Item 2.		Properties		20
		Item 3.		Legal Proceedings		20
		Item 4.		Submission of Matters to a Vote of Security Holders		21
PART II
		Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		21
		Item 6.		Selected Financial Data		22
		Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
		Item 7A.		Quantitative and Qualitative Disclosures About Market Risk		69
		Item 8.		Consolidated Financial Statements		F-1
		Item 9.		Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		71
		Item 9A.		Controls and Procedures		71
		Item 9B.		Other Information		73
PART III
		Item 10.		Directors and Executive Officers of the Registrant		73
		Item 11.		Executive Compensation		73
		Item 12.		Security Ownership of Certain Beneficial Owners and Management		74
		Item 13.		Certain Relationships and Related Transactions		74
		Item 14.		Principal Accountant Fees and Services		74
PART IV
		Item 15.		Exhibits and Financial Statement Schedules		75
		Signatures				82

 

(i)

Table of Contents

 

M.D.C. HOLDINGS, INC.

FORM 10-K

PART I

Forward-Looking Statements.

Certain statements in this Annual Report on Form 10-K, the Company’s Annual Report to Shareowners, as well as statements made by us in periodic press releases, oral statements made by our officials in the course of presentations about the Company and conference calls in connection with quarterly earnings releases, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operation, cash flows, strategies and prospects. Although we believe that the expectations reflected in the forward-looking statements contained in this Annual Report on Form 10-K are reasonable, we cannot guarantee future results. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by the forward-looking statements. These factors include those described under the caption “Risk Factors Relating to our Business” in Item 1A of this Annual Report on Form 10-K. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted.

 

Item 1.

Business.

 

(a)

General Development of Business

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 Annual Report on Form 10-K, 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 and Virginia, which includes Virginia and West Virginia); and (4) Other Homebuilding (Florida, Illinois, Delaware Valley, which includes Pennsylvania, Delaware and New Jersey, and Texas, although during 2007 we completed our exit of the Texas market).

Our financial services operations primarily consist of our mortgage lending, title agency and insurance companies. These companies are aggregated together to form our Financial Services and Other reportable segment. 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, Delaware, Florida, Illinois, Nevada, Maryland, Virginia and West Virginia. This segment also includes Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”), which provides to its customers, primarily certain subcontractors of MDC’s homebuilding subsidiaries, general liability coverage during the construction of the Company’s homes and for work performed in completed subdivisions, and StarAmerican Insurance Ltd. (“StarAmerican”), a Hawaii corporation and a wholly owned subsidiary of MDC. StarAmerican has

 

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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.

The following summarizes several significant business developments during the five most recently completed fiscal years:

 

•

Beginning in 2006 and continuing throughout 2007, we reduced our overall operations through Company-wide headcount reductions and reorganized our homebuilding operations through consolidation of homebuilding divisions and elimination of most of our regional offices. This right-sizing of our homebuilding operations included the consolidation of:

 

•

six California divisions into one;

•

two Nevada divisions into one;

•

three Phoenix divisions into one;

•

three Virginia divisions into one;

•

two Florida divisions into one; and

•

three Colorado divisions into two.

 

•

During 2007, we began reducing our homebuilding operations in Tampa through the disposition of a majority of the remaining assets as we initiated the exit of this sub-market.

 

•

During 2006 and 2007, we implemented a new customer service initiative, which is focused on making improvements in our customers’ home buying experience.

 

•

During 2006, we began exiting the Texas market, which we completed during 2007.

 

•

During 2004 and 2005, we initiated our Home Gallery concept, which improved sales support and offered more options and upgrades for homebuyers to personalize their new homes.

 

•

During 2004, we expanded our Florida operations through the purchase of the assets of Watson Home Builders, Inc. in Jacksonville.

 

•

During 2003, we entered the Delaware Valley and Illinois homebuilding markets, and re-entered the Florida homebuilding market through the purchase of assets of Crawford Homes, Inc. in Jacksonville.

 

(b)

Available Information

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Anyone seeking information about our business can receive copies of our 2007 Annual Report on Form 10-K, Annual Report to Shareholders, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports and other documents filed with the SEC at the public reference section of the SEC at 100 F Street, NE, Room 1580, Washington, D.C. 20549. These documents also may be obtained, free of charge, by: contacting our Investor Relations office at (720) 773-1100; writing to M.D.C. Holdings, Inc., Investor Relations, 4350 South Monaco Street, Suite 400, Denver, Colorado 80237; or accessing our website at www.richmondamerican.com. We make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, available on our website as soon as reasonably practicable after we file or furnish the materials electronically with the SEC. To obtain any of this information, go to www.richmondamerican.com, select “Investors,” “Financial Reports” and “SEC Filings.” Our website also includes our: (1) Corporate Governance Guidelines; (2) Corporate Code of Conduct; (3) Rules for Senior Financial Officers; (4) Audit Committee Procedures for Handling Confidential Complaints; and (5) charters for the Audit, Compensation and Nominating and Corporate Governance Committees. These materials may be obtained, free of charge, at our website, http://ir.richmondamerican.com (select “Corporate Governance”).

