================================================================================UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549------------------FORM 10-K
|X|xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(FEE REQUIRED)For the fiscal year ended December 31,
19992002OR
|_|oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(NO FEE REQUIRED)For the Transition period from __________________ to
---------- -----------__________________Commission file number 1-8951
-----------------------M.D.C. HOLDINGS, INC.
(Exact(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)
Delaware 84-0622967 (State or other jurisdiction
of incorporation or organization)(I.R.S. Employer
Identification No.)3600 South Yosemite Street, Suite 900
Denver, Colorado80237 (Address of principal executive offices) (Zip code) (303) 773-1100
(Registrant's(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, $.01 par value New York Stock Exchange/ 8 3/8% Senior Notes due February 2008 The Pacific Stock Exchange New York Stock Exchange
Title of each class Name of each exchange on which registered Common Stock, $.01 par value New York Stock Exchange/The Pacific Stock Exchange 8 3/8% Senior Notes due February 2008 New York Stock Exchange 7% Senior Notes due December 2012 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None
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[X] No []Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
Registrant'sRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.AsxIndicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of
February 2, 2000, 22,497,000 shares of M.D.C. Holdings, Inc. common stock were outstanding, andthe Exchange Act).xThe aggregate market value of voting stock held by non-affiliates of the
shares (based uponRegistrant was $1,057,213,000. Computation is based on the closing sales priceon that dateofthe shares$52.00 per share of such stock on the New York Stock ExchangeInc. as reportedon June 28, 2002, theComposite Tape) held by non-affiliateslast business day of the Registrant’s most recently completed second quarter.As of February 5, 2003, the number of shares outstanding of Registrant’s common stock was
approximately $229,113,000.26,509,000.DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K is incorporated by reference from the
Registrant's 2000Registrant’s 2003 definitive proxy statement to be filed with the Securities and Exchange Commission no later than 120 days after the end of theRegistrant'sRegistrant’s fiscal year.================================================================================TABLE OF CONTENTSM.D.C. HOLDINGS, INC.
FORM 10-K
For the Year Ended December 31,
1999 ---------------2002Table of Contents
Page No. ---- PART I ITEMS 1. AND 2. BUSINESS AND PROPERTIES (a) General Development of Business............. 1 (b) Financial Information About Industry Segments.................................. 1 (c) Narrative Description of Business........... 1 ITEM 3. LEGAL PROCEEDINGS.................................... 6 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.. 6 PART II ITEM 5. MARKET PRICE OF COMMON STOCK AND RELATED SECURITY HOLDER MATTERS..................................... 7 ITEM 6. SELECTED FINANCIAL AND OTHER DATA.................... 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 10 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................ 20 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS.................... F-1 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................ 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT... 21 ITEM 11. EXECUTIVE COMPENSATION............................... 21 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................................... 21 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....... 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K........................................ 21 (i)M.D.C. HOLDINGS, INC. FORM 10-K PART I Items 1 and 2. Business and Properties.
Page No. PART I ITEMS 1. AND 2. BUSINESS AND PROPERTIES (a) General Development of Business 1 (b) Financial Information About Industry Segments 1 (c) Narrative Description of Business 1 ITEM 3. LEGAL PROCEEDINGS 6 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 6 PART II ITEM 5. MARKET PRICE OF COMMON STOCK AND RELATED SECURITY HOLDER MATTERS 7 ITEM 6. SELECTED FINANCIAL AND OTHER DATA 9 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS F-1 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 23 ITEM 11. EXECUTIVE COMPENSATION 23 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 23 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 23 ITEM 14. CONTROLS AND PROCEDURES 23 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 24 SIGNATURES 30 CERTIFICATIONS 31 (i)
M.D.C. HOLDINGS, INC.
FORM 10-K
PART I
Items 1 and 2.Business and Properties.
(a) General Development of Business
M.D.C. Holdings, Inc. is a Delaware
Corporation originally incorporated in Colorado in 1972.Corporation. We refer to M.D.C. Holdings, Inc. as the"Company"“Company” or as"MDC"“MDC” in this Form 10-K. The"Company"“Company” or"MDC"“MDC” includes our subsidiaries unless we state otherwise.MDC'sMDC’s primary business is owning and managing subsidiary companies that build and sell homes under the name"Richmond“Richmond American Homes."” We also own and manage HomeAmerican Mortgage Corporation("HomeAmerican"(“HomeAmerican”), which originates mortgage loans primarily forMDC'sMDC’s home buyers. In addition, MDC provides title agency services through American Home Title and Escrow Company (“American Home Title”) to MDC home buyers in Virginia, Maryland and Colorado and offers third party insurance products through American Home Insurance Agency, Inc. (“American Home Insurance”) to MDC’s home buyers in all of our markets. This Form 10-K and all other reports filed by the Company with the Securities and Exchange Commission (“SEC”) can be accessed, free of charge, through our website at http://investorrelations.richmondamerican.com/edgar.cfm as soon as reasonably practicable after the report is electronically filed with the SEC, or by contacting the Investor Relations department of M.D.C. Holdings, Inc.(b) Financial Information About Industry Segments
Note B to the
Consolidated Financial Statementsconsolidated financial statements contains information regarding theCompany'sCompany’s business segments for each of the three years ended December 31,1999, 19982002, 2001 and1997.2000.(c) Narrative Description of Business
MDC'sMDC’s business consists of two segments, homebuilding and financial services. In our homebuilding segment,
weour homebuilding subsidiaries build and sell single-family homes in metropolitan Denver, Colorado Springs and Northern Colorado; Utah; Northern Virginia and suburban Maryland; Northern and Southern California; Phoenix and Tucson, Arizona;andLas Vegas,Nevada.Nevada; and Dallas/Fort Worth, Texas. Our financial services segment consists principally of the operations of HomeAmerican.Our strategy is to build homes generally for the first-time and move-up buyer, the largest
segmentsgroup of prospective home buyers. The base prices for these homes generally range fromapproximately $80,000$90,000 to$520,000,$500,000, although the Company also builds homes with base prices as high as$740,000.$1,400,000. The average sales prices of theCompany'sCompany’s homes closed in19992002 and19982001 were$211,400$254,000 and$193,700,$254,100, respectively.When opening a new homebuilding project, the Company generally acquires
fewerno more than150a two-year supply of lots to avoid overexposure to any single sub-market. The Company prefers to acquire finished lots using rolling options or in phases for cash.If potential returns justifyMDC also acquires entitled land for development into finished lots when the Company determines that the riskentitled landisacquired for development.justified. TheCompany'sCompany’s Asset Management Committee, composed of members of theCompany'sCompany’s senior management, generally meets weekly to review all proposed land acquisitions and takedowns of lots under option. Additional information aboutMDC'sMDC’s land acquisition practices may be found in the Homebuilding Segment,Land Acquisition and Developmentsection.Homes are designed and built to meet local customer preferences. The Company
asis the general contractorsupervises construction offor all of its projects andemploysretains subcontractors for site development and home construction. The Company builds single-family detached homes, except in Virginia and Maryland, where we also build townhomes.HomeAmerican is a full service mortgage lender with offices located in each of
MDC'sMDC’s markets. Because itprovidesoriginates or brokers mortgage loansto a majorityfor approximately 81% ofMDC'sMDC’s home buyers, HomeAmerican is an integral part ofMDC'sMDC’s homebuilding business.1
Homebuilding Segment.
General.The Company is one of the largest homebuilders in the United States. MDC is a major regional homebuilder with a significant presence in a number of selected growth markets. The Company is the largest homebuilder in
metropolitan Denver;Colorado; among the top five homebuilders in Northern Virginia,suburban Maryland,Phoenix, Tucson andColorado Springs; andLas Vegas; among the top tenbuildershomebuilders in suburban Maryland, Northern California and SouthernCalifornia, PhoenixCalifornia; and1Las Vegas.has recently entered the Salt Lake City and Dallas/Fort Worth markets. MDC believes a significant presence in its markets enables it to compete effectively for home buyers, land acquisitions and subcontractor labor.The Company designs, builds and sells quality single-family homes at affordable prices, generally for the first-time and move-up buyer.
Approximately 71%Almost 80% of its homes closed in19992002 were in subdivisions targeted tothefirst-time and first-time move-upbuyer, compared with approximately 74% and 83% in 1998 and 1997, respectively.buyers.The
Company'sCompany’s operations are diversified geographically, as shown in the following table of home sales revenues by state for the years19972000 through19992002 (dollars in thousands).
Total Home Sales Revenues Percent of Total --------------------------------------- ------------------------------------ 1999 1998 1997 1999 1998 1997 ----------- ----------- ----------- ---------- ---------- ----------Colorado................ $ 519,870 $ 439,600 $ 325,466 34% 36% 35% California.............. 434,553 275,682 188,893 28% 22% 20% Arizona................. 260,224 218,110 154,875 17% 18% 16% Nevada.................. 83,342 67,455 55,358 6% 6% 6% Virginia................ 162,577 145,569 129,128 11% 12% 14% Maryland................ 65,953 72,243 85,296 4% 6% 9% ----------- ----------- ----------- ---------- ---------- ---------- Total............. $ 1,526,519 $ 1,218,659 $ 939,016 100% 100% 100% =========== =========== =========== ========== ========== ==========
Total Home Sales Revenues Percent of Total 2002 2001 2000 2002 2001 2000 Colorado $ 731,211 $ 716,313 $ 659,549 32 % 35 % 39 % Utah 16,936 — — 1 % — — California 645,700 611,899 443,332 29 % 30 % 26 % Arizona 370,367 346,582 228,550 16 % 17 % 13 % Nevada 227,319 133,548 111,108 10 % 6 % 7 % Virginia 183,668 196,656 183,900 8 % 9 % 11 % Maryland 84,913 71,809 74,669 4 % 3 % 4 % Texas 177 — — 0 % — — Total $ 2,260,291 $ 2,076,807 $ 1,701,108 100 % 100 % 100 % Housing.MDC builds homes in a number of basic series, each designed to appeal to a different segment of the home buyer market. Within each series, MDC builds several models, each with a different floor plan, elevation and standard and optional features. Differences in sales prices of similar models in any series depend primarily upon location, optional features and design specifications. The series of homes offered at a particular location are based on customer preference, lot size, the
area'sarea’s demographics and,to a lesser extent,in certain cases, the requirements of major land sellers and local municipalities.Design centers are located in each of the
Company's Colorado, Phoenix, Southern California, Nevada and VirginiaCompany’s homebuildingdivisions.divisions, except Texas. Home buyers are able to customize certain features of their homes by selecting options and upgrades on display at the design centers. Home buyers can select finishes and upgrades soon after they decide to purchase a Richmond American home. The design centerswhich are also planned for most of MDC's other divisions,not only provideMDC'sMDC’s customers with a convenient way to select upgrades and options for their new homes, but also provide the Company with an additional source of revenue and profit.The Company maintains limited levels of inventories of unsold homes in its markets. Unsold homes in various stages of completion allow the Company to meet the immediate and near-term demands of prospective home buyers. In order to mitigate the risk of carrying excess inventory, the Company has
reducedstrict controls and limits on the number of its unsold homes under construction.Land Acquisition and Development.MDC purchases finished lots using option contracts and in phases or in bulk for cash.
When estimated potential returns justify the risk, theThe Company also acquires entitled land for development into finishedlots.lots when the Company determines that the risk is justified. In making land purchases, MDC considers a number of factors, including projected rates of return, sales prices of the homes to be built on the lots, population and employment growth patterns, proximity to developed areas, estimated costs of development and demographic trends. Generally, MDC acquires finished lots and land for development only in areaswhichthat will have, among other things, available building permits, utilities and suitable zoning. The Company attempts to maintain a supply of finished lots sufficient to enable it to start homesas soon as practicalpromptly after a contract for a home sale is executed. This approach is intended to minimize theCompany'sCompany’s investment in inventories and reduce the risk of shortages of labor and building materials. Increases in the cost of finished lots may reduce Home Gross Margins (as defined below) in the future to the extent that market conditions would not allow the Company to recover the higher cost of land through higher sales prices."HomeWe define “Home GrossMargins" are gross margins (homeMargins” to mean home sales revenues less cost of goods soldwhich(which primarily includes land and2
construction costs, capitalized interest, a reserve for warranty expense and financing and closing costs) as a percent of home sales revenues. See
"Forward-Looking Statements"“Forward-Looking Statements” below.MDC has the right to acquire a portion of the land it will require in the future utilizing option contracts,
normallyin some cases on a"rolling"“rolling” basis. Generally, ina rollingan option contract, the Company obtains the right to purchase lots2in consideration for an option deposit. In the event the Company elects not to purchase the lots within a specified period of time, the Company relinquishesforfeits the option deposit. The Company’s option contracts do not contain provisions requiring specific performance by the Company. This practice limits theCompany'sCompany’s risk and avoids a greater demand on its liquidity. At December 31,1999,2002, MDC had the right to acquire8,0636,995 lots under option agreements with approximately$8,700,000$16,712,000 intotalnon-refundable cash optiondeposits.deposits and $2,641,000 in letters of credit at risk. Because of increased demand for finished lots in certain of its markets, theCompany'sCompany’s ability to acquire lots using rolling options has been reduced or has become significantly more expensive.MDC owns various undeveloped parcels of real estate
most of whichthat it intends to develop into finished lots. MDC develops its land in phases (generally fewer than 100 lots at a time for each home series in a subdivision) in order to limit theCompany'sCompany’s risk in a particular project and tomaximize the efficient use ofefficiently employ available liquidity. Building permits and utilities are available and zoning is suitable for the current intended use of substantially all ofMDC'sMDC’s undeveloped land. When developed, these lots generally will be used in theCompany'sCompany’s homebuildingactivities, although some lots may be sold to others. Certain undeveloped land also may be sold to others before it is developed.activities. See"Forward-Looking Statements"“Forward-Looking Statements” below.The table below shows the carrying value of land and land under development, by state, as of December 31,
1997 through 19992002, 2001 and 2000 (in thousands).
December 31, -------------------------------------- 1999 1998 1997 ----------- ----------- -----------Colorado............................... $ 74,117 $ 53,720 $ 62,093 California............................. 161,508 100,754 44,423 Arizona................................ 29,426 25,178 32,067 Nevada................................. 27,419 20,027 17,342 Virginia............................... 6,357 11,292 21,081 Maryland............................... 9,853 6,209 16,006 ----------- ----------- ----------- Total.............................. $ 308,680 $ 217,180 $ 193,012 =========== =========== ===========
December 31, 2002 2001 2000 Colorado $ 140,930 $ 165,228 $ 126,524 Utah 12,984 — — California 154,980 110,010 149,088 Arizona 92,639 70,602 50,937 Nevada 114,142 44,103 26,546 Virginia 113,717 49,929 29,596 Maryland 21,892 10,630 6,020 Texas 5,559 — — Total $ 656,843 $ 450,502 $ 388,711 The table below shows the number of lots owned and under option (excluding lots in work-in-process), by state, as of December 31,
1997 through 1999.2002, 2001 and 2000.
December 31, -------------------------------------- 1999 1998 1997 ---------- ---------- ----------Lots Owned Colorado................................ 5,096 3,932 4,948 California.............................. 2,070 1,769 654 Arizona................................. 1,976 1,836 1,531 Nevada.................................. 857 848 586 Virginia................................ 265 309 1,360 Maryland................................ 188 231 387 ---------- ---------- ---------- Total............................... 10,452 8,925 9,466 ========== ========== ========== Lots Under Option Colorado................................ 3,682 4,063 2,925 California.............................. 632 552 787 Arizona................................. 1,724 1,492 435 Nevada.................................. 50 405 - - Virginia................................ 1,771 903 925 Maryland................................ 204 314 658 ---------- ---------- ---------- Total............................... 8,063 7,729 5,730 ========== ========== ==========
December 31, 2002 2001 2000 Lots Owned Colorado 4,733 5,777 5,905 Utah 730 — — California 2,473 1,632 1,589 Arizona 3,356 3,099 2,298 Nevada 3,254 1,380 680 Virginia 2,018 1,511 1,052 Maryland 228 125 109 Texas 170 — — Total 16,962 13,524 11,633 Lots Under Option Colorado 1,027 1,163 3,498 Utah 131 — — California 983 1,374 1,030 Arizona 584 1,558 1,720 Nevada 1,137 517 39 Virginia 1,239 911 1,344 Maryland 1,223 536 500 Texas 671 — — Total 6,995 6,059 8,131 3
Labor and Raw
Materials.Materials. Generally, the materials used inMDC'sMDC’s homebuilding operations are standard items carried by major suppliers. The Company generally contracts for most of its materials and labor at a fixed price during the anticipated construction period of its homes. This allows the Company to mitigate the risks associated with increases in building materials and labor costs between the time construction begins on a home and the time it is closed. Increases in the costs of building materials, particularly lumber, and subcontracted labor may reduce Home Gross Margins to the extent that market conditions prevent the recovery of increased costs through higher sales prices.ToFrom time to time and to varying degrees, the Companyexperiencedmay experience shortages in the availability of building materials3and/or labor in 1999in each of its markets, whichresultedcan result in delays in the delivery of homes under construction.The Company may experienceThese shortages and delaysin the future whichmay result in delays in the delivery of homes under construction, reduced Home Gross Margins or both. See"Forward-Looking Statements"“Forward-Looking Statements” below.Seasonal Nature of
Business. MDC'sBusiness. MDC’s business is seasonal to the extent that its Colorado, Utah, Northern California, Virginia and Maryland operations encounter weather-related slowdowns. Delays in development and construction activities resulting from adverse weather conditions can increase theCompany'sCompany’s risk of buyer cancellations and contribute to higher costs for interest, materials and labor. In addition, home buyer preferences and demographics influence the seasonal nature ofMDC'sMDC’s business. See “Forward-Looking Statements” below.Backlog.As of December 31,
19992002 and1998,2001, homes under contract but not yet delivered("Backlog"(“Backlog”)totalled 2,941totaled 4,035 and2,930,2,882, respectively, with estimated sales values of$600,000,000$1,120,000,000 and$580,000,000,$760,000,000, respectively. Based on its past experience, assuming no significant change in market conditions and mortgage interest rates, MDC anticipates that approximately75%80% of its December 31,19992002 Backlog will close under existing sales contracts during the first nine months of2000.2003. The remaining25%20% of the homes in Backlog are not expected to close under existing contracts due to cancellations. See"Forward-Looking Statements"“Forward-Looking Statements” below.Marketing and
Sales. MDC'sSales. MDC’s homes are sold under various commission arrangements by its own sales personnel and by cooperating brokers and referrals in the realtor community. In marketing homes, MDC primarily uses on-site model homes, advertisements in local newspapers, radio, billboards and other signage, magazines and illustrated brochures.In 1998, weWe alsobegan marketingmarket our homesthroughon our internet website,www.RichmondAmerican.com.www.richmondamerican.com, and utilize a variety of other internet sites to advertise our homes and communities. All ofMDC'sMDC’s homes are sold with a ten-year limited warranty issued by an unaffiliated warranty company.Title
Operations. Since January 1998, the Company has providedOperations. American Home Title provides title agency servicesthrough its wholly owned subsidiary, American Home Title and Escrow Company ("American Home Title")to MDC home buyers in Virginia, Maryland andMaryland. American Home Title began offering title agency services to MDC's Colorado home buyers in 1999.Colorado. The Company is evaluating opportunities to providethesetitle agency services in its other markets.Competition.Competition. The homebuilding industry is fragmented and highly competitive. MDC competes with numerous homebuilders, including a number that are larger and have greater financial resources. Homebuilders compete for customers, desirable financing, land, building materials and subcontractor labor. Competition for home orders primarily is based upon price, style, financing provided to prospective purchasers, location of property, quality of homes built,
warrantycustomer service and general reputation in the community. The Company also competes with subdivision developers and land developmentcompanies.companies when acquiring land.Mortgage Interest Rates.The
Company'sCompany’s operations are dependent upon the availability and cost of mortgage financing. Increases in home mortgage interest rates may reduce the demand for homes and home mortgages and, generally, will reduce home mortgage refinancing activity. The Company is unable to predict future changes in home mortgage interest rates or the impact such changes may have on theCompany'sCompany’s operating activities and results of operations. See"Forward-Looking Statements"“Forward-Looking Statements” below.Regulation.Regulation. The
Company'sCompany’s operations are subject to continuing compliance requirements mandated by applicable federal, state and local statutes, ordinances, rules and regulations, including zoning and land use ordinances, building, plumbing and electrical codes,contractors'contractors’ licensing laws, state insurance laws, federal and state human resources laws and regulations and health and safety regulations and laws (including, but not limited to, those of the Occupational Safety and Health Administration). Various localities in which the Company operates have imposed (or may impose in the future) fees on developers to fund schools, road improvements and low andmoderate incomemoderate-income housing. See"Forward-Looking Statements"“Forward-Looking Statements” below.4From time to time, various municipalities in which the Company operates restrict or place moratoriums on the availability of utilities, including water and sewer taps. Additionally, certain jurisdictions in which the Company
4
operates have proposed or enacted growth initiatives
whichthat may restrict the number of building permits available in any given year. In addition, in certain parts of Colorado, water taps may become more difficult to obtain if current drought conditions continue. Although no assurances can be given as to future conditions or governmental actions, MDC believes that it has, or can obtain, water and sewer taps and building permits for its land inventory and land held for development. See"Forward-Looking Statements"“Forward-Looking Statements” below.The
Company'sCompany’s homebuilding operations also are affected by environmental laws and regulations pertaining to availability of water, municipal sewage treatment capacity, land use, hazardous waste disposal, naturally occurring radioactive materials, building materials, population density and preservation of endangered species, natural terrain and vegetation. Due to these considerations, the Company generally obtains an environmental site assessment for parcels of landwhichthat it acquires. The particular environmental laws and regulations that apply to any given homebuilding project vary greatly according to thesite'ssite’s location, thesite'ssite’s environmental conditions and the present and former uses of the site. These environmental laws and regulations may result in project delays; cause the Company to incur substantial compliance and other costs; and/or prohibit or severely restrict homebuilding activity in certain environmentally sensitive regions or areas. See"Forward-Looking Statements"“Forward-Looking Statements” below.Bonds and Letters of Credit.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 December 31, 2002, MDC had outstanding approximately $25,019,000 and $181,124,000 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. See “Forward-Looking Statements” below.
Financial Services Segment.
Mortgage Lending Operations.
General.General. HomeAmerican is a full-service mortgage lender. Through office locations in each of the
Company'sCompany’s markets, HomeAmerican originates mortgage loans primarily forMDC'sMDC’s homebuyers and, to a lesser extent, for others on a "spot" basis.buyers. HomeAmerican also brokers mortgage loans for origination by outside lending institutions for MDC home buyers. HomeAmerican is the principal originator of mortgage loans forMDC'sMDC’s home buyers.HomeAmerican is authorized to originate Federal Housing Administration-insured
("FHA"(“FHA”), Veterans Administration-guaranteed("VA"(“VA”), Federal National Mortgage Association("FNMA"(“FNMA”), Federal Home Loan Mortgage Corporation("FHLMC"(“FHLMC”) and conventional mortgage loans. HomeAmerican is also an authorized loan servicer for FNMA, FHLMC and the Government National Mortgage Association("GNMA"(“GNMA”) and, as such, is subject to the rules and regulations of such organizations.Through early 1999, HomeAmerican also purchased loans and the related servicing rights from unaffiliated loan correspondents. The origination fees for these loans were retained by the correspondents. HomeAmerican does not intend to purchase mortgage loans from correspondents in the future. See "Forward-Looking Statements" below.Substantially all of the mortgage loans originated by HomeAmerican are sold to
privateinvestors within 40 days of origination. The Company usesHomeAmerican'sHomeAmerican’s secured warehouse line of credit, other borrowings and internally generated Company funds to finance these mortgage loans until they are sold.Portfolio of Mortgage Loan
Servicing.Servicing. Mortgage loan servicing involves the collection of principal, interest, taxes and insurance premiums from the borrower and the remittance of such funds to the mortgage loan investor, local taxing authorities and insurancecompanies, for which thecompanies. The servicer is paid afee.fee to perform these services. HomeAmerican obtains the servicing rights related to the mortgage loans it originates. Certain mortgage loans are sold"servicing released"“servicing released” (the servicing rights are included with the sale of the corresponding mortgage loans). In 2002, 30% of the mortgage loans were sold “servicing released”. The servicing rights on the remainder of the mortgage loanswhich are not sold "servicing released"generally are soldin bulk at a later date.under minibulk contracts within two months of the sale of the mortgage loan. HomeAmericanhas sold, andintends to sell servicing on all mortgage loans originated in thefuture, mortgage loan servicing.future. See"Forward-Looking Statements"“Forward-Looking Statements” below.HomeAmerican'sHomeAmerican’s portfolio of mortgage loan servicing at December 31,
19992002 consisted of servicing rights with respect to approximately3,5002,889 single-family loans,93%94% of which were less thantwo yearsone year old. This includes 1,640 single-family loans for which the servicing rights had been sold but not transferred to the purchasers as of December 31, 2002. The Company anticipates transferring these servicing rights in the first quarter of 2003. These loans are secured by mortgages on properties in eight states, with interest rates on the loans ranging from5
approximately
5.5%2.45% to11.5%11.38% and averaging7.4%6.16%. The underlying value of a servicing portfolio generally is determined based on the interest rates and the annual servicing fee rates (currently .44% for FHA/VA loans and .25% for conventional loans) applicable to the loans comprising the portfolio.As interest rates increased during the course of 1999, the proportion of HomeAmerican's customers who selected adjustable rate mortgages ("ARMs") increased to approximately 28% in December 1999, compared with 2% in December 1998. The value of mortgage servicing rights related to ARMs is substantially less than mortgage servicing rights related to fixed rate mortgage loans.Pipeline.
HomeAmerican'sHomeAmerican’s mortgage loans in processwhichthat had not closed("Pipeline"(the “Pipeline”) at December 31,19992002 had aggregate principal balances of$362,376,000. Approximately 75%$729,680,000. An estimated 80% of the Pipeline at5December 31, 19992002 is anticipated to close during the firstsixnine months of2000.2003. If mortgage interest rates decline, a smaller percentage of these loans would be expected to close. See"Forward-Looking Statements"“Forward-Looking Statements” below.Forward Sales Commitments.
HomeAmerican'sHomeAmerican’s operations are affected by changes in mortgage interest rates. HomeAmerican utilizes forward mortgage securitiescontractscommitments to manage the price risk related to fluctuations in interestrate riskrates on its fixed-rate mortgage loans owned and rate-locked mortgage loans in the Pipeline.Such contracts are the only significant financial derivative instrument utilized by MDC.Competition.The mortgage industry is fragmented and highly competitive. In each of the locations in which it originates loans, HomeAmerican competes with numerous banks, thrifts and other mortgage bankers, many of which are larger and have greater financial resources. Competitive factors include pricing, loan terms, underwriting criteria and customer service.
Insurance Operations. In 1998, the Company began offering homeowners, auto and other types of casualty insurance to its Colorado home buyers through a wholly owned subsidiary, American Home Insurance Agency, Inc. ("American Home Insurance"). In 1999, American Home Insurance began offering these insurance services to MDC's home buyers in all states in which the Company operates except California. American Home Insurance services will be available to MDC's California home buyers beginning in the first quarter of 2000.Employees.
At December 31,
1999,2002, MDC employed approximately1,5002,250 persons. MDC considers its employee relations to be satisfactory.Item 3.Legal Proceedings.
The Company and certain of its subsidiaries have been named as defendants in various claims, complaints and other legal actions arising in the normal course of
business.business, including moisture intrusion and related mold claims. In the opinion of management, the outcome of these matters will not have a material adverse effectuponon the financial condition, results of operations or cash flows of the Company. See"Forward-Looking Statements"“Forward-Looking Statements” below.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
whichthat would result in material contingent liabilities related to environmental hazards or asbestos.Item 4.Submission of Matters to a Vote of Security Holders.
No meetings of the
Company'sCompany’s stockholders were held during the fourth quarter of1999.2002.6
PART II
Item 5.Market Price of Common Stock and Related Security Holder Matters.
On February 5, 2003, MDC had 1,030 shareowners of record. The shares of MDC common stock are traded on the New York and the Pacific Stock Exchanges. The following table sets forth, for the periods indicated, the
high and low sale pricesprice ranges of MDC’s common stock.
Three Months Ended March 31 June 30 September 30 December 31 High $ 48.95 $ 52.99 $ 53.10 $ 40.55 Low $ 34.04 $ 41.05 $ 34.40 $ 29.75 High $ 37.68 $ 44.05 $ 41.77 $ 38.96 Low $ 26.82 $ 28.37 $ 21.32 $ 23.09 The following table sets forth the
shares of MDC common stock as reported on the Composite Tape.
High Low ------- -------1998 First quarter.................. $ 18.88 $ 14.00 Second quarter................. $ 20.00 $ 13.00 Third quarter.................. $ 24.00 $ 14.63 Fourth quarter................. $ 21.94 $ 13.19 1999 First quarter.................. $ 21.56 $ 13.69 Second quarter................. $ 21.50 $ 15.00 Third quarter.................. $ 22.00 $ 15.00 Fourth quarter................. $ 17.25 $ 13.38The Companycash dividends declared and paiddividendsin 2002 and 2001 (dollars in thousands except per share amounts).
