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EX-12 - RATIO OF EARNINGS TO FIXED CHARGES SCHEDULE - M.D.C. HOLDINGS, INC.dex12.htm
EX-31.2 - CERTIFICATION OF CFO - M.D.C. HOLDINGS, INC.dex312.htm
EX-32.1 - CERTIFICATION OF CEO - M.D.C. HOLDINGS, INC.dex321.htm
EX-31.1 - CERTIFICATION OF CEO - M.D.C. HOLDINGS, INC.dex311.htm
EX-32.2 - CERTIFICATION OF CFO - M.D.C. HOLDINGS, INC.dex322.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-8951

M.D.C. HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   84-0622967

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. employer

identification no.)

 

4350 South Monaco Street, Suite 500   80237
Denver, Colorado   (Zip code)
(Address of principal executive offices)  

(303) 773-1100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ¨  No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  x    Accelerated Filer  ¨    Non-Accelerated Filer  ¨    (Do not check if a smaller reporting company)    Smaller Reporting Company  ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  x

As of March 31, 2010, 47,140,000 shares of M.D.C. Holdings, Inc. common stock were outstanding.

 

 

 


Table of Contents

M.D.C. HOLDINGS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2010

INDEX

 

     Page
No.
Part I.   Financial Information:   
  Item 1.  

Unaudited Consolidated Financial Statements:

  
   

Consolidated Balance Sheets at March 31, 2010 and December 31, 2009

   1
   

Consolidated Statements of Operations for the three months ended March, 2010 and 2009

   2
   

Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009

   3
   

Notes to Unaudited Consolidated Financial Statements

   4
  Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   26
  Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

   52
  Item 4.  

Controls and Procedures

   52
Part II.   Other Information:   
  Item 1.  

Legal Proceedings

   53
  Item 1A.  

Risk Factors

   54
  Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

   55
  Item 3.  

Defaults Upon Senior Securities

   55
  Item 4.  

(Removed and Reserved)

   55
  Item 5.  

Other Information

   55
  Item 6.  

Exhibits

   55
  Signature    57

 

(i)


Table of Contents
ITEM 1. Unaudited Consolidated Financial Statements

M.D.C. HOLDINGS, INC.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

     March 31,
2010
    December 31,
2009
 

Assets

    

Cash and cash equivalents

   $ 950,139      $ 1,234,252   

Marketable securities

     830,438        327,944   

Restricted cash

     594        476   

Receivables

    

Home sales receivables

     13,013        10,056   

Income taxes receivable

     3,153        145,144   

Other receivables

     8,839        5,844   

Mortgage loans held-for-sale, net

     36,704        62,315   

Inventories, net

    

Housing completed or under construction

     399,606        260,324   

Land and land under development

     277,276        262,860   

Property and equipment, net

     39,451        38,421   

Deferred tax asset, net of valuation allowance of $216,292 and $208,144 at March 31, 2010 and December 31, 2009, respectively

     -        -   

Related party assets

     7,856        7,856   

Prepaid expenses and other assets, net

     77,656        73,816   
                

Total Assets

   $ 2,644,725      $ 2,429,308   
                

Liabilities

    

Accounts payable

   $ 63,855      $ 36,087   

Accrued liabilities

     288,224        291,969   

Related party liabilities

     103        1,000   

Mortgage repurchase facility

     4,714        29,115   

Senior notes, net

     1,242,095        997,991   
                

Total Liabilities

     1,598,991        1,356,162   
                

Commitments and Contingencies

     -        -   
                

Stockholders’ Equity

    

Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued or outstanding

     -        -   

Common stock, $0.01 par value; 250,000,000 shares authorized; 47,193,000 and 47,140,000 issued and outstanding, respectively, at March 31, 2010 and 47,070,000 and 47,017,000 issued and outstanding, respectively, at December 31, 2009

     472        471   

Additional paid-in-capital

     806,765        802,675   

Retained earnings

     238,002        270,659   

Accumulated other comprehensive income

     1,154        -   

Treasury stock, at cost; 53,000 shares at March 31, 2010 and December 31, 2009

     (659     (659
                

Total Stockholders’ Equity

     1,045,734        1,073,146   
                

Total Liabilities and Stockholders’ Equity

   $   2,644,725      $   2,429,308   
                

The accompanying Notes are an integral part of the Unaudited Consolidated Financial Statements.

 

- 1 -


Table of Contents

M.D.C. HOLDINGS, INC.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended March 31,  
     2010     2009  

Revenue

    

Home sales revenue

   $     140,943      $     166,982   

Land sales revenue

     15        2,618   

Other revenue

     6,120        6,332   
                

Total Revenue

     147,078        175,932   
                

Costs and Expenses

    

Home cost of sales

     109,390        141,325   

Land cost of sales

     191        1,341   

Asset impairments

     -        14,569   

Marketing expenses

     7,060        8,832   

Commission expenses

     5,129        6,358   

General and administrative expenses

     40,203        38,381   

Other operating expenses

     491        265   

Related party expenses

     9        5   
                

Total Operating Costs and Expenses

     162,473        211,076   
                

Loss from Operations

     (15,395     (35,144

Other income (expense)

    

Interest income

     4,428        4,071   

Interest expense

     (10,374     (9,740

Gain (loss) on sale of other assets

     99        (260
                

Loss before income taxes

     (21,242     (41,073

Benefit from income taxes, net

     369        220   
                

Net Loss

   $ (20,873   $ (40,853
                

Loss Per Share

    

Basic

   $ (0.45   $ (0.88
                

Diluted

   $ (0.45   $ (0.88
                

Dividends Declared Per Share

   $ 0.25      $ 0.25   
                

 

The accompanying Notes are an integral part of the Unaudited Consolidated Financial Statements.

 

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Table of Contents

M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     Three Months Ended March 31,  
     2010     2009  

Operating Activities

    

Net loss

   $ (20,873   $ (40,853

Adjustments to reconcile net loss to net cash provided by operating activities

    

Stock-based compensation expense

     4,056        3,745   

Amortization of deferred marketing costs

     1,667        2,270   

Depreciation and amortization of long-lived assets

     1,265        1,623   

Write-offs of land option deposits and pre-acquisition costs

     383        265   

Loss (gain) on sale of assets, net

     175        (1,017

Asset impairments

     -        14,569   

Excess tax benefits from stock-based compensation

     -        (15

Other non-cash expenses

     466        604   

Net changes in assets and liabilities:

    

Restricted cash

     (118     199   

Home sales and other receivables

     (5,952     7,899   

Income taxes receivable

     141,991        162,176   

Mortgage loans held-for-sale, net

     25,611        38,704   

Housing completed or under construction

     (139,282     62,020   

Land and land under development

     (13,318     6,238   

Prepaid expenses and other assets, net

     (7,350     (1,161

Accounts payable

     27,768        (7,693

Accrued liabilities and related party liabilities

     (4,973     (10,080
                

Net cash provided by operating activities

     11,516        239,493   
                

Investing Activities

    

Purchase of marketable securities

     (555,296     (22,909

Maturity of marketable securities

     48,662        54,864   

Sale of marketable securities

     5,294        -   

Settlement of unsettled trades

     1,678        54,433   

Purchase of property and equipment

     (2,105     (3,698
                

Net cash (used in) provided by investing activities

     (501,767     82,690   
                

Financing Activities

    

Proceeds from issuance of senior notes

     242,288        -   

Payment on mortgage repurchase facility

     (29,119     (34,873

Advances on mortgage repurchase facility

     4,718        4,117   

Dividend payments

     (11,784     (11,595

Proceeds from exercise of stock options

     35        56   

Excess tax benefits from stock-based compensation

     -        15   
                

Net cash provided by (used in) financing activities

     206,138        (42,280
                

Net (decrease) increase in cash and cash equivalents

     (284,113     279,903   

Cash and cash equivalents

    

Beginning of period

     1,234,252        1,304,728   
                

End of period

   $      950,139      $   1,584,631   
                

The accompanying Notes are an integral part of the Unaudited Consolidated Financial Statements.

 

- 3 -


Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

1.

Basis of Presentation

The Unaudited Consolidated Financial Statements of M.D.C. Holdings, Inc. (“MDC” or the “Company,” which refers to M.D.C. Holdings, Inc. and its subsidiaries) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The Company has evaluated subsequent events through the date the Unaudited Consolidated Financial Statements were filed with the SEC. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC at March 31, 2010 and for all periods presented. These statements should be read in conjunction with MDC’s Consolidated Financial Statements and Notes thereto included in MDC’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on February 5, 2010.

The Consolidated Statements of Operations for the three months ended March 31, 2010 and Consolidated Statement of Cash Flows for the three months ended March 31, 2010 are not necessarily indicative of the results to be expected for the full year. Refer to the economic conditions described under the caption “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and “Risk Factors Relating to our Business” in Item 1A of the Company’s December 31, 2009 Annual Report on Form 10-K.

Certain prior period balances have been reclassified to conform to the current year’s presentation.

 

2.

Asset Impairment

The Company’s held-for-development and held-for-sale inventories are included as a component of housing completed or under construction and land and land under development in the Consolidated Balance Sheets. The Company’s held-for-sale inventories include inventory associated with subdivisions that the Company intends to sell the assets in their current condition.

The Company evaluates its held-for-development and held-for-sale inventory for impairment at each quarter-end. The Company did not have any impairments of its homebuilding inventory during the three months ended March 31, 2010. The following table sets forth, by reportable segment, the asset impairments recorded during the three months ended March 31, 2009 (in thousands).

 

      Three Months
Ended March  31, 2009

Land and Land Under Development (Held-for-Development)

  

West

   $ 9,791

Mountain

     254

East

     150

Other Homebuilding

     17
      

Subtotal

     10,212
      

Housing Completed or Under Construction (Held-for-Development)

  

West

     3,276

Mountain

     -

East

     600

Other Homebuilding

     267
      

Subtotal

     4,143
      

Other Assets

     214
      

Consolidated Asset Impairments

   $      14,569
      

 

- 4 -


Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

The 2009 first quarter impairments of the Company’s held-for-development inventories were concentrated in the Nevada market of the West segment. These impairments resulted from a significant decrease in the average selling prices of closed homes during the 2009 first quarter, compared with the 2008 fourth quarter, in response to increased levels of competition in this market and continued high levels of home foreclosures. The impairments in the Mountain, East and Other Homebuilding segments primarily resulted from lower forecasted average selling prices for communities that are in the close out phase.

 

3.

Recent Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, “Improving Disclosures About Fair Value Measurements” (“ASU 2010-06”), which provides amendments to Accounting Standards Codification Subtopic No. 820-10, “Fair Value Measurements and Disclosures — Overall.” ASU 2010-06 requires additional disclosures and clarifications of existing disclosures for recurring and nonrecurring fair value measurements. The revised guidance is effective for interim and annual reporting periods beginning after December 15, 2009. ASU 2010-06 concerns disclosure only and will not have a material impact on the Company’s financial position or results of operations.

 

4.

Fair Value Measurements

ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”) defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

Cash and Cash Equivalents.  For cash and cash equivalents, the fair value approximates carrying value.

Marketable securities.  The Company’s marketable securities consist of both held-to-maturity and available-for-sale securities. The Company’s held-to-maturity marketable securities consist of both fixed rate and floating rate interest earning securities, primarily: (1) debt securities, which may include, among others, United States government and government agency debt and corporate debt; and (2) deposit securities, which may include, among others, certificates of deposit and time deposits. For those debt securities that the Company has both the ability and intent to hold the investment to their maturity date, the Company classifies such debt securities as held-to-maturity. The Company’s held-to-maturity debt securities are reported at amortized cost in the Consolidated Balance Sheets.

The following table shows the Company’s carrying value of its held-to-maturity marketable securities by both security type and maturity date as well as the estimated fair value for each security type (in thousands).

 

     March 31, 2010    December 31, 2009
     Recorded
Amount
   Estimated Fair
Value
   Recorded
Amount
   Estimated Fair
Value

Debt securities - maturity less than 1 year

   $      182,697    $      184,019    $      160,765    $      159,752

Debt securities - maturity 1 to 5 years

     446,613      446,176      64,679      64,844

Deposit securities - maturity less than 1 year

     2,519      2,565      2,500      2,558
                           

Total held-to-maturity securities

   $ 631,829    $ 632,760    $ 227,944    $ 227,154
                           

Included in the Company’s March 31, 2010 held-to-maturity investment balances are $521.4 million of debt securities that were in a gross unrealized gain position of $1.5 million and $110.4 million of debt securities that were in a gross unrealized loss position of $0.6 million. Because the Company has the intent and ability to hold these securities to maturity and ultimately expects to receive the contractual amounts due to it, the Company has concluded that the decrease in fair value of these securities is not indicative of an other-than-temporary-impairment. Accordingly, the Company has continued to record each of these securities at its amortized cost.