 

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(c)

Financial Information About Industry Segments

Note 3 to the Consolidated Financial Statements contains information regarding our reportable segments for each of the years ended December 31, 2007, 2006 and 2005.

 

(d)

Narrative Description of Business

Our business consists of two primary operations, homebuilding and financial services. We build and sell primarily single-family detached homes, that are designed and built to meet local customer preferences. We are the general contractor for all of our projects and retain subcontractors for site development and home construction. The base selling prices for our homes closed during 2007 ranged primarily from approximately $200,000 to 500,000. We maintain a variety of home styles in each of our markets, targeting generally first-time and first-time move-up homebuyers. Also, we build a limited number of homes for the second-time move-up and luxury homebuyers.

When opening a new homebuilding subdivision, we seek to limit our supply of lots with the goal of avoiding overexposure to any single sub-market. When we acquire finished lots, we prefer using option contracts or paying in phases with cash. Also, we acquire entitled land for development into finished lots when we determine that the risk is justified. Additional information about our land acquisition practices may be found in the Homebuilding Operations, Land Acquisition and Development section.

Homebuilding Operations.

At December 31, 2007, our homebuilding operations had subdivisions in multiple sub-markets in ten markets within four reportable segments as follows.

 

Reportable Segment		Market		Sub-market		Reportable Segment		Market		Sub-market
West		Arizona		Phoenix East Valley		Mountain		Colorado		Denver Metro Area
				Phoenix West Valley						Colorado Springs
				Tucson						Northern Colorado
		California		Bay Area				Utah		Salt Lake City Metro Area
				Central Valley
				Inland Empire		Other Homebuilding		Delaware Valley		Delaware - Dover Area
				Los Angeles						New Jersey - Burlington
				Orange County						Southeastern Pennsylvania
				San Diego						Southern Pennsylvania
		Nevada		Las Vegas				Florida		Jacksonville
										Tampa
East		Virginia		Northern Virginia
				Shenandoah Valley				Illinois		Chicago Suburbs
				West Virginia
		Maryland		Southern Maryland
				Suburban Maryland

 

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Our home sales revenue for the years ended December 31, 2007, 2006 and 2005 is set forth in the table below for each market within our homebuilding segments (dollars in thousands).

 

		Total Homes Sales Revenue												Percent of Total
		2007				2006				2005				2007		2006		2005
Arizona		$	702,418			$	980,409			$	831,796			26%		21%		17%
California			588,562				998,471				1,075,900			21%		21%		23%
Nevada			385,751				872,970				920,728			14%		19%		19%
West			1,676,731				2,851,850				2,828,424			61%		61%		59%
Colorado			284,419				450,392				627,042			10%		10%		13%
Utah			255,273				277,743				204,496			9%		6%		4%
Mountain			539,692				728,135				831,538			19%		16%		17%
Maryland			149,917				246,492				191,365			6%		5%		4%
Virginia			167,194				378,373				539,519			6%		8%		11%
East			317,111				624,865				730,884			12%		13%		15%
Delaware Valley			80,057				80,966				12,196			3%		2%		0%
Florida			129,880				262,209				238,054			5%		6%		5%
Illinois			39,126				63,925				33,490			1%		1%		1%
Texas			3,369				65,560				128,289			0%		1%		3%
Other Homebuilding			252,432				472,660				412,029			9%		10%		9%
Intercompany adjustments			(19,985	)			(26,954	)			(10,175	)		-1%		0%		0%
Total		$	2,765,981			$	4,650,556			$	4,792,700			100%		100%		100%

Economies of Scale.  We believe that our scale of operations has afforded us benefits such as:

 

•

the ability to negotiate favorable contract terms associated with lot option contracts;

 

•

the ability to sustain operations in our markets despite limiting or altogether eliminating the acquisition of new land until such time as land becomes available at reasonable prices;

 

•

the ability to negotiate volume contracts with material suppliers and subcontractors;

 

•

access to affordable insurance coverage; and

 

•

access to lower cost capital.

Operating Divisions.  In our homebuilding segments, our primary functions include land acquisition and development, home construction, purchasing, sales and marketing, merchandising and customer service. Operating decisions are made on a subdivision-by-subdivision basis under the oversight of our Chief Operating Decision Makers (“CODMs”), defined as our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. Generally, each operating division consists of a division president; land procurement, sales, construction, customer service, finance and purchasing personnel; and office staff. The Company’s underlying organizational structure – i.e. the grouping and reporting of subdivisions and divisions – changes based upon the current needs of the Company. At December 31, 2007 and 2006, we had 12 and 23 separate homebuilding operating divisions, respectively. Officers of our divisions generally receive performance-related bonuses based upon achieving targeted financial and operational results in their respective operating divisions.

Corporate Management.  We manage our homebuilding business primarily through members of senior management in our Corporate segment and our Asset Management Committees (each an “AMC”). Each AMC is comprised of the COO and one of the Company’s corporate officers or employees. The AMCs review and approve all

 

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subdivision acquisition transactions in accordance with land resource allocation decisions made by the CODMs. Land acquisition transactions may not proceed without the approval by AMC and/or our CODMs. Generally, the role of our senior management team and/or AMCs includes:

 

•

review and approval of division business plans and budgets;

•

oversight of land and home inventory levels; and

•

review of major personnel decisions.