Date of Date of Dividend Declaration Payment per Share Dollars First quarter January 21, 2002 February 21, 2002 $ 0.07 $ 1,868 Second quarter April 25, 2002 May 23, 2002 0.08 2,163 Third quarter July 22, 2002 August 21, 2002 0.08 2,137 Fourth quarter October 18, 2002 November 15, 2002 0.08 2,124 $ 0.31 $ 8,292 First quarter January 22, 2001 February 16, 2001 $ 0.06 $ 1,308 Second quarter April 23, 2001 May 22, 2001 0.07 1,693 Third quarter July 23, 2001 August 22, 2001 0.07 1,704 Fourth quarter October 22, 2001 November 21, 2001 0.07 1,751 $ 0.27 $ 6,456 On January 20, 2003, MDC’s board of
sixdirectors approved the payment of a cash dividend of eight cents per shareinpayable February 21, 2003 to shareowners of record on February 6, 2003.On January 22, 2001, MDC’s board of directors approved the
first quarterpayment of2000; five cents per share in each quarter in 1999; four cents per share ina 10% stock dividend, which was distributed on February 16, 2001 to shareowners of record on February 5, 2001. On December 6, 2001, MDC’s board of directors approved thelast three quarterspayment of1998 and three cents per share in the first quarteranother 10% stock dividend, which was distributed on December 28, 2001 to shareowners of1998.record on December 17, 2001.In connection with the declaration and payment of dividends, the Company is required to comply with certain covenants contained in its
$300,000,000$600,000,000 unsecured revolving line of credit agreement and the indenture dated January 1998 for its 8 3/8%Senior Notessenior notes due2008 (the "New Senior Notes") indenture dated January 1998.2008. Pursuant to the terms of these agreements, dividends may be declared or paid if the Company is in compliance with certainstockholders'stockholders’ equity and debt coverage tests. At December 31,1999,2002, the Company had a permitted dividend capacity of approximately$97,000,000$184,000,000 pursuant to the most restrictive of these covenants.On February 2, 2000,7
The following table provides information as of December 31, 2002 with respect to the shares of MDC
had 1,282 shareownerscommon stock that may be issued under existing equity compensation plans, all ofrecord. 7which have been approved by the shareowners.
Common Shares to be Common Shares Remaining Issued Upon Weighted-Average Available for Future Exercise of Exercise Price of Issuance Under Equity Outstanding Options Outstanding Options Compensation Plans Employee Equity Incentive Plan 2,491,642 $ 23.03 177,425 Equity Incentive Plan 1,325,600 $ 30.58 1,088,900 Director Equity Incentive Plan 83,250 $ 24.17 0 Director Stock Option Plan 207,500 $ 31.48 342,500 Total equity compensation plans approved by shareowners 4,107,992 $ 25.92 1,608,825 Please refer to the discussion of the Company’s equity incentive plans in Note G to the Company’s consolidated financial statements for a description of the plans and the types of grants, in addition to options, that may be made under the plans. The referenced discussion also describes the formula by which the number of securities available for issuance under those plans automatically increases.
8
Item 6.Selected Financial and Other Data.
The data in this table should be read in conjunction with
"Management's“Management’s Discussion and Analysis of Financial Condition and Results ofOperations"Operations” and theCompany'sCompany’s Consolidated Financial Statementsand the notes thereto presented elsewhere herein(in thousands, except per share and unit amounts).SELECTED FINANCIAL DATA
Year Ended December 31, 2002 2001 2000 1999 1998 Revenues $ 2,318,524 $ 2,125,874 $ 1,751,545 $ 1,567,638 $ 1,263,209 Income before income taxes and extraordinary items Homebuilding $ 295,604 $ 279,267 $ 227,319 $ 162,258 $ 86,764 Financial services Mortgage lending 24,194 21,116 14,282 13,169 11,198 Asset management - - - - - - - - 4,590 Total financial services 24,194 21,116 14,282 13,169 15,788 (45,754 ) (44,996 ) (38,400 ) (26,974 ) (18,700 ) Total $ 274,044 $ 255,387 $ 203,201 $ 148,453 $ 83,852 Income before extraordinary items $ 167,305 $ 155,715 $ 123,303 $ 89,392 $ 51,568 Basic per common share $ 6.25 $ 5.89 $ 4.75 $ 3.32 $ 2.31 Diluted per common share $ 6.03 $ 5.72 $ 4.64 $ 3.26 $ 1.91 $ 167,305 $ 155,715 $ 123,303 $ 89,392 $ 36,254 Basic per common share $ 6.25 $ 5.89 $ 4.75 $ 3.32 $ 1.62 Diluted per common share $ 6.03 $ 5.72 $ 4.64 $ 3.26 $ 1.35 Weighted-average shares outstanding Basic 26,767 26,421 25,974 26,919 22,325 Diluted 27,754 27,232 26,556 27,414 27,354 Dividends paid per share $ .31 $ .27 $ .24 $ .20 $ .15
December 31, 2002 2001 2000 1999 1998 Housing completed or under construction $ 578,475 $ 456,752 $ 443,512 $ 337,029 $ 294,104 Land and land under development $ 656,843 $ 450,502 $ 388,711 $ 308,680 $ 217,180 Total assets $ 1,595,180 $ 1,190,956 $ 1,061,598 $ 877,008 $ 714,013 Homebuilding line of credit $ - - $ - - $ 90,000 $ 40,000 $ 21,871 Senior notes $ 322,990 $ 174,503 $ 174,444 $ 174,389 $ 174,339 Total homebuilding and corporate debt $ 322,990 $ 174,503 $ 264,444 $ 214,389 $ 197,076 $ 800,567 $ 653,831 $ 482,230 $ 389,023 $ 298,131 $ 30.29 $ 24.59 $ 18.81 $ 14.41 $ 11.21 .40 .27 .55 .55 .66 .29 .21 .35 .36 .40 .99 .55 1.04 1.07 1.36 9
Year Ended December 31, 2002 2001 2000 1999 1998 Home sales revenues $ 2,260,291 $ 2,076,807 $ 1,701,108 $ 1,526,519 $ 1,218,659 Orders for homes, net (units) 9,899 7,701 7,835 7,232 7,191 Homes closed (units) 8,900 8,174 7,484 7,221 6,293 Backlog 4,035 2,882 3,292 2,941 2,930 $ 1,120,000 $ 760,000 $ 775,000 $ 600,000 $ 580,000 Average selling price per home closed $ 254.0 $ 254.1 $ 227.3 $ 211.4 $ 193.7 Home Gross Margins 23.0 % 23.2 % 22.3 % 19.3 % 16.9 % Excluding interest in home cost of sales 23.9 % 24.4 % 23.6 % 21.2 % 19.5 % Operating activities $ (166,429 ) $ 93,251 $ (63,457 ) $ (3,845 ) $ 800 Investing activities $ (12,441 ) $ (3,219 ) $ (3,160 ) $ (1,878 ) $ 15,081 Financing activities $ 171,212 $ (67,547 ) $ 41,802 $ 34,574 $ (17,480 ) 12.3 % 12.1 % 11.9 % 10.8 % 11.5 % Net income $ 167,305 $ 155,715 $ 123,303 $ 89,392 $ 36,254 Add Extraordinary items - - - - - - - - 15,314 Income taxes 106,739 99,672 79,898 59,061 32,284 Interest in cost of sales 20,691 24,557 22,356 30,187 34,184 4,516 3,618 3,362 1,347 953 Depreciation and amortization 26,907 27,445 21,792 17,845 20,228 Non-cash charges Homebuilding asset impairment - - 7,041 4,200 2,242 5,300 Total EBITDA, as adjusted $ 326,158 $ 318,048 $ 254,911 $ 200,074 $ 144,517 Interest incurred $ 21,116 $ 22,498 $ 24,367 $ 21,261 $ 22,525 15.5 14.1 10.5 9.4 6.4
| (1) | Net corporate expenses represent (a) net realized gains and losses on corporate investments and marketable securities; (b) interest, dividend and other income; and (c) corporate general and administrative | |
| (2) | Net income in 1998 includes the effects of extraordinary after-tax losses on the early extinguishment of debt resulting | |
| (3) | Excludes mortgage lending debt from the | |
| (4) | At the | |
| (5) | “EBITDA, as | |
| (6) | Other fixed charges primarily consists of the interest component of rent expense and |
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Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
Consolidated Results.
1999
2002 Compared With 1998.2001. Revenues for the year ended December 31, 19992002 were $1,567,638,000,$2,319,000,000, representing the highest in the Company's historyninth consecutive record for annual revenues and a 24%9% increase over 1998.2001. The increase primarily resulted from a 9% increase in the number of homes closed to 8,900, the most in the Company’s history.
Income before income taxes increased 7% to $274,044,000 in 2002. The increase primarily was due to a 6% increase in homebuilding segment operating profit and a 15% increase in financial services segment operating profit. The homebuilding segment profit increase principally was a result of the home closing increase described above. In addition, no asset impairment charges were taken in 2002, while operating profits in 2001 were reduced by non-cash, pre-tax asset impairment charges of $7,041,000. The financial services segment profit increase primarily was due to a 41% increase in gains on sales of mortgage loans and a 7% increase in loan origination fees.
The Company’s financial position continued to strengthen throughout 2002. The Company’s strong 2002 operating results increased stockholders’ equity by 22% to $800,567,000, or $30.29 per outstanding share, at December 31, 2002. This stockholders’ equity amount also reflects the repurchase during 2002 of 789,000 shares of MDC common stock for an aggregate purchase price of $29,403,000. Homebuilding inventories grew by 36% in support of the increasing homebuilding operations as the Company prepares to close over 10,500 homes in 2003. To finance our growth objective of doubling in size from 2001 levels in five years or less, both the top line and bottom line, the Company issued $150,000,000 of 7% senior notes due in December 2012 and increased the capacity of its homebuilding line of credit to $600,000,000 from $450,000,000. Despite the increase in corporate and homebuilding debt, the Company reported a ratio of corporate and homebuilding debt-to-capital of .29 at December 31, 2002, one of the lowest in the homebuilding industry.
2001 Compared With 2000. Revenues for the year ended December 31, 2001 were $2,126,000,000, a 21% increase over 2000. The increase primarily resulted from a 9% increase in the number of home closings and a $17,700$26,800 increase in the average selling price per home closed.
Income before income taxes and extraordinary item increased 77%26% to $148,453,000$255,387,000 in 1999.2001. The increase primarily was due to an 87%a 23% increase in homebuilding segment operating profit partially offset byand a 17% decrease48% increase in financial services segment operating profit. The homebuilding segment profit increase principally was a result of the home closing and average selling price increases described above and an increase of 24090 basis points in Home Gross Margins. The financial services segment operating profit decreased in 1999increase primarily was due to a $4,450,000 gain recognized56% increase in 1998 resulting from the receiptgains on sales of the final
payment for the September 1996 sale of the Company's asset management business.
Operating profit increased 18% in 1999 in the Company's mortgage lending
operations primarily due toloans and a 28%26% increase in loan origination fees.
Throughout 1999, the Company continued to strengthen its balance sheet
and improve the efficiency of its operations. Homebuilding and corporate debt at
December 31, 1999 increased by only $17,313,000 from December 31, 1998,
notwithstanding a $134,425,000 increase in homebuilding inventories and a
$28,851,000 increase in available cash. The Company's strong 1999 operating
results increased stockholders' equity by 30% to $389,023,000, or $17.43 per
outstanding share, at December 31, 1999. These factors contributed to a
reduction in the Company's corporate and homebuilding debt-to-capital ratio to
.36 at December 31, 1999, compared with .40 at December 31, 1998. In addition,
the Company's ratio of EBITDA, as adjusted, to interest incurred improved to 9.4
for the year ended December 31, 1999, compared with 6.4 for the same period in
1998.
1998 Compared With 1997. Revenues for the year ended December 31, 1998
were $1,263,209,000, a 30% increase from 1997. The increase primarily resulted
from a 20% increase in the number of home closings and a $13,900 increase in the
average selling price per home closed.
Income before income taxes and extraordinary item increased 113% to
$83,852,000 in 1998. The increase primarily was due to the increased
profitability of the homebuilding and financial services segments. The
homebuilding segment increase principally was a result of the home closing and
average selling price increase described above and an increase of 240 basis
points in Home Gross Margins. The financial services segment increase primarily
resulted from increased mortgage lending profits and the gain from the sale of
the Company's asset management business discussed above.
Net income for 1998 included an extraordinary loss of $15,314,000, net
of an income tax benefit of $9,587,000, recognized in connection with the
Company's repurchase and defeasance of the remaining $152,000,000 principal
amount of the Old Senior Notes. Net income for 1997 included an extraordinary
loss of $2,179,000, net of an income tax benefit of $1,336,000, recognized in
connection with the Company's repurchase of $38,000,000 principal amount of Old
Senior Notes.
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11
Homebuilding Segment.
The table below sets forth information relating to the Company'sCompany’s homebuilding segment (dollars in thousands).
Year Ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Home Sales Revenues......................... $ 1,526,519 $ 1,218,659 $ 939,016
Operating Profits........................... $ 162,258 $ 86,764 $ 41,543
Average Selling Price Per Home Closed....... $ 211.4 $ 193.7 $ 179.8
Home Gross Margins.......................... 19.3% 16.9% 14.5%
Excluding Interest in Home Cost of
Sales................................ 21.2% 19.5% 17.5%
Orders For Homes, Net (Units)
Colorado............................... 2,755 2,742 2,039
California............................. 1,396 1,042 938
Arizona................................ 1,455 1,829 1,297
Nevada................................. 552 540 434
Virginia............................... 738 710 650
Maryland............................... 336 328 411
----------- ----------- -----------
Total................................ 7,232 7,191 5,769
=========== =========== ===========
Homes Closed (Units)
Colorado............................... 2,484 2,267 1,735
California............................. 1,465 986 828
Arizona................................ 1,699 1,526 1,135
Nevada................................. 561 489 437
Virginia............................... 702 667 642
Maryland............................... 310 358 446
----------- ----------- -----------
Total................................ 7,221 6,293 5,223
=========== =========== ===========
December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Backlog (Units)
Colorado............................... 1,626 1,355 880
California............................. 257 326 270
Arizona................................ 452 696 393
Nevada................................. 137 146 95
Virginia............................... 290 254 211
Maryland............................... 179 153 183
----------- ----------- -----------
Total................................ 2,941 2,930 2,032
=========== =========== ===========
Estimated Sales Value................ $ 600,000 $ 580,000 $ 380,000
=========== =========== ===========
Active Subdivisions
Colorado............................... 50 45 48
California............................. 24 21 12
Arizona................................ 20 24 29
Nevada................................. 12 9 6
Virginia............................... 16 20 23
Maryland............................... 9 11 19
----------- ----------- -----------
Total................................ 131 130 137
=========== =========== ===========
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| Year Ended December 31, | ||||||||||||||
| 2002 | 2001 | 2000 | ||||||||||||
| Home Sales Revenues | $ | 2,260,291 | $ | 2,076,807 | $ | 1,701,108 | ||||||||
| Operating Profits | $ | 295,604 | $ | 279,267 | $ | 227,319 | ||||||||
| Average Selling Price Per Home Closed | $ | 254.0 | $ | 254.1 | $ | 227.3 | ||||||||
| Home Gross Margins | 23.0 | % | 23.2 | % | 22.3 | % | ||||||||
| Excluding Interest in Home Cost of Sales | 23.9 | % | 24.4 | % | 23.6 | % | ||||||||
Orders For Homes, Net (Units) | ||||||||||||||
| Colorado | 2,681 | 2,616 | 2,607 | |||||||||||
| Utah | 111 | - - | - - | |||||||||||
| California | 2,086 | 1,519 | 1,614 | |||||||||||
| Arizona | 2,669 | 2,038 | 1,849 | |||||||||||
| Nevada | 1,260 | 687 | 739 | |||||||||||
| Virginia | 798 | 551 | 765 | |||||||||||
| Maryland | 277 | 290 | 261 | |||||||||||
| Texas | 17 | - - | - - | |||||||||||
| Total | 9,899 | 7,701 | 7,835 | |||||||||||
Homes Closed (Units) | ||||||||||||||
| Colorado | 2,919 | 2,806 | 2,848 | |||||||||||
| Utah | 102 | - - | - - | |||||||||||
| California | 1,654 | 1,537 | 1,363 | |||||||||||
| Arizona | 2,218 | 2,223 | 1,554 | |||||||||||
| Nevada | 1,204 | 704 | 678 | |||||||||||
| Virginia | 556 | 645 | 727 | |||||||||||
| Maryland | 246 | 259 | 314 | |||||||||||
| Texas | 1 | - - | - - | |||||||||||
| Total | 8,900 | 8,174 | 7,484 | |||||||||||
| December 31, | ||||||||||||||
| 2002 | 2001 | 2000 | ||||||||||||
Backlog (Units) | ||||||||||||||
| Colorado | 957 | 1,195 | 1,385 | |||||||||||
| Utah | 50 | - - | - - | |||||||||||
| California | 922 | 490 | 508 | |||||||||||
| Arizona | 1,076 | 625 | 747 | |||||||||||
| Nevada | 350 | 181 | 198 | |||||||||||
| Virginia | 476 | 234 | 328 | |||||||||||
| Maryland | 188 | 157 | 126 | |||||||||||
| Texas | 16 | - - | - - | |||||||||||
| Total | 4,035 | 2,882 | 3,292 | |||||||||||
| Estimated Sales Value | $ | 1,120,000 | $ | 760,000 | $ | 775,000 | ||||||||
| Active Subdivisions | ||||||||||||||
| Colorado | 61 | 61 | 48 | |||||||||||
| Utah | 4 | - - | - - | |||||||||||
| California | 24 | 26 | 29 | |||||||||||
| Arizona | 44 | 27 | 27 | |||||||||||
| Nevada | 18 | 7 | 10 | |||||||||||
| Virginia | 20 | 11 | 12 | |||||||||||
| Maryland | 6 | 5 | 7 | |||||||||||
| Texas | 1 | - - | - - | |||||||||||
| Total | 178 | 137 | 133 | |||||||||||
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Homebuilding Activities - 1999— 2002 Compared With 1998.
2001.
Home Sales Revenues and Homes Closed.Home sales revenues in 19992002 were the highest in the Company'sCompany’s history and represented a 25%9% increase compared with home sales revenues in 1998.2001. The increase resulted from record home closings.
Home closings increased 9% in 2002, compared with 2001. Home closings particularly were strong in (1) Las Vegas (a 71% increase), primarily due to the strong demand for new homes and increased active subdivisions in this market, including subdivisions acquired from W.L. Homes LLC (d/b/a John Laing Homes) in April 2002; and (2) Tucson and Southern California (increases of 24% and 10%, respectively), as a result of the strong home orders received in these markets in the fourth quarter of 2001 and first half of 2002. MDC closed fewer homes in 2002, compared with 2001, in Virginia and Phoenix, primarily due to lower home orders in these markets in the second half of 2001, resulting from fewer active subdivisions and a significant number of active subdivisions approaching close-out during this time period.
Average Selling Price Per Home Closed.The average selling price per home closed was $254,000 in 2002, compared with $254,100 in 2001. Average selling prices increased in Maryland, Virginia, Phoenix and Northern California, primarily due to (1) the ability to increase sales prices due to the strong demand for new homes in these markets throughout 2002; and (2) a greater number of homes closed in relatively higher-priced subdivisions. Average selling prices were lower in Tucson, Southern California and Colorado due to the Company’s increased emphasis on providing more affordable homes in these markets.
Home Gross Margins.Home Gross Margins were 23.0% for the year ended December 31, 2002, compared with 23.2% in 2001. Future Home Gross Margins may be impacted adversely by (1) increased 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; (4) shortages of subcontractor labor, finished lots and other resources, which can result in delays in the delivery of homes under construction; and (5) other general risk factors. See “Forward-Looking Statements” below.
Orders for Homes and Backlog. The Company received orders for 9,899 homes, net of cancellations, during 2002, compared with net orders for 7,701 homes during 2001. The Company received net orders for 1,931 homes during the fourth quarter of 2002, compared with net orders for 1,373 homes for the same period in 2001. The Company’s active subdivisions increased 30% to 178 at December 31, 2002 from 137 at December 31, 2001, including an additional 20 in Phoenix, 11 in Nevada and nine in Virginia. These additional subdivisions, combined with the strong demand for new homes in these markets, contributed to year-over-year increases in home orders of 83% in Nevada, 45% in Virginia and 36% in Phoenix. An improved demand for new homes also contributed to year-over-year increases in home orders of 41% and 30%, respectively, in Southern California and Northern California from a consistent level of active subdivisions.
The Company ended 2002 with a Backlog of 4,035 homes with an estimated sales value of $1,120,000,000, compared with the Backlog of 2,882 homes with an estimated sales value of $760,000,000 at December 31, 2001. Assuming no significant change in market conditions or mortgage interest rates, the Company expects approximately 80% of its December 31, 2002 Backlog to close under existing sales contracts during the first nine months 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 $125,060,000 in 2002, compared with $114,129,000 in 2001. The increase in both2002 primarily was due to (1) more product advertising and deferred marketing amortization in connection with the increased number of active subdivisions and greater number of home closings in 2002; (2) higher sales commissions resulting from the Company’s increased home sales revenues; and (3) increased sales overhead resulting from the Company’s expanding home sales activities.
General and Administrative.General and administrative expenses totaled $105,482,000 in 2002, compared with $90,390,000 in 2001. The increase primarily was due to increased compensation and other administrative costs associated with the expanding operations in certain of the Company’s markets, most notably Phoenix, Virginia, Nevada and Texas. General and administrative expenses in 2002 also increased in Utah and
13
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.
Homebuilding Activities — 2001 Compared With 2000.
Home Sales Revenues and Homes Closed.Home sales revenues in 2001 were 22% higher than home sales revenues in 2000. The increase resulted from a greater number of home closings and a significantly higher average selling price per home closed, as further discussed below.
Home closings increased 9% in 2001, compared with 2000. Home closings were higher in all of the Company's markets except
Maryland in 1999, compared with 1998. Home closings particularly were strong in
(1) Southern California, Phoenix and Colorado, which increased 22%(a 60% increase), 13% and 10%,
respectively, as a result of the continued strong demand for new homes in these
markets;this market and increased active subdivision levels in the second half of 2000 and first half of 2001; and (2) Northern California (a 33% increase), where the Company opened six new active
subdivisions in 1999 in the San Francisco Bay area. In Maryland, home closings
decreased in 1999, primarily due to a decrease inincreased the number of active subdivisions to nine at the end of 1999,by approximately 50% during 2001, compared with 11 at2000. Home closings decreased in 2001 in Virginia, Maryland and Colorado, compared with 2000, primarily due to lower home orders resulting from fewer active subdivisions in Virginia in the endsecond half of 1998.
2000 and the first half of 2001, in Maryland in the second half of 2000 and all of 2001, and in Colorado in the second half of 2000.
Average Selling Price Per Home Closed.The average selling price per home closed increased to $211,400$26,800 in 1999,2001, compared with $193,700 in 1998. Each2000, as each of the Company'sCompany’s markets realized higher average selling prices in 1999,
compared with 1998.prices. The increases primarily were due to (1) the ability to increase sales prices due to the strong demand for new homes in most of the Company's markets;Company’s markets throughout the first six months of 2001; (2) a greater number of homes closed in higher-priced subdivisions in Southern and Northern California, where average selling prices approached $300,000;exceeded $370,000; and (3) a higher proportion of detached homes closed in
Virginia, which generally have higher selling prices than townhomes; and (4) increased sales volume per home from the Company's establishedCompany’s design centers in
Colorado, Phoenix and Southern California and from its new design centers in Las
Vegas and Virginia.
centers.
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 19.3%23.2% for the year ended December 31, 1999,2001, representing an increase of 24090 basis points compared with 1998.from Home Gross Margins in 2000. The increase largely was due to (1) in Colorado and Phoenix, selling price increases and reduced incentives offered to home buyers due toin most of the continued strong demand for new homes in theseCompany’s markets; (2) in Maryland, fewer
under-performing subdivisions in 1999 and management's continued efforts to
improve profitability;increased sales of higher-margin products through the Company’s design centers; (3) a reduction in previous estimates of costs to complete land development and homes in certain projectsmost of the Company’s markets; (4) in Phoenix; (4) reduced
interest includedMaryland, fewer under-performing subdivisions in home cost of sales, as discussed below;2001 and management’s continued efforts to improve profitability; and (5) increases in
sales of higher-margin products through the Company's design centers; (6) a
higher proportion of presold homes closed, which generally have higher Home
Gross Margins than closings of spec homes; (7) home order cancellations which
were re-sold at higher average selling prices; and (8)ongoing initiatives implemented in each of the Company'sCompany’s markets designed to improve operating efficiency, control costs and increase rates of return. TheseThe impact of these increases in Home Gross
Margins were partially was offset by, increases inamong other things, the rising cost of (1) land; (2) lumber,
insulation, concrete and other raw materials; (3) subcontract labor; and (4)
incurred and estimated future land development costs with respect to certain
projects in Southern California.
Interest in Home Cost of Sales - Interest in home cost of sales as a
percent of home sales revenues in 1999 decreased to 1.9%, compared with 2.6% and
3.0%, respectively, for the same periods in 1998 and 1997. These reductions
primarily resulted from lower levels of capitalized interest in homebuilding
inventories during 1999, compared with 1998 and 1997. Notwithstanding increases
in the Company's homebuilding inventories, interest capitalized in homebuilding
inventories at December 31, 1999 decreased to $17,406,000, compared with
$26,332,000 at December 31, 1998 and $37,991,000 at December 31, 1997. These
reductions in interest capitalized in homebuilding inventories primarily were
due to (1) lower levels of interest incurred resulting from lower effective
interest rates on the Company's lines of credit and lower levels of homebuilding
and corporate debt; and (2) the build-out of older projects with higher levels
of capitalized interest in Colorado, Virginia and Maryland.
land.
Orders for Homes and Backlog. OrdersBacklog. The Company received orders for 7,701 homes, increasednet of cancellations, during 2001, compared with net orders for 7,835 homes during 2000. Home orders were lower in 2001 primarily due to 7,232a significant decline in 1999,net orders received during the highest numberweeks following the events of September 11th. Despite these events, home orders in the Company's history. Home orders in 1999
particularly2001 were strong in (1) Southern California,Tucson and Phoenix (increases of 18% and 8%, respectively), primarily as a result of the continued strong demand for new homes; and (2) Northern California, where the
Company has added six new active subdivisionshomes in 1999 in the San Francisco Bay
area. In Phoenix, record home orders in 1998 accelerated the close-out of
certain projects which, compounded by delays in land development, caused a
temporary decline in the number of active subdivisions and a corresponding
decrease in home orders in 1999 in this market.
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The Company ended 19992001 with a record Backlog of 2,9412,882 homes with an estimated sales value of $600,000,000,$760,000,000, compared with the Backlog of 2,9303,292 homes with an estimated sales value of $580,000,000$775,000,000 at December 31, 1998. Assuming no
significant change in market conditions or mortgage interest rates,2000.
Other Revenues. Other revenues during the Company
expects approximately 75% of itsyear ended December 31, 1999 Backlog to close under
existing2001 included net pre-tax gains realized on the sales contracts duringof certain investments by an MDC captive insurance subsidiary of $291,000, compared with gains of a similar nature of $8,629,000 for the first nine months ofyear ended December 31, 2000. The remaining 25%
of the homes in Backlog are not expected to close under existing contracts due
to cancellations. See "Forward-Looking Statements" below.
Marketing.
Marketing. Marketing expenses (which include sales commissions, advertising, amortization of deferred marketing costs, model home expenses and other costs) totalled $80,545,000totaled $114,129,000 in 1999,2001, compared with $74,463,000$94,412,000 in 1998.2000. The increase in 19992001 primarily was volume related, resulting from higher (1)
sales commissions; (2) marketing-related salaries and benefits; and (3)commissions, product advertising and other costs incurred in connection with the Company'sCompany’s increased
homebuilding activities. Notwithstanding the increased costs, these expenses
declined as a percentage of home sales revenues to 5.3% in 1999, compared with
6.1% for 1998.
revenues.
General and Administrative.General and administrative expenses totalled $54,829,000totaled $90,390,000 in 1999,2001, compared with $45,905,000$69,150,000 in 1998.2000. The increase primarily was due to increased compensation, land acquisition and other overhead costs resulting from MDC's higher
profitability and increased homebuilding activity. These expenses declined as a
percentage of home sales revenues to 3.6% in 1999 from 3.8% for 1998.
Homebuilding Activities - 1998 Compared With 1997.
Home Sales Revenues and Homes Closed. Home sales revenues in 1998 were
30% higher than home sales revenues in 1997. The increase resulted from an
increase in both home closings and average selling price per home closed, as
further discussed below.
In Colorado and Arizona, home closings increased in 1998 by 31% and
34%, respectively, as a result of the strong demand for homes in these markets
and substantially higher Backlog levels in 1998 comparedassociated with 1997. Home
closings increased by 28% and 12% in Southern California and Nevada,
respectively, where the Company increased the number of active subdivisions by
more than 40% as of December 31, 1998 compared with December 31, 1997. In
Maryland, home closings decreased in 1998, primarily due to a decrease in the
number of active subdivisions to 11 at the end of 1998 compared with 19 at the
end of 1997. Home closings also decreased in Northern California in 1998,
because the Company exited the Sacramento market and no homes were closed in the
three new active subdivisions in the San Francisco Bay area.
Average Selling Price Per Home Closed. The average selling price per
home closed increased to $193,700 in 1998, compared with $179,800 in 1997. This
increase primarily resulted from (1) a greater number of homes closed in
relatively higher-priced subdivisions in Southern California, Phoenix and
Nevada; (2) a higher proportion of detached homes closed in Virginia and
Maryland, which generally have higher selling prices than townhomes; and (3)
selling price increasesexpanding operations in most of the Company's markets, particularlyCompany’s markets.
14
Title Operations.
American Home Title provides title agency services to MDC home buyers in Southern CaliforniaVirginia, Maryland and Colorado. Home Gross Margins. Home Gross Margins increased 240 basis pointsThe Company is evaluating opportunities to provide title agency services in 1998. The increase largely was due to (1)its other markets. Income before income taxes from title operations totaled $2,415,000, $2,401,000 and $2,181,000, respectively, in Colorado, selling price increases2002, 2001 and reduced incentives offered to home buyers due to the increased demand for
new homes in this market; (2) in Colorado and Arizona, the favorable impact of a
number of home closings in several highly profitable subdivisions; (3) a
decrease in the cost of certain raw materials from suppliers and manufacturers
pursuant to national purchasing contracts; and (4) initiatives implemented in
each of the Company's markets designed to improve operating efficiency, control
costs and increase rates of return.
Orders for Homes and Backlog. Orders for homes increased 25% to 7,191
in 1998. The increase primarily was due to strong home orders experienced in all
of the Company's markets, except Maryland and Northern California, in response
to an improved economy marked by decreasing mortgage interest rates, low
unemployment, high levels of consumer confidence, improved home affordability
and low inventories of new homes.
As a result of the increased orders for homes during 1998, the
Company's Backlog at December 31, 1998 increased 44% from December 31, 1997 to
2,930 units, with an estimated sales value of $580,000,000.