 

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Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

For certain debt securities, the Company may not have the intent to hold them until their maturity date and, as such, the Company classifies such debt securities as available-for-sale. The Company’s available-for-sale securities also include holdings in a fund that invests predominately in fixed income securities. The Company records all of its available for sale marketable securities at fair value with changes in fair value being recorded as a component of accumulated other comprehensive income in the Consolidated Balance Sheets. The fair value of the Company’s marketable securities are based upon Level 1 fair value inputs.

The following table sets forth the amortized cost and estimated fair value of the Company’s available-for-sale marketable securities (in thousands).

 

     March 31, 2010    December 31, 2009
     Amortized Cost    Estimated Fair
Value
   Amortized Cost    Estimated Fair
Value

Equity security

   $      100,796    $      101,578    $      100,000    $      100,000

Debt securities

     96,659      97,031      -      -
                           

Total available-for-sale securities

   $ 197,455    $ 198,609    $ 100,000    $ 100,000
                           

Mortgage Loans Held-for-Sale, Net.  As of March 31, 2010, the primary components of the Company’s mortgage loans held-for-sale that are measured at fair value on a recurring basis are: (1) mortgage loans held-for-sale under commitments to sell; and (2) mortgage loans held-for-sale not under commitments to sell. At March 31, 2010 and December 31, 2009, the Company had $22.2 million and $42.8 million, respectively, of mortgage loans held-for-sale under commitments to sell for which fair value was based upon a Level 1 input being the quoted market prices for those mortgage loans. At March 31, 2010 and December 31, 2009, the Company had $14.5 million and $19.4 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell and, as such, their fair value was based upon Level 2 fair value inputs, primarily estimated market price received from an outside party.

Inventories.  The Company records its homebuilding inventory (housing completed or under construction and land and land under development) at fair value only when events or circumstances indicate the fair value is less than its carrying value. For the Company’s held-for-development subdivisions, the Company determines the estimated fair value of each subdivision by calculating the present value of the estimated future cash flows at discount rates that are commensurate with the risk of the subdivision under evaluation. These estimates are dependent on specific market or sub-market conditions for each subdivision. Local market-specific conditions that may impact these estimates for a subdivision include, among other things: (1) forecasted base selling prices and home sales incentives; (2) estimated land development costs and home cost of construction; (3) the current sales pace for active subdivisions; (4) changes by management in the sales strategy of a given subdivision; and (5) the intensity of competition within a market or sub-market, including publicly available home sales prices and home sales incentives offered by our competitors. The Company did not have any homebuilding subdivisions that were impaired at March 31, 2010.

Related Party Asset.  The Company’s related party assets are debt security bonds that it acquired from a quasi-municipal corporation in the state of Colorado. The Company has estimated the fair value of the related party assets based upon discounted cash flows as the Company does not believe there is a readily available market for such assets. The Company used a 15% discount rate in determining the present value of the estimated future cash flows from the servicing of the bonds. The estimated cash flows from the servicing of the bonds are ultimately based upon the Company’s estimated cash flows associated with the building, selling and closing of homes in one of its Colorado subdivisions. Accordingly, the estimated fair values of these assets are based upon Level 3 cash flow inputs. Based upon this evaluation, the estimated fair value of the related party assets approximates its carrying value.

Lines of Credit.  The Company’s lines of credit are at floating rates or at fixed rates that approximate current market rates and have relatively short-term maturities. The fair value approximates carrying value.

Senior Notes.  The estimated fair values of the senior notes in the following table are considered to be Level 2 fair value inputs pursuant to ASC 820 and are an estimated fair value of the bonds when compared with bonds in the homebuilding sector (in thousands).

 

- 6 -


Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

     March 31, 2010    December 31, 2009
     Recorded Amount    Estimated Fair
Value
   Recorded Amount    Estimated Fair
Value

7% Senior Notes due 2012

   $ 149,506    $ 163,382    $ 149,460    $ 161,550

5 1/2 % Senior Notes due 2013

     349,668      367,066      349,642      360,500

5 3/8 % Medium Term Senior Notes due 2014

     249,142      246,414      249,102      240,050

5 3/8 % Medium Term Senior Notes due 2015

     249,796      243,699      249,787      236,800

5 3/8 % Senior Notes due 2020

     243,983      241,239      -      -
                           

Total

   $   1,242,095    $   1,261,800    $   997,991    $   998,900
                           

 

5.

Derivative Financial Instruments

The Company utilizes certain derivative instruments in the normal course of business, which primarily include commitments to originate mortgage loans (interest rate lock commitments or locked pipeline) and forward sales of mortgage-backed securities commitments, both of which typically are short-term in nature. Forward sales securities commitments and private investor sales commitments are utilized to hedge changes in fair value of mortgage loan inventory and commitments to originate mortgage loans. At March 31, 2010, the Company had $228.7 million in interest rate lock commitments, which consisted of $93.1 million in loan locks and $135.6 million in 4.5% promotional program commitments. Additionally, the Company had $180.0 million in forward sales of mortgage-backed securities.

The Company records its mortgage loans held-for-sale at fair value to achieve matching of the changes in the fair value of its derivative instruments with the changes in fair values of the loans it is hedging, without having to designate its derivatives as hedging instruments. For forward sales commitments, as well as commitments to originate mortgage loans that are still outstanding at the end of a reporting period, the Company records the fair value of the derivatives in other revenue in the Consolidated Statements of Operations with an offset to either prepaid and other assets or accrued liabilities in the Consolidated Balance Sheets, depending on the nature of the change. The changes in fair value of the Company’s derivatives were not material during the three months ended March 31, 2010 and 2009.

 

6.

Balance Sheet Components

The following table sets forth information relating to accrued liabilities (in thousands).

 

     March 31,
2010
   December 31,
2009

Accrued liabilities

     

Unrecognized tax benefit reserve

   $ 59,998    $ 60,226

Warranty reserves

     54,054      59,022

Insurance reserves

     51,390      51,606

Land development and home construction accruals

     18,548      21,236

Accrued compensation and related expenses

     11,480      20,297

Accrued executive deferred compensation

     18,472      17,782

Legal reserves

     15,590      14,489

Accrued interest payable

     21,722      12,023

Loan loss reserves

     8,241      9,641

Customer and escrow deposits

     7,051      5,524

Other accrued liabilities

     21,678      20,123
             

Total accrued liabilities

   $   288,224    $   291,969
             

 

- 7 -


Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

7.

Loss Per Share

For purposes of calculating loss per share (“EPS”), a company that has participating security holders (for example, security holders who receive non-forfeitable dividends on unvested restricted stock) is required to utilize the two-class method for calculating earnings per share. The two-class method is an allocation of earnings between the holders of common stock and a company’s participating security holders. Under the two-class method, earnings for the reporting period are allocated between common shareholders and other security holders, based on their respective rights to receive distributed earnings (i.e. dividends) and undistributed earnings (i.e. net income or loss). Currently, the Company has one class of security and has participating security holders which consist of shareholders of unvested restricted stock. The basic and diluted EPS calculations are shown below (in thousands, except per share amounts).

 

     Three Months Ended March 31,  
     2010     2009  

Basic and Diluted Loss Per Common Share

    

Net loss

   $ (20,873   $ (40,853

Less: distributed and undistributed earnings allocated to participating securities

     (124     (101
                

Net loss attributable to common stockholders

   $     (20,997   $     (40,954
                

Basic and diluted weighted-average shares outstanding

     46,613        46,397   

Basic Loss Per Common Share

   $ (0.45   $ (0.88
                

Dilutive Loss Per Common Share

   $ (0.45   $ (0.88
                

Diluted EPS includes the dilutive effect of common stock equivalents and is computed using the weighted-average number of common stock and common stock equivalents outstanding during the reporting period. Common stock equivalents include stock options and unvested restricted stock. Diluted EPS for the three months ended March 31, 2010 and 2009 excluded common stock equivalents because the effect of their inclusion would be anti-dilutive, or would decrease the reported loss per share. Using the treasury stock method, the weighted-average common stock equivalents excluded from diluted EPS were 0.5 million and 0.4 million shares during the three months ended March 31, 2010 and 2009, respectively.

 

8.

Interest Activity

The Company capitalizes interest on its senior notes and Homebuilding Line associated with its “qualifying assets.” The Company has determined that inventory is a qualifying asset during the period of active development and through the completion of construction of a home. When construction of a home is complete, such home is no longer considered to be a qualifying asset and interest is no longer capitalized on that home.

Interest activity is shown below (in thousands).

 

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

     Three Months Ended March 31,  
     2010     2009  

Total Interest Incurred

    

Corporate and homebuilding segments

   $ 16,931      $ 14,493   

Financial Services and Other

     79        91   
                

Total interest incurred

   $ 17,010      $ 14,584   
                

Total Interest Capitalized

    

Interest capitalized, beginning of period

   $ 28,339      $ 39,239   

Interest capitalized

     6,636        4,844   

Previously capitalized interest included in home cost of sales

     (3,202     (8,033
                

Interest capitalized, end of period

   $       31,773      $       36,050   
                

 

9.

Warranty Reserves

Warranty reserves presented in the table below relate to general and structural reserves, as well as reserves for known, unusual warranty-related expenditures. Warranty payments for an individual house may exceed the related reserve. Payments in excess of the reserve are evaluated in the aggregate to determine if an adjustment to the warranty reserve should be recorded, which could result in a corresponding adjustment to home cost of sales. During 2009 and continuing into the first three months of 2010, the Company experienced a significant downward trend in the amount of warranty payments incurred on its previously closed homes. Because the Company’s warranty reserve balance at each period end is generally determined based upon historical warranty payment patterns, the foregoing downward trend in warranty payments have significantly impacted the Company’s warranty reserves during 2009 and 2010. As a result of the significant decline in warranty payments incurred on previously closed homes, the Company recorded adjustments to reduce its warranty reserves for previously closed homes totaling $3.9 million and $3.6 million during the three months ended March 31, 2010 and 2009, respectively. The foregoing warranty reserve adjustments were recorded as a reduction to home cost of sales in the Consolidated Statements of Operations.

The following table summarizes the warranty reserve activity for the three months ended March 31, 2010 and 2009 (in thousands).

 

     Three Months Ended March 31,  
     2010     2009  

Warranty reserve balance at beginning of year

   $ 59,022      $ 89,318   

Warranty expense provisions

     990        1,474   

Warranty cash payments

     (2,029     (2,238

Warranty reserve adjustments

     (3,929     (3,643
                

Warranty reserve balance at end of period

   $       54,054      $       84,911   
                

 

10.

Insurance Reserves

The Company records expenses and liabilities for losses and loss adjustment expenses for claims associated with: (1) insurance policies and re-insurance agreements issued by StarAmerican Insurance Ltd. (“StarAmerican”) and Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”); (2) self-insurance, including workers compensation; and (3) deductible amounts under the Company’s insurance policies. The establishment of the provisions for outstanding losses and loss adjustment expenses is based on actuarial studies that include known facts and interpretations of circumstances, including the Company’s experience with similar cases and historical trends involving claim payment patterns, pending levels of unpaid claims, product mix or concentration, claim severity, frequency patterns such as those caused by natural disasters, fires or accidents, depending on the business conducted, and changing regulatory and legal environments.

 

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

The following table summarizes the insurance reserve activity for the three months ended March 31, 2010 and 2009 (in thousands).

 

     Three Months Ended March 31,  
     2010     2009  

Insurance reserve balance at beginning of year

   $ 51,606      $ 59,171   

Insurance expense provisions

     583        898   

Insurance cash payments

     (799     (374

Insurance reserve adjustments

     -        -   
                

Insurance reserve balance at end of period

   $       51,390      $       59,695   
                

 

11.

Information on Business Segments

The Company’s operating segments are defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the chief operating decision-maker, or decision-making group, to evaluate performance and make operating decisions. The Company has identified its chief operating decision-makers (“CODMs”) as three key executives—the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer.

The Company has identified each homebuilding subdivision as an operating segment as each homebuilding subdivision engages in business activities from which it earns revenue primarily from the sale of single-family detached homes, generally to first-time and first-time move-up homebuyers. Subdivisions in the reportable segments noted below have been aggregated because they are similar in the following regards: (1) economic characteristics; (2) housing products; (3) class of homebuyer; (4) regulatory environments; and (5) methods used to construct and sell homes. The Company’s homebuilding reportable segments are as follows:

 

  (1)

West (Arizona, California and Nevada)

 

  (2)

Mountain (Colorado and Utah)

 

  (3)

East (Delaware Valley, Maryland and Virginia)

 

  (4)

Other Homebuilding (Florida and Illinois)

The Company’s Financial Services and Other reportable segment consists of the operations of the following operating segments: (1) HomeAmerican Mortgage Corporation (“HomeAmerican”); (2) Allegiant; (3) StarAmerican; (4) American Home Insurance Agency, Inc.; and (5) American Home Title and Escrow Company. These operating segments have been aggregated into one reportable segment because they do not individually exceed 10 percent of: (1) consolidated revenue; (2) the greater of (A) the combined reported profit of all operating segments that did not report a loss or (B) the positive value of the combined reported loss of all operating segments that reported losses; or (3) consolidated assets. The Company’s Corporate reportable segment incurs general and administrative expenses that are not identifiable specifically to another operating segment, earns interest income on its cash, cash equivalents and marketable securities, and incurs interest expense on its senior notes.

