10-Q 1 a66715e10-q.txt FORM 10-Q FOR PERIOD ENDING SEPTEMBER 30, 2000 1 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, 2000 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 Number) 24025 Park Sorrento, Suite 400 Calabasas, California 91302 818.223.7500 (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. [X] Yes [ ] 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 7, 2000, was 13,235,063. 2 THE RYLAND GROUP, INC. FORM 10-Q INDEX
PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets at September 30, 2000, (unaudited) and December 31, 1999 1-2 Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, 2000 and 1999 (unaudited) 3 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 (unaudited) 4 Notes to Consolidated Financial Statements (unaudited) 5-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15 INDEX OF EXHIBITS 16
3 PART I. FINANCIAL INFORMATION Item I. Financial Statements THE RYLAND GROUP, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (amounts in thousands, except share data)
SEPTEMBER 30, December 31, 2000 1999 ---------- ---------- (UNAUDITED) ASSETS HOMEBUILDING Cash and cash equivalents $ 57,189 $ 36,297 Housing inventories: Homes under construction 553,719 432,735 Land under development and improved lots 404,919 389,946 ---------- ---------- Total inventories 958,638 822,681 Property, plant and equipment 33,467 26,619 Purchase price in excess of net assets acquired 20,388 21,710 Other assets 58,960 48,064 ---------- ---------- 1,128,642 955,371 ---------- ---------- FINANCIAL SERVICES Cash and cash equivalents 32,210 33,629 Mortgage loans, held-for-sale 59,677 40,520 Mortgage-backed securities and notes receivable 87,035 99,249 Other assets 7,340 16,326 ---------- ---------- 186,262 189,724 ---------- ---------- OTHER ASSETS Collateral for bonds payable of limited-purpose subsidiaries 24,140 39,633 Net deferred taxes 30,001 32,134 Other 39,058 31,461 ---------- ---------- TOTAL ASSETS $1,408,103 $1,248,323 ---------- ----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 1 4 THE RYLAND GROUP, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (amounts in thousands, except share data)
SEPTEMBER 30, December 31, 2000 1999 ---------- ---------- (UNAUDITED) LIABILITIES HOMEBUILDING Accounts payable and other liabilities $ 227,430 $ 208,133 Long-term debt 508,341 378,000 ---------- ---------- 735,771 586,133 ---------- ---------- FINANCIAL SERVICES Accounts payable and other liabilities 10,353 7,211 Short-term notes payable 153,606 157,458 ---------- ---------- 163,959 164,669 ---------- ---------- OTHER LIABILITIES Bonds payable of limited-purpose subsidiaries 22,469 37,339 Other 64,872 73,645 ---------- ---------- TOTAL LIABILITIES 987,071 861,786 ---------- ---------- STOCKHOLDERS' EQUITY Convertible preferred stock, $1 par value: Authorized - 1,400,000 shares Issued - 308,139 shares (350,137 for 1999) 308 350 Common stock, $1 par value: Authorized - 78,600,000 shares Issued - 13,115,899 shares (13,850,819 for 1999) 13,116 13,851 Paid-in capital 58,909 71,730 Retained earnings 348,158 299,547 Accumulated other comprehensive income 541 1,059 ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 421,032 386,537 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,408,103 $1,248,323 ---------- ---------- STOCKHOLDERS' EQUITY PER COMMON SHARE $ 31.36 $ 27.22 ---------- ----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 2 5 THE RYLAND GROUP, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (amounts in thousands, except share data)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 2000 1999 ------------ -------------- ------------- ------------- REVENUES Homebuilding: Residential revenue $ 574,335 $ 494,283 $ 1,496,174 $ 1,360,286 Other revenue 42,124 1,583 54,229 16,203 ----------- ----------- ----------- ----------- Total homebuilding revenue 616,459 495,866 1,550,403 1,376,489 Financial services 11,868 11,309 31,686 37,130 ----------- ----------- ----------- ----------- Total revenues 628,327 507,175 1,582,089 1,413,619 ----------- ----------- ----------- ----------- EXPENSES Homebuilding: Cost of sales 516,101 411,908 1,297,936 1,148,112 Selling, general and administrative 55,145 45,757 147,927 135,466 Interest 4,834 2,757 11,579 8,814 ----------- ----------- ----------- ----------- Total homebuilding expenses 576,080 460,422 1,457,442 1,292,392 Financial services: General and administrative 4,302 4,843 15,323 16,480 Interest 2,991 4,343 8,804 13,232 ----------- ----------- ----------- ----------- Total