Marketing. Marketing expenses totalled $74,463,000 in 1998, compared
with $61,139,000 in 1997. The increases in 1998 primarily were volume related,
resulting from higher marketing-related salaries, benefits and sales
13
commissions incurred and deferred marketing costs amortized in connection with
the increased number of home closings and product advertising and other costs
incurred in connection with the Company's expanded operations, particularly in
Colorado and Southern California. These expenses declined as a percentage of
home sales revenues to 6.1% in 1998 from 6.5% in 1997.
General and Administrative. General and administrative expenses
totalled $45,905,000 in 1998, compared with $30,557,000 in 1997. The increase
primarily was due to (1) increased compensation costs resulting from expanded
operations in each of the Company's markets except Northern California and
Maryland; (2) the write-off of due diligence costs and deposits with respect to
certain proposed homebuilding projects which were not acquired; and (3)
additional costs associated with new branch offices in Southern California and
design centers in Southern California and Phoenix.
2000.
Land Sales.
Revenue from land sales totalled $8,114,000, $13,964,000totaled $6,022,000, $2,909,000 and $9,978,000,$6,641,000, respectively, in 1999, 19982002, 2001 and 1997.2000. The land sales in 2002 primarily were in Colorado and Utah. Land sales in 19992001 and Colorado and Virginia2000 primarily were in 1998 and 1997.Colorado. Gross profits from these sales were $2,347,000, $4,264,000$1,422,000, $1,804,000 and $2,238,000,$2,348,000, respectively, for
the years 1999, 1998in 2002, 2001 and 1997.
2000.
Asset Impairment Charges.
No homebuilding asset impairment charges were recorded by the Company in 2002. Homebuilding operating results were reduced by asset impairment charges totalling $2,242,000, $5,300,000totaling $7,041,000 and $5,850,000$4,200,000 in 1999, 19982001 and 1997,2000, respectively. The Company'sCompany’s assets to which these asset impairment charges relaterelated are summarized as follows (in thousands).
Year Ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Completed homes and homes under
construction....................... $ - - $ 888 $ 1,916
Land under development and other...... 2,242 4,412 3,934
----------- ----------- -----------
Total........................... $ 2,242 $ 5,300 $ 5,850
=========== =========== ===========
| Year Ended December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| Completed homes and homes under construction | $ | - - | $ | 1,075 | $ | - - | |||||||
| Land under development and other | - - | 5,966 | 4,200 | ||||||||||
| Total | $ | - - | $ | 7,041 | $ | 4,200 | |||||||
The 1999 charge primarily2001 asset impairment charges resulted from the write-down to fair market value of one homebuilding project in Southern California and three homebuilding projects in the San Francisco Bay area. These four projects had experienced a much slower than anticipated home order pace and a significant increase in sales incentive requirements. The three San Francisco Bay area projects offered homes with prices originally averaging over $650,000, and each was impacted adversely by substantial reductions in home selling prices by competing projects. All four of these projects performed better than expected in 2002 and, currently, have no homes remaining to be sold. The 2000 asset impairment charges resulted from the write-down to fair value of onetwo homebuilding projectprojects in Southern California which hasthat experienced higher
than anticipated development costs, a slowerreduced home order pace and increasedsignificantly higher sales incentive requirements. The 1998 and 1997 asset impairment charges described
above relatedincentives than anticipated.
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 2002, the Company acquired control of over 850 lots in ten subdivisions in this market.
In mid-April 2002, one of the Company’s subsidiaries acquired most of the homebuilding assets, primarilyand hired former employees, of John Laing Homes in MarylandSalt Lake City, marking the Company’s entry into this market. The assets acquired included approximately 750 lots and principally were
the result of the (1) recognition of losses anticipated from the closing of
certain24 homes under construction in Backlog and from the reduction of selling prices and the
offering of increased incentives to stimulate sales of certain completed unsold
homes in inventory; (2) write-down to fair value of certain subdivisions which
experienced slow sales and negative Home Gross Margins; and (3) write-off of
other capitalized costs, primarily deferred marketing and option deposits,
related to several low margin projects or projects which the Company terminated.
See Note A to the Company's Consolidated Financial Statements.
14
15
Financial Services Segment.
Mortgage Lending Operations.
The table below sets forth information relating to HomeAmerican'sHomeAmerican’s operations (dollars in thousands).
Year Ended December 31,
-------------------------------------
1999 1998 1997
--------- --------- ---------
Loan Origination Fees.................................... $ 12,459 $ 9,738 $ 6,751
Gains on Sales of Mortgage Servicing..................... $ 3,114 $ 2,512 $ 1,739
Gains on Sales of Mortgage Loans......................... $ 8,456 $ 8,575 $ 6,182
Operating Profits........................................ $ 13,169 $ 11,198 $ 7,745
Principal Amount of Loan Originations and Purchases
MDC home buyers..................................... $ 833,055 $ 701,679 $ 525,687
Spot................................................ 39,049 54,147 31,841
Correspondent....................................... 12,074 157,107 74,654
--------- --------- ---------
Total........................................... $ 884,178 $ 912,933 $ 632,182
========= ========= =========
Capture Rate............................................ 68% 70% 68%
========= ========= =========
Including Brokered Loans............................ 81% 78% 72%
========= ========= =========
HomeAmerican's
| Year Ended December 31, | ||||||||||||||
| 2002 | 2001 | 2000 | ||||||||||||
| Origination Fees | $ | 18,771 | $ | 17,572 | $ | 13,951 | ||||||||
| Gains on Sales of Mortgage Servicing, net | $ | 1,773 | $ | 3,288 | $ | 3,162 | ||||||||
| Gains on Sales of Mortgage Loans, net | $ | 19,587 | $ | 13,923 | $ | 8,951 | ||||||||
| Operating Profit | $ | 24,194 | $ | 21,116 | $ | 14,282 | ||||||||
| Principal Amount of Loan Originations | ||||||||||||||
| MDC home buyers | $ | 1,290,650 | $ | 1,195,579 | $ | 880,692 | ||||||||
| Spot | 31,587 | 55,775 | 14,942 | |||||||||||
| Total | $ | 1,322,237 | $ | 1,251,354 | $ | 895,634 | ||||||||
| Principal Amount of Loans Brokered | ||||||||||||||
| MDC home buyers | $ | 215,228 | $ | 237,389 | $ | 244,141 | ||||||||
| Spot | 5,862 | 10,169 | 7,756 | |||||||||||
| Total | $ | 221,090 | $ | 247,558 | $ | 251,897 | ||||||||
| Capture Rate | 71 | % | 73 | % | 65 | % | ||||||||
| Including brokered loans | 81 | % | 85 | % | 81 | % | ||||||||
HomeAmerican’s operating profits increased 18% in 1999, compared with
1998,2002 exceeded 2001 operating profits by 15%. This increase primarily was due to higher gains on sales of mortgage loans, as well as higher origination volume.fees received from record levels of mortgage loans originated and brokered for MDC home buyers. Operating profits increased 45%48% in 1998,2001, compared with 1997,2000, primarily as a result of higher mortgage loan origination volume and increased gains on sales of mortgage loans. These increases partially were offset by higher general and administrative expenses resulting from increased mortgage lending activityloan origination and related activities in both 19992002 and 1998.2001.
Most of HomeAmerican's mortgage loans are originated for MDC home
buyers. Additionally, HomeAmerican brokers mortgage loans originated by outside
lending institutionsHomeAmerican are for MDC home buyers. The portion of mortgage loans originated by HomeAmerican for MDC home buyers as a percentage of total MDC home closings ("(“Capture Rate"Rate”) was 68%71% for the year ended December 31, 1999,2002, compared with 70%73% for the same period in 19982001 and 68%65% in 1997. Mortgage2000. Additionally, HomeAmerican brokers mortgage loans brokeredoriginated by HomeAmerican as a percentage of totaloutside lending institutions for MDC home closings increased to
approximately 13% for the year ended December 31, 1999, compared with
approximately 8% for 1998 and 4% in 1997.buyers. These brokered mortgage 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% for 2002, compared with 85% for 2001. The decrease in Capture Rate in 2002 primarily was due to homes closed by MDC in Nevada and Utah that were purchased from John Laing Homes with mortgage loans already contracted for by other mortgage companies.
Other Operating Results.
Insurance Operations —American Home Insurance provides third party 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.
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 reflected as interest expense. All corporate and homebuilding interest incurred in 2002, 2001 and 2000 was capitalized. Interest incurred by the financial services segment is charged to interest expense, which is deducted from interest income and totalled $0 for 1999 and 1998,
compared with $761,000 for 1997.reported as net interest income in Note B to the Company’s consolidated financial statements. Corporate and homebuilding interest incurred decreased to $21,261,000$21,116,000 in 1999,2002, compared with $22,525,000$22,498,000 in 19982001 and $26,368,000$24,367,000 in 1997,2000, primarily due to lower effective interest rates on the Company'sCompany’s outstanding debt and lower levels of homebuilding and corporate debt. For a reconciliation of interest incurred, capitalized and expensed, see Note I to the Company's Consolidated Financial Statements.
Company’s consolidated financial statements.
Corporate General and Administrative Expenses.Corporate general and administrative expenses totalled $29,589,000totaled $46,727,000 for 1999,2002, compared with $19,728,000$45,960,000 and $11,849,000,$39,461,000, respectively, for 19982001 and 1997.2000. The increase
16
in 1999,2002, compared with 1998,2001, primarily was due to (1) greater compensation expensecompensation-related costs and computer expenses in 1999 related
to2002 resulting from the Company'sCompany’s higher profitability and increased homebuilding activities; (2)
the recognitionactivities, partially offset by a $1,800,000 loss provision recorded in 1998 of2001 as a credit to health insurance expense related to a
reduction in incurred but not reported liabilitiesresult of the employee medical plan
sponsored byCompany’s decision to terminate the Company; and (3) approximately $2,000,000 in increased expenses
primarily attributablelease of an aircraft prior to the developmentend of new processes, controls and
computer systems related to the Company's "best practices" endeavors.lease term. The increase in 1998,2001, compared with 1997,2000, primarily was due to higher compensation
expensethe $1,800,000 loss provision and greater compensation-related costs in 2001 related to the 15
Company'sCompany’s higher profitability and expanding operations and the recognition in
1997 of a $2,032,000 offset to legal expense for insurance recoveries received
and the reversal of insurance-related reserves no longer required.
"Year 2000" Issue. The Company began assessing the possible impact of
the Year 2000 ("Y2K") issue on its business operations in 1997. The issue arose
because of information technology ("IT") which utilized a two digit date field.
Y2K introduced the potential for errors and miscalculations related to IT and
non-IT systems which were not designed to accommodate a date of year 2000 and
beyond. As of February 9, 2000, the Company had encountered no significant Y2K
related problems.
The Company identified the following six phases in its Y2K remediation
program: (1) assessment of the Y2K capabilities of its IT and non-IT systems;
(2) acquisition of new IT and non-IT systems or modification of existing IT and
non-IT systems to meet Y2K requirements; (3) testing; (4) evaluation of efforts
to meet Y2K requirements; (5) adjustments as identified in the evaluation phase;
and (6) implementation and integration of modified IT and non-IT systems into
the Company's business operations.
The Company completed all six phases with respect to itsincreased homebuilding and financial services information systems and believes these systems are Y2K
compliant. Given the nature of the homebuilding industry, the Company is only
minimally dependent upon non-IT systems such as telephone, security systems and
time clocks. With respect to such non-IT systems, the Company completed the
implementation phase and believes these systems are Y2K compliant.
The Company evaluated other potential Y2K issues. As part of this
evaluation, the Company requested and received representations from certain
financial institutions and third party vendors that indicated their progress
toward Y2K compliance. The survey responses did not indicate any Y2K compliance
issues that would have resulted in a material adverse effect on the Company's
financial position or results of operations.
The Company incurred costs for outside consultants and capital
expenditures in 1999, 1998 and 1997 related to Y2K which aggregated
approximately $850,000. Future consulting and capital acquisition costs are
expected to be insignificant. These costs, which were expensed as incurred, have
been funded from operations. The costs incurred through December 31, 1999 did
not have a material affect on the Company's financial position or results of
operations.
The most likely worst-case Y2K scenario considered by the Company
includes isolated instances of construction delays caused by the Company's
inability to secure building permits, zoning and utilities as well as closing
delays caused by the inability of home buyers to obtain financing. In addition,
there could be isolated instances of subcontractors experiencing construction
delays due to their inability to secure building materials on a timely basis.
The Company typically uses several subcontractors within a given trade. As a
result, the Company believes that it would be able to replace subcontractors
that would not be able to perform due to Y2K deficiencies.
activities.
Income Taxes - MDC'sTaxes.MDC’s overall effective income tax rates of 39.8%39.0%, 38.5%39.0% and 38.5%39.3%, respectively, for 1999, 1998,2002, 2001, and 1997,2000, differed from the federal statutory rate of 35% primarily due to the impact of state income taxes. TheIn 2000, the effective rate was impacted by net pre-tax investment gains of $8,629,000 realized on sales of certain investments by one of the Company’s captive insurance subsidiaries, which is subject to taxation at both the subsidiary and Company levels. Also in 2000, the Company recognized an income tax benefit resulting from the resolution of Internal Revenue Service (the "IRS") has completed its examinations
of the Company's federal income tax returnsexaminations for the years 1991 through 1995 and
has proposed adjustments to the taxable income reflected in such returns. The
Company is protesting certain of these proposed adjustments. The IRS currently
is examining the Company's federal income tax returns for the years 1996 and
1997. No audit report has been issued by the IRS in connection with this latter
examination. In the opinion of management, adequate provision has been made for
additional income taxes and interest, if any, that may arise as a result of
these examinations. See "Forward-Looking Statements" below.
16
LIQUIDITY AND CAPITAL RESOURCES
MDC uses its liquidity and capital resources to, among other things, (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. In September 2002, the Company filed an amended registration statement increasing its capacity to issue equity, debt or hybrid securities to $750,000,000 from $300,000,000. The amended registration statement was declared effective in October 2002. In December 2002, the Company issued $150,000,000 principal amount of 7% senior notes due 2012 (the “7% Senior Notes”), thereby reducing its capacity to issue equity, debt or hybrid securities to $600,000,000.
Capital Resources.
The Company'sCompany’s capital structure is a combination of (1) permanent financing, represented by stockholders'stockholders’ equity; (2) long-term financing, represented by its publicly traded 8 3/88% senior notes due 2008 (the “8 3/8% Senior Notes”), 7% Senior Notes and its homebuilding line of credit;credit (the “Homebuilding Line”); and (3) current financing, primarily its mortgage lending line of credit. Thecredit (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 operationaloperating structure and adequate to satisfy its
current and near-term capital requirements. See "Forward-Looking Statements"
below.
Based upon its current capital resources and additional liquidity
available under existing credit relationships, MDC anticipates that it has
adequate financial resources to satisfy its current and near-term capital requirements, 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'sCompany’s business or capital and credit market occur as a result of the various risk factors described elsewhere in this report. See "Forward-Looking Statements"“Forward-Looking Statements” below.
Lines of Credit and Notes Payable.
Homebuilding. In June 1998, the Company modified
Homebuilding. On July 30, 2002, the terms of its
homebuilding line of credit, increasing available borrowings from $175,000,000
to $300,000,000, and extending the maturity date of this agreement by two years
to June 30, 2003. In October 1999, the line of credit wasHomebuilding Line were amended and restated (the "Amended“Second Amended and Restated Credit Agreement"Agreement”) to extend the maturity date to September 30, 2004July 29, 2006, and increase the maximum amount available from $450,000,000 to $450,000,000$600,000,000 upon the Company'sCompany’s request, requiringsubject to additional commitments from existing or additional participant lenders. There can be no assurance that existing orLender commitments under the Homebuilding Line increased from $413,000,000 to $450,000,000 in 2001, to $538,000,000 in July 2002 and to $593,000,000 in December 2002. In January 2003, the Company received an additional lenders would agree$7,000,000 lender commitment, bringing total commitments to provide the additional commitments.$600,000,000. Pursuant to the terms of the related credit agreement,Second Amended and Restated Credit Agreement, a term-out of this credit may commence earlierprior to July 29, 2006 under certain circumstances. At December 31, 1999, $40,000,000
was borrowed2002, the Company had no borrowings and $11,269,000$20,423,000 in letters of credit were outstanding under this
line of credit. At December 31, 1999 and 1998, the weighted-averageHomebuilding Line, but could have borrowed funds at interest rates on the line of credit were 7.8% and 7.4%, respectively.
ranging from 2.94% to 4.25%.
Mortgage Lending.To provide funds to originate and purchase mortgage loans and to finance these mortgage loans on a short-term basis, HomeAmerican utilizes its mortgage lending bank line of credit (the "Mortgage Line").Mortgage Line. These mortgage loans are pooled into GNMA, FNMA and FHLMC pools, or retained as whole loans, and subsequently are sold in the open market on a spot basis or pursuant to mortgage loan sale commitments, generally within 40 days after origination. During 1999, 19982002, 2001 and 1997,2000, HomeAmerican sold $877,362,000, $892,040,000$1,260,447,000, $1,208,597,000 and $626,174,000,$874,383,000, respectively, principal amount of mortgage loans and mortgage certificates to unaffiliated purchasers.
17
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 termination date is 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. In December 1999, the Company modified the
terms of the Mortgage Line, increasing the available borrowings from $51,000,000
to $75,000,000. At December 31, 1999, $50,234,0002002, $154,074,000 was borrowed under the
Mortgage Line and an additional $19,714,000$20,926,000 was collateralized and available to be borrowed. The Mortgage Line is cancellablecancelable upon 90 days120 days’ notice. At December 31, 2002 and 2001, the interest rates on the Mortgage Line were 2.7% and 3.0%, respectively.
General.The agreements for the Company's New Senior Notes andCompany’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 containing these representations, warranties and covenants other thanfor the Mortgage Line,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 this Annual Report on Form 10-K.
17
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'sMDC’s consolidated indebtedness is not permitted to exceed the product of 2.15 (subject to downward adjustment in certain circumstances) times MDC's "adjustedMDC’s “adjusted consolidated tangible net worth,"” as defined. Under the adjusted consolidated tangible net worth test, MDC's "tangibleMDC’s “adjusted consolidated tangible net worth,"” as defined, must not be less than the sum of $238,000,000 and(1) $491,382,000; (2) 50% of "consolidated“consolidated net income,"” as defined, of the “borrower,” as defined, and the “guarantors,” as defined, after December 31, 1998.2001; and (3) 50% of the net proceeds or other consideration received for the issuance of capital stock. In addition, the
"consolidated“adjusted consolidated tangible net worth,"” as defined, must not be less than $150,000,000.$307,114,000.
The Company's New Senior Notes indenture doesCompany’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'sCompany’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 New8 3/8% Senior Notes. The Newsenior 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 not secured.fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by most of the Company’s homebuilding segment subsidiaries.
As of December 31, 1999,2002, the maximum amount of additional homebuilding and corporate indebtedness that MDC could have incurred under the most restrictive of the debt limitations described above was approximately $542,000,000.
$1,320,000,000.
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. The repurchase of MDC common stock under this program was completed in March 2000 at per share prices ranging from $13.53 to $14.78, with an average cost of $14.06. On February 21, 2000, the MDC board of directors authorized another program to repurchase up to 2,000,000 additional shares of MDC common stock. On December 18, 2002, the MDC board of directors authorized the repurchase of an additional 1,000,000 shares of MDC common stock, bringing the total authorization under this program to 3,000,000 shares. During 2002, the Company repurchased 789,000 shares of MDC common stock, bringing the total shares repurchased under this program to 1,853,300 and leaving 1,146,700 shares available to be repurchased as of December 31, 2002. The per share prices, including commissions, for the 1,853,300 shares repurchased ranged from $13.85 to $40.48, with an average cost of $26.99. At December 31, 2002 and 2001, the Company held 5,373,000 shares and 4,809,000 shares of treasury stock with average purchase prices of $13.46 and $9.45, respectively.
18
Consolidated Cash Flow.
During 1999,2002, the Company used $5,723,000cash of $178,870,000 in its operating and investing activities, as net income during the period was more than offset by increases in net homebuilding and mortgage loan assets in conjunction with the Company’s expanded homebuilding operations. The operating and investing cash usage, the repurchase of MDC common stock for $29,403,000 and the payment of $8,292,000 in dividends primarily were financed by the issuance of $150,000,000 principal amount of 7% Senior Notes, an increase in the Company’s borrowings under its mortgage lending line of credit by $54,432,000 and the proceeds from the exercise of stock options. During 2001, the Company generated $93,251,000 in cash from its operating and
investing activities and increased its available cash on hand by $28,851,000.
Thisreceived $7,571,000 in proceeds from stock option exercises. $75,118,000 of this cash was provided by increasedused to reduce borrowings from the lines of credit, of
$40,029,000 partially offset by dividend paymentsrepurchase stock and principal payments on
notes payable. Thepay dividends. During 2000, the Company generated $15,881,000used $66,617,000 in cash fromin its operating and investing activities during 1998.activities. The Company also used this$36,048,000 in cash to repurchase its common stock and pay dividends. This cash was provided primarily by reducing available cash on hand to reduce notes payable by $22,472,000.$24,815,000 and increasing borrowings from the lines of credit by $74,225,000.
Operating activities used cash of $3,845,000$166,429,000 in 1999, compared with2002, provided cash generated of $800,000$93,251,000 in 2001, and $18,516,000, respectively,used cash of $63,457,000 in 1998 and 1997.2000. The 19992002 cash decrease primarily was the result of a significant increase in homebuilding and mortgage lending inventories in conjunction with the Company’s expanded homebuilding operations. The 2001 cash increase primarily resulted from 1998 and 1998 cash decrease from 1997 primarily were due
to 1999 and 1998the increase in income before income taxes, partially offset by increases in homebuilding and mortgage loan inventories in conjunction with the Company'sCompany’s expanded homebuilding operations, partially
offset by increases in income before income taxes and extraordinary item.
Investing activities used cash of $1,878,000 in 1999, compared with
cash generated of $15,081,000 and $3,513,000, respectively, in 1998 and 1997.
Cash generated in 1998 was higher than both 1999 and 1997 primarily due to the
$13,250,000 net proceeds received from the sale of the Company's headquarters
office building in 1998.operations.
Financing activities generated cash of $34,574,000$171,212,000 in 1999,2002, used cash of $67,547,000 in 2001 and generated cash of $41,802,000 in 2000. The 2002 increase, compared with cash used2001, primarily was due to the issuance of $17,480,000 and $21,655,000, respectively, in 1998 and 1997.
The$150,000,000 principal amount of 7% Senior Notes, as well as an increase in the Company’s mortgage lending line of credit, partially offset by a use of $29,403,000 in cash generated in 1999to repurchase MDC common stock. The 2001 decrease, compared with 2000, primarily was due to increased borrowingspayments on the homebuilding and mortgage lending lines of credit, compared with 1998.
The decrease in cash used in 1998 primarily was due to stock repurchases in 1997
in the amount of $7,349,000, partially offset by greater reductionsa use of $26,983,000 in outstanding debt in 1997, compared with 1998.
Included in 1998 cash flows from financing activities is the Company's
sale of $175,000,000 principal amount of New Senior Notes (less issue costs of
$3,459,000). The Company used the proceeds from this sale to repurchase $61,181,000 principal amount of Old Senior Notes, to defease the remaining
$90,819,000 principal amount of Old Senior Notes outstanding and for general
corporate purposes. A premium of $17,592,000 was paid on the repurchase and
defeasance.
18
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'sMDC’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'sMDC’s future operations and liquidity. Among other things, these conditions 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"“Forward-Looking Statements” below.
MDC's
MDC’s business also is affected significantly by, among other things, 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.
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. Due to
19
uncertainties in the estimation process, it is at least reasonably possible that actual results could differ from those estimates.
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. Actual results could differ from such estimates.
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. Actual amounts could differ from estimated amounts.
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. Actual amounts could differ from estimated amounts.
ISSUANCE OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. (“FIN”) 46, which addresses financial reporting requirements for variable interest entities, also referred to as special purpose entities. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (1) does not have equity investors with voting rights; or (2) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property and may be essentially passive or it may engage in research and development or other activities on behalf of another company. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 1998,15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company anticipates that the adoption of FIN 46 will not have an effect on its financial position or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 133,
"Accounting148, “Accounting for Derivative InstrumentsStock-Based Compensation – Transition and Hedging Activities" ("Disclosure.” SFAS 133") was
issued.No. 148 amends SFAS 133 addresses theNo. 123, “Accounting for Stock-Based Compensation,” to provide three alternative methods of transition to SFAS No. 123’s fair value method of accounting for derivative instruments,stock-based employee compensation for companies that elect to adopt the provisions of SFAS No. 123. Transition to SFAS No. 123 is not required by SFAS No. 148. The Company has elected to use the intrinsic value method of accounting for stock compensation in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” and related interpretations.
SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB No. 28, “Interim Financial Reporting,” to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock based compensation on reported net income and earnings per share in annual and interim financial statements. The disclosure provisions of SFAS No. 148 are required to be adopted by all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB No. 25. The disclosure provisions of SFAS No. 148, effective for fiscal years ending after December 15, 2002, have been adopted by the Company, with the appropriate disclosures in the notes to the consolidated financial statements included in this Annual Report on Form 10-K.
20
In November 2002, the FASB issued FIN 45, which elaborates on the existing disclosure requirements for most guarantees, including loan guarantees. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. FIN 45 does not apply to certain derivative instrumentsguarantee contracts, such as those issued by insurance companies or for a lessee’s residual value guarantee embedded in other contracts,a capital lease. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor’s obligations would not apply to product warranties or to guarantees accounted for as derivatives. The initial recognition and hedging
activities.initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002, regardless of the guarantor’s fiscal year-end. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 did not have an effect on the Company’s financial position or results of operations.
In June 1999,2002, the FASB issued SFAS 137 was issued, deferringNo. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring).” SFAS No. 146 requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred as opposed to when the entity commits to an exit plan under EITF No. 94-3. SFAS No. 146 is effective date of
SFAS 133 to January 1, 2001.for exit or disposal activities initiated after December 31, 2002. The Company anticipates that the adoption of SFAS 133 as of January 1, 2001,No. 146 will not have a material affecteffect on its financial position or results of operations. See "Forward-Looking Statements" below.
In April 2002, the FASB issued SFAS No. 145, “Rescission of SFAS No. 4, 44, 64 and Amendment of SFAS No. 13 and Technical Corrections.” SFAS No. 145 prevents treatment as extraordinary any gains or losses recognized on extinguishment of debt not meeting the criteria of APB No. 30. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The adoption of SFAS No. 145 will affect the classification of such amounts in the financial statements of subsequent periods and comparative prior periods.
OTHER
Forward-Looking Statements.
Certain statements in this Form 10-K Annual Report, the Company'sCompany’s Annual Report to Shareowners, as well as statements made by the Company in periodic press releases, oral statements made by the Company'sCompany’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"“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We have identified the forward-looking statements in this Form 10-K by cross referencingcross-referencing this section at the end of the paragraph in which the forward-looking statement is located. 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) demographic changes;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) the
impact on the Companyterrorist acts and other acts of Y2K compliance by the Company and its vendors,
suppliers and subcontractors and by various governmental and regulatory
agencies;war; and (15) other factors over which the Company has little or no control.
19
21
Item 7A.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 forward salethese commitments to mitigate some ofmanage the price risk associated withon fluctuations in interest rates on its mortgage loans owned and commitments to originate mortgage loans. Such contracts are the mortgage loan portfolio. Other than the forward commitments described above, the
Company does not utilize interest rate swaps, forward option contracts on
foreign currencies or commodities, or other types ofonly significant financial derivative financial
instruments.instruments utilized by MDC.
HomeAmerican provides mortgage loans whichthat generally are sold forward
upon closing 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 the frequency of these loan sales,this hedging philosophy, the market risk associated with these mortgages is minimal.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'sCompany’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'sCompany’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 December 31, 1999,2002, short-term debt was $50,234,000,$154,074,000, which consisted of MDC'samounts 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 December 31, 19992002 are as follows (in thousands).
Maturities through December 31,
----------------------------------------------------------------- Estimated
2000 2001 2002 2003 2004 Thereafter Total Fair Value
---------- --------- --------- ---------- --------- ---------- --------- ----------
Fixed Rate Debt........... $ - - $ - - $ - - $ - - $ - - $ 175,000 $ 175,000 $ 161,000
Average Interest Rate - - - - - - - - - - 8.38% 8.38%
Variable Rate Debt........ $ - - $ - - $ - - $ - - $ 40,000 $ - - $ 40,000 $ 40,000
Average Interest Rate.. - - - - - - - - 7.80% - - 7.80%
| Maturities through December 31, | |||||||||||||||||||||||||||||||||
| Estimated | |||||||||||||||||||||||||||||||||
| 2003 | 2004 | 2005 | 2006 | 2007 | Thereafter | Total | Fair Value | ||||||||||||||||||||||||||
| Fixed Rate Debt | $ | - - | $ | - - | $ | - - | $ | - - | $ | - - | $ | 325,000 | $ | 325,000 | $ | 326,603 | |||||||||||||||||
| Average Interest Rate | - - | - - | - - | - - | - - | 7.74 | % | 7.74 | % | ||||||||||||||||||||||||
The Company believes that its overall balance sheet structure has repricing and cash flow characteristics that mitigate the impact of interest rate movements.
20
22
Item 8.Consolidated Financial Statements.
M.D.C. HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements
Report of Independent Accountants ..................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and
December 31, 1998.................................................... F-3
Consolidated Statements of Income and Comprehensive Income for each of
the Three Years in the Period Ended December 31, 1999................ F-5
Consolidated Statements of Stockholders' Equity for each of the Three
Years in the Period Ended December 31, 1999.......................... F-6
Consolidated Statements of Cash Flows for each of the Three Years in
the Period Ended December 31, 1999................................... F-7
Notes to Consolidated Financial Statements............................. F-8
| Page | |||||
| Consolidated Financial Statements | |||||
| Report of Independent Auditors | F-2 | ||||
| Consolidated Balance Sheets as of December 31, 2002 and December 31, 2001 | F-3 | ||||
| Consolidated Statements of Income for each of the Three Years in the Period Ended December 31, 2002 | F-5 | ||||
| Consolidated Statements of Stockholders’ Equity for each of the Three Years in the Period Ended December 31, 2002 | F-6 | ||||
| Consolidated Statements of Cash Flows for each of the Three Years in the Period Ended December 31, 2002 | F-7 | ||||
| Notes to Consolidated Financial Statements | F-8 | ||||
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
AUDITORS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
M.D.C. HOLDINGS, INC.
