Annual Report (Form 10-K), fiscal year 1994





ITEM 3. LEGAL PROCEEDINGS
SETTLEMENT OF WESTERN SAVINGS CIVIL MATTERS.
In December 1994, the Company and the Resolution Trust Corporation (the "RTC"), acting in its corporate capacity as receiver for Western Savings and Loan Association ("Western"), executed a final settlement agreement providing for the mutual release of all potential claims between the parties and certain related persons insofar as such claims relate to any of the Company's past transactions with Western.
Under the terms of the settlement, MDC paid to the RTC $3,912,000, which MDC reserved (and set aside the cash) for as of December 31, 1992 when an agreement in principle for the settlement was executed by the parties. MDC believes that consummation of the settlement agreement will not result in any material adverse effect on the Company's operations or financial position. The settlement remains subject to the entry of a court order determining that the settlement precludes the filing of cross-claims against MDC by various third parties, a condition which can be waived or extended by the Company.
EXPANSIVE SOILS CASES.
On October 21, 1994, a complaint was served on several of the Company's subsidiaries in an action initiated by six homeowners in Highlands Ranch, Colorado. On January 26, 1995, counsel for the Company accepted service of two additional complaints by a homeowner in the Stonegate subdivision in Douglas County, Colorado and by a homeowner in the Rock Creek development located in Boulder County, Colorado. The complaints, each of which seek certification of a class action, purport to allege substantially identical claims relating to the construction of homes on lots with expansive soils, including negligence, breach of express and implied warranties, violation of the Colorado Consumer Protection Act, non-disclosure and a claim for exemplary damages. The homeowners in each complaint seek, individually and on behalf of the alleged class, recovery in unspecified amounts including actual damages, statutory damages, exemplary damages
and treble damages. The Company has not as yet been required to file a response to any of the complaints or to any discovery in these cases. While the ultimate outcome of these matters is uncertain, management does not believe that the outcome of these matters will have a material adverse effect on the financial condition or results of operations of the Company.
The Company has notified its insurance carriers of these complaints and currently is reviewing with the carriers how the Company will proceed. The insurance carriers providing primary coverage have (i) agreed to defend the Company in the Highlands Ranch case subject to reservations of rights; and (ii) not responded, as yet, to the request to defend the Company with respect to the matters alleged in the two other complaints.
OTHER.
The Company and certain of its subsidiaries and affiliates have been named as defendants in various other claims, complaints and legal actions arising in the normal course of business. In the opinion of management, the outcome of these matters will not have a material adverse effect upon the financial condition or results of operations of the Company.
The Company is not aware of any litigation, matter or pending claim against the Company which would result in material contingent liabilities related to environmental hazards or asbestos.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No meetings of the Company's shareowners were held during the fourth quarter of 1994.
ITEM 5.

ITEM 5. MARKET PRICE OF COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.
The shares of MDC Common Stock are traded on the New York and the Pacific Stock Exchanges. The following table sets forth, for the quarterly periods indicated, the high and low sale prices of the shares of MDC Common Stock as reported on the Composite Tape.
The Company has declared dividends of two cents per share for each quarter in the year ended December 31, 1994. Prior to 1994, no dividends had been declared on the MDC Common Stock since 1988.
In connection with the declaration and payment of dividends, as well as the purchase, redemption or other acquisition of shares of MDC Common Stock, the Company is required to comply with certain covenants contained in the Senior Notes indenture (the "Senior Notes Indenture"). The Senior Notes Indenture allows the Company to pay dividends on its Common Stock in an amount, on a cumulative basis, not to exceed 50% of its Consolidated Net Income, as defined, after December 31, 1993, subject to certain other adjustments such as the value of MDC Common Stock issued after such date. Pursuant to the Senior Notes Indenture, the Company had approximately $12,000,000 available for the payment of dividends at December 31, 1994.
On March 6, 1995, MDC had approximately 1,900 shareowners of record.
ITEM 6.

ITEM 6. SELECTED FINANCIAL AND OTHER DATA.
The data in this table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and the notes thereto presented elsewhere herein (dollars in thousands, except per share amounts).
SELECTED FINANCIAL DATA
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Beginning in early 1992, demand for homes and the availability of capital for the construction of homes increased in the areas where the Company has operations as the economies of these areas improved and mortgage interest rates declined, reaching a 25-year low in October 1993. During this period, the Company, among other things, purchased and used "rolling options" to control additional home sites in both new and existing developments to expand its home building operations. Home sales and closings have increased in each of the three years since 1991 due, in part, to these expanded operations, improved economies and generally lower mortgage interest rates.
Since October 1993, interest rates have generally increased from a 25-year low of 6.7% on a 30-year, fixed-rate mortgage to as high as 9.25% through February 1995. While current mortgage interest rates are still low compared with historical rates for the past 25 years, the general increase in mortgage interest rates, particularly since April 1994 when rates moved above 8%, has affected adversely the Company's home building and mortgage lending segments.
The increases in mortgage interest rates have affected adversely and may continue to affect adversely in the future (i) sales of new homes and the level of Home Gross Margins (as hereinafter defined); and (ii) the Company's mortgage lending operations by substantially decreasing mortgage loan origination activity.
The Company is unable to predict the extent to which current or future increases in mortgage interest rates will affect adversely the Company's operating activities and results of operations.
CONSOLIDATED RESULTS.
1994 COMPARED WITH 1993. MDC's revenues increased 27% for 1994 compared with 1993 primarily as a result of a 26% increase in home closings and an $11,000 increase in the average selling price per housing unit. MDC's 1994 revenues of $824,869,000 represented the second highest level of revenues in the Company's history and the highest revenue total since 1988.
The Company's income before income taxes and extraordinary gains increased for 1994 compared with 1993 due principally to (i) increased home building segment operating profits from significantly higher home closings, primarily resulting from the opening of new subdivisions in each of the Company's markets, and higher Home Gross Margins; and (ii) lower corporate and home building interest expense.
These positive income effects partially were offset by lower operating profit from the asset management segment primarily resulting from lower mortgage interest rates in 1993 that enabled the Company to sell certain of its mortgage-related assets at a profit in 1993.
During 1993, the Company recognized net extraordinary gains of $15,823,000, net of income taxes of $9,967,000, substantially all of which resulted from the early extinguishment of the Restructured Notes Payable with a portion of the Net Proceeds received in the 1993 Offering. No extraordinary gains or losses were recognized by the Company in 1994.
1993 COMPARED WITH 1992. MDC's revenues increased during 1993 compared with 1992 primarily as a result of a 39% increase in home closings and a higher average selling price per housing unit. This increase partially was offset by a reduction in revenues of the asset management segment. From January 1, 1992 through December 31, 1993, prepayments on, and sales of, Mortgage Collateral reduced, by $597,166,000 (from $731,332,000 to $134,166,000), the amount of the Company's Mortgage Collateral and related assets, the asset management segment's principal interest earning assets.
The Company's income before income taxes, extraordinary gain (loss) and the cumulative effect of an accounting change increased in 1993 compared with 1992 due principally to (i) increased home building segment operating profits from significantly higher home closings; (ii) lower corporate general and administrative expenses; and (iii) lower corporate and home building interest expense. These positive income effects partially were offset by lower mortgage lending operating profit resulting primarily from management's decision to sell less mortgage loan servicing in 1993 compared with 1992.
The redemption of mortgage-backed bonds in 1992 in connection with the sales of portions of the Mortgage Collateral resulted in extraordinary losses on the early extinguishment of debt of $2,851,000, net of income tax benefits of $1,469,000. These extraordinary losses partially were offset by extraordinary gains resulting from the early payoff of certain notes payable at a discount from their carrying value.
The adoption of SFAS No. 109, "Accounting for Income Taxes," increased net income for 1992 by $1,700,000, or $.08 per share, for the cumulative effect, as of January 1, 1992, of the accounting change.
HOME BUILDING SEGMENT.
The table below sets forth certain information with respect to the Company's home building segment during each of the periods presented and at the end of such periods (dollars in thousands).
HOME BUILDING ACTIVITIES 1994 COMPARED WITH 1993.
HOME SALES REVENUES AND HOMES CLOSED AND DELIVERED. Home sales revenues for 1994 were the highest in the Company's history, representing an increase of 33% over home sales revenues for 1993. This increase primarily was the result of increases in home closings in (i) Colorado, due to strong market conditions in the first half of 1994; (ii) Arizona, due to a significant
expansion of the Company's operations, and continued strong demand for homes, in the Tucson and Phoenix markets; (iii) California, due to the Company's acquisition and opening of several new subdivisions in this market, particularly in Southern California; and (iv) the Company's Mid-Atlantic market, due to improved market conditions in the first quarter of 1994 and an increase in the number of active subdivisions in this market. The Company also realized an $11,000 increase in the average selling price per housing unit.
The Company increased the number of active subdivisions throughout its markets from 95 at December 31, 1993 to 135 at December 31, 1994. The majority of the increases in active subdivisions occurred in (i) the Mid-Atlantic market (a net increase of 18); (ii) California (a net increase of seven); and (iii) Arizona (a net increase of ten).
AVERAGE SELLING PRICE PER HOUSING UNIT. The increase in the average selling price per housing unit in 1994 compared with 1993 primarily was due to increases in average selling prices in all of the Company's markets except Phoenix and Northern California. The increases in selling prices principally were due to (i) the mix of homes closed; (ii) general price increases in most of the Company's markets to, among other things, offset increases in costs; and (iii) in certain markets, improved market conditions. These increases partially were offset by lower average selling prices in (i) Northern California primarily due to the introduction of more affordable homes during the latter part of 1993 in response to continuing consumer demand for lower-priced housing and softness in consumer demand for new homes; and (ii) Phoenix primarily due to the opening of new subdivisions which targeted the first-time and first-time move-up buyer.
HOME GROSS MARGINS. Gross margins (home sales revenues less cost of goods sold, which primarily includes land and construction costs, capitalized interest, a reserve for warranty expense and financing costs) as a percent of home sales revenue ("Home Gross Margins") increased during 1994 compared with 1993. The Company achieved higher Home Gross Margins in 1994 compared with 1993 in its Colorado, Southern California and Arizona markets primarily due to improved market conditions. Home Gross Margins also were higher in the Company's Mid-Atlantic market in 1994 compared with 1993 due to improved market conditions through the first quarter of 1994 combined with home closings from a more profitable mix of subdivisions in 1994 compared with 1993. The increases partially were offset by lower Home Gross Margins in Northern California as the Company's profitability in this area continues to be affected adversely by softness in consumer demand for new homes. To a substantially lesser extent, Home Gross Margins also were impacted negatively by builder competition in Nevada.
Increases in, among other things, the costs of subcontracted labor, finished lots and building materials have affected adversely, and may affect adversely in the future, Home Gross Margins to the extent that market conditions prevent the recovery of increased costs through higher sales prices. In addition, increased home building activities in several of the Company's markets, particularly Colorado, the Mid-Atlantic region and Arizona, have caused shortages of subcontracted labor that have increased the period of time required for completing construction and delivery of homes. Longer delivery periods increase interest costs capitalized during the construction period, which have affected adversely, and may affect adversely in the future, Home Gross Margins.
HOME SALES AND BACKLOG. Home sales for 1994 reached their highest level since 1988. "Sales contracted, net" increased 8% during 1994 compared with 1993. Backlog at December 31, 1994 was approximately the same as at December 31, 1993. MDC expects approximately 70% of its December 31, 1994 Backlog to close under existing sales contracts during the first six months of 1995. The Backlog at December 31, 1994 included 248 homes that had not been started.
