debt issue costs, net.............................................. 3,210 3,305
Other assets, net........................................................... 6,386 6,708
------------- -------------
97,097 70,008
------------- -------------
Homebuilding
Cash and cash equivalents................................................... 4,690 4,686
Home sales and other accounts receivable.................................... 23,592 3,519
Inventories, net
Housing completed or under construction................................... 634,677 578,475
Land and land under development........................................... 643,698 656,843
Prepaid expenses and other assets, net...................................... 70,182 65,936
------------- -------------
1,376,839 1,309,459
Financial Services
Cash and cash equivalents................................................... 1,551 1,092
Mortgage loans held in inventory............................................ 133,891 207,938
Other assets, net........................................................... 7,861 6,683
------------- -------------
143,303 215,713
------------- -------------
Total Assets.......................................................... $ 1,617,239 $ 1,595,180
============= =============
See notes to condensed consolidated financial statements.
-1-
M.D.C. HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
March 31, December 31,
2003 2002
------------- -------------
LIABILITIES (Unaudited)
Corporate
Accounts payable and accrued expenses........................................ $ 48,235 $ 63,871
Income taxes payable......................................................... 26,031 21,571
Senior notes, net............................................................ 323,035 322,990
------------- -------------
397,301 408,432
------------- -------------
Homebuilding
Accounts payable and accrued expenses........................................ 204,650 210,601
Line of credit............................................................... 90,000 - -
------------- -------------
294,650 210,601
------------- -------------
Financial Services
Accounts payable and accrued expenses........................................ 20,541 21,506
Line of credit............................................................... 88,552 154,074
------------- -------------
109,093 175,580
------------- -------------
Total Liabilities...................................................... 801,044 794,613
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE H).......................................... - - - -
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 25,000,000 shares authorized; none issued... - - - -
Common stock, $.01 par value; 100,000,000 shares authorized; 31,823,000 and
31,802,000 shares issued, respectively, at March 31, 2003 and
December 31, 2002.......................................................... 318 318
Additional paid-in capital................................................... 377,015 371,896
Retained earnings............................................................ 536,415 501,498
Unearned restricted stock.................................................... (1,175) (820)
Accumulated other comprehensive income....................................... 129 2
------------- -------------
912,702 872,894
Less treasury stock, at cost; 5,913,000 and 5,373,000 shares, respectively,
at March 31, 2003 and December 31, 2002.................................... (96,507) (72,327)
------------- -------------
Total Stockholders' Equity............................................. 816,195 800,567
------------- -------------
Total Liabilities and Stockholders' Equity............................. $ 1,617,239 $ 1,595,180
============= =============
See notes to condensed consolidated financial statements.
-2-
M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months
Ended March 31,
2003 2002
----------- -----------
REVENUES
Homebuilding............................................................... $ 554,912 $ 446,761
Financial Services......................................................... 14,513 9,381
Corporate.................................................................. 217 232
----------- -----------
Total Revenues......................................................... 569,642 456,374
----------- -----------
COSTS AND EXPENSES
Homebuilding............................................................... 490,454 388,917
Financial Services......................................................... 6,946 4,351
Corporate general and administrative....................................... 11,476 10,060
----------- -----------
Total Costs and Expenses............................................... 508,876 403,328
----------- -----------
Income before income taxes.................................................... 60,766 53,046
Provision for income taxes.................................................... (23,729) (20,710)
----------- -----------
NET INCOME.................................................................... $ 37,037 $ 32,336
=========== ===========
EARNINGS PER SHARE (NOTE I)
Basic...................................................................... $ 1.28 $ 1.10
=========== ===========
Diluted.................................................................... $ 1.24 $ 1.06
=========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING (NOTE I)
Basic...................................................................... 28,995 29,385
=========== ===========
Diluted.................................................................... 29,933 30,550
=========== ===========
DIVIDENDS PAID PER SHARE...................................................... $ .08 $ .07
=========== ===========
See notes to condensed consolidated financial statements.
-3-
M.D.C. HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months
Ended March 31,
2003 2002
----------- -----------
OPERATING ACTIVITIES
Net income........................................................ $ 37,037 $ 32,336
Adjustments to reconcile net income to net cash provided by (used in)
operating activities
Depreciation and amortization................................ 7,028 5,249
Deferred income taxes........................................ 994 2,702
Net changes in assets and liabilities
Home sales and other accounts receivable.............. (20,073) (3,129)
Homebuilding inventories.............................. (43,057) (75,136)
Prepaid expenses and other assets..................... (9,246) (8,455)
Mortgage loans held in inventory...................... 74,047 52,836
Accounts payable and accrued expenses.................. (11,210) (5,969)
Other, net................................................... (885) (4,642)
----------- -----------
Net cash provided by (used in) operating activities............... 34,635 (4,208)
----------- -----------
INVESTING ACTIVITIES
Net purchase of property and equipment............................ (1,565) (428)
----------- -----------
FINANCING ACTIVITIES
Lines of credit
Advances..................................................... 608,800 400,700
Principal payments........................................... (584,322) (405,509)
Dividend payments................................................. (2,120) (1,868)
Stock repurchases................................................. (26,731) - -
Proceeds from exercise of stock options........................... 434 3,622
----------- -----------
Net cash used in financing activities............................. (3,939) (3,055)
----------- -----------
Net increase (decrease) in cash and cash equivalents.............. 29,131 (7,691)
Cash and cash equivalents
Beginning of period.......................................... 28,942 36,600
----------- -----------
End of period................................................ $ 58,073 $ 28,909
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Three Months
Ended March 31,
2003 2002
----------- -----------
Cash paid during the period for
Interest..................................................... $ 7,973 $ 7,765
Income taxes................................................. $ 18,275 $ 4,004
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 March 31, 2003 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, 2002. Certain reclassifications
have been made in the 2002 financial statements to conform to the
classifications used in the current year.
The Company historically has experienced, and expects to continue to
experience, variability in quarterly results. The condensed consolidated
statements of income are not necessarily indicative of the results to be
expected for the full year.
B. Earnings Per Share
The basic and diluted earnings per share calculations are shown below
(in thousands, except per share amounts). Earnings per share and
weighted-average shares outstanding have been restated for all periods presented
to reflect the effect of a 10% stock dividend declared on April 28, 2003 (see
Note I).