financial services expenses 7,293 9,186 24,127 29,712 Corporate expenses 7,513 7,831 17,392 16,332 ----------- ----------- ----------- ----------- Total expenses 590,886 477,439 1,498,961 1,338,436 EARNINGS BEFORE TAXES 37,441 29,736 83,128 75,183 Tax expense 14,602 11,597 32,420 29,321 ----------- ----------- ----------- ----------- NET EARNINGS $ 22,839 $ 18,139 $ 50,708 $ 45,862 =========== =========== =========== =========== NET EARNINGS PER COMMON SHARE Basic $ 1.74 $ 1.21 $ 3.81 $ 3.05 Diluted $ 1.67 $ 1.15 $ 3.68 $ 2.92 AVERAGE COMMON SHARES OUTSTANDING Basic 12,992,492 14,855,799 13,156,245 14,839,146 Diluted 13,691,616 15,741,410 13,785,868 15,723,099
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3 6 THE RYLAND GROUP, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (amounts in thousands)
NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 50,708 $ 45,862 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 20,036 19,763 Increase in inventories (135,957) (141,622) Net change in other assets, payables and other liabilities 11,907 18,815 (Increase) decrease in mortgage loans held-for-sale (19,157) 66,547 Other operating activities, net 2,339 (2,224) --------- --------- Net cash (used for) provided by operating activities (70,124) 7,141 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Net additions to property, plant and equipment (24,964) (18,947) Net principal reduction of mortgage collateral 11,948 24,594 Net principal reduction (increase) of mortgage-backed securities, available-for-sale 7,958 (3,154) Principal reduction of mortgage-backed securities, held-to-maturity 7,414 27,113 Other investing activities, net 1,236 (4,743) --------- --------- Net cash provided by investing activities 3,592 24,863 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Cash proceeds of long-term debt 150,000 61,425 Reduction of long-term debt (28,000) (1,628) Decrease in short-term notes payable (3,852) (16,748) Bond principal payments (15,127) (32,581) Common and preferred stock dividends (2,161) (2,449) Common stock repurchases (18,021) (8,983) Other financing activities, net 3,166 2,373 --------- --------- Net cash provided by financing activities 86,005 1,409 --------- --------- Net increase in cash and cash equivalents 19,473 33,413 Cash and cash equivalents at beginning of period 69,926 49,784 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 89,399 $ 83,197 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest (net of capitalized interest) $ 17,997 $ 20,131 Cash paid for income taxes (net of refunds) $ 32,263 $ 30,464
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4 7 THE RYLAND GROUP, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (amounts in thousands, except share data) Note 1. Consolidated Financial Statements The consolidated financial statements include the accounts of The Ryland Group and its wholly owned subsidiaries ("the Company"). Intercompany transactions have been eliminated in consolidation. The consolidated balance sheet as of September 30, 2000, the consolidated statements of earnings for the three months and nine months ended September 30, 2000 and 1999, and the consolidated statements of cash flows for the nine months ended September 30, 2000 and 1999, 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 Company's financial position, results of operations and cash flows at September 30, 2000, and for all periods presented, have been made. The consolidated balance sheet at December 31, 1999, is taken from the audited financial statements as of that date. Certain amounts in the consolidated statements have been reclassified to conform to the 2000 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 1999 annual report to its shareholders. The results of operations for the nine months ended September 30, 2000, 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:
2000 1999 -------- -------- Capitalized interest as of January 1 $ 26,970 $ 21,600 Interest capitalized 25,972 17,870 Interest amortized to cost of sales (19,037) (13,343) -------- -------- Capitalized interest as of September 30 $ 33,905 $ 26,127 ======== ========