Sales increased in the year ended December 31, 1994 compared with 1993 in (i) Arizona (an increase of 82%) due to improved market conditions and an expansion of the Company's operations in the Phoenix and Tucson markets; and (ii) California (an increase of 49%) due to an expansion of the Company's operations in Northern California and the Company's re-entry into the Southern California market which began in the second half of 1993 and continued through 1994.
Sales for 1994 in Colorado declined 3% compared with 1993 sales. While sales in Colorado increased by 24% in the first quarter of 1994 compared with the first quarter of 1993, sales declined in each of the three remaining quarters of 1994 compared with the same periods in 1993 as, among other things, new competitors entered the market and mortgage rates increased which affected adversely the demand for new homes.
Sales for 1994 in the Mid-Atlantic market declined 7% compared with 1993 sales. Sales increased by 11% in the first quarter of 1994 compared with the same period in 1993 but declined in each of the three remaining quarters of 1994 compared with the same periods in 1993 due to an overall slowing in this market which began in the second quarter of 1994. The overall Mid-Atlantic market declined by approximately 10% in 1994 compared with 1993.
While total sales for 1994 increased compared with 1993, sales for the fourth quarter of 1994 decreased by 13% to 714 homes from 822 homes for the same period in 1993 as the Company, in general, experienced lower sales per active subdivision in
each of its markets in the fourth quarter of 1994 compared with the same period in the prior year.
In addition, sales for the first two months of 1995 decreased by 18% to 762 homes from 930 homes for the same period in 1994 (which reflected the strong sales experienced during the first quarter of 1994 prior to the significant increase in mortgage interest rates). During the first two months of 1993, the Company sold 725 homes. The Company is unable to predict if these trends will continue in the future.
INVENTORY VALUATION RESERVES. Operating results during the fourth quarter of 1994 were impacted adversely by $4,000,000 in net realizable value adjustments related to, among other factors, several projects in Northern California which experienced significant slowing in sales and reduced selling prices during the fourth quarter due to softness in consumer demand which led to a general decline in home sales activity in this market.
MARKETING. Marketing expenses (which include, among other things, amortization of deferred marketing, model home expenses and sales commissions) totalled $44,588,000 for 1994 compared with $34,820,000 for 1993. This 28% increase during 1994 principally was due to the 33% increase in home sales revenue and expanded operations in all of the Company's major regions. Significant additional marketing-related salary, sales commission and model home operation expenses were incurred to support the Company's expanded operations. Marketing expenses as a percentage of home sales revenues, however, decreased to 5.7% in 1994, compared with 5.9% in 1993.
GENERAL AND ADMINISTRATIVE. General and administrative expenses totalled $29,215,000 during 1994 compared with $27,497,000 in 1993. General and administrative expenses during 1993 were affected adversely by non-recurring charges totalling approximately $2,500,000. While general and administrative expenses have increased in the aggregate primarily due to salary expense for the additional personnel needed for the Company's expanded operations, general and administrative expenses as a percentage of home sales revenues decreased to 3.7% for 1994 compared with 4.7% in 1993 because the Company was able to deliver more homes without a proportionate increase in overhead.
HOME BUILDING ACTIVITIES 1993 COMPARED WITH 1992.
HOME SALES REVENUES AND HOMES CLOSED AND DELIVERED. Home sales revenues increased 41% for 1993 compared with 1992 primarily as a result of (i) significant increases in home closings in all of the Company's markets, particularly in Colorado and the Mid-Atlantic region; and (ii) a $3,000 increase in the average selling price per housing unit.
AVERAGE SELLING PRICE PER HOUSING UNIT. The increase in the average selling price per housing unit for 1993 compared with 1992 primarily was due to (i) increases in average selling prices in the Mid-Atlantic region due principally to the mix of homes closed; and (ii) price increases in most of the Company's markets to, among other things, offset increases in costs. These increases partially were offset by lower average selling prices in Northern California due to the design and sale of more affordable homes in response to consumer demand for lower-priced housing.
HOME GROSS MARGINS. Overall, Home Gross Margins declined slightly during 1993 compared with 1992. The Company achieved higher Home Gross Margins in (i) Colorado due to the improved market conditions; and (ii) Arizona due to improved market conditions and a reduction in lot costs as the Company substantially completed in 1992 the sale of homes built on certain higher-priced lots acquired prior to 1990. These increases largely were offset by lower Home Gross Margins in Northern California as a result of (i) closings from homes built on higher-priced lots purchased during the peak of the market in 1990; and (ii) the inability to recover increased housing costs through increases in home sales prices due to greater builder competition and a softening in the Northern California market.
MARKETING. Marketing expenses totalled $34,820,000 for 1993 compared with $26,203,000 for 1992. The 33% increase in 1993 was due to the 39% increase in home closings and expanded operations in many of the regions in which the Company operates. As a result of the increased operations, additional marketing-related salary, commission and model home operating expenses were incurred.
GENERAL AND ADMINISTRATIVE. General and administrative expenses of the home building segment totalled $27,497,000 for 1993 compared with $18,529,000 for 1992. This 48% increase in 1993 was due to, among other things, (i) increased salary expense; and (ii) increased office and other expenses, both in response to increased operations. Additionally, property taxes increased in 1993 as market conditions improved, particularly in Colorado. General and administrative expenses in 1993 were affected adversely by $2,500,000 of expenses incurred primarily in Northern California because of (i) operational problems in certain subdivisions; and (ii) costs incurred by the Company with respect to certain potential project acquisitions which were not consummated by the Company in view of continuing weak conditions in the Northern California market.
HOME SALES AND BACKLOG. "Sales contracted, net" increased 43% during 1993 compared with 1992. Backlog at December 31, 1993 increased 64% from December 31, 1992. These increases principally were due to significant increases in sales in (i) Colorado (an increase of 32%) due to continued improvement in
this home building market as well as expanded operations; and (ii) the Mid-Atlantic region (an increase of 73%) due to expansion of the Company's operations in order to meet increased demand for homes in this market.
UNSOLD HOMES UNDER CONSTRUCTION.
The Company maintains levels of unsold homes in various stages of completion to assist it in meeting the immediate and near-term demands of its home buyers. The Company monitors and adjusts its levels of unsold homes under construction based on, among other factors, its evaluation of market conditions and in anticipation of seasonal sales patterns and weather.
The Company in the past has offered, and may in the future offer, incentives to assist in selling certain of its unsold homes under construction. These incentives include offering prospective home buyers options and upgrades at a discount, buying down mortgage interest rates and, to a substantially lesser extent, price concessions. The cost of these incentives is included in the determination of the Company's Home Gross Margins.
As with all inventories, interest and other carrying costs incurred with respect to the Company's unsold homes under construction are capitalized during periods of active construction and expensed following their completion. In view of the Company's recent sales trends, the period of time required to sell and close the Company's unsold homes under construction, in some cases, may be extended. The Company's operating income will be affected adversely by any additional interest and other carrying costs incurred (most of which will be expensed) with respect to these unsold homes during this extended period.
The Company is unable to predict the extent to which its Home Gross Margins and operating income in 1995 will be affected adversely by the incentives offered and the additional interest and carrying costs incurred with respect to the Company's unsold homes under construction.
LAND SALES.
Revenue from land sales totalled $8,296,000, $7,441,000 and $5,800,000, respectively, for the years 1994, 1993 and 1992. The land sales primarily were in Colorado and, to a lesser extent, in California. Gross profits (losses) from these land sales were $319,000, $(423,000) and $(26,000), respectively, for the years 1994, 1993 and 1992.
LAND INVENTORY.
The table below shows the carrying value of MDC's land and land under development in each of its home building markets at
December 31, 1994, segregated by the years in which the property was acquired or optioned (in thousands).
The Company's net income and cash flow continue to be affected adversely by the carrying costs (e.g., interest and property taxes) associated with inactive land inventories. These inactive land inventories comprised approximately 27% of the carrying value of the Company's total land and land under development at December 31, 1994 compared with approximately 50% of the $192,881,000 carrying value at December 31, 1993. The decrease in inactive land inventory in 1994 was due to the commencement of development and construction activity in certain subdivisions during 1994 as well as sales of inactive land. Carrying costs on inactive land inventories are expensed, not capitalized.
The table below shows the total carrying value of the amounts of inactive land inventories included in the table above owned by MDC in each of its home building markets at December 31, 1994, segregated by the years in which the property was acquired (in thousands).
The Company is actively pursuing opportunities to reduce, through sales or home building activities, its inactive land inventories.
MORTGAGE LENDING SEGMENT.
The table below summarizes the results of HomeAmerican's operations during each of the periods presented (in thousands).
The table below sets forth certain information regarding HomeAmerican's portfolio of mortgage loans serviced (in thousands).
1994 COMPARED WITH 1993. HomeAmerican's loan originations and purchases decreased by 35% in 1994 compared with 1993 primarily due to increased mortgage interest rates which resulted in lower mortgage loan originations market wide. The decrease partially was offset by a 5% increase in the dollar amount of originations for MDC's home buyers principally due to increased closings by MDC's home building segment. HomeAmerican originated mortgages for 52% of MDC's home buyers in 1994 compared with 63%
in 1993. The decline in the percentage of mortgages originated for MDC's home buyers was the result of, among other things, increased competition for mortgage loan originations and increases in closings in Southern California where HomeAmerican does not have an origination facility.
HomeAmerican's operating profit of $6,951,000 during 1994 was lower than the operating profit of $7,508,000 for 1993 principally due to (i) losses from sales of mortgage loans totalling $585,000 in 1994 (when mortgage rates were increasing) compared with gains totalling $2,864,000 in 1993 (when mortgage rates were decreasing), partially offset by higher gains from bulk sales of mortgage servicing in 1994. While loan origination fees were lower in 1994 compared with 1993, this reduction was offset by a decrease in general and administrative expenses as HomeAmerican was able to reduce its general and administrative costs in response to the decline in its mortgage lending operations.
At December 31, 1994, servicing on approximately $506,098,000 of conforming mortgage loans (i.e., loans that meet the criteria for the guarantee programs of GNMA, FNMA or FHLMC) was available for sale, which represents a 12% decrease from the servicing on $574,088,000 of conforming mortgage loans available for sale at December 31, 1993.
1993 COMPARED WITH 1992. HomeAmerican's loan originations and purchases increased 25% in 1993 compared with 1992 to the highest level of mortgage loan production in HomeAmerican's history. Substantially all of the increase in originations was due to (i) increased spot originations for others to refinance mortgage loans in response to record low mortgage interest rates; and (ii) to a lesser extent, increases in home closings by MDC's home building segment and an increase from 58% to 63% in the percentage of originations by HomeAmerican for MDC's home buyers.
HomeAmerican's operating profit for 1993 was lower than operating profit for 1992 principally due to (i) management's decision to reduce the amount of bulk sales of servicing; and (ii) an increase in general and administrative expenses resulting from increased staff levels needed to process the increased loan originations, partially offset by significantly increased gains on sales of mortgage loans and an increase in loan origination fees.
ASSET MANAGEMENT SEGMENT.
OVERVIEW. Since 1986, the Company's asset management segment has been a significant part of the Company's business. From 1992 through early 1994, mortgage interest rates fell significantly, encouraging millions of homeowners to refinance their mortgages by paying them off with the proceeds of new lower interest rate mortgages. This resulted in a significant decrease
in the Company's mortgage-related assets (and a significant reduction in corresponding revenue). As a result of the reduction in rates, the Company also was able to liquidate, generally at a profit, other portions of its mortgage-related assets. As a consequence, future income from the asset management segment primarily will be dependent on management fees earned by FAMC, from two publicly-traded REITs.