The following table summarizes revenue for each of the Company’s six reportable segments (in thousands). Inter-company adjustments noted in the revenue table below relate to Mortgage Loan Origination fees paid by the Company’s homebuilding subsidiaries to HomeAmerican on behalf of homebuyers.

 

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

     Three Months Ended March 31,  
     2010     2009  

Homebuilding

    

West

   $ 57,137      $ 74,682   

Mountain

     46,682        44,117   

East

     31,505        40,492   

Other Homebuilding

     9,036        13,683   
                

Total Homebuilding

     144,360        172,974   

Financial Services and Other

     5,621        5,563   

Corporate

     -        50   

Intercompany adjustments

     (2,903     (2,655
                

Consolidated

   $     147,078      $     175,932   
                

The following table summarizes (loss) income before income taxes for each of the Company’s six reportable segments (in thousands). Inter-company supervisory fees (“Supervisory Fees”), which are included in (loss) income before income taxes for each reportable segment in the table below, are charged by the Company’s Corporate segment to the homebuilding segments and the Financial Services and Other segment. Supervisory Fees represent costs incurred by the Company’s Corporate segment associated with certain resources that support the Company’s other reportable segments. Transfers, if any, between operating segments are recorded at cost.

 

     Three Months Ended March 31,  
     2010     2009  

Homebuilding

    

West

   $ 2,354      $ (10,303

Mountain

     1,170        (4,811

East

     (1,519     (2,371

Other Homebuilding

     (519     (831
                

Total Homebuilding

     1,486        (18,316

Financial Services and Other

     1,846        1,621   

Corporate

     (24,574     (24,378
                

Consolidated

   $     (21,242   $     (41,073
                

The following table summarizes total assets for each of the Company’s six reportable segments (in thousands). Inter-company adjustments noted in the table below relate to loans from the Company’s Financial Services and Other segment to its Corporate segment. The assets in the Company’s Corporate segment primarily include cash, cash equivalents and marketable securities.

 

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

     March 31,
2010
    December 31,
2009
 

Homebuilding

    

West

   $ 265,978      $ 190,204   

Mountain

     284,695        237,702   

East

     147,050        112,964   

Other Homebuilding

     31,879        26,778   
                

Total Homebuilding

     729,602        567,648   

Financial Services and Other

     107,425        133,957   

Corporate

     1,810,355        1,773,660   

Intercompany adjustments

     (2,657     (45,957
                

Consolidated

   $   2,644,725      $   2,429,308   
                

The following table summarizes depreciation and amortization of long-lived assets and amortization of deferred marketing costs for each of the Company’s six reportable segments (in thousands).

 

     Three Months Ended March 31,
     2010    2009

Homebuilding

     

West

   $ 1,074    $ 1,746

Mountain

     463      562

East

     312      503

Other Homebuilding

     161      108
             

Total Homebuilding

     2,010      2,919

Financial Services and Other

     169      219

Corporate

     753      755
             

Consolidated

   $         2,932    $         3,893
             

 

12.

Commitments and Contingencies

The Company often is required to obtain bonds and letters of credit in support of its obligations for land development and subdivision improvements, homeowner association dues and start-up expenses, warranty work, contractor license fees and earnest money deposits. At March 31, 2010, the Company had issued and outstanding performance bonds and letters of credit totaling $108.4 million and $21.9 million, respectively, including $4.5 million in letters of credit issued by HomeAmerican. In the event any such bonds or letters of credit issued by third parties are called, MDC could be obligated to reimburse the issuer of the bond or letter of credit.

Legal Reserves.  Litigation has been filed by homeowners in West Virginia against MDC, its subsidiary Richmond American Homes of West Virginia, Inc. (“RAH West Virginia”) and various subcontractors alleging a failure to install functional passive radon mitigation systems in their homes. The plaintiffs seek compensatory and punitive damages and medical monitoring costs for alleged negligent construction, failure to warn, breach of warranty or contract, breach of implied warranty of habitability, fraud, and intentional and negligent infliction of emotional distress based upon alleged exposure to radon gas. The litigation consists of the following actions:

Joy, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-204, Circuit Court of Jefferson County, West Virginia (“Joy”). This action was filed on May 16, 2008, by sixty-six plaintiffs from sixteen households. The Company and RAH West Virginia have answered and asserted claims against the subcontractors for contractual and implied indemnity and contribution.

 

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

Bauer, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-431, Circuit Court of Jefferson County, West Virginia (“Bauer”). This action was filed on October 24, 2008, by eighty-six plaintiffs from twenty-one households. This action has been consolidated for discovery and pre-trial proceedings with the Joy action.

Saliba, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-447, Circuit Court, Jefferson County, West Virginia (“Saliba”). This action was filed on November 7, 2008, by thirty-five plaintiffs from nine households. This action has been consolidated for discovery and pre-trial proceedings with the Joy action.

By orders dated November 4 and 18, 2009, the court granted the plaintiffs’ motion for default judgment against the Company and RAH West Virginia, motion to strike the defendants’ answers and motion for sanctions. The damages are to be determined in a subsequent jury trial. At this time, MDC and RAH West Virginia are unsure whether the court’s action pertains to only the Joy case or also to the Bauer and Saliba cases.

On December 4, 2009, the court entered an order amending its prior order, which had restricted the parties from making statements elaborating on the facts or theories of the cases. The amended order now permits disclosures required by or in accordance with law.

On December 7, 2009, MDC and RAH West Virginia filed with the West Virginia Supreme Court of Appeals a motion seeking to stay the proceedings and a petition for writ of prohibition to vacate the default judgment. On January 15, 2010, the West Virginia Supreme Court of Appeals entered an order agreeing to consider the request to vacate the default judgment. The hearing to consider this request occurred on March 31, 2010. Pursuant to the rules of the Supreme Court, the underlying proceedings in the Circuit Court have been stayed pending a decision by the Supreme Court on the petition.

MDC and RAH West Virginia believe that they have meritorious defenses to each of the lawsuits and intend to vigorously defend the actions.

Additionally, in the normal course of business, the Company is a defendant in claims primarily relating to construction defects, product liability and personal injury claims. These claims seek relief from the Company under various theories, including breach of implied and express warranty, negligence, strict liability, misrepresentation and violation of consumer protection statutes. The Company has accrued for losses that may be incurred with respect to legal claims based upon information provided to it by its legal counsel, including counsels’ on-going evaluation of the merits of the claims and defenses. Due to uncertainties in the estimation process, actual results could vary from those accruals. The Company had legal accruals of $15.6 million and $14.5 million at March 31, 2010 and December 31, 2009, respectively.

Mortgage Loan Loss Reserves.  In the normal course of business, the Company establishes reserves for potential losses associated with HomeAmerican’s loan sale agreements pursuant to which mortgage loans are sold to third-parties. These reserves are created to address repurchase and indemnity claims by third-party purchasers of the mortgage loans, which claims arise primarily out of allegations of homebuyer fraud at the time of origination of the loan. These reserves are based upon, among other matters: (1) pending claims received from third-party purchasers associated with previously sold mortgage loans; (2) a current assessment of the potential exposure associated with future claims of homebuyer fraud in mortgage loans originated in prior period loans; and (3) historical loss experience. The Company’s mortgage loan loss reserves of $8.2 million and $9.6 million at March, 31, 2010 and December 31, 2009, respectively, are reflected as a component of accrued liabilities in the Consolidated Balance Sheets, and the associated expenses are included as a component of general and administrative expenses in the Consolidated Statements of Operations. During the three months ended March 31, 2010, the Company made $1.3 million in cash payments associated with its mortgage loan loss reserve.

 

13.

Lines of Credit and Total Debt Obligations

Homebuilding.  The Company’s homebuilding line of credit (“Homebuilding Line”) is an unsecured revolving line of credit with a group of lenders for support of our homebuilding segments, which has a maturity date of March 21, 2011. Effective April 5, 2010, the aggregate commitment under the Homebuilding Line was reduced from $100 million to $50 million (the “Commitment”) and thus the aggregate sublimit for letters of credit was reduced from $100 million to $50 million. The Commitment was reduced as the Company believes that it does not need the full capacity of the Homebuilding Line to meet its liquidity needs.

 

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

Interest rates for borrowings on the Homebuilding Line, if any, are determined by reference to an applicable London Interbank Offered Rate (“LIBOR”) or to an alternate base rate, each with a margin that is determined based on changes in our credit rating and leverage ratio. At March 31, 2010 and December 31, 2009, there were no borrowings under the Homebuilding Line and there were $16.2 million and $16.7 million, respectively, in letters of credit outstanding as of such dates. The outstanding letters of credit reduce the amount that is available to be borrowed under the Commitment. However, the outstanding letters of credit do not impact the calculation of the Company’s borrowing capacity under the permitted leverage ratio. Additionally, while the Company’s borrowing capacity may be reduced under the permitted leverage ratio, this reduction does not impact its ability to issue letters of credit up to the limits specified in the Homebuilding Line.

Mortgage Lending.  As of March 31, 2010 HomeAmerican had, and continues to have, a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”) and other banks that may be parties to the Mortgage Repurchase Facility (collectively with USBNA, the “Buyers”). As of March 31, 2010, USBNA was the only Buyer under the Mortgage Repurchase Facility. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of eligible mortgage loans to USBNA (as agent for the Buyers) with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as agent for the Buyers and as custodian, pursuant to the Custody Agreement (“Custody Agreement”), dated as of November 12, 2008, by and between HomeAmerican and USBNA. The Mortgage Repurchase Facility has a maximum aggregate commitment of $70 million and includes an accordion feature that permits the maximum aggregate commitment to be increased to $150 million, subject to the availability of additional commitments. The Mortgage Repurchase Facility expires on October 28, 2010. Advances under the Mortgage Repurchase Facility carry a Pricing Rate equal to the greater of (i) the LIBOR Rate (as defined in the Mortgage Repurchase Facility) plus 2.5%, or (ii) 4.5%. At HomeAmerican’s option the Balance Funded Rate (equal to 4.5%) may be applied to advances under the Mortgage Repurchase Facility provided Buyer is holding sufficient Qualifying Balances. The foregoing terms are defined in the Mortgage Repurchase Facility. At March 31, 2010 and December 31, 2009, the Company had $4.7 million and $29.1 million, respectively, of mortgage loans that it was obligated to repurchase under the Mortgage Repurchase Facility.

The Mortgage Repurchase Facility is accounted for as a debt financing arrangement. Accordingly, at March 31, 2010 and December 31, 2009, amounts advanced under the Mortgage Repurchase Facility, which were used to finance mortgage loan originations, have been reported under the Mortgage Repurchase Facility in the Consolidated Balance Sheets.

General.  The agreements for the Company’s Homebuilding Line and Mortgage Repurchase Facility require compliance with certain representations, warranties and covenants. The Company believes that it is in compliance with these representations, warranties and covenants and the Company is not aware of any covenant violations.

The Homebuilding Line agreement covenants include a consolidated tangible net worth test. Under this test, the Company’s Consolidated Tangible Net Worth (as defined) must not be less than: (1) $850 million; plus (2) 50% of consolidated net income, as defined, earned by the Company and the Guarantors (as defined) after September 30, 2008; plus (3) 50% of the net proceeds or other consideration received by the Company for the issuance of capital stock after September 30, 2008; minus (4) the lesser of (A) the aggregate amount paid by the Company after September 30, 2008 to repurchase its common stock and (B) $300 million. Failure to satisfy this covenant test would not result in a default, but would result in a scheduled reduction in the amount of the Commitment.

In addition to the foregoing covenants, the Homebuilding Line agreement specifies that Consolidated Tangible Net Worth must not be less than the sum of: (1) $650 million; (2) 50% of the quarterly consolidated net income of Borrower and the Guarantors earned after September 30, 2008; and (3) 50% of the net proceeds or other consideration received for the issuance of capital stock after September 30, 2008. Failure to satisfy this covenant could result in a termination of the facility.

The Homebuilding line also contains a cash flow/liquidity test. Under this test, if the Company fails to maintain for any fiscal quarter ending on and after December 31, 2008 an Interest Coverage Ratio (as defined) equal to or greater than 1.5 to 1.0 for the period of four consecutive fiscal quarters, then as of the end of such fiscal quarter

 

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

and as of the end of all fiscal quarters thereafter until the Interest Coverage Ratio is greater than or equal to 1.5 to 1.0, the Company would have to maintain either (1) a ratio of (A) Adjusted Cash Flow From Operations (as defined) to (B) Consolidated Interest Incurred (as defined) of greater than or equal to 1.5 to 1.0 or (2) a sum of (A) Borrowing Base Availability (as defined) plus (B) Unrestricted Cash (as defined, which includes, among other things, cash, cash equivalents and certain marketable securities), to the extent such Unrestricted Cash is not included in calculating Borrowing Base Availability, less (C) principal payments due on Consolidated Indebtedness (as defined) within the next succeeding four fiscal quarters, equal to or greater than $500 million. The Company’s compliance with the cash flow/liquidity test would be measured on a quarterly basis and failure to satisfy this test would not result in a default but would result in a scheduled reduction in the amount of the facility.

