UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

Amendment No. 1

(Mark One)

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

For the quarterly period ended March 31, 2006

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

M.D.C. HOLDINGS, INC.

Delaware (State or other jurisdiction of incorporation or organization)		84-0622967 (I.R.S. employer identification no.)
4350 South Monaco Street, Suite 500 Denver, Colorado (Address of principal executive offices)		80237 (Zip 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 þ No o

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

Large Accelerated Filer þ   Accelerated Filer o    Non-Accelerated Filer o

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

As of April 28, 2006, 44,932,000 shares of M.D.C. Holdings, Inc. common stock were outstanding.

 

 

EXPLANATORY NOTE: This Form 10-Q/A is being filed to provide additional segment reporting footnote disclosure related to our homebuilding operations. We have restated the accompanying Unaudited Consolidated Financial Statements to revise our segment disclosures for all periods presented by disaggregating our one homebuilding reportable segment into four reportable segments. See our revised disclosures in Note 11 to the Unaudited Consolidated Financial Statements. This amendment does not reflect events occurring after the filing of our Quarterly Report on Form 10-Q on May 10, 2006, nor does it modify or update those disclosures, except as discussed above or in Note 2 to the Unaudited Consolidated Financial Statements.

This Form 10-Q/A has all Items included in our Form 10-Q filed May 10, 2006. However, this Form 10-Q/A amends and restates only Part I, Items 1, 2 and 4 of the March 31, 2006 Quarterly Report on Form 10-Q, in each case solely to be responsive to certain disclosure comments, primarily relating to segment reporting, received from the Division of Corporation Finance of the Securities and Exchange Commission. The restatement has no impact for any periods presented on: our total assets, liabilities or stockholders’ equity included in the Consolidated Balance Sheets; net income or earnings per share amounts included in the Consolidated Statements of Income; and the Consolidated Statements of Cash Flows.

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

FOR THE QUARTER ENDED MARCH 31, 2006

INDEX

						Page
						No.
Part I.		Financial Information:
		Item 1.		Unaudited Consolidated Financial Statements:
				Consolidated Balance Sheets at March 31, 2006 and December 31, 2005		1
				Consolidated Statements of Income for the three months ended March 31, 2006 and 2005		2
				Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005		3
				Notes to Unaudited Consolidated Financial Statements		4
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk		38
		Item 4.		Controls and Procedures		38
Part II.		Other Information:
		Item 1.		Legal Proceedings		39
		Item 1A.		Risk Factors		39
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		40
		Item 3.		Defaults Upon Senior Securities		40
		Item 4.		Submission of Matters to a Vote of Security Holders		40
		Item 5.		Other Information		40
		Item 6.		Exhibits		41
		Signature				43
Certification of Chief Executive Officer pursuant to Section 302
Certification of Chief Financial Officer pursuant to Section 302
Certification of Chief Executive Officer pursuant to Section 906
Certification of Chief Financial Officer pursuant to Section 906

ITEM 1. Unaudited Consolidated Financial Statements

M.D.C. HOLDINGS, INC.

		March 31,				December 31,
		2006				2005
ASSETS
Cash and cash equivalents		$	165,739			$	214,531
Restricted cash			7,649				6,742
Home sales receivables			80,016				134,270
Mortgage loans held in inventory			190,437				237,376
Inventories, net
Housing completed or under construction			1,379,944				1,320,106
Land and land under development			1,836,901				1,677,948
Property and equipment, net			47,330				49,119
Deferred income taxes			58,959				54,319
Prepaid expenses and other assets, net			168,324				165,439
Total Assets		$	3,935,299			$	3,859,850
LIABILITIES
Accounts payable		$	190,383			$	201,747
Accrued liabilities			383,253				442,409
Income taxes payable			82,924				102,656
Related party liabilities (see Note 15)			1,600				8,100
Homebuilding line of credit			100,000				—
Mortgage line of credit			125,540				156,532
Senior notes, net			996,391				996,297
Total Liabilities			1,880,091				1,907,741
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; 44,298,000 and 44,915,000 issued and outstanding at March 31, 2006 and 44,642,000 and 44,630,000 issued and outstanding at December 31, 2005			449				447
Additional paid-in capital			741,003				722,291
Retained earnings			1,317,175				1,232,971
Unearned restricted stock			(2,231	)			(2,478	)
Accumulated other comprehensive loss			(622	)			(622	)
Less treasury stock, at cost; 13,000 and 12,000 shares, respectively, at March 31, 2006 and December 31, 2005			(566	)			(500	)
Total Stockholders’ Equity			2,055,208				1,952,109
Total Liabilities and Stockholders’ Equity		$	3,935,299			$	3,859,850

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

M.D.C. HOLDINGS, INC.