In our opinion,
We have audited the accompanying consolidated balance sheets of M.D.C. Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2002 and 2001, and the related consolidated statements of income, and comprehensive income,
stockholders'stockholders’ equity, and cash flows present fairly, in all material respects,
the financial position of M.D.C. Holdings, Inc. and its subsidiaries (the
"Company") at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the
United States.2002. These financial statements are the responsibility of the Company's management; ourCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits of these
statements in accordance with auditing standards generally accepted in the United States whichStates. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,statements. An audit also includes assessing the accounting principles used and significant estimates made by management, andas well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the opinion expressed above.
PricewaterhouseCoopers LLP
financial statements referred to above present fairly, in all material respects, the consolidated financial position of M.D.C. Holdings, Inc. and subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.
| /s/ Ernst & Young LLP |
Denver, Colorado
January 17, 2000
7, 2003
F-2
M.D.C. HOLDINGS, INC.
Consolidated Balance Sheets
(In
(In thousands)
December 31,
-------------------------
1999 1998
----------- -----------
ASSETS
Corporate
Cash and cash equivalents........................................... $ 33,637 $ 2,460
Property and equipment, net......................................... 2,909 2,901
Deferred income taxes............................................... 21,201 17,949
Deferred debt issue costs, net...................................... 2,393 2,589
Other assets, net................................................... 6,771 5,670
----------- -----------
66,911 31,569
Homebuilding
Cash and cash equivalents........................................... 4,935 7,279
Home sales and other accounts receivable............................ 3,496 12,771
Inventories, net
Housing completed or under construction........................... 337,029 294,104
Land and land under development................................... 308,680 217,180
Prepaid expenses and other assets, net.............................. 58,156 58,981
----------- -----------
712,296 590,315
Financial Services
Cash and cash equivalents........................................... 358 340
Mortgage loans held in inventory.................................... 89,953 84,548
Other assets, net................................................... 7,490 7,241
----------- -----------
97,801 92,129
Total Assets.................................................. $ 877,008 $ 714,013
=========== ===========
F-3
| December 31, | |||||||||||
| 2002 | 2001 | ||||||||||
ASSETS | |||||||||||
| Corporate | |||||||||||
| Cash and cash equivalents | $ | 23,164 | $ | 31,322 | |||||||
| Property and equipment, net | 10,851 | 2,723 | |||||||||
| Deferred income taxes | 25,980 | 30,081 | |||||||||
| Deferred debt issue costs, net | 3,305 | 1,947 | |||||||||
| Other assets, net | 6,708 | 7,597 | |||||||||
| 70,008 | 73,670 | ||||||||||
| Homebuilding | |||||||||||
| Cash and cash equivalents | 4,686 | 4,760 | |||||||||
| Home sales and other accounts receivable | 3,519 | 2,621 | |||||||||
| Inventories, net | |||||||||||
| Housing completed or under construction | 578,475 | 456,752 | |||||||||
| Land and land under development | 656,843 | 450,502 | |||||||||
| Prepaid expenses and other assets, net | 65,936 | 49,544 | |||||||||
| 1,309,459 | 964,179 | ||||||||||
| Financial Services | |||||||||||
| Cash and cash equivalents | 1,092 | 518 | |||||||||
| Mortgage loans held in inventory | 207,938 | 144,971 | |||||||||
| Other assets, net | 6,683 | 7,618 | |||||||||
| 215,713 | 153,107 | ||||||||||
| Total Assets | $ | 1,595,180 | $ | 1,190,956 | |||||||
See notes to consolidated financial statements.
F-3
M.D.C. HOLDINGS, INC.
Consolidated Balance Sheets
(In
(In thousands, except share amounts)
December 31,
-------------------------
1999 1998
----------- -----------
LIABILITIES
Corporate
Accounts payable and accrued expenses............................... $ 46,721 $ 32,378
Income taxes payable................................................ 18,291 14,568
Senior notes, net................................................... 174,389 174,339
----------- -----------
239,401 221,285
Homebuilding
Accounts payable and accrued expenses............................... 152,488 131,374
Line of credit...................................................... 40,000 21,871
Notes payable....................................................... - - 866
----------- -----------
192,488 154,111
Financial Services
Accounts payable and accrued expenses............................... 5,862 12,152
Line of credit...................................................... 50,234 28,334
----------- -----------
56,096 40,486
Total Liabilities............................................. 487,985 415,882
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTES K, N
AND P).............................................................. - - - -
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 25,000,000 shares authorized; none
issued............................................................ - - - -
Common stock, $.01 par value; 100,000,000 shares authorized;
28,166,000 and 27,858,000 shares issued, respectively, at
December 31, 1999 and 1998........................................ 282 279
Additional paid-in capital.......................................... 179,094 175,160
Retained earnings................................................... 245,235 160,291
Accumulated other comprehensive income.............................. 3,623 1,785
----------- -----------
428,234 337,515
Less treasury stock, at cost, 5,850,000 and 5,876,000 shares,
respectively, at December 31, 1999 and 1998....................... (39,211) (39,384)
----------- -----------
Total Stockholders' Equity.................................... 389,023 298,131
----------- -----------
Total Liabilities and Stockholders' Equity.................... $ 877,008 $ 714,013
=========== ===========
F-4
| December 31, | ||||||||||
| 2002 | 2001 | |||||||||
LIABILITIES | ||||||||||
| Corporate | ||||||||||
| Accounts payable and accrued expenses | $ | 63,871 | $ | 61,135 | ||||||
| Income taxes payable | 21,571 | 9,953 | ||||||||
| Senior notes, net | 322,990 | 174,503 | ||||||||
| 408,432 | 245,591 | |||||||||
| Homebuilding | ||||||||||
| Accounts payable and accrued expenses | 210,601 | 174,955 | ||||||||
| Line of credit | - - | - - | ||||||||
| 210,601 | 174,955 | |||||||||
| Financial Services | ||||||||||
| Accounts payable and accrued expenses | 21,506 | 16,937 | ||||||||
| Line of credit | 154,074 | 99,642 | ||||||||
| 175,580 | 116,579 | |||||||||
| Total Liabilities | 794,613 | 537,125 | ||||||||
COMMITMENTS AND CONTINGENCIES (NOTES L AND N) | - - | - - | ||||||||
STOCKHOLDERS’ EQUITY (NOTE G) | ||||||||||
| Preferred stock, $.01 par value; 25,000,000 shares authorized; none issued | - - | - - | ||||||||
| Common stock, $.01 par value; 100,000,000 shares authorized; 31,802,000 and 31,395,000 shares issued, respectively, at December 31, 2002 and 2001 | 318 | 314 | ||||||||
| Additional paid-in capital | 371,896 | 357,037 | ||||||||
| Retained earnings | 501,498 | 342,485 | ||||||||
| Unearned restricted stock | (820 | ) | (412 | ) | ||||||
| Accumulated other comprehensive income (loss) | 2 | (163 | ) | |||||||
| 872,894 | 699,261 | |||||||||
| Less treasury stock, at cost, 5,373,000 and 4,809,000 shares, respectively, at December 31, 2002 and 2001 | (72,327 | ) | (45,430 | ) | ||||||
| Total Stockholders’ Equity | 800,567 | 653,831 | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | 1,595,180 | $ | 1,190,956 | ||||||
See notes to consolidated financial statements.
F-4
M.D.C. HOLDINGS, INC.
Consolidated Statements of Income and Comprehensive Income
(In
(In thousands, except per share amounts)
Year Ended December 31,
--------------------------------------------
1999 1998 1997
----------- ----------- -----------
REVENUES
Homebuilding.............................................. $ 1,537,563 $ 1,234,272 $ 949,790
Financial Services........................................ 27,460 27,909 18,557
Corporate................................................. 2,615 1,028 1,215
----------- ----------- -----------
Total Revenues...................................... 1,567,638 1,263,209 969,562
----------- ----------- -----------
COSTS AND EXPENSES
Homebuilding.............................................. 1,375,305 1,147,508 908,247
Financial Services........................................ 14,291 12,121 9,378
Corporate general and administrative...................... 29,589 19,728 11,849
Corporate and homebuilding interest....................... - - - - 761
----------- ----------- -----------
Total Costs and Expenses............................ 1,419,185 1,179,357 930,235
----------- ----------- -----------
Income before income taxes and extraordinary item............ 148,453 83,852 39,327
Provision for income taxes................................... (59,061) (32,284) (15,122)
----------- ----------- -----------
Income before extraordinary item............................. 89,392 51,568 24,205
Extraordinary loss from early extinguishments of debt, net
of income tax benefit of $9,587 for 1998 and $1,336 for
1997...................................................... - - (15,314) (2,179)
----------- ----------- -----------
NET INCOME................................................... 89,392 36,254 22,026
----------- ----------- -----------
Unrealized holding gains on securities arising during the
year...................................................... 2,123 1,593 1,246
Less reclassification adjustment for gains (losses) included
in net income............................................. 285 (54) 880
----------- ----------- -----------
Net unrealized holding gains on securities arising during
the year, net of deferred income taxes of $5,204 for
1999, $1,080 for 1998 and $233 for 1997................... 1,838 1,647 366
----------- ----------- -----------
COMPREHENSIVE INCOME......................................... $ 91,230 $ 37,901 $ 22,392
=========== =========== ===========
EARNINGS PER SHARE (NOTES A and M)
Basic
Income before extraordinary item..................... $ 4.02 $ 2.79 $ 1.37
=========== =========== ===========
Net Income........................................... $ 4.02 $ 1.96 $ 1.25
=========== =========== ===========
Diluted
Income before extraordinary item..................... $ 3.95 $ 2.32 $ 1.18
=========== =========== ===========
Net Income........................................... $ 3.95 $ 1.64 $ 1.08
=========== =========== ===========
WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic...................................................... 22,247 18,451 17,673
=========== =========== ===========
Diluted.................................................... 22,656 22,606 21,899
=========== =========== ===========
DIVIDENDS PAID PER SHARE..................................... $ .20 $ .15 $ .12
=========== =========== ===========
F-5
| Year Ended December 31, | |||||||||||||||
| 2002 | 2001 | 2000 | |||||||||||||
REVENUES | |||||||||||||||
| Homebuilding | $ | 2,272,195 | $ | 2,086,344 | $ | 1,721,559 | |||||||||
| Financial services | 45,356 | 38,566 | 28,925 | ||||||||||||
| Corporate | 973 | 964 | 1,061 | ||||||||||||
| Total Revenues | 2,318,524 | 2,125,874 | 1,751,545 | ||||||||||||
COSTS AND EXPENSES | |||||||||||||||
| Homebuilding | 1,976,591 | 1,807,077 | 1,494,240 | ||||||||||||
| Financial services | 21,162 | 17,450 | 14,643 | ||||||||||||
| Corporate general and administrative | 46,727 | 45,960 | 39,461 | ||||||||||||
| Total Costs and Expenses | 2,044,480 | 1,870,487 | 1,548,344 | ||||||||||||
| Income before income taxes | 274,044 | 255,387 | 203,201 | ||||||||||||
| Provision for income taxes | (106,739 | ) | (99,672 | ) | (79,898 | ) | |||||||||
NET INCOME | $ | 167,305 | $ | 155,715 | $ | 123,303 | |||||||||
EARNINGS PER SHARE (NOTES G AND K) | |||||||||||||||
| Basic | $ | 6.25 | $ | 5.89 | $ | 4.75 | |||||||||
| Diluted | $ | 6.03 | $ | 5.72 | $ | 4.64 | |||||||||
WEIGHTED-AVERAGE SHARES OUTSTANDING | |||||||||||||||
| Basic | 26,767 | 26,421 | 25,974 | ||||||||||||
| Diluted | 27,754 | 27,232 | 26,556 | ||||||||||||
DIVIDENDS PAID PER SHARE | $ | .31 | $ | .27 | $ | .24 | |||||||||
See notes to consolidated financial statements.
F-5
M.D.C. HOLDINGS, INC.
Consolidated Statements of Stockholders'Stockholders’ Equity
(In
(In thousands)
Accumulated
Additional Other
Common Paid-In Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock Total
------- ----------- ----------- -------------- ----------- -----------
BALANCES-JANUARY 1, 1997............... $ 231 $ 138,705 $ 106,417 $ (228) $ (31,278) $ 213,847
Shares issued....................... 6 3,153 45 - - (940) 2,264
Shares reacquired................... - - - - - - - - (7,349) (7,349)
Unrealized gains on
available-for-sale securities, net - - - - - - 366 - - 366
Non-qualified stock options exercised. - - 1,012 - - - - - - 1,012
Notes receivable for stock purchases,
net of repayments................. - - (441) - - - - - - (441)
Dividends paid...................... - - - - (2,132) - - - - (2,132)
Net income.......................... - - - - 22,026 - - - - 22,026
------ ----------- ----------- ----------- ----------- -----------
BALANCES-DECEMBER 31, 1997............. 237 142,429 126,356 138 (39,567) 229,593
Shares issued....................... 42 30,267 456 - - 183 30,948
Unrealized gains on
available-for-sale securities, net - - - - - - 1,647 - - 1,647
Non-qualified stock options exercised. - - 2,484 - - - - - - 2,484
Notes receivable for stock purchases,
net of repayments................. - - (20) - - - - - - (20)
Dividends paid...................... - - - - (2,775) - - - - (2,775)
Net income.......................... - - - - 36,254 - - - - 36,254
------ ----------- ----------- ----------- ----------- -----------
BALANCES-DECEMBER 31, 1998............. 279 175,160 160,291 1,785 (39,384) 298,131
Shares issued....................... 3 3,399 - - - - 173 3,575
Unrealized gains on
available-for-sale securities, net - - - - - - 1,838 - - 1,838
Non-qualified stock options exercised. - - 695 - - - - - - 695
Notes receivable for stock purchases,
net of repayments................. - - (160) - - - - - - (160)
Dividends paid...................... - - - - (4,448) - - - - (4,448)
Net income.......................... - - - - 89,392 - - - - 89,392
------ ----------- ----------- ----------- ----------- -----------
BALANCES-DECEMBER 31, 1999............. $ 282 $ 179,094 $ 245,235 $ 3,623 $ (39,211) $ 389,023
====== =========== =========== =========== =========== ===========
F-6
| Additional | Accumulated Other | Unearned | ||||||||||||||||||||||||||||
| Common | Paid-In | Retained | Comprehensive | Restricted | Treasury | |||||||||||||||||||||||||
| Stock | Capital | Earnings | Income (Loss) | Stock | Stock | Total | ||||||||||||||||||||||||
BALANCES-JANUARY 1, 2000 | $ | 282 | $ | 179,094 | $ | 245,235 | $ | 3,623 | $ | - - | $ | (39,211 | ) | $ | 389,023 | |||||||||||||||
| Comprehensive income | ||||||||||||||||||||||||||||||
| Net income | - - | - - | 123,303 | - - | - - | - - | 123,303 | |||||||||||||||||||||||
| Change in unrealized gains on securities available for sale, net of income taxes of $(6,090) | - - | - - | - - | (3,456 | ) | - - | - - | (3,456 | ) | |||||||||||||||||||||
| Total comprehensive income | 119,847 | |||||||||||||||||||||||||||||
| Shares issued | 4 | 5,823 | - - | - - | - - | 2,036 | 7,863 | |||||||||||||||||||||||
| Tax benefit of non-qualified stock options exercised | - - | 1,439 | - - | - - | - - | - - | 1,439 | |||||||||||||||||||||||
| Notes receivable for stock purchases, net of repayments | - - | (1,794 | ) | - - | - - | - - | - - | (1,794 | ) | |||||||||||||||||||||
| Contribution of common stock | - - | 1,372 | - - | - - | - - | 528 | 1,900 | |||||||||||||||||||||||
| Stock repurchases | - - | - - | - - | - - | - - | (30,828 | ) | (30,828 | ) | |||||||||||||||||||||
| Cash dividends paid | - - | - - | (5,220 | ) | - - | - - | - - | (5,220 | ) | |||||||||||||||||||||
| 10% stock dividend | 22 | 80,403 | (80,425 | ) | - - | - - | - - | - - | ||||||||||||||||||||||
BALANCES-DECEMBER 31, 2000 | 308 | 266,337 | 282,893 | 167 | - - | (67,475 | ) | 482,230 | ||||||||||||||||||||||
| Comprehensive income | ||||||||||||||||||||||||||||||
| Net income | - - | - - | 155,715 | - - | - - | - - | 155,715 | |||||||||||||||||||||||
| Minimum pension liability adjustment, net of income taxes of $(48) | - - | - - | - - | (75 | ) | - - | - - | (75 | ) | |||||||||||||||||||||
| Change in unrealized gains on securities available for sale, net of income taxes of $(432) | - - | - - | - - | (255 | ) | - - | - - | (255 | ) | |||||||||||||||||||||
| Total comprehensive income | 155,385 | |||||||||||||||||||||||||||||
| Shares issued | 7 | 11,730 | - - | - - | - - | 1,595 | 13,332 | |||||||||||||||||||||||
| Tax benefit of non-qualified stock options exercised | - - | 8,541 | - - | - - | - - | - - | 8,541 | |||||||||||||||||||||||
| Notes receivable for stock purchases, net of repayments | - - | 2,644 | - - | - - | - - | - - | 2,644 | |||||||||||||||||||||||
| Contribution of common stock | - - | 1,474 | - - | - - | - - | 526 | 2,000 | |||||||||||||||||||||||
| Stock repurchases | - - | - - | - - | - - | - - | (3,845 | ) | (3,845 | ) | |||||||||||||||||||||
| Cash dividends paid | - - | - - | (6,456 | ) | - - | - - | - - | (6,456 | ) | |||||||||||||||||||||
| 10% stock dividend | (1 | ) | 66,021 | (89,667 | ) | - - | - - | 23,647 | - - | |||||||||||||||||||||
| Issuance of restricted stock | - - | 290 | - - | - - | (412 | ) | 122 | - - | ||||||||||||||||||||||
BALANCES-DECEMBER 31, 2001 | 314 | 357,037 | 342,485 | (163 | ) | (412 | ) | (45,430 | ) | 653,831 | ||||||||||||||||||||
| Comprehensive income | ||||||||||||||||||||||||||||||
| Net income | - - | - - | 167,305 | - - | - - | - - | 167,305 | |||||||||||||||||||||||
| Minimum pension liability adjustment, net of income taxes of $(26) | - - | - - | - - | (41 | ) | - - | - - | (41 | ) | |||||||||||||||||||||
| Change in unrealized gains on securities available for sale, net of income taxes of $345 | - - | - - | - - | 206 | - - | - - | 206 | |||||||||||||||||||||||
| Total comprehensive income | 167,470 | |||||||||||||||||||||||||||||
| Shares issued | 4 | 8,940 | - - | - - | - - | 2,307 | 11,251 | |||||||||||||||||||||||
| Tax benefit of non-qualified stock options exercised | - - | 5,525 | - - | - - | - - | - - | 5,525 | |||||||||||||||||||||||
| Notes receivable for stock purchases, net of repayments | - - | 34 | - - | - - | - - | - - | 34 | |||||||||||||||||||||||
| Stock repurchases | - - | - - | - - | - - | - - | (29,403 | ) | (29,403 | ) | |||||||||||||||||||||
| Cash dividends paid | - - | - - | (8,292 | ) | - - | - - | - - | (8,292 | ) | |||||||||||||||||||||
| Issuance of restricted stock | - - | 360 | - - | - - | (559 | ) | 199 | - - | ||||||||||||||||||||||
| Restricted stock vesting | - - | - - | - - | - - | 151 | - - | 151 | |||||||||||||||||||||||
BALANCES-DECEMBER 31, 2002 | $ | 318 | $ | 371,896 | $ | 501,498 | $ | 2 | $ | (820 | ) | $ | (72,327 | ) | $ | 800,567 | ||||||||||||||
See notes to consolidated financial statements.
F-6
M.D.C. HOLDINGS, INC.
Consolidated Statements of Cash Flows
(In
(In thousands)
Year Ended December 31,
---------------------------------------
1999 1998 1997
---------- ---------- ----------
OPERATING ACTIVITIES
Net income.......................................... $ 89,392 $ 36,254 $ 22,026
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Loss from the early extinguishments of debt.... - - 24,901 3,515
Depreciation and amortization.................. 17,845 20,228 15,050
Homebuilding asset impairment charges.......... 2,242 5,300 5,850
Deferred income taxes.......................... (3,252) (5,673) (1,472)
Gains on sales of mortgage related assets...... - - (4,509) (986)
Net changes in operating assets and liabilities
Home sales and other accounts receivable.... 9,275 (5,212) 2,659
Homebuilding inventories.................... (135,678) (76,454) (7,077)
Prepaid expenses and other assets........... (5,263) (18,981) (9,215)
Mortgage loans held in inventory............ (5,405) (19,292) (6,514)
Accounts payable and accrued expenses....... 27,950 45,666 (5,695)
Other, net..................................... (951) (1,428) 375
----------- ----------- -----------
Net cash provided by (used in) operating activities. (3,845) 800 18,516
----------- ----------- -----------
INVESTING ACTIVITIES
Net proceeds from sale of office building........... - - 13,250 - -
Net purchase of property and equipment.............. (3,642) (6,083) (2,705)
Proceeds from the sale of FAMC...................... - - 4,450 1,000
Changes in investments and marketable securities.... 1,764 3,272 3,586
Other, net.......................................... - - 192 1,632
----------- ----------- -----------
Net cash provided by (used in) investing activities. (1,878) 15,081 3,513
----------- ----------- -----------
FINANCING ACTIVITIES
Lines of credit
Advances........................................ 1,429,600 1,267,540 1,045,276
Principal payments.............................. (1,389,571) (1,265,083) (1,019,266)
Notes payable
Borrowings...................................... - - 866 192
Principal payments.............................. (1,898) (13,108) (192)
Senior notes
Proceeds from issuance.......................... - - 171,541 - -
Repurchase and defeasance....................... - - (152,000) (38,000)
Premium on repurchase and defeasance............ - - (17,592) (1,520)
Repayment of subordinated notes...................... - - (10,230) - -
Stock repurchases.................................... - - - - (7,349)
Dividend payments.................................... (4,448) (2,775) (2,132)
Proceeds from stock issuance......................... 891 3,361 1,336
----------- ----------- -----------
Net cash provided by (used in) financing activities.. 34,574 (17,480) (21,655)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents. 28,851 (1,599) 374
Cash and cash equivalents
Beginning of year............................... 10,079 11,678 11,304
----------- ----------- -----------
End of year..................................... $ 38,930 $ 10,079 $ 11,678
=========== =========== ===========
F-7
| Year Ended December 31, | ||||||||||||||
| 2002 | 2001 | 2000 | ||||||||||||
OPERATING ACTIVITIES | ||||||||||||||
| Net income | $ | 167,305 | $ | 155,715 | $ | 123,303 | ||||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities | ||||||||||||||
| Depreciation and amortization | 26,907 | 27,445 | 21,792 | |||||||||||
| Homebuilding asset impairment charges | - - | 7,041 | 4,200 | |||||||||||
| Deferred income taxes | 4,101 | 1,740 | (10,620 | ) | ||||||||||
| Net changes in operating assets and liabilities | ||||||||||||||
| Home sales and other accounts receivable | (898 | ) | 2,092 | (1,217 | ) | |||||||||
| Homebuilding inventories | (328,064 | ) | (82,072 | ) | (190,714 | ) | ||||||||
| Prepaid expenses and other assets | (37,900 | ) | (20,685 | ) | (11,330 | ) | ||||||||
| Mortgage loans held in inventory | (62,967 | ) | (37,820 | ) | (17,198 | ) | ||||||||
| Accounts payable and accrued expenses | 63,846 | 36,817 | 20,775 | |||||||||||
| Other, net | 1,241 | 2,978 | (2,448 | ) | ||||||||||
| Net cash provided by (used in) operating activities | (166,429 | ) | 93,251 | (63,457 | ) | |||||||||
INVESTING ACTIVITIES | ||||||||||||||
| Net purchase of property and equipment | (12,441 | ) | (3,219 | ) | (3,160 | ) | ||||||||
FINANCING ACTIVITIES | ||||||||||||||
| Lines of credit | ||||||||||||||
| Advances | 2,627,632 | 1,866,183 | 1,721,125 | |||||||||||
| Principal payments | (2,573,200 | ) | (1,931,000 | ) | (1,646,900 | ) | ||||||||
| Net proceeds from issuance of senior notes | 146,791 | - - | - - | |||||||||||
| Dividend payments | (8,292 | ) | (6,456 | ) | (5,220 | ) | ||||||||
| Stock repurchases | (29,403 | ) | (3,845 | ) | (30,828 | ) | ||||||||
| Proceeds from exercise of stock options | 7,684 | 7,571 | 3,625 | |||||||||||
| Net cash provided by (used in) financing activities | 171,212 | (67,547 | ) | 41,802 | ||||||||||
| Net increase (decrease) in cash and cash equivalents | (7,658 | ) | 22,485 | (24,815 | ) | |||||||||
| Cash and cash equivalents | ||||||||||||||
| Beginning of year | 36,600 | 14,115 | 38,930 | |||||||||||
| End of year | $ | 28,942 | $ | 36,600 | $ | 14,115 | ||||||||
See notes to consolidated financial statements.
F-7
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies
Principles of Consolidation - — The consolidated financial statements of M.D.C. Holdings, Inc. ("MDC"(“MDC” or the "Company"“Company”, which, unless otherwise indicated, refers to M.D.C. Holdings, Inc. and its subsidiaries) include the accounts of MDC and its wholly owned and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Segment Information - — MDC has determined that its reportable segments are those that are based on the Company'sCompany’s method of internal reporting, which disaggregates its business by product category. MDC'sMDC’s products come from two segments, homebuilding and financial services. In its homebuilding segment, through separate subsidiaries, the Company is engaged in the design, construction and sale of single-family homes. In its financial services segment, HomeAmerican Mortgage Corporation (a wholly owned subsidiary of M.D.C. Holdings, Inc., "HomeAmerican"“HomeAmerican”) provides mortgage loans primarily to the Company'sCompany’s home buyers (the mortgage lending operations). Through September 30, 1996, Financial
Asset Management LLC (an indirect subsidiary of M.D.C. Holdings, Inc.; "FAMC")
managed by contract the operations of two publicly traded real estate investment
trusts (the asset management operations). In September 1996, the Company sold
its 80% interest in FAMC.
Homebuilding.
Inventories - — 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'sproject’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 a project basis. Fair value is determined by management estimate and incorporates anticipated future revenues and costs. Cost includes interest capitalized during the period of active development through completion of construction. Construction-related overhead and salaries are capitalized and allocated proportionately to projects being developed. Land and related costs are transferred to housing inventory when construction commences. See Note H.
Prepaid Expenses and Other Assets, Net - — Homebuilding prepaid expenses and other assets include qualified settlement fund (“QSF”) assets whichthat are held for the processing and disposition of eligible claims made under the warranties created pursuant to the settlement of litigation commenced in 1994 and settled in November 1996. The qualified settlement fundHeld for sale investments included in QSF assets are recorded on the Consolidated Balance Sheetconsolidated balance sheets at fair value, which is based on quoted prices, with the related unrealized gain or loss included in accumulated other comprehensive income.income (loss). At December 31, 2002 and 2001, respectively, MDC had intercompany notes payable (including accrued interest) to the QSF, and the QSF had offsetting intercompany notes receivable from MDC, of $12,435,000 and $13,040,000, respectively, under a borrowing arrangement that was approved by the Colorado Division of Insurance and the Company’s board of directors.
The following table sets forth the information relating to prepaid expenses and other assets, net (in thousands).
December 31,
-----------------------
1999 1998
--------- ---------
Qualified settlement fund assets............ $ 26,625 $ 21,342
Land option deposits........................ 8,673 12,504
Deferred marketing costs.................... 10,320 7,649
Prepaid tap and system development fees..... 3,472 5,444
Other....................................... 9,066 12,042
--------- ---------
Total................................. $ 58,156 $ 58,981
========= =========
| December 31, | |||||||||
| 2002 | 2001 | ||||||||
| QSF assets | $ | 16,295 | $ | 17,434 | |||||
| MDC intercompany notes payable to QSF | (12,435 | ) | (13,040 | ) | |||||
| Land option deposits | 18,007 | 14,520 | |||||||
| Deferred marketing costs | 22,728 | 14,099 | |||||||
| Prepaid tap and system development fees | 2,964 | 3,197 | |||||||
| Other | 18,377 | 13,334 | |||||||
| Total | $ | 65,936 | $ | 49,544 | |||||
F-8
Deferred Marketing Costs - — Certain marketing costs related to model homes and sales offices are capitalized as prepaid assets and amortized to selling, general and administrative expenses as the homes in the related subdivision are closed. All other marketing costs are expensed as incurred.
Revenue Recognition - — Revenues from real estate sales are recognized when a sufficient down payment has been received, financing has been arranged, title, possession and other attributes of ownership have been transferred to the buyer and the Company is not obligated to perform significant additional activities after sale and delivery.
Warranty Costs - — The Company'sCompany’s homes are sold with limited warranties issued bythat generally provide for ten years of structural coverage, two years of coverage for plumbing, electrical and heating, ventilation and air conditioning systems, and one year of coverage for workmanship and materials. Warranty reserves are established as homes close on a per-unit basis in an unaffiliatedamount estimated to be adequate to cover expected costs of materials and outside labor during warranty company.periods. Reserves are determined based upon historical experience with respect to similar product types and geographical areas. Certain factors are given consideration in determining the per-house reserve amount, including 1) the historical range of amounts paid per house; 2) the historical average amount paid per house; 3) any warranty expenditures included in the above not considered to be normal and recurring; 4) improvements in quality control and construction techniques expected to impact future warranty expenditures; and 5) conditions that may affect certain projects and require higher per-house reserves for those specific projects.