Additionally, pursuant to the Homebuilding Line, should there be a defaulting lender, the Company is required to: (i) prepay swing line loans or cash collateralize the defaulting lender’s share of the swing line loans and (ii) cash collateralize the defaulting lender’s share of the outstanding facility letters of credit.

The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants customary for agreements of this type. The negative covenants include, among others, (i) an Adjusted Tangible Net Worth (as defined) requirement, (ii) a minimum Adjusted Tangible Net Worth Ratio, (iii) an Adjusted Net Income requirement, and (iv) a minimum Liquidity (as defined) requirement (the foregoing terms are defined in the Mortgage Repurchase Facility). Adjusted Tangible Net Worth means the sum of (a) all assets of HomeAmerican less (b) the sum of (i) all Debt and all Contingent Indebtedness of HomeAmerican, (ii) all assets of HomeAmerican that would be classified as intangible assets under generally accepted accounting principles, and (iii) receivables from Affiliates. HomeAmerican’s Adjusted Tangible Net Worth Ratio is the ratio of HomeAmerican’s total liabilities (excluding Permitted Letters of Credit) to the Adjusted Tangible Net Worth. HomeAmerican’s Adjusted Net Income is a rolling twelve consecutive months of net income for HomeAmerican. HomeAmerican’s Liquidity is defined as its unencumbered and unrestricted cash and Cash Equivalents plus the amount by which the aggregate Purchase Value of all Purchased Mortgage Loans at such time exceeds the aggregate Purchase Price outstanding for all Open Transactions at such time. The foregoing terms are defined in the Mortgage Repurchase Facility.

Failure to meet the foregoing negative covenants would constitute an event of default. In the event of default, USBNA may, at its option, declare the Repurchase Date for any or all Transactions to be deemed immediately to occur. Upon such event of default, and if USBNA exercises its right to terminate any Transactions, then (a) HomeAmerican’s obligation to repurchase all Purchased Loans in such Transactions will become immediately due and payable; (b) the Repurchase Price for each such Transaction shall be increased by the aggregate amount obtained by daily multiplication of (i) the greater of the Pricing Rate for such Transaction and the Default Pricing Rate by (ii) the Purchase Price for the Transaction as of the Repurchase Date, (c) all Income paid after the event of default will be payable to and retained by USBNA and applied to the aggregate unpaid Repurchase Prices owed by HomeAmerican, and (d) HomeAmerican shall deliver any documents relating to Purchased Loans subject to such Transactions to USBNA. Upon the occurrence of default, USBNA may (a) sell any or all Purchased Loans subject to such Transactions on a servicing released or servicing retained basis and apply the proceeds to the unpaid amounts owed by HomeAmerican, (b) give HomeAmerican credit for such Purchased Loans in an amount equal to the Market Value and apply such credit to the unpaid amounts owed by HomeAmerican, (c) replace HomeAmerican as Servicer, (d) exercise its right under the Mortgage Repurchase Facility with respect to the Income Account and Escrow Account, and (e) with notice to HomeAmerican, declare the Termination Date to have occurred. The foregoing terms are defined in the Mortgage Repurchase Facility.

In January 2010, the Company completed a public offering of $250 million principal amount of 5 5/8% senior notes due February 2020 (the “2020 Notes”). The 2020 Notes, which pay interest in February and August of each year, are general unsecured obligations of MDC and rank equally and ratably with its other general unsecured and unsubordinated indebtedness. The Company is not required to make any principal payments until February 2020. In addition, the Notes are fully guaranteed on an unsecured basis, jointly and severally, by most of the Company’s homebuilding subsidiaries. The 2020 Notes may be redeemed, at the election of the Company, in whole at any time or in part from time to time, at a redemption price equal to the greater of (1) 100% of their principal amount; or (2) the present value of the remaining scheduled payments on the notes being redeemed on the redemption date discounted on a semiannual basis at the Treasury Rate (as defined) plus 0.35%, plus, in each case, accrued and unpaid interest. Upon the occurrence of both a change of control and a below investment grade rating event, the Company is required to offer to repurchase the 2020 Notes at a repurchase price in cash equal to 101% of the

 

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

aggregate principal amount of the notes. The Company received proceeds of $242.3 million, net of discounts and issuance costs of $6.1 million and $1.6 million, respectively. The Company will use the proceeds of the offering for general corporate purposes.

The Company’s senior notes are not secured and, while the senior notes indentures contain some restrictions on secured debt and other transactions, they do not contain financial covenants. The Company’s senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by most of its homebuilding segment subsidiaries. The Company’s debt obligations at March 31, 2010 and December 31, 2009 are as follows (in thousands):

 

     March 31,
2010
   December  31,
2009

7% Senior Notes due 2012

   $ 149,506    $ 149,460

5 1/2 % Senior Notes due 2013

     349,668      349,642

5 3/8 % Medium-Term Senior Notes due 2014

     249,142      249,102

5 3/8 % Medium-Term Senior Notes due 2015

     249,796      249,787

5 3/8 % Senior Notes due 2020

     243,983      -
             

Total Senior Notes, net

   $ 1,242,095    $ 997,991

Homebuilding line of credit

     -      -
             

Total Corporate and Homebuilding Debt

     1,242,095      997,991

Mortgage repurchase facility

     4,714      29,115
             

Total Debt

   $   1,246,809    $   1,027,106
             

 

14.

Income Taxes

The Company is required, at the end of each interim period, to estimate its annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. Based on these estimates, the Company had an income tax benefit of $0.4 million, or 1.7%, during the three months ended March 31, 2010, compared with $0.2 million or 0.5% during the three months ended March 31, 2009.

The Company is required to recognize the financial statement effects of a tax position when it is more likely than not (defined as a likelihood of more than 50%), based on the technical merits, that the position will be sustained upon examination. Any difference between the income tax return position and the benefit recognized in the financial statements results in a liability for unrecognized tax benefits. During the three months ended March 31, 2010, there have been no material changes in the Company’s liability for unrecognized tax benefits.

In January 2010, the Company reached a settlement with the IRS on the audit of its 2004 and 2005 federal income tax returns, which is subject to review by the Joint Committee on Taxation. The settlement is expected to result in a decrease of approximately $35 million in the Company’s gross unrecognized tax benefits. The settlement is also expected to result in an increase of approximately $13 million to additional paid-in-capital in the Company’s Consolidated Statements of Stockholders’ Equity and an income tax benefit of approximately $1 million in the Company’s Consolidated Statement of Operations. Finally, since the Company made a deposit of $35.6 million with the IRS during 2008 related to this audit, the settlement is expected to result in an increase of approximately $12 million to cash in the Company’s Consolidated Balance Sheets.

In February 2010, the Company received a $142.1 million federal income tax refund, which was generated by a 2009 federal net operating loss carry back to the 2004 and 2005 tax years in accordance with the provisions contained in the Worker, Homeownership, and Business Assistance Act of 2009.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The increase in the Company’s total deferred tax asset at March 31, 2010 (per the table below) resulted primarily from an increase in the Company’s federal net operating loss carry forward, offset by a decrease in the Company’s asset impairment charges.

 

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

A valuation allowance is recorded against a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not (a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized. The Company had a valuation allowance of $216.3 million and $208.1 million at March 31, 2010 and December 31, 2009, respectively, resulting in a net deferred tax asset of zero. The Company’s future realization of its deferred tax assets ultimately depends upon the existence of sufficient taxable income in the carryback or carryforward periods under the tax laws. The Company will continue analyzing, in subsequent reporting periods, the positive and negative evidence in determining the expected realization of its deferred tax assets.

The tax effects of significant temporary differences that give rise to the net deferred tax asset are as follows (in thousands).

 

     March 31,
2010
    December 31,
2009
 

Deferred tax assets

    

Asset impairment charges

   $        75,106      $        87,121   

State net operating loss carryforward

     43,712        41,845   

Warranty, litigation and other reserves

     36,811        38,789   

Federal net operating loss carryforward

     24,384        5,716   

Stock-based compensation expense

     18,960        17,510   

Alternative minimum tax credit carryforward

     9,679        9,679   

Accrued liabilities

     8,455        7,921   

Inventory, additional costs capitalized for tax purposes

     6,971        7,317   

Property, equipment and other assets, net

     2,384        2,622   

Charitable contribution carryforward

     931        934   

Deferred revenue

     345        321   
                

Total deferred tax assets

     227,738        219,775   

Valuation allowance

     (216,291     (208,144
                

Total deferred tax assets, net of valuation allowance

     11,447        11,631   
                

Deferred tax liabilities

    

Deferred revenue

     5,836        5,820   

Accrued liabilities

     765        926   

Inventory, additional costs capitalized for financial statement purposes

     642        681   

Other, net

     4,204        4,204   
                

Total deferred tax liabilities

     11,447        11,631   
                

Net deferred tax asset

   $ -      $ -   
                

 

15.

Variable Interest Entities

In June 2009, the Financial Accounting Standards Board (“FASB”) revised the authoritative guidance for determining the primary beneficiary of a variable interest entity (“VIE”). In December 2009, the FASB issued Accounting Standards Update No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU 2009-17”), which provides amendments to Accounting Standards Codification Topic No. 810, “Consolidation” (“ASC 810”) to reflect the revised guidance. The amendments to ASC 810 replace the quantitative-based risk and rewards calculation for

 

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

determining which reporting entity, if any, has a controlling interest in a VIE with an approach focused on identifying which reporting entity has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. The adoption of the amended provisions of ASC 810 during the 2010 first quarter did not have a material effect on the Company’s consolidated financial position or results of operations.

In the normal course of business, the Company enters into lot option purchase contracts (“Option Contracts”), generally through a deposit of cash or letter of credit, for the right to purchase land or lots at a future point in time with predetermined terms. The use of such land option and other contracts generally allows the Company to reduce the risks associated with direct land ownership and development, reduces the Company’s capital and financial commitments, including interest and other carrying costs, and minimizes the amount of the Company’s land inventories on its consolidated balance sheets.

In compliance with ASC 810, the Company analyzes its land option contracts and other contractual arrangements to determine whether the corresponding land sellers are VIEs and, if so, whether the Company is the primary beneficiary. Although the Company does not have legal title to the optioned land, ASC 810 requires the Company to consolidate a VIE if the Company is determined to be the primary beneficiary. As a result of its analyses, the Company determined that as of March 31, 2010 it was not the primary beneficiary of any VIEs from which it is purchasing land under land option contracts. In determining whether it is the primary beneficiary, the Company considers, among other things, whether it has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, including, but not limited to, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE. The Company also considers whether it has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE.

The Company’s financial exposure with respect to VIE’s is limited to the forfeiture of non-refundable deposit of cash or letters of credit. As of March 31, 2010 the Company had non-refundable cash deposits and letters of credit totaling $9.5 million and $2.1 million respectively associated with the right to acquire 3,381 lots under Option Contracts.

 

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

16.

Other Comprehensive Loss

Total other comprehensive loss includes net loss plus $1.2 million of unrealized gains on the Company’s available-for-sale marketable securities. The Company’s other comprehensive loss was $19.7 million during the three months ended March 31, 2010.

 

17.

Supplemental Guarantor Information

The Company’s senior notes and Homebuilding Line are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by the following subsidiaries (collectively, the “Guarantor Subsidiaries”), which are 100%-owned subsidiaries of the Company.

 

   

M.D.C. Land Corporation

   

RAH of Florida, Inc.

   

Richmond American Construction, Inc.

   

Richmond American Homes of Arizona, Inc.

   

Richmond American Homes of Colorado, Inc.

   

Richmond American Homes of Delaware, Inc.

   

Richmond American Homes of Florida, LP

   

Richmond American Homes of Illinois, Inc.

   

Richmond American Homes of Maryland, Inc.

   

Richmond American Homes of Nevada, Inc.

   

Richmond American Homes of New Jersey, Inc.

   

Richmond American Homes of Pennsylvania, Inc.

   

Richmond American Homes of Utah, Inc.

   

Richmond American Homes of Virginia, Inc.

   

Richmond American Homes of West Virginia, Inc.

Subsidiaries that do not guarantee the Company’s senior notes and Homebuilding Line (collectively, the “Non-Guarantor Subsidiaries”) primarily include:

 

   

American Home Insurance

   

American Home Title

   

HomeAmerican

   

StarAmerican

   

Allegiant

The Company has determined that separate, full financial statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor Subsidiaries is presented.

