UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1999
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _____________to_____________.
Commission File Number: 1-8029
THE RYLAND GROUP, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 52-0849948
(State of incorporation) (I.R.S. employer identification no.)
11000 Broken Land Parkway,
Columbia, Maryland 21044
(410) 715-7000
(Address and telephone number of principal executive offices)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of common stock of The Ryland Group, Inc., outstanding on
November 3, 1999 was 14,260,273.
THE RYLAND GROUP, INC.
FORM 10-Q
INDEX
Page Number(s)
-------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1999
(unaudited) and December 31, 1998 1-2
Consolidated Statements of Earnings for the
Three and Nine Months Ended September 30, 1999
and 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998
(unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
INDEX OF EXHIBITS 18
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
ASSETS
Homebuilding:
Cash and cash equivalents $ 51,502 $ 48,100
Housing inventories:
Homes under construction 481,049 373,012
Land under developement and improved lots 302,335 268,750
---------- ----------
Total inventories 783,384 641,762
Property, plant and equipment 26,123 26,818
Purchase price in excess of net assets acquired 22,151 23,473
Other assets 39,776 38,515
---------- ----------
922,936 778,668
---------- ----------
Financial Services:
Cash and cash equivalents 31,695 1,684
Mortgage loans held-for-sale 92,064 158,611
Mortgage-backed securities and notes receivable 99,749 111,654
Other assets 17,604 14,734
---------- ----------
241,112 286,683
---------- ----------
Other Assets:
Collateral for bonds payable of
limited-purpose subsidiaries 59,858 92,403
Net deferred taxes 31,560 31,384
Other 30,579 26,260
---------- ----------
Total assets $1,286,045 $1,215,398
---------- ----------
See notes to consolidated financial statements.
1
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
LIABILITIES
Homebuilding:
Accounts payable and other liabilities $ 197,811 $ 173,370
Long-term debt 367,949 308,152
---------- ----------
565,760 481,522
---------- ----------
Financial Services:
Accounts payable and other liabilities 12,141 16,473
Short-term notes payable 206,310 223,058
---------- ----------
218,451 239,531
---------- ----------
Other Liabilities:
Bonds payable of limited-purpose subsidiaries 56,538 87,980
Other 63,210 60,082
---------- ----------
Total liabilities 903,959 869,115
---------- ----------
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value:
Authorized - 1,400,000 shares
Issued - 364,254 shares (416,744 for 1998) 364 417
Common stock, $1 par value:
Authorized - 78,600,000 shares
Issued - 14,568,996 shares
(14,751,753 for 1998) 14,569 14,752
Paid-in capital 86,441 93,193
Retained earnings 279,442 236,011
Accumulated other comprehensive income 1,270 1,910
---------- ----------
Total stockholders' equity 382,086 346,283
---------- ----------
Total liabilities and stockholders' equity $1,286,045 $1,215,398
---------- ----------
Stockholders' equity per common share $ 25.59 $ 22.83
---------- ----------
See notes to consolidated financial statements.
