Item 1. Business
With headquarters in Southern California, The Ryland Group, Inc. ("Ryland") is one of the nation's largest homebuilders and mortgage-finance company. Founded in 1967, the Company has built more than 170,000 homes during its 32-year history. Ryland Mortgage Company, founded in 1978, has provided mortgage-financing and related services for more than 150,000 homebuyers.
Today, Ryland homes are available in 260 communities in 21 markets across the country. The Company's home prices range from $90,000 to more than $500,000. The current average price of a Ryland home is $190,000.
The Company's operations span the significant aspects of the home-buying process - from the design, construction and sale of single-family homes to mortgage-financing, title insurance, settlement and escrow services and homeowners insurance.
As used herein, the term "Company" refers to The Ryland Group, Inc. and its subsidiaries, unless the context indicates otherwise.
Homebuilding ------------
Markets Ryland markets and builds homes that are constructed on-site in three ------- regions which include 21 of the nation's strongest housing markets. The three regions are the North, South and West. As of December 31, 1999, the Company operated in the following metropolitan markets:
Region Major Markets Served ------ --------------------
North: Baltimore, Washington, D.C./Northern Virginia, Chicago, Cincinnati, Indianapolis, Minneapolis
South: Atlanta, Charlotte, Greenville, Orlando, West Florida, Austin, San Antonio, Dallas, Houston
West: Denver, Phoenix, San Diego, Los Angeles, Bay Area, Sacramento
Ryland markets detached and attached single family homes generally targeted to the entry-level, and first-time and second-time move-up buyers, as well as active adults seeking retirement housing. The Company markets through a diverse product line tailored to local styles and preferences in each of its geographic markets. The product line offered in a particular community is determined in conjunction with the land acquisition process, and is dependent upon a number of factors, including consumer preferences, competitive product offerings and the cost of building lots in a community.
The Company developed 400 new home designs in 1999 - bringing to more than 1,200 the number of new floor plans the Company has introduced since 1993. The Company generally outsources architectural services to a network of architects to increase creativity and to ensure that its home designs are consistent with local market preferences.
The Company's operations in each of its homebuilding markets may differ based on a number of market-specific factors. These factors include regional economic conditions and job growth; land availability and the local land development process; consumer tastes; competition from other builders of new homes; and home resale activity. The Company considers each of these factors when entering into new markets or determining the extent of its operations and capital allocation in existing markets.
Land Acquisition and Development As of December 31, 1999, the Company operated in 260 communities in 21 markets across the country. The Company's objective is to control a portfolio of building lots sufficient to meet anticipated homebuilding requirements for a period of two to three years. The land acquisition process is controlled through a corporate land approval committee to help ensure that transactions meet the Company's standards for financial performance and risk. In the ordinary course of its homebuilding business, the Company utilizes both direct acquisition and option contracts to control building lots for use in the sale and construction of homes. The Company's direct land acquisition activities include the bulk purchase of finished building lots from land developers and the purchase of undeveloped, entitled land from third parties. The Company generally does not purchase unentitled or unzoned land.
Although control of lot inventory through the use of option contracts minimizes the Company's investment, such a strategy is not viable in certain markets due to the absence of third party land developers. In other markets, competitive conditions may prevent the Company from controlling quality building lots solely through the use of option contracts. In such situations, the Company may acquire undeveloped, entitled land and/or finished lots on a bulk basis. The Company utilizes the selective development of land to gain access to prime locations, increase margins and position the Company as a leader in the community through its influence over the community's character, layout and amenities.
As of December 31, 1999, the Company had deposits and letters of credit outstanding of $43.2 million in connection with option and land purchase contracts having a total purchase price of $624.5 million. These options and commitments expire at various dates through 2002.
Materials Costs Substantially all materials used in the construction of homes are available from a number of sources, but may fluctuate in price due to various factors. To increase purchasing efficiencies, the Company standardizes certain building materials and products in its homes and may acquire such products through national supply contracts. The Company has on occasion experienced shortages of certain materials. If shortages were to occur in the future, such shortages could result in longer construction times and higher cost than those experienced in the past.
Production Management and Subcontractors Substantially all on-site construction is performed for a fixed price by independent subcontractors selected on a competitive bid basis. The Company generally requires a minimum of three competitive bids for each phase of construction. Construction activities are supervised by the Company's production supervisors who schedule and coordinate subcontractor work, monitor quality and ensure compliance with local zoning and building codes. The Company has an integrated financial and homebuilding management information system which assists in scheduling production and controlling costs. Through this system, the Company monitors the construction status and job costs incurred for each home for each phase of construction. The system provides for detailed budgeting and allows the Company to monitor and control actual costs versus construction bids for each subcontractor. The Company has, on occasion, experienced shortages of skilled labor in certain markets. If shortages were to occur in the future, such shortages could result in longer construction times and higher costs than those experienced in the past.