Consolidated Statements of Income

(In thousands, except per share amounts)
(Unaudited)

		Three Months
		Ended March 31,
		2006				2005
REVENUE
Home sales revenue		$	1,119,308			$	916,831
Land sales revenue			1,837				1,296
Other revenue			21,549				15,789
Total Revenue			1,142,694				933,916
COSTS AND EXPENSES
Home cost of sales			814,589				656,780
Land cost of sales			2,374				790
Marketing expense			29,035				22,318
Commission expense			32,843				25,846
General and administrative expenses			109,696				92,153
Related party expenses			1,676				100
Total Costs and Expenses			990,213				797,987
Income before income taxes			152,481				135,929
Provisions for income taxes			(57,060	)			(51,298	)
NET INCOME		$	95,421			$	84,631
EARNINGS PER SHARE
Basic		$	2.13			$	1.95
Diluted		$	2.08			$	1.86
WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic			44,820				43,458
Diluted			45,970				45,564
DIVIDENDS DECLARED PER SHARE		$	0.25			$	0.15

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

M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows

(In thousands)
(Unaudited)

		Three Months
		Ended March 31,
		2006				2005
OPERATING ACTIVITIES
Net income		$	95,421			$	84,631
Adjustments to reconcile net income to net cash used in operating activities
Amortization of deferred marketing costs			9,085				6,766
Depreciation and amortization of long-lived assets			4,543				3,228
Amortization of debt discount			94				82
Deferred income taxes			(4,640	)			(1,334	)
Stock-based compensation expense			3,947				657
Excess tax benefits from stock-based compensation			(1,192	)			—
Net changes in assets and liabilities
Home sales receivables			54,254				(14,015	)
Housing completed or under construction			(59,838	)			(46,823	)
Land and land under development			(158,953	)			(199,209	)
Prepaid expenses and other assets			(22,710	)			(14,456	)
Mortgage loans held in inventory			46,939				62,848
Accounts payable and accrued liabilities			(82,510	)			(3,430	)
Restricted cash			(907	)			(825	)
Other, net			8,024				3,547
Net cash used in operating activities			(108,443	)			(118,333	)
INVESTING ACTIVITIES
Net purchase of property and equipment			(1,638	)			(4,663	)
FINANCING ACTIVITIES
Lines of credit
Advances			354,800				—
Principal payments			(285,792	)			(60,667	)
Excess tax benefits from stock-based compensation			1,192				—
Dividend payments			(11,217	)			(6,509	)
Proceeds from exercise of stock options			2,306				8,031
Net cash provided by (used in) financing activities			61,289				(59,145	)
Net decrease in cash and cash equivalents			(48,792	)			(182,141	)
Cash and cash equivalents
Beginning of period			214,531				400,959
End of period		$	165,739			$	218,818

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

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. 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, 2006 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 Form 10-K/A for the year ended December 31, 2005.

     The Company has experienced, and expects to continue to experience, significant seasonality and quarter-to-quarter variability in homebuilding activity levels. In general, the number of homes closed increases substantially during the third and fourth quarters, compared with the first and second quarters. The Company believes that this seasonality reflects the historical tendency of homebuyers to purchase new homes in the spring with the goal of closing in the fall or winter, as well as the scheduling of construction to accommodate seasonal weather conditions. Also, the Company has experienced, and expects to continue to experience, seasonality in the financial services operations because loan originations correspond with the closing of homes in the homebuilding operations. The Consolidated Statements of Income and Cash Flows for the three months ended March 31, 2006 are not necessarily indicative of the results to be expected for the full year.

2. Reclassifications

     In conjunction with the filing of this Form 10-Q/A, the Company has reclassified the presentation of the Consolidated Balance Sheets and Consolidated Statements of Income. The Consolidated Balance Sheets and Consolidated Statements of Income previously disclosed assets, liabilities, revenue and expenses by each reportable segment. As a result of the restatement to the segment disclosures (see Note 11), assets, liabilities, revenue and expenses are now being presented on a consolidated basis. The Company’s total assets, total liabilities and net income have not been affected for any periods presented as a result of this reclassification. Certain other prior year balances have been reclassified to conform to the current year’s presentation.

M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

     The Company previously included accruals for land development costs related to closed subdivisions as a component of land and land under development and accruals for home construction costs related to closed homes as a component of housing completed or under construction. The Company has reclassified these land development and home construction accruals to a component of accrued liabilities in the Consolidated Balance Sheets. The following table summarizes the effect to the previously reported balances for land and land under development, housing completed or under construction, total assets and total liabilities (in thousands).

		March 31,				December 31,
		2006				2005
Housing completed or under construction — as previously reported		$	1,346,057			$	1,266,901
Home construction accruals			33,887				53,205
Housing completed or under construction — as reclassified		$	1,379,944			$	1,320,106
Land and land under development — as previously reported		$	1,814,612			$	1,656,198
Land development accruals			22,289				21,750
Land and land under development — as reclassified		$	1,836,901			$	1,677,948
Total assets — as previously reported		$	3,879,123			$	3,784,895
Land development accruals			22,289				21,750
Home construction accruals			33,887				53,205
Total assets — as reclassified		$	3,935,299			$	3,859,850
Total liabilities — as previously reported		$	1,823,915			$	1,832,786
Land development accruals			22,289				21,750
Home construction accruals			33,887				53,205
Total liabilities — as reclassified		$	1,880,091			$	1,907,741

3. Recent Accounting Pronouncements

     In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155 eliminates the exemption from applying SFAS 133 to interest in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instrument. SFAS 155 also allows a preparer to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement event, on an instrument-by-instrument basis, in cases in which a derivative would otherwise be bifurcated. At the adoption of SFAS 155, any difference between the total carrying amount of the individual components of any existing hybrid financial instrument and the fair value of the combined hybrid financial instrument should be recognized as a cumulative-effect adjustment to the Company’s beginning retained earnings. SFAS 155 is effective for the Company for all financial instruments acquired or issued after January 1, 2007. The Company is currently evaluating the impact, if any, that SFAS 155 will have on its financial position, results of operations or cash flows.