At December 31, 1994, FAMC had approximately $190 million in assets under management for the REITs.
The table below summarizes the results of the asset management segment operations during each of the periods presented (in thousands).
The decrease in the Company's asset management segment operating profit for 1994 compared with 1993 and 1992 is due principally to gains on sales of Mortgage Collateral in 1993 and 1992 as the lower interest rates in those years enabled the Company to sell portions of its Mortgage Collateral at a profit. This profit was partially offset by valuation adjustments related to the Company's Equity CMO Interests recorded in 1993 and 1992 which were not required in 1994. Also in 1993 and 1992, the Company earned $1,490,000 and $1,036,000, respectively, in interest on the CMO Bond (as hereinafter defined). The CMO Bond was fully paid at December 31, 1993.
EQUITY CMO INTERESTS. During 1993 and 1992, MDC recorded $3,100,000 and $4,166,000, respectively, in valuation adjustments for its Equity CMO Interests because of permanent declines in the value of the undiscounted projected cash flow from the Equity CMO Interests. These declines resulted from higher actual and projected Mortgage Collateral prepayments caused by low interest rates. During 1994, higher mortgage interest rates slowed both the actual and anticipated future prepayment speeds and, accordingly, no additional valuation adjustments were necessary.
SALES OF MORTGAGE COLLATERAL AND RELATED ASSETS. In 1994, MDC completed various sales of mortgage-related assets which resulted in pre-tax gains totalling $295,000. In January 1993, MDC completed a sale of mortgage-related assets which resulted in a pre-tax gain totalling $5,011,000. In addition, MDC completed various other sales of mortgage-related assets which resulted in net gains totalling $2,494,000 in 1993.
In 1992, MDC sold, at a premium, Mortgage Collateral which resulted in pre-tax gains totalling $8,169,000. The proceeds from certain of these sales were utilized to redeem in full the related outstanding mortgage-backed bonds, the redemption of
which resulted in an aggregate extraordinary loss on the early extinguishment of debt of $2,851,000, net of an income tax benefit of $1,469,000.
INVESTMENT IN A CMO BOND. On July 31, 1992, MDC purchased a $7,823,000 principal amount mortgage-backed bond (the "CMO Bond") for $7,367,000. For the years 1993 and 1992, the CMO Bond earned interest totalling $1,490,000 and $1,036,000, respectively. The principal amount of the CMO Bond was fully paid at December 31, 1993.
OTHER OPERATING RESULTS.
INTEREST EXPENSE. Corporate and home building interest incurred increased by 40% to $35,799,000 for 1994 compared with $25,505,000 and $24,802,000, respectively, for the years 1993 and 1992 due to (i) higher average effective interest rates associated with the 11 1/8% Senior Notes due 2003 (in part due to the repayment, in December 1993 and January 1994, of $132,496,000 of Restructured Notes Payable for approximately $100,701,000) compared with the debt outstanding for the years 1993 and 1992; (ii) higher average effective interest rates with respect to the Company's variable-rate bank lines of credit and project loans due to an increase in the prime rate in 1994; and (iii) higher levels of borrowings resulting from the Company's expanded home building operations.
The portion of this corporate and home building interest which was capitalized (the Company capitalizes interest on its home building inventories during the period of active development and through the completion of construction) during 1994 totalled $26,345,000 compared with $14,051,000 and $11,443,000, respectively, during 1993 and 1992. The increase in interest capitalized for 1994 primarily was due to (i) increased levels of active home building inventories resulting from expanded operations; and (ii) higher capitalization rates resulting from higher average effective interest rates on the Company's debt, particularly with respect to Colorado.
Corporate and home building interest incurred not capitalized is reflected as interest expense and totalled $9,454,000 for 1994 compared with $11,454,000 and $13,359,000, respectively, for 1993 and 1992.
For a reconciliation of interest incurred, capitalized and expensed, see Note I to the Company's Consolidated Financial Statements.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and administrative expenses totalled $15,132,000 for 1994 compared with $14,890,000 and $18,108,000, respectively, for 1993 and 1992. The 18% decrease in 1993 compared with 1992 primarily was due to a reduction in insurance and legal expenses, partially
offset by an increase in salary expense and financing costs associated with the Company's expanded operations in 1993.
INCOME TAXES. M.D.C. Holdings, Inc. and its wholly owned subsidiaries file a consolidated federal income tax return (an "MDC Consolidated Return"). Richmond Homes and its wholly owned subsidiaries filed a separate consolidated federal income tax return (each a "Richmond Homes Consolidated Return") from its inception (December 28, 1989) through February 2, 1994, the date Richmond Homes became a wholly owned subsidiary of MDC.
MDC's overall effective income tax rates of 38%, 37% and 16%, respectively, for 1994, 1993, and 1992, differed from the federal statutory rate of 35% in 1994 and 1993 and 34% in 1992. These differences primarily were due to, among other things, (i) the impact of state income taxes; (ii) the realization of non-taxable income for financial reporting purposes for which no tax liability was recorded; (iii) in 1994 and 1992, adjustments of prior years' income taxes; and (iv) in 1992, the reduction in the deferred tax asset valuation allowance.
At December 31, 1994, the Company had a net deferred tax asset of $11,944,000, net of a valuation allowance of $3,000,000. Given present economic trends, particularly in the home building industry, as evidenced by recent improvements in the Company's results of operations, management believes the net deferred tax asset to be recoverable from future earnings. The valuation allowance has been provided to offset the related deferred income tax assets due to the uncertainty of realizing the benefit of certain future tax deductions. See Note J to the Company's Consolidated Financial Statements.
The Internal Revenue Service (the "IRS") has completed its examination of the MDC Consolidated Returns for the years 1986 through 1990 and the Richmond Homes Consolidated Returns for the years 1989 and 1990 and has proposed certain adjustments to the taxable income reflected in such returns. In general, the proposed adjustments would shift the recognition of certain items of income and expense from one year to another ("Timing Adjustments"). To the extent taxable income in a prior year is increased by proposed Timing Adjustments, taxable income may be reduced by a corresponding amount in other years; however, the Company would incur an interest charge as a result of such adjustment. The Company currently is protesting many of these proposed adjustments through the IRS appeals process and believes the amount of these adjustments will be reduced as a result. In the opinion of management, adequate provision has been made for the additional income taxes and interest which may arise as a result of the proposed adjustments.
In December 1994, the Company and the IRS appeals officer resolved, subject to approval of the Congressional Joint Committee on Taxation (the "Joint Committee"), all outstanding issues with respect to the IRS examination of the 1984 and 1985 MDC Consolidated Returns. In connection with this resolution, the Company paid the IRS $8,000,000 for the additional taxes and interest due for 1984 and 1985, as computed by the IRS. Adequate provision for these additional taxes and interest had been made by the Company in prior years. As of March 15, 1995, approval of the Joint Committee had not been received.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL.
MDC uses its capital resources to, among other things, (i) support its operations, including its inventories of homes, home sites and land; (ii) provide working capital; and (iii) provide mortgage loans for its home buyers. Capital resources are generated internally from operations and from external sources.
In December 1993, the Company completed the 1993 Offering of $190,000,000 principal amount of Senior Notes and $28,000,000 principal amount of Convertible Subordinated Notes. This 1993 Offering significantly improved the Company's capital structure and financial condition. The 1993 Offering resulted in net proceeds, after expenses, of $204,013,000 (the "Net Proceeds"). The Net Proceeds were used to (i) repurchase, for $100,701,000, the Company's Restructured Notes Payable with a carrying value on the Company's books of $132,496,000 at the date of retirement; (ii) redeem, at par ($51,816,000), all of the Company's then outstanding 11 1/4% senior subordinated notes due May 1996; (iii) purchase, for $31,211,000, certain assets (including outstanding shares of MDC Common Stock, investments in metropolitan district bonds and certain ownership interests in Richmond Homes) from an unaffiliated liquidating trust; and (iv) pay down existing debt of $14,100,000. The balance of the Net Proceeds ($6,185,000) was used for general corporate purposes. No principal payments are required on the Senior Notes or Convertible Subordinated Notes until 2003 and 2005, respectively.
These repayments and repurchases of debt from the Net Proceeds enabled the Company to achieve greater operating and financial flexibility by postponing to 2003 significant principal payments which would have otherwise been due in 1994, 1995 and 1996. As a result, the Company has no substantial principal payments on its publicly-held notes until 2003 except for a $10,230,000 payment due in 1998 to repay in full the Company's subordinated fixed-rate notes.
The Company has expanded its bank lines of credit to, among other things, reduce the levels of its secured project financing, the cost of which is generally higher than the cost of bank lines of credit.
Based upon its current financial condition and credit relationships, MDC believes that it has, or can obtain, adequate financial resources to satisfy its current and near-term capital requirements. The Company believes that it can meet its long- term capital needs (including, among other things, meeting future debt payments and refinancing or paying off other long-term debt as it becomes due) from operations and external financing sources.
LINES OF CREDIT AND NOTES PAYABLE.
HOME BUILDING. MDC's home building bank lines of credit at December 31, 1994 aggregated $153,000,000 compared with $65,000,000 at December 31, 1993. Agreements governing $140,000,000 of these lines of credit were entered into during 1994, with terms that provide for final maturities from four to five years, including scheduled term-out periods (although the term-out periods may commence earlier under certain circumstances). Borrowings under the bank lines of credit are collateralized by home building inventories and are limited to the value of "eligible collateral" (as defined in the credit agreements). At December 31, 1994, $62,332,000 was borrowed and an additional $64,258,000 was collateralized and available to be borrowed under the bank lines of credit.
A bank has advised the Company that it will expand an existing $13,000,000 line of credit with an amended $28,000,000 credit facility. The Company believes that it will be successful in amending this credit facility; however, there can be no assurance that this credit facility will be amended or, if amended, at what levels or terms.
MORTGAGE LENDING. To provide funds to originate and purchase mortgage loans and to finance these mortgage loans on a short-term basis, HomeAmerican utilizes its mortgage lending bank line of credit (the "Mortgage Line"). These mortgage loans are pooled into GNMA, FNMA and FHLMC pools or retained as whole loans and subsequently are sold in the open market on a "spot" basis or pursuant to mortgage loan sale commitments. During 1994, 1993 and 1992, HomeAmerican sold $480,485,000, $695,635,000 and $564,800,000, respectively, principal amount of mortgage loans and mortgage certificates to unaffiliated purchasers.
The aggregate amount available under the Mortgage Line at December 31, 1994 was $51,000,000. This was reduced from $75,000,000 in 1994 at the Company's request because of a significant reduction in the number of loans originated and purchased by HomeAmerican. Borrowings under the Mortgage Line
are collateralized by mortgage loans and mortgage-backed certificates and are limited to the value of "eligible collateral" (as defined in the credit agreement). At December 31, 1994, $23,211,000 was borrowed and an additional $5,929,000 was collateralized and available to be borrowed under the Mortgage Line. The Company also has additional borrowing capability with available repurchase agreements.
GENERAL. The Company's lines of credit and notes payable require compliance with certain covenants, representations and warranties. Currently, the Company believes that it is in compliance with these covenants, representations and warranties.
In the event that MDC's lines of credit are not renewed as they become due or are renewed at substantially lower levels, the Company believes that it could meet its financing requirements through a combination of internally-generated funds and new borrowings.