2
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)
(amounts in thousands, except share data)
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenues:
Homebuilding:
Residential revenue $ 494,283 $ 440,724 $ 1,360,286 $ 1,144,612
Other revenue 1,583 6,856 16,203 24,075
------------ ------------ ------------ ------------
Total homebuiliding revenue 495,866 447,580 1,376,489 1,168,687
Financial services 9,506 12,259 31,237 47,423
Limited-purpose subsidiaries 1,803 2,407 5,893 8,292
------------ ------------ ------------ ------------
Total revenues 507,175 462,246 1,413,619 1,224,402
------------ ------------ ------------ ------------
Expenses:
Homebuilding:
Cost of sales 411,908 375,213 1,148,112 992,021
Selling, general and administrative 45,757 42,697 135,466 116,366
Interest 2,757 4,537 8,814 14,526
------------ ------------ ------------ ------------
Total homebuilding expenses 460,422 422,447 1,292,392 1,122,913
Financial Services:
General and administrative 4,832 7,041 16,443 24,825
Interest 2,551 3,661 7,376 12,460
------------ ------------ ------------ ------------
Total financial services expenses 7,383 10,702 23,819 37,285
Limited-purpose subsidiaries expenses 1,803 2,407 5,893 8,292
Corporate expenses 7,831 4,395 16,332 11,089
------------ ------------ ------------ ------------
Total expenses 477,439 439,951 1,338,436 1,179,579
Earnings before taxes and extraordinary item 29,736 22,295 75,183 44,823
Tax expense 11,597 9,772 29,321 18,783
------------ ------------ ------------ ------------
Net earnings before extraordinary item 18,139 12,523 45,862 26,040
Extraordinary item - loss on early
extinguishment of debt
(net of taxes of $2,217) -- (3,326) -- (3,326)
------------ ------------ ------------ ------------
Net earnings $ 18,139 $ 9,197 $ 45,862 $ 22,714
------------ ------------ ------------ ------------
Net earnings per common share:
Basic:
Net earnings before extraordinary item $ 1.21 $ 0.84 $ 3.05 $ 1.72
Extraordinary item -- (0.23) -- (0.23)
------------ ------------ ------------ ------------
Net earnings per common share $ 1.21 $ 0.61 $ 3.05 $ 1.49
Diluted:
Net earnings before extraordinary item $ 1.15 $ 0.81 $ 2.92 $ 1.67
Extraordinary item -- (0.22) -- (0.21)
------------ ------------ ------------ ------------
Net earnings per common share $ 1.15 $ 0.59 $ 2.92 $ 1.46
Average common shares outstanding:
Basic 14,855,799 14,667,471 14,839,146 14,715,601
Diluted 15,741,410 15,521,430 15,723,099 15,609,471
See notes to consolidated financial statements.
3
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(amounts in thousands) Nine months ended September 30,
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 45,862 $ 22,714
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 19,763 17,770
Loss on early extinguishment of debt -- 5,543
Increase in inventories (141,622) (73,112)
Net change in other assets, payables
and other liabilities 18,815 75,754
Decrease in mortgage loans held-for-sale 66,547 74,133
Other operating activities, net (2,224) 98
--------- ---------
Net cash provided by operating activities 7,141 122,900
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property, plant and equipment (18,947) (16,492)
Principal reduction of mortgage collateral 24,594 29,462
Principal (increase) reduction of mortgage-backed
securities - available-for-sale (3,154) 10,301
Sales of mortgage-backed securities -
available-for-sale -- 8,703
Principal reduction of mortgage-backed
securities - held-to-maturity 27,113 15,098
Other investing activities, net (4,743) 9,457
--------- ---------
Net cash provided by investing activities 24,863 56,529
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash proceeds of long-term debt 61,425 114,262
Reduction of long-term debt (1,628) (106,728)
Decrease in short-term notes payable (16,748) (128,253)
Bond principal payments (32,581) (45,153)
Common and preferred stock dividends (2,449) (2,556)
Common stock repurchases (8,983) (6,153)
Other financing activities, net 2,373 7,217
--------- ---------
Net cash provided by (used for)
financing activities 1,409 (167,364)
--------- ---------
Net increase in cash and cash equivalents 33,413 12,065
Cash and cash equivalents at beginning of period 49,784 36,131
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 83,197 $ 48,196
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest (net of capitalized interest) $ 20,131 $ 37,254
Cash paid for income taxes (net of refunds) $ 11,240 $ 9,346
See notes to consolidated financial statements.
4
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(amounts in thousands, except for share data, in all notes)
Note 1. Consolidated Financial Statements
The consolidated financial statements include the accounts of The Ryland Group,
Inc. and its wholly owned subsidiaries (the "Company"). Intercompany
transactions have been eliminated in consolidation.
The consolidated balance sheet as of September 30, 1999, the consolidated
statements of earnings for the three and nine months ended September 30, 1999
and 1998, and the consolidated statements of cash flows for the nine months
ended September 30, 1999 and 1998 have been prepared by the Company, without
audit. In the opinion of management, all adjustments, which include normal
recurring adjustments necessary to present fairly the financial position,
results of operations and cash flows at September 30, 1999, and for all periods
presented, have been made. The consolidated balance sheet at December 31, 1998
is taken from the audited financial statements as of that date. Certain amounts
in the consolidated statements have been reclassified to conform to the 1999
presentation.