     In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS 156”), an amendment of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 156 requires that servicing assets and servicing liabilities be recognized at fair value, if practicable, when the Company enters into a servicing agreement and allows two alternatives, the amortization and fair value measurement methods, as subsequent measurement methods. This accounting standard is effective for all new transactions occurring as of the

M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

beginning of fiscal years beginning after September 15, 2006. The Company is currently evaluating the impact, if any, that SFAS 156 will have on its financial position, results of operations or cash flows.

4. Stock-Based Compensation

     Stock-Based Compensation Policy - Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), using the modified prospective transition method and, therefore, has not restated results for prior periods. Under this transition method, stock-based compensation expense for the first quarter of 2006 includes compensation expense for all share-based payment awards granted prior to, but not yet vested at December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Stock-based compensation expense for all share-based payment awards granted after December 31, 2005 is based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). The Company recognizes these compensation costs net of an estimated annual forfeiture rate and recognizes the compensation costs for only those awards expected to vest on a straight-line basis over the requisite service period of the award, which is currently the option vesting term of up to seven years. Prior to the adoption of SFAS 123(R), the Company recognized stock-based compensation expense in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).

     In March 2005, the SEC issued Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”), regarding the SEC’s interpretation of SFAS 123(R) and the valuation of share-based payment awards for public companies. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). Additionally, upon the adoption of SFAS 123(R), tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options are classified as financing cash flows. Prior to the adoption of SFAS 123(R), the Company presented the tax benefit of stock option exercises as operating cash flows.

     As a result of adopting SFAS 123(R), income before income taxes and net income for the three months ended March 31, 2006 were $3.0 million and $1.9 million lower, respectively, or $0.7 per basic and diluted share, than if the Company had continued to account for share-based payment awards under APB 25. The Company has recorded all stock-based compensation expense to general and administrative expense in the Consolidated Statements of Income.

     Pro Forma Disclosures Pursuant to SFAS 123 — Prior to January 1, 2006, the Company provided pro forma disclosure amounts in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“SFAS 148”), as if the fair value method defined by SFAS 123 had been applied to all share-based payment awards. As the Company has only granted stock options with exercise prices that are equal to or greater than the fair market value of the Company’s common stock on the date of grant through December 31, 2005, stock-based compensation expense was recorded only in association with the vesting of restricted stock and unrestricted stock awards prior to January 1, 2006. Any resulting compensation expense was recognized ratably over the associated service period, which was generally the vesting term. The following table illustrates the effect on net income and earnings per share if the fair value method prescribed by SFAS 123, as amended by SFAS 148, had been applied to all outstanding and unvested share-based payment awards in the three months ended March 31, 2005 (in thousands, except per share amounts).

M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

		Three Months Ended
		March 31, 2005
Net income, as reported		$	84,631
Deduct stock-based compensation expense determined using the fair value method, net of related tax effects			(2,421	)
Pro forma net income		$	82,210
Earnings per share
Basic as reported		$	1.95
Basic pro forma		$	1.89
Diluted as reported		$	1.86
Diluted pro forma		$	1.80

     Determining Fair Value of Share-Based Awards - As part of the adoption of SFAS 123(R), the Company examined its historical pattern of option exercises in an effort to determine if there were any discernable activity patterns based on certain employee and non-employee populations. Based upon this evaluation, the Company identified three distinct populations: (1) executives consisting of the Company’s Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and General Counsel (collectively, the “Executives”); (2) non-executive employees; and (3) non-employee members of the Company’s board of directors (“Directors”). The Company has used the Black-Scholes option pricing model to value stock options for each of these populations.

     The fair values for stock options granted during the three months ended March 31, 2006 and 2005 were estimated using the Black-Scholes option pricing model with the following weighted-average assumptions and weighted-average fair values. These assumptions were used for the stock options granted only to non-executive employees during the three months ended March 31, 2006 and 2005. No stock option awards were granted during these periods to Executives or Directors.

		Three Months
		Ended March 31,
		2006				2005
Weighted-average grant date fair value		$	22.94			$	33.50
Expected volatility			46.4	%			45.2	%
Risk-free interest rate			4.7	%			3.9	%
Dividend yield rate			1.2	%			0.8	%
Expected lives of options		3.8 yrs.				6.0 yrs.

     The expected volatility is based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options, adjusted for the impact of unusual fluctuations not reasonably expected to recur and other relevant factors. The risk-free interest rate assumption is determined based upon observed interest rates appropriate for the expected term of the Company’s employee stock options. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. The expected life of employee stock options represents the weighted-average period for which the stock options are expected to remain outstanding and are derived primarily from historical exercise patterns.