CONSOLIDATED CASH FLOW.
In 1994, MDC used cash of $19,439,000 compared with cash generated in 1993 and 1992 of $1,975,000 and $12,395,000, respectively. At December 31, 1994, the Company had $43,564,000 available in cash and cash equivalents.
MDC's $19,439,000 use of cash in 1994 primarily resulted from the Company's net use of cash in Operating Activities of $36,790,000, partially offset by net cash generated in Investing Activities of $16,395,000 from the redemption by payment-in-full on certain metropolitan district bonds owned by the Company. $76,991,000 of cash was used in Operating Activities to increase MDC's home building inventories primarily as a result of expanded home building operations. A portion of this cash required to increase home building inventories was provided by (i) a $24,076,000 reduction in mortgage loans in inventory; and (ii) $29,545,000 in net income generated before non-cash expenses such as depreciation, amortization and valuation adjustments. Cash also was used in Operating Activities in connection with increases in receivables and reductions in accounts payable and accrued expenses.
For 1993, MDC's net cash used in Operating Activities of $34,237,000 was offset by cash generated from (i) Investing Activities of $26,517,000 with respect to distributions of capital from Equity CMO Interests, cash received from redemption of marketable securities and principal payments received from the CMO Bond; and (ii) the 1993 Offering discussed above. Net Cash used in Operating Activities in 1993 principally resulted from increases in home building inventories and mortgage loans held in inventory.
For 1992, cash generated by MDC of $12,395,000 principally was due to net cash generated in Operating Activities of $16,361,000 resulting from net income generated and an increase in accounts payable and accrued expenses, partially offset by increases in receivables and home building inventories.
As the Company's home building activities have expanded in 1993 and 1994, the Company has used cash in Operating Activities primarily to expand its level of home building inventories to meet the increased demand for new homes. To the extent the Company may continue to expand the home building segment in the future, and such expansion is not funded by net income, cash flows from Operating Activities could continue to be negative. The Company generally funds these negative cash flows through increased borrowings under bank lines of credit.
Net cash provided by Investing Activities is primarily generated by principal payments and prepayments on, and sales of, Mortgage Collateral (collectively, "Mortgage Collateral Reductions") and a reduction in restricted cash. Mortgage Collateral Reductions were substantial during 1992 through 1994. During this period, Mortgage Collateral and mortgage-related assets declined from $731,332,000 to $64,574,000 substantially as a result of (i) the high rate of prepayments on the Mortgage Collateral; and (ii) sales of Mortgage Collateral and mortgage-related assets at a premium to carrying value. Most of the cash generated by the Mortgage Collateral Reductions and changes in restricted cash was required to be used in Financing Activities to make principal payments on the mortgage-backed bonds collateralized by the Mortgage Collateral and, accordingly, had a relatively minor net cash impact. The Company anticipates that its Mortgage Collateral and related mortgage-backed bonds will continue to decrease.
CHANGES IN HOME BUILDING ASSETS.
Housing completed or under construction increased to $280,319,000 at December 31, 1994 compared with $201,023,000 and $132,752,000 at December 31, 1993 and 1992, respectively, principally due to an increase in Backlog and unsold homes under construction during 1994 and 1993.
Land and land under development totalled $183,838,000 at December 31, 1994 compared with $192,881,000 and $206,583,000 at December 31, 1993 and 1992, respectively. The net decline in land over these periods is due principally to (i) increased housing construction activity; and (ii) the increased use of "rolling" options, with periodic takedowns of lots, to acquire new land inventories.
The Company's total home building inventories at December 31, 1994 include $42,478,000 of interest capitalized in the current and prior periods, representing 9% of the inventory
balance on such date. Interest capitalized in home building inventories at December 31, 1993 and 1992 was $42,681,000 and $48,440,000, respectively, representing 11% and 14%, respectively, of the inventory balances on such dates.
Based upon its current business plan, MDC anticipates the acquisition of various parcels of finished lots and partially- developed land for use in its future home building operations during 1995. The Company currently intends to acquire a portion of the land inventories required in future periods through takedowns of lots subject to "rolling" options entered into in prior periods and under new "rolling" options. The use of "rolling" options lessens the Company's land-related risk and improves liquidity.
IMPACT OF INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS
Real estate and residential housing prices are affected by inflation, which can cause increases in the price of land, raw materials and subcontracted labor. Unless costs are recovered through higher sales prices, Home Gross Margins can decrease. If interest rates increase, construction and financing costs, as well as the cost of borrowings, also increase, which can result in lower Home Gross Margins. Increases in home mortgage interest rates make it more difficult for MDC's customers to qualify for home mortgage loans, potentially decreasing home sales volume. Increases in interest rates also may affect adversely the volume of mortgage loan originations.
The volatility of interest rates could have an adverse effect on MDC's future operations and liquidity. Among other things, these conditions may (i) affect adversely the demand for housing and the availability of mortgage financing; and (ii) reduce the credit facilities offered to MDC by banks, investment bankers and mortgage bankers.
MDC's business also is affected significantly by, among other things, general economic conditions and particularly the demand for new homes in the areas in which it builds.
PROPOSED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
In November 1993, the Financial Accounting Standards Board issued a Proposed Statement of Financial Accounting Standards titled "Accounting for the Impairment of Long-Lived Assets" (the "Proposed Statement"). The Company understands the standards in the Proposed Statement have been modified such that the expected standards in the final statement, which is scheduled to be issued in the near future, will not have a material impact on the results of operations and financial position of the Company in the year of adoption.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS
M.D.C. HOLDINGS, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page Consolidated Financial Statements: Report of Independent Accountants . . . . . . . . . . . . . . . . . F- 2 Consolidated Balance Sheets as of December 31, 1994 and December 31, 1993 F- 3 Consolidated Statements of Income for the Three Years Ended December 31, 1994. . . . . . . . . . . . . . . . . . . . . . F- 5 Consolidated Statements of Stockholders' Equity for the Three Years Ended December 31, 1994. . . . . . . . . . . . . . . . . . . . . . F- 6 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1994. . . . . . . . . . . . . . . . . . . . . . . . . F- 7 Notes to Consolidated Financial Statements. . . . . . . . . . . . .
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREOWNERS OF M.D.C. HOLDINGS, INC.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders' equity and of cash flows present fairly, in all material respects, the financial position of M.D.C. Holdings, Inc. and its subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note J to the financial statements, the Company changed its method of accounting for income taxes in 1992.
/s/ Price Waterhouse LLP Price Waterhouse LLP
Los Angeles, California
February 15, 1995
M.D.C. HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
See notes to consolidated financial statements.
M.D.C. HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
See notes to consolidated financial statements.
M.D.C. HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See notes to consolidated financial statements.
M.D.C. HOLDINGS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
See notes to consolidated financial statements.
M.D.C. HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See notes to consolidated financial statements.
M.D.C. HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements of M.D.C. Holdings, Inc. ("MDC" or the "Company", which, unless otherwise indicated, refers to M.D.C. Holdings, Inc. and its subsidiaries) include the accounts of MDC and its wholly owned and majority-owned subsidiaries. Investments in 50% or less owned limited partnerships, joint ventures and ownership interests in trusts are accounted for using the equity method. All significant intercompany balances and transactions have been eliminated in consolidation.
In the home building segment of its operations, MDC designs, constructs and sells residential housing and, to a lesser extent, acquires and develops land for use in its home building operations and for sale to others.
MDC's mortgage lending operations are conducted by HomeAmerican Mortgage Corporation ("HomeAmerican"), which provides mortgage loans for MDC home buyers as well as for others. Substantially all of the mortgage loans originated by HomeAmerican, as well as mortgage loans purchased from unaffiliated loan correspondents, subsequently are sold to private investors. Additionally, HomeAmerican sells mortgage loan servicing.
In MDC's asset management segment, Financial Asset Management Corporation (an indirect, wholly owned subsidiary of M.D.C. Holdings, Inc., "FAMC") manages the operations of two publicly-traded real estate investment trusts (each a "REIT"). MDC also owns interests in various other investments.
HOME BUILDING.
INVENTORIES - Inventories are stated at the lower of cost or net realizable value and include interest capitalized during the period of active development through the completion of construction. Construction-related overhead and salaries are capitalized and allocated proportionately to projects actively being developed. Land and related costs are transferred to housing inventory when construction commences.
Net realizable value is based on the Company's plans for development and build-out of each project using estimated sales prices less estimated costs to complete (which includes interest anticipated to be capitalized during active development) and sell the project. Net realizable value does not represent, for a
specific project, the current sales price that the Company could obtain from third parties for such properties and projects at their current stage of development. Management believes that its assumptions as to projected demand are reasonable based on present economic conditions and that financing will be available to enable the Company to realize the carrying value of its home building inventories consistent with its plans for build-out and development. At December 31, 1994 and 1993, inventory valuation reserves totalled $34,067,000 and $40,829,000, respectively. The Company charged $4,000,000 in 1994 and $2,345,000 in 1993 to costs and expenses in connection with such inventory valuation reserves. Inventory valuation reserves utilized through home sales, land sales and in connection with the deeding of inactive land inventories, totalled $10,762,000, $8,616,000 and $11,808,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
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 the sale.
WARRANTY COSTS - The Company's homes are sold with limited ten-year warranties from independent entities. Home buyer claims under these warranties generally are subject to a deductible payable by the Company. Reserves, which are included in home cost of sales, are established by the Company on a per-house basis to cover anticipated costs of repairs during the Company's warranty period and a portion of the supplemental warranty deductible.
MORTGAGE LENDING.
RESTRICTED CASH - Restricted cash represents cash pledged to support certain letters of credit.
MORTGAGE LOANS HELD IN INVENTORY - The Company generally purchases forward commitments to deliver mortgage loans held for sale. Mortgage loans held in inventory are stated at the lower of aggregate cost or market based upon such commitments for loans to be delivered into such commitments or prevailing market for uncommitted loans. Substantially all of the loans originated or purchased by the Company are sold to private investors within 45 days of origination or purchase. Gains or losses on mortgage loans held in inventory are realized when the loans are sold.
REVENUE RECOGNITION - Loan origination fees in excess of origination costs incurred and loan commitment fees are deferred
until the related loans are sold. Loan servicing fees are recorded as revenue when the mortgage loan payments are received. Revenues from the sale of mortgage loan servicing are recognized when title and all risks and rewards of ownership have irrevocably passed to the buyer and there are no significant unresolved contingencies.
ASSET MANAGEMENT.
RESTRICTED CASH - Restricted cash represents mortgage loan principal and interest receipts held pending distribution to holders of mortgage-backed bonds.
EQUITY CMO INTERESTS - MDC owns a 49.999% ownership interest in seven trusts which in 1987 issued collateralized mortgage obligations ("CMOs") collateralized by fixed-rate agency-guaranteed mortgage certificates. These interests (collectively, "Equity CMO Interests") are accounted for on the equity method.
MDC's Equity CMO Interests are carried at the lower of cost or undiscounted projected excess cash flow ("Projected Excess Cash Flow") and are included in the line item "Other loans and assets" on the Consolidated Balance Sheet. To the extent Projected Excess Cash Flow is less than carrying cost, a valuation adjustment is recorded. These valuation adjustments provide for estimated losses to be recognized by the related ownership interest in the trusts subsequent to the date on which the valuation adjustments were taken, and the Company's share of such losses have been, and will in the future be, charged against these valuation adjustments as they occur.