Certain information and footnote disclosures normally included in the financial
statements have been condensed or omitted. These financial statements should be
read in conjunction with the financial statements and related notes included in
the Company's 1998 annual report to shareholders.
The results of operations for the nine months ended September 30, 1999 are not
necessarily indicative of the operating results for the full year.
Assets presented in the financial statements are net of any valuation
allowances.
The following table is a summary of capitalized interest:
1999 1998
---- ----
Capitalized interest as of January 1, $ 21,600 $ 23,644
Interest capitalized 17,870 12,972
Interest amortized to cost of sales (13,343) (15,222)
-------- --------
Capitalized interest as of September 30, $ 26,127 $ 21,394
======== ========
5
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 2. New Accounting Pronouncements
FASB 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities". In June 1999, the Financial Accounting
Standards Board delayed for one year the effective date of FAS 133 to all years
beginning after June 15, 2000. FAS 133 requires all derivatives to be recorded
on the balance sheet at fair value and establishes new accounting procedures for
hedges that will effect the timing of recognition and the manner in which
hedging gains and losses are recognized in the Company's financial statements.
The Company has not completed its evaluation of FAS 133; however, management
does not anticipate that the adoption of FAS 133 will have a material impact on
the Company's earnings or financial position. The Company currently expects to
adopt FAS 133 beginning on January 1, 2001.
Note 3. Segment Information
Operations of the Company consist of two business segments: homebuilding and
financial services. The Company's homebuilding segment constructs and sells
single-family attached and detached homes in 21 markets. The financial services
segment provides mortgage-related products and services for retail customers and
conducts investment activities. Corporate expenses represent the costs of
corporate functions, which support the business segments.
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Earnings before taxes and
extraordinary item:
Homebuilding $ 35,444 $ 25,133 $ 84,097 $ 45,774
Financial services 2,123 1,557 7,418 10,138
Corporate and other (7,831) (4,395) (16,332) (11,089)
-------- -------- -------- --------
Total $ 29,736 $ 22,295 $ 75,183 $ 44,823
======== ======== ======== ========
Note 4. Earnings Per Share Reconciliation
The following table sets forth the computation of basic and diluted earnings per
share. The assumed conversion of preferred stock was dilutive for the three and
nine months ended September 30, 1999 and 1998.
6
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- -----
Numerator:
Net earnings before extraordinary item $ 18,139 $ 12,523 $ 45,862 $ 26,040
Preferred stock dividends (201) (243) (637) (770)
------------ ------------ ------------ ------------
Numerator for basic earnings per share -
income available to common stockholders $ 17,938 $ 12,280 $ 45,225 $ 25,270
Effect of dilutive securities:
Preferred stock dividends 201 243 637 770
Numerator for diluted earnings per
share - income available to common
stockholders after assumed conversion $ 18,139 $ 12,523 $ 45,862 $ 26,040
Denominator:
Denominator for basic earnings per
share - weighted-average shares 14,855,799 14,667,471 14,839,146 14,715,601
Effect of dilutive securities:
Stock options 350,970 310,813 340,679 320,880
Conversion of preferred shares 374,721 451,868 393,275 474,916
Other equity incentives 159,920 91,278 149,999 98,074
------------ ------------ ------------ ------------
Dilutive potential common shares 885,611 853,959 883,953 893,870
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 15,741,410 15,521,430 15,723,099 15,609,471
Basic earnings per share
before extraodinary item $ 1.21 $ 0.84 $ 3.05 $ 1.72
Dilutive earnings per share
before extraordinary item $ 1.15 $ 0.81 $ 2.92 $ 1.67
Note 5. Commitments and Contingencies
Refer to Part II, Other Information, Item 1, Legal Proceedings of this document
for updated information regarding the Company's commitments and contingencies.
Note 6. Comprehensive Income
Comprehensive income consists of net income and the increase or decrease in
unrealized gains or losses on the company's available-for-sale securities and
totaled $17.9 million and $9.0 million for the three months ended September 30,
1999 and 1998, respectively. For the nine months ended September 30, 1999 and
1998, comprehensive income was $45.2 million and $22.2 million, respectively.
