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 June 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
August 3, 1999 was 14,910,355.
THE RYLAND GROUP, INC.
FORM 10-Q
INDEX
Page Number(s)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1999
(unaudited) and December 31, 1998 1-2
Consolidated Statements of Earnings for the
three and six months ended June 30,1999 and 1998
(unaudited) 3
Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998
(unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5-8
Item 2. Management's Discussion and Analysis of Results of
Operation and Financial Condition 9-14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 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)
June 30, December 31,
1999 1998
---------- ----------
(unaudited)
ASSETS
Homebuilding:
Cash and cash equivalents $ 46,664 $ 48,100
Housing inventories:
Homes under construction 434,279 373,012
Land under development
and improved lots 297,021 268,750
---------- ----------
Total inventories 731,300 641,762
Property, plant and equipment 27,101 26,818
Purchase price in excess of
net assets acquired 22,592 23,473
Other assets 38,360 38,515
---------- ----------
866,017 778,668
---------- ----------
Financial Services:
Cash and cash equivalents 4,391 1,684
Mortgage loans held-for-sale 116,050 158,611
Mortgage-backed securities and
notes receivable 90,299 111,654
Other assets 13,546 14,734
---------- ----------
224,286 286,683
---------- ----------
Other Assets:
Collateral for bonds payable of
limited-purpose subsidiaries 75,136 92,403
Net deferred taxes 31,429 31,384
Other 31,894 26,260
---------- ----------
Total assets $1,228,762 $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)
June 30, December 31,
1999 1998
---------- ----------
(unaudited)
LIABILITIES
Homebuilding:
Accounts payable
and other liabilities $ 177,351 $ 173,370
Long-term debt 369,517 308,152
---------- ----------
546,868 481,522
---------- ----------
Financial Services:
Accounts payable
and other liabilities 13,407 16,473
Short-term notes payable 164,266 223,058
---------- ----------
177,673 239,531
---------- ----------
Other Liabilities:
Bonds payable of
limited-purpose subsidiaries 71,711 87,980
Other 57,867 60,082
---------- ----------
Total liabilities 854,119 869,115
---------- ----------
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value:
Authorized - 1,400,000 shares
Issued - 385,189 shares
(416,744 for 1998) 385 417
Common stock, $1 par value:
Authorized - 78,600,000 shares
Issued - 14,903,167 shares
(14,751,753 for 1998) 14,903 14,752
Paid-in capital 95,870 93,193
Retained earnings 262,009 236,011
Accumulated other comprehensive income 1,476 1,910
---------- ----------
Total stockholders' equity 374,643 346,283
---------- ----------
Total liabilities and
stockholders' equity $1,228,762 $1,215,398
---------- ----------
Stockholders' equity per common share $ 24.51 $ 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 Six months ended
June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenues:
Homebuilding:
Residential revenue $ 478,743 $ 395,888 $ 866,003 $ 703,888
Other revenue 10,566 13,680 14,620 17,219
---------- ---------- ---------- ----------
Total homebuiliding revenue 489,309 409,568 880,623 721,107
Financial services 11,143 13,482 21,731 35,164
Limited-purpose subsidiaries 1,953 2,801 4,090 5,885
---------- ---------- ---------- ----------
Total revenues 502,405 425,851 906,444 762,156
---------- ---------- ---------- ----------
Expenses:
Homebuilding:
Cost of sales 408,714 347,626 736,204 616,808
Selling, general
and administrative 47,303 39,725 89,709 73,669
Interest 3,448 5,429 6,057 9,989
---------- ---------- ---------- ----------
Total homebuilding expenses 459,465 392,780 831,970 700,466
Financial services:
General and administrative 5,695 8,017 11,611 17,784
Interest 2,372 4,198 4,825 8,799
---------- ---------- ---------- ----------
Total financial
services expenses 8,067 12,215 16,436 26,583
Limited-purpose
subsidiaries expenses 1,953 2,801 4,090 5,885
Corporate expenses 4,342 3,344 8,501 6,694
---------- ---------- ---------- ----------
Total expenses 473,827 411,140 860,997 739,628
Earnings before taxes 28,578 14,711 45,447 22,528
Tax expense 10,976 5,884 17,724 9,011
---------- ---------- ---------- ----------
Net earnings $ 17,602 $ 8,827 $ 27,723 $ 13,517
---------- ---------- ---------- ----------
Net earnings per common share:
Basic $ 1.17 $ 0.58 $ 1.84 $ 0.88
Diluted * $ 1.12 $ 0.57 $ 1.76 $ 0.86
Average common shares outstanding:
Basic 14,851,189 14,757,845 14,830,822 14,735,500
Diluted * 15,762,261 15,599,143 15,718,829 15,171,345
*The effect of the conversion of preferred stock was dilutive for the three and
six months ended June 30, 1999, and for the three months ended June 30, 1998.