MORTGAGE COLLATERAL AND RELATED ASSETS - Effective January 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The adoption of SFAS No. 115 had no effect on the Company's Net Income and had an immaterial effect on the Company's Stockholders' Equity. The adoption of SFAS No. 115 changed the accounting for mortgage certificates collateralizing mortgage-backed bonds from a cost basis to a market basis. Accordingly, at December 31, 1994, mortgage certificates collateralizing mortgage-backed bonds are recorded at market. Mortgage certificates are repaid through the pass through of principal payments from the mortgage loans collateralizing these certificates or, in the event of default by the borrower, proceeds from the sale of the underlying property and/or mortgage insurance proceeds. Conventional mortgage loans collateralizing mortgage-backed bonds are carried at cost (outstanding principal
balance, net of unamortized premium or discount) and have private mortgage insurance.
AMORTIZATION OF PREMIUMS AND DISCOUNTS - Premiums and discounts on Mortgage Collateral (as hereinafter defined) and original issue discounts on CMO bonds are amortized over their respective estimated lives based upon a method which provides a constant effective yield and assumes an estimated principal prepayment rate which is adjusted prospectively for actual experience.
GENERAL.
CASH AND CASH EQUIVALENTS - The Company periodically invests funds not immediately required for operating purposes in highly liquid, short-term investments with an original maturity of 90 days or less such as commercial paper and repurchase agreements which are included in cash and cash equivalents in the Consolidated Balance Sheet and Consolidated Statement of Cash Flows.
PROPERTY AND EQUIPMENT - Property and equipment is carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets.
EARNINGS PER SHARE - Primary earnings per share are based on the weighted-average number of common and common equivalent shares outstanding during each period. For the year ended December 31, 1994, fully-diluted earnings per share also assumes the conversion into Common Stock of all of the outstanding convertible subordinated notes at the stated conversion price.
RECLASSIFICATIONS - Certain amounts in the 1993 and 1992 consolidated financial statements have been reclassified to conform to the 1994 presentation.
B. INFORMATION ON BUSINESS SEGMENTS
The Company operates in three business segments: home building, mortgage lending and asset management. A summary of the Company's segment information is shown below (in thousands).
(Continued)
(Continued)
Corporate general and administrative expenses consist principally of salaries and other administrative expenses which are not identifiable to a specific segment. Transfers between segments are recorded at cost. Capital expenditures and related depreciation and amortization for the years ended December 31, 1994, 1993 and 1992 were not material. Identifiable segment assets are shown on the face of the Consolidated Balance Sheet.
C. PURCHASE OF ASSETS
In December 1993, as part of the use of proceeds in the 1993 Offering described in Note G, the Company purchased from an unaffiliated liquidating trust (the "Trust") (i) 1,990 shares (19.9%) of Richmond Homes, Inc. I (the Company's consolidated subsidiary which conducts substantially all of the Company's home building activities in Colorado, "Richmond Homes") common stock; (ii) 1,400 shares of Class A preferred stock of Richmond Homes; (iii) a general partnership interest in Rock Creek Investment Partnership, a partnership in which Richmond Homes also was a partner; and (iv) 2,560,866 shares of Common Stock of MDC ("MDC Common Stock") (collectively, the "Trust Securities").
MDC paid $16,038,000 in cash for the Trust Securities other than the shares of MDC Common Stock. The purchase price of the Trust Securities, other than the shares of MDC Common Stock, was allocated to the assets received to the extent of their fair value. The consideration paid in excess of the fair value was accounted for as a part of the reacquisition price of the Restructured Notes Payable (as hereinafter defined) which were repurchased in related transactions. See Note G. The per share purchase price for the shares of MDC Common Stock was approximately $5.93 which was based on closing prices of MDC Common Stock reported on the New York Stock Exchange for certain trading days preceding the closing date of the 1993 Offering.
Following the purchase of the Trust Securities, MDC owned 65% of the outstanding Richmond Homes common stock and all of the Richmond Homes preferred stock.
Prior to February 2, 1994, Larry A. Mizel (Chairman of the Board and Chief Executive Officer of the Company) and David D. Mandarich (Executive Vice President-Real Estate, Co-Chief Operating Officer and a director of the Company) owned 35% of the outstanding shares of Richmond Homes common stock. In furtherance of the Company's desire to own all of the outstanding shares of Richmond Homes common stock, in December 1993, a special committee of the Board of Directors of the Company (the "Special Committee") negotiated on behalf of the Company terms of an option agreement with Messrs. Mizel and Mandarich to acquire the shares of Richmond Homes common stock owned by them in exchange for MDC Common Stock with a value of up to $3,500,000 in the aggregate. For purposes of the exchange, the shares of MDC Common Stock were valued at $5.75 per share, the closing price of MDC Common Stock on the date of the option agreement. The Special Committee engaged a financial advisor to perform a business enterprise valuation of Richmond Homes. In February 1994, based on the results of the valuation, the maximum value of $3,500,000 of MDC Common Stock (an aggregate of 608,695 shares) was issued to Messrs. Mizel and Mandarich in exchange for their shares of Richmond Homes common stock. As of February 2, 1994, MDC owns 100% of the equity of Richmond Homes.
As the transaction with Messrs. Mizel and Mandarich was between related parties, the issuance of the MDC Common Stock was recorded based on the net book value of Richmond Homes, which had approximately zero common stockholders' equity at the date of the acquisition. Accordingly, the value of the shares of MDC Common Stock issued to Messrs. Mizel and Mandarich was recorded at zero.
D. MORTGAGE LOANS HELD IN INVENTORY
Mortgage loans held in inventory consist of (in thousands):
Mortgage loans held in inventory consist primarily of loans collateralized by first mortgages and deeds of trust due over periods of up to 30 years. The weighted-average effective yield on mortgage loans held in inventory was approximately 8.4% and 7.1%, respectively, at December 31, 1994 and 1993.
E. MORTGAGE COLLATERAL AND RELATED ASSETS AND MORTGAGE-BACKED BONDS AND RELATED LIABILITIES
In the past, mortgage-backed bonds were issued by limited- purpose subsidiaries of the asset management segment and other non-related entities. Payments are made on the bonds on a periodic basis as a result of, and in amounts related to, corresponding payments received on the underlying mortgage collateral (the "Mortgage Collateral"). Mortgage Collateral for mortgage-backed bonds payable consists of fixed-rate mortgage loans and mortgage-backed securities secured by first liens on single-family residential housing. Mortgage-backed securities consist of Government National Mortgage Association ("GNMA") certificates, Federal National Mortgage Association ("FNMA") mortgage pass-through certificates and conventional mortgage loans. All of the Mortgage Collateral and related assets are held by a trustee. All principal and interest on the collateral is remitted directly to a trustee and is available for payment on the bonds, all of which are rated "AAA" by Standard and Poor's Corporation or other national credit rating agencies. The Company has not guaranteed, nor is it otherwise obligated with respect to, these mortgage-backed bond issues.
The following assets and liabilities are held by trustees (in thousands):
The weighted-average effective yield on the Mortgage Collateral was approximately 9.5% and 9.9% at December 31, 1994 and 1993. Mortgage-backed bonds mature through 2019 and bear interest at weighted-average rates of 9.9% and 10.0%, respectively, at December 31, 1994 and 1993. The negative difference between the effective yield on the Mortgage Collateral and interest rates on the mortgage-backed bonds primarily is covered by the overcollateralization of the bonds.
Because the mortgage-backed bond indentures prohibit liquidation of the Mortgage Collateral, the Mortgage Collateral cannot be sold unless the corresponding mortgage-backed bonds payable are redeemed. The mortgage-backed bonds can be redeemed before maturity by the Company only under certain prescribed conditions. If those conditions are met, and the Company redeems the mortgage-backed bonds, the mortgage-backed bonds would be redeemed at par and any market appreciation or depreciation on the related Mortgage Collateral would accrue to the Company.
In 1994 and 1993, MDC sold, at a premium, Mortgage Collateral totalling $19,088,000 and $44,735,000, respectively. The proceeds from these sales were utilized to redeem in full the
related outstanding mortgage-backed bonds which totalled $19,109,000 and $44,375,000, respectively. These sales, net of redemptions, resulted in pre-tax gains totalling $295,000 and $2,129,000, respectively.
In 1992, MDC sold, at a premium, Mortgage Collateral totalling $73,345,000. The proceeds from these sales were utilized to redeem in full the related outstanding mortgage- backed bonds which totalled $74,021,000. Additionally, in 1992, the Company sold, at a premium, Mortgage Collateral and related assets totalling $92,305,000 subject to the related mortgage- backed bonds and related liabilities totalling $91,300,000. The above sales resulted in pre-tax gains totalling $8,169,000. The redemption of the $74,021,000 of mortgage-backed bonds resulted in an aggregate extraordinary loss on the early extinguishment of debt of $2,851,000, net of an income tax benefit of $1,469,000.
F. LINES OF CREDIT
HOME BUILDING - The aggregate amount of MDC's home building bank lines of credit at December 31, 1994 was $153,000,000 compared with $65,000,000 at December 31, 1993. Available borrowings under these bank lines of credit are collateralized by home building inventories and are limited to the value of "eligible collateral" (as defined in the credit agreements). At December 31, 1994, $62,332,000 was borrowed and an additional $64,258,000 was collateralized and available to be borrowed. At December 31, 1994, the weighted-average interest rate of the lines of credit was 8.85%.
MORTGAGE LENDING - The aggregate amount available under MDC's mortgage lending bank line of credit at December 31, 1994, was $51,000,000. Available borrowings under this bank line of credit are collateralized by mortgage loans and mortgage-backed certificates and are limited to the value of "eligible collateral" (as defined in the credit agreement). At December 31, 1994, $23,211,000 was borrowed and an additional $5,929,000 was collateralized and available to be borrowed. The mortgage lending line of credit is cancellable upon 90 days' notice. At December 31, 1994, the weighted-average interest rate of the line was 3.42%.
GENERAL - The agreements for the Company's bank lines of credit include representations, warranties and covenants, the most restrictive of which require that the Company maintain certain minimum defined stockholders' equity. Currently, the Company believes that it is in compliance with these covenants, representations and warranties.
G. NOTES PAYABLE
SENIOR NOTES AND SUBORDINATED NOTES - The Senior Notes (as hereinafter defined) and the subordinated notes consist of (in thousands):
In December 1993, the Company completed an offering (the "1993 Offering") of $190,000,000 principal amount of 11 1/8% senior notes due 2003 (the "Senior Notes") and $28,000,000 principal amount of 8 3/4% convertible subordinated notes due 2005 (the "Convertible Subordinated Notes"). The Senior Notes were sold at 98.525% of par value. The Convertible Subordinated Notes were sold at par value and are convertible into MDC Common Stock at an initial conversion price of $7.75 per share, subject to adjustment upon certain events. A portion of the proceeds of the 1993 Offering was utilized to redeem $51,816,000 principal amount of 11 1/4% senior subordinated notes due May 1996 at par value, resulting in an extraordinary loss on the early extinguishment of debt of $885,000, net of an income tax benefit of $559,000.