 

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

Supplemental Condensed Combining Balance Sheet

March 31, 2010

(In thousands)

 

     MDC     Guarantor
Subsidiaries
   Non-
Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated
MDC

Asset

           

Cash and cash equivalents

   $ 883,544      $ 2,841    $ 63,754      $ -      $ 950,139

Marketable securities

     830,438        -      -        -        830,438

Restricted cash

     -        594      -        -        594

Receivables

     10,333        14,866      2,463        (2,657     25,005

Mortgage loans held-for-sale, net

     -        -      36,704        -        36,704

Inventories, net

           

Housing completed or under construction

     -        399,606      -        -        399,606

Land and land under development

     -        277,276      -        -        277,276

Investment in subsidiaries

     74,459        -      -        (74,459     -

Other assets, net

     86,914        34,398      3,651        -        124,963
                                     

Total Assets

   $ 1,885,688      $ 729,581    $ 106,572      $ (77,116   $ 2,644,725
                                     

Liabilities

           

Accounts payable and related party liabilities

   $ 3,683      $ 61,934    $ 998      $ (2,657   $ 63,958

Accrued liabilities

     141,005        86,526      60,693        -        288,224

Advances and notes payable to parent and subsidiaries

     (546,829     556,073      (9,244     -        -

Mortgage repurchase facility

     -        -      4,714        -        4,714

Senior notes, net

     1,242,095        -      -        -        1,242,095
                                     

Total Liabilities

     839,954        704,533      57,161        (2,657     1,598,991
                                     

Stockholders’ Equity

     1,045,734        25,048      49,411        (74,459     1,045,734
                                     

Total Liabilities and Stockholders’ Equity

   $   1,885,688      $      729,581    $      106,572      $     (77,116   $   2,644,725
                                     

 

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

Supplemental Condensed Combining Balance Sheet

December 31, 2009

(In thousands)

 

     MDC     Guarantor
Subsidiaries
   Non-
Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated
MDC

Asset

           

Cash and cash equivalents

   $ 1,210,123      $ 3,258    $ 20,871      $ -      $ 1,234,252

Marketable securities

     327,944        -      -        -        327,944

Restricted cash

     -        476      -        -        476

Receivables

     137,688        24,740      44,573        (45,957     161,044

Mortgage loans held-for-sale, net

     -        -      62,315        -        62,315

Inventories, net

           

Housing completed or under construction

     -        260,324      -        -        260,324

Land and land under development

     -        262,860      -        -        262,860

Investment in subsidiaries

     90,413        -      -        (90,413     -

Other assets, net

     87,121        29,629      3,343        -        120,093
                                     

Total Assets

   $ 1,853,289      $ 581,287    $ 131,102      $ (136,370   $ 2,429,308
                                     

Liabilities

           

Accounts payable and related party liabilities

   $ 48,331      $ 34,017    $ 696      $ (45,957   $ 37,087

Accrued liabilities

     133,226        95,705      63,038        -        291,969

Advances and notes payable to parent and subsidiaries

     (399,405     410,285      (10,880     -        -

Mortgage repurchase facility

     -        -      29,115        -        29,115

Senior notes, net

     997,991        -      -        -        997,991
                                     

Total Liabilities

     780,143        540,007      81,969        (45,957     1,356,162
                                     

Stockholders’ Equity

     1,073,146        41,280      49,133        (90,413     1,073,146
                                     

Total Liabilities and Stockholders’ Equity

   $   1,853,289      $      581,287    $      131,102      $     (136,370   $   2,429,308
                                     

 

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

Supplemental Condensed Combining Statements of Operations

Three Months Ended March 31, 2010

(In thousands)

 

     MDC     Guarantor
Subsidiaries
   Non-
Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated
MDC
 

Revenue

           

Home sales revenue

   $ -      $ 143,846    $ -      $ (2,903   $ 140,943   

Land sales and other revenue

     -        514      5,621        -        6,135   

Equity in (loss) income of subsidiaries

     2,354        -      -        (2,354     -   
                                       

Total Revenue

     2,354        144,360      5,621        (5,257     147,078   
                                       

Costs and Expenses

           

Home cost of sales

     -        112,311      (18     (2,903     109,390   

Asset impairments

     -        -      -        -        -   

Marketing and commission expenses

     -        12,189      -        -        12,189   

General and administrative and other expenses

     18,182        18,623      4,089        -        40,894   
                                       

Total Operating Costs and Expenses

     18,182        143,123      4,071        (2,903     162,473   
                                       

(Loss) income from Operations

     (15,828     1,237      1,550        (2,354     (15,395

Other (expense) income

     (6,208     48      313        -        (5,847
                                       

(Loss) income before income taxes

     (22,036     1,285      1,863        (2,354     (21,242

Benefit from (provision for) income taxes

     1,163        22      (816     -        369   
                                       

Net (Loss) Income

   $     (20,873   $        1,307    $        1,047      $     (2,354   $     (20,873
                                       

 

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

Supplemental Condensed Combining Statements of Operations

Three Months Ended March 31, 2009

(In thousands)

 

     MDC     Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated
MDC
 

Revenue

          

Home sales revenue

   $ -      $ 169,637      $ -      $ (2,655   $ 166,982   

Land sales and other revenue

     50        3,337        5,563        -        8,950   

Equity in (loss) income of subsidiaries

     (17,326     -        -        17,326        -   
                                        

Total Revenue

     (17,276     172,974        5,563        14,671        175,932   
                                        

Costs and Expenses

          

Home cost of sales

     -        143,980        -        (2,655     141,325   

Asset impairments

     -        14,569        -        -        14,569   

Marketing and commission expenses

     -        15,190        -        -        15,190   

General and administrative and other expenses

     17,971        17,581        4,440        -        39,992   
                                        

Total Operating Costs and Expenses

     17,971        191,320        4,440        (2,655     211,076   
                                        

(Loss) income from Operations

     (35,247     (18,346     1,123        17,326        (35,144

Other income (expense)

     (6,319     (167     557        -        (5,929
                                        

(Loss) income before income taxes

     (41,566     (18,513     1,680        17,326        (41,073

Benefit from (provision for) income taxes

     713        100        (593     -        220   
                                        

Net (Loss) Income

   $     (40,853   $     (18,413   $        1,087      $      17,326      $     (40,853
                                        

 

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

Supplemental Condensed Combining Statements of Cash Flows

Three Months Ended March 31, 2010

(In thousands)

 

     MDC     Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated
MDC
 

Net cash provided by (used in) operating activities

   $ 76,099      $     (128,646   $        66,417      $         (2,354   $ 11,516   
                                        

Net cash used in investing activities

     (501,747     (20     -        -        (501,767
                                        

Financing activities

          

Payments from (advances to) subsidiaries

     (131,470     128,249        867        2,354        -   

Proceeds from issuance of senior notes, net

     242,288        -        -        -        242,288   

Mortgage repurchase facility

     -        -        (24,401     -        (24,401

Dividend payments

     (11,784     -        -        -        (11,784

Proceeds from exercise of stock options

     35        -        -        -        35   

Excess tax benefit from stock-based compensation

     -        -        -        -        -   
                                        

Net cash provided by (used in) financing activities

     99,069        128,249        (23,534     2,354        206,138   
                                        

Net (decrease) increase in cash and cash equivalents

     (326,579     (417     42,883        -        (284,113

Cash and cash equivalents

          

Beginning of period

       1,210,123        3,258        20,871        -          1,234,252   
                                        

End of period

   $ 883,544      $ 2,841      $ 63,754      $ -      $ 950,139   
                                        

 

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

 

Supplemental Condensed Combining Statements of Cash Flows

Three Months Ended March 31, 2009

(In thousands)

 

     MDC     Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated
MDC
 

Net cash provided by operating activities

   $ 133,023      $ 53,433      $ 35,613      $ 17,424      $ 239,493   
                                        

Net cash provided by (used in) investing activities

     82,692        (2     -        -        82,690   
                                        

Financing activities

          

Payments from (advances to) subsidiaries

     78,102        (54,470     (6,208     (17,424     -   

Mortgage repurchase facility

     -        -        (30,756     -        (30,756

Dividend payments

     (11,595     -        -        -        (11,595

Proceeds from exercise of stock options

     56        -        -        -        56   

Excess tax benefit from stock-based compensation

     15        -        -        -        15   
                                        

Net cash provided by (used in) financing activities

     66,578            (54,470         (36,964         (17,424     (42,280
                                        

Net increase (decrease) in cash and cash equivalents

     282,293        (1,039     (1,351     -        279,903   

Cash and cash equivalents

          

Beginning of period

     1,279,684        3,536        21,508        -        1,304,728   
                                        

End of period

   $   1,561,977      $ 2,497      $ 20,157      $ -      $   1,584,631   
                                        

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Unaudited Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in “Item 1A: Risk Factors Relating to our Business” of our Annual Report on Form 10-K for the year ended December 31, 2009 and this Quarterly Report on Form 10-Q.

INTRODUCTION

M.D.C. Holdings, Inc. is a Delaware corporation. We refer to M.D.C. Holdings, Inc. as the “Company,” “MDC,” “we” or “our” in this Quarterly Report on Form 10-Q, and these designations include our subsidiaries unless we state otherwise. We have two primary operations, homebuilding and financial services. Our homebuilding operations consist of wholly-owned subsidiary companies that generally purchase finished lots for the construction and sale of single-family detached homes to first-time and first-time move-up homebuyers under the name “Richmond American Homes.” Our homebuilding operations are comprised of many homebuilding subdivisions that we consider to be our operating segments. Homebuilding subdivisions in a given market are aggregated into reportable segments as follows: (1) West (Arizona, California and Nevada); (2) Mountain (Colorado and Utah); (3) East (Maryland, Virginia, which includes Virginia and West Virginia, and Delaware Valley, which includes Pennsylvania, Delaware and New Jersey); and (4) Other Homebuilding (Florida and Illinois, although we began our exit of the Illinois market during the 2008 third quarter).

Our Financial Services and Other segment consists of HomeAmerican Mortgage Corporation (“HomeAmerican”), which originates mortgage loans primarily for our homebuyers, American Home Insurance Agency, Inc. (“American Home Insurance”), which offers third-party insurance products to our homebuyers, and American Home Title and Escrow Company (“American Home Title”), which provides title agency services to the Company and our homebuyers in Colorado, Florida, Maryland, Nevada and Virginia. This segment also includes Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”), which provides to its customers, primarily many of our homebuilding subsidiaries and certain subcontractors of these homebuilding subsidiaries, general liability coverage for construction work performed associated with closed homes, and StarAmerican Insurance Ltd. (“StarAmerican”), a Hawaii corporation and a wholly-owned subsidiary of MDC. StarAmerican has agreed to re-insure: (1) all claims pursuant to two policies issued to the Company by a third-party; and (2) pursuant to agreements beginning in June 2004, all Allegiant claims in excess of $50,000 per occurrence, up to $3.0 million per occurrence, subject to various aggregate limits, not to exceed $18.0 million per year, through June 30, 2009. Effective July 1, 2009, StarAmerican re-insures Allegiant for all claims in excess of $50,000 per occurrence, up to $3.0 million per occurrence, subject to various aggregate limits, not to exceed $6.0 million per year.

EXECUTIVE SUMMARY

During the three months ended March 31, 2010, our homebuilding operations experienced a 38% increase in net orders for homes even though the start of the spring selling season did not produce the robust net orders for homes that we had hoped for. Despite the slow start to the spring selling season, we did see increases in net orders for homes in each homebuilding segment and we saw our Backlog (as defined below) increase by 49% and 96% from December 31, 2009 and March 31, 2009, respectively. Additionally, we experienced a 700 basis point increase in Home Gross Margins with increases coming in each homebuilding segment during the 2010 first quarter, compared with the same period during 2009, and we did not incur any inventory impairments during the 2010 first quarter. This represents the first quarter since the 2006 second quarter in which we have not incurred any inventory impairments. Despite these improvements, we continued to experience decreases in home closing levels as our homes closed declined by 10% during the 2010 first quarter, compared with the 2009 first quarter. We also experienced decreases in the average selling prices for homes in most markets during the three months ended March 31, 2010, compared with the three months ended March 31, 2009. This performance resulted in a loss before income tax of $21.2 million during the three months ended March 31, 2010, compared with a loss before income tax of $41.1 million during the same period in 2009.

Contributing to our operational and financial performance during the 2010 first quarter were sales programs, which focused on offering low mortgage interest rates and the impending expiration of the federal

 

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homebuyer tax credit. The recession in the United States economy, high unemployment levels, high levels of distressed foreclosures and elevated resale home inventories, together with strong competition for new home sales, all impacted our financial and operating results during the three months ended March 31, 2010. Additionally, despite the increased affordability of new housing products, low interest rates and the availability of various federal and local tax credits or incentives, economic conditions continued to create uncertainty in the timing, strength and sustainability of any recovery in the new home sales market. As a result of these conditions, we continued to experience downward pressure on the average selling prices of our closed homes and homes in Backlog from December 31, 2009. We believe that stability in the credit and capital markets, improvement in U.S. employment levels and an eventual renewal of confidence in the United States and global economy will play a major role in any turnaround in the homebuilding and mortgage lending industries. While the United States government responded during 2009 by taking steps in an attempt to stabilize the banking system and financial markets, the future impact of these measures and other legislation or proposed legislation on the financial markets, and the timing of a sustainable turnaround in the homebuilding industry, remain unclear. See “Forward-Looking Statements” below.