Note 2. New Accounting Pronouncements FAS 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," as amended by FAS 137 and FAS 138, which is required to be adopted in fiscal 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 affect the timing of recognition and the manner in which hedging gains and losses are recognized in the Company's financial statements. The Company is currently in the process of completing its evaluation of the impact of FAS 133 on its earnings and financial position and does not expect that impact to be material. The Company will adopt FAS 133 on January 1, 2001. 5 8 THE RYLAND GROUP, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (amounts in thousands, except share data) Note 3. Segment Information Operations of the Company consist of two business segments: homebuilding and financial services. The Company's homebuilding segment specializes in the sale and construction of single-family attached and detached housing in 19 markets. The financial services segment provides mortgage-related products and services for Ryland Homes' customers and also conducts investment activities. Corporate expenses represent the costs of corporate functions which support the business segments.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 2000 1999 -------- -------- -------- -------- Earnings before taxes Homebuilding $ 40,379 $ 35,444 $ 92,961 $ 84,097 Financial services 4,575 2,123 7,559 7,418 Corporate and other (7,513) (7,831) (17,392) (16,332) -------- -------- -------- -------- Total $ 37,441 $ 29,736 $ 83,128 $ 75,183 ======== ======== ======== ========
Note 4. Earnings Per Share Reconciliation The following table sets forth the computation of basic and diluted earnings per share.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Numerator Net earnings $ 22,839 $ 18,139 $ 50,708 $ 45,862 Preferred stock dividends (170) (201) (531) (637) ------------ ------------ ------------ ------------ Numerator for basic earnings per share, available to common stockholders 22,669 17,938 50,177 45,225 Effect of dilutive securities, preferred stock dividends 170 201 531 637 ------------ ------------ ------------ ------------ Numerator for diluted earnings per share, available to common stockholders $ 22,839 $ 18,139 $ 50,708 $ 45,862 ============ ============ ============ ============ Denominator Denominator for basic earnings per share, weighted-average shares 12,992,492 14,855,799 13,156,245 14,839,146 Effect of dilutive securities, Stock options 305,741 350,970 223,598 340,679 Equity incentive plan 79,891 374,721 78,384 393,275 Conversion of preferred shares 313,492 159,920 327,641 149,999 ------------ ------------ ------------ ------------ Dilutive potential of common shares 699,124 885,611 629,623 883,953 Denominator for diluted earnings per share, adjusted weighted-average shares and assumed conversions 13,691,616 15,741,410 13,785,868 15,723,099 BASIC EARNINGS PER SHARE $ 1.74 $ 1.21 $ 3.81 $ 3.05 DILUTED EARNINGS PER SHARE $ 1.67 $ 1.15 $ 3.68 $ 2.92
6 9 THE RYLAND GROUP, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (amounts in thousands, except share data) 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, which consists of net income and the increase or decrease in unrealized gains or losses on the Company's available-for-sale securities, totaled $22.8 million and $17.9 million for the three months ended September 30, 2000 and 1999, respectively. For the nine months ended September 30, 2000 and 1999, comprehensive income was $50.2 million and $45.2 million, respectively. Note 7. Financial Services Short-term Notes Payable In September 2000, the Company amended a revolving credit facility used to finance investment securities in the financial services segment. The facility, previously $100 million, was renewed at $45 million. The agreement extends through March 2001, bears interest at market rates, and is collateralized by investment portfolio securities. Borrowings outstanding under this facility were $28.8 million and $19.6 million at September 30, 2000, and December 31, 1999, respectively. Note 8. Long-term Debt In August 2000, the Company issued $150 million of 9.75 percent senior notes, which mature on September 1, 2010. The net proceeds from this issuance were used to repay amounts outstanding under the revolving credit facility. In July 2000, the Company increased its unsecured revolving credit facility from $375 million to $400 million. This facility matures in October 2003. The Company had borrowings under this facility of $50 million and $70 million at September 30, 2000, and December 31, 1999, respectively. Note 9. Financial Services Long-term Debt In August 2000, the financial services segment decreased its warehouse credit facility from $200 million to $150 million. This facility matures in May 2002. The Company had borrowings under this facility of $67.4 million and $60.2 million at September 30, 2000, and December 31, 1999, respectively. 