Three Months
Ended March 31,
2003 2002
----------- -----------
Basic Earnings Per Share
Net income..................................................... $ 37,037 $ 32,336
=========== ===========
Basic weighted-average shares outstanding...................... 28,995 29,385
=========== ===========
Per share amounts.............................................. $ 1.28 $ 1.10
=========== ===========
Diluted Earnings Per Share
Net income..................................................... $ 37,037 $ 32,336
=========== ===========
Basic weighted-average shares outstanding...................... 28,995 29,385
Stock options, net............................................. 938 1,165
----------- -----------
Diluted weighted-average shares outstanding.................... 29,933 30,550
=========== ===========
Per share amounts.............................................. $ 1.24 $ 1.06
=========== ===========
C. Stockholders' Equity
Stock Repurchase Program - On March 24, 2003, the MDC board of
directors authorized the repurchase of up to an additional 1,350,000 shares of
MDC common stock, bringing the total authorization under this program to
4,350,000 shares. During the first quarter of 2003, the Company repurchased
727,100 shares of MDC common stock, bringing the total shares repurchased to
2,580,400 and leaving 1,769,600 shares available to be repurchased as of March
31, 2003 under this program. The
-5-
per share prices, including commissions, for
the 727,100 shares repurchased ranged from $35.96 to $39.03 with an average cost
of $36.76. At March 31, 2003, the Company held 5,913,000 shares of treasury
stock with an average purchase price of approximately $16 per share.
Stock-Based Compensation - The Company has elected to account for
stock-based compensation using the intrinsic value method as prescribed by
Accounting Principles Board Opinion ("APB") No. 25 and related interpretations
and, therefore, recorded no compensation expense in the determination of net
income in the first three months of both 2003 and 2002. The following table
illustrates the effect on net income and earnings per share if the fair value
method had been applied to all outstanding and unvested awards in the quarterly
periods ended March 31, 2003 and 2002.
Three Months Ended
March 31,
2003 2002
----------- -----------
Net income, as reported.............................................. $ 37,037 $ 32,336
Deduct stock-based compensation expense determined using the fair
value method, net of related tax effects.......................... (1,535) (1,782)
----------- -----------
Pro forma net income................................................. $ 35,502 $ 30,554
=========== ===========
Earnings per share
Basic as reported................................................. $ 1.28 $ 1.10
=========== ===========
Basic pro forma................................................... $ 1.23 $ 1.04
=========== ===========
Diluted as reported............................................... $ 1.24 $ 1.06
=========== ===========
Diluted pro forma................................................. $ 1.19 $ 1.00
=========== ===========
D. Interest Activity
The Company capitalizes interest incurred on its corporate and
homebuilding debt during the period of active development and through the
completion of construction of its homebuilding inventories. Corporate and
homebuilding interest incurred but not capitalized is reported as interest
expense. Interest incurred by the financial services segment is charged to
interest expense, which is deducted from interest income and reported as net
interest income in Note G. Interest activity, in total and by business segment,
is shown below (in thousands).
Three Months
Ended March 31,
2003 2002
---------- ----------
Total Interest Incurred
Corporate and homebuilding................................................. $ 7,052 $ 4,041
Financial services......................................................... 570 397
---------- ----------
Total interest incurred.................................................... $ 7,622 $ 4,438
========== ==========
Corporate/Homebuilding Interest Capitalized
Interest capitalized in homebuilding inventory, beginning of period........ $ 17,783 $ 17,358
Interest incurred.......................................................... 7,052 4,041
Interest expense........................................................... - - - -
Previously capitalized interest included in cost of sales.................. (4,803) (4,462)
---------- ----------
Interest capitalized in homebuilding inventory, end of period.............. $ 20,032 $ 16,937
========== ==========
Financial Services Net Interest Income
Interest income............................................................ $ 1,578 $ 1,405
Interest expense........................................................... (570) (397)
---------- ----------
Net interest income........................................................ $ 1,008 $ 1,008
========== ==========
-6-
E. 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"). 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 and to $593,000,000 in December 2002. In January 2003,
the Company received an additional $7,000,000 lender commitment, bringing total
commitments to $600,000,000. Pursuant to the terms of the Second Amended and
Restated Credit Agreement, a term-out of this credit may commence prior to July
29, 2006 under certain circumstances. At March 31, 2003, $90,000,000 was
borrowed and $20,231,000 in letters of credit were outstanding under the
Homebuilding Line.
Mortgage Lending - In June 2002, the Company received $25,000,000 in
additional commitments on its mortgage lending bank line of credit (the
"Mortgage Line"), increasing the borrowing limit to $125,000,000 from
$100,000,000. In August 2002, the terms of the Mortgage Line were amended to
allow for a $50,000,000 increase in the borrowing limit to a maximum of
$175,000,000, subject to concurrence by the participating banks. The terms of
the Mortgage Line are set forth in a Second Amended and Restated Warehousing
Credit Agreement dated as of September 9, 2002. In December 2002, the Company
received commitments to temporarily increase the borrowing limit to the maximum
of $175,000,000. The temporary increase terminated on February 14, 2003.
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 March 31, 2003, $88,552,000 was borrowed and an
additional $12,046,000 was collateralized and available to be borrowed. The
Mortgage Line is cancelable upon 120 days notice.
F. Warranty Reserves
Warranty reserves are reviewed quarterly, using historical data and
other relevant information, to determine the reasonableness and adequacy of both
the reserve and the per unit reserve amount originally included in cost of
sales, as well as the timing of the reversal of the reserve. Warranty reserves
are included in corporate and homebuilding accounts payable and accrued expenses
in the condensed consolidated balance sheets and totaled $45,740,000 and
$38,384,000, respectively, at March 31, 2003 and 2002. The first quarter 2003
warranty expense increased, compared with the same period in 2002, primarily in
Colorado due to costs incurred in connection with moisture intrusion and related
mold concerns. Reserves carried over from prior years primarily are the result
of the Company's volume of homes closed increasing by over 300% in the last ten
years, giving rise to continuing warranty reserves that exceed current
expenditures. In addition, the carryover includes additional qualified
settlement fund warranty reserves created pursuant to litigation settled in
1996. Warranty activity for the quarters ended March 31, 2003 and 2002 is shown
below (in thousands).