For the six months ended June 30, 1998, the conversion of preferred stock was
not assumed due to an antidilutive effect.
See notes to consolidated financial statements.
3
The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(amounts in thousands)
Six months ended June 30,
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 27,723 $ 13,517
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 13,170 11,528
Increase in inventories (89,538) (68,535)
Net change in other assets, payables
and other liabilities (1,313) 53,696
Decrease in mortgage loans held-for-sale 42,561 65,381
Other operating activities (1,263) (457)
--------- ---------
Net cash (used for) provided
by operating activities (8,660) 75,130
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property,
plant and equipment (13,937) (10,127)
Principal reduction of mortgage collateral 18,275 20,981
Principal reduction of mortgage-backed
securities - available-for-sale 6,025 9,555
Sales of mortgage-backed securities -
available-for-sale -- 4,098
Principal reduction of mortgage-backed
securities - held-to-maturity 10,467 10,118
Other investing activities, net 2,869 6,567
--------- ---------
Net cash provided by investing activities 23,699 41,192
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash proceeds of long-term debt 61,425 100,762
Reduction of long-term debt (60) (2,299)
Decrease in short-term notes payable (58,792) (157,089)
Bond principal payments (16,911) (28,375)
Common and preferred stock dividends (1,639) (1,725)
Common stock repurchases (1,771) (6,153)
Other financing activities, net 3,980 7,056
--------- ---------
Net cash used for financing activities (13,768) (87,823)
--------- ---------
Net increase in cash
and cash equivalents 1,271 28,499
Cash and cash equivalents
at beginning of period 49,784 36,131
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 51,055 $ 64,630
--------- ---------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest
(net of capitalized interest) $ 13,770 $ 24,119
Cash paid for income taxes
(net of refunds) $ 19,224 $ 7,265
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 June 30, 1999, the consolidated statements
of earnings for the three and six months ended June 30, 1999 and 1998, and the
consolidated statements of cash flows for the six months ended June 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 June 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 six months ended June 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 11,688 8,461
Interest amortized to cost of sales (8,918) (9,199)
-------- --------
Capitalized interest as of June 30, $ 24,370 $ 22,906
======== ========
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 Six months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Pretax earnings:
Homebuilding $ 29,844 $ 16,788 $ 48,653 $ 20,641
Financial services 3,076 1,267 5,295 8,581
Corporate and other (4,342) (3,344) (8,501) (6,694)
-------- -------- -------- --------
Total $ 28,578 $ 14,711 $ 45,447 $ 22,528
======== ======== ======== ========
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
months ended June 30, 1999 and 1998 and for the six months ended June 30, 1999.
For the six months ended June 30, 1998, the conversion of preferred stock was
not assumed due to an anti-dilutive effect.