Warranty expenditures are tracked on a house-by-house basis and are charged against the warranty reserve established for the house. Any expenditures incurred within 120 days of closing a home are recorded against the “estimate-to-complete” amount accrued in the house job at the closing of the house unless it is clear that the expense is a warranty expense. Expenses incurred after 120 days of closing a home are considered warranty expenditures. Additional reserves are established for known unusual warranty-related expenditures not covered by the Companyregular warranty reserves. Warranty reserves not utilized for a particular house are written off no earlier than 15 months after the date of closing and no later than 36 months after the date of the closing. The historical experience of the product type and geographical area are taken into consideration when determining the write-off period. Once established, this time frame is kept consistent from month to cover estimatedmonth. If warranty expenditures for an individual house exceed the related reserve, then costs in excess of repairs for which the Company is
responsible.reserve are expensed as an adjustment to housing cost of sales in the month incurred.
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 Homebuilding - Accountscorporate and homebuilding accounts payable and accrued expenses in the consolidated balance sheets and totalled $37,500,000totaled $44,743,000 and $35,249,000,$38,430,000, respectively, at December 31, 19992002 and 1998.
2001. The 2002 warranty expense increased, compared with 2001, primarily in Colorado and Northern California, principally 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 warranty reserves created pursuant to the QSF. Warranty activity for each of the three years ended December 31, 2002, is shown below (in thousands).
| Year Ended December 31, | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
| Warranty reserve balance at beginning of period | $ | 38,430 | $ | 38,178 | $ | 37,498 | ||||||
| Warranty expense provided | 24,529 | 11,142 | 9,739 | |||||||||
| Payments | (18,216 | ) | (10,890 | ) | (9,059 | ) | ||||||
| Warranty reserve balance at end of period | $ | 44,743 | $ | 38,430 | $ | 38,178 | ||||||
F-9
Financial Services.
Mortgage Loans Held in Inventory - — The Company generally purchases forward commitments to deliver mortgage loans held for sale. Mortgage loans held in inventory are stated at the lower of aggregate cost or fair value based upon such commitments for loans to be delivered or prevailing market for uncommitted loans. Substantially all of the loans originated or purchased by the Company are sold to private investors within 40 days of origination or purchase. Gains or losses on mortgage loans held in inventory are realized when the loans are sold.
Revenue Recognition - — Loan origination fees in excess of origination costs incurred and loan commitment fees are deferred until the related loans are sold. Loan servicing fees are recorded as revenue when the mortgage loan payments are received. Loan servicing costs are recognized as incurred. Revenues from the sale of mortgage loan servicing are recognized when title and all risks and rewards of ownership have irrevocably passed to the buyer and there are no significant unresolved contingencies.
Derivative Financial Instruments — The mortgage lending operations are affected by, among other things, changes in mortgage interest rates. 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 forward mortgage
securities contractsthese commitments to manage the interest rateprice risk on fluctuations in interest rates on its fixed-rate mortgage loans owned and rate-lockedcommitments to originate mortgage loans in process which have not closed.loans. Such contracts are the only significant financial derivative instrumentinstruments utilized by MDC. Hedging gains or losses are recognized when the hedged mortgage loans are sold. 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.
Mortgage Servicing Rights - Effective January 1, 1997, the — The Company adopted Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
("SFAS 125"). SFAS 125 requires the Company to allocateallocates the cost of mortgage loans originated and purchased between the mortgage loans and the right to service those mortgage loans, based on relative fair value, on the date the loan is sold. The adoption of SFAS 125 did not have a material impact on the
financial statements.
Mortgage servicing rights ("(“Servicing Rights"Rights”) of $8,090,000$10,511,000 and $8,491,000$8,849,000 were capitalized during 19992002 and 1998, respectively, pursuant to SFAS
125.2001, respectively. Servicing Rights are amortized over the estimated period of net servicing revenues. The cost attributed to the Servicing Rights sold and the amortization of Servicing Rights was $7,920,000$10,506,000 and $8,097,000$13,788,000 for 19992002 and 1998,2001, respectively. Servicing Rights are evaluated for impairment by stratifying the portfolio based on loan type and interest rate. Impairment of $115,000 was
recognized during 1998 and reversed in 1999.
As of December 31, 19992002 and 1998,2001, the Company had unamortized Servicing Rights of $5,200,000$166,000 with no related impairment, and $4,915,000,$111,000 net of an impairment reserve of $48,000, respectively, included in Financial
Services - Otherfinancial services other assets, net.
net in the consolidated balance sheets.
General.
Cash and Cash Equivalents - — The Company periodically invests funds not immediately required for operating purposes in highly liquid, short-term investments with an original maturity of 90 days or less, such as F-9
Consolidated Balance Sheetconsolidated balance sheets and Consolidated Statementconsolidated statements of Cash Flows.
cash flows.
Property and Equipment - — Property and equipment is carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets.
assets, which range from two to 15 years.
Stock-Based Compensation — The Company grants options to certain employees and directors to acquire a fixed number of shares with an exercise price not less than the fair market value of the Company’s common stock on the date of grant. The Company also makes restricted stock grants to employees, which are valued based on the market price of MDC’s common stock at the measurement dates and vest over four years. Unearned compensation arising from the restricted stock grants is shown as a reduction in stockholders’ equity in the consolidated balance sheets and is amortized to expense over the vesting period.
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 any of the three years ended December 31, 2002. The following table illustrates the effect on net income and earnings per share if the fair value
F-10
method had been applied to all outstanding and unvested awards in each of the three years ended December 31, 2002.
| Year Ended December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| Net income, as reported | $ | 167,305 | $ | 155,715 | $ | 123,303 | |||||||
| Deduct stock-based compensation expense determined using the fair value method, net of related tax effects | (9,144 | ) | (5,841 | ) | (2,771 | ) | |||||||
| Pro forma net income | $ | 158,161 | $ | 149,874 | $ | 120,532 | |||||||
| Earnings per share | |||||||||||||
| Basic as reported | $ | 6.25 | $ | 5.89 | $ | 4.75 | |||||||
| Basic pro forma | $ | 5.91 | $ | 5.67 | $ | 4.64 | |||||||
| Diluted as reported | $ | 6.03 | $ | 5.72 | $ | 4.64 | |||||||
| Diluted pro forma | $ | 5.70 | $ | 5.50 | $ | 4.54 | |||||||
The following table is a summary of the average fair values of options granted during 2002, 2001 and 2000 on the date of grant using the Black-Scholes option pricing model with the assumptions used for the expected volatility, risk free interest rate and dividend yield rate.
| Year Ended December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| Average fair value of options granted | $ | 19.04 | $ | 15.74 | $ | 12.85 | |||||||
| Expected volatility | 54.9 | % | 51.9 | % | 44.7 | % | |||||||
| Risk free interest rate | 3.8 | % | 4.5 | % | 5.7 | % | |||||||
| Dividend yield rate | 0.8 | % | 0.8 | % | 0.7 | % | |||||||
| Weighted-average expected lives of options | 7.0 yrs | 7.5 yrs. | 5.4 yrs. | ||||||||||
Other Comprehensive Income — The accumulated balances related to each component of other comprehensive income are as follows (in thousands).
| December 31, | |||||||||||||
| 2002 | 2001 | ||||||||||||
| Minimum pension liability adjustment, net of income taxes of $(74) in 2002 and $(48) in 2001 | $ | (116 | ) | $ | (75 | ) | |||||||
| Unrealized gains (losses) on securities available for sale, net of income taxes of $195 in 2002 and $(150) in 2001 | 118 | (88 | ) | ||||||||||
| Accumulated other comprehensive income (loss) | $ | 2 | $ | (163 | ) | ||||||||
Estimates in Financial Statements - — The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Such estimates include warranty, other accrued expenses, litigation reserves, estimates to complete land development and construction and estimates related to potential asset impairment charges.
Additional
Recent Statements of Financial Accounting Standards - — In January 2003, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. (“FIN”) 46, which addresses financial reporting requirements for variable interest entities, also referred to as special purpose entities. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (1) does not have equity investors with voting rights; or (2) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property and may be essentially passive or it may engage in research and
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development or other activities on behalf of another company. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 1998,15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company anticipates that the adoption of FIN 46 will not have an effect on its financial position or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 133, "Accounting148, “Accounting for Derivative
InstrumentsStock-Based Compensation — Transition and Hedging Activities" ("Disclosure.” SFAS 133") was issued.No. 148 amends SFAS 133 addresses
theNo. 123, “Accounting for Stock-Based Compensation,” to provide three alternative methods of transition to SFAS No. 123’s fair value method of accounting for derivative instruments,stock-based employee compensation for companies that elect to adopt the provisions of SFAS No. 123. Transition to SFAS No. 123 is not required by SFAS No. 148. The Company has elected to use the intrinsic value method of accounting for stock compensation in accordance with APB No. 25 “Accounting for Stock Issued to Employees” and related interpretations.
SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB No. 28, “Interim Financial Reporting,” to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock based compensation on reported net income and earnings per share in annual and interim financial statements. The disclosure provisions of SFAS No. 148 are required to be adopted by all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB No. 25. The disclosure provisions of SFAS No. 148, effective for fiscal years ending after December 15, 2002, have been adopted by the Company, with the appropriate disclosures under “Stock Based Compensation,” above.
In November 2002, the FASB issued FIN 45, which elaborates on the existing disclosure requirements for most guarantees, including loan guarantees. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. FIN 45 does not apply to certain derivative
instrumentsguarantee contracts, such as those issued by insurance companies or for a lessee’s residual value guarantee embedded in other contracts,a capital lease. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor’s obligations would not apply to product warranties or to guarantees accounted for as derivatives. The initial recognition and hedging activities.initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002, regardless of the guarantor’s fiscal year-end. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 did not have an effect on the Company’s financial position or results of operations.
In June 1999,2002, the FASB issued SFAS 137 was issued, deferringNo. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring).” SFAS No. 146 requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred as opposed to when the entity commits to an exit plan under EITF No. 94-3. SFAS No. 146 is effective date of SFAS 133 to January 1,
2001.for exit or disposal activities initiated after December 31, 2002. The Company anticipates that the adoption of SFAS 133 as of January 1,
2001,No. 146 will not have a material affecteffect on its financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, “Rescission of SFAS No. 4, 44, 64 and Amendment of SFAS No. 13 and Technical Corrections.” SFAS No. 145 prevents treatment as extraordinary any gains or losses recognized on extinguishment of debt not meeting the criteria of APB Opinion No. 30. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The adoption of SFAS No. 145 will affect the classification of such amounts in the financial statements of subsequent periods and comparative prior periods.
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B. Information on Business Segments
The Company operates in two business segments -— homebuilding and financial services. A summary of the Company'sCompany’s business segments is shown below (in thousands).
Year Ended December 31,
----------------------------------------
1999 1998 1997
----------- ----------- -----------
Homebuilding
Home sales............................................... $ 1,526,519 $ 1,218,659 $ 939,016
Land sales............................................... 8,114 13,964 9,978
Other revenues........................................... 2,930 1,649 796
----------- ----------- -----------
1,537,563 1,234,272 949,790
----------- ----------- -----------
Home cost of sales....................................... 1,231,922 1,012,140 802,961
Land cost of sales....................................... 5,767 9,700 7,740
Asset impairment charges................................. 2,242 5,300 5,850
Marketing................................................ 80,545 74,463 61,139
General and administrative............................... 54,829 45,905 30,557
----------- ----------- -----------
1,375,305 1,147,508 908,247
----------- ----------- -----------
Homebuilding Operating Profit........................ 162,258 86,764 41,543
----------- ----------- -----------
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Year Ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- ----------
Financial Services
Mortgage Lending Revenues
Interest................................................. 2,844 2,270 1,918
Origination fees......................................... 12,459 9,738 6,751
Gains on sales of mortgage servicing..................... 3,114 2,512 1,739
Gains on sales of mortgage loans, net.................... 8,456 8,460 6,182
Mortgage servicing and other............................. 587 327 490
Asset Management Revenues................................... - - 4,602 1,477
----------- ----------- -----------
27,460 27,909 18,557
General and Administrative Expenses......................... 14,291 12,121 9,378
----------- ----------- -----------
Financial Services Operating Profit.................. 13,169 15,788 9,179
----------- ----------- -----------
Total Operating Profit.......................................... 175,427 102,552 50,722
----------- ----------- -----------
Corporate
Interest and other revenues.............................. 2,615 1,028 1,215
Interest expense......................................... - - - - (761)
General and administrative............................... (29,589) (19,728) (11,849)
----------- ----------- -----------
Net Corporate Expenses............................... (26,974) (18,700) (11,395)
----------- ----------- -----------
Income Before Income Taxes and Extraordinary Item............... $ 148,453 $ 83,852 $ 39,327
=========== =========== ===========
| Year Ended December 31, | |||||||||||||||
| 2002 | 2001 | 2000 | |||||||||||||
Homebuilding | |||||||||||||||
| Home sales | $ | 2,260,291 | $ | 2,076,807 | $ | 1,701,108 | |||||||||
| Land sales | 6,022 | 2,909 | 6,641 | ||||||||||||
| Other revenues | 5,882 | 6,628 | 13,810 | ||||||||||||
| 2,272,195 | 2,086,344 | 1,721,559 | |||||||||||||
| Home cost of sales | 1,741,449 | 1,594,412 | 1,322,185 | ||||||||||||
| Land cost of sales | 4,600 | 1,105 | 4,293 | ||||||||||||
| Asset impairment charges | - - | 7,041 | 4,200 | ||||||||||||
| Marketing | 125,060 | 114,129 | 94,412 | ||||||||||||
| General and administrative | 105,482 | 90,390 | 69,150 | ||||||||||||
| 1,976,591 | 1,807,077 | 1,494,240 | |||||||||||||
Homebuilding Operating Profit | 295,604 | 279,267 | 227,319 | ||||||||||||
Financial Services | |||||||||||||||
| Revenues | |||||||||||||||
| Net interest income | 4,348 | 3,544 | 2,313 | ||||||||||||
| Origination fees | 18,771 | 17,572 | 13,951 | ||||||||||||
| Gains on sales of mortgage servicing, net | 1,773 | 3,288 | 3,162 | ||||||||||||
| Gains on sales of mortgage loans, net | 19,587 | 13,923 | 8,951 | ||||||||||||
| Mortgage servicing and other | 877 | 239 | 548 | ||||||||||||
| 45,356 | 38,566 | 28,925 | |||||||||||||
| General and Administrative Expenses | 21,162 | 17,450 | 14,643 | ||||||||||||
Financial Services Operating Profit | 24,194 | 21,116 | 14,282 | ||||||||||||
Total Operating Profit | 319,798 | 300,383 | 241,601 | ||||||||||||
Corporate | |||||||||||||||
| Interest and other revenues | 973 | 964 | 1,061 | ||||||||||||
| General and administrative | (46,727 | ) | (45,960 | ) | (39,461 | ) | |||||||||
Net Corporate Expenses | (45,754 | ) | (44,996 | ) | (38,400 | ) | |||||||||
Income Before Income Taxes | $ | 274,044 | $ | 255,387 | $ | 203,201 | |||||||||
Corporate general and administrative expenses consist principally of salaries and other administrative expenses whichthat are not identifiable to a specific segment. Transfers between segments are recorded at cost. Capital expenditures and related depreciation and amortization for the years ended December 31, 1999, 19982002, 2001 and 19972000 were not material. Identifiable segment assets are shown on the face of the Consolidated Balance Sheets.
consolidated balance sheets.
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C. Mortgage Loans Held in Inventory
The following table sets forth the information relating to mortgage loans held in inventory (in thousands).
December 31,
-----------------------
1999 1998
--------- ---------
First mortgage loans
Conventional...................................... $ 67,462 $ 59,605
FHA and VA........................................ 24,041 26,618
--------- ---------
91,503 86,223
Less
Unamortized discounts............................. (344) (224)
Deferred fees..................................... (545) (472)
Allowance for loan losses......................... (661) (979)
--------- ---------
Total........................................... $ 89,953 $ 84,548
========= =========
| December 31, | ||||||||||
| 2002 | 2001 | |||||||||
| First mortgage loans | ||||||||||
| Conventional | $ | 159,857 | $ | 117,597 | ||||||
| FHA and VA | 47,597 | 30,854 | ||||||||
| 207,454 | 148,451 | |||||||||
| Less | ||||||||||
| Unamortized discounts | (241 | ) | (390 | ) | ||||||
| Deferred fees | (786 | ) | (1,024 | ) | ||||||
| Adjustment for derivatives and hedging activities | 1,789 | (1,862 | ) | |||||||
| Allowance for loan losses | (278 | ) | (204 | ) | ||||||
| Total | $ | 207,938 | $ | 144,971 | ||||||
Mortgage loans held in inventory consist primarily of loans collateralized by first mortgages and deeds of trust due over periods of up to 30 years. The weighted-average effective yield on mortgage loans held in inventory was approximately 7.7%6.1% at December 31, 1999.
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D. Lines of Credit
Homebuilding - In June 1998, the — The Company modifiedhas 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 its
homebuilding line of credit, increasing available borrowings from $175,000,000
to $300,000,000, and extending the maturity date of this agreement by two years
to June 30, 2003. In October 1999, the line of credit wasHomebuilding Line were amended and restated (the "Amended“Second Amended and Restated Credit Agreement"Agreement”) to extend the maturity date to September 30, 2004July 29, 2006, and increase the maximum amount available from $450,000,000 to $450,000,000$600,000,000 upon the Company'sCompany’s request, requiringsubject to additional commitments from existing or additional participant lenders. There can be no assurance that existing orLender commitments under the Homebuilding Line increased from $413,000,000 to $450,000,000 in 2001, to $538,000,000 in July 2002 and to $593,000,000 in December 2002. In January 2003, the Company received an additional lenders would agree$7,000,000 lender commitment, bringing total commitments to provide the additional commitments.$600,000,000. Pursuant to the terms of the related credit agreement,Second Amended and Restated Credit Agreement, a term-out of this credit may commence earlierprior to July 29, 2006 under certain circumstances. At December 31, 1999, $40,000,000
was borrowed2002, the Company had no borrowings and $11,269,000$20,423,000 in letters of credit were outstanding under this
line of credit. At December 31, 1999 and 1998, the weighted-averageHomebuilding Line, but could have borrowed funds at interest rates on the line of credit were 7.8% and 7.4%, respectively.
ranging from 2.94% to 4.25%.
Mortgage Lending - — To provide funds to originate mortgage loans and to finance these mortgage loans on a short-term basis, HomeAmerican utilizes its Mortgage Line. These mortgage loans are pooled into GNMA, FNMA and FHLMC pools, or retained as whole loans, and subsequently are sold in the open market on a spot basis or pursuant to mortgage loan sale commitments, generally within 40 days after origination. During 2002, 2001 and 2000, HomeAmerican sold $1,260,447,000, $1,208,597,000 and $874,383,000, respectively, principal amount of mortgage loans and mortgage certificates to unaffiliated purchasers.
In December 1999,June 2002, the Company modifiedreceived $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 its mortgage lending bank linethe Mortgage Line were amended to allow for a $50,000,000 increase in the borrowing limit to a maximum of credit, increasing$175,000,000, subject to concurrence by the available borrowings
from $51,000,000participating 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 $75,000,000.temporarily increase the borrowing limit to the maximum of $175,000,000. The temporary increase termination date is February 14, 2003. Available borrowings under this line of creditthe Mortgage Line are collateralized by mortgage loans and mortgage-backed certificates and are limited to the value of "eligible collateral" (as defined in the credit
agreement).eligible collateral as defined. At December 31, 1999, $50,234,0002002, $154,074,000 was borrowed and an additional $19,714,000$20,926,000 was collateralized and available to be borrowed. The line of creditMortgage Line is cancellablecancelable upon 90 days'120 days’ notice. At December 31, 19992002 and 1998,2001, the interest rates on the line of creditMortgage Line were 7.0%2.7% and 6.2%3.0%, respectively.
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General - — The agreements for the Company'sCompany’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 containing these representations, warranties and covenants other thanfor the mortgage lending linebank 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 this Annual Report on Form 10-K.
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'sMDC’s consolidated indebtedness is not permitted to exceed the product of 2.15 (subject to downward adjustment in certain circumstances) times MDC's "adjustedMDC’s “adjusted consolidated tangible net worth,"” as defined. Under the adjusted consolidated tangible net worth test, MDC's "tangibleMDC’s “adjusted consolidated tangible net worth,"” as defined, must not be less than the sum of $238,000,000 and(1) $491,382,000; (2) 50% of "consolidated“consolidated net income,"” as defined, of the “borrower,” as defined, and the “guarantors,” as defined, after December 31, 1998.2001; and (3) 50% of the net proceeds or other consideration received for the issuance of capital stock. In addition, the
"consolidated“adjusted consolidated tangible net worth,"” as defined, must not be less than $150,000,000.
$307,114,000.
E. Notes Payable Senior Notes - The following table sets forth the information relating
to senior notes (in thousands).
December 31,
------------------------
1999 1998
---------- ----------
Senior notes
8 3/8% senior notes due February 2008 (effective rate 8.7%).. $ 174,389 $ 174,339
========== ==========
In
On December 1993,4, 2002, the Company completed ana public offering of $190,000,000$150,000,000 principal amount of 11 1/8%7% senior notes due 2003December 2012 (the "Old“7% Senior Notes"Notes”) and
$28,000,000at a discount, with an effective yield of 7.15%. The principal amount outstanding, net of 8 3/4% convertible subordinated notes due 2005
(the "Convertible Subordinated Notes").unamortized discount, at December 31, 2002 was $148,422,000. The Convertible Subordinated7% Senior Notes were
convertible into sharesmay be redeemed, at the election of MDC common stock at an initial conversion price of
$7.75 per share. In March 1997, the Company, repurchased $38,000,000in whole at any time or in part from time to time, at a redemption price equal to the greater of (1) 100% of their principal amountamount; or (2) the present value of the Old Senior Notes.“remaining scheduled payments,” as defined, on the notes being redeemed on the redemption date, plus, in each case, accrued and unpaid interest.
On January 28, 1998, the remaining Old Senior
Notes either were repurchased or defeased with the proceedsCompany completed a public offering of the issuance$175,000,000 principal amount of
the Company's 8 3/8% senior notes due February 2008 (the "New“8 3/8% Senior Notes"Notes”) at a discount, with an effective yield of 8.7%. The Convertible Subordinated Notesprincipal amounts outstanding, net of unamortized discount, at December 31, 2002 and 2001 were called for redemption by the Company in
December 1998 at a price of 105, resulting in the conversion of all $28,000,000
principal amount of Convertible Subordinated Notes into 3,612,900 shares of MDC
common stock. See Note M.
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Company's New8 3/8% Senior Notes indenture doesare callable in February 2003 at 104.188% of principal.
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'sCompany’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 New8 3/8% Senior Notes. The New Senior Notessenior notes are not secured. OtherIn December 2001, the Company amended its 8 3/8% Senior Notes Payable - Corporateindenture to provide for the full and homebuilding notes payable of
$866,000 at December 31, 1998 consisted principally of loans collateralized by
real estate. These notes incurred interest at rates ranging from 0% to 7.50%.
The aggregate net carrying valueunconditional guarantee of the assets collateralizingsenior notes on an unsecured basis, jointly and severally, by most of the other notes
payable totalled approximately $2,153,000 at December 31, 1998. These notes were
repaid in the third quarter of 1999.
General -Company’s homebuilding segment subsidiaries. The following table sets forth the scheduled principal
payments on the NewCompany’s 7% Senior Notes at December 31, 1999 (in thousands).
2000............. $ - -
2001............. $ - -
2002............. $ - -
2003............. $ - -
2004............. $ - -
Thereafter....... $ 175,000
also are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by most of the Company’s homebuilding segment subsidiaries. See Note R.
F. Retirement Plans
In October 1997, the Company established a defined benefit retirement plan (the "Retirement Plan"“Retirement Plan”) for two executive officers of the Company under which the Company agreed to make future payments whichthat have a projected benefit obligation of $6,824,000$10,391,000 at December 31, 1999.2002. The Retirement Plan is not funded and benefits vest in either two or five years from plan inception.now are fully vested for both participants. Unrecognized prior service cost of $3,249,000$2,275,000 at December 31, 1999 will be2002 is being recognized over the employees'officers’ average estimated service periods. Retirement Plan expenses for
the years ended December 31, 1999, 1998 and 1997 were $1,059,000, $869,000 and
$183,000, respectively. Included on the December 31, 1999 Consolidated Balance
Sheet2002 consolidated balance sheet is an intangible asset of $2,690,000$2,275,000 related to unamortized prior service cost and a corresponding accrued pension liability for the same amount.of $2,465,000 and an accumulated other comprehensive loss of $190,000. Accrued benefit costs as of December 31, 1999, 19982002 and 19972001 were $2,132,000, $1,073,000$5,744,000 and $204,000,$4,538,000, respectively. ABelow is a summary of the
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changes in the projected benefit obligation, duringthe assumptions used in its calculation and the components of Retirement Plan expense for each of the three years ended December 31, 1999, is as follows
(in2002 (dollars in thousands).
Year Ended December 31,
----------------------------------
1999 1998 1997
--------- --------- ---------
Projected benefit obligation - beginning of year.............. $ 4,881 $ 4,103 $ - -
Prior service cost........................................ - - - - 3,980
Service cost.............................................. 245 197 42
Interest cost............................................. 451 347 81
Unrecognized loss due to change in actuarial assumptions.. 1,247 234 - -
--------- --------- ---------
Projected benefit obligation - end of year.................... $ 6,824 $ 4,881 $ 4,103
========= ========= =========
Assumptions used in the calculation of the present value of
the projected benefit obligation
Discount rate............................................. 7.5% 8.0% 8.0%
Future annual compensation rate increase.................. 4.0% 4.0% 3.0%
| Year Ended December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| Projected benefit obligation — beginning of year | $ | 9,667 | $ | 7,930 | $ | 6,824 | |||||||
| Service cost | 116 | 155 | 131 | ||||||||||
| Interest cost | 649 | 641 | 544 | ||||||||||
| Unrecognized (gain) loss due to change in actuarial assumptions | (41 | ) | 941 | 431 | |||||||||
| Projected benefit obligation — end of year | $ | 10,391 | $ | 9,667 | $ | 7,930 | |||||||
| Assumptions used in the calculation of the present value of the projected benefit obligation | |||||||||||||
| Discount rate | 6.75 | % | 7.25 | % | 7.50 | % | |||||||
| Future annual compensation rate increase | 4.00 | % | 4.00 | % | 4.00 | % | |||||||
| Components of Retirement Plan expense | |||||||||||||
| Service cost | $ | 116 | $ | 155 | $ | 131 | |||||||
| Interest cost | 649 | 641 | 544 | ||||||||||
| Prior service cost amortization | 325 | 325 | 325 | ||||||||||
| Net loss recognition | 116 | 170 | 116 | ||||||||||
| Total Retirement Plan expense | $ | 1,206 | $ | 1,291 | $ | 1,116 | |||||||
The Company sponsors a Section 401(k) defined contribution plan coveringthat is available to all of itsthe Company’s eligible employees. At its discretion, the Company may make annual matching contributions. The matching contributions are funded with shares of MDC common stock, and the expense recordedrecognized by the Company F-13
its matching contributions2002, 2001 and 2000 was $3,384,000, $2,577,000 and $2,300,000, respectively.
G. Stockholders’ Equity
Stock Dividends — On January 22, 2001, MDC’s board of directors approved the payment of a 10% stock dividend, which was distributed on February 16, 2001 to shareowners of record on February 5, 2001. On December 6, 2001, MDC’s board of directors approved the payment of another 10% stock dividend, which was distributed on December 28, 2001 to shareowners of record on December 17, 2001. In accordance with SFAS No. 128, basic and diluted net income per share amounts and weighted-average shares outstanding have been restated for 2001 and 2000 to reflect the years ended December 31, 1999, 1998 and
1997 was $2,060,000, $1,377,000 and $696,000, respectively.
G. Stockholders' effect of these stock dividends. No stock dividends were declared or paid in 2002.
Equity Stock OptionIncentive Plans - — A summary of the Company's stock optionCompany’s equity incentive plans follows.
Employee Equity Incentive Plan - ThePlans — In June 1993, the Company adopted the Employee Equity Incentive Plan (the "Employee Plan"“Employee Plan”). The Employee Plan provided for an initial authorization of 2,100,0002,541,000 shares of MDC common stock (restated for both stock dividends) for issuance thereunder, plus an additional annual authorization equal to 10% of the then authorized shares of MDC common stock under the Employee Plan as of each succeeding annual anniversary of the effective date of the Employee Plan. Under the Employee Plan, the Company may grant awards of restricted stock, incentive and non-statutory stock options and dividend equivalents, or any combination thereof, to officers and employees of the Company or any of its subsidiaries. The incentive and non-statutory stock options granted under the Employee Plan are exercisable at prices greaternot less than
or equal to the market value on the date of grant over periods of up to six years. In 2002, 744,000 options to purchase shares of MDC common stock and 16,271 shares of restricted stock were awarded under the Employee Plan. The Company’s ability to make further grants under the Employee Plan terminates pursuant to its terms on April 20, 2003.
In March 2001, the Company adopted the M.D.C. Holdings, Inc. 2001 Equity Incentive Plan (the “Equity Incentive Plan”). The Equity Incentive Plan provided for an initial authorization of 2,200,000 shares of MDC
F-16
common stock (restated for the December 28, 2001 stock dividend) for issuance thereunder, plus an additional annual authorization equal to 10% of the authorized shares of MDC common stock under the Equity Incentive Plan. The Equity Incentive Plan provides for the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, stock units and other stock grants to employees of the Company. Incentive stock options granted under the Equity Incentive Plan must have an exercise price that is at least equal to the fair market value of the common stock on the date the incentive stock option is granted. In 2002, 341,500 options to purchase shares of MDC common stock were awarded under the Equity Incentive Plan.
Executive Option Purchase Program — Pursuant to the terms of the Executive Option Purchase Program (the "Option“Option Purchase Program"Program”), the Company iswas authorized by the MDC Boardboard of Directorsdirectors to lend eligible executives of the Company up to two-thirds of the aggregate exercise price and state and federal taxes payable in connection with their exercise of stock options under the Employee Plan,Equity Incentive Plans, subject to certain maximum amounts as set forth under the Option Purchase Program. Notes receivable under the Option Purchase Program are recourse and secured by 100% of the shares of MDC common stock issued in connection with options exercised. During 1999 and
1998,2001, certain eligible executives of the Company exercised options to purchase 150,000 and 175,000385,000 shares respectively, of MDC common stock under the Employee
Plan.equity incentive plans. Effective August 19, 2002, no further loans are permitted and no modifications can be made to existing loans under the Option Purchase Program. Aggregate notes receivable under the Option Purchase Program of $1,780,000$896,000 and $1,620,000,$930,000, respectively, at December 31, 19992002 and 19982001 have reduced stockholders'stockholders’ equity.