Three Months Ended
March 31,
2003 2002
------------ ------------
Warranty reserve balance at beginning of period............ $ 44,743 $ 38,430
Warranty expense provided.................................. 8,045 3,402
Payments................................................... (7,048) (3,448)
------------- -------------
Warranty reserve balance at end of period.................. $ 45,740 $ 38,384
============ ============
-7-
G. 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
Ended March 31,
2003 2002
----------- -----------
Homebuilding
Revenues
Home sales....................................................... $ 553,575 $ 445,167
Land sales....................................................... 123 - -
Other revenues................................................... 1,214 1,594
----------- -----------
Total Homebuilding Revenues........................................ 554,912 446,761
----------- -----------
Home cost of sales............................................... 427,602 341,061
Land cost of sales............................................... 87 - -
Marketing expenses............................................... 33,600 25,663
General and administrative expenses.............................. 29,165 22,193
----------- -----------
490,454 388,917
Homebuilding Operating Profit................................. 64,458 57,844
----------- -----------
Financial Services
Revenues
Net interest income.............................................. 1,008 1,008
Origination fees................................................. 4,660 4,229
Gains on sales of mortgage servicing............................. 834 471
Gains on sales of mortgage loans, net............................ 7,342 3,461
Mortgage servicing and other..................................... 669 212
----------- -----------
Total Financial Services Revenues.................................. 14,513 9,381
General and Administrative Expenses................................ 6,946 4,351
----------- -----------
Financial Services Operating Profit........................... 7,567 5,030
----------- -----------
Total Operating Profit................................................ 72,025 62,874
----------- -----------
Corporate
Interest and other revenues...................................... 217 232
General and administrative expenses.............................. (11,476) (10,060)
----------- -----------
Net Corporate Expenses........................................ (11,259) (9,828)
----------- -----------
Income Before Income Taxes............................................ $ 60,766 $ 53,046
=========== ===========
H. Commitments and Contingencies
The Company is often required to obtain bonds and letters of credit in
support of its related obligations with respect to subdivision improvement,
homeowners association dues and start-up expenses, warranty work, contractors
license fees, earnest money deposits, etc. At March 31, 2003, MDC had
outstanding approximately $24,273,000 and $212,743,000 of letters of credit and
performance bonds, respectively. In the event any such bonds or letters of
credit are called, MDC would be obligated to reimburse the issuer of the bond or
letter of credit. However, the Company does not believe that any currently
outstanding bonds or letters of credit will be unexpectedly called.
-8-
I. Subsequent Event
On April 28, 2003, MDC's board of directors approved the payment of a
10% stock dividend, which will be distributed on May 27, 2003 to shareowners of
record on May 12, 2003. In accordance with the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 128 "Earnings per
Share", basic and diluted net income per share amounts and weighted-average
shares outstanding have been restated for all periods presented to reflect the
effect of this stock dividend.
J. Supplemental Guarantor Information
The Company's senior notes are fully and 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., Richmond American Homes of Colorado, Inc.,
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 (collectively, the
"Guarantor Subsidiaries"). Non-guarantor subsidiaries primarily consist of
HomeAmerican Mortgage Corporation, American Home Title and Escrow Company,
American Home Insurance Agency, Inc., Lion Insurance Company and StarAmerican
Insurance Ltd. (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.
-9-
M.D.C. Holdings, Inc.
Supplemental Combining Balance Sheet
March 31, 2003
(In thousands)
(Unaudited)
Non-
Guarantor Guarantor Eliminating
ASSETS MDC Subsidiaries Subsidiaries Entries Total
----------- ----------- ----------- ----------- -----------
Corporate
Cash and cash equivalents............... $ 51,832 $ - - $ - - $ - - $ 51,832
Investments in and advances to
parent and subsidiaries............... 190,231 242 7,018 (197,491) - -
Other assets............................ 47,315 - - (2,050) - - 45,265
----------- ----------- ----------- ----------- -----------
289,378 242 4,968 (197,491) 97,097
----------- ----------- ----------- ----------- -----------
Homebuilding
Cash and cash equivalents............... - - 4,426 264 - - 4,690
Home sales and other accounts
receivable............................ - - 31,068 157 (7,633) 23,592
Inventories, net
Housing completed or under construction - - 634,677 - - - - 634,677
Land and land under development....... - - 643,698 - - - - 643,698
Other assets............................ - - 52,366 17,816 - - 70,182
----------- ----------- ----------- ----------- -----------
- - 1,366,235 18,237 (7,633) 1,376,839
----------- ----------- ----------- ----------- -----------
Financial Services - - - - 143,303 - - 143,303
----------- ----------- ----------- ----------- -----------
Total Assets...................... $ 289,378 $ 1,366,477 $ 166,508 $ (205,124) $ 1,617,239
=========== =========== =========== =========== ===========
LIABILITIES
Corporate
Accounts payable and accrued expenses. $ 48,123 $ - - $ 112 $ - - $ 48,235
Advances and notes payable - parent and
subsidiaries.......................... (988,212) 973,306 14,906 - - - -
Income taxes payable.................... 5,549 17,749 2,733 - - 26,031
Senior notes, net....................... 323,035 - - - - - - 323,035
----------- ----------- ----------- ------------ -----------
(611,505) 991,055 17,751 - - 397,301
----------- ----------- ----------- ------------ -----------
Homebuilding
Accounts payable and accrued expenses.. - - 199,963 4,687 - - 204,650
Lines of credit......................... 90,000 - - - - - - 90,000
----------- ----------- ----------- ------------ -----------
90,000 199,963 4,687 - - 294,650
----------- ----------- ----------- ------------ -----------
Financial Services - - - - 116,726 (7,633) 109,093
----------- ----------- ----------- ------------ -----------
Total Liabilities................. (521,505) 1,191,018 139,164 (7,633) 801,044
----------- ----------- ----------- ------------ -----------
STOCKHOLDERS' EQUITY...................... 810,883 175,459 27,344 (197,491) 816,195
----------- ----------- ----------- ------------ -----------
Total Liabilities and
Stockholders' Equity............ $ 289,378 $ 1,366,477 $ 166,508 $ (205,124) $ 1,617,239
=========== =========== =========== ============= ===========
-10-
M.D.C. Holdings, Inc.