The Senior Notes are guaranteed, fully and unconditionally, and jointly and severally on an unsecured subordinated basis (the "Guaranties") by most of the Company's home building segment subsidiaries (the "Guarantors"). The Guaranties are subordinated to all Guarantor Senior Indebtedness as defined in the indenture pursuant to which the Senior Notes are issued (the "Senior Notes Indenture"). In addition, the Senior Notes are secured by a first priority pledge of the capital stock of most of the Guarantors plus the capital stock of HomeAmerican. The Senior Notes Indenture contains certain covenants which, among other things, limit (i) the incurrence of additional Indebtedness (as defined) by the Company and Restricted Subsidiaries (as defined);
(ii) the payment of dividends; (iii) the repurchase of capital stock or subordinated indebtedness; and (iv) the ability to enter into transactions with Affiliates (as defined) or merge, consolidate or transfer substantially all of the Company's or a Guarantor's assets. At December 31, 1994, the Company was in compliance with all covenants.
The Company, as of April 1, 1993, exchanged its $10,230,000 principal amount subordinated exchangeable variable-rate notes due July 1994 for five-year subordinated fixed-rate notes. The new notes bear interest at 6.64%, payable quarterly, and mature on April 1, 1998.
The Company redeemed its remaining $355,000 principal amount 10 1/2% subordinated notes due April 1995 at par on March 31, 1993. On April 15, 1993, the Company's 7% subordinated notes totalling $1,355,000 matured and were paid in full.
RESTRUCTURED NOTES PAYABLE - All of the restructured notes payable (the "Restructured Notes Payable") outstanding were repurchased by the Company in December 1993 and January 1994 with a portion of the proceeds from the 1993 Offering. The consideration paid for the Restructured Notes Payable plus certain reacquisition costs described in Note C resulted in an extraordinary gain on the early extinguishment of debt in 1993 of $16,708,000, net of income taxes of $10,526,000.
OTHER NOTES PAYABLE - Notes payable other than the notes discussed above consist principally of loans collateralized by real estate, mortgage loans and a building. These notes bear interest at rates ranging from 8.0% to 12.0%. The aggregate net carrying value of the assets collateralizing the other notes payable totalled approximately $70,000,000 at December 31, 1994.
GENERAL - The following table sets forth the scheduled principal payments on the Senior Notes, subordinated notes and notes payable at December 31, 1994 (in thousands).
H. STOCKHOLDERS' EQUITY
In 1993, the Company adopted incentive plans (the "Plans") to replace the 1983 Incentive Stock Option Plan and the 1983 Non-
Qualified Stock Option Plan, each of which expired in January 1993. A summary of the Plans follows:
EMPLOYEE EQUITY INCENTIVE PLAN - The Employee Equity Incentive Plan (the "Employee Plan") provides for an initial authorization of 2,100,000 shares of MDC Common Stock for issuance thereunder plus an additional annual authorization equal to 10% of the then authorized shares of MDC Common Stock under the Employee Plan as of each succeeding annual anniversary of the effective date of the Employee Plan. Under the Employee Plan, the Company may grant awards of restricted stock, incentive and non-statutory stock options and dividend equivalents, or any combination thereof, to officers and employees of the Company or any of its subsidiaries. The incentive stock options granted under this plan are exercisable at prices greater than or equal to the market value on the date of grant over periods of up to six years. Non-statutory options granted under this plan have discretionary exercise prices and are exercisable over periods of up to six years.
DIRECTOR EQUITY INCENTIVE PLAN - Under the Director Equity Incentive Plan (the "Director Plan"), non-employee directors of the Company will be entitled to receive stock options. The Director Plan provides for an initial authorization of 300,000 shares of MDC Common Stock for issuance thereunder plus an additional annual authorization of shares equal to 10% of the then authorized shares of MDC Common Stock under the Director Plan. Each option granted under the Director Plan will expire five years from the date of grant. The option exercise price must be equal to 100% of the fair market value of the MDC Common Stock on the date of grant of the option.
A summary of the changes in options during each of the three years ended December 31, 1994 is as follows (in shares of MDC Common Stock):
I. INTEREST
Interest activity is set forth below (in thousands):
J. INCOME TAXES
The Company adopted SFAS No. 109, "Accounting for Income Taxes," effective January 1, 1992. The cumulative effect of this change in accounting for income taxes was $1,700,000, determined as of January 1, 1992, and is reported separately in the Consolidated Statements of Income for the year ended December 31, 1992.
Total income tax expense (benefit) has been allocated as follows (in thousands):
The significant components of income tax expense on income before income taxes, extraordinary gain (loss) and cumulative effect of accounting change consist of the following (in thousands):
The provision for income tax expense differs from the amount which would be computed by applying the statutory federal income tax rate of 35% in 1994 and 1993 and 34% in 1992 to pre-tax income before extraordinary gain (loss) and cumulative effect of accounting change, as a result of the following (in thousands):
The tax effects of the temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands).
M.D.C. Holdings, Inc. and its wholly owned subsidiaries file a consolidated federal income tax return (an "MDC Consolidated Return"). Richmond Homes and its wholly owned subsidiaries filed separate consolidated federal income tax returns for the periods from December 28, 1989 through February 2, 1994 (each a "Richmond Homes Consolidated Return").
The Internal Revenue Service (the "IRS") has completed its examination of the MDC Consolidated Returns for the years 1986 through 1990 and the Richmond Homes Consolidated Returns for the years 1989 and 1990 and has proposed certain adjustments to the taxable income reflected in such returns. In general, the proposed adjustments would shift the recognition of certain items of income and expense from one year to another ("Timing Adjustments"). To the extent taxable income in a prior year is increased by proposed Timing Adjustments, taxable income may be reduced by a corresponding amount in other years; however, the Company would incur an interest charge as a result of such adjustment. The Company currently is protesting many of these proposed adjustments through the IRS appeals process and believes the amount of these adjustments will be reduced as a result. In the opinion of management, adequate provision has been made for the additional income taxes and interest which may arise as a result of the proposed adjustments.
In December 1994, the Company and the IRS appeals officer resolved, subject to approval of the Congressional Joint Committee on Taxation, all outstanding issues with respect to the IRS examination of the 1984 and 1985 MDC Consolidated Returns. In connection with this resolution, the Company paid the IRS $8,000,000 for the additional taxes and interest due for 1984 and 1985, as computed by the IRS. Adequate provision for these additional taxes and interest had been made by the Company in prior years.
K. EARNINGS PER SHARE
Primary earnings per share are based on the weighted-average number of common and common equivalent shares outstanding during each period. In 1994, the computation of fully-diluted earnings per share also assumes the conversion into MDC Common Stock of all of the $28,000,000 outstanding principal amount of the 8 3/4% Convertible Subordinated Notes at a conversion price of $7.75 per share of MDC Common Stock. The primary and fully-diluted earnings per share calculations are shown below (in thousands, except per share amounts).
L. LEGAL PROCEEDINGS
SETTLEMENT OF WESTERN SAVINGS CIVIL MATTERS.
In December 1994, the Company and the Resolution Trust Corporation (the "RTC"), acting in its corporate capacity as receiver for Western Savings and Loan Association ("Western"), executed a final settlement agreement providing for the mutual release of all potential claims between the parties and certain related persons insofar as such claims relate to any of the Company's past transactions with Western.
Under the terms of the settlement, MDC paid to the RTC $3,912,000, which MDC reserved (and set aside the cash) for as of December 31, 1992 when an agreement in principle for the settlement was executed by the parties. MDC believes that consummation of the settlement agreement will not result in any material adverse effect on the Company's operations or financial position. The settlement remains subject to the entry of a court order determining that the settlement precludes the filing of
cross-claims against MDC by various third parties, a condition which can be waived or extended by the Company.
EXPANSIVE SOILS CASES.
On October 21, 1994, a complaint was served on several of the Company's subsidiaries in an action initiated by six homeowners in Highlands Ranch, Colorado. On January 26, 1995, counsel for the Company accepted service of two additional complaints by a homeowner in the Stonegate subdivision in Douglas County, Colorado and by a homeowner in the Rock Creek development located in Boulder County, Colorado. The complaints, each of which seek certification of a class action, purport to allege substantially identical claims relating to the construction of homes on lots with expansive soils, including negligence, breach of express and implied warranties, violation of the Colorado Consumer Protection Act, non-disclosure and a claim for exemplary damages. The homeowners in each complaint seek, individually and on behalf of the alleged class, recovery in unspecified amounts including actual damages, statutory damages, exemplary damages and treble damages. The Company has not as yet been required to file a response to any of the complaints or to any discovery in these cases. While the ultimate outcome of these matters is uncertain, management does not believe that the outcome of these matters will have a material adverse effect on the financial condition or results of operations of the Company.
The Company has notified its insurance carriers of these complaints and currently is reviewing with the carriers how the Company will proceed. The insurance carriers providing primary coverage have (i) agreed to defend the Company in the Highlands Ranch case subject to reservations of rights; and (ii) not responded, as yet, to the request to defend the Company with respect to the matters alleged in the two other complaints.
OTHER.
The Company and certain of its subsidiaries and affiliates have been named as defendants in various other claims, complaints and legal actions arising in the normal course of business. In the opinion of management, the outcome of these matters will not have a material adverse effect upon the financial condition or results of operations of the Company.
The Company is not aware of any litigation, matter or pending claim against the Company which would result in material contingent liabilities related to environmental hazards or asbestos.
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 are carried on the balance sheet at cost, which approximates market value. Accordingly, the carrying value of the investments is a reasonable estimate of the fair value.
INVESTMENT IN METROPOLITAN DISTRICT BONDS - Investments in metropolitan district bonds are carried on the balance sheet at cost, which approximates market value. Accordingly, the carrying value of the investments is a reasonable estimate of the fair value.
MORTGAGE LOANS HELD IN INVENTORY - The Company generally purchases forward commitments to deliver mortgage loans held for sale. For loans which have no forward commitments, loans in inventory are stated at the lower of cost or market. Accordingly, the carrying value is a reasonable estimate of fair value.
MORTGAGE COLLATERAL, NET, AND ASSETS RELATED TO MORTGAGE-BACKED BONDS AND RELATED LIABILITIES, AND MORTGAGE-BACKED BONDS, NET, AND RELATED LIABILITIES, RECOURSE SOLELY TO LIMITED-PURPOSE SUBSIDIARY ASSETS - Mortgage Collateral and related assets which are estimated not to be salable (under terms in indentures governing the corresponding mortgage-backed bonds) within one year are valued at par plus (minus) the discounted estimated value of the remaining cash flow (cash deficit) to be realized (paid) by MDC over the remaining economic life of the corresponding Mortgage Collateral.
Mortgage Collateral and related assets which are estimated to be salable (under terms in indentures governing the corresponding mortgage-backed bonds) within one year, at a profit or to minimize a loss, are valued at the estimated value of the Mortgage Collateral (less any costs necessary to effect the sale and subsequent call of the related mortgage-backed bonds) plus (minus) the discounted estimated value of the remaining cash flow (cash deficit) to be realized (paid) by MDC from December 31, 1994 to the date of estimated sale.
Mortgage-backed bonds and related liabilities are valued at call or settlement value (generally face value).
The cash flow estimates used in determining the fair value for the Mortgage Collateral and related assets assume the liquidation of the mortgage-backed bonds and related liabilities at call or settlement dates.
NOTES PAYABLE AND LINES OF CREDIT - The Company's notes payable and lines of credit are at floating rates or at fixed rates which approximate current market rates and have relatively short-term maturities. Accordingly, the carrying value is a reasonable estimate of fair value.
SENIOR NOTES AND SUBORDINATED NOTES - Senior Notes and subordinated notes are valued based on dealer quotes.