Middle Management Option Purchase Program — Pursuant to the terms of the Middle Management Option Purchase Program (the “Management Program”), created on July 1, 2000, the Company is authorized by the MDC board of directors to lend eligible members of middle management of the Company up to two-thirds of the aggregate exercise price and state and federal taxes payable in connection with their exercise of stock options under the equity incentive plans, subject to certain maximum amounts as set forth under the Management Program. Notes receivable under the Management Program are recourse and secured by 100% of the shares of MDC common stock issued in connection with options exercised. At December 31, 2002, there were no loans outstanding under the Management Program.
Director Equity Incentive Plans — The Director Equity Incentive Plan - Underwas adopted by the Director Equity Incentive
PlanCompany in June 1993 (the "Director Plan"“Director Plan”), to provide for the grant of stock options to non-employee directors of the Company are granted
stock options.Company. The Director Plan provided for an initial authorization of 300,000363,000 shares of MDC common stock (restated for stock dividends) for issuance thereunder plus an additional annual authorization of shares equal to 10% of the then authorized shares of MDC common stock under the Director Plan. During 1997, the Boardboard of Directorsdirectors authorized, and the Company'sCompany’s stockholders approved, an additional 350,000423,500 shares of MDC common stock (restated for stock dividends) for issuance under the Director Plan. Pursuant to the Director Plan, on December 1 of each year, each non-employee director of the Company iswas granted options to purchase 25,000 shares of MDC common stock. Each option granted under the Director Plan vestsvested immediately and expires five years from the date of grant. The option exercise price must be equal to 100% of the market value of the MDC common stock on the date of grant of the option. The Company’s ability to make further grants under the Director Plan was terminated in March 2001.
In March 2001, the Company adopted the M.D.C. Holdings, Inc. Stock Option Plan for Non-Employee Directors (the “Director Stock Option Plan”). Under the Director Stock Option Plan, non-employee directors of the Company are granted non-qualified stock options. The Director Stock Option Plan provided for an initial authorization of 550,000 shares of MDC common stock (restated for the December 28, 2001 stock dividend) for issuance thereunder, plus an additional annual authorization of shares equal to 10% of the then authorized shares of MDC common stock under the Director Stock Option Plan. Pursuant to the Director Stock Option Plan, on October 1 of each year, each non-employee director of the Company is granted options to purchase 25,000 shares of MDC common stock. On October 1, 2002, options to purchase 125,000 shares of MDC common stock were granted to directors pursuant to the Director Stock Option Plan. Each option granted under the Director Stock Option Plan vests immediately and expires ten years from the date of grant. The option exercise price must be equal to 100% of the market value of the MDC common stock on the date of grant of the option.
F-17
A summary of the changes in stock options during each of the three years ended December 31, 19992002 is as follows (in shares of MDC common stock).
1999 1998 1997
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- -------- ----------- -------- ---------- --------
Options outstanding - beginning of year 1,805,000 $ 10.96 1,891,000 $ 7.65 2,048,000 $ 5.88
Granted............................. 776,000 $ 15.73 509,000 $ 18.01 461,000 $ 11.46
Exercised........................... (186,500) $ 5.63 (554,000) $ 6.10 (618,000) $ 4.63
Cancelled........................... (19,375) $ 13.07 (41,000) $ 11.79 - - - -
----------- ----------- -----------
Options outstanding - end of year..... 2,375,125 $ 12.92 1,805,000 $ 10.96 1,891,000 $ 7.65
Available for future grant............ 949,697 1,299,105 1,402,965
----------- ----------- -----------
Total shares reserved - end of year... 3,324,822 3,104,105 3,293,965
=========== =========== ===========
Options exercisable December 31....... 1,146,333 $ 9.92 984,332 $ 7.48 1,283,416 $ 6.33
=========== =========== ===========
F-14
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), issued in October 1995, established
financial accounting and reporting standards for stock-based employee
compensation plans. As permitted by SFAS 123, the Company elected to continue to
use Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations, in accounting for its stock option
incentive plans. If the Company had elected to recognize compensation cost based
on the fair value of the options granted at grant date and the vesting
provisions under the plans in accordance with SFAS 123, net income in 1999 would
have been reduced by approximately $1,786,000, or $.08 per basic and diluted
share. Net income for 1998 and 1997 would have been reduced by $1,154,000 and
$520,000, respectively, or $.06 per basic and $.05 per diluted share and $.03
per basic and $.02 per diluted share, respectively.
The following table is a summary of the average fair values of options
granted during 1999, 1998 and 1997 on the date of grant using the Black-Scholes
option pricing model with the assumptions used for volatility, risk free
interest rate and dividend yield rate.
Year Ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Average fair value of options granted............ $ 7.41 $ 7.68 $ 4.55
Volatility....................................... 51.5% 48.6% 35.6%
Risk free interest rate.......................... 6.2% 4.9% 5.9%
Dividend yield rate.............................. 1.6% 1.0% 1.0%
Expected lives of options........................ 5-6 yrs. 5-6 yrs. 5-6 yrs.
| 2002 | 2001 | 2000 | |||||||||||||||||||||||
| Weighted | Weighted | Weighted | |||||||||||||||||||||||
| Average | Average | Average | |||||||||||||||||||||||
| Exercise | Exercise | Exercise | |||||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | ||||||||||||||||||||
| Options outstanding — beginning of year | 3,509,199 | $ | 20.88 | 3,202,748 | $ | 15.18 | 2,886,002 | $ | 10.69 | ||||||||||||||||
| Granted | 1,210,500 | $ | 35.56 | 1,180,520 | $ | 28.49 | 1,024,870 | $ | 23.17 | ||||||||||||||||
| Exercised | (528,214 | ) | $ | 14.50 | (811,878 | ) | $ | 9.33 | (532,675 | ) | $ | 6.74 | |||||||||||||
| Cancelled | (83,493 | ) | $ | 25.02 | (62,191 | ) | $ | 22.17 | (175,449 | ) | $ | 13.78 | |||||||||||||
| Options outstanding — end of year | 4,107,992 | $ | 25.92 | 3,509,199 | $ | 20.88 | 3,202,748 | $ | 15.18 | ||||||||||||||||
| Available for future grant | 1,608,825 | 1,914,935 | 192,340 | ||||||||||||||||||||||
| Total shares reserved — end of year | 5,716,817 | 5,424,134 | 3,395,088 | ||||||||||||||||||||||
| Options exercisable December 31 | 1,722,752 | $ | 20.40 | 1,395,718 | $ | 16.13 | 1,367,059 | $ | 10.40 | ||||||||||||||||
The following table summarizes information concerning outstanding and exercisable options at December 31, 1999.
2002.
Options Outstanding Options Exercisable
--------------------------------------------- -----------------------------
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Price Outstanding Contract Life Exercise Price Exercisable Exercise Price
-------------- ------------ --------------- -------------- ------------- --------------
$5.62 - $7.38 688,750 1.83 $7.08 688,750 $7.08
$7.50 -$14.94 543,375 3.52 $12.00 259,500 $11.07
$15.56 -$15.56 602,000 5.22 $15.56 - - - -
$16.63 -$20.81 541,000 4.28 $18.34 198,083 $18.32
---------- ----------
2,375,125 3.63 $12.92 1,146,333 $9.92
========== ==========
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||||||
| Range of | Number | Remaining | Average | Number | Average | |||||||||||||||
| Exercise Price | Outstanding | Contract Life | Exercise Price | Exercisable | Exercise Price | |||||||||||||||
| $ 9.41 - $16.58 | 1,042,443 | 1.64 | $ | 13.29 | 850,197 | $ | 13.37 | |||||||||||||
| $17.20 - $29.05 | 1,856,299 | 6.45 | $ | 26.75 | 746,868 | $ | 25.73 | |||||||||||||
| $32.68 - $36.31 | 1,039,750 | 6.86 | $ | 33.97 | 125,687 | $ | 36.29 | |||||||||||||
| $36.32 - $52.35 | 169,500 | 6.08 | $ | 45.07 | - - | - - | ||||||||||||||
| 4,107,992 | 5.32 | $ | 25.92 | 1,722,752 | $ | 20.40 | ||||||||||||||
MDC Common Stock Repurchase Program -Programs — On January 25,24, 2000, the Company
announced a plan toMDC board of directors authorized the repurchase of up to 1,000,000 shares of itsMDC common stock. The repurchase of MDC common stock under this program was completed in open market purchases, if price levels warrant.March 2000 at per share prices ranging from $13.53 to $14.78, with an average cost of $14.06. On February 21, 2000, the MDC board of directors authorized another program to repurchase up to 2,000,000 additional shares of MDC common stock. On December 18, 2002, the MDC board of directors authorized the repurchase of an additional 1,000,000 shares of MDC common stock, bringing the total authorization under this program to 3,000,000 shares. During 2002, the Company repurchased 789,000 shares of MDC common stock, bringing the total shares repurchased under this program to 1,853,300 and leaving 1,146,700 shares available to be repurchased as of December 31, 2002. The per share prices, including commissions, for the 1,853,300 shares repurchased ranged from $13.85 to $40.48, with an average cost of $26.99. At December 31, 19992002 and 1998,2001, the Company held 5,850,0005,373,000 shares and 5,876,0004,809,000 shares of treasury stock respectively,
with an average purchase priceprices of $6.70.
$13.46 and $9.45, respectively.
H. Homebuilding Asset Impairment Charges
No homebuilding assets impairment charges were recorded by the Company in 2002. Homebuilding operating results were reduced by asset impairment charges totalling $2,242,000, $5,300,000totaling $7,041,000 and $5,850,000$4,200,000 in 1999, 19982001 and 1997,2000, respectively. The Company'sCompany’s assets to which these asset impairment charges relaterelated are summarized as follows (in thousands).
Year Ended December 31,
--------------------------------------
1999 1998 1997
---------- ----------- ----------
Completed homes and homes under
construction....................... $ - - $ 888 $ 1,916
Land under development and other...... 2,242 4,412 3,934
----------- ----------- -----------
Total........................... $ 2,242 $ 5,300 $ 5,850
=========== =========== ===========
F-15
| Year Ended December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| Completed homes and homes under construction | $ | - - | $ | 1,075 | $ | - - | |||||||
| Land under development and other | - - | 5,966 | 4,200 | ||||||||||
| Total | $ | - - | $ | 7,041 | $ | 4,200 | |||||||
F-18
The 2001 asset impairment charges described above are includedresulted from the write-down to fair market value of one homebuilding project in Southern California and three homebuilding costs and expensesprojects in the consolidated statementsSan Francisco Bay area. These four projects had experienced a much slower than anticipated home order pace and a significant increase in sales incentive requirements. The three San Francisco Bay area projects offered homes with prices originally averaging over $650,000, and each was impacted adversely by substantial reductions in home selling prices by competing projects. All four of income.these projects performed better than expected in 2002 and, currently, have no homes remaining to be sold. The 1999 charge primarily2000 asset impairment charges resulted from the write-down to fair value of onetwo homebuilding projectprojects in Southern California which hasthat experienced higher than
anticipated development costs, a slowerreduced home order pace and increasedsignificantly higher sales incentive requirements.incentives than anticipated.
I. Interest Activity
The 1998Company capitalizes interest incurred on its corporate and 1997 asset impairment charges described
above related to homebuilding assets primarily in Marylanddebt during the period of active development and principally werethrough the resultcompletion of the (1) recognitionconstruction of losses anticipated from the closing of
certain homes in Backlog and from the reduction of selling prices and the
offering of increased incentives to stimulate sales of certain completed unsold
homes in inventory; (2) write-down to fair value of certain subdivisions which
experienced slow sales and negative Home Gross Margins (as defined below); and
(3) write-off of other capitalized costs, primarily deferred marketing and
option deposits, related to several low margin projects or projects which the
Company terminated. "Home Gross Margins" are gross margins (home sales revenues
less cost of goods sold, which primarily included land and construction costs,
capitalized interest, a reserve for warranty expense and financing costs) as a
percentage of home sales revenues.
I.its homebuilding inventories. Corporate and Homebuildinghomebuilding interest incurred but not capitalized is reported as interest expense. Interest Activityincurred by the financial services segment is charged to interest expense, which is deducted from interest income and reported as net interest income in Note B. Interest activity, in total and by business segment, is shown below (in thousands)
.
Year Ended December 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Interest capitalized in homebuilding inventory,
beginning of year............................... $ 26,332 $ 37,991 $ 40,745
Interest incurred.................................. 21,261 22,525 26,368
Interest expensed.................................. - - - - (761)
Previously capitalized interest included in
cost of sales................................... (30,187) (34,184) (28,361)
---------- ---------- ----------
Interest capitalized in homebuilding inventory,
end of year..................................... $ 17,406 $ 26,332 $ 37,991
========== ========== ==========
| Year Ended December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
Total Interest Incurred | |||||||||||||
| Corporate and homebuilding | $ | 21,116 | $ | 22,498 | $ | 24,367 | |||||||
| Financial services | 1,822 | 2,666 | 3,115 | ||||||||||
| Total interest incurred | $ | 22,938 | $ | 25,164 | $ | 27,482 | |||||||
Corporate and Homebuilding Interest | |||||||||||||
Capitalized | |||||||||||||
| Interest capitalized in homebuilding inventory, beginning of period | $ | 17,358 | $ | 19,417 | $ | 17,406 | |||||||
| Interest incurred | 21,116 | 22,498 | 24,367 | ||||||||||
| Previously capitalized interest included in cost of sales | (20,691 | ) | (24,557 | ) | (22,356 | ) | |||||||
| Interest capitalized in homebuilding inventory, end of period | $ | 17,783 | $ | 17,358 | $ | 19,417 | |||||||
Financial Services Net Interest Income | |||||||||||||
| Interest income | $ | 6,170 | $ | 6,210 | $ | 5,428 | |||||||
| Interest expense | (1,822 | ) | (2,666 | ) | (3,115 | ) | |||||||
| Net interest income | $ | 4,348 | $ | 3,544 | $ | 2,313 | |||||||
J. Sale of FAMC
In September 1996, the Company sold its 80% interest in FAMC for
$11,450,000. The sales proceeds consisted of $6,000,000 cash and $5,450,000 of
promissory notes which were payable at specified dates during the 10 years
following the sale and were convertible, under certain circumstances, into an
equity interest in FAMC. The sale resulted in the recognition of a gain of
$4,042,000 in 1996. An additional gain of $5,450,000 attributable to the
promissory notes was deferred based upon uncertainty regarding the
collectibility of principal on the notes and the expiration of the conversion
features. In 1998 and 1997, the Company received principal payments of
$4,450,000 and $1,000,000, respectively, on the promissory notes, resulting in
the recognition of gains in 1998 and 1997 equal to the amounts received.
K. Income Taxes
Total income taxes have been allocated as follows (in thousands).
Year Ended December 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Tax expense on income before income taxes and
extraordinary item................................ $ 59,061 $ 32,284 $ 15,122
Extraordinary loss................................... - - (9,587) (1,336)
Stockholders' equity, related to exercise of stock
options........................................... (695) (2,484) (1,012)
---------- ---------- ----------
Total income taxes................................... $ 58,366 $ 20,213 $ 12,774
========== ========== ==========
F-16
| Year Ended December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| Provision for income taxes | $ | 106,739 | $ | 99,672 | $ | 79,898 | |||||||
| Stockholders’ equity, related to exercise of stock options | (5,525 | ) | (8,541 | ) | (1,439 | ) | |||||||
| Total income taxes | $ | 101,214 | $ | 91,131 | $ | 78,459 | |||||||
F-19
The significant components of income tax expense on income beforethe provision for income taxes and extraordinary item consist of the followingare as follows (in thousands).
Year Ended December 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Current tax expense
Federal........................................... $ 51,192 $ 32,875 $ 14,972
State............................................. 11,121 5,082 1,622
---------- ---------- ----------
Total current................................... 62,313 37,957 16,594
---------- ---------- ----------
Deferred tax benefit
Federal........................................... (1,914) (5,095) (1,349)
State............................................. (1,338) (578) (123)
---------- ---------- ----------
Total deferred.................................. (3,252) (5,673) (1,472)
---------- ---------- ----------
Total income tax expense............................. $ 59,061 $ 32,284 $ 15,122
========== ========== ==========
| Year Ended December 31, | ||||||||||||||
| 2002 | 2001 | 2000 | ||||||||||||
| Current tax expense | ||||||||||||||
| Federal | $ | 88,999 | $ | 85,797 | $ | 79,115 | ||||||||
| State | 13,639 | 12,135 | 11,403 | |||||||||||
| Total current | 102,638 | 97,932 | 90,518 | |||||||||||
| Deferred tax expense (benefit) | ||||||||||||||
| Federal | 3,906 | 1,471 | (10,159 | ) | ||||||||||
| State | 195 | 269 | (461 | ) | ||||||||||
| Total deferred | 4,101 | 1,740 | (10,620 | ) | ||||||||||
| Provision for income taxes | $ | 106,739 | $ | 99,672 | $ | 79,898 | ||||||||
The provision for income tax expensetaxes differs from the amount whichthat would be computed by applying the statutory federal income tax rate of 35% to income before income taxes and extraordinary item as a result of the following (in thousands).
Year Ended December 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Tax expense computed at statutory rate............... $ 51,959 $ 29,348 $ 13,764
Increase due to
Permanent differences between financial
statement income and taxable income........... 158 293 231
State income tax, net of federal benefit........ 6,601 2,350 864
Other........................................... 343 293 263
---------- ---------- ----------
Total income tax expense............................. $ 59,061 $ 32,284 $ 15,122
========== ========== ==========
Effective tax rate................................... 39.8% 38.5% 38.5%
========== ========== ==========
| Year Ended December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| Tax expense computed at statutory rate | $ | 95,915 | $ | 89,385 | $ | 71,120 | |||||||
| Increase due to | |||||||||||||
| Permanent differences between financial statement income and taxable income | 175 | 242 | 175 | ||||||||||
| State income tax, net of federal benefit | 8,615 | 8,297 | 7,024 | ||||||||||
| Other, net | 2,034 | 1,748 | 1,579 | ||||||||||
| Provision for income taxes | $ | 106,739 | $ | 99,672 | $ | 79,898 | |||||||
| Effective tax rate | 39.0 | % | 39.0 | % | 39.3 | % | |||||||
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands).
December 31,
------------------------
1999 1998
---------- ----------
Deferred tax assets
Warranty, litigation and other reserves.. $ 19,563 $ 14,443
Inventory impairment charges............. 6,305 8,049
Accrued liabilities...................... 3,682 3,160
Inventory, additional costs capitalized
for tax purposes....................... 9,422 5,775
Property, equipment and other assets, net 857 1,146
---------- ----------
Total gross deferred tax assets...... 39,829 32,573
---------- ----------
Deferred tax liabilities
Deferred revenue......................... 5,396 4,391
Inventory, additional costs capitalized
for financial statement purposes....... 5,372 7,721
Subsidiaries not consolidated for tax
purposes............................... 6,567 1,730
Other.................................... 1,293 782
---------- ----------
Total gross deferred tax liabilities. 18,628 14,624
Net deferred tax asset................... $ 21,201 $ 17,949
========== ==========
F-17
The Internal Revenue Service (the "IRS") has completed its examinations
of the Company's federal income tax returns for the years 1991 through 1995 and
has proposed adjustments to the taxable income reflected in such returns. The
Company is protesting certain of these proposed adjustments. The IRS currently
is examining the Company's federal income tax returns for the years 1996 and
1997. No audit report has been issued by the IRS in connection with this latter
examination. In the opinion of management, adequate provision has been made for
additional income taxes and interest, if any, that may arise as a result of
these examinations.
L. Extraordinary Item
Net income for 1998 included an extraordinary loss of $15,314,000, net
of an income tax benefit of $9,587,000, recognized in connection with the
Company's repurchase and defeasance of the remaining $152,000,000 principal
amount of Old Senior Notes. Net income for 1997 included an extraordinary loss
of $2,179,000, net of an income tax benefit of $1,336,000, recognized in
connection with the Company's repurchase of $38,000,000 principal amount of Old
Senior Notes.
M.
| December 31, | ||||||||||
| 2002 | 2001 | |||||||||
| Deferred tax assets | ||||||||||
| Warranty, litigation and other reserves | $ | 23,979 | $ | 21,226 | ||||||
| Inventory impairment charges | 2,748 | 4,982 | ||||||||
| Accrued liabilities | 5,175 | 4,734 | ||||||||
| Inventory, additional costs capitalized for tax purposes | 10,343 | 9,134 | ||||||||
| Property, equipment and other assets, net | (521 | ) | 136 | |||||||
| Total gross deferred tax assets | 41,724 | 40,212 | ||||||||
| Deferred tax liabilities | ||||||||||
| Deferred revenue | 10,129 | 7,708 | ||||||||
| Inventory, additional costs capitalized for financial statement purposes | 1,222 | 823 | ||||||||
| Subsidiaries not consolidated for tax purposes | 2,194 | 1,633 | ||||||||
| Other, net | 2,199 | (33 | ) | |||||||
| Total gross deferred tax liabilities | 15,744 | 10,131 | ||||||||
| Net deferred tax asset | $ | 25,980 | $ | 30,081 | ||||||
F-20
K. Earnings Per Share
Pursuant to SFAS No. 128, “Earnings per Share,” the computation of diluted earnings per share takes into account the effect of dilutive stock options and, for periods prior
to December 15, 1998, assumes the conversion into MDC common stock of all of the
$28,000,000 outstanding principal amount of the Convertible Subordinated Notes
at a conversion price of $7.75 per share of MDC common stock.options. The basic and diluted earnings per share calculations are shown below (in thousands, except per share amounts).
Year Ended December 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Basic Earnings Per Share
Income before extraordinary item................. $ 89,392 $ 51,568 $ 24,205
Extraordinary loss, net of taxes................. - - (15,314) (2,179)
---------- ---------- ----------
Net income.................................... $ 89,392 $ 36,254 $ 22,026
========== ========== ==========
Weighted-average shares outstanding.............. 22,247 18,451 17,673
========== ========== ==========
Per share amounts
Income before extraordinary item.............. $ 4.02 $ 2.79 $ 1.37
Extraordinary loss, net of taxes.............. - - (0.83) (0.12)
---------- ---------- ----------
Net income.................................... $ 4.02 $ 1.96 $ 1.25
========== ========== ==========
Diluted Earnings Per Share
Income before extraordinary item................. $ 89,392 $ 51,568 $ 24,205
Conversion of Convertible Subordinated Notes..... - - 783 1,575
---------- ---------- ----------
Adjusted income before extraordinary item..... 89,392 52,351 25,780
Extraordinary loss, net of taxes................. - - (15,314) (2,179)
---------- ---------- ----------
Adjusted net income........................... $ 89,392 $ 37,037 $ 23,601
========== ========== ==========
Weighted-average shares outstanding.............. 22,247 18,451 17,673
Stock options, net............................... 409 866 613
Conversion of Convertible Subordinated Notes..... - - 3,289 3,613
---------- ---------- ----------
Diluted weighted-average shares outstanding... 22,656 22,606 21,899
========== ========== ==========
Per share amounts
Income before extraordinary item.............. $ 3.95 $ 2.32 $ 1.18
Extraordinary loss, net of taxes.............. - - (0.68) (0.10)
---------- ---------- ----------
Net income.................................... $ 3.95 $ 1.64 $ 1.08
========== ========== ==========
F-18
N.
| Year Ended December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
Basic Earnings Per Share | |||||||||||||
| Net income | $ | 167,305 | $ | 155,715 | $ | 123,303 | |||||||
| Basic weighted-average shares outstanding | 26,767 | 26,421 | 25,974 | ||||||||||
| Per share amounts | $ | 6.25 | $ | 5.89 | $ | 4.75 | |||||||
Diluted Earnings Per Share | |||||||||||||
| Net income | $ | 167,305 | $ | 155,715 | $ | 123,303 | |||||||
| Basic weighted-average shares outstanding | 26,767 | 26,421 | 25,974 | ||||||||||
| Stock options, net | 987 | 811 | 582 | ||||||||||
| Diluted weighted-average shares outstanding | 27,754 | 27,232 | 26,556 | ||||||||||
| Per share amounts | $ | 6.03 | $ | 5.72 | $ | 4.64 | |||||||
L. Legal Proceedings
The Company and certain of its subsidiaries have been named as
defendants in various claims, complaints and other legal actions arising in
In the normal course of business.business, the Company is a defendant in cases primarily relating to construction defects. These cases seek relief from the Company under various theories, including breach of implied and express warranty, negligence, strict liability, misrepresentation and violation of consumer protection statutes. The Company has reserved for these cases based upon information provided to it by its legal counsel, including counsel’s ongoing evaluation of the merits of the claims and defenses and the likelihood of the Company prevailing in these cases. At December 31, 2002, none of these cases were expected to result in a cash expenditure of greater than $850,000. 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 which would result in material contingent liabilities
related to environmental hazards or asbestos.
O.
M. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value.
Cash and Cash Equivalents - — For cash and cash equivalents, the carrying value is a reasonable estimate of fair value.
Investments and Marketable Securities, Net - — Investments in marketable equity securities (other than thosethe QSF assets, held for eligible claims made under
warranties created pursuant to the 1996 settlement of litigation commenced in
1994, see Note A) are recorded on the balance sheet at cost, which approximates market value. Accordingly, the carrying value of the investment is a reasonable estimate of the fair value.
Mortgage Loans Held in Inventory - — The Company generally purchases forward commitments to deliver mortgage loans held for sale. For loans whichthat have no forward commitments, loans in inventory are stated at the lower of cost or market. Accordingly, the carrying value is a reasonable estimate of fair value.
Lines of Credit - — The Company'sCompany’s lines of credit are at floating rates or at fixed rates whichthat approximate current market rates and have relatively short-term maturities. Accordingly, the carrying value is a reasonable estimate of fair value.
Senior Notes - — The estimated fair value of the New Senior Notessenior notes in the following table are based on dealer quotes.
December 31, 1999 December 31, 1998
------------------------- -------------------------
Recorded Estimated Recorded Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
New Senior Notes................................ $ 174,389 $ 161,000 $ 174,339 $ 172,813
P.
| December 31, 2002 | December 31, 2001 | |||||||||||||||
| Recorded | Estimated | Recorded | Estimated | |||||||||||||
| Amount | Fair Value | Amount | Fair Value | |||||||||||||
| 7% Senior Notes due 2012 | $ | 148,422 | $ | 145,688 | $ | - - | $ | - - | ||||||||
| 8 3/8% Senior Notes due 2008 | $ | 174,568 | $ | 180,915 | $ | 174,503 | $ | 176,995 | ||||||||
F-21
N. Commitments and Contingencies
The Company believes that it is subject to risks and uncertainties common to the homebuilding industry, including (1) cyclical markets sensitive to changes in general and local economic conditions; (2) volatility of interest rates, which affects homebuilding demand and may affect credit availability; (3) seasonal nature of the business due to weather-related factors; (4) significant fluctuations in the price of building materials, particularly lumber, and of finished lots and subcontract labor; (5) counterpartycounter-party non-performance risk associated with performance bonds; (6) competition; (7) the availability and (6)cost of performance bonds and insurance covering risks associated with our business; (8) slow growth initiatives; (9) building moratoria; (10) governmental regulation, including the interpretation of tax, labor and environmental regulations which vary
significantly according to a site's condition, locationlaws; and former uses.(11) changes in consumer confidence and preferences. The Company'sCompany’s operations are concentrated in the geographic regions of Colorado, Virginia, Maryland, California, Arizona, Nevada, Utah and Nevada.Texas.
To reduce exposure to fluctuations in interest rates, HomeAmerican makes commitments to originate (buy) and sell loans and mortgage-backed securities. At December 31, 1999,2002, commitments by HomeAmerican to F-19
totalled $28,360,000totaled $39,152,000 at market rates of interest. At December 31, 1999,2002, unexpired short-term forward commitments to sell loans totalled $79,053,000totaled $137,588,000 at market rates of interest.
MDC leases office space, equipment and certain of its model show homes under noncancellablenon-cancelable operating leases. Future minimum rental payments for leases with initial terms in excess of one year total $3,903,000 in 2000, $3,693,000 in
2001, $3,350,000 in 2002, $2,519,000$7,742,000 in 2003, $6,933,000 in 2004, $5,725,000 in 2005, $3,437,000 in 2006 and $2,390,000$3,331,000 in 2004.2007 and thereafter. Rent expense under cancellablecancelable and noncancellablenon-cancelable leases totalled $4,846,000,
$3,665,000totaled $8,436,000, $6,758,000 and $3,091,000$6,531,000 in 1999, 1998,2002, 2001, and 1997,2000, respectively.
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 December 31, 2002, MDC had outstanding approximately $25,019,000 and $181,124,000 of letters of credit and performance bonds, respectively. In May 1998,the event any such bonds or letters of credit are called, MDC sold its headquarters office building for net proceedswould be obligated to reimburse the issuer of $13,250,000 in a sale-leaseback transaction. The gain on the salebond or letter of $3,715,000 is being recognized ratably overcredit. However, the initial lease termCompany does not believe that any currently outstanding bonds or letters of seven
years.
As of December 31, 1999, MDC had guaranteed payment of principal and
interest on $25,954,000 principal amount of bonds issued by municipal agencies
to fund the development of project infrastructure for a master-planned community
in Colorado. On January 31, 2000, the municipal agencies completed a refunding
and defeasance of these bonds and the Company's guarantee was released.
Q.credit will be unexpectedly called.
O. Supplemental Disclosure of Cash Flow Information (in thousands)
Year Ended December 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Cash paid during the year for
Interest................................ $ 17,335 $ 15,296 $ 28,526
Income taxes............................ $ 63,557 $ 24,820 $ 14,307
Non-cash investing and financing activities
Land purchases financed by seller....... $ 1,032 $ - - $ 6,750
Land sales financed by MDC.............. $ 43 $ - - $ 1,183
Conversion of Convertible Subordinated
Notes to equity....................... $ - - $ 28,000 $ - -
R.
| Year Ended December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| Cash paid during the year for | |||||||||||||
| Interest | $ | 20,276 | $ | 22,881 | $ | 29,933 | |||||||
| Income taxes | $ | 85,304 | $ | 83,227 | $ | 89,802 | |||||||
P. Related Party Transactions
MDC has transacted business with related or affiliated companies and with certain officers and directors of the Company.
Gilbert Goldstein, P.C., a law firm of which a director of the Company is the sole shareholder, was paid legal fees of $209,000, $243,000$180,000, $246,000 and $404,000$240,000 in 1999, 19982002, 2001 and 1997,2000, respectively.
The
Prior to 2002, the Company utilizesutilized in the ordinary course of business the services of a marketing and communications firm whichthat is owned by the brother-in-law of an officer and director of the Company. Total fees paid for advertising and marketing design services were $432,000, $418,000$246,000 and $414,000,$412,000, respectively, in
1999, 1998for 2001 and 1997.2000.
The wifespouse of an officer and director of the Company owns a company that provides consulting services to the Company. Total fees paid for herthese services were $120,000, $80,000$240,000 in both 2002 and $98,000, respectively,2001, and $220,000 in 1999, 19982000.
During 2001, the Company contributed 57,889 shares of MDC common stock valued at $2,000,000 to the MDC Holdings Foundation (the “Foundation”), a Delaware not-for-profit corporation that was incorporated on
F-22
September 30, 2000. During 2000, the Company contributed $2,000,000 to the Foundation, consisting of 58,033 shares of MDC common stock valued at $1,900,000 and 1997.
F-20
S.$100,000 in cash. The Company made no contributions to the Foundation in 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.
Q. Summarized Quarterly Consolidated Financial Information (Unaudited)
Unaudited summarized quarterly consolidated financial information for the two years ended December 31, 19992002 is as follows (in thousands, except per share amounts).
Quarter
-----------------------------------------------------
Fourth Third Second First
----------- ----------- ----------- -----------
1999
Revenues........................................ $ 460,628 $ 410,126 $ 399,759 $ 297,125
=========== =========== =========== ===========
Income before extraordinary item................ $ 26,544 $ 24,140 $ 24,957 $ 13,751
Extraordinary items............................. - - - - - - - -
----------- ----------- ----------- -----------
Net income............................... $ 26,544 $ 24,140 $ 24,957 $ 13,751
=========== =========== =========== ===========
Earnings Per Share
Basic
Income before extraordinary item......... $ 1.19 $ 1.08 $ 1.12 $ .62
=========== =========== =========== ===========
Net income............................... $ 1.19 $ 1.08 $ 1.12 $ .62
=========== =========== =========== ===========
Diluted
Income before extraordinary item......... $ 1.17 $ 1.06 $ 1.10 $ .61
=========== =========== =========== ===========
Net income............................... $ 1.17 $ 1.06 $ 1.10 $ .61
=========== =========== =========== ===========
Weighted-Average Shares Outstanding
Basic.................................... 22,247 22,294 22,274 22,102
=========== =========== =========== ===========
Diluted.................................. 22,656 22,739 22,695 22,565
=========== =========== =========== ===========
1998
Revenues........................................ $ 384,194 $ 331,635 $ 303,879 $ 243,501
=========== =========== =========== ===========
Income before extraordinary item................ $ 16,802 $ 14,257 $ 12,581 $ 7,928
Extraordinary (loss)............................ - - - - - - (15,314)
----------- ----------- ----------- -----------
Net income (loss)........................ $ 16,802 $ 14,257 $ 12,581 $ (7,386)
=========== =========== =========== ===========
Earnings Per Share
Basic
Income before extraordinary item......... $ .86 $ .78 $ .70 $ .44
=========== =========== =========== ===========
Net income (loss)........................ $ .86 $ .78 $ .70 $ (.41)
=========== =========== =========== ===========
Diluted
Income before extraordinary item......... $ .74 $ .65 $ .58 $ .37
=========== =========== =========== ===========
Net income (loss)........................ $ .74 $ .65 $ .58 $ (.31)
=========== =========== =========== ===========
Weighted-Average Shares Outstanding
Basic.................................... 19,620 18,205 18,042 17,919
=========== =========== =========== ===========
Diluted.................................. 22,700 22,673 22,469 22,392
=========== =========== =========== ===========
F-21
| Quarter | |||||||||||||||||
| Fourth | Third | Second | First | ||||||||||||||
2002 | |||||||||||||||||
| Revenues | $ | 771,022 | $ | 581,698 | $ | 509,430 | $ | 456,374 | |||||||||
| Home gross profit margin | $ | 169,773 | $ | 133,154 | $ | 111,809 | $ | 104,106 | |||||||||
| Net income | $ | 57,074 | $ | 43,559 | $ | 34,336 | $ | 32,336 | |||||||||
| Earnings Per Share | |||||||||||||||||
| Basic | $ | 2.14 | $ | 1.63 | $ | 1.27 | $ | 1.21 | |||||||||
| Diluted | $ | 2.08 | $ | 1.57 | $ | 1.22 | $ | 1.16 | |||||||||
| Weighted-Average Shares Outstanding | |||||||||||||||||
| Basic | 26,626 | 26,727 | 27,001 | 26,714 | |||||||||||||
| Diluted | 27,379 | 27,680 | 28,102 | 27,773 | |||||||||||||
2001 | |||||||||||||||||
| Revenues | $ | 676,605 | $ | 521,312 | $ | 508,235 | $ | 419,722 | |||||||||
| Home gross profit margin | $ | 147,060 | $ | 122,218 | $ | 117,834 | $ | 95,283 | |||||||||
| Net income | $ | 47,064 | $ | 40,525 | $ | 38,843 | $ | 29,283 | |||||||||
| Earnings Per Share | |||||||||||||||||
| Basic | $ | 1.77 | $ | 1.52 | $ | 1.47 | $ | 1.13 | |||||||||
| Diluted | $ | 1.73 | $ | 1.48 | $ | 1.42 | $ | 1.09 | |||||||||
| Weighted-Average Shares Outstanding | |||||||||||||||||
| Basic | 26,562 | 26,654 | 26,468 | 25,933 | |||||||||||||
| Diluted | 27,226 | 27,370 | 27,316 | 26,938 | |||||||||||||
R. Supplemental Guarantor Information
The 7% Senior Notes and the 8 3/8% 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, 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.
F-23
M.D.C. Holdings, Inc.
Supplemental Combining Balance Sheet
December 31, 2002
(In thousands)
| Non- | |||||||||||||||||||||||
| Guarantor | Guarantor | Eliminating | |||||||||||||||||||||
| MDC | Subsidiaries | Subsidiaries | Entries | Total | |||||||||||||||||||
ASSETS | |||||||||||||||||||||||
| 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 | ||||||||||||
F-24
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 | - - | 450,502 | - - | - - | 450,502 | ||||||||||||||||||
| �� | Other assets | - - | 32,063 | 17,481 | - - | 49,544 | |||||||||||||||||
| - - | 947,413 | 18,058 | (1,292 | ) | 964,179 | ||||||||||||||||||
| Financial services | - - | - - | 153,107 | - - | 153,107 | ||||||||||||||||||
| Total Assets | $ | 405,135 | $ | 947,878 | $ | 168,693 | $ | (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 | ) | 365,801 | 9,489 | - - | - - | |||||||||||||||||
| Income taxes payable | (100,585 | ) | 102,864 | 7,674 | - - | 9,953 | |||||||||||||||||
| Senior notes, net | 174,503 | - - | - - | - - | 174,503 | ||||||||||||||||||
| (240,688 | ) | 468,665 | 17,606 | 8 | 245,591 | ||||||||||||||||||
| Homebuilding | |||||||||||||||||||||||
| Accounts payable and accrued expenses | - - | 168,935 | 6,020 | - - | 174,955 | ||||||||||||||||||
| Line of credit | - - | - - | - - | - - | - - | ||||||||||||||||||
| - - | 168,935 | 6,020 | - - | 174,955 | |||||||||||||||||||
| Financial services | - - | - - | 117,878 | (1,299 | ) | 116,579 | |||||||||||||||||
| Total Liabilities | (240,688 | ) | 637,600 | 141,504 | (1,291 | ) | 537,125 | ||||||||||||||||
STOCKHOLDERS’ EQUITY | 645,823 | 310,278 | 27,189 | (329,459 | ) | 653,831 | |||||||||||||||||
| Total Liabilities and Stockholders’ Equity | $ | 405,135 | $ | 947,878 | $ | 168,693 | $ | (330,750 | ) | $ | 1,190,956 | ||||||||||||
F-25
M.D.C. Holdings, Inc.
Supplemental Combining Statements of Income
(In thousands)
Year Ended December 31, 2002
| Non- | |||||||||||||||||||||||
| Guarantor | Guarantor | Eliminating | |||||||||||||||||||||
| MDC | Subsidiaries | Subsidiaries | Entries | Total | |||||||||||||||||||
REVENUES | |||||||||||||||||||||||
| Homebuilding | $ | - - | $ | 2,268,996 | $ | 3,493 | $ | (294 | ) | $ | 2,272,195 | ||||||||||||
| Financial services | - - | - - | 45,356 | - - | 45,356 | ||||||||||||||||||
| Corporate | 947 | - - | 26 | - - | 973 | ||||||||||||||||||
| Equity in earnings of subsidiaries | 185,452 | - - | - - | (185,452 | ) | - - | |||||||||||||||||
| Total Revenues | 186,399 | 2,268,996 | 48,875 | (185,746 | ) | 2,318,524 | |||||||||||||||||
COSTS AND EXPENSES | |||||||||||||||||||||||
| Homebuilding | 480 | 1,993,711 | 1,062 | (18,662 | ) | 1,976,591 | |||||||||||||||||
| Financial services | - - | - - | 21,162 | - - | 21,162 | ||||||||||||||||||
| Corporate general and administrative | 46,727 | - - | - - | - - | 46,727 | ||||||||||||||||||
| Corporate and homebuilding interest | (18,662 | ) | - - | - - | 18,662 | - - | |||||||||||||||||
| Total Expenses | 28,545 | 1,993,711 | 22,224 | - - | 2,044,480 | ||||||||||||||||||
| Income before income taxes | 157,854 | 275,285 | 26,651 | (185,746 | ) | 274,044 | |||||||||||||||||
| Provision for income taxes | 12,474 | (108,828 | ) | (10,385 | ) | - - | (106,739 | ) | |||||||||||||||
NET INCOME | $ | 170,328 | $ | 166,457 | $ | 16,266 | $ | (185,746 | ) | $ | 167,305 | ||||||||||||
Year Ended December 31, 2001
| Non- | |||||||||||||||||||||||
| Guarantor | Guarantor | Eliminating | |||||||||||||||||||||
| MDC | Subsidiaries | Subsidiaries | Entries | Total | |||||||||||||||||||
REVENUES | |||||||||||||||||||||||
| Homebuilding | $ | - - | $ | 2,082,555 | $ | 4,017 | $ | (228 | ) | $ | 2,086,344 | ||||||||||||
| Financial services | - - | - - | 38,566 | - - | 38,566 | ||||||||||||||||||
| Corporate | 917 | - - | 47 | - - | 964 | ||||||||||||||||||
| Equity in earnings of subsidiaries | 174,402 | - - | - - | (174,402 | ) | - - | |||||||||||||||||
| Total Revenues | 175,319 | 2,082,555 | 42,630 | (174,630 | ) | 2,125,874 | |||||||||||||||||
COSTS AND EXPENSES | |||||||||||||||||||||||
| Homebuilding | 529 | 1,821,793 | 265 | (15,510 | ) | 1,807,077 | |||||||||||||||||
| Financial services | - - | - - | 17,450 | - - | 17,450 | ||||||||||||||||||
| Corporate general and administrative | 45,960 | - - | - - | - - | 45,960 | ||||||||||||||||||
| Corporate and homebuilding interest | (15,510 | ) | - - | - - | 15,510 | - - | |||||||||||||||||
| Total Expenses | 30,979 | 1,821,793 | 17,715 | - - | 1,870,487 | ||||||||||||||||||
| Income before income taxes | 144,340 | 260,762 | 24,915 | (174,630 | ) | 255,387 | |||||||||||||||||
| Provision for income taxes | 13,017 | (102,863 | ) | (9,826 | ) | - - | (99,672 | ) | |||||||||||||||
NET INCOME | $ | 157,357 | $ | 157,899 | $ | 15,089 | $ | (174,630 | ) | $ | 155,715 | ||||||||||||
F-26
M.D.C. Holdings, Inc.
Supplemental Combining Statements of Income
(In thousands)
Year Ended December 31, 2000
| Non- | ||||||||||||||||||||||
| Guarantor | Guarantor | Eliminating | ||||||||||||||||||||
| MDC | Subsidiaries | Subsidiaries | Entries | Total | ||||||||||||||||||
REVENUES | ||||||||||||||||||||||
| Homebuilding | $ | - - | $ | 1,709,939 | $ | 11,808 | $ | (188 | ) | $ | 1,721,559 | |||||||||||
| Financial services | - - | - - | 28,925 | - - | 28,925 | |||||||||||||||||
| Corporate | 1,024 | - - | 37 | - - | 1,061 | |||||||||||||||||
| Equity in earnings of subsidiaries | 139,090 | - - | - - | (139,090 | ) | - - | ||||||||||||||||
| Total Revenues | 140,114 | 1,709,939 | 40,770 | (139,278 | ) | 1,751,545 | ||||||||||||||||
COSTS AND EXPENSES | ||||||||||||||||||||||
| Homebuilding | 103 | 1,504,103 | 332 | (10,298 | ) | 1,494,240 | ||||||||||||||||
| Financial services | - - | - - | 14,643 | - - | 14,643 | |||||||||||||||||
| Corporate general and administrative | 39,461 | - - | - - | 39,461 | ||||||||||||||||||
| Corporate and homebuilding interest | (10,298 | ) | - - | - - | 10,298 | - - | ||||||||||||||||
| Total Expenses | 29,266 | 1,504,103 | 14,975 | - - | 1,548,344 | |||||||||||||||||
| Income before income taxes | 110,848 | 205,836 | 25,795 | (139,278 | ) | 203,201 | ||||||||||||||||
| Provision for income taxes | 7,682 | (78,478 | ) | (9,102 | ) | - - | (79,898 | ) | ||||||||||||||
NET INCOME | $ | 118,530 | $ | 127,358 | $ | 16,693 | $ | (139,278 | ) | $ | 123,303 | |||||||||||
F-27
M.D.C. Holdings, Inc.
Supplemental Combining Statements of Cash Flows
(In thousands)
Year Ended December 31, 2002
| Non- | ||||||||||||||||||||||
| Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||||
| MDC | Subsidiaries | Subsidiaries | Entries | MDC | ||||||||||||||||||
Net cash provided by (used in) operating activities | $ | 14,770 | $ | (140,207 | ) | $ | (40,698 | ) | $ | (294 | ) | $ | (166,429 | ) | ||||||||
Net cash used in investing activities | (10,177 | ) | (2,018 | ) | (246 | ) | - - | (12,441 | ) | |||||||||||||
Financing Activities | ||||||||||||||||||||||
| Net increase (reduction) in borrowings from parent and subsidiaries | (129,237 | ) | 142,044 | (12,807 | ) | - - | - - | |||||||||||||||
| Lines of credit | ||||||||||||||||||||||
| Advances | 2,573,200 | - - | 54,432 | - - | 2,627,632 | |||||||||||||||||
| Principal payments | (2,573,200 | ) | - - | - - | - - | (2,573,200 | ) | |||||||||||||||
| Net proceeds from issuance of senior notes | 146,791 | - - | - - | - - | 146,791 | |||||||||||||||||
| Dividend payments | (8,586 | ) | - - | - - | 294 | (8,292 | ) | |||||||||||||||
| Stock repurchases | (29,403 | ) | - - | - - | - - | (29,403 | ) | |||||||||||||||
| Proceeds from exercise of stock options | 7,684 | - - | - - | - - | 7,684 | |||||||||||||||||
| Net cash provided by (used in) financing activities | (12,751 | ) | 142,044 | 41,625 | 294 | 171,212 | ||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | (8,158 | ) | (181 | ) | 681 | - - | (7,658 | ) | ||||||||||||||
| Cash and cash equivalents | ||||||||||||||||||||||
| Beginning of year | 31,322 | 4,352 | 926 | - - | 36,600 | |||||||||||||||||
| End of year | $ | 23,164 | $ | 4,171 | $ | 1,607 | $ | - - | $ | 28,942 | ||||||||||||
Year Ended December 31, 2001
| Non- | ||||||||||||||||||||||
| Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||||
| MDC | Subsidiaries | Subsidiaries | Entries | MDC | ||||||||||||||||||
Net cash provided by (used in) operating activities | $ | 11,322 | $ | 101,428 | $ | (19,271 | ) | $ | (228 | ) | $ | 93,251 | ||||||||||
Net cash used in investing activities | (1,386 | ) | (1,607 | ) | (226 | ) | - - | (3,219 | ) | |||||||||||||
Financing Activities | ||||||||||||||||||||||
| Net increase (reduction) in borrowings from parent and subsidiaries | 105,933 | (100,261 | ) | (5,672 | ) | - - | - - | |||||||||||||||
| Lines of credit | ||||||||||||||||||||||
| Advances | 1,841,000 | - - | 25,183 | - - | 1,866,183 | |||||||||||||||||
| Principal payments | (1,931,000 | ) | - - | - - | - - | (1,931,000 | ) | |||||||||||||||
| Dividend payments | (6,684 | ) | - - | - - | 228 | (6,456 | ) | |||||||||||||||
| Stock repurchases | (3,845 | ) | - - | - - | - - | (3,845 | ) | |||||||||||||||
| Proceeds from exercise of stock options | 7,571 | - - | - - | - - | 7,571 | |||||||||||||||||
| Net cash provided by (used in) financing activities | 12,975 | (100,261 | ) | 19,511 | 228 | (67,547 | ) | |||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 22,911 | (440 | ) | 14 | - - | 22,485 | ||||||||||||||||
| Cash and cash equivalents | ||||||||||||||||||||||
| Beginning of year | 8,411 | 4,792 | 912 | - - | 14,115 | |||||||||||||||||
| End of year | $ | 31,322 | $ | 4,352 | $ | 926 | $ | - - | $ | 36,600 | ||||||||||||
F-28
M.D.C. Holdings, Inc.
Supplemental Combining Statement of Cash Flows
(In thousands)
Year Ended December 31, 2000
| Non- | ||||||||||||||||||||||
| Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||||
| MDC | Subsidiaries | Subsidiaries | Entries | MDC | ||||||||||||||||||
Net cash used in operating activities | $ | (27,901 | ) | $ | (34,861 | ) | $ | (507 | ) | $ | (188 | ) | $ | (63,457 | ) | |||||||
| �� | ||||||||||||||||||||||
Net cash used in investing activities | (1,633 | ) | (1,167 | ) | (360 | ) | - - | (3,160 | ) | |||||||||||||
Financing Activities | ||||||||||||||||||||||
| Net increase (reduction) in borrowings from parent and subsidiaries | (13,081 | ) | 35,957 | (22,876 | ) | - - | - - | |||||||||||||||
| Lines of credit | ||||||||||||||||||||||
| Advances | 1,696,900 | - - | 24,225 | - - | 1,721,125 | |||||||||||||||||
| Principal payments | (1,646,900 | ) | - - | - - | - - | (1,646,900 | ) | |||||||||||||||
| Dividend payments | (5,408 | ) | - - | - - | 188 | (5,220 | ) | |||||||||||||||
| Stock repurchases | (30,828 | ) | - - | - - | - - | (30,828 | ) | |||||||||||||||
| Proceeds from exercise of stock options | 3,625 | - - | - - | - - | 3,625 | |||||||||||||||||
| Net cash provided by financing activities | 4,308 | 35,957 | 1,349 | 188 | 41,802 | |||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | (25,226 | ) | (71 | ) | 482 | - - | (24,815 | ) | ||||||||||||||
| Cash and cash equivalents | ||||||||||||||||||||||
| Beginning of year | 33,637 | 4,863 | 430 | - - | 38,930 | |||||||||||||||||
| End of year | $ | 8,411 | $ | 4,792 | $ | 912 | $ | - - | $ | 14,115 | ||||||||||||
F-29
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.Directors and Executive Officers of the Registrant.
Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, from the Company'sCompany’s Proxy Statement for its 20002003 Annual Meeting of Shareowners to be held on or about May
19, 2000.
April 28, 2003.
Item 11.Executive Compensation.
Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, from the Company'sCompany’s Proxy Statement for its 20002003 Annual Meeting of Shareowners to be held on or about May
19, 2000.
April 28, 2003.
Item 12.Security Ownership of Certain Beneficial Owners and Management.
Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, from the Company'sCompany’s Proxy Statement for its 20002003 Annual Meeting of Shareowners to be held on or about May
19, 2000.
April 28, 2003.
Item 13.Certain Relationships and Related Transactions.
Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, from the Company'sCompany’s Proxy Statement for its 20002003 Annual Meeting of Shareowners to be held on or about May
19, 2000.
April 28, 2003.
Item 14.Controls and Procedures.
Management of MDC recognizes their 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 all 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-K. 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 December 31, 2002. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2002.
23
PART IV
Item 14. 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements.
| (a) | 1. | Financial Statements |
The following consolidated financial statements of the Company and its subsidiaries are included in Part II, Item 8.
Page
----
M.D.C. Holdings, Inc. and Subsidiaries
Report of Independent Accountants.................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998......... F-3
Consolidated Statements of Income and Comprehensive Income for each
of the Three Years Ended December 31, 1999......................... F-5
Consolidated Statements of Stockholders' Equity for each of the
Three Years Ended December 31, 1999................................ F-6
Consolidated Statements of Cash Flows for each of the Three Years
Ended December 31, 1999............................................ F-7
Notes to Consolidated Financial Statements........................... F-8
(a) 2. Financial Statement Schedules.
21
| Page | |||||
| M.D.C. Holdings, Inc. and Subsidiaries Report of Independent Auditors | F-2 | ||||
| Consolidated Balance Sheets as of December 31, 2002 and December 31, 2001 | F-3 | ||||
| Consolidated Statements of Income for each of the Three Years in the Period Ended December 31, 2002 | F-5 | ||||
| Consolidated Statements of Stockholders’ Equity for each of the Three Years in the Period Ended December 31, 2002 | F-6 | ||||
| Consolidated Statements of Cash Flows for each of the Three Years in the Period Ended December 31, 2002 | F-7 | ||||
| Notes to Consolidated Financial Statements | F-8 | ||||
| (a) | 2. | Financial Statements Schedules |
All schedules are omitted because they are not applicable, not material, not required or the required information is included in the applicable financial statements or notes thereto.
Financial statements for certain unconsolidated partnerships and joint
ventures owned 50% or less by the Company or its subsidiaries, which are
accounted for on the equity method, have been omitted because they do not,
individually, or in the aggregate, constitute a significant subsidiary.
(a) 3. Exhibits.
3.1(a) Form of Amendment to the Certificate of Incorporation of
M.D.C. Holdings, Inc. (hereinafter sometimes referred to as
"MDC", the "Company" or the "Registrant") regarding director
liability, filed with the Delaware Secretary of State on July
1, 1987 (incorporated by reference to Exhibit 3.1(a) of the
Company's Quarterly Report on Form 10-Q dated June 30, 1987).
*
3.1(b) Form of Certificate of Incorporation of MDC, as amended
(incorporated herein by reference to Exhibit 3.1(b) of the
Company's Quarterly Report on Form 10-Q dated June 30, 1987).