Supplemental Combining Balance Sheet
December 31, 2002
(In thousands)
Non-
Guarantor Guarantor Eliminating
ASSETS MDC Subsidiaries Subsidiaries Entries Total
----------- ----------- ----------- ----------- ------------
Corporate
Cash and cash equivalents............... $ 23,164 $ - - $ - - $ - - $ 23,164
Investments in and advances to parent
and subsidiaries...................... 345,214 774 (2,645) (343,343) - -
Other assets ........................... 49,017 - - (2,173) - - 46,844
----------- ----------- ----------- ----------- ------------
417,395 774 (4,818) (343,343) 70,008
----------- ----------- ----------- ----------- ------------
Homebuilding
Cash and cash equivalents............... - - 4,171 515 - - 4,686
Home sales and other accounts receivable - - 3,317 202 - - 3,519
Inventories, net
Housing completed or under construction - - 578,475 - - - - 578,475
Land and land under development....... - - 656,843 - - - - 656,843
Other assets............................ - - 48,168 17,768 - - 65,936
----------- ----------- ----------- ----------- ------------
- - 1,290,974 18,485 - - 1,309,459
----------- ----------- ----------- ----------- ------------
Financial services......................... - - - - 215,713 - - 215,713
----------- ----------- ----------- ----------- ------------
Total Assets...................... $ 417,395 $ 1,291,748 $ 229,380 $ (343,343) $ 1,595,180
=========== =========== =========== =========== ============
LIABILITIES
Corporate
Accounts payable and accrued expenses. $ 63,772 $ - - $ 99 $ - - $ 63,871
Advances and notes payable - parent and
subsidiaries.......................... (673,479) 658,804 14,675 - - - -
Income taxes payable.................... (90,854) 108,829 3,596 - - 21,571
Senior notes, net....................... 322,990 - - - - - - 322,990
----------- ----------- ----------- ------------ ------------
(377,571) 767,633 18,370 - - 408,432
----------- ----------- ----------- ------------ ------------
Homebuilding
Accounts payable and accrued expenses. - - 204,615 5,986 - - 210,601
Line of credit.......................... - - - - - - - - - -
----------- ----------- ----------- ------------ ------------
- - 204,615 5,986 - - 210,601
----------- ----------- ----------- ------------ ------------
Financial Services........................ - - - - 175,580 - - 175,580
----------- ----------- ----------- ------------ ------------
Total Liabilities................. (377,571) 972,248 199,936 - - 794,613
----------- ----------- ----------- ------------ ------------
STOCKHOLDERS' EQUITY...................... 794,966 319,500 29,444 (343,343) 800,567
----------- ----------- ----------- ------------ ------------
Total Liabilities and
Stockholders' Equity............ $ 417,395 $ 1,291,748 $ 229,380 $ (343,343) $ 1,595,180
=========== =========== =========== ============ ============
-11-
M.D.C. Holdings, Inc.
Supplemental Combining Statements of Income
(In thousands)
(Unaudited)
Three Months Ended March 31, 2003
Non-
Guarantor Guarantor Eliminating
MDC Subsidiaries Subsidiaries Entries Total
----------- ----------- ----------- ----------- ------------
REVENUES
Homebuilding............................. $ - - $ 554,232 $ 756 $ (76) $ 554,912
Financial Services....................... - - - - 14,513 - - 14,513
Corporate................................ 207 - - 10 - - 217
Equity in earnings of subsidiaries....... 32,748 - - - - (32,748) - -
----------- ----------- ----------- ----------- ------------
Total Revenues..................... 32,955 554,232 15,279 (32,824) 569,642
----------- ----------- ----------- ----------- ------------
COSTS AND EXPENSES
Homebuilding............................. (35) 509,324 45 (18,880) 490,454
Financial Services....................... - - - - 6,946 - - 6,946
Corporate general and administrative..... 11,476 - - - - - - 11,476
Corporate and homebuilding interest...... (18,880) - - - - 18,880 - -
----------- ----------- ----------- ----------- ------------
Total Expenses...................... (7,439) 509,324 6,991 - - 508,876
----------- ----------- ----------- ----------- ------------
Income before income taxes............... 40,394 44,908 8,288 (32,824) 60,766
Provision for income taxes............... (2,765) (17,749) (3,215) - - (23,729)
----------- ----------- ----------- ----------- ------------
NET INCOME.................................. $ 37,629 $ 27,159 $ 5,073 $ (32,824) $ 37,037
=========== =========== =========== ===========- ============
Three Months Ended March 31, 2002
Non-
Guarantor Guarantor Eliminating
MDC Subsidiaries Subsidiaries Entries Total
----------- ----------- ----------- ----------- ------------
REVENUES
Homebuilding............................. $ - - $ 445,798 $ 1,029 $ (66) $ 446,761
Financial Services....................... - - - - 9,381 - - 9,381
Corporate................................ 226 - - 6 - - 232
Equity in earnings of subsidiaries....... 35,751 - - - - (35,751) - -
----------- ----------- ----------- ----------- ------------
Total Revenues..................... 35,977 445,798 10,416 (35,817) 456,374
----------- ----------- ----------- ----------- ------------
COSTS AND EXPENSES
Homebuilding............................. (67) 393,662 207 (4,885) 388,917
Financial Services....................... - - - - 4,351 - - 4,351
Corporate general and administrative..... 10,060 - - - - - - 10,060
Corporate and homebuilding interest...... (4,885) - - - - 4,885 - -
----------- ----------- ----------- ----------- ------------
Total Expenses...................... 5,108 393,662 4,558 - - 403,328
----------- ----------- ----------- ----------- ------------
Income before income taxes............... 30,869 52,136 5,858 (35,817) 53,046
Provision for income taxes............... 2,353 (20,781) (2,282) - - (20,710)
----------- ----------- ----------- ----------- ------------
NET INCOME.................................. $ 33,222 $ 31,355 $ 3,576 $ (35,817) $ 32,336
=========== =========== =========== =========== ============
-12-
M.D.C. Holdings, Inc.