Marketing and Customer Service The Company generally markets it's homes to entry-level, first-time and second-time move-up buyers, and active adults seeking retirement housing, through targeted product offerings in each of the communities in which it operates. The Company's marketing strategy is determined during the land acquisition and feasibility stage of a community's development. Employees and independent real estate brokers sell the Company's homes, generally by showing furnished model homes. The Company reports a new order when a customer's sales contract is approved, and records revenue from a sale at closing. The Company normally starts construction of homes when a customer has selected a lot and floor plan and has received preliminary mortgage approval. However, construction of homes may begin prior to a sale to satisfy market demand for completed homes and to facilitate construction scheduling.
The Company provides each homeowner with a comprehensive one-year warranty at the time of sale and a ten-year warranty covering loss related to structural defects. The Company believes its warranty program meets or exceeds terms customarily offered in the homebuilding industry.
Financial Services ------------------
The Ryland Mortgage Company provides mortgage-related products and services for retail customers and conducts investment activities. In recent years, the Company has repositioned the Ryland Mortgage Company to align its operations with the homebuilding divisions by:
o leveraging the relationship with the Company's homebuilding segment to increase its capture rate for its homebuyer's loans;
o focusing on retail mortgage loan originations and improving the efficiency of these activities through cost reduction initiatives and improved profitability per loan;
o divesting non-core assets and lines of business, including the sale of loan servicing rights; and
o creating value for Ryland homebuyers through innovative and competitive mortgage programs and related services.
Retail Operations
Loan Origination In 1999, Ryland Mortgage Company's mortgage origination operations consisted primarily of the Company's homebuilder loans, which were originated in connection with the sale of the Company's homes. During 1999, mortgage operations originated 7,106 loans totaling approximately $1.1 billion of which 88 percent were for purchases of homes built by the Company and 12 percent were for purchases of homes built by others, purchases of existing homes, or for the refinancing of existing mortgage loans. In an effort to increased its focus on the Company's homebuilders loan production, Ryland Mortgage Company made the strategic decision to reduce its third-party originations business by exiting certain markets in the first quarter of 1999. The Company has increased its focus by deploying loan officers directly to the homebuilding communities and by utilizing traffic and prospect information generated by the homebuilding sales and marketing staff. The Ryland Mortgage Company capture rate of Ryland's homebuying customers was 68 percent in 1999.
The Company arranges various types of mortgage financing including conventional, Federal Housing Administration (FHA), and Veterans Administration (VA) mortgages with various fixed- and adjustable-rate features. Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA), and Government National Mortgage Association (GNMA) approve the Company's mortgage operations.
Loan Servicing The repositioning of Ryland Mortgage Company in recent years led to the sale of the majority of its loan servicing portfolio in the first quarter of 1998 and the remaining portfolio during 1999. As a result, the Company no longer services loans.
Title and Escrow Services Cornerstone Title Company, a wholly owned subsidiary, provides title services primarily to the Company's homebuyers. As of December 31, 1999, Cornerstone Title had offices in Colorado, Florida, Illinois, Maryland, Ohio, Texas and Virginia. The Company also operates an escrow company in California, which performs escrow and loan closing functions primarily on homes built by the Company. During 1999, Cornerstone Title captured 91percent of the title and escrow business related to settlement of the Company's homes in the markets in which they operate.
Investment Operations
Ryland Mortgage Company's investment operations hold certain assets, primarily mortgage-backed securities and notes receivable, 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. The Company earns a net interest spread on the investment portfolio and may periodically realize gains from the sale of mortgage-backed securities from the portfolio.
Real Estate and Economic Conditions -----------------------------------
The Company is significantly affected by the cyclical nature of the homebuilding industry. The industry is sensitive to fluctuations in economic activity, interest rates and levels of consumer confidence. The effects of these fluctuations differ among the various geographic markets in which the Company operates. Higher interest rates may affect the ability of buyers to qualify for mortgage financing and decrease demand for new homes. As a result, rising interest rates generally will decrease the Company's home sales and mortgage originations. The Company's business is also affected by local economic conditions, such as employment rates and housing demand in the markets in which it builds homes. Some of the markets in which the Company operates have at times experienced a significant decline in housing demand.