6
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Three months ended June 30,
1999 1998
---- ----
Numerator:
Net earnings $ 17,602 $ 8,827
Preferred stock dividends (213) (256)
-------- -------
Numerator for basic earnings per share -
income available to common stockholders $ 17,389 $ 8,571
Effect of dilutive securities:
Preferred stock dividends 213 256
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversion $ 17,602 $ 8,827
Denominator:
Denominator for basic earnings per share -
weighted-average shares 14,851,189 14,757,845
Effect of dilutive securities:
Stock options 363,398 272,520
Conversion of preferred shares 394,664 476,479
Other equity incentives 153,010 92,299
-------- --------
Dilutive potential common shares 911,072 841,298
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 15,762,261 15,599,143
Basic earnings per share $ 1.17 $ 0.58
Dilutive earnings per share $ 1.12 $ 0.57
Six months ended June 30,
1999 1998
---- ----
Numerator:
Net earnings $ 27,723 $ 13,517
Preferred stock dividends (436) (526)
-------- --------
Numerator for basic earnings per share -
income available to common stockholders $ 27,287 $ 12,991
Effect of dilutive securities:
Preferred stock dividends 436 0
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversion $ 27,723 $ 12,991
7
The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Denominator:
Denominator for basic earnings per share -
weighted-average shares 14,830,822 14,735,500
Effect of dilutive securities:
Stock options 340,417 334,374
Conversion of preferred shares 402,553 0
Other equity incentives 145,037 101,471
-------- --------
Dilutive potential common shares 888,007 435,845
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 15,718,829 15,171,345
Basic earnings per share $ 1.84 $ 0.88
Dilutive earnings per share $ 1.76 $ 0.86
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 $17.3 million and $8.4 million for the three months ended June 30, 1999
and 1998, respectively. For the six months ended June 30, 1999 and 1998,
comprehensive income was $27.3 million and $13.3 million, respectively.
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.
8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
CONSOLIDATED
For the second quarter of 1999, the Company reported consolidated net earnings
from operations of $17.6 million, or $1.17 per share ($1.12 per share diluted).
This compared with consolidated net earnings of $8.8 million, or $.58 per share
($.57 per share diluted) for the second quarter 1998. The increase of $8.8
million, or $.59 per share, was driven by increased homebuilding closing volume,
higher homebuilding gross profit margins, and improved performance by the
financial services segment.
Consolidated net earnings for the first six months of 1999 were $27.7 million,
or $1.84 per share ($1.76 per share diluted), compared with $13.5 million, or
$.88 per share ($.86 per share diluted), for the first six months of 1998.
The homebuilding segment reported pretax earnings of $29.8 million for the
second quarter of 1999, compared with pretax earnings of $16.8 million for the
second quarter 1998. Homebuilding results in the second quarter increased over
last year primarily due to improved gross profit margins and higher closing
volume, combined with lower interest expense. For the first six months the
homebuilding segment reported pretax earnings of $48.7 million, compared to the
$20.6 million reported for the first six months of 1998. Pretax homebuilding
margins reached 6.1 percent in the second quarter versus 4.1 percent for the
second quarter of 1998.
The financial services segment reported operating pretax earnings of $3.1
million for the second quarter of 1999, compared with $1.3 million for the same
period in 1998. The financial services segment reported pretax earnings from
operations of $5.3 million for the first six months of 1999 as compared with
$2.5 million for the same period last year. The $2.5 million excludes a $6.1
million gain on the bulk sale of servicing rights. Including that gain, pretax
earnings for the first half of 1998 were $8.6 million.
Corporate expenses represent the cost of corporate functions, which support the
business segments. Corporate expenses of $4.3 million for the second quarter of
1999, were up $1.0 million from the prior year levels primarily due to increases
in incentive compensation attributable to the higher earnings levels.
The Company's limited-purpose subsidiaries no longer issue mortgage-backed
securities and mortgage-participation securities, but they continue to hold
collateral for previously issued mortgage-backed bonds in which the Company
maintains a residual interest. Revenues, expenses, and portfolio balances
continue to decline as the mortgage collateral pledged to secure the bonds
decreases due to scheduled payments, prepayments and exercises of early
redemption provisions. Revenues have approximated expenses for the last three
years.