7
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 7. Income Taxes
In the second quarter of 1999, the Company changed its effective income tax rate
for the year ending December 31, 1999 to 39 percent and adjusted its income tax
provision for the second quarter to achieve a 39 percent effective tax rate for
the six months ended June 30, 1999. The change in the tax rate was primarily due
to a reduction in the estimate of the Company's effective state income tax rate.
Note 8. Financial Services Short-Term Notes Payable
On May 21, 1999, the Company renewed its three year bank credit facility which
provides up to $200 million for mortgage warehouse funding and will mature on
May 20, 2002.
Note 9. Long-Term Debt
On October 20, 1999, the Company increased its unsecured revolving credit
facility from $300 million to $375 million. This new facility will mature in
October 2003. At September 30, 1999, the Company had $58.5 million of borrowings
under the credit agreement.
8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
CONSOLIDATED
For the third quarter of 1999, the Company reported consolidated net earnings
from operations of $18.1 million, or $1.21 per share ($1.15 per share diluted).
This compared with consolidated net earnings before extraordinary item of $12.5
million, or $.84 per share ($.81 per share diluted) for the third quarter 1998.
The increase of $5.6 million, or $.37 per share, was driven by increased
homebuilding closing volume, higher gross margins, and improved performance by
the financial services segment.
Consolidated net earnings for the first nine months of 1999 were $45.9 million,
or $3.05 per share ($2.92 per share diluted), compared with consolidated net
earnings before extraordinary item of $26.0 million, or $1.72 per share ($1.67
per share diluted), for the first nine months of 1998.
The homebuilding segment reported pretax earnings of $35.4 million for the third
quarter of 1999, a $10.3 million increase over the $25.1 million reported for
the third quarter 1998. Homebuilding results in the third quarter increased over
last year primarily due to improvement in gross profit margins, record closings,
and lower interest expense. For the first nine months the homebuilding segment
reported pretax earnings of $84.1 million, compared to the $45.8 million
reported for the first nine months of 1998. Pretax homebuilding margins reached
7.1 percent in the third quarter of 1999 versus 5.6 percent for the third
quarter of 1998.
The financial services segment reported operating pretax earnings of $2.1
million for the third quarter of 1999 compared with $1.5 million for the same
period in 1998. The financial services segment reported pretax earnings from
operations of $7.4 million for the first nine months of 1999 compared with $4.0
million for the same period last year. The $4.0 million excludes a $6.1 million
gain on the bulk sale of servicing rights. Including that gain, pretax earnings
for the first nine months of 1998 were $10.1 million.
Corporate expenses represent the cost of corporate functions, which support the
business segments. Corporate expenses of $7.8 million for the third quarter of
1999, were up $3.4 million from the prior year levels, primarily resulting from
a $2.8 million non-recurring charge relating to the relocation of the corporate
offices to California.
The Company's limited-purpose subsidiaries no longer issue mortgage-backed
securities and mortgage-participation securities, but they continue to hold
collateral for previously issued mortgage-backed bonds in which the Company
maintains a residual interest. Revenues, expenses, and portfolio balances
continue to decline as the mortgage collateral pledged to secure the bonds
decreases due to scheduled payments, prepayments and exercises of early
redemption provisions. Revenues have approximated expenses for the last three
years.
9
HOMEBUILDING SEGMENT
Results of operations from the homebuilding segment are summarized as follows ($
amounts in thousands, except average closing price):
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Residential $ 494,283 $ 440,724 $1,360,286 $1,144,612
Other 1,583 6,856 16,203 24,075
---------- ---------- ---------- ----------
Total 495,866 447,580 1,376,489 1,168,687
Gross profit 83,958 72,367 228,377 176,666
Selling, general and
administrative expenses 45,757 42,697 135,466 116,366
Interest expense 2,757 4,537 8,814 14,526
---------- ---------- ---------- ----------
Homebuilding pretax earnings $ 35,444 $ 25,133 $ 84,097 $ 45,774
========== ========== ========== ==========
Operational unit data:
New orders (units) 2,250 2,183 8,171 7,284
Closings (units) 2,624 2,361 7,227 6,265
Outstanding contracts at
September 30:
Units 4,396 3,831
Dollar value $ 841,887 $ 738,252
Average closing price $ 188,000 $ 187,000 $ 188,000 $ 183,000
Homebuilding revenues increased 10.8 percent for the third quarter of 1999,
compared with the same period last year, due to an 11.1 percent increase in
closings (2,624 homes closed compared with 2,361 homes closed in the third
quarter of 1998). For the nine months ended September 30, 1999, homebuilding
revenues increased 17.8 percent, compared with the nine months ended September
30, 1998.