     SFAS 123(R) requires an annual forfeiture rate to be estimated at the time of grant for all share-based payment awards granted subsequent to January 1, 2006, and revised, if necessary, in subsequent periods if the actual forfeiture rate differs from the Company’s estimate. Additionally, in accordance with SFAS 123(R), the Company has estimated an annual forfeiture rate to be applied to all share-based

M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

payment awards which were unvested as of December 31, 2005 in determining the number of awards expected to vest in the future. The Company estimated the annual forfeiture rate to be 25% for share-based payment awards granted to non-executive employees and 0% for share-based payment awards granted to Executives and Directors, based on the terms of their awards, as well as historical forfeiture experience. In the Company’s pro forma information required under SFAS 123 for the periods prior to 2006, the Company accounted for forfeitures as they occurred.

     Stock Option Award Activity - Option activity under the Company’s option plans at March 31, 2006 and changes during the three months ended March 31, 2006 were as follows.

										Weighted-Average Remaining				Aggregate Intrinsic
		Number of				Weighted-Average				Contractual Life				Value (in
		Shares				Exercise Price				(in years)				thousands)
Outstanding at December 31, 2005			5,659,766			$	40.54
Granted			5,000			$	61.19
Exercised			(105,694	)		$	21.82
Cancelled			(55,049	)		$	55.88
Outstanding at March 31, 2006			5,504,023			$	40.76				6.66			$	129,596

     The following table summarizes information concerning stock options exercisable, as well as options vested and expected to vest for the previously discussed Executives, non-executive employees and Directors at March 31, 2006.

		Vested and Expected to Vest at March 31, 2006
										Weighted-Average				Aggregate
										Remaining				Intrinsic Value
		Number of				Weighted-Average				Contractual Life				(in
		Shares				Exercise Price				(in years)				thousands)
Executives			3,875,815			$	36.24
Non-Executive Employees			593,911			$	43.15
Directors			303,325			$	61.41
Total			4,773,051			$	38.70				6.52			$	115,802

		Exercisable at March 31, 2006
										Weighted-Average				Aggregate
										Remaining				Intrinsic Value
		Number of				Weighted-Average				Contractual Life				(in
		Shares				Exercise Price				(in years)				thousands)
Executives			1,449,699			$	19.53
Non-Executive Employees			200,311			$	21.28
Directors			303,325			$	61.41
Total			1,953,335			$	26.21				5.36			$	74,422

M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

     The following table summarizes information concerning outstanding and exercisable options at March 31, 2006.

		Options Outstanding												Options Exercisable
						Weighted-Average
						Remaining				Weighted-								Weighted-
Range of		Number				Contractual				Average				Number				Average
Exercise Price		Outstanding				Life (in years)				Exercise Price				Exercisable				Exercise Price
$7.92 - $23.77			2,265,820				4.66			$	19.96				1,570,863			$	19.32
$23.78 - $31.69			290,190				2.07			$	26.67				86,471			$	27.17
$31.70 - $47.53			946,663				7.61			$	44.33				73,501			$	41.02
$47.54 - $71.30			1,859,350				9.12			$	63.60				97,500			$	57.66
$71.31 - $79.22			142,000				9.49			$	78.70				125,000			$	78.89
Total			5,504,023				6.66			$	40.76				1,953,335			$	26.21

     The aggregate intrinsic values in the tables above represent the total pre-tax intrinsic values (the difference between the closing price of MDC’s common stock on the last trading day of the first quarter of 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2006. This amount changes based on changes in the fair market value of the Company’s common stock. The total intrinsic value of options exercised and total fair value of options vested during the three months ended March 31, 2006 was $4.4 million and $294,000 respectively.

     Total stock-based compensation expense relating to stock options granted by the Company was $3.0 million for the three months ended March 31, 2006. As of March 31, 2006, $45.0 million of total unrecognized compensation cost related to stock options is expected to be recognized as an expense by the Company in the future over a weighted-average period of 4.4 years.

     Cash received from stock option exercises was $2.3 million and the actual tax benefit realized for the tax deduction from these option exercises totaled $1.2 million for the three months ended March 31, 2006.

     Restricted and Unrestricted Stock Award Activity - Non-vested restricted stock awards at March 31, 2006 and changes during the three months ended March 31, 2006 were as follows.

		Number of				Weighted-Average Grant
		Shares				Date Fair Value
Non-vested at December 31, 2005			43,312			$	57.16
Granted			31,851			$	64.58
Vested			(17,365	)		$	60.94
Forfeited			(789	)		$	63.45
Non-vested at March 31, 2006			57,009			$	60.07

     Total stock-based compensation expense relating to restricted stock and unrestricted stock awards was $0.9 million and $0.7 million for the three months ended March 31, 2006 and 2005, respectively. As of March 31, 2006, there was $2.6 million of unrecognized stock-based compensation expense related to non-vested restricted stock awards. That cost is expected to be recognized as an expense by the Company in the future over a weighted-average period of 3.2 years.