7 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS CONSOLIDATED For the third quarter of 2000, the Company reported consolidated net earnings from operations of $22.8 million, or $1.74 per share ($1.67 per share diluted). This compared with consolidated net earnings from operations of $18.1 million, or $1.21 per share ($1.15 per share diluted), for the third quarter of 1999. Consolidated net earnings for the nine months ended September 30, 2000, were $50.7 million, or $3.81 per share ($3.68 per share diluted), compared to $45.9 million, or $3.05 per share ($2.92 per share diluted), for the same period in the prior year. The homebuilding segment reported pretax earnings of $40.4 million for the third quarter of 2000, a $5 million increase over the $35.4 million reported for the third quarter of 1999. The increase over the prior year was primarily attributable to higher closing volume and homebuilding revenues. For the nine months ended September 30, 2000, the homebuilding segment reported pretax earnings of $93 million, compared with $84.1 million for the same period in the prior year. Pretax homebuilding margins were 6.6 percent and 6 percent for the three and nine months ended September 30, 2000, compared to 7.1 percent and 6.1 percent for the corresponding periods in 1999. The financial services segment reported pretax earnings from operations of $4.6 million and $7.6 million for the three and nine months ended September 30, 2000, compared to $2.1 million and $7.4 million for the same periods in 1999. The increase from the prior year was primarily attributable to increased gains from the sale of mortgages and mortgage servicing rights; a 6.5 percent increase in loan originations; operating cost reductions; and increased earnings from title and escrow operations. Corporate expenses represent the cost of corporate functions which support the business segments. Corporate expenses were $7.5 million for the third quarter of 2000, compared to $7.8 million for the third quarter of 1999, and $17.4 million for the first nine months of 2000, versus $16.3 million for the first nine months of 1999. Corporate expenses included non-recurring charges associated with the relocation of the Company's corporate headquarters of $.2 million and $1.3 million for the three-month and nine-month periods ended September 30, 2000, respectively, compared with $2.8 million for the same periods in 1999. No further charges associated with the relocation of the Company's headquarters are anticipated. Excluding these charges, corporate expenses increased by $2.3 million and $2.6 million for the three-month and nine-month periods ended September 30, 2000, respectively. The increases are primarily related to increased incentive compensation expense. Although the Company's limited-purpose subsidiaries no longer issue mortgage-backed securities and mortgage-participation securities, they continue to hold collateral for previously issued mortgage-backed bonds in which the Company maintains a residual interest. Revenues, expenses, and portfolio balances continue to decline as the mortgage collateral pledged to secure the bonds decreases due to scheduled payments, prepayments, and exercises of early redemption provisions. Revenues have approximated expenses for the last three years. 8 11 HOMEBUILDING SEGMENT Results of operations from the homebuilding segment are summarized as follows: ($ amounts in thousands, except average closing price)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Revenues Residential $ 574,335 $ 494,283 $1,496,174 $1,360,286 Other 42,124 1,583 54,229 16,203 ---------- ---------- ---------- ---------- Total 616,459 495,866 1,550,403 1,376,489 Gross profit 100,358 83,958 252,467 228,377 Selling, general and administrative expenses 55,145 45,757 147,927 135,466 Interest expense 4,834 2,757 11,579 8,814 ---------- ---------- ---------- ---------- Homebuilding pretax earnings $ 40,379 $ 35,444 $ 92,961 $ 84,097 ========== ========== ========== ========== Operational unit data New orders (units) 2,912 2,250 9,318 8,171 Closings (units) 3,017 2,624 7,858 7,227 Outstanding contracts at September 30, Units 5,127 4,396 Dollar value $1,052,024 $ 841,887 Average closing price $ 190,000 $ 188,000 $ 190,000 $ 188,000