Gross profit margins from home sales averaged 17.1 percent for the third quarter
of 1999, an 80 basis point increase from the 16.3 percent for the third quarter
of 1998. The improvement was primarily due to the Company's strategic
initiatives and the strong market condition. Gross profit margins from home
sales for the first nine months of 1999 averaged 16.7 percent versus 15.3
percent for the same period last year.
New orders increased 3.1 percent from the third quarter of last year to 2,250
homes, the highest third quarter sales in the Company's history, on fewer active
communities compared to third quarter of 1998. At 8,171, new orders for the
first nine months of 1999 were up 12.2 percent from the first nine months of
1998.
Outstanding contracts as of September 30, 1999 were 4,396 compared with 3,831 at
September 30, 1998 and 3,452 at December 31, 1998. Outstanding contracts
represent the Company's backlog of sold, but not closed homes, which generally
are built and closed, subject to cancellation, over the next two quarters. The
value of outstanding contracts at September 30, 1999 was $841.9 million, an
increase of 14.0 percent from September 30, 1998 and an increase of 28.9 percent
from December 31, 1998.
10
Selling, general and administrative expenses as a percentage of revenues were
9.2 and 9.8 percent for the third quarter and first nine months of 1999,
respectively, which are slightly lower than the levels in the third quarter and
first nine months of 1998. Interest expense for the third quarter and first nine
months of 1999 decreased by $1.8 million and $5.7 million, respectively,
compared with the same periods of 1998. The decrease was due to a lower cost of
funds and an increase in capitalized interest due to land development activity.
FINANCIAL SERVICES
Results of operations of the Company's financial services segment are summarized
as follows (amounts in thousands):
Three months Nine months
ended September 30, ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
Retail revenues:
Interest and
net origination fees $ 1,546 $ 1,554 $ 4,696 $ 5,776
Net gains on sales of mortgages
and servicing rights 3,115 4,438 11,701 17,343
Loan servicing 377 702 1,392 7,249
Title/escrow 2,140 2,100 6,138 6,242
------- ------- ------- -------
Total retail revenue 7,178 8,794 23,927 36,610
Revenue from investment
operations 2,328 3,465 7,310 10,813
------- ------- ------- -------
Total revenues $ 9,506 $12,259 $31,237 $47,423
Expenses:
General and administrative 4,832 7,041 16,443 24,825
Interest 2,551 3,661 7,376 12,460
------- ------- ------- -------
Total expenses 7,383 10,702 23,819 37,285
Pretax earnings $ 2,123 $ 1,557 $ 7,418 $10,138
======= ======= ======= =======
Pretax earnings by line of business were as follows (amounts in thousands):
Three months Nine months
ended September 30, ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
Retail $ 1,401 $ 534 $ 5,356 $ 7,092
Investments 722 1,023 2,062 3,046
------- ------- ------- -------
Total $ 2,123 $ 1,557 $ 7,418 $10,138
======= ======= ======= =======
11
OPERATIONAL DATA:
Three months Nine months
ended September 30, ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
Retail operations:
Originations 1,803 2,110 5,218 6,032
Percent of Ryland Homes
closings 89% 75% 86% 67%
Ryland Homes capture rate 67% 71% 69% 68%
Investment operations:
Portfolio average
balance (in millions) $ 89 $ 135 $ 97 $ 143
Revenues and general and administrative expenses for the financial services
segment decreased for the three and nine month period ended September 30, 1999,
compared with the same period of 1998. The decreases were primarily due to the
decline in the loan servicing operations related to the sale of a majority of
the loan servicing portfolio in the first quarter of 1998, and overhead
reduction initiatives. Interest expense decreased 30 percent and 41 percent for
the three and nine months ended September 30, 1999, respectively, compared with
1998, due to a decrease in the warehouse-holding period for mortgage loans
before they were sold in the secondary market and a lower investment portfolio
balance.