M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

5. Equity Incentive Plans

     A summary of the Company’s equity incentive plans follows:

     Employee Equity Incentive Plans - In April 1993, the Company adopted the Employee Equity Incentive Plan (the “Employee Plan”). The Employee Plan provided for an initial authorization of 2,100,000 shares of MDC common stock for issuance thereunder, subject to adjustment for stock dividends and stock splits, plus an additional annual authorization equal to 10% of the then authorized shares of MDC common stock under the Employee Plan as of each succeeding annual anniversary of the date the Employee Plan was adopted. Under the Employee Plan, the Company could grant awards of restricted stock, incentive and non-statutory stock options and dividend equivalents, or any combination thereof, to officers and employees of the Company or any of its subsidiaries. The incentive and non-statutory stock options granted under the Employee Plan are exercisable at prices not less than the market value on the date of grant and vest over periods of up to four years and expire within six years. The Company’s ability to make further grants under the Employee Plan terminated pursuant to its terms on April 20, 2003.

     Effective March 2001, the Company adopted the M.D.C. Holdings, Inc. 2001 Equity Incentive Plan (the “Equity Incentive Plan”). The Equity Incentive Plan provided for an initial authorization of 2,000,000 shares of MDC common stock for issuance thereunder, subject to adjustment for stock dividends and stock splits, plus an additional annual authorization equal to 10% of the then authorized shares of MDC common stock under the Equity Incentive Plan as of each succeeding annual anniversary of the date the Equity Incentive Plan was adopted. In April 2003, an additional 1,000,000 shares (also subject to adjustment for stock dividends and stock splits) were authorized for issuance by vote of the Company’s shareowners. The Equity Incentive Plan provides for the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, stock bonuses and other stock grants to employees of the Company. Incentive stock options granted under the Equity Incentive Plan must have an exercise price that is at least equal to the fair market value of the common stock on the date the incentive stock option is granted. Non-qualified option awards generally vest over periods of up to seven years and expire in ten years. Restricted stock awards are granted with vesting terms of up to four years.

     Director Equity Incentive Plan - Effective March 2001, the Company adopted the M.D.C. Holdings, Inc. Stock Option Plan for Non-Employee Directors (the “Director Stock Option Plan”). Under the Director Stock Option Plan, non-employee Directors of the Company are granted non-qualified stock options. The Director Stock Option Plan provided for an initial authorization of 500,000 shares of MDC common stock for issuance thereunder, subject to adjustment for stock dividends and stock splits, plus an additional annual authorization equal to 10% of the then authorized shares of MDC common stock under the Director Stock Option Plan as of each succeeding annual anniversary of the date the Director Stock Option Plan was adopted. Pursuant to the Director Stock Option Plan, on October 1 of each year, each non-employee director of the Company is granted options to purchase 25,000 shares of MDC common stock. Each option granted under the Director Stock Option Plan vests immediately and expires ten years from the date of grant. The option exercise price must be equal to the fair market value (as defined in the plan) of MDC common stock on the date of grant of the option. In October 2003, the Director Stock Option Plan, which was approved by the shareowners on May 21, 2001, was amended to terminate on May 21, 2011.

M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

6. Balance Sheet Components

     The following tables set forth information relating to accrued liabilities (in thousands).

		March 31,				December 31,
		2006				2005
Accrued liabilities
Warranty reserves		$	85,613			$	82,238
Land development and home construction accruals			56,176				74,955
Customer and escrow deposits			50,261				56,186
Accrued compensation and related expenses			53,889				99,541
Insurance reserves			33,888				32,166
Accrued interest payable			20,496				13,027
Accrued pension liability			11,987				11,687
Other accrued liabilities			70,943				72,609
Total accrued liabilities		$	383,253			$	442,409

M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

7. Earnings Per Share

     Pursuant to SFAS No. 128, “Earnings per Share,” the computation of diluted earnings per share takes into account the effect of dilutive stock options. The basic and diluted earnings per share calculations are shown below (in thousands, except per share amounts).

		Three Months
		Ended March 31,
		2006				2005
Basic Earnings Per Share
Net income		$	95,421			$	84,631
Basic weighted-average shares outstanding			44,820				43,458
Per share amounts		$	2.13			$	1.95
Diluted Earnings Per share
Net income		$	95,421			$	84,631
Basic weighted-average shares outstanding			44,820				43,458
Stock options, net			1,150				2,106
Diluted weighted-average shares outstanding			45,970				45,564
Per share amounts		$	2.08			$	1.86

8. Interest Activity

     The Company capitalizes interest incurred on its senior notes and Homebuilding Line (as defined below) during the period of active development and through the completion of construction of its homebuilding inventories. Interest incurred on the senior notes or Homebuilding Line that is not capitalized is reported as interest expense. Interest incurred by the Mortgage Line (as defined below) is charged to interest expense. Interest activity is shown below (in thousands).

		Three Months
		Ended March 31,
		2006				2005
Total Interest Incurred
Corporate and homebuilding		$	14,837			$	10,815
Financial services and other			1,964				484
Total interest incurred		$	16,801			$	11,299
Total Interest Capitalized
Interest capitalized in homebuilding inventory, beginning of period		$	41,999			$	24,220
Interest capitalized			14,837				10,815
Previously capitalized interest included in home cost of sales			(9,614	)			(7,294	)
Interest capitalized in homebuilding inventory, end of period		$	47,222			$	27,741

M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

     Interest income and interest expense are shown below (in thousands).