9
HOMEBUILDING SEGMENT
Results of operations from the homebuilding segment are summarized as follows
($ amounts in thousands, except average closing price):
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Residential $478,743 $395,888 $866,003 $703,888
Other 10,566 13,680 14,620 17,219
-------- -------- -------- --------
Total 489,309 409,568 880,623 721,107
Gross profit 80,595 61,942 144,419 104,299
Selling, general and
administrative expenses 47,303 39,725 89,709 73,669
Interest expense 3,448 5,429 6,057 9,989
-------- -------- -------- --------
Homebuilding pretax earnings $ 29,844 $ 16,788 $ 48,653 $ 20,641
======== ======== ======== ========
Operational unit data:
New orders (units) 2,941 2,470 5,921 5,101
Closings (units) 2,558 2,210 4,603 3,904
Outstanding contracts at
June 30:
Units 4,770 4,009
Dollar value $886,237 $756,044
Average closing price $187,000 $179,000 $188,000 $180,000
Homebuilding revenues increased 19 percent for the second quarter of 1999,
compared with the same period last year, due to a 16 percent increase in
closings and a 4 percent increase in average closing price. For the six months
ended June 30, 1999, homebuilding revenues increased 22 percent, compared with
the six months ended June 30, 1998.
Gross profit margins from home sales averaged 16.6 percent for the second
quarter of 1999, a 130 basis point increase from the 15.3 percent for the second
quarter of 1998. The improvement was primarily due to the Company's strategic
initiatives which focused on operational efficiencies, homebuilding designs,
land positions, management teams and increased dominance in markets the Company
serves. Gross profit margins from home sales for the first half of 1999 averaged
16.5 percent versus 14.7 percent for the same period last year.
New orders increased 19 percent from the second quarter of last year to 2,941
homes, the highest second quarter sales in the Company's history, on the same
number of active communities compared to second quarter of 1998. At 5,921, new
orders for the first half of 1999 were up 16 percent from the first half of
1998.
Outstanding contracts as of June 30, 1999 were 4,770 compared with 4,009 at June
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 June 30, 1999 was $886 million, an increase of 17
percent from June 30, 1998 and an increase of 36 percent from December 31, 1998.
10
Selling, general and administrative expenses as a percentage of revenues were
9.7 and 10.2 percent for the second quarter and first half of 1999,
respectively, which are the same levels as in the second quarter and first half
of 1998. Interest expense for the second quarter and first half of 1999 declined
by $2.0 million and $3.9 million, respectively, compared with the same periods
of 1998. The decrease is due to a lower cost of funds and an increase in land
development.
FINANCIAL SERVICES
Results of operations of the Company's financial services segment are summarized
as follows (amounts in thousands):
Three months Six months
ended June 30, ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
Retail revenues:
Interest and
net origination fees $ 1,603 $ 2,116 $ 3,150 $ 4,222
Net gains on sales of mortgages
and servicing rights 4,652 3,857 8,586 12,905
Loan servicing 591 1,831 1,015 6,547
Title/escrow 1,966 2,151 3,998 4,142
------- ------- ------- -------
Total retail revenue 8,812 9,955 16,749 27,816
Revenue from investment
operations 2,331 3,527 4,982 7,348
------- ------- ------- -------
Total revenues $11,143 $13,482 $21,731 $35,164
Expenses:
General and administrative 5,695 8,017 11,611 17,784
Interest 2,372 4,198 4,825 8,799
------- ------- ------- -------
Total expenses 8,067 12,215 16,436 26,583
Pretax earnings $ 3,076 $ 1,267 $ 5,295 $ 8,581
======= ======= ======= =======
Pretax earnings by line of business were as follows (amounts in thousands):
Three months Six months
ended June 30, ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
Retail $ 2,466 $ 289 $ 3,955 $ 6,558
Investments 610 978 1,340 2,023
------- ------- ------- -------
Total $ 3,076 $ 1,267 $ 5,295 $ 8,581
======= ======= ======= =======
11
OPERATIONAL DATA:
Three months Six months
ended June 30, ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
Retail operations:
Originations 1,863 2,201 3,415 4,034
Percent of Ryland Homes
closings 87% 66% 84% 63%
Ryland Homes capture rate 72% 67% 70% 66%
Investment operations:
Portfolio average
balance (in millions) $94.0 $140.9 $100.8 $147.4
Revenues and general and administrative expenses for the financial services
segment decreased significantly for the three and six month period ended June
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 43 percent and 45
percent for the three and six months ended June 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 a lower investment portfolio
balance.