The estimated fair values of the Company's financial instruments are as follows (in thousands):
N. COMMITMENTS AND CONTINGENCIES
To reduce exposure to fluctuations in interest rates, HomeAmerican makes commitments to originate (buy) and sell loans and mortgage-backed securities. At December 31, 1994, commitments by HomeAmerican to originate mortgage loans totalled $24,125,000, at market rates of interest. At December 31, 1994, unexpired forward commitments to sell loans totalled $55,700,000.
MDC leases office space, equipment and certain of its model show homes under noncancellable operating leases. Future minimum rental payments for leases with initial terms in excess of one year are $2,294,000 in 1995, $1,726,000 in 1996, $1,039,000 in 1997, $819,000 in 1998, $397,000 in 1999 and $194,000 thereafter. Rent expense under cancellable and noncancellable leases totalled $3,250,000, $2,956,000 and $2,731,000 in 1994, 1993 and 1992, respectively.
On August 4, 1994, Superior Metropolitan District No. 1 ("District No. 1") and Superior Metropolitan District No. 2 ("District No. 2") (collectively, the "Districts") issued $35,730,000 principal amount of bonds (the "Bonds"). The Districts were organized and are operated to provide, among other things, water and sanitary sewer services, street improvements and park and recreation facilities for inhabitants of a master- planned community located northwest of Denver (the "Project"). A significant portion of the Project served by the Districts is owned and is being developed by the Company. The Company received $16,395,000 of the proceeds of the Bond issuances to redeem in full, at par value, the Districts' outstanding bonds. Additionally, proceeds totalling approximately $11,000,000 were paid to the Company by District No. 1 to purchase certain interests in a water supply project (the "Water Project") and to reimburse the Company for prepaid water taps and for certain other funds previously advanced to District No. 1.
In connection with the issuance of the Bonds, MDC has guaranteed payment of principal and interest on $27,500,000 principal amount of District No. 1 Bonds and has entered into certain agreements with District No. 1 to purchase certain water and sewer taps and pay certain storm drainage fees in connection with the Company's home building operations within the Project. In connection with the guarantee, MDC was required to deposit $6,000,000 into a trust account. The $6,000,000 will be released in $1,000,000 increments as certain levels of completed homes are achieved in the Project, provided that if the Water Project is not completed by January 1, 1997 or if the Water Project is enjoined and such injunction is not lifted, no withdrawals may occur. In addition, MDC has guaranteed payment of principal and interest on $2,580,000 principal amount of District No. 2 Bonds.
O. SUPPLEMENTAL GUARANTOR INFORMATION
The Senior Notes are unconditionally guaranteed on an unsecured subordinated basis, jointly and severally, by Richmond American Homes of California, Inc., Richmond American Homes of Maryland, Inc., Richmond American Homes of Nevada, Inc., Richmond American Homes of Virginia, Inc., Richmond American Homes, Inc.,
Richmond Homes, Inc. I and Richmond Homes, Inc. II (collectively, the "Guarantors"). The Guaranties are subordinated to all Guarantor Senior Indebtedness (as defined in the Senior Notes Indenture).
In June 1994, MDC (Parent Company) exchanged three notes receivable from a Guarantor subsidiary with a carrying amount of $104,350,000 for a new note receivable from the same Guarantor subsidiary with a principal amount of $69,731,000. Because the exchange was between parties under common control, the difference between the principal amounts of the notes exchanged, net of income taxes, was recorded as an additional investment in the Guarantor subsidiary by the Parent and as additional paid-in-capital by the Guarantor subsidiary.
Supplemental combining financial information follows.
SUPPLEMENTAL COMBINING BALANCE SHEET DECEMBER 31, 1994 (IN THOUSANDS)
SUPPLEMENTAL COMBINING BALANCE SHEET DECEMBER 31, 1994 (IN THOUSANDS)
(continued)
SUPPLEMENTAL COMBINING BALANCE SHEET DECEMBER 31, 1993 (IN THOUSANDS)
SUPPLEMENTAL COMBINING BALANCE SHEET DECEMBER 31, 1993 (IN THOUSANDS)
(continued)
SUPPLEMENTAL COMBINING STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS)
SUPPLEMENTAL COMBINING STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 1993 (IN THOUSANDS)
SUPPLEMENTAL COMBINING STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 1992 (IN THOUSANDS)
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS)
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1993 (IN THOUSANDS)
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1992 (IN THOUSANDS)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Investments in subsidiaries are accounted for on the equity method for purposes of the supplemental information. The Guarantors follow the accounting policies set forth in Note A.
RELATED PARTIES. The Guarantors are members of a group of affiliated companies and have transactions and relationships with members of the group.
MDC charges the Guarantors for a share of its general and administrative expenses, which amounted to $2,846,000, $2,654,000 and $2,552,000, respectively, in 1994, 1993 and 1992.
MDC pays costs associated with litigation and other significant claims against the Guarantors as it considers such costs to be a general corporate expense. Amounts paid by MDC on behalf of the Guarantors amounted to approximately $769,000, $3,481,000, and $1,620,000, respectively, in 1994, 1993 and 1992.
Advances and notes receivable/payable-Parent (M.D.C. Holdings, Inc.) and subsidiaries consists, among other things, of ongoing activities relating to the Guarantors' participation in MDC's cash management system and current and deferred income taxes.
INCOME TAXES. The Guarantors report their results of operations as if they were separate taxpayers. The current tax liabilities and deferred income tax assets and liabilities of the Guarantors are reported in the financial statements in the Advances and notes receivable/payable--Parent and subsidiaries accounts.
P. RELATED PARTY TRANSACTIONS
MDC has transacted business with related or affiliated companies and with certain officers and directors of the Company.
FAMC has agreements with Asset Investors Corporation and Commercial Assets, Inc., each a publicly-traded REIT, to advise them on various facets of their business and to manage their day-to-day operations subject to the supervision of their respective boards of directors. FAMC earned fees from management and administration, including from acquisitions and incentives from these agreements which are included in asset management revenues of $2,780,000 during 1994, $2,180,000 during 1993 and $2,566,000 during 1992.
The Company acquired certain assets from Messrs. Mizel and Mandarich in February 1994. See Note C.
On December 28, 1989, MDC granted loans to Messrs. Mizel and Mandarich for purposes of purchasing shares of common stock of Richmond Homes. On February 2, 1994, in conjunction with MDC's acquisition of Richmond Homes common stock from Messrs. Mizel and Mandarich as discussed in Note C, MDC exchanged these loans for new loans of equal amount. Each of the notes evidencing the new loans now provides that, upon sale of any of the MDC Common Stock acquired by Messrs. Mizel and Mandarich in exchange for their respective Richmond Homes common stock, the cash proceeds shall be remitted to the Company in payment of accrued interest and principal under the note. The new loans, which mature in 1999, bear interest at 8.0% and are unsecured. At both December 31, 1994 and 1993, $840,000 of such loans were outstanding. Interest income of $67,000 was recognized on these loans in each of 1994, 1993 and 1992.
The Company utilizes the services of companies owned by two former employees of the Company, one of whom is the brother-in-law of a current officer and director of the Company. During 1994, 1993 and 1992, the Company paid $11,880,000, $11,557,000 and $9,268,000, respectively, for plumbing, door and millwork services provided by these companies.
The Company leases office space and furniture to certain organizations in which certain officers and/or directors of the Company have an ownership interest. The rental revenue from those leases totalled $250,000, $259,000 and $200,000, respectively, in 1994, 1993 and 1992.
The Company utilizes in the ordinary course of business the services of a marketing and communications firm which is owned by the brother-in-law of an officer and director of the Company. Total fees paid for advertising and marketing design services were $275,000, $246,000 and $134,000, respectively, in 1994, 1993 and 1992.
Q. SUMMARIZED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
Unaudited summarized quarterly consolidated financial information for the two years ended December 31, 1994 is as follows (in thousands, except per share amounts):
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, from the Company's Proxy Statement for its 1995 Annual Meeting of Shareowners to be held on or about May 25, 1995.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, from the Company's Proxy Statement for its 1995 Annual Meeting of Shareowners to be held on or about May 25, 1995.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, from the Company's Proxy Statement for its 1995 Annual Meeting of Shareowners to be held on or about May 25, 1995.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, from the Company's Proxy Statement for its 1995 Annual Meeting of Shareowners to be held on or about May 25, 1995.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
The following consolidated financial statements of the Company and its subsidiaries are included in Part II, Item 8:
PAGE ----
M.D.C. Holdings, Inc. and Subsidiaries Report of Independent Accountants . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets as of December 31, 1994 and 1993. . . . . Consolidated Statements of Income for the three years ended December 31, 1994 . . . . . . . . . . . . . . . . . . . Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1994 . . . . . . . . . . . . . . Consolidated Statements of Cash Flows for the three years ended December 31, 1994 . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements. . . . . . . . . . . . . .F-10
All schedules are omitted because they are not applicable, not material, not required or the required information is included in the applicable financial statements or notes thereto.
Financial statements for certain unconsolidated partnerships and joint ventures owned 50% or less by the Company or its subsidiaries, which are accounted for on the equity method, have been omitted because they do not, individually, or in the aggregate, constitute a significant subsidiary.
(A) 3. EXHIBITS.
3.1(a) Form of Amendment to the Certificate of Incorporation of M.D.C. Holdings, Inc. (hereinafter sometimes referred to as "MDC", the "Company" or the "Registrant") regarding director liability, filed with the Delaware Secretary of State on July 1, 1987 (incorporated by reference to Exhibit 3.1(a) of the Company's Quarterly Report on Form 10-Q dated June 30, 1987). *
3.1(b) Form of Certificate of Incorporation of MDC, as amended (incorporated herein by reference to Exhibit 3.1(b) of the Company's Quarterly Report on Form 10-Q dated June 30, 1987). *
3.2(a) Form of Amendment to the Bylaws of MDC regarding indemnification adopted by its Board of Directors and effective as of March 20, 1987 (incorporated herein by reference to Exhibit 3.2(a) of the Company's Quarterly Report on Form 10-Q dated June 30, 1987). *
3.2(b) Form of Bylaws of MDC, as amended (incorporated herein by reference to Exhibit 3.2(b) of the Company's Quarterly Report on Form 10-Q dated June 30, 1987). *
4.1 Form of Certificate for shares of the Company's common stock (incorporated herein by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-3, Registration No. 33-426). *
4.2(a) Form of Indenture, dated as of June 15, 1984, between the Company and The Royal Bank and Trust Company, with respect to the Company's Subordinated Exchangeable Variable Rate Notes (the "1984 RBTC Indenture") (incorporated herein by reference to Exhibit 4.3 of the Company's Registration Statement on Form S-2, Registration No. 2-90744). *
4.2(b) First Supplemental Indenture, dated as of June 20, 1985, to the 1984 RBTC Indenture (incorporated herein by reference to Exhibit 4.13(a) of the Company's Registration Statement on Form S-3, Registration No. 33-426). *
4.2(c) Form of the Company's Subordinated Exchangeable Variable Rate Notes (filed as Exhibits A and B to Exhibit 4.13 and incorporated herein by reference to
Exhibit 4.3 of the Company's Registration Statement on Form S-2, Registration No. 2-90744). *
4.3(a) Form of Senior Notes Indenture, dated as of December 15, 1993, by and among the Company, the Guarantors and Pledgors named therein and First Bank National Association, a National Association, as Trustee, with respect to the Company's 11 1/8% Senior Notes due 2003, including form of Senior Note (the "Senior Notes Indenture") (incorporated herein by reference to Exhibit 4.1 of the Company's Form 8-K dated January 11, 1994). *
4.3(b) First Supplemental Indenture, dated as of February 2, 1994, to the Senior Notes Indenture (incorporated herein by reference to Exhibit 4.4(b) of the Company's Annual Report on Form 10-K for the year ended December 31, 1993). *
4.4 Form of Convertible Notes Indenture, dated as of December 15, 1993, by and between the Company and First Bank National Association, a National Association, as Trustee, with respect to the Company's 8 3/4% Convertible Subordinated Notes due 2005, including form of Convertible Note (incorporated herein by reference to Exhibit 4.2 of the Company's Form 8-K dated January 11, 1994). *
4.5 Loan Agreement and related Promissory Note between Richmond American Homes, Inc., Richmond American Homes of California, Inc., Richmond Homes, Inc. I, Richmond Homes, Inc. II and Richmond American Homes of Nevada, Inc., all wholly owned subsidiaries of the Company and Bank One, Arizona, N.A. ("Bank One") dated June 13, 1994.