Retail operations include residential mortgage origination, loan servicing, and
title, escrow and homeowners insurance services for retail customers. Retail
operations reported pretax earnings of $1.4 million for the third quarter of
1999 compared with $.5 million for the same period last year. For the first nine
months of 1999, retail operations reported $5.4 million versus $7.1 million for
the first nine months of 1998. The Company sold the majority of its loan
servicing portfolio in the first quarter of 1998 and realized a $6.1 million
pretax gain, net of expenses and liabilities related to the sale of servicing.
Mortgage origination volume decreased by 14.5 and 13.5 percent for the three and
nine-month period ended September 30, 1999, respectfully, compared with the same
period last year primarily due to a decrease in third party origiations,
partially offset by higher closing volume from homebuilder originations.
Investment operations hold certain assets, primarily mortgage-backed securities
which were obtained as a result of the exercise of redemption rights on various
mortgage-backed bonds previously owned by the Company's limited-purpose
subsidiaries. Pretax earnings from investment operations were $.7 million for
the third quarter compared with $1.0 million in the prior year. For the first
nine months of 1999, investment earnings were $2.1 million versus $3.0 million
for the same period last year. The decrease was primarily due to a lower average
portfolio balance, which resulted in a decline in interest and other income.
12
YEAR 2000
The Company's Year 2000 remediation efforts have focused on its key business
computer applications representing those systems that the Company is dependent
upon for the conduct of day-to-day business operations. Starting in 1997, the
Company initiated a comprehensive review of its business applications to
determine their Year 2000 readiness and the adequacy of these systems to meet
future business requirements. Out of this effort, a number of systems were
identified that were not Year 2000 compliant. In most cases, these systems were
already in the process of being replaced or upgraded.
As of September 1999, the Company believes that its key homebuilding and
financial services business systems are Year 2000 compliant. All necesary
replacements and upgrades have been completed. Some implementation and testing
procedures were completed in 1998 and the remainder are scheduled for completion
in 1999. The costs of achieving Year 2000 compliance incurred since 1997 could
aggregate between $1 to $2 million.
The Company is currently assessing other potential Year 2000 issues, including
non-information technology systems. The Company's relationships with vendors,
financial institutions and other third parties are being reviewed to determine
the status of their Year 2000 compliance and the impact their potential
noncompliance could have on the Company. The Company has no means of ensuring
that its third party service providers will be Year 2000 ready. In the event
that they are not ready on a timely basis, the Company will seek alternative
sources for goods and services, where practicable. The Company is concluding
their Year 2000 contingency plan.
Although the Company will continue to monitor the situation, it is possible that
the Company or the third parties with whom it has significant relationships will
not successfully complete all of their Year 2000 remediation efforts. If this
were to occur, the Company could encounter disruptions to its business, but,
currently believes it unlikely that such disruptions will have a material
adverse effect on its financial results or results of operations. The Company
could also be impacted by financial market disruption or by Year 2000 computer
system failures at government agencies on which the Company is dependent for
zoning, building permits and related matters.
FINANCIAL CONDITION AND LIQUIDITY
The Company generally provides for the cash requirements of the homebuilding and
financial services businesses from outside borrowings and internally generated
funds. The Company believes that its current sources of cash are sufficient to
finance its current requirements.
The homebuilding segment borrowings include senior notes, senior subordinated
notes, an unsecured revolving credit facility, and nonrecourse secured notes
payable. Senior and senior subordinated notes outstanding totaled $308 million
as of September 30, 1999 and December 31, 1998.
The Company uses its unsecured revolving credit facility to finance increases in
its homebuilding inventory and working capital. On October 20, 1999, the Company
increased its bank revolving credit agreement from $300 million to $375 million.
This new facility will mature in October 2003. There were $58.5 million in
outstanding borrowings under this facility as of September 30, 1999 and no
outstanding borrowings at December 31, 1998. The Company had letters of credit
outstanding under this facility totaling $35 million at September 30, 1999 and
$34 million at December 31, 1998. To finance land purchases, the Company may
also use seller-financed, non-recourse secured notes payable. At September 30,
1999, such notes payable outstanding amounted to $1.4 million compared with no
outstanding notes payable at December 31, 1998.