Retail operations include residential mortgage origination, loan servicing,
title, escrow and homeowners insurance services for retail customers. Retail
operations reported pretax earnings of $2.5 million for the second quarter of
1999 compared with $.3 million for the same period last year. For the first six
months of 1999, retail operations reported $4.0 million versus $6.6 million for
the first half 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 15 percent for the three and six month
period ended June 30, 1999, compared with the same period last year primarily
due to a decrease in refinancing activity partially offset by higher closing
volume from homebuilder loan 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 $.6 million for
the second quarter, compared with $1.0 million in the prior year. For the first
six months of 1999, investment earnings were $1.3 million versus $2.0 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 June 1999, the Company believes that its key homebuilding business systems
are Year 2000 compliant. However, certain data, voice communication and
financial service's systems are in the process of being replaced or upgraded.
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 in the process
of developing a 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 June 30, 1999 and December 31, 1998.
The Company uses its unsecured revolving credit facility to finance increases in
its homebuilding inventory and working capital. This facility, which matures in
July 2000, provides for total borrowings of up to $300 million. There were $60
million in outstanding borrowings under this facility as of June 30, 1999 and no
outstanding borrowings at December 31, 1998. The Company had letters of credit
outstanding under this facility totaling $33 million at June 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 June 30, 1999, such
notes payable outstanding amounted to $1.5 million, compared with no outstanding
notes payable at December 31, 1998.
13
Housing inventories increased to $731 million as of June 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 June 30, 1999 included repurchase agreement facilities
aggregating $370 million, and a $100 million revolving credit facility used to
finance investment portfolio securities. At June 30, 1999 and December 31, 1998,
the combined borrowings of the financial services segment outstanding under all
agreements were $164 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. During 1999 the Company repurchased
approximately 77,000 shares of its outstanding common stock at a cost of
approximately $1.8 million. The Company repurchase program has been funded
through internally generated funds.
Note: Certain statements in Management's Discussion and Analysis of Results of
Operation and Financial Condition 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.
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no 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 other 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.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on April 21, 1999.
Proxies were solicited by the Company pursuant to Regulation 14 under the
Securities and Exchange Act of 1934 to elect directors of the Company for the
ensuing year.
Proxies representing 13,481,671 shares of stock eligible to vote at the meeting,
or 88 percent of the outstanding shares, were voted in connection with the
election of directors. The nine incumbent directors nominated by the Company
were elected. The following is a separate tabulation with respect to the vote
for each nominee:
Name Total Votes For Total Votes Withheld
R. Chad Dreier 13,478,229 27,854
James A. Flick, Jr. 13,478,540 27,543
Leslie M. Frecon 13,478,535 27,548
Robert J. Gaw 13,476,240 29,843
Leonard M. Harlan 13,478,540 27,543
William L. Jews 13,476,540 29,543
William G. Kagler 13,478,340 27,743
Charlotte St. Martin 13,488,540 17,543
John O. Wilson 13,478,534 27,549
Page Number
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
10.16 Employment Agreement dated as of April 21, 1999 between 19-33
R. Chad Dreier and The Ryland Group, Inc. (filed herewith)
10.17 Restated Credit Agreement dated May 21, 1999, between 34-172
Ryland Mortgage Company; Associates Mortgage Funding
Corporation; BankOne, Texas, N.A.; and certain
lenders (filed herewith)
27 Financial Data Schedule (filed herewith) 173
B. Reports on Form 8-K.
No reports on Form 8-K were filed during the second quarter of 1999.
16
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
August 13, 1999 By: /s/ Michael D. Mangan
Date --------------------------
Michael D. Mangan,
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
August 13, 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
- ----------- --------------
10.16 Employment Agreement dated as of April 21, 1999 19-33
between R. Chad Dreier and The Ryland Group, Inc.
(filed herewith)
10.17 Restated Credit Agreement dated May 21, 1999, between 34-172
Ryland Mortgage Company; Associates Mortgage Funding
Corporation; BankOne, Texas, N.A.; and certain
lenders (filed herewith)
27 Financial Data Schedule 173
(filed herewith)