Homebuilding revenues increased 24.3 percent for the third quarter of 2000, compared with the same period last year, due to a 15 percent increase in closings (3,017 homes closed, compared with 2,624 homes closed in the third quarter of 1999) and a 1.1 percent increase in average closing price. For the nine months ended September 30, 2000, homebuilding revenues were $1,550.4 million, an increase of $173.9 million, or 12.6 percent, compared to the nine months ended September 30, 1999. Gross profit margins from home sales averaged 17.6 percent for the third quarter of 2000, an increase from 17.1 percent for the third quarter of 1999. Gross profit margins from home sales averaged 17.1 percent for the first nine months of 2000, versus 16.7 percent for the same period in 1999. New orders for the third quarter of 2000 increased 29.4 percent from the third quarter of the prior year to 2,912 homes. Sales per community were up 21.7 percent from the third quarter of 1999, with the Company operating in 16 additional active communities. At 9,318 homes sold, new orders were up 14 percent for the first nine months of 2000, as compared to the first nine months of 1999. Outstanding contracts as of September 30, 2000, were 5,127, versus 4,396 at September 30, 1999, and 3,667 at December 31, 1999. Outstanding contracts represent the Company's backlog of homes sold but not yet closed, which are generally built and closed, subject to cancellation, over the subsequent two quarters. The value of outstanding contracts at September 30, 2000, was $1.1 billion, an increase of 25 percent from September 30, 1999, and an increase of 52.4 percent from December 31, 1999. 9 12 Selling, general and administrative expenses, as a percentage of revenue, were 8.9 percent and 9.5 percent for the three and nine months ended September 30, 2000, respectively, compared to 9.2 percent and 9.8 percent for the same periods in the prior year. Compared with the third quarter of 1999, interest expense increased $2.1 million to $4.8 million in the third quarter of 2000 due to increased activity in the Company's homebuilding operations and higher interest rates. For the first nine months of 2000, interest expense was $11.6 million, an increase of $2.8 million from the prior year. FINANCIAL SERVICES Results of operations of the Company's financial services segment are summarized as follows: (amounts in thousands)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 2000 1999 ------- ------- ------- ------- Retail revenues Interest and net origination fees $ 1,067 $ 1,546 $ 2,664 $ 4,696 Net gains on sales of mortgages and servicing rights 5,216 3,115 12,658 11,701 Loan servicing 80 377 360 1,392 Title/escrow 2,473 2,140 6,771 6,138 ------- ------- ------- ------- Total retail revenue 8,836 7,178 22,453 23,927 Revenue from investment operations and limited-purpose subsidiaries 3,032 4,131 9,233 13,203 ------- ------- ------- ------- Total revenues $11,868 $11,309 $31,686 $37,130 Expenses General and administrative 4,302 4,843 15,323 16,480 Interest 2,991 4,343 8,804 13,232 ------- ------- ------- ------- Total expenses 7,293 9,186 24,127 29,712 ------- ------- ------- ------- Pretax earnings $ 4,575 $ 2,123 $ 7,559 $ 7,418 ======= ======= ======= =======
Pretax earnings by line of business were as follows: (amounts in thousands)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 2000 1999 ------ ------ ------ ------ Retail $4,010 $1,401 $5,998 $5,356 Investments 565 722 1,561 2,062 ------ ------ ------ ------ Total $4,575 $2,123 $7,559 $7,418 ====== ====== ====== ======
10 13 OPERATIONAL DATA
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 2000 1999 ---- ---- ---- ---- Retail operations: Originations 1,920 1,803 5,001 5,218 Percent of Ryland Homes closings 97% 89% 96% 86% Ryland Homes capture rate 71% 67% 69% 69% Investment operations: Portfolio average balance (in millions) $89.2 $89.1 $95.5 $96.8
Revenues for the financial services segment increased $.6 million, or 4.9 percent, for the quarter ended September 30, 2000. For the first nine months of 2000, revenues for the financial services segment were $31.7 million, down $5.4 million from the same period in the prior year. Revenues from retail operations increased by $1.6 million to $8.8 million for the three months ended September 30, 2000, compared with the same period in 1999. For the nine months ended September 30, 2000, revenues from retail operations decreased by $1.5 million to $22.4 million, compared with the nine months ended September 30, 1999. The fluctuations from the prior year were attributable to increased gains from the sale of mortgages and mortgage servicing rights, and