		Three Months
		Ended March 31,
		2006				2005
Interest income
Financial services and other		$	2,841			$	1,024
Homebuilding			110				78
Corporate			432				988
Total			3,383				2,090
Interest expense, net of interest capitalized
Financial services and other			1,964				484
Homebuilding			—				—
Corporate			—				—
Total interest income, net		$	1,419			$	1,606

9. Warranty Reserves

     Warranty reserves are reviewed quarterly, using historical data and other relevant information, to determine the reasonableness and adequacy of both the reserve and the per unit reserve amount originally included in home cost of sales, as well as the timing of the reversal of the reserve. Warranty reserves are included in corporate accounts payable and accrued liabilities and homebuilding accrued liabilities in the Consolidated Balance Sheets, and totaled $85.6 million and $82.2 million, respectively, at March 31, 2006 and December 31, 2005, respectively. In addition, the reserves include additional qualified settlement fund warranty reserves created pursuant to litigation settled in 1996. Warranty activity for the three months ended March 31, 2006 is shown below (in thousands).

Warranty reserve balance at December 31, 2005		$	82,238
Warranty expense provision			11,496
Warranty cash payments			(8,121	)
Warranty reserve balance at March 31, 2006		$	85,613

M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

10. Insurance Reserves

     The Company records expenses and liabilities for costs to cover self-insurance and deductible amounts under the Company’s insurance policies and for any estimated outstanding losses and loss adjustment expenses associated with claims in excess of coverage limits or not covered by insurance policies. The establishment of the provisions for outstanding losses and loss adjustment expenses is based on known facts and interpretation of circumstances, which include 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.

     The following table summarizes the insurance activity for the three months ended March 31, 2006 (in thousands).

Insurance reserve balance at beginning of period		$	32,166
Insurance expense provisions			2,562
Insurance cash payments			(840	)
Insurance reserve balance at end of period		$	33,888

11. Information on Business Segments

     SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information” (“SFAS 131”), defines operating segments 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. Subsequent to the issuance of the Company’s Unaudited Consolidated Financial Statements for the three months ended March 31, 2006, management determined that the homebuilding operations should be restated by disaggregating its one homebuilding reportable segment into four reportable segments. Accordingly, the Company has restated its segment disclosure for the three months ended March 31, 2006 and 2005. The restatement has no impact for any periods presented on: the Company’s total assets, liabilities or stockholders’ equity included in the Consolidated Balance Sheets; net income or earnings per share amounts included in the Consolidated Statements of Income; and the Consolidated Statements of Cash Flows.

     The Company has identified each homebuilding subdivision as an operating segment in accordance with SFAS 131. 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 have similar: (1) economic characteristics; (2) housing products; (3) class of homebuyer; (4) regulatory environments; and (5) similar methods used to construct and sell homes. The Company’s homebuilding reportable segments are as follows:

     (1) West: (Arizona, California and Nevada markets)

     (2) Mountain: (Colorado and Utah markets)

     (3) East: (Virginia and Maryland markets)

     (4) Other Homebuilding: (Delaware Valley, Florida, Illinois and Texas markets)

     The Company’s financial services and other segment consists of the operations of the following operating segments: (1) HomeAmerican Mortgage Corporation (“HomeAmerican”); (2) American Home Insurance Agency, Inc. (“American Home Insurance”); (3) American Home Title and Escrow Company (“American Home Title”); (4) Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”);

M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

and (5) StarAmerican Insurance Ltd. (“StarAmerican”). American Home Title, Allegiant and StarAmerican previously were included in the Company’s homebuilding segment and are now included in the financial services and other segment. Because these operating segments do not individually exceed 10 percent of the consolidated revenue, net income or total assets, they have been aggregated into one other reportable segment. The Company’s corporate reportable segment incurs general and administrative expenses that are not identifiable specifically to another operating segment. Transfers between operating segments are recorded at cost.

     The following table summarizes revenue and income before income taxes for each of the Company’s six reportable segments (in thousands).

		Three Months
		Ended March 31,
		2006				2005
Revenue
West		$	687,246			$	539,190
Mountain			163,190				162,797
East			147,181				134,521
Other Homebuilding			125,887				83,236
Total Homebuilding			1,123,504				919,744
Financial Services and Other			18,758				13,184
Corporate			432				988
Consolidated		$	1,142,694			$	933,916
Income Before Income Taxes
West		$	122,063			$	120,876
Mountain			8,635				10,683
East			35,318				31,055
Other Homebuilding			4,882				(930	)
Total Homebuilding			170,898				161,684
Financial Services and Other			11,184				3,673
Corporate			(29,601	)			(29,428	)
Consolidated		$	152,481			$	135,929

M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

     The following table summarizes total assets for each of the Company’s six reportable segments (in thousands).

		March 31,				December 31,
		2006				2005
Total Assets
West		$	2,189,810			$	2,113,384
Mountain			526,728				466,362
East			384,898				368,848
Other Homebuilding			371,749				359,151
Total Homebuilding			3,473,185				3,307,745
Financial Services and Other			211,109				253,365
Corporate			251,005				298,740
Consolidated		$	3,935,299			$	3,859,850

12. Other Comprehensive Income

     Total other comprehensive income includes net income plus unrealized gains or losses on securities available for sale and minimum pension liability adjustments which have been reflected as a component of stockholders’ equity and have not affected net income and consolidated net income. The Company’s other comprehensive income was $95.4 million and $84.6 million for the three months ended March 31, 2006 and 2005, respectively.