13
Housing inventories increased to $783 million as of September 30, 1999, from
$642 million as of December 31, 1998. The increase primarily reflects higher
sold inventory related to the significant increase in backlog. The increase in
inventory was funded with internally generated funds and borrowing under the
revolving credit facility.
The financial services segment uses cash generated from operations and borrowing
arrangements to finance its operations. The financial services segment renewed
its three-year bank credit facility, which provides up to $200 million for
mortgage warehouse funding and will mature on May 20, 2002. Other borrowing
arrangements as of September 30, 1999 included repurchase agreement facilities
aggregating $370 million, and a $100 million revolving credit facility used to
finance investment portfolio securities. At September 30, 1999 and December 31,
1998, the combined borrowings of the financial services segment outstanding
under all agreements were $206 million and $223 million, respectively.
Mortgage loans, notes receivable, and mortgage-backed securities held by the
limited-purpose subsidiaries are pledged as collateral for the issued bonds, the
terms of which provide for the retirement of all bonds from the proceeds of the
collateral. The source of cash for the bond payments is cash received from the
mortgage loans, notes receivable and mortgage-backed securities.
The Company has not guaranteed the debt of the financial services segment or
limited-purpose subsidiaries.
As of December 31, 1998, the Company had Board authorization to repurchase up to
958,400 shares of its common stock. As of November 3, 1999, pursuant to this
Board authorization, the Company repurchased approximately 765,100 shares of its
outstanding common stock at a cost of approximately $17.7 million. The Company's
repurchase program has been funded through internally generated funds.
Note: Certain statements in Management's Discussion and Analysis of Financial
Condition and results of operations may be "forward-looking statements" within
the meaning of the Private Securities Litigation Act of 1995. Forward-looking
statements are based on various factors and assumptions that include risks and
uncertainties, such as the costs of Year 2000 compliance, the completion and
profitability of sales reported, the market for homes generally and in areas
where the Company operates, the availability and cost of land, changes in
economic conditions and interest rates, the availability and increases in raw
material and labor costs, consumer confidence, government regulation, and
general competitive factors, all or each of which may cause actual results to
differ materially.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
During the nine months ended September 30, 1999, the Company's decrease in third
party originations has lead to a reduction in the amount of mortgage loans
held-for-sale to a fair value of $66 million as of September 30, 1999 and as a
result, the Company reduced the amount of outstanding forward delivery contracts
by $49 million.
There have been no other material changes in the Company's market risk from
December 31, 1998. For information regarding the Company's market risk, refer to
Form 10-K for the fiscal year ended December 31, 1998 of The Ryland Group, Inc.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to various legal proceedings generally incidental to its
businesses. Based on evaluation of these other matters and discussions with
counsel, management believes that liabilities to the Company arising from these
other matters will not have a material adverse effect on the overall financial
position of the Company.
Page Number
-----------
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
10.5 Restated Credit Agreement dated as of October 19, 1999 19-173
Between, The Ryland Group, Inc. and Certain Banks.
(filed herewith)
11 Earnings Per Share (filed herewith) 174
27 Financial Data Schedule (filed herewith) 175
B. Reports on Form 8-K.
No reports on Form 8-K were filed during the third quarter of 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE RYLAND GROUP, INC.
Registrant
November 12, 1999 By: /S/ Timothy J. Geckle
- ----------------- ---------------------
Date Timothy J. Geckle
Senior Vice President
General Counsel and Secretary
November 12, 1999 By: /S/ David L. Fristoe
- ----------------- --------------------
Date David L. Fristoe, Vice President
and Corporate Controller
(Principal Accounting Officer)
17
INDEX OF EXHIBITS
A. Exhibits Page of
Sequentially
Exhibit No. numbered pages
10.5 Restated Credit Agreement dated as of October 19, 1999, 19-173
Between The Ryland Group, Inc. and Certain Banks.
(filed herewith)
11 Earnings Per Share (filed herewith) 174
27 Financial Data Schedule (filed herewith 175
18