Inventory risk can be substantial for homebuilders. The market value of land, building lots and housing inventories fluctuates significantly as a result of changing market and economic conditions. In addition, inventory-carrying costs can be significant and can result in losses in poorly performing projects or markets. The Company must continuously seek and make acquisitions of land for expansion into new markets as well as for replacement and expansion of land inventory within its current markets. The Company employs various measures including the land approval process, and continued review by senior management designed to manage inventory risks. The Company can not assure that these measures will avoid or eliminate inventory risk.
Competition -----------
The residential housing industry is highly competitive, and the Company competes in each of its markets with a large number of national, regional and local homebuilding companies. Some of these companies are larger than the Company and have greater financial resources. In addition, the increase in the availability of capital and financing in recent years has made it easier for both large and small homebuilders to expand and enter new markets and has increased competition. This competition could make it more difficult to acquire suitable land at acceptable prices, force an increase in selling incentives or lowering sales as dictated by local market conditions. Any of these could have an adverse impact on the Company's financial performance or results of operations. The Company also competes with other housing alternatives including existing homes and rental housing. Principal competitive factors in homebuilding are home price, design, quality, reputation, relationship with developers, accessibility of subcontractors, availability and location of lots and availability of customer financing.
Regulatory and Environmental Matters ------------------------------------
The homebuilding segment is subject to various local, state and federal laws, ordinances, rules and regulations concerning zoning, building design, construction and similar matters. These include local regulations, which impose restrictive zoning and density requirements to limit the number of homes that can be built within the boundaries of a particular area. The Company may also experience periodic delays in homebuilding projects due to building moratoria in any of the areas in which it operates.
The Company is also subject to a variety of local, state and federal laws, ordinances, rules and regulations concerning the protection of health and the environment. The Company is also subject to a variety of environmental conditions that can affect its business and its homebuilding projects. The particular environmental laws which apply to any given homebuilding site vary greatly according to the site's location, environmental condition and the present and former uses of the site, and adjoining properties. Environmental laws and conditions may result in delays, may cause the Company to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity in certain environmentally sensitive regions or areas.
Ryland Mortgage Company is subject to the rules and regulations of HUD, FHA, VA, FNMA, FHLMC and GNMA with respect to originating, processing, selling and servicing mortgage loans. There are other federal and state laws and regulations affecting these activities. These rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines which include provisions for inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts. The Company is required to submit audited financial statements annually, and each regulatory entity has its own financial requirements. The Company's affairs are also subject to examination by these regulatory agencies and state agencies at all times to assure compliance with the applicable regulations, policies and procedures. Mortgage origination activities are subject to the Equal Credit Opportunity Act, Federal Truth-in-Lending Act and Real Estate Settlement Procedures Act and the associated regulations which prohibit discrimination and require the disclosure of certain information to mortgagors concerning credit and settlement costs.
Employees ---------
At December 31, 1999, the Company employed 2,130 people. The Company considers its employee relations to be good. No employees are represented by a collective bargaining agreement.
Item 2.
Item 2. Properties
The Company leases office space for its corporate headquarters in Woodland Hills, California and its temporary headquarters in Columbia, Maryland. In addition, the Company leases office space in the various markets in which it operates.
Item 3.
Item 3. Legal Proceedings
Contingent liabilities may arise from the obligations incurred in the ordinary course of business, or from the usual obligations of on-site housing producers for the completion of contracts.
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 financial condition of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1999.
Executive Officers of the Company
The following sets forth certain information regarding the executive officers of the Company:
Name Age Position (date elected to position) Prior Business Experience -------------------------------------------------------------------------------
R.Chad Dreier 52 Chairman of the Board of Directors (1994), President and Chief Executive Officer of the Company (1993).
Robert J. Cunnion,III 44 Senior Vice President, Human Resources of the Company (1999), Vice President, Human Resources - West Region (1993-1999).
Eric E. Elder 43 Senior Vice President, Marketing of the Company (2000), Vice President, Marketing - West Region (1995-1999)
David L. Fristoe 43 Senior Vice President, Controller and Chief Accounting Officer of the Company (2000), Vice President, Controller and Chief Accounting Officer of the Company (1999), Vice President, Financial Operations - West Region (1995-1999).
John M. Garrity 53 Senior Vice President of the Company (1995), President of the South Region of Ryland Homes (1996), President of the Southeast Region of Ryland Homes (1994-1996).
Timothy J. Geckle 47 Senior Vice President, General Counsel and Secretary of the Company (1997). Vice President, Deputy General Counsel (1995-1996). Corporate Counsel (1991-1995).