Recognizing the challenges presented by the sustained downturn in the homebuilding and mortgage lending businesses, our management continued to work on the following: (1) strengthening our sales and marketing organization; (2) managing inventory levels; (3) purchasing lots or controlling lots under option; (4) improving our processes and business practices; and (5) improving the return on investment for our cash and marketable securities.

During the 2010 first quarter, we continued to strengthen our sales and marketing operations with training and special sales promotions, in an effort to improve sales velocity both before and after the April 30, 2010 expiration of the federal homebuyer tax credit. We continued to manage our inventory levels by limiting the number of finished spec and model homes, yet increased levels of unsold homes under construction at the foundation and framing stages to meet the needs of homebuyers who are required to close on their home purchases by June 30, 2010 in order to receive the federal homebuyer tax credit. Additionally, while competition for the purchase of finished lots continued to be intense during the 2010 first quarter, we were able to increase the total number of lots controlled through acquisition and lot option contracts by almost 2,200 in 39 new subdivisions. Additionally, during the 2010 first quarter, we continued to rebuild and improve our processes and business practices seeking to increase efficiency and standardized business practices nationwide. To that end, we continue to make progress toward the implementation of a new enterprise resource planning system. Finally, we continued to evaluate ways to improve the return on investment associated with our marketable securities. Accordingly, and in conjunction with receiving $142.0 million of our December 31, 2009 income tax receivable and generating $242.3 million from the issuance of senior notes in January 2010, we invested $550.2 million of cash into various debt and equity securities during the 2010 first quarter.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The preparation of financial statements in conformity with accounting policies generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Management evaluates such estimates and judgments on an on-going basis and makes adjustments as deemed necessary. Actual results could differ from these estimates if conditions are significantly different in the future. Additionally, using different estimates or assumptions in our critical accounting estimates and policies could have a material impact to our consolidated financial statements. See “Forward-Looking Statements” below.

The accounting policies and estimates, which we believe are critical and require the use of complex judgment in their application, are those related to: (1) homebuilding inventory valuation (held-for-development); (2) homebuilding inventory valuation (held-for-sale); (3) warranty costs; (4) insurance reserves; (5) legal accruals; (6) income taxes—valuation allowance; (7) income taxes reserves; (8) revenue recognition; (9) home cost of sales; (10) mortgage loan loss reserves; (11) stock-based compensation; (12) segment reporting; and (13) land option contracts. Our critical accounting estimates and policies have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009.

 

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KEY HOMEBUILDING MEASURES

The table below sets forth information relating to orders for homes (dollars in thousands).

 

     Three Months Ended March 31,    Change
     2010    2009    Amount     %

Orders For Homes, net (units)

          

Arizona

                    168                     158                     10      6%

California

     26      75      (49   -65%

Nevada

     170      95      75      79%
                        

West

     364      328      36      11%
                        

Colorado

     270      134      136      101%

Utah

     125      41      84      205%
                        

Mountain

     395      175      220      126%
                        

Delaware Valley

     14      14      -      0%

Maryland

     33      37      (4   -11%

Virginia

     66      56      10      18%
                        

East

     113      107      6      6%
                        

Florida

     59      58      1      2%

Illinois

     -      8      (8   -100%
                        

Other Homebuilding

     59      66      (7   -11%
                        

Total

     931      676      255      38%
                        

Estimated Value of Orders for Homes, net

   $          257,655    $          191,000    $            66,655      35%

Estimated Average Selling Price of Orders for Homes, net

   $ 276.8    $ 282.5    $ (5.7   -2%

Orders for Homes, net.  During the three months ended March 31, 2010, net orders for homes increased in most of our homebuilding divisions. The increase in these markets primarily was attributable to higher demand for new homes due to continued low interest rate levels, decreases in the average selling prices of homes, making them more affordable, the federal homebuyer tax credit and strengthening our sales and marketing departments. We did experience decreases in net orders for homes in California and Maryland, primarily resulting from having fewer active subdivisions during the 2010 first quarter compared with the 2009 first quarter.

 

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Homes Closed.  The following table sets forth homes closed for each market within our homebuilding segments (in units).

 

     Three Months Ended March 31,    Change
     2010    2009    Amount     %

Arizona

                  108                   172    (64   -37%

California

   46    59    (13   -22%

Nevada

   98    74    24      32%
                  

West

   252    305    (53   -17%
                  

Colorado

   108    91                     17      19%

Utah

   52    40    12      30%
                  

Mountain

   160    131    29      22%
                  

Delaware Valley

   4    19    (15   -79%

Maryland

   26    26    -      0%

Virginia

   40    41    (1   -2%
                  

East

   70    86    (16   -19%
                  

Florida

   41    49    (8   -16%

Illinois

   -    9    (9   -100%
                  

Other Homebuilding

   41    58    (17   -29%
                  

Total

   523    580    (57   -10%
                  

During the three months ended March 31, 2010, our home closings decreased by 57 units or 10%. The decrease primarily was driven by closing 53 fewer homes in our West segment. In the West segment, we closed 64 fewer homes in Arizona as we had 55 fewer units in Backlog at the beginning of the 2010 first quarter, compared with the beginning of the 2009 first quarter. Also in Arizona, we had a 36% decrease in the number of active subdivisions during the 2010 first quarter, which also contributed to a decline in home closings as we had fewer homes available to be sold and closed. Home closings in our Mountain segment increased during the three months ended March 31, 2010 as we had 187 more homes in Backlog at the beginning of the 2010 first quarter, compared with the 2009 first quarter. Offsetting this improvement was the impact of closing fewer homes in each market of our East and Other Homebuilding segments.

 

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Home Gross Margins.  We define “Home Gross Margins” to mean home sales revenue less home cost of sales as a percent of home sales revenue. The following table sets forth our Home Gross Margins by reportable segment.

 

     Three Months Ended March 31,    Change
     2010    2009   

Homebuilding

        

West

             26.4%              21.4%                5.0%

Mountain

   18.7%    7.0%    11.7%

East

   18.0%    14.0%    4.0%

Other Homebuilding

   24.2%    11.4%    12.8%
              

Consolidated

   22.4%    15.4%    7.0%
              

Home Gross Margins can be impacted positively or negatively in a reporting period by adjustments in our warranty reserves. During the three months ended March 31, 2010 and 2009, we experienced warranty adjustments in most of our homebuilding segments. These adjustments resulted primarily from a continued significant downward trend in the amount of warranty payments incurred on our previously closed homes. Because our warranty reserve balance at each period end is generally determined based upon historical warranty payment patterns, the foregoing downward trend in warranty payments resulted in a reduction to the Company’s warranty reserves during 2009 and continued into 2010.

The following table sets forth the warranty adjustments we recorded to home cost of sales during the three months ended March 31, 2010 and 2009 by reportable segment (in thousands).

 

    Three Months Ended March 31,  
    2010     2009  

(Decrease) Increase to Home Cost of Sales

   

West

  $           (2,572   $           (3,173

Mountain

    (800     513   

East

    (196     (983

Other Homebuilding

    (361     -   
               

Total

  $ (3,929   $ (3,643
               

The following table sets forth our Home Gross Margins excluding warranty adjustments.

 

     Three Months Ended March 31,    Change
     2010    2009   

West

             21.9%              17.0%                4.9%

Mountain

   17.0%    8.2%    8.8%

East

   17.4%    11.6%    5.8%

Other

   20.2%    11.4%    8.8%
              

Consolidated

   19.6%    13.2%    6.4%
              

Also impacting Home Gross Margins in each of our homebuilding segments were decreases in home cost of construction primarily resulting from closing more of our newer product, which is generally smaller and is built in a more cost efficient manner and lower interest expense included in home cost of sales. These items were partially offset by increases in the lot cost per closed home and decreases in the average selling price of closed homes in most markets of our homebuilding segments primarily resulting from closing more of our newer smaller product.

In our West segment, Home Gross Margins during the three months ended March 31, 2010 were impacted positively by a reduction of $29,400 per closed home in home cost of construction, a 220 basis point reduction of interest in home cost of sales and a $11,100 increase in the average selling price of closed homes in the Arizona market of this segment. These items partially were offset by an $11,600 increase in the lot cost per closed home in the West segment and a $46,200 and $13,700 decrease in the average selling price of closed homes in the California and Nevada markets, respectively.

 

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In our Mountain segment, Home Gross Margins were impacted positively by a decrease of $53,200 per closed home in home cost of construction and a 340 basis point decrease in interest expense in cost of sales. These items were partially offset by a $52,500 and $25,100 decrease in the average selling price of closed homes in Colorado and Utah, respectively.

In the East segment, Home Gross Margins were impacted positively by a decrease of $52,100 per closed home in home cost of construction and a 230 basis point reduction in interest expense in cost of sales. These items were partially offset by a $19,900 increase in the lot cost per closed home and decreases of $90,800, $30,700 and $16,100 in the average selling prices of closed homes in Delaware Valley, Virginia and Maryland markets, respectively.

In the Other Homebuilding segment, Home Gross Margins were impacted positively by a decrease of $57,800 per closed home in home cost of construction and a 60 basis point decrease in interest expense in cost of sales. These items partially were offset by a $30,400 increase in the lot cost per closed home.

Future Home Gross Margins may be impacted negatively by, among other things: (1) a weaker economic environment, including recurring effects of the recession in the United States, as well as homebuyers’ reluctance to purchase new homes based on concerns about employment conditions; (2) continued and/or increases in home foreclosure levels; (3) on-going tightening of mortgage loan origination requirements; (4) increased competition and increases in the level of home order cancellations, which could affect our ability to maintain existing home prices and/or home sales incentive levels; (5) deterioration in the demand for new homes in our markets; (6) fluctuating energy costs, including oil and gasoline; (7) increases in the costs of subcontracted labor, finished lots, building materials, and other resources, to the extent that market conditions prevent the recovery of increased costs through higher selling prices; (8) increases in interest expense included in home cost of sales; (9) increases in the costs of finished lots; (10) changes in our warranty payment experiences and/or increases in warranty expenses or litigation expenses associated with construction defect claims; and (11) other general risk factors. See “Forward-Looking Statements” below.

The following table sets forth a reconciliation of our home cost of sales as reported to home cost of sale excluding warranty, which is used in the calculation of Home Gross Margins excluding warranty adjustments by reportable segment.

 

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Three Months Ended March, 31, 2010    Home Sales
Revenue - As
reported
    Home Cost of
Sales - As
reported
    Warranty
Adjustments
    Home Cost of
Sales - Excluding
Warrant
Adjustments
    Home Gross
Margins -  Excluding
Warranty
Adjustments (1)

West

   $      56,727      $      41,745      $      (2,572   $      44,317      21.9%

Mountain

     46,599        37,879        (800     38,679      17.0%

East

     31,486        25,817        (196     26,013      17.4%

Other

     9,034        6,852        (361     7,213      20.2%

Intercompany adjustments

     (2,903     (2,903     -        (2,903   N/A
                                  

Consolidated

   $ 140,943      $ 109,390      $ (3,929   $ 113,319      19.6%
                                  
Three Months Ended March, 31, 2009                             

West

   $ 71,628      $ 56,288      $ (3,173   $ 59,461      17.0%

Mountain

     44,006        40,906        513        40,393      8.2%

East

     40,376        34,707        (983     35,690      11.6%

Other

     13,627        12,079        -        12,079      11.4%

Intercompany adjustments

     (2,655     (2,655     -        (2,655   N/A
                                  

Consolidated

   $ 166,982      $ 141,325      $ (3,643   $ 144,968      13.2%
                                  

 

(1)

Home Gross Margins excluding the impact of warranty adjustments is a non-GAAP financial measure. We believe this information is meaningful as it isolates the impact that warranty adjustment has on our Home Gross Margins.

Backlog.  The following table below sets forth information relating to Backlog for each market within our homebuilding segments (dollars in thousands).

 

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     March 31,
2010
   December 31,
2009
   March 31,
2009

Backlog (units)

        

Arizona

     163      103      144

California

     56      76      65

Nevada

     160      88      74
                    

West

     379      267      283
                    

Colorado

     369      207      115

Utah

     167      94      43
                    

Mountain

     536      301      158
                    

Delaware Valley

     33      23      22

Maryland

     110      103      69

Virginia

     99      73      51
                    

East

     242      199      142
                    

Florida

     77      59      44

Illinois

     -      -      2
                    

Other Homebuilding

     77      59      46
                    

Total

     1,234      826      629
                    

Backlog Estimated Sales Value

   $          381,000    $          265,000    $          196,000
                    

Estimated Average Selling Price of Homes in Backlog

   $ 308.8    $ 320.8    $ 311.6
                    

We define “Backlog” as homes under contract but not yet delivered. Our Backlog at March 31, 2010 increased in each homebuilding segment as our net orders for homes during the 2010 first quarter exceeded our home closings in each market. The Backlog estimated sales value also increased from December 31, 2009 due to the 49% increase in the number of homes in Backlog at March 31, 2010, partially offset by the 4% decrease in the estimated average selling price of homes in Backlog.