Additionally, our corporate executives and corporate and national departments generally are responsible for establishing and monitoring compliance with our policies and procedures. Among other things, the corporate office also has primary responsibility for:

 

•

asset management and capital allocation;

•

accounting and internal audit functions;

•

legal matters;

•

information technology;

•

merchandising and marketing;

•

training and development;

•

human resources and payroll;

•

risk management; and

•

treasury.

Housing.  Generally, we build single family detached homes in a number of standardized series, designed to provide variety in the size and style of homes for our potential homebuyers. Within each series, we build several models, each with a different floor plan and standard and optional features. Differences in sales prices of similar models in any series depend primarily upon homebuyer demand, home prices offered by our competitors, location, optional features and design specifications. The series of homes offered at a particular location is based on perceived customer preferences, lot size, the area’s demographics and, in certain cases, the requirements of major land sellers and local municipalities.

We seek to maintain limited levels of inventories of unsold homes in our markets. Unsold homes in various stages of completion allow us to meet the immediate and near-term demands of prospective homebuyers. In order to mitigate the risk of carrying excess inventory, we have procedures and limits on the number of our unsold homes under construction and speculative homes resulting from home order cancellations. The table below shows the stage of construction for our homes completed or under construction, number of sold homes under construction and model homes (in units).

 

		December 31, 2007		December 31, 2006		December 31, 2005
Unsold Homes Under Construction - Final		515		476		258
Unsold Homes Under Construction - Frame		656		573		520
Unsold Homes Under Construction - Foundation		229		400		353
Total Unsold Homes Under Construction		1,400		1,449		1,131
Sold Homes Under Construction		1,350		2,430		5,093
Model Homes		730		757		667
Homes Completed or Under Construction		3,480		4,636		6,891

Land Acquisition and Development.  We acquire our lots with the intention of constructing and selling homes on the acquired land. Generally, we purchase finished lots using option contracts, in phases or in bulk for cash. On a limited basis, we acquire entitled land for development into finished lots when we believe that the risk is justified. In

 

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making land purchases, we consider a number of factors, including projected rates of return, estimated Home Gross Margins (defined as home sales revenue less home cost of sales as a percent of home sales revenue), sales prices of the homes to be built, population and employment growth patterns, proximity to developed areas, estimated costs of development, estimated levels of competition and demographic trends. Generally, we acquire finished lots and land for development only in areas that will have, among other things, available building permits, utilities and suitable zoning. We attempt to maintain a supply of finished lots sufficient to enable us to start homes promptly after a contract for a home sale is executed. This approach is intended to minimize our investment in inventories. See “Forward-Looking Statements” above.

In our option contracts, we generally obtain the right to purchase lots in consideration for an option deposit in the form of cash or letters of credit. In the event we elect not to purchase the lots within a specified period of time, we forfeit the option deposit. Our option contracts generally do not contain provisions requiring our specific performance. During the years ended December 31, 2007, 2006 and 2005, we wrote-off lot option deposits and pre-acquisition costs of $23.4 million, $29.7 million and $10.4 million, respectively. At December 31, 2007, we had the right to acquire 3,615 lots under option contracts, with approximately $6.3 million and $6.5 million in non-refundable cash and letters of credit option deposits at risk, respectively. At December 31, 2007, the total purchase price for lots under option and total capitalized pre-acquisition costs were $419 million and $1.4 million, respectively.

We own or have the right under option contracts to acquire undeveloped parcels of real estate that we intend to develop into finished lots. We develop our land in phases (generally fewer than 100 lots at a time) in order to limit our risk in a particular subdivision and to efficiently employ available resources. Building permits and utilities are available and zoning is suitable for the current intended use of substantially all of our undeveloped land. When developed, these lots generally will be used in our homebuilding activities. See “Forward-Looking Statements” above.

The table below shows the carrying value of land and land under development, by homebuilding segment, at December 31, 2007, 2006 and 2005 (in thousands).

 

		December 31,
		2007			2006			2005
West		$	226,621		$	980,666		$	1,108,777
Mountain			205,983			282,063			216,729
East			87,118			185,627			187,999
Other Homebuilding			34,614			126,802			164,443
Total		$	554,336		$	1,575,158		$	1,677,948

 

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The table below shows the number of lots owned and controlled under option (excluding lots in housing completed or under construction), by homebuilding segment, at December 31, 2007, 2006 and 2005 (in units).

 

		December 31,
		2007		2006		2005
Lots Owned
West		6,009		11,917		14,807
Mountain		3,855		4,664		4,603
East		671		1,171		1,462
Other Homebuilding		980		1,658		2,573
Total		11,515		19,410		23,445
Lots Controlled Under Option
West		673		1,381		7,055
Mountain		262		892		2,616
East		1,869		3,341		4,397
Other Homebuilding		811		2,483		4,751
Total		3,615		8,097		18,819