Gordon A. Milne 48 Senior Vice President and Chief Financial Officer of the Company (2000). Senior Vice President of Finance and Chief Financial Officer of Agrium, Inc. (1996-1999). Division President of Occidental Petroleum Ltd. (1994-1996).
Frank J. Scardina 52 Senior Vice President of the Company (1994), President of West Region of Ryland Homes (1996), President of California Region of Ryland Homes (1994-1996).
Daniel G. Schreiner 42 Senior Vice President of the Company (1999), President, Ryland Mortgage Company (1998). President, Kaufman and Broad Mortgage Company (1991-1998).
Kipling W. Scott 45 Senior Vice President of the Company (1995), President of the North Region of Ryland Homes (1997), President of Midwest Region of Ryland Homes (1994-1997).
The board of directors elects all officers.
There are no family relationships, arrangements or understandings pursuant to which any of the officers listed were elected. For a description of employment and severance arrangements with certain executive officers of the Company, see page 9 of the Proxy Statement for the 2000 Annual Meeting of Stockholders.
PART II
Item 5.
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
The information required by this item is incorporated by reference from the section entitled "Common Stock Prices and Dividends" appearing on page 43 of the Annual Report to Shareholders for the year ended December 31, 1999.
Item 6.
Item 6. Selected Financial Data
The information required by this item is incorporated by reference from the section entitled "Selected Financial Data" appearing on page 21 of the Annual Report to Shareholders for the year ended December 31, 1999.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information required by this item is incorporated by reference from the section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition" appearing on pages 22 through 26 of the Annual Report to Shareholders for the year ended December 31, 1999.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated by reference from the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations", Market Risk Summary, appearing on page 25 through 26 of the Annual Report to Shareholders for the year ended December 31, 1999.
Item 8.
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated by reference from the information appearing on pages 27 through 40 and from the section entitled "Quarterly Financial Data and Common Stock Prices and Dividends" appearing on page 43 of the Annual Report to Shareholders for the year ended December 31, 1999.
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
During the fiscal years ended December 31, 1999 and 1998, there were no disagreements between the Company and its accountants on any matter of accounting principle or financial statement disclosure.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information as to the Company's Directors is incorporated by reference from pages 2 and 4 of the Company's Proxy Statement for its 2000 Annual Meeting of Stockholders. Information as to the Company's executive officers is shown under Part I as a separate item.
Item 11.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from pages 5 through 10 of the Company's Proxy Statement for its 2000 Annual Meeting of Stockholders.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from page 3 of the Company's Proxy Statement for its 2000 Annual Meeting of Stockholders.
Item 13.
Item 13. Certain Relationships and Related Transactions
There are no transactions, business relationships or indebtedness required to be reported by the Company pursuant to this Item.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements.
The following consolidated financial statements of The Ryland Group, Inc., and Subsidiaries, included in the Annual Report to Shareholders for the year ended December 31, 1999, are incorporated by reference in Item 8:
Consolidated Statements of Earnings - years ended December 31, 1999, 1998 and 1997.
Consolidated Balance Sheets - December 31, 1999 and 1998.
Consolidated Statements of Stockholders' Equity - years ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows - years ended December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
(a) 2. Financial Statement Schedules. (filed herewith) Page No. --------
Schedule II - Valuation and Qualifying Accounts.. ...............16
Schedules not listed above have been omitted because they are either inapplicable or the required information has been given in the financial statements or notes thereto.
(a) (a) 3. Exhibits
The following exhibits are included with this report or incorporated herein by reference as indicated below:
Exhibit No.