Cancellation Rate.  We define our home order “Cancellation Rate” as the approximate number of cancelled home order contracts during a reporting period as a percentage of total home order contracts received during such reporting period. The following tables set forth our Cancellation Rate by segment.

 

     Three Months Ended March 31,    Increase
(Decrease)
     2010    2009   

Homebuilding

        

West

                 19%                  22%                  -3%

Mountain

   21%    23%    -2%

East

   28%    31%    -3%

Other Homebuilding

   32%    20%    12%
              

Consolidated

   22%    23%    -1%
              

The Cancellation Rate in most of our segments did not change significantly except in our Other Homebuilding segment in which we experienced a higher volume of home orders cancellations where the homebuyer was not able to qualify for a mortgage loan.

Active Subdivisions.  The following table displays the number of our active subdivisions for each market within our homebuilding segments. We define an active subdivision as a subdivision that has more than five homes available to be sold and closed and has sold at least five homes.

 

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     March 31,
2010
   December 31,
2009
   March 31,
2009
    

Arizona

                  28                     28                     37   

California

   3      3      16   

Nevada

   17      18      23   
                     

West

   48      49      76   
                     

 

Colorado

   41      42      45   

Utah

   17      16      22   
                     

Mountain

   58      58      67   
                     

 

Delaware Valley

   1      1      2   

Maryland

   8      8      12   

Virginia

   7      7      10   
                     

East

   16      16      24   
                     

 

Florida

   10      10      7   

Illinois

   -      -      1   
                     

Other Homebuilding

   10      10      8   
                     

Total

   132      133      175   
                     

Average Selling Price Per Home Closed.  The average selling price for our closed homes includes the base sales price, any purchased options and upgrades, reduced by any Sales Price Incentives (defined as discounts on the sales price of a home) or Mortgage Loan Origination Fees (defined as mortgage loan origination fees paid by Richmond American Homes to HomeAmerican). The following tables set forth our average selling price per home closed, by market (dollars in thousands).

          Three Months Ended March 31,    Change
          2010    2009    Amount     %

Arizona

      $            203.7    $            192.6    $             11.1      6%

California

        351.9      398.1      (46.2   -12%

Colorado

        299.8      352.3      (52.5   -15%

Delaware Valley

        334.1      424.9      (90.8   -21%

Florida

        220.3      219.2      1.1      1%

Illinois

        N/A      320.4      N/A      N/A

Maryland

        424.5      440.6      (16.1   -4%

Nevada

        189.3      203.0      (13.7   -7%

Utah

        273.5      298.6      (25.1   -8%

Virginia

        477.8      508.5      (30.7   -6%

Average

      $ 269.5    $ 287.9    $ (18.4   -6%

The average selling price in most of our markets decreased during the three months ended March 31, 2010. These declines were primarily attributable to a shift in the mix of product that were closed during the 2010 first quarter as we were able to close on more of our newer and smaller products, which were introduced into the market in late 2009. We did experience an increase in the average selling price of closed homes in our Arizona market primarily resulting from a shift in mix of product as we closed larger homes during the 2010 first quarter.

 

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RESULTS OF OPERATIONS

The following discussion compares results for the three months ended March 31, 2010 with the three months ended March 31, 2009.

Home Sales Revenue.  Home sales revenue from a home closing includes the base sales price and any purchased options and upgrades and is reduced for any Sales Price Incentives (defined as discounts on the sales price of a home) or Mortgage Loan Origination Fees (defined as mortgage loan origination fees paid by Richmond American Homes to HomeAmerican). The table below summarizes home sales revenue by reportable segment (dollars in thousands).

 

     Three Months Ended March 31,     Change
     2010     2009     Amount     %

West

   $        56,727      $        71,628      $ (14,901   -21%

Mountain

     46,599        44,006                 2,593      6%

East

     31,486        40,376        (8,890   -22%

Other Homebuilding

     9,034        13,627        (4,593   -34%
                          

Total Homebuilding

     143,846        169,637        (25,791   -15%

Intercompany adjustments

     (2,903     (2,655     (248   -9%
                          

Consolidated

   $ 140,943      $ 166,982      $ (26,039   -16%
                          

 

Home sales revenue in our West, East and Other Homebuilding segments was lower during the three months ended March 31, 2010, primarily due to closing 53, 16 and 17 fewer homes in each segment, respectively. Additionally, we experienced decreases in the average selling prices of homes in nearly each market of these segments during the three months ended March 31, 2010. For our Mountain segment, the increase in home sales revenue primarily resulted from closing 29 more homes, partially offset by a 15% and 8% decrease in the average selling price of closed homes in the Colorado and Utah markets, respectively.

 

Land Sales.  Land sales revenue during the three months ended March 31, 2010 was not material. During the three months ended March 31, 2009, land sales revenue was $2.6 million and related to the sale of 115 lots in our West segment.

 

Other Revenue.  Gains on the sale of mortgage loans and broker origination fees, net primarily represent revenue earned by HomeAmerican from the sale of HomeAmerican’s originated mortgage loans to third-parties and fees that HomeAmerican earns upon brokering a mortgage loan for a home closing. Insurance premiums collected by StarAmerican and Allegiant from our homebuilding subcontractors in connection with the construction of homes primarily comprise insurance revenue. Title and other revenue primarily consist of forfeiture of homebuyer deposits on home sales contracts and revenue associated with our American Home Title operations. The table below sets forth the components of other revenue (dollars in thousands).

 

     Three Months Ended March 31,     Change
     2010     2009     Amount     %

Gains on sales of mortgage loans and broker origination fees, net

   $          4,010      $          3,869      $            141      4%

Insurance revenue

     1,289        1,429        (140   -10%

Title and other revenue

     821        1,034        (213   -21%
                          

Total other revenue

   $ 6,120      $ 6,332      $ (212   -3%
                          

Home Cost of Sales.  Home cost of sales primarily includes land acquisition, land development and related costs (both incurred and estimated to be incurred), warranty costs and finance and closing costs, including Closing

 

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Cost Incentives (defined as homebuyer closing costs assistance paid by Richmond American Homes to a third-party). Home cost of sales excludes expenses associated with commissions, amortization of deferred marketing costs and inventory impairment charges. However, while inventory impairment charges recorded during a reporting period do not impact home cost of sales, they do impact future home cost of sales as they lower the lot cost basis of the impaired inventory.

The table below sets forth the home cost of sales by reportable segment (dollars in thousands).

 

     Three Months Ended March 31,     Change
     2010     2009     Amount     %

Homebuilding

        

West

   $      41,745      $      56,288      $     (14,543   -26%

Mountain

     37,879        40,906        (3,027   -7%

East

     25,817        34,707        (8,890   -26%

Other Homebuilding

     6,852        12,079        (5,227   -43%
                          

Total Homebuilding

     112,293        143,980        (31,687   -22%

Intercompany adjustments

     (2,903     (2,655     (248   -9%
                          

Consolidated

   $ 109,390      $ 141,325      $ (31,935   -23%
                          

During the three months ended March 31, 2010, the decrease in our consolidated home cost of sales resulted primarily from the following: (1) closing 57 fewer homes, which resulted in a $13.9 million decrease to home cost of sales; (2) $20.0 million associated with a decrease in the cost of home construction for our closed homes as we closed more of our smaller sized product which is generally more cost efficient to build; and (3) a $4.8 million decrease in interest expense. These items partially were offset by a $5.9 million increase in the lot cost basis of our inventory.

The decrease in our West segment during the three months ended March 31, 2010, primarily resulted from the following decreases: (1) closing 53 fewer homes, which resulted in a $9.8 million decrease to home cost of sales; (2) $7.4 million associated with a decrease in the cost of home construction for our closed homes as we closed more of our smaller sized product which is generally more cost efficient to build; and (3) $1.3 million decrease in interest expense. These items partially were offset by a $2.9 million increase in the lot cost basis of our inventory.

In our Mountain segment, the decline during the three months ended March 31, 2010, primarily resulted from the following decreases: (1) $8.5 million associated with a decrease in the cost of home construction for our closed homes as we closed more of our smaller sized product which is generally more cost efficient to build; (2) a $1.9 million decrease in interest expense; and (3) $1.3 million decrease associated with adjustments in our warranty reserves. These items partially were offset by closing 29 more homes, which resulted in a $9.1 million increase to home cost of sales.

In our East segment, the decline during the three months ended March 31, 2010, primarily resulted from the following: (1) closing 16 fewer homes, which resulted in a $6.5 million decrease to home cost of sales; (2) $3.6 million associated with a decrease in the cost of home construction for our closed homes as we closed more of our smaller sized product which is generally more cost efficient to build; and (3) a $1.3 million decrease in interest expense. These items partially were offset by an increase in the lot cost basis of our closed homes which contributed to a $1.4 million increase to home cost of sales.

The decrease in our Other Homebuilding segment during the three months ended March 31, 2010, primarily resulted from: (1) closing 17 fewer homes, which resulted in a $3.5 million decrease to home cost of sales; and (2) $2.4 million associated with a decrease in the cost of home construction for our closed homes as we closed more of our smaller sized product which is generally more cost efficient to build. These items partially were offset by an increase in the lot cost basis of our closed homes, which contributed to a $1.2 million increase to home cost of sales.

 

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Land Cost of Sales.  Land cost of sales during the 2010 first quarter was not material. During the three months ended March 31, 2009, land cost of sales was $1.3 million and related to the sale of 115 lots in our West segment.

 

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Asset Impairments.  We did not have any asset impairments during the three months ended March 31, 2010. The following table sets forth, by reportable segment, the asset impairments recorded for the three months ended March 31, 2009 (in thousands).

 

     Three Months
Ended March 31,
2009

Land and Land Under Development (Held-for-Development)

  

West

   $        9,791

Mountain

     254

East

     150

Other Homebuilding

     17
      

Subtotal

     10,212
      

Housing Completed or Under Construction (Held-for-Development)

  

West

     3,276

Mountain

     -

East

     600

Other Homebuilding

     267
      

Subtotal

     4,143
      

Other Assets

     214
      

Consolidated Asset Impairments

   $ 14,569
      

The 2009 first quarter impairments of our held-for-development inventories were concentrated in the Nevada market of the West segment. These impairments resulted from significant decreases in the average selling prices of closed homes during the 2009 first quarter, compared with the 2008 fourth quarter in response to increased levels of competition in this market and continued high levels of home foreclosures. The impairments in the Mountain, East and Other Homebuilding segments primarily resulted from lower forecasted average selling prices for communities that were in the close out phase.

The following table sets forth the inventory impairments that were recorded on a quarterly basis over the last five quarters, as well as the fair value of these inventories and the number of lots and subdivisions at the period end to which the impairments relate (dollars in thousands).

 

    

 

Inventory Impairments for the

   Fair Value  of
Impaired

Inventory at
Quarter End
   Number of
Lots  Impaired
During the
Quarter
   Number of
Subdivisions
Impaired
During the
Quarter

Three Months Ended

   Held-for-
Development
   Held-for-
Sale
    Total Inventory
Impairments
        

March 31, 2010

   $ -    $ -      $ -    $ -    -    -

December 31, 2009

               12,276                    234                  12,510                29,536                  336                    10

September 30, 2009

     1,103      -        1,103      4,172    61    3

June 30, 2009

     1,725      (557     1,168      2,978    53    2

March 31, 2009

     14,355      -        14,355      38,602    719    46

 

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Marketing Expenses.  Marketing expenses primarily include advertising, amortization of deferred marketing costs, model home expenses, compensation related expenses and other selling costs. The following table summarizes our marketing expenses by reportable segment (in thousands).

 

     Three Months Ended March 31,    Change
     2010    2009    Amount     %

Homebuilding

          

West

   $ 3,069    $ 4,533    $ (1,464   -32%

Mountain

     2,179      2,035      144      7%

East

     1,264      1,688      (424   -25%

Other Homebuilding

     548      576      (28   -5%
                        

Consolidated

   $            7,060    $            8,832    $           (1,772   -20%
                        

The $1.8 million decrease in marketing expenses during the three months ended March 31, 2010 primarily resulted from decreases of: (1) $0.7 million in employee compensation and other employee-related benefit costs; and (2) $0.6 million in amortization of deferred marketing costs resulting from closing 57 fewer homes and a 23% decrease in the number of model homes at March 31, 2010, compared with March 31, 2009.