4.6 Guaranty of Payment between the Company and Bank One dated June 13, 1994.
4.7 Form of Senior Notes Registration Rights Agreement, dated as of December 28, 1993, by and among the Company, the Guarantors named therein and the Purchasers who are signatories thereto, with respect to the Company's Senior Notes (incorporated herein by reference to Exhibit 4.3 of the Company's Form 8-K dated January 11, 1994). *
4.8 Form of Convertible Notes Registration Rights Agreement, dated as of December 28, 1993, by and between the Company and the Purchasers who are
signatories thereto, with respect to the Company's Convertible Subordinated Notes (incorporated herein by reference to Exhibit 4.4 of the Company's Form 8-K dated January 11, 1994). *
4.9 Guaranty Agreement between the Company as guarantor and Bank One, Denver, N.A., as Trustee under Indenture of Trust dated as of June 1, 1994 between it and Superior Metropolitan District No. 1 dated as of June 1, 1994 (incorporated herein by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q dated September 30, 1994). *
4.10 Guaranty Agreement between the Company as guarantor and Bank One, Denver, N.A., as Trustee under Indenture of Trust dated as of June 1, 1994 between it and Superior Metropolitan District No. 2, dated as of June 1, 1994 (incorporated herein by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q dated September 30, 1994). *
10.1(a) The Company's 1983 Incentive Stock Option Plan (incorporated herein by reference to Exhibit 10.4 of the Company's Annual Report on Form 10-K for the year ended December 31, 1982). *
10.1(b) 1987 Amendments to the Incentive Stock Option Plan of MDC (incorporated herein by reference to Exhibit 10.1(a) of the Company's Annual Report on Form 10-K for the year ended December 31, 1986). *
10.1(c) 1988 Amendment to the 1983 Incentive Stock Option Plan of MDC (incorporated herein by reference to Exhibit 19.3(a) of the Company's Quarterly Report on Form 10-Q dated June 30, 1988). *
10.2(a) The Company's 1983 Non-Qualified Stock Option Plan (incorporated herein by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the year ended December 31, 1983). *
10.2(b) 1988 Amendment to the 1983 Non-Qualified Stock Option Plan of MDC (incorporated herein by reference to Exhibit 10.2(b) of the Company's Quarterly Report on Form 10-Q dated June 30, 1988). *
10.3 The Company's Employee Equity Incentive Plan (incorporated herein by reference to Exhibit A of the Company's Proxy Statement dated May 14, 1993
relating to the 1993 Annual Meeting of Stockholders).*
10.4 The Company's Director Equity Incentive Plan (incorporated herein by reference to Exhibit B of the Company's Proxy Statement dated May 14, 1993 relating to the 1993 Annual Meeting of Stockholders).*
10.5(a) Amended Management Agreement between Asset Investors Corporation ("AIC") and Financial Asset Management Corporation ("FAMC") dated as of January 1, 1990 (incorporated herein by reference to Exhibit 10.8(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989). *
10.5(b) Amended Management Agreement between AIC and FAMC dated as of January 1, 1991 (incorporated herein by reference to Exhibit 19 of the Company's Quarterly Report on Form 10-Q dated June 30, 1991). *
10.5(c) Amended Management Agreement between AIC and FAMC dated as of January 1, 1992 (incorporated herein by reference to Exhibit 10.3(c) of the Company's Annual Report on Form 10-K for the year ended December 31, 1991). *
10.5(d) Management Agreement between AIC and FAMC dated as of January 1, 1993.
10.5(e) Amendment to Management Agreement dated as of January 1, 1993 between AIC and FAMC dated as of October 12, 1993.
10.5(f) Management Agreement between AIC and FAMC dated as of January 1, 1994.
10.5(g) Management Agreement between Commercial Assets, Inc. ("CAI") and FAMC dated as of August __, 1993.
10.5(h) Management Agreement between CAI and FAMC dated as of October 12, 1993.
10.6 CMO Participation Agreement among the Company, M.D.C. Asset Investors, Inc. and Yosemite Financial, Inc. (incorporated herein by reference to Exhibit 10.6 of M.D.C. Asset Investors, Inc.'s Registration Statement on Form S-11, Registration No. 33-9557). *
10.7(a) Form of Indemnity Agreement entered into between the Registrant and each member of its Board of Directors as of March 20, 1987 (incorporated herein by reference to Exhibit 19.1 of the Company's Quarterly Report on Form 10-Q dated June 30, 1987). *
10.7(b) Form of Indemnity Agreement entered into between the Registrant and certain officers of the Registrant on various dates during 1988 and early 1989 (incorporated herein by reference to Exhibit 10.18(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988). *
10.7(c) Form of Indemnity Agreement entered into between the Registrant and John J. Heaney dated as of May 12, 1989 (incorporated herein by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). *
10.7(d) Form of Agreement, relating to the advancement of expenses and indemnification, entered into between the Registrant and each of its current and former officers and directors named in certain securities litigation (incorporated herein by reference to Exhibit 10.18(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988). *
10.8 Indemnification Agreement by and among the Company and Larry A. Mizel ("Mizel") and David D. Mandarich ("Mandarich") dated December 21, 1989 (incorporated herein by reference to Exhibit 9 of the Company's Form 8-K dated December 28, 1989). *
10.9 Promissory Note in the amount of $559,920 from Mizel to the Company dated February 2, 1994 (incorporated herein by reference to Exhibit 10.9 of the Company's Annual Report on Form 10-K for the year ended December 31, 1993). *
10.10 Promissory Note in the amount of $280,080 from Mandarich to the Company February 2, 1994 (incorporated herein by reference to Exhibit 10.10 of the Company's Annual Report on Form 10-K for the year ended December 31, 1993). *
10.11 Fifth Amendment to Piney Creek Development Co. Joint Venture Agreement dated June 13, 1991 by and between Commercial Federal Bank and Land (incorporated herein by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991). *
10.12 Letter Agreement effective October 1, 1994 by and between Gilbert Goldstein, P.C. and the Company.
10.13 MDC 401(k) Savings Plan (incorporated herein by reference to Exhibit 10.31(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992).*
10.14(a) Purchase Agreement dated as of December 6, 1993 by and between the Company and the Base Assets Trust (incorporated herein by reference to Exhibit (c)(2) of the Company's Form 8-K dated December 6, 1993).*
10.14(b) Amendment to Purchase Agreement dated as of December 10, 1993 by and between the Company and the Base Assets Trust (incorporated herein by reference to Exhibit (c)(3) of the Company's Form 8-K dated December 6, 1993).*
10.15(a) Option Agreement dated as of December 6, 1993 by and among the Company and Mizel and Mandarich (incorporated herein by reference to Exhibit (c)(4) of the Company's Form 8-K dated December 6, 1993).*
10.15(b) First Amendment to Option Agreement dated December 20, 1993 by and among the Company and Mizel and Mandarich (incorporated herein by reference to Exhibit 10.15(b) of the Company's Annual Report on Form 10-K for the year ended December 31, 1993).*
10.16 M.D.C. Holdings, Inc. Executive Officer Performance-Based Compensation Plan (incorporated herein by reference to Exhibit A to the Company's Proxy Statement dated May 25, 1994 related to the 1994 Meeting of Shareowners). *
10.17 Employment Agreement between the Company and Michael Touff dated December 31, 1994.
21 Subsidiaries of the Company.
23 Consent of Price Waterhouse LLP.
27 Financial Data Schedule.
99 Agreement and Plan of Merger dated February 2, 1994 between Richmond Acquisitions, Inc. and Richmond Homes (incorporated herein by reference to Exhibit 99 of the Company's Annual Report on Form 10-K for the year ended December 31, 1993).* ___________________
* Incorporated herein by reference.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of the year ended December 31, 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on this 27th day of March, 1995 on its behalf by the undersigned, thereunto duly authorized.
M.D.C. HOLDINGS, INC. (Registrant)
By: /s/ Larry A. Mizel ----------------------- Larry A. Mizel CHIEF EXECUTIVE OFFICER
By: /s/ Paris G. Reece III ----------------------- Paris G. Reece III Senior VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and/or directors of the Registrant, by virtue of their signatures to this report, appearing below, hereby constitute and appoint Larry A. Mizel, Spencer I. Browne and Paris G. Reece III, or any one of them, with full power of substitution, as attorneys-in-fact in their names, places and steads to execute any and all amendments to this report in the capacities set forth opposite their names and hereby ratify all that said attorneys-in-fact do by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Larry A. Mizel Chairman of the Board of March 27, 1995 ----------------------- Directors and Chief -------------- Larry A. Mizel Executive Office
/s/ Spencer I. Browne Director, President and March 27, 1995 ----------------------- Co-Chief Operating -------------- Spencer I. Browne Officer
SIGNATURE TITLE DATE --------- ----- ----
/s/ David D. Mandarich Director, Executive Vice March 27, 1995 ----------------------- -------------- David D. Mandarich President - Real Estate and Co-Chief Operating Officer
/s/ Steven J. Borick Director March 27, 1995 ----------------------- -------------- Steven J. Borick
/s/ Gilbert Goldstein Director March 27, 1995 ----------------------- -------------- Gilbert Goldstein
/s/ William B. Kemper Director March 27, 1995 ----------------------- -------------- William B. Kemper
/s/ Herbert T. Buchwald Director March 27, 1995 ----------------------- -------------- Herbert T. Buchwald
(A Majority of the Board of Directors)
INDEX TO EXHIBITS
4.5 Loan Agreement and related Promissory Note between Richmond American Homes, Inc., Richmond American Homes of California, Inc., Richmond Homes, Inc. I, Richmond Homes, Inc. II and Richmond American Homes of Nevada, Inc., all wholly owned subsidiaries of the Company and Bank One, Arizona, N.A. ("Bank One") dated June 13, 1994.
4.6 Guaranty of Payment between the Company and Bank One dated June 13, 1994.
10.5(d) Management Agreement between AIC and FAMC dated as of January 1, 1993.
10.5(e) Amendment to Management Agreement dated as of January 1, 1993 between AIC and FAMC dated as of October 12, 1993.
10.5(f) Management Agreement between AIC and FAMC dated as of January 1, 1994.
10.5(g) Management Agreement between Commercial Assets, Inc. ("CAI") and FAMC dated as of August __, 1993.
10.5(h) Management Agreement between CAI and FAMC dated as of October 12, 1993.
10.12 Letter Agreement effective October 1, 1994 by and between Gilbert Goldstein, P.C. and the Company.
10.17 Employment Agreement between the Company and Michael Touff dated December 31, 1994.
21 Subsidiaries of the Company.
23 Consent of Price Waterhouse LLP.
27 Financial Data Schedule.