3.1 Charter of The Ryland Group, Inc., as amended. (Incorporated by reference from Form 10-K for the year ended December 31, 1989)
3.2 By-laws of The Ryland Group, Inc., as amended. (Incorporated by reference from Form 10-K for the year ended December 31, 1996)
4.1 Rights Agreement dated as of October 18, 1996, between The Ryland Group, Inc., and ChaseMellon Shareholder Services, L.L.C. (Incorporated by reference from Form 8-K filed October 24, 1996)
4.2 Articles Supplementary dated as of August 31, 1989. (Incorporated by reference from Form 8-K filed September 12, 1989)
4.3 Senior Subordinated Notes dated as of November 4, 1993. (Incorporated by reference from Registration Statement on Form S-3, Registration No. 33-48071)
4.4 Indenture dated as of June 28, 1996, between The Ryland Group, Inc., and Chemical Bank, as Trustee. (Incorporated by reference from Form 8-K filed July 2, 1996)
4.5 Senior Notes dated as of June 10, 1996. (Incorporated by reference from Registration Statement on Form S-3, Registration No. 333-03791)
4.6 Senior Subordinated Notes dated as of April 13, 1998. (Incorporated by reference from Registration Statement on Form S-3, Registration No. 33-50933 and 333-03791)
10.1 Lease Agreement between Seventy Corporate Center Limited Partnership and The Ryland Group, Inc. dated April 17, 1990. (Incorporated by reference from Form 10-K for the year ended December 31, 1990)
10.2 Lease Agreement between Kilroy Realty Group and The Ryland Group, Inc. dated December 29, 1999. (Filed herewith)
10.3* 1992 Equity Incentive Plan of The Ryland Group, Inc. (Incorporated by reference from Form 10-Q for the quarter ended June 30, 1992)
10.4* 1992 Non-Employee Director Equity Plan of The Ryland Group, Inc., as amended. (Incorporated by reference from Form 10-Q for the quarter ended June 30, 1994)
10.5 Restated Credit Agreement dated as of October 19, 1999, between The Ryland Group, Inc., and certain banks. (Incorporated by reference from Form 10-Q for the quarter ended September 30, 1999)
(a) 3. Exhibits, continued
Exhibit No.
10.6 Restate Credit Agreement dated May 21, 1999, between Ryland Mortgage Company; Associates Mortgage Funding Corporation; BankOne, Texas, N.A.; and certain lenders. (Incorporated by reference from Form 10-Q for the quarter ended June 30, 1999)
10.7* Employment Agreement dates as of April 21, 1999 between R. Chad Dreier and The Ryland Group, Inc. (Incorporated by reference from Form 10-Q for the quarter ended June 30, 1999)
10.8* Senior Executive Severance Agreement, between the executive officers of the Company and The Ryland Group, Inc. (Incorporated by reference from Form 10-K for the year ended December 31, 1996)
10.9* Amendment and Restatement of the Executive and Director Deferred Compensation Plan Effective March 1, 1998. (Filed herewith)
10.10* Non-Employee Directors' Stock Unit Plan between The Ryland Group, Inc. and the Board of Directors, effective January 1, 1998. (Incorporated by reference from Form 10-K for the year ended December 31, 1997)
11 Computation of Per Share Earnings. (Filed herewith)
13 Annual Report to Shareholders for the year ended December 31, 1999. (Filed herewith)
21 Subsidiaries of the Registrant. (Filed herewith)
23 Consent of Ernst and Young LLP, Independent Auditors. (Filed herewith)
24 Power of Attorney. (Filed herewith)
27 Financial Data Schedule. (Filed herewith)
* Executive Compensation Plan or Arrangement
(b) There were no reports on Form 8-K filed in the fourth quarter of 1999.
The Ryland Group, Inc., and Subsidiaries SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (dollar amounts in thousands)
Balance at Charged to Charged Deductions Balance at Beginning Costs and to Other and End of Description of Period Expenses Accounts Transfers Period (1)
Valuation allowance: Homebuilding inventories
1999 $ 6,233 $ 2,952 $ 0 $(5,585) $ 3,600 1998 2,967 4,188 0 (922) 6,233 1997 3,052 580 0 (665) 2,967
Valuation allowance: Investment in and advances to joint ventures
1999 $ 1,000 $ 0 $ 0 $ 0 $ 1,000 1998 0 1,000 0 0 1,000 1997 6,500 0 0 (6,500) 0
(1) Balances as of December 31, 1999, 1998 and 1997, represent valuation allowances for assets to be disposed of.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ R. Chad Dreier March 24, 2000 ------------------------------------- R. Chad Dreier, Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Principal Executive Officer:
/s/ R. Chad Dreier March 24, 2000 ---------------------------------- R. Chad Dreier Chief Executive Officer
Principal Accounting Officer:
/s/ David L. Fristoe March 24, 2000 ------------------------------------ David L. Fristoe Chief Accounting Officer
Majority of the Board of Directors: R. Chad Dreier; James A. Flick, Jr.; Leslie M. Frecon; William L. Jews; William G. Kagler; Robert E. Mellor; Charlotte St. Martin.
By: /s/ Timothy J. Geckle March 24, 2000 --------------------- Timothy J. Geckle As Attorney-in-Fact
Page Of Sequentially Numbered Pages --------------
INDEX OF EXHIBITS
10.2 Lease Agreement between Kilroy Realty Group and The Ryland 19-87 Group, Inc. dated December 29, 1