Commission Expenses.  Commission expenses primarily include direct commissions paid for closed homes. The following table summarizes our commission expenses by reportable segment (in thousands).

 

     Three Months Ended March 31,    Change
     2010    2009    Amount     %

Homebuilding

          

West

   $ 2,139    $ 2,567    $ (428   -17%

Mountain

     1,572      1,668      (96   -6%

East

     1,105      1,608      (503   -31%

Other Homebuilding

     313      515      (202   -39%
                        

Consolidated

   $            5,129    $            6,358    $           (1,229   -19%
                        

Commission expense was lower in our West, East and Other Homebuilding segments primarily due to closing 53, 16 and 17 fewer homes, respectively, in these segments and decreases in the average selling price of closed homes for nearly each market within these three segments. In our Mountain segment, commission expense decreased during the three months ended March 31, 2010 due to a $52,500 and $25,100 decrease in the average selling price of closed homes in our Colorado and Utah markets, respectively, partially offset by 22% increase in the number of homes closed for the Mountain segment.

 

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General and Administrative Expenses.  The following table summarizes our general and administrative expenses by reportable segment (dollars in thousands).

 

     Three Months Ended March 31,    Change
     2010    2009    Amount     %

Homebuilding

          

West

   $ 7,340    $ 6,895    $ 445      6%

Mountain

     3,724      4,050      (326   -8%

East

     4,836      3,771      1,065      28%

Other Homebuilding

     1,826      1,063      763      72%
                        

Total Homebuilding

     17,726      15,779      1,947      12%

Financial Services and Other

     4,088      4,498      (410   -9%

Corporate

     18,389      18,104      285      2%
                        

Consolidated

   $          40,203    $          38,381    $            1,822      5%
                        

Our consolidated general and administrative expense increased during the three months ended March 31, 2010, primarily resulting from a $3.1 million increase in legal-related costs and $1.7 million increase in employee compensation and other employee-related benefit costs. These items partially were offset by decreases of $0.9 million in fees associated with our Homebuilding Line and $2.0 million in other general and administrative expenses, which includes, among other things, office-related expenses, depreciation and mortgage loan loss expenses.

General and administrative expenses in our West, East and Other Homebuilding segments increased during the three months ended March 31, 2010, primarily resulting from legal-related costs. In our Mountain segment, general and administrative expenses decreased, primarily resulting from lower employee compensation and other employee-related benefit costs.

In our Financial Services and Other segment, general and administrative expenses decreased due to decreases in the mortgage loan loss reserve. In our Corporate segment, general and administrative costs were relatively flat during the three months ended March 31, 2010. Impacting this segment were increases in employee compensation and other employee-related benefit costs, partially offset by decreases in fees associated with our Homebuilding Line.

Other Operating Expenses.  Other operating expenses of $0.4 million and $0.3 million during the three months ended March 31, 2010 and 2009, respectively, primarily relate to write-offs of pre-acquisition costs and deposits on lot option contracts that we elected not to exercise.

Other Income (Expense).  Other income (expense) primarily includes interest income on our cash, cash equivalents and marketable securities, interest expense, primarily on our senior notes, and gain or loss on the sale of other assets. Interest income during the three months ended March 31, 2010 increased, primarily from an increase in our cash, cash equivalents and marketable securities balances during 2010. Interest expense was also higher during the 2010 first quarter, primarily resulting from an increase in our debt level due to the issuance of $250 million in senior notes in January 2010.

 

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(Loss) Income Before Income Taxes.  The table below summarizes our (loss) income before income taxes by segment (dollars in thousands).

 

     Three Months Ended March 31,     Change
     2010     2009     Amount     %

Homebuilding

        

West

   $ 2,354      $ (10,303   $ 12,657      123%

Mountain

     1,170        (4,811     5,981      124%

East

     (1,519     (2,371     852      36%

Other Homebuilding

     (519     (831     312      38%
                          

Total Homebuilding

     1,486        (18,316     19,802      108%

Financial Services and Other

     1,846        1,621        225      14%

Corporate

     (24,574     (24,378     (196   -1%
                          

Consolidated

   $         (21,242   $         (41,073   $          19,831      48%
                          

Overall, the financial performance in each of our homebuilding segments improved during the 2010 first quarter as this was the first quarter since the 2006 fourth quarter in which we have not experienced inventory impairments. This, together with the improvements in Home Gross Margins, more than offset the impact of closing 10% fewer homes during the 2010 first quarter. While the overall financial performance of the Company did improve during the 2010 first quarter, we continue to be adversely affected by the lack of homebuyer demand, unprecedented changes that occurred in the mortgage finance, banking and insurance industries during 2008 and 2009, including the failure or takeover of a number of major industry leaders, as well as governmental intervention in, and support of, the businesses of many surviving entities. These factors contributed to the following, which impacted our financial results during the three months ended March 31, 2010: (1) high levels of competition for new home orders driven by builders that significantly reduced new home sales prices; (2) continued high levels of home sales incentives and, in many cases, increased home sales incentives offered to stimulate new home orders and maintain previous home orders in Backlog until they close; (3) high levels of home foreclosures, which contributed to an excess supply of homes available to be purchased; and (4) prospective homebuyers experiencing difficulty in selling their existing homes in this competitive environment.

In our West segment, we reported income before income taxes of $2.4 million during the three months ended March 31, 2010, compared to a $10.3 million loss before income taxes during the same period in 2009. This improvement was primarily due to: (1) the absence of any inventory impairments during the 2010 first quarter, compared with $13.1 million of impairments during the same period in 2009; and (2) a combined decrease of $1.9 million in commission and sales and marketing expenses and a 500 basis point increase in Home Gross Margins. These improvements partially were offset by closing 53 fewer homes and a $0.4 million increase in general and administrative expenses. In our Mountain segment, we reported income before income taxes of $1.2 million during the three months ended March 31, 2010, compared with a loss before income taxes of $4.8 million during the same period in 2009. This improvement was primarily due to: (1) a 1,170 basis point improvement in our Home Gross Margins; (2) closing 29 more homes, a 22% improvement over the 2009 first quarter; and (3) a combined decrease of $0.4 million in general and administrative expenses and commission expense.

In our East segment, our 2010 first quarter loss before income taxes was lower, primarily due to the following: (1) a combined decrease of $0.9 million in sales, marketing and commission expenses; (2) the absence of any inventory impairments during the 2010 first quarter, compared with $0.8 million during the same period in 2009; and (3) a 400 basis point increase in Home Gross Margins. These improvements partially were offset by closing 16 fewer homes, representing a 19% decrease in home closings.

In our Other Homebuilding segment, the loss before income taxes for the 2010 first quarter was lower ,primarily due to the following: (1) a 1,280 basis point increase in Home Gross Margins; (2) the absence of any inventory impairments during the 2010 first quarter, compared with $0.3 million during the same period in 2009; and (3) a combined decrease of $0.2 million in sales, marketing and commission expenses. These items partially were offset by a $0.8 increase in general and administrative expenses during the 2010 first quarter and the impact of closing 17 fewer homes, a 29% decline from the 2009 first quarter.

 

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In our Financial Services and Other segment, income before income taxes increased, primarily due to a $0.4 million decrease in general and administrative expenses.

Loss before income taxes in our Corporate segment during the 2010 first quarter was higher, primarily due to a $0.3 million increase in general and administrative expenses and a $0.6 million increase in interest expense on our senior notes. These items partially were offset by a $0.7 million increase in interest income during the three months ended March 31, 2010.

Income Taxes.  We are required, at the end of each interim period, to estimate our annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. Based on these estimates, we had an income tax benefit of $0.4 million, or 1.7%, during the three months ended March 31, 2010, compared with $0.2 million or 0.5% during the three months ended March 31, 2009.

OTHER HOMEBUILDING MEASURES

Inventory.  Our inventory consists of land and land under development and housing completed or under construction. Land and land under development on our Consolidated Balance Sheets primarily includes land acquisition costs and land development costs associated with subdivisions for which we have the intent to construct and sell homes. Also, we include land that is accounted for as held-for-sale as a component of land and land under development in our Consolidated Balance Sheets. Housing completed or under construction in our Consolidated Balance Sheets primarily includes: (1) land costs transferred from land and land under development; (2) hard costs associated with the construction of a house; (3) overhead costs, which include real property taxes, engineering and permit fees; (4) capitalized interest; and (5) certain indirect fees.

The following table shows the carrying value of land and land under development for each market within our homebuilding segments (dollars in thousands).

 

     March 31,
2010
   December 31,
2009
   March 31,
2009

Arizona

   $ 40,033    $ 32,839    $ 20,811

California

     52,063      36,790      4,278

Nevada

     27,324      27,591      21,916
                    

West

     119,420      97,220      47,005
                    

Colorado

     99,376      97,406      82,131

Utah

     16,148      24,093      24,902
                    

Mountain

     115,524      121,499      107,033
                    

Delaware Valley

     1,851      2,909      3,923

Maryland

     6,057      6,592      12,297

Virginia

     25,952      26,071      29,441
                    

East

     33,860      35,572      45,661
                    

Florida

     4,791      5,329      3,677

Illinois

     3,681      3,240      3,205
                    

Other Homebuilding

     8,472      8,569      6,882
                    

Total

   $          277,276    $          262,860    $          206,581
                    

 

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The following table shows the carrying value of housing completed or under construction for each market within our homebuilding segments (dollars in thousands).

 

     March 31,
2010
   December 31,
2009
   March 31,
2009

Arizona

   $ 49,656    $ 30,838    $ 51,935

California

     38,082      23,890      51,848

Nevada

     40,681      23,714      33,624
                    

West

     128,419      78,442      137,407
                    

Colorado

     117,612      85,537      94,231

Utah

     35,836      19,239      28,225
                    

Mountain

     153,448      104,776      122,456
                    

Delaware Valley

     6,009      3,907      9,222

Maryland

     47,899      26,729      26,731

Virginia

     42,527      29,739      33,628
                    

East

     96,435      60,375      69,581
                    

Florida

     21,304      16,731      15,951

Illinois

     -      -      4,010
                    

Other Homebuilding

     21,304      16,731      19,961
                    

Total

   $          399,606    $          260,324    $          349,405
                    

 

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The tables below show the total number of lots owned (excluding homes completed or under construction) and lots controlled under option agreements for each market within our homebuilding segments (in units).

 

     March 31,
2010
   December 31,
2009
   March 31,
2009

Lots Owned

        

Arizona

   1,040    1,075    1,365

California

   756    581    695

Nevada

   894    966    1,045
              

West

   2,690    2,622    3,105
              

Colorado

   2,549    2,514    2,523

Utah

   366    545    621
              

Mountain

   2,915    3,059    3,144
              

Delaware Valley

   64    82    110

Maryland

   94    100    180

Virginia

   318    241    227
              

East

   476    423    517
              

Florida

   127    138    242

Illinois

   141    141    141
              

Other Homebuilding

   268    279    383
              

Total

   6,349    6,383    7,149
              

Lots Controlled Under Option

        

Arizona

   482    328    460

California

   232    113    149

Nevada

   429    222    95
              

West

   1,143    663    704
              

Colorado

   507    537    158

Utah

   145    117    -
              

Mountain

   652    654    158
              

Delaware Valley

   -    -    14

Maryland

   602    575    350

Virginia

   271    192    620
              

East

   873    767    984
              

Florida

   713    500    438

Illinois

   -    -    -
              

Other Homebuilding

   713    500    438
              

Total

   3,381    2,584    2,284
              

Total Lots Owned and Controlled

                9,730                 8,967                 9,433
              

During the three months ended March 31, 2010, our total number of lots owned (excluding homes completed or under construction) decreased slightly from December 31, 2009, primarily due to the transfer of lots from land to homes completed or under construction. These items partially were offset by the purchase of more than 1,400 lots across most of our markets. Despite the impact of transferring of lots to work in process, we increased our land and land under development by $14.4 million since December 31, 2009, primarily due to the

 

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purchase of more than 1,400 lots during the quarter. The acquisition of lots during the 2010 first quarter relates to nearly 40 existing and new subdivisions that have or we expect will become active. Additionally, our housing completed and under construction increased by $139.3 million, as we increased the total homes under construction from 1,321 at December 31, 2009 to 2,311 at March 31, 2010. This increase was primarily attributable to a 104% increase in the number of unsold homes under construction, mostly at the foundation or framing stage of construction, and a 76% increase in sold homes under construction.

Our total number of lots under option increased in each of our homebuilding segments and within most of our markets from December 2009. The increase in each homebuilding segment resulted from entering into lot option agreements that we believe meet our underwriting criteria within each market of this segment. This increase was partially offset by exercising our right to purchase lots under existing option contracts.

The table below shows the amount of non-refundable option deposits (in thousands).

 

     March 31,
2010
  December 31, 2009   March 31,
2009
    

Non-refundable Option Deposits

         

Cash

   $ 9,467   $ 7,654   $ 5,526   

Letters of Credit

     2,084