increased revenues from title and escrow operations due to increased settlement volume, offset by decreased financing income resulting from a reduction in the number of days loans were held for sale, and a decrease in loan servicing fee income as a result of exiting this line of business. Revenues from investment operations and limited-purpose subsidiaries decreased by $1.1 million and $4 million for the three-month and nine-month periods ended September 30, 2000, respectively, compared with the same periods in 1999. The decrease from the prior year was primarily attributable to reduced interest income from the declining mortgage collateral and investment portfolio balances. General and administrative expenses were $4.3 million and $15.3 million for the three and nine months ended September 30, 2000, respectively, compared with $4.8 million and $16.5 million for the periods ended September 30, 1999. These decreases were primarily attributable to cost reductions made at the mortgage branch level. Interest expense was $3 million and $8.8 million for the three and nine months ended September 30, 2000, respectively, compared with $4.3 million and $13.2 million for the same periods in 1999. These decreases were primarily attributable to declining mortgage collateral and investment portfolio balances, and a reduction in the number of days loans were held for sale. Retail operations include residential mortgage origination; loan servicing; and title, escrow and homeowners insurance services for retail customers. Retail operations reported pretax earnings of $4 million and $6 million for the third quarter and first nine months of 2000, respectively, compared to $1.4 million and $5.4 million for the same periods in the prior year. Mortgage origination volume increased by 6.5 percent for the three months ended September 30, 2000, and decreased by 4.2 percent for the nine months ended September 30, 2000, compared with the same periods in 1999. The decline from the nine-month levels reported in 1999 was primarily due to a decrease in third-party originations, resulting from the Company's 1999 decision to exit the third-party originations market, offset by increased closings from homebuilding operations that were financed by the Company. 11 14 Investment operations hold certain assets, mainly 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 and $1.6 million for the three and nine months ended September 30, 2000, respectively, versus $.7 million and $2.1 million for the same periods in 1999. The decrease was essentially the result of decreases in the investment portfolio's average balance and its weighted-average coupon rate, which resulted in a decline in interest and other income. FINANCIAL CONDITION AND LIQUIDITY Cash requirements for the Company's homebuilding and financial services segments are generally provided 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's borrowings include senior notes, senior subordinated notes, an unsecured revolving credit facility, and nonrecourse secured notes payable. Senior and senior subordinated notes outstanding totaled $450 million as of September 30, 2000, and $308 million as of December 31, 1999. The Company uses its unsecured revolving credit facility to finance increases in its homebuilding inventory and working capital. This facility matures in October 2003 and provides for borrowings up to $400 million. Outstanding borrowings under this facility totaled $50 million as of September 30, 2000, and $70 million at December 31, 1999. The Company had letters of credit outstanding under this facility totaling $59.7 million at September 30, 2000, and $48.9 million at December 31, 1999. To finance land purchases, the Company also uses seller-financed, nonrecourse secured notes payable. At September 30, 2000, such notes payable outstanding amounted to $1.1 million, compared with $8.1 million at December 31, 1999. Housing inventories increased to $958.6 million as of September 30, 2000, from $822.7 million at December 31, 1999. This increase reflects higher sold inventory levels, related to a significant increase in quarter-end backlog, and an increase in land under development and improved lots commensurate with growth. The increase in inventory was funded with internally generated funds and borrowings 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 has borrowing arrangements that include a credit facility which provides up to $150 million for mortgage warehouse funding and matures in May 2002; repurchase