13. Commitments and Contingencies

     The Company often is required to obtain bonds and letters of credit in support of its obligations relating to subdivision improvement, homeowner association dues and start-up expenses, warranty work, contractor license fees and earnest money deposits. At March 31, 2006, MDC had issued and outstanding performance bonds and letters of credit totaling $421.5 million and $94.1 million, respectively, including $29.0 million in letters of credit issued by HomeAmerican, a wholly owned subsidiary of MDC. In the event any such bonds or letters of credit issued by third parties are called, MDC would be obligated to reimburse the issuer of the bond or letter of credit.

14. 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 operations. On March 22, 2006, the Company amended and restated the Homebuilding Line, increasing the aggregate commitment amount to $1.250 billion, and extending the maturity date to March 21, 2011. The facility’s provision for letters of credit is available in the aggregate amount of $500 million. The amended and restated facility permits an increase in the maximum commitment amount to $1.750 billion upon the Company’s request, subject to receipt of additional commitments from existing or additional participant lenders. Interest rates on outstanding borrowings are determined by reference to LIBOR, with a spread from LIBOR, which is determined based on changes in the Company’s credit ratings and leverage ratio, or to an alternate base rate. At March 31, 2006, the Company had $100.0 million of borrowings and $65.1 million in letters of credit issued under the Homebuilding Line.

     Mortgage Lending - The Company’s mortgage line of credit (“Mortgage Line”) has a borrowing limit of $225 million with terms that allow for increases of up to $175 million in the borrowing limit to a maximum of $400 million, subject to concurrence by the participating banks. The terms of the Mortgage

M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

Line are set forth in the Third Amended and Restated Warehousing Credit Agreement dated as of October 31, 2003, as amended. Available borrowings under the Mortgage Line are collateralized by mortgage loans and mortgage-backed securities and are limited to the value of eligible collateral, as defined. At March 31, 2006, $125.5 million was borrowed and an additional $15.2 million was collateralized and available to be borrowed. The Mortgage Line is cancelable upon 120 days notice.

     General - The agreements for the Company’s bank lines of credit and the indentures for the Company’s senior notes require compliance with certain representations, warranties and covenants. The Company believes that it is in compliance with these requirements, and the Company is not aware of any covenant violations. The agreements containing these representations, warranties and covenants for the bank lines of credit and the indentures for the Company’s senior notes are on file with the SEC and are listed in the Exhibit Table in Part IV of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 and in Part II, Item 6, of this Form 10-Q/A.

     The Company’s debt obligations at March 31, 2006 and December 31, 2005 are as follows (in thousands):

		March 31,				December 31,
		2006				2005
7% Senior Notes due 2012		$	148,855			$	148,821
51/2% Senior Notes due 2013			349,297				349,276
53/8% Medium Term Senior Notes due 2014			248,564				248,532
53/8% Medium Term Senior Notes due 2015			249,675				249,668
Total Senior Notes			996,391				996,297
Homebuilding Line			100,000				—
Total Corporate and Homebuilding Debt			1,096,391				996,297
Mortgage Line			125,540				156,532
Total Debt		$	1,221,931			$	1,152,829

15. Related Party Transactions

     During the first quarter of 2006, the Company accrued $1.6 million of contributions to be made to the MDC/Richmond American Homes Foundation (the “Foundation”), a Delaware non-profit corporation that was incorporated on September 30, 1999.

16. Income Taxes

     The Company’s overall effective income tax rates were 37.4% and 37.7% for the three months ended March 31, 2006 and 2005, respectively.

17. Subsequent Events

     On April 27, 2006, the Company amended the Certificate of Incorporation, as authorized by the Company’s shareowners on April 24, 2006, thereby increasing the number of authorized shares of the Company’s common stock from 100 million shares to 250 million shares.

M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

18.

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.
	•		RAH of Texas, LP
	•		RAH Texas Holdings, LLC
	•		Richmond American Construction, Inc.
	•		Richmond American Homes of Arizona, Inc.
	•		Richmond American Homes of California, 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 Texas, 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”) include:

	•		American Home Insurance
	•		American Home Title
	•		HomeAmerican
	•		Lion Insurance Company
	•		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.

M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Combining Balance Sheet
March 31, 2006
(In thousands)

										Non-
						Guarantor				Guarantor				Eliminating				Consolidated
		MDC				Subsidiaries				Subsidiaries				Entries				MDC
ASSETS
Cash and cash equivalents		$	142,651			$	7,496			$	15,592			$	—			$	165,739
Restricted cash			—				7,649				—				—				7,649
Home sales receivables			—				94,789				1,383				(16,156	)			80,016
Mortgage loans held in inventory			—				—				190,437				—				190,437
Inventories, net
Housing completed or under construction			—				1,379,944				—				—				1,379,944
Land and land under development			—				1,836,901				—				—				1,836,901
Investment in and advances to parent and subsidiaries			358,376				599				(13,027	)			(345,948	)			—
Other assets			108,326				134,089				58,198				(26,000	)			274,613
Total Assets		$	609,353			$	3,461,467			$	252,583			$	(388,104	)		$	3,935,299
LIABILITIES
Corporate
Accounts payable and related party liabilities		$	29,099			$	171,993			$	17,940			$	(27,049	)		$	191,983
Accrued liabilities			88,609				258,473				51,276				(15,105	)			383,253
Advances and notes payable — parent and subsidiaries			(2,693,089	)			2,676,938				16,151				—				—
Income taxes payable			33,135				45,216				4,573				—				82,924
Homebuilding line of credit			100,000				—				—				—				100,000
Mortgage line of credit			—				—				125,540				—				125,540
Senior notes, net			996,391				—				—				—				996,391
Total Liabilities			(1,445,855	)			3,152,620				215,480				(42,154	)			1,880,091
STOCKHOLDERS’ EQUITY			2,055,208				308,847				37,103				(345,950	)			2,055,208
Total Liabilities and Stockholders’ Equity		$	609,353			$	3,461,467			$	252,583			$	(388,104	)		$	3,935,299