*
3.2(a) Form of Amendment to the Bylaws of MDC regarding
indemnification adopted by its Board of Directors and
effective as of March 20, 1987 (incorporated herein by
reference to Exhibit 3.2(a) of the Company's Quarterly Report
on Form 10-Q dated June 30, 1987). *
3.2(b) Form of Bylaws of MDC, as amended (incorporated herein by
reference to Exhibit 3.2(b) of the Company's Quarterly Report
on Form 10-Q dated June 30, 1987). *
4.2 Form of Certificate for shares of the Company's common stock
(incorporated herein by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-3, Registration
No. 33-426). *
4.3 Amended and Restated Credit Agreement dated as of October 8,
1999 among M.D.C. Holdings, Inc. as Borrower and The Banks
Named therein and Bank One, NA as Administrative Agent, Bank
United of Texas FSB as Co-Agent and KeyBank, National
Association as Co-Agent (incorporated herein by reference to
Exhibit 10.2 to the Company's Form 10-Q dated September 30,
1999). *
4.4 Form of Guaranty agreement dated as of October 8, 1999 by
certain subsidiaries of M.D.C. Holdings, Inc., including
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., RICHMOND AMERICAN HOMES OF NORTHERN
CALIFORNIA, INC., M.D.C. LAND CORPORATION, and RICHMOND
AMERICAN CONSTRUCTION, INC. (incorporated herein by reference
to Exhibit 10.2 to the Company's Form 10-Q dated September 30,
1999). *
4.5 Form of Promissory Note of M.D.C. Holdings, Inc. as Maker
dated as of October 8, 1999 payable to each of the Banks named
in the Amended and Restated Credit Agreement dated as of
October 8, 1999 among M.D.C. Holdings, Inc. as Borrower and
The Banks Named therein and Bank One, NA as Administrative
Agent, Bank United of Texas FSB as Co-Agent and KeyBank,
National Association as Co-Agent (incorporated herein by
reference to Exhibit 10.2 to the Company's Form 10-Q dated
September 30, 1999). *
4.6
| (a) | 3. | Exhibits |
| 3.1(a) | Form of Amendment to the Certificate of Incorporation of M.D.C. Holdings, Inc. (hereinafter sometimes referred to as “MDC”, the “Company” or the “Registrant”) regarding director liability, filed with the Delaware Secretary of State on July 1, 1987 (incorporated by reference to Exhibit 3.1(a) of the Company’s Quarterly Report on Form 10-Q dated June 30, 1987). * | |
| 3.1(b) | Form of Certificate of Incorporation of MDC, as amended (incorporated herein by reference to Exhibit 3.1(b) of the Company’s Quarterly Report on Form 10-Q dated June 30, 1987). * | |
| 3.2(a) | Form of Amendment to the Bylaws of MDC regarding indemnification adopted by its board of directors and effective as of March 20, 1987 (incorporated herein by reference to Exhibit 3.2(a) of the Company’s Quarterly Report on Form 10-Q dated June 30, 1987). * | |
| 3.2(b) | Form of Bylaws of MDC, as amended (incorporated herein by reference to Exhibit 3.2(b) of the Company’s Quarterly Report on Form 10-Q dated June 30, 1987). * | |
| 4.2 | Form of Certificate for shares of the Company’s common stock (incorporated herein by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-3, Registration No. 33-426). * | |
| 4.3 | 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 (incorporated herein by reference to Exhibit 4.1 to the Company’s Form 10-Q dated June 30, 2002). * |
24
| 4.4 | 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 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 (incorporated herein by reference to Exhibit 4.2 to the Company’s Form 10-Q dated June 30, 2002). * | |
| 4.5 | 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 (incorporated herein by reference to Exhibit 4.3 to the Company’s Form 10-Q dated June 30, 2002). * | |
| 4.6 | Commitment and Acceptance dated as of December 5, 2002, among the Registrant, Bank One, NA, as Administrative Agent, and Guaranty Bank, SunTrust Bank and Citicorp North America, Inc. | |
| 4.7 | Form of Amended and Restated Promissory Note, dated December 5, 2002, payable to each of Guaranty Bank and SunTrust Bank. | |
| 4.8 | Form of Promissory Note, dated December 5, 2002, payable to Citicorp North America, Inc. | |
| 4.9 | Consent of Guarantors, dated as of December 5, 2002. | |
| 4.10 | Commitment and Acceptance dated as of January 8, 2003, among the Registrant, Bank One, NA, as Administrative Agent, and Wachovia Bank, N.A. | |
| 4.11 | Form of Amended and Restated Promissory Note, dated January 8, 2003, payable to Wachovia Bank, N.A. | |
| 4.12 | Consent of Guarantors, dated as of January 8, 2003. | |
| 4.13 | Senior Notes Indenture dated as of January 28, 1998 by and between the Company and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.2(a) of the Company’s Post Effective Amendment No. 1 to Form S-3). * | |
| 4.14 | FIRST SUPPLEMENTAL INDENTURE, dated as of December 7, 2001 by and among M.D.C. Holdings, Inc., a Delaware corporation (the “Company”), U.S. Bank National Association (the “Trustee”), and each of the following wholly owned subsidiaries of the Company (individually a “Guarantor,” and together with any other Subsidiary of the Company that executes and delivers a supplemental indenture pursuant to Section 1.04 hereof, the “Guarantors”): Richmond American Homes of California, Inc., a Colorado corporation, Richmond American Homes of Maryland, Inc., a Maryland corporation, Richmond American Homes of Nevada, Inc., a Colorado corporation, Richmond American Homes of Virginia, Inc., a Virginia corporation, Richmond American Homes of Arizona, Inc., a Delaware corporation, and Richmond American Homes of Colorado, Inc., a Delaware corporation, including the Form of Guaranty executed by each Guarantor (incorporated herein by reference to Exhibit 4.7 of the Company’s Annual Report on Form 10-K dated December 31, 2001). * |
25
| 4.15 | 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 (incorporated herein by reference to Exhibit 4.4 to the Company’s Form 10-Q dated June 30, 2002). * | |
| 10.1 | The Company’s Employee Equity Incentive Plan (incorporated herein by reference to Exhibit A of the Company’s Proxy Statement dated May 14, 1993 relating to the 1993 Annual Meeting of Stockholders). * | |
| 10.2 | The Company’s Director Equity Incentive Plan (incorporated herein by reference to Exhibit B of the Company’s Proxy Statement dated May 14, 1993 relating to the 1993 Annual Meeting of Stockholders). * | |
| 10.3(a) | First Amendment to M.D.C. Holdings, Inc. Director Equity Incentive Plan (incorporated herein by reference to Exhibit A of the Company’s Proxy Statement dated March 24, 1997 relating to the 1997 Annual Meeting of Stockholders). * | |
| 10.3(b) | Second Amendment to M.D.C. Holdings, Inc. Director Equity Incentive Plan (incorporated herein by reference to Exhibit 4.3 of the Company’s Quarterly Report on Form 10-Q dated June 30, 1998). * | |
| 10.4(a) | Form of Indemnity Agreement entered into between the Registrant and each member of its board of directors as of March 20, 1987 (incorporated herein by reference to Exhibit 19.1 of the Company’s Quarterly Report on Form 10-Q dated June 30, 1987). * | |
| 10.4(b) | Form of Indemnity Agreement entered into between the Registrant and certain officers of the Registrant on various dates during 1988 and early 1989 (incorporated herein by reference to Exhibit 10.18(b) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1988). * | |
| 10.5 | Indemnification Agreements by and among the Company and Larry A. Mizel (“Mizel”) and David D. Mandarich (“Mandarich”) dated December 21, 1989 (incorporated herein by reference to Exhibit 9 of the Company’s Form 8-K dated December 28, 1989). * | |
| 10.6(a) | Consulting Agreement effective October 1, 1998 by and between Gilbert Goldstein, P.C. and the Company (incorporated herein by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q dated September 30, 1998). * | |
| 10.6(b) | Letter Agreement between M.D.C. Holdings, Inc. and Gilbert Goldstein, P.C. dated October 25, 1999 amending the Consulting Agreement effective October 1, 1998 between M.D.C. Holdings, Inc. and Gilbert Goldstein, P.C. (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 10-Q dated September 30, 1999). * | |
| 10.6(c) | Letter Agreement between the Registrant and Gilbert Goldstein, P.C. dated October 23, 2000 amending the Consulting Agreement effective October 1, 1998 between the Registrant and Gilbert Goldstein, P.C. (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q dated September 30, 2000). * |
26
| 10.6(d) | Letter Agreement between M.D.C. Holdings, Inc. and Gilbert Goldstein, P.C. dated October 22, 2001 amending the consulting Agreement effective October 1, 1998 between Registrant and Gilbert Goldstein, P.C. (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q dated September 30, 2001). * | |
| 10.7 | Form of Restricted Stock Agreement between the Company and certain officers and employees of the Company (incorporated herein by reference to Exhibit 10.10 to the Company’s Form 10-K dated December 31, 1998). * | |
| 10.8 | M.D.C. Holdings, Inc. Executive Officer Performance-Based Compensation Plan (incorporated herein by reference to Exhibit A to the Company’s Proxy Statement dated May 25, 1994 related to the 1994 Meeting of Stockholders). * | |
| 10.9 | M.D.C. Holdings, Inc. 2000 Executive Option Purchase Program, including form of Promissory Note and Pledge Agreement (incorporated herein by reference to Exhibit 10.11 to the Company’s Form 10-K dated December 31, 2000). * | |
| 10.10(a) | Forms of Promissory Notes and Pledge Agreements dated December 9, 1996 between M.D.C. Holdings, Inc. and Michael Touff and Paris G. Reece III related to amounts advanced to such persons in connection with income taxes due on the portion of their 1996 performance bonuses paid in the form of the Company’s common stock (incorporated herein by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K dated December 31, 1996). * | |
| 10.10(b) | Forms of Promissory Notes and Pledge Agreements dated December 18, 1997 between the Company and Michael Touff and Paris G. Reece III related to amounts advanced to such persons in connection with income taxes due and the portion of their 1997 performance bonuses paid in the form of the Company’s common stock (incorporated herein by reference to Exhibit 10.16(b) of the Company’s Annual Report on Form 10-K dated December 31, 1997). * | |
| 10.11(a) | Employment Agreement between the Company and Larry A. Mizel dated October 1, 1997 (incorporated herein by reference to Exhibit 99.1 of the Company’s Form 8-K dated January 14, 1998). * | |
| 10.11(b) | Employment Agreement between the Company and David D. Mandarich dated October 1, 1997 (incorporated herein by reference to Exhibit 99.2 of the Company’s Form 8-K dated January 14, 1998). * | |
| 10.12(a) | Change in Control Agreement between M.D.C. Holdings, Inc. and Paris G. Reece III effective January 26, 1998 (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated March 27, 1998). * | |
| 10.12(b) | Change in Control Agreement between M.D.C. Holdings, Inc. and Michael Touff effective January 26, 1998 (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated March 27, 1998). * | |
| 10.12(c) | Form of Change in Control Agreement between M.D.C. Holdings, Inc. and certain employees of M.D.C. Holdings, Inc. (incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K dated March 27, 1998). * | |
| 10.13 | Independent Contractor Agreement between Mizel Design and Decorating Company and M.D.C. Holdings, Inc. effective as of January 1, 2001 (incorporated herein by reference to Exhibit 10.15 to the Company’s Form 10-K dated December 31, 2000). * | |
| 10.14 | M.D.C. Holdings, Inc. 401(k) Savings Plan Prototype Retirement Plan and Trust (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q dated June 30, 1999). * |
27
| 10.15 | M.D.C. Holdings, Inc. 401(k) Savings Plan Prototype Retirement Plan & Trust Adoption Agreement between M.D.C. Holdings, Inc. and Key Trust Company National Association effective as of July 1, 1998 (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 10-Q dated June 30, 1999). * | |
| 10.15(a) | First Amendment to the M.D.C. Holdings, Inc. 401(k) Savings Plan effective June 1, 2001 (incorporated herein by reference to Exhibit 10.15(a) of the Company’s Annual Report on Form 10-K dated December 31, 2001). * | |
| 10.16 | Third Amendment to the M.D.C. Holdings, Inc. Director Incentive Plan effective May 21, 2001 (incorporated herein by reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K dated December 31, 2001). * | |
| 10.17 | M.D.C. Holdings, Inc. 2001 Equity Incentive Plan Effective March 26, 2001 (incorporated herein by reference to Exhibit B of the Company’s Proxy Statement dated March 31, 2001 relating to the 2001 Annual Meeting of Stockholders). * | |
| 10.18 | M.D.C. Holdings, Inc. Stock Option Plan for Non-Employee Directors Effective March 26, 2001 (incorporated herein by reference to Exhibit C of the Company’s Proxy Statement dated March 31, 2001 relating to the 2001 Annual Meeting of Stockholders). * | |
| 10.19 | Second Amended and Restated Warehousing Credit Agreement dated as of September 9, 2002, among HomeAmerican Mortgage Corporation and the Banks which are signatories thereto and U.S. Bank National Association, as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q dated September 30, 2002). * | |
| 10.20 | M.D.C. Holdings, Inc. 401(k) Savings Plan Prototype Retirement Plan and Trust. | |
| 10.21 | M.D.C. Holdings, Inc. 401(k) Savings Plan Prototype Retirement Plan and Trust Adoption Agreement between M.D.C. Holdings, Inc. and INVESCO/BankOne, as of January 1, 2003. | |
| 12 | Ratio of Earnings to Fixed Charges Schedule. | |
| 21 | Subsidiaries of the Company. | |
| 23 | Consent of Ernst & Young LLP. | |
| 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. |
| * | Incorporated herein by reference. |
28 1998 by and
between the Company and U.S. Bank National Association, as
Trustee (incorporated herein by reference to Exhibit 4.2(a)
of the Company's Post Effective Amendment No. 1 to Form
S-3). *
22
10.1 The Company's Employee Equity Incentive Plan (incorporated
herein by reference to Exhibit A of the Company's Proxy
Statement dated May 14, 1993 relating to the 1993 Annual
Meeting of Stockholders). *
10.2 The Company's Director Equity Incentive Plan (incorporated
herein by reference to Exhibit B of the Company's Proxy
Statement dated May 14, 1993 relating to the 1993 Annual
Meeting of Stockholders). *
10.3(a) First Amendment to M.D.C. Holdings, Inc. Director Equity
Incentive Plan (incorporated herein by reference to Exhibit A
of the Company's Proxy Statement dated March 24, 1997
relating to the 1997 Annual Meeting of Stockholders). *
10.3(b) Second Amendment to M.D.C. Holdings, Inc. Director Equity
Incentive Plan (incorporated herein by reference to Exhibit
4.3 of the Company's Quarterly Report on Form 10-Q
dated June 30, 1998). *
10.4(a) Form of Indemnity Agreement entered into between the
Registrant and each member of its Board of Directors as of
March 20, 1987 (incorporated herein by reference to Exhibit
19.1 of the Company's Quarterly Report on Form 10-Q dated June
30, 1987). *
10.4(b) Form of Indemnity Agreement entered into between the
Registrant and certain officers of the Registrant on various
dates during 1988 and early 1989 (incorporated herein by
reference to Exhibit 10.18(b) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1988). *
10.5 Indemnification Agreement by and among the Company and Larry
A. Mizel ("Mizel") and David D. Mandarich ("Mandarich") dated
December 21, 1989 (incorporated herein by reference to Exhibit
9 of the Company's Form 8-K dated December 28, 1989). *
10.6 Promissory Note in the amount of $280,080 from Mandarich to
the Company dated February 2, 1994 (incorporated herein by
reference to Exhibit 10.10 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1993). *
10.7 Fifth Amendment to Piney Creek Development Co. Joint Venture
Agreement dated June 13, 1991 by and between Commercial
Federal Bank and Land (incorporated herein by reference to
Exhibit 10.25 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1991). *
10.8(a) Consulting Agreement effective October 1, 1998 by and between
Gilbert Goldstein, P.C. and the Company (incorporated herein
by reference to Exhibit 10.1 of the Company's Quarterly Report
on Form 10-Q dated September 30, 1998). *
10.8(b) Letter Agreement between M.D.C. Holdings, Inc. and
Gilbert Goldstein, P.C. dated October 25, 1999 amending
the Consulting Agreement effective October 1, 1998 between
M.D.C. Holdings, Inc. and Gilbert Goldstein, P.C.
(incorporated herein by reference to Exhibit 10.2 to the
Company's Form 10-Q dated September 30, 1999). *
10.9(a) Form of Restricted Stock Agreement between the Company and
certain officers and employees of the Company effective as of
November 20, 1998 (incorporated herein by reference to Exhibit
10.10 to the Company's Form 10-K dated December 31, 1998). *
10.9(b) Form of Restricted Stock Agreement between the Company and
certain officers and employees of the Company effective as of
November 19, 1999.
23
10.10 M.D.C. Holdings, Inc. Executive Officer Performance-Based
Compensation Plan (incorporated herein by reference to Exhibit
A to the Company's Proxy Statement dated May 25, 1994 related
to the 1994 Meeting of Stockholders). *
10.11(a) M.D.C. Holdings, Inc. Executive Option Purchase Program,
including form of Promissory Note and Pledge Agreement
(incorporated herein by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q dated March 31, 1995).
*
10.11(b) Amendment No. 1 to Executive Option Purchase program,
effective November 4, 1997 in part and December 1, 1997 in
part (incorporated herein by reference to Exhibit 10.12(b) of
the Company's Annual Report on Form 10-K dated December 31,
1997). *
10.12(a) Forms of Promissory Notes and Pledge Agreements dated December
9, 1996 between M.D.C. Holdings, Inc. and Michael Touff and
Paris G. Reece III related to amounts advanced to such persons
in connection with income taxes due on the portion of their
1996 performance bonuses paid in the form of the Company's
common stock (incorporated herein by reference to Exhibit
10.19 of the Company's Annual Report on Form 10-K dated
December 31, 1996). *
10.12(b) Forms of Promissory Notes and Pledge Agreements dated December
18, 1997 between the Company and Michael Touff and Paris G.
Reece III related to amounts advanced to such persons in
connection with income taxes due and the portion of their 1997
performance bonuses paid in the form of the Company's common
stock (incorporated herein by reference to Exhibit 10.16(b) of
the Company's Annual Report on Form 10-K dated December 31,
1997). *
10.13(a) Employment Agreement between the Company and Larry A. Mizel
dated October 1, 1997 (incorporated herein by reference to
Exhibit 99.1 of the Company's Form 8-K dated January 14,
1998). *
10.13(b) Employment Agreement between the Company and David D.
Mandarich dated October 1, 1997 (incorporated herein by
reference to Exhibit 99.2 of the Company's Form 8-K dated
January 14, 1998). *
10.14(a) Change in Control Agreement between M.D.C. Holdings, Inc.
and Paris G. Reece III effective January 26, 1998
(incorporated herein by reference to Exhibit 10.1 to the
Company's Form 8-K dated March 27, 1998). *
10.14(b) Change in Control Agreement between M.D.C. Holdings, Inc.
and Michael Touff effective January 26, 1998 (incorporated
herein by reference to Exhibit 10.2 to the Company's Form
8-K dated March 27, 1998). *
10.14(c) Form of Change in Control Agreement between M.D.C. Holdings,
Inc. and certain employees of M.D.C. Holdings, Inc.
(incorporated herein by reference to Exhibit 10.3 to the
Company's Form 8-K dated March 27, 1998). *
10.15 Independent Contractor Agreement between Mizel Design and
Development Company and M.D.C. Holdings, Inc. effective as
of January 1, 1999 (incorporated herein by reference to
Exhibit 10.1 to the Company's Form 10-Q dated
March 31, 1999). *
10.16 M.D.C. Holdings, Inc. 401(k) Savings Plan Prototype
Retirement Plan and Trust (incorporated herein by reference
to Exhibit 10.1 to the Company's Form 10-Q dated June 30,
1999). *
10.17 M.D.C. Holdings, Inc. 401(k) Savings Plan Prototype
Retirement Plan & Trust Adoption Agreement between M.D.C.
Holdings, Inc. and Key Trust Company National Association
effective as of July 1, 1998 (incorporated herein by
reference to Exhibit 10.2 to the Company's Form 10-Q dated
June 30, 1999). *
24
21 Subsidiaries of the Company.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
- -------------------
* Incorporated herein by reference.
(b) Reports on Form 8-K during the fourth quarter of 1999:
(1) Form 8-K dated December 3, 1999 reporting Directors and
Executive Officers who exercised stock options during
1998 and 1999 through September 30, 1999.
25
| (b) | Reports on Form 8-K during the fourth quarter of 2002: | |
| (1) | Form 8-K (Item 5) dated November 25, 2002 reporting information in connection with the offering of $150,000,000 of the Registrant’s 7% Senior Notes due 2012: |
| 1. | On November 25, 2002, the Registrant and certain of its subsidiaries entered into an Underwriting Agreement. | |
| 2. | On December 3, 2002, the Registrant entered into an Indenture and the Registrant and certain of its subsidiaries entered into a Supplemental Indenture. | |
| 3. | Holme Roberts & Owen LLP provided the Registrant with the legal opinion. |
| (2) | Form 8-K (Item 5) dated November 25, 2002 reporting the Statement of Eligibility of Trustee on Form T-1 of U.S. Bank National Association. | ||
| (3) | Form 8-K (Item 5) dated November 25, 2002 reporting the Computation of Ratio of Earnings to Fixed Charges. | ||
| (4) | Form 8-K (Item 5) dated October 3, 2002, reporting the Company’s third quarter 2002 home orders, home closings and backlog press release. | ||
| (5) | Form 8-K (Item 5) dated September 19, 2002, reporting 2002 third quarter earnings press release. |
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on this 9th11th day of February, 20002003 on its behalf by the undersigned, thereunto duly authorized.
M.D.C. HOLDINGS, INC.
(Registrant)
By: /s/ LARRY A. MIZEL
-----------------------------------------
Larry A. Mizel
Chief Executive Officer
By: /s/ PARIS G. REECE III
-----------------------------------------
Paris G. Reece III
Executive Vice President, Chief Financial
Officer and Principal Accounting
| M.D.C. HOLDINGS, INC. (Registrant) | |||
| By: | /s/ LARRY A. MIZEL Larry A. Mizel Chief Executive Officer | ||
| By: | /s/ PARIS G. REECE III Paris G. Reece III Executive Vice President, Chief Financial Officer and Principal Accounting Officer | ||
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and/or directors of the Registrant, by virtue of their signatures to this report, appearing below, hereby constitute and appoint Larry A. Mizel, David D. Mandarich and Paris G. Reece III, or any one of them, with full power of substitution, as attorneys-in-fact in their names, places and steads to execute any and all amendments to this report in the capacities set forth opposite their names and hereby ratify all that said attorneys-in-fact do by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ LARRY A. MIZEL Chairman of the Board February 9, 2000
- ---------------------------- of Directors and Chief
Larry A. Mizel Executive Officer
/s/ DAVID D. MANDARICH Director, President February 9, 2000
- ---------------------------- and Chief Operating
David D. Mandarich Officer
/s/ STEVEN J. BORICK Director February 9, 2000
- ----------------------------
Steven J. Borick
/s/ GILBERT GOLDSTEIN Director February 9, 2000
- ----------------------------
Gilbert Goldstein
/s/ WILLIAM B. KEMPER Director February 9, 2000
- ----------------------------
William B. Kemper
/s/ HERBERT T. BUCHWALD Director February 9, 2000
- ----------------------------
Herbert T. Buchwald
(A
| Signature | Title | Date | ||
| /s/ LARRY A. MIZEL Larry A. Mizel | Chairman of the Board of Directors and Chief Executive Officer | February 11, 2003 | ||
| /s/ DAVID D. MANDARICH David D. Mandarich | Director, President and Chief Operating Officer | February 11, 2003 | ||
| /s/ STEVEN J. BORICK Steven J. Borick | Director | February 11, 2003 | ||
| /s/ GILBERT GOLDSTEIN Gilbert Goldstein | Director | February 11, 2003 | ||
| /s/ WILLIAM B. KEMPER William B. Kemper | Director | February 11, 2003 | ||
| /s/ HERBERT T. BUCHWALD Herbert T. Buchwald | Director | February 11, 2003 | ||
| /s/ DAVID E. BLACKFORD David E. Blackford | Director | February 11, 2003 |
(A Majority of the Board of Directors)
26
30
CHIEF EXECUTIVE OFFICER’S CERTIFICATION
I, Larry A. Mizel, certify that:
1. I have reviewed this annual report on Form 10-K of M.D.C. Holdings, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 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 annual 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 annual report (the “Evaluation Date”); and | |
| c) | presented in this annual 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 annual 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: | February 11, 2003 | /s/ Larry A. Mizel Larry A. Mizel Chairman of the Board of Directors and Chief Executive Officer |
31
CHIEF FINANCIAL OFFICER’S CERTIFICATION
I, Paris G. Reece III, certify that:
| 1. | I have reviewed this annual report on Form 10-K of M.D.C. Holdings, Inc.; | |
| 2. | Based on my knowledge, this annual 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 annual report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 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 annual 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 annual report (the “Evaluation Date”); and | |
| c) | presented in this annual 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 annual 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: | February 11, 2003 | /s/ Paris G. Reece III Paris G. Reece III Executive Vice President, Chief Financial Officer and Principal Accounting Officer |
32
EXHIBIT INDEX
| EXHIBIT | ||
| NUMBER | DESCRIPTION | |
| 3.1(a) | Form of Amendment to the Certificate of Incorporation of M.D.C. Holdings, Inc. (hereinafter sometimes referred to as “MDC”, the “Company” or the “Registrant”) regarding director liability, filed with the Delaware Secretary of State on July 1, 1987 (incorporated by reference to Exhibit 3.1(a) of the Company’s Quarterly Report on Form 10-Q dated June 30, 1987). * | |
| 3.1(b) | Form of Certificate of Incorporation of MDC, as amended (incorporated herein by reference to Exhibit 3.1(b) of the Company’s Quarterly Report on Form 10-Q dated June 30, 1987). * | |
| 3.2(a) | Form of Amendment to the Bylaws of MDC regarding indemnification adopted by its board of directors and effective as of March 20, 1987 (incorporated herein by reference to Exhibit 3.2(a) of the Company’s Quarterly Report on Form 10-Q dated June 30, 1987). * | |
| 3.2(b) | Form of Bylaws of MDC, as amended (incorporated herein by reference to Exhibit 3.2(b) of the Company’s Quarterly Report on Form 10-Q dated June 30, 1987). * | |
| 4.2 | Form of Certificate for shares of the Company’s common stock (incorporated herein by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-3, Registration No. 33-426). * | |
| 4.3 | 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 (incorporated herein by reference to Exhibit 4.1 to the Company’s Form 10-Q dated June 30, 2002). * |
| EXHIBIT | ||
| NUMBER | DESCRIPTION | |
| 4.4 | 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 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 (incorporated herein by reference to Exhibit 4.2 to the Company’s Form 10-Q dated June 30, 2002). * | |
| 4.5 | 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 (incorporated herein by reference to Exhibit 4.3 to the Company’s Form 10-Q dated June 30, 2002). * | |
| 4.6 | Commitment and Acceptance dated as of December 5, 2002, among the Registrant, Bank One, NA, as Administrative Agent, and Guaranty Bank, SunTrust Bank and Citicorp North America, Inc. | |
| 4.7 | Form of Amended and Restated Promissory Note, dated December 5, 2002, payable to each of Guaranty Bank and SunTrust Bank. | |
| 4.8 | Form of Promissory Note, dated December 5, 2002, payable to Citicorp North America, Inc. | |
| 4.9 | Consent of Guarantors, dated as of December 5, 2002. | |
| 4.10 | Commitment and Acceptance dated as of January 8, 2003, among the Registrant, Bank One, NA, as Administrative Agent, and Wachovia Bank, N.A. | |
| 4.11 | Form of Amended and Restated Promissory Note, dated January 8, 2003, payable to Wachovia Bank, N.A. | |
| 4.12 | Consent of Guarantors, dated as of January 8, 2003. | |
| 4.13 | Senior Notes Indenture dated as of January 28, 1998 by and between the Company and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.2(a) of the Company’s Post Effective Amendment No. 1 to Form S-3). * | |
| 4.14 | FIRST SUPPLEMENTAL INDENTURE, dated as of December 7, 2001 by and among M.D.C. Holdings, Inc., a Delaware corporation (the “Company”), U.S. Bank National Association (the “Trustee”), and each of the following wholly owned subsidiaries of the Company (individually a “Guarantor,” and together with any other Subsidiary of the Company that executes and delivers a supplemental indenture pursuant to Section 1.04 hereof, the “Guarantors”): Richmond American Homes of California, Inc., a Colorado corporation, Richmond American Homes of Maryland, Inc., a Maryland corporation, Richmond American Homes of Nevada, Inc., a Colorado corporation, Richmond American Homes of Virginia, Inc., a Virginia corporation, Richmond American Homes of Arizona, Inc., a Delaware corporation, and Richmond American Homes of Colorado, Inc., a Delaware corporation, including the Form of Guaranty executed by each Guarantor (incorporated herein by reference to Exhibit 4.7 of the Company’s Annual Report on Form 10-K dated December 31, 2001). * |
| EXHIBIT | ||
| NUMBER | DESCRIPTION | |
| 4.15 | 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 (incorporated herein by reference to Exhibit 4.4 to the Company’s Form 10-Q dated June 30, 2002). * | |
| 10.1 | The Company’s Employee Equity Incentive Plan (incorporated herein by reference to Exhibit A of the Company’s Proxy Statement dated May 14, 1993 relating to the 1993 Annual Meeting of Stockholders). * | |
| 10.2 | The Company’s Director Equity Incentive Plan (incorporated herein by reference to Exhibit B of the Company’s Proxy Statement dated May 14, 1993 relating to the 1993 Annual Meeting of Stockholders). * | |
| 10.3(a) | First Amendment to M.D.C. Holdings, Inc. Director Equity Incentive Plan (incorporated herein by reference to Exhibit A of the Company’s Proxy Statement dated March 24, 1997 relating to the 1997 Annual Meeting of Stockholders). * | |
| 10.3(b) | Second Amendment to M.D.C. Holdings, Inc. Director Equity Incentive Plan (incorporated herein by reference to Exhibit 4.3 of the Company’s Quarterly Report on Form 10-Q dated June 30, 1998). * | |
| 10.4(a) | Form of Indemnity Agreement entered into between the Registrant and each member of its board of directors as of March 20, 1987 (incorporated herein by reference to Exhibit 19.1 of the Company’s Quarterly Report on Form 10-Q dated June 30, 1987). * | |
| 10.4(b) | Form of Indemnity Agreement entered into between the Registrant and certain officers of the Registrant on various dates during 1988 and early 1989 (incorporated herein by reference to Exhibit 10.18(b) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1988). * | |
| 10.5 | Indemnification Agreements by and among the Company and Larry A. Mizel (“Mizel”) and David D. Mandarich (“Mandarich”) dated December 21, 1989 (incorporated herein by reference to Exhibit 9 of the Company’s Form 8-K dated December 28, 1989). * | |
| 10.6(a) | Consulting Agreement effective October 1, 1998 by and between Gilbert Goldstein, P.C. and the Company (incorporated herein by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q dated September 30, 1998). * | |
| 10.6(b) | Letter Agreement between M.D.C. Holdings, Inc. and Gilbert Goldstein, P.C. dated October 25, 1999 amending the Consulting Agreement effective October 1, 1998 between M.D.C. Holdings, Inc. and Gilbert Goldstein, P.C. (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 10-Q dated September 30, 1999). * | |
| 10.6(c) | Letter Agreement between the Registrant and Gilbert Goldstein, P.C. dated October 23, 2000 amending the Consulting Agreement effective October 1, 1998 between the Registrant and Gilbert Goldstein, P.C. (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q dated September 30, 2000). * |
| EXHIBIT | ||
| NUMBER | DESCRIPTION | |
| 10.6(d) | Letter Agreement between M.D.C. Holdings, Inc. and Gilbert Goldstein, P.C. dated October 22, 2001 amending the consulting Agreement effective October 1, 1998 between Registrant and Gilbert Goldstein, P.C. (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q dated September 30, 2001). * | |
| 10.7 | Form of Restricted Stock Agreement between the Company and certain officers and employees of the Company (incorporated herein by reference to Exhibit 10.10 to the Company’s Form 10-K dated December 31, 1998). * | |
| 10.8 | M.D.C. Holdings, Inc. Executive Officer Performance-Based Compensation Plan (incorporated herein by reference to Exhibit A to the Company’s Proxy Statement dated May 25, 1994 related to the 1994 Meeting of Stockholders). * | |
| 10.9 | M.D.C. Holdings, Inc. 2000 Executive Option Purchase Program, including form of Promissory Note and Pledge Agreement (incorporated herein by reference to Exhibit 10.11 to the Company’s Form 10-K dated December 31, 2000). * | |
| 10.10(a) | Forms of Promissory Notes and Pledge Agreements dated December 9, 1996 between M.D.C. Holdings, Inc. and Michael Touff and Paris G. Reece III related to amounts advanced to such persons in connection with income taxes due on the portion of their 1996 performance bonuses paid in the form of the Company’s common stock (incorporated herein by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K dated December 31, 1996). * | |
| 10.10(b) | Forms of Promissory Notes and Pledge Agreements dated December 18, 1997 between the Company and Michael Touff and Paris G. Reece III related to amounts advanced to such persons in connection with income taxes due and the portion of their 1997 performance bonuses paid in the form of the Company’s common stock (incorporated herein by reference to Exhibit 10.16(b) of the Company’s Annual Report on Form 10-K dated December 31, 1997). * | |
| 10.11(a) | Employment Agreement between the Company and Larry A. Mizel dated October 1, 1997 (incorporated herein by reference to Exhibit 99.1 of the Company’s Form 8-K dated January 14, 1998). * | |
| 10.11(b) | Employment Agreement between the Company and David D. Mandarich dated October 1, 1997 (incorporated herein by reference to Exhibit 99.2 of the Company’s Form 8-K dated January 14, 1998). * | |
| 10.12(a) | Change in Control Agreement between M.D.C. Holdings, Inc. and Paris G. Reece III effective January 26, 1998 (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated March 27, 1998). * | |
| 10.12(b) | Change in Control Agreement between M.D.C. Holdings, Inc. and Michael Touff effective January 26, 1998 (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated March 27, 1998). * | |
| 10.12(c) | Form of Change in Control Agreement between M.D.C. Holdings, Inc. and certain employees of M.D.C. Holdings, Inc. (incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K dated March 27, 1998). * | |
| 10.13 | Independent Contractor Agreement between Mizel Design and Decorating Company and M.D.C. Holdings, Inc. effective as of January 1, 2001 (incorporated herein by reference to Exhibit 10.15 to the Company’s Form 10-K dated December 31, 2000). * | |
| 10.14 | M.D.C. Holdings, Inc. 401(k) Savings Plan Prototype Retirement Plan and Trust (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q dated June 30, 1999). * |
| EXHIBIT | ||
| NUMBER | DESCRIPTION | |
| 10.15 | M.D.C. Holdings, Inc. 401(k) Savings Plan Prototype Retirement Plan & Trust Adoption Agreement between M.D.C. Holdings, Inc. and Key Trust Company National Association effective as of July 1, 1998 (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 10-Q dated June 30, 1999). * | |
| 10.15(a) | First Amendment to the M.D.C. Holdings, Inc. 401(k) Savings Plan effective June 1, 2001 (incorporated herein by reference to Exhibit 10.15(a) of the Company’s Annual Report on Form 10-K dated December 31, 2001). * | |
| 10.16 | Third Amendment to the M.D.C. Holdings, Inc. Director Incentive Plan effective May 21, 2001 (incorporated herein by reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K dated December 31, 2001). * | |
| 10.17 | M.D.C. Holdings, Inc. 2001 Equity Incentive Plan Effective March 26, 2001 (incorporated herein by reference to Exhibit B of the Company’s Proxy Statement dated March 31, 2001 relating to the 2001 Annual Meeting of Stockholders). * | |
| 10.18 | M.D.C. Holdings, Inc. Stock Option Plan for Non-Employee Directors Effective March 26, 2001 (incorporated herein by reference to Exhibit C of the Company’s Proxy Statement dated March 31, 2001 relating to the 2001 Annual Meeting of Stockholders). * | |
| 10.19 | Second Amended and Restated Warehousing Credit Agreement dated as of September 9, 2002, among HomeAmerican Mortgage Corporation and the Banks which are signatories thereto and U.S. Bank National Association, as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q dated September 30, 2002). * | |
| 10.20 | M.D.C. Holdings, Inc. 401(k) Savings Plan Prototype Retirement Plan and Trust. | |
| 10.21 | M.D.C. Holdings, Inc. 401(k) Savings Plan Prototype Retirement Plan and Trust Adoption Agreement between M.D.C. Holdings, Inc. and INVESCO/BankOne, as of January 1, 2003. | |
| 12 | Ratio of Earnings to Fixed Charges Schedule. | |
| 21 | Subsidiaries of the Company. | |
| 23 | Consent of Ernst & Young LLP. | |
| 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. |
| * | Incorporated herein by reference. |