agreement facilities aggregating $80 million; and a $45 million revolving credit facility which is used to finance investment portfolio securities. At September 30, 2000, and December 31, 1999, the combined borrowings of the financial services segment outstanding under all agreements totaled $153.6 million and $157.5 million, respectively. Mortgage loans, notes receivable, and mortgage-backed securities held by the financial services subsidiaries were pledged as collateral for previously issued mortgage-backed bonds, the terms of which provided for the retirement of all bonds from the proceeds of the collateral. The source of cash for the bond payments was received from the mortgage loans, notes receivable, and mortgage-backed securities. The Company has not guaranteed the debt of either its financial services segment or limited-purpose subsidiaries. During the nine months ended September 30, 2000, the Company repurchased approximately 950,000 shares of its outstanding common stock at a cost of approximately $18 million. In February 2000, the Board of Directors approved the repurchase of up to one million shares of the Company's outstanding common stock. As of September 30, 2000, the Company had Board authorization to repurchase up to an additional 820,000 shares of its common stock. The Company's repurchase program has been funded through internally generated funds. 12 15 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 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 regulations; and general competitive factors, all or each of which may cause actual results to differ materially. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no other material changes in the Company's market risk from December 31, 1999. For information regarding the Company's market risk, refer to Form 10-K for the fiscal year ended December 31, 1999, of The Ryland Group, Inc. 13 16 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 matters and discussions with counsel, management believes that liabilities to the Company arising from these matters will not have a material adverse effect on the overall financial condition of the Company. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the third quarter of 2000. Item 6. Exhibits and Reports on Form 8-K A. Exhibits 10.7 Amended and restated Employment Agreement, dated 17-33 as of September 20, 2000, between R. Chad Dreier and The Ryland Group, Inc. (filed herewith) 10.8 Senior Executive Severance Agreement, between 34-41 the executive officers of the Company and The Ryland Group, Inc. (filed herewith) 10.12 Amendment to the Restated Loan and Security 42 Agreement (Warehouse Agreement), dated as of February 18, 2000, between The Ryland Group, Inc. and certain financial institutions (filed herewith) 10.13 Amended Credit Agreement dated as of 43-52 September 1, 2000, between Ryland Mortgage Company; Associates Funding Corporation; Chase Manhattan Bank; and certain lenders. (filed herewith) 27 Financial Data Schedule 53 (filed herewith)
B. Reports on Form 8-K The Company filed one current report on Form 8-K, dated August 24, 2000, regarding the completion of the sale of $150 million aggregate principal Senior Notes at 9.75 percent, which are due September 2010. 14 17 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 14, 2000 By: /s/ Gordon A. Milne ----------------- ------------------- Date Gordon A. Milne Senior Vice President and Chief Financial Officer (Principal Financial Officer) November 14, 2000 By: /s/ David L. Fristoe ----------------- -------------------- Date David L. Fristoe Senior Vice President and Corporate Controller (Principal Accounting Officer) 15 18 INDEX OF EXHIBITS A. Exhibits
Exhibit No. Page ----------- ---- 10.7 Amended and restated Employment Agreement, dated 17-33 as of September 20, 2000, between R. Chad Dreier and The Ryland Group, Inc. (filed herewith) 10.8 Senior Executive Severance Agreement, between 34-41 the executive officers of the Company and The Ryland Group, Inc. (filed herewith) 10.12 Amendment to the Restated Loan and Security 42 Agreement (Warehouse Agreement), dated as of February 18, 2000, between The Ryland Group, Inc. and certain financial institutions (filed herewith) 10.13 Amended Credit Agreement dated as of 43-52 September 1, 2000, between Ryland Mortgage Company; Associates Funding Corporation; Chase Manhattan Bank; and certain lenders. (filed herewith) 27 Financial Data Schedule 53 (filed herewith)
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