Supplemental Combining Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended March 31, 2003
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities..................... $ 3,100 $ (51,776) $ 83,387 $ (76) $ 34,635
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities....... (510) (781) (274) - - (1,565)
------------ ------------ ------------ ------------ ------------
Financing activities
Net increase (reduction) in borrowings from
parent and subsidiaries.................. (35,429) 52,812 (17,383) - - - -
Lines of credit
Advances............................... 608,800 - - - - - - 608,800
Principal payments..................... (518,800) - - (65,522) - - (584,322)
Dividend payments........................... (2,196) - - - - 76 (2,120)
Stock repurchases........................... (26,731) - - - - - - (26,731)
Proceeds from exercise of stock options..... 434 - - - - - - 434
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities............................... 26,078 52,812 (82,905) 76 (3,939)
------------ ------------ ------------- ------------ ------------
Net increase in cash and cash equivalents... 28,668 255 208 - - 29,131
Cash and cash equivalents
Beginning of year........................ 23,164 4,171 1,607 - - 28,942
------------ ------------ ------------ ------------ ------------
End of year.............................. $ 51,832 $ 4,426 $ 1,815 $ - - $ 58,073
============ ============ ============ ============ ============
Three Months Ended March 31, 2002
Non-
Guarantor Guarantor Eliminating Consolidated
MDC Subsidiaries Subsidiaries Entries MDC
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities..................... $ (5,714) $ (60,423) $ 61,995 $ (66) $ (4,208)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities............................... 327 (736) (19) - - (428)
------------ ------------ ------------ ------------ ------------
Financing activities
Net increase (reduction) in borrowings from
parent and subsidiaries.................. (54,358) 61,525 (7,167) - - - -
Lines of credit
Advances............................... 400,700 - - - - - - 400,700
Principal payments..................... (350,700) - - (54,809) - - (405,509)
Dividend payments........................... (1,934) - - - - 66 (1,868)
Proceeds from exercise of stock options..... 3,622 - - - - - - 3,622
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities............................... (2,670) 61,525 (61,976) 66 (3,055)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents.............................. (8,057) 366 0 - - (7,691)
Cash and cash equivalents
Beginning of year........................ 31,322 4,352 926 - - 36,600
------------ ------------ ------------ ------------ ------------
End of year.............................. $ 23,265 $ 4,718 $ 926 $ - - $ 28,909
============ ============ ============ ============ ============
-13-
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; American Home Title and Escrow Company ("American Home
Title"), which provides title agency services; and American Home Insurance
Agency, Inc. ("American Home Insurance"), which offers insurance to MDC's home
buyers.
RESULTS OF OPERATIONS
The table below summarizes MDC's results of operations (in thousands,
except per share amounts). Earnings per share have been restated for all periods
presented to reflect the effect of a 10% stock dividend declared on April 28,
2003 (see Note I to the Company's Condensed Consolidated Financial Statements).
Three Months
Ended March 31,
2003 2002
---------- -----------
Revenues............................................................... $ 569,642 $ 456,374
Income Before Income Taxes............................................. $ 60,766 $ 53,046
Net Income............................................................. $ 37,037 $ 32,336
Earnings Per Share
Basic............................................................... $ 1.28 $ 1.10
Diluted............................................................. $ 1.24 $ 1.06
Revenues for the first quarter of 2003 increased by $113,268,000, or
25%, compared with the same period in 2002, primarily due to increased home
closings. This includes an increase in revenues from the financial services
segment of $5,132,000, or 55%, primarily resulting from higher gains on sales of
mortgage loans.
Income before income taxes increased 15% in the first quarter of 2003,
compared with the first quarter of 2002. This increase was a result of record
first quarter operating profits from both the homebuilding and financial
services operations. The increase in homebuilding segment profits primarily
resulted from the factors contributing to the increase in revenues described
above, partially offset by lower Home Gross Margins (as defined below).
Financial services segment profits increased primarily due to higher gains on
sales of mortgage loans and increased origination fee income, partially offset
by higher general and administrative expenses resulting from HomeAmerican's
expanded loan origination activity.
-14-
Homebuilding Segment
The table below sets forth information relating to the Company's
homebuilding segment (dollars in thousands).
Three Months
Ended March 31,
2003 2002
-------------- --------------
Home Sales Revenues............................... $ 553,575 $ 445,167
Operating Profit.................................. $ 64,458 $ 57,844
Average Selling Price Per Home Closed............. $ 263.6 $ 265.9
Home Gross Margins................................ 22.8% 23.4%
Home Gross Margins Excluding Interest............. 23.7% 24.4%
Orders For Homes, net (units)
Colorado................................... 671 1,001
California................................. 530 591
Nevada..................................... 583 207
Arizona.................................... 924 670
Utah....................................... 93 - -
Texas...................................... 50 - -
Virginia................................... 403 242
Maryland................................... 111 65
-------------- --------------
Total................................ 3,365 2,776
============== ==============
Homes Closed (units)
Colorado................................... 609 609
California................................. 428 292
Nevada..................................... 273 141
Arizona.................................... 571 438
Utah....................................... 40 - -
Texas...................................... 10 - -
Virginia................................... 102 130
Maryland................................... 67 64
-------------- --------------
Total................................ 2,100 1,674
============== ==============
March 31, December 31, March 31,
2003 2002 2002
------------- -------------- -------------
Backlog (units)
Colorado................................... 1,019 957 1,587
California................................. 1,024 922 789
Nevada..................................... 660 350 247
Arizona.................................... 1,429 1,076 857
Utah....................................... 103 50 - -
Texas...................................... 56 16 - -
Virginia................................... 777 476 346
Maryland................................... 232 188 158
-------------- -------------- --------------
Total................................ 5,300 4,035 3,984
============== ============== ==============
Backlog Estimated Sales Value..................... $ 1,400,000 $ 1,120,000 $ 1,050,000
============== ============== ==============
Average Sales Price in Backlog.................... $ 264.2 $ 277.6 $ 263.6
============== ============== ==============
-15-
March 31, December 31, March 31,
2003 2002 2002
------------- -------------- -------------
Active Subdivisions
Colorado................................... 62 61 63
California................................. 22 24 25
Nevada..................................... 23 18 9
Arizona.................................... 46 44 36
Utah....................................... 7 4 - -
Texas...................................... 4 1 - -
Virginia................................... 32 20 13
Maryland................................... 8 6 4
-------------- -------------- --------------
Total................................ 204 178 150
============== ============== ==============
Home Sales Revenues - Home sales revenues for the quarter ended March
31, 2003 were 24% higher than home sales revenues for the same period in 2002.
The improved revenues primarily were a result of increased home closings,
partially offset by a decrease in average selling price, as discussed below.
Homes Closed - Home closings in the first quarter of 2003 were 25%
higher than the same period in 2002. Closings increased in the first three
months of 2003, compared with the same period in 2002, in (1) Nevada and Arizona
(increases of 94% and 30%, respectively), where home orders particularly were
strong in the second half of 2002 as a result of increases in active
subdivisions; and (2) Southern and Northern California (increases of 57% and
28%, respectively), primarily due to the strong demand for new homes in these
markets. In addition, the Company closed 50 homes in its new markets in Utah and
Texas in the first quarter of 2003.
Average Selling Price Per Home Closed - The average selling price per
home closed in the first quarter of 2003 was $263,600, compared with $265,900
for the same period in 2002. The decrease in average selling price primarily was
due to a greater percentage of homes closed in Nevada, Phoenix, Utah and Texas,
where the average sales price of homes is lower than the Company average.
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 were 22.8% for
the quarter ended March 31, 2003, compared with 23.4% for the same period in
2002. The decrease in 2003 primarily was due to (1) increased warranty costs in
Colorado and Northern California, including costs incurred in connection with
moisture intrusion and related mold concerns; (2) increased incentives in
Colorado due to the more challenging economic conditions experienced in this
market; and (3) homes closed in Utah and Texas with a lower Home Gross Margin
than the Company average. The impact of these decreases in Home Gross Margins
partially was offset by reductions in previous estimates of costs to complete
land development in Southern California.
Future Home Gross Margins may be impacted adversely by the previously
mentioned factors, as well as (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 - The Company received 3,365 orders for
homes during the first quarter of 2003, 21% greater than the 2,776 home orders
received in the first quarter of 2002. Home
-16-
orders during the first quarter of 2003 particularly were strong in Nevada,
Maryland, Virginia and Arizona (up 182%, 71%, 67% and 38%, respectively), aided
by year-over-year increases in the number of active subdivisions and a continued
strong demand for new homes in these markets. In addition, the Company received
143 home orders in its new markets in Utah and Texas in the first quarter of
2003. Home orders were lower in Colorado on a comparable number of active
subdivisions, primarily due to the market's more challenging economic
environment.
Homes under contract but not yet delivered ("Backlog") at March 31,
2003 was 5,300 units with an estimated sales value of $1,400,000,000, compared
with a Backlog of 3,984 units with an estimated sales value of $1,050,000,000 at
March 31, 2002. Assuming no significant change in market conditions or mortgage
interest rates, the Company expects approximately 80% of its March 31, 2003
Backlog to close under existing sales contracts during the remainder of 2003.
The remaining 20% 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 $33,600,000 for the first quarter of 2003, compared with
$25,663,000 for the same period in 2002. The increase in the 2003 first quarter
primarily was due to (1) higher sales commissions resulting from the Company's
increased home sales revenues; (2) higher product advertising and deferred
marketing amortization, primarily as a result of the increased number of active
subdivisions during the first quarter of 2003, compared with the first quarter
of 2002; and (3) increased sales overhead resulting from the Company's expanding
home sales activities.
General and Administrative - General and administrative expenses
increased to $29,165,000 during the first quarter of 2003, compared with
$22,193,000 during the same period in 2002, primarily due to increased
compensation and other costs associated with expanded operations in most of the
Company's markets, most notably Nevada, Phoenix, Virginia, Southern California,
Texas and Utah.
Title Operations - American Home Title provides title agency services
to MDC home buyers in Virginia, Maryland and Colorado. The Company is evaluating
opportunities to provide title agency services in its other markets. Income
before income taxes from title operations was $459,000 for the quarter ended
March 31, 2003, compared with $469,000 for the same period in 2002.
New Homebuilding Divisions
In February 2002, the Company expanded into the Dallas/Fort Worth
market by hiring a division president to manage the start-up operation. During
2002 and the first quarter of 2003, the Company acquired control of over 850
lots in ten subdivisions in this market. In the 2003 first quarter, this
division received 50 home orders and closed ten homes.
In April 2002, one of the Company's subsidiaries 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. In the 2003 first quarter, this division received 93 home orders
and closed 40 homes.
-17-
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).
March 31, December 31, March 31,
2003 2002 2002
----------- ----------- -----------
Colorado........................................ $ 139,499 $ 140,930 $ 159,007
California...................................... 142,516 154,980 130,772
Nevada.......................................... 110,982 114,142 53,226
Arizona......................................... 88,459 92,639 83,700
Utah............................................ 13,083 12,984 - -
Texas........................................... 5,773 5,559 - -
Virginia........................................ 111,756 113,717 60,804
Maryland........................................ 31,630 21,892 19,027
----------- ----------- -----------
Total...................................... $ 643,698 $ 656,843 $ 506,536
=========== =========== ===========
Total Lots Owned (excluding lots in
work-in-process).............................. 16,054 16,962 14,354
Total Lots Controlled Under Option.............. 6,813 6,995 5,559
----------- ----------- -----------
Total Lots Owned and Controlled (excluding
lots in work-in-process).................. 22,867 23,957 19,913
=========== =========== ===========
Total Cash Option Deposits...................... $ 17,078 $ 18,007 $ 10,912
=========== =========== ===========
Financial Services Segment
The table below sets forth information relating to the Company's
financial services segment (in thousands).
Three Months
Ended March 31,
2003 2002
----------- -----------
Mortgage loan origination fees.............................. $ 4,660 $ 4,229
Gains on sales of mortgage servicing, net................... $ 834 $ 471
Gains on sales of mortgage loans, net....................... $ 7,342 $ 3,461
Operating Profit............................................ $ 7,567 $ 5,030
Principal amount of loan originations
MDC home buyers........................................ $ 315,022 $ 250,888
Spot................................................... 3,749 9,529
----------- -----------
Total.............................................. $ 318,771 $ 260,417
=========== ===========
Principal amount of loans brokered
MDC home buyers........................................ $ 45,325 $ 43,602
Spot................................................... 538 1,608
----------- -----------
Total.............................................. $ 45,863 $ 45,210
=========== ===========
Capture Rate................................................ 71% 73%
=========== ===========
Including brokered loans............................... 81% 83%
=========== ===========
-18-
Financial services operating profit for the first quarter of 2003
increased, compared with the same period in 2002, primarily due to higher gains
on sales of mortgage loans and increased origination fee income, partially
offset by higher general and administrative expenses resulting from
HomeAmerican's expanded loan origination activity. HomeAmerican's originated
loans increased by $58,354,000 in the first quarter of 2003, compared with the
same period in 2002. This improvement primarily was due to an increase in homes
closed by the homebuilding segment.
Mortgage loans originated by HomeAmerican for MDC home buyers as a
percentage of total MDC home closings ("Capture Rate") was 71% for the first
quarter of 2003, compared with 73% for the same period in 2002. 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. The Capture Rate
including brokered loans was 81% for the quarter ended March 31, 2003, compared
with 83% for the quarter ended March 31, 2002.
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 to fluctuations in interest
rates on its fixed-rate mortgage loans owned and rate-locked mortgage loans in
the pipeline.
Insurance Operations - American Home Insurance provides homeowners,
auto and other types of casualty insurance in each of MDC's markets. The results
of its operations were not material for any of the periods presented.
Other Operating Results
Interest Expense - The Company capitalizes interest incurred on its
corporate and homebuilding debt during the period of active development and
through the completion of construction of its homebuilding inventories.
Corporate and homebuilding interest incurred but not capitalized is reported as
interest expense. Interest incurred by the financial services segment is charged
to interest expense, which is deducted from interest income and reported as net
interest income in Note G to the Company's Condensed Consolidated Financial
Statements. For a reconciliation of interest incurred, capitalized and expensed,
see Note D to the Company's Condensed Consolidated Financial Statements.
Corporate General and Administrative Expenses - Corporate general and
administrative expenses totaled $11,476,000 during the first quarter of 2003,
compared with $10,060,000 during the first quarter of 2002. The increase in 2003
primarily was due to increased expenditures for information technology, as the
Company is focusing on improving its systems in preparation for the growth of
its homebuilding and financial services operations.
Income Taxes - MDC's overall effective income tax rate of 39% for the
first quarter of 2003 and 2002 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 homebuilding inventories; (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
-19-
sources. The Company currently has an effective registration statement that
would allow the Company to issue up to $600,000,000 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 "8 3/8%
Senior Notes"), 7% senior notes due 2012 (the "7% 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 capacity 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 and expansion into new markets. 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 capital and credit markets occur as a
result of the various risk factors described elsewhere in this report. See
"Forward-Looking Statements" below.
Lines of Credit and Other
Homebuilding - 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 and to $593,000,000 in December 2002. In January 2003,
the Company received an additional $7,000,000 lender commitment, bringing total
commitments to $600,000,000. Pursuant to the terms of the Second Amended and
Restated Credit Agreement, a term-out of this credit may commence prior to July
29, 2006 under certain circumstances. At March 31, 2003, $90,000,000 was
borrowed and $20,231,000 in letters of credit were outstanding under the
Homebuilding Line.
Mortgage Lending - In June 2002, the Company received $25,000,000 in
additional commitments on its Mortgage Line, increasing the borrowing limit to
$125,000,000 from $100,000,000. In August 2002, the terms of the Mortgage Line
were amended to allow for a $50,000,000 increase in the borrowing limit to a
maximum of $175,000,000, subject to concurrence by the participating banks. The
terms of the Mortgage Line are set forth in a Second Amended and Restated
Warehousing Credit Agreement dated as of September 9, 2002. In December 2002,
the Company received commitments to temporarily increase the borrowing limit to
the maximum of $175,000,000. The temporary increase terminated on February 14,
2003. 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 March 31, 2003, $88,552,000 was borrowed and
an additional $12,046,000 was collateralized and available to be borrowed. The
Mortgage Line is cancelable upon 120 days notice.
General - The agreements for the Company's bank lines of credit and the
indentures for the Company's senior notes require compliance with certain
representations, warranties and covenants. The Company believes that it is in
compliance with these representations, warranties and covenants. The agreements
for the bank lines of credit and the indentures for the Company's 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, 2002.
-20-
The financial covenants contained in 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 (1) $491,382,000; (2) 50% of "consolidated net income," as defined,
of the "borrower," as defined, and the "guarantors," as defined, after December
31, 2001; and (3) 50% of the net proceeds or other consideration received for
the issuance of capital stock. In addition, "adjusted consolidated tangible net
worth," as defined, must not be less than $307,114,000.
The Company's senior notes indentures do not contain financial
covenants. However, there are covenants in the 8 3/8% Senior Notes indenture
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
8 3/8% Senior Notes. The senior notes are not secured. In December 2001, the
Company amended its 8 3/8% Senior Notes indenture to provide for the full and
unconditional guarantee of the senior notes on an unsecured basis, jointly and
severally, by most of the Company's homebuilding segment subsidiaries. The
Company's 7% Senior Notes also are fully and unconditionally guaranteed on an
unsecured basis, jointly and severally, by most of the Company's homebuilding
segment subsidiaries.
MDC Common Stock Repurchase Programs
On March 24, 2003, the MDC board of directors authorized the repurchase
of up to an additional 1,350,000 shares of MDC common stock, bringing the total
authorization under this program to 4,350,000 shares. During the first quarter
of 2003, the Company repurchased 727,100 shares of MDC common stock, bringing
the total shares repurchased to 2,580,400 and leaving 1,769,600 shares available
to be repurchased as of March 31, 2003 under this program. The per share prices,
including commissions, for the 727,100 shares repurchased ranged from $35.96 to
$39.03 with an average cost of $36.76. At March 31, 2003, the Company held
5,913,000 shares of treasury stock with an average purchase price of
approximately $16 per share.
Consolidated Cash Flow
During the first quarter of 2003, the Company generated cash of
$34,635,000 from its operating activities, as net income during the period and
the sale of mortgage loans provided cash that more than offset increases in net
homebuilding assets in conjunction with the Company's expanded homebuilding
operations. The net cash provided by operating activities and an increase in the
Company's lines of credit provided for the repurchase of MDC common stock for
$26,731,000 and the payment of $2,120,000 in dividends and resulted in an
increase in cash and cash equivalents on hand by $29,131,000.
During the first quarter of 2002, the Company used $4,208,000 of cash
in its operating activities. Cash provided by net income for the period and the
sale of mortgage loans was more than offset by an increase in homebuilding
inventories in support of the Company's expanding homebuilding activities. The
Company financed these net operating cash requirements primarily through a
reduction in cash and cash equivalents on hand.
-21-
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 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. 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 held in inventory and commitments to
originate mortgage loans. Such contracts are the only significant financial
derivative instruments utilized by MDC.
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 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. Due to uncertainties in the estimation process, it is at least
reasonably possible that actual results could differ from those estimates. The
Company has determined that its critical accounting policies, or those policies
that require significant use of judgment and estimates in their application, are
those related to (1) homebuilding inventory valuation; (2) estimates to complete
land development and home construction; (3) warranty costs; and (4) litigation
reserves.
Homebuilding Inventory Valuation - Homebuilding inventories under
development and construction are carried at cost unless facts and circumstances
indicate that the carrying value of the underlying projects may be impaired.
Impairment is determined by comparing the estimated future cash flows
(undiscounted and without interest charges) from an individual project to its
carrying value. If such cash flows are less than the project's carrying value,
the carrying value of the project is written down to its fair value.
Homebuilding inventories held for sale are carried at the lower of cost or fair
value, less selling costs, and are evaluated on an individual asset basis. Fair
value is determined by management estimate and incorporates anticipated future
revenues and costs.
Estimates to Complete Land Development and Home Construction - Home
sales revenue is recognized when a home is closed. In order to properly match
revenues with expenses, an estimation must be made by the Company as to certain
construction and land development costs incurred but not yet paid at the time of
closing. Estimated costs to complete a home are determined for each closed home
based upon historical data with respect to similar product types and
geographical areas.
-22-
Warranty Costs - Warranty reserves are established as homes close on a
per-unit basis in an amount estimated to be adequate to cover expected
warranty-related costs for materials and outside labor to be incurred during the
warranty period. Reserves are determined based upon historical data with respect
to similar product types and geographical areas.
Litigation Reserves - The Company and certain of its subsidiaries have
been named as defendants in various cases arising in the normal course of
business. The Company has reserved for costs to be incurred with respect to
these cases based upon information provided by its legal counsel.
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, 2002, 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
performance bonds and 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.
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. 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
-23-
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
refinance such debt.
As of March 31, 2003, short-term debt was $88,552,000, 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 value at March 31, 2003 are as follows (in
thousands).
Maturities through December 31, Estimated
---------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total Fair Value
------------------------------------------------------------------------------------
Fixed Rate Debt............ $ - - $ - - $ - - $ - - $ - - $ 325,000 $ 325,000 $ 339,489
Average Interest Rate (units) - - - - - - - - - - 7.74% 7.74%
Variable Rate Debt......... $ - - $ - - $ - - $ 90,000 $ - - $ - - $ 90,000 $ 90,000
Average Interest Rate... - - - - - - 2.78% - - - - 2.78%
The Company believes that its overall balance sheet structure has
repricing and cash flow characteristics that mitigate the impact of interest
rate changes.
ITEM 4. CONTROLS AND PROCEDURES.
Management of MDC recognizes its responsibility for maintaining
effective and efficient internal controls and disclosure controls (the controls
and procedures by which the Company ensures that information disclosed in annual
and quarterly reports filed with the Securities and Exchange Commission ("SEC")
is accurately processed, summarized and reported within the required time
period). MDC has procedures in place for gathering the information that is
needed to enable the Company to file required reports with the SEC. The Company
has a group of officers who are responsible for reviewing all quarterly and
annual SEC reports. This group consists of most of MDC's senior management,
including its chief financial officer, general counsel, treasurer, and
homebuilding and mortgage lending presidents and vice presidents of finance.
An evaluation of the effectiveness of the design and operation of
the Company's disclosure controls and procedures was performed under the
supervision, and with the participation, of the Company's management, including
the chief executive officer and the chief financial officer. This evaluation was
performed within 90 days of filing this report on Form 10-Q. Based on that
evaluation, the Company's management, including the chief executive officer and
chief financial officer, concluded that the Company's disclosure controls and
procedures were effective as of March 31, 2003. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to March 31, 2003.
-24-
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, including moisture intrusion and
related mold claims. 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.
------ ----------------------------------------------
At the Company's shareowners meeting on April 28, 2003, Messrs. Steven
J. Borick, David D. Mandarich and David E. Blackford were elected as Class III
Directors for three-year terms expiring in 2006. Also at the meeting, the
shareowners approved an amendment to the M.D.C. Holdings, Inc. 2001 Equity
Incentive Plan (the "Equity Incentive Plan") that increased by 1,000,000 the
number of shares of MDC common stock authorized for issuance under the Equity
Incentive Plan.
ITEM 5. OTHER INFORMATION.
------ -----------------
At the Company's board of directors meeting on April 28, 2003, a cash
dividend of nine cents per share for the quarter ended March 31, 2003 and a 10%
stock dividend were declared. The cash dividend will be paid and the stock
dividend will be distributed on May 27, 2003 to shareowners of record on May 12,
2003. Future dividends are subject to the discretion of the Company's Board of
Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
------ --------------------------------
(a) Exhibit:
10.1 Consulting Agreement, effective as of March
1, 2003, by and between Gilbert Goldstein, P.C.
and the Company.
-25-
10.2 First Amendment to M.D.C. Holdings, Inc. 2001
Equity Incentive Plan, effective
April 28, 2003.
12 Ratio of Earnings to Fixed Charges Schedule.
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:
Form 8-K (Item 5) dated February 26, 2003, reporting
the Compensation Committee and the Board of Directors
of M.D.C. Holdings, Inc. approved restated Employment
Agreements for Larry A. Mizel and David D. Mandarich.
Form 8-K (Item 9) dated April 2, 2003, reporting home
orders, home closings and quarter-end backlog for the
quarterly period ended March 31, 2003 with a copy of
the Press Release attached and provided pursuant to
Item 12.
Form 8-K (Item 9) dated April 9, 2003, reporting
first quarter earnings information with a copy of the
Press Release attached and provided pursuant to both
Item 9 and Item 12.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 5, 2003 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
-26-
CHIEF EXECUTIVE OFFICER'S CERTIFICATION
I, Larry A. Mizel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of M.D.C. Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Securities Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 5, 2003 /s/ Larry A. Mizel
--------------------------------------
Larry A. Mizel
Chairman of the Board of Directors
and Chief Executive Officer
-27-
CHIEF FINANCIAL OFFICER'S CERTIFICATION
I, Paris G. Reece III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of M.D.C. Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Securities Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 5, 2003 /s/ Paris G. Reece III
-------------------------------
Paris G. Reece III
Executive Vice President,
Chief Financial Officer
and Principal Accounting Officer
-28-
INDEX TO EXHIBITS
Exhibit Number Description
-------------- ---------------------------------------------------
10.1 Consulting Agreement, effective as of March
1, 2003, by and between Gilbert Goldstein, P.C.
and the Company.
10.2 First Amendment to M.D.C. Holdings, Inc. 2001
Equity Incentive Plan, effective
April 28, 2003.
12 Ratio of Earnings to Fixed Charges Schedule.
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.
-29-