M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Combining Balance Sheet
December 31, 2005
(In thousands)

										Non-
						Guarantor				Guarantor				Eliminating				Consolidated
		MDC				Subsidiaries				Subsidiaries				Entries				MDC
ASSETS
Cash and cash equivalents		$	196,032			$	5,527			$	12,972			$	—			$	214,531
Restricted cash			—				6,742				—				—				6,742
Home sales receivables			—				160,028				1,462				(27,220	)			134,270
Mortgage loans held in inventory			—				—				237,376				—				237,376
Inventories, net
Housing completed or under construction			—				1,320,106				—				—				1,320,106
Land and land under development			—				1,677,948				—				—				1,677,948
Investment in and advances to parent and subsidiaries			728,608				1,248				(4,687	)			(725,169	)			—
Other assets			102,768				124,939				67,170				(26,000	)			268,877
Total Assets		$	1,027,408			$	3,296,538			$	314,293			$	(778,389	)		$	3,859,850
LIABILITIES
Corporate
Accounts payable and related party liabilities		$	37,304			$	182,735			$	16,857			$	(27,049	)		$	209,847
Accrued liabilities			115,388				282,454				70,737				(26,170	)			442,409
Advances and notes payable — parent and subsidiaries			(1,892,320	)			1,876,894				15,426				—				—
Income taxes payable			(181,370	)			275,602				8,424				—				102,656
Homebuilding line of credit			—				—				—				—				—
Mortgage line of credit			—				—				156,532				—				156,532
Senior notes, net			996,297				—				—				—				996,297
Total Liabilities			(924,701	)			2,617,685				267,976				(53,219	)			1,907,741
STOCKHOLDERS’ EQUITY			1,952,109				678,853				46,317				(725,170	)			1,952,109
Total Liabilities and Stockholders’ Equity		$	1,027,408			$	3,296,538			$	314,293			$	(778,389	)		$	3,859,850

M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Combining Statements of Income
(In thousands)

Three Months Ended March 31, 2006

										Non-
						Guarantor				Guarantor				Eliminating				Consolidated
		MDC				Subsidiaries				Subsidiaries				Entries				MDC
REVENUE
Home sales revenue		$	—			$	1,119,308			$	—			$	—			$	1,119,308
Other revenue			422				4,428				18,910				(374	)			23,386
Equity in earnings of subsidiaries			82,798				—				—				(82,798	)			—
Total Revenue			83,220				1,123,736				18,910				(83,172	)			1,142,694
COSTS AND EXPENSES
Home cost of sales			—				816,986				(2,397	)			—				814,589
Marketing and commission expenses			(199	)			62,077				—				—				61,878
General and administrative expenses			28,357				71,679				9,660				—				109,696
Other expenses			1,676				2,374												4,050
Corporate and homebuilding interest			(49,519	)			49,519				—				—				—
Total Costs and Expenses			(19,685	)			1,002,635				7,263				—				990,213
Income before income taxes			102,905				121,101				11,647				(83,172	)			152,481
Provision for income taxes			(7,484	)			(45,216	)			(4,360	)			—				(57,060	)
NET INCOME		$	95,421			$	75,885			$	7,287			$	(83,172	)		$	95,421

Three Months Ended March 31, 2005

										Non-
						Guarantor				Guarantor				Eliminating				Consolidated
		MDC				Subsidiaries				Subsidiaries				Entries				MDC
REVENUE
Home sales revenue		$	—			$	916,831			$	—			$	—			$	916,831
Other revenue			978				3,062				13,269				(224	)			17,085
Equity in earnings of subsidiaries			83,073				—				—				(83,073	)			—
Total Revenue			84,051				919,893				13,269				(83,297	)			933,916
COSTS AND EXPENSES
Home cost of sales			—				657,015				(235	)			—				656,780
Marketing and commission expenses			179				47,985				—				—				48,164
General and administrative expenses			30,316				52,067				9,770				—				92,153
Other expenses			100				790												890
Corporate and homebuilding interest			(32,987	)			32,987				—				—				—
Total Costs and Expenses			(2,392	)			790,844				9,535				—				797,987
Income before income taxes			86,443				129,049				3,734				(83,297	)			135,929
Provision for income taxes			(1,812	)			(48,053	)			(1,433	)			—				(51,298	)
NET INCOME		$	84,631			$	80,996			$	2,301			$	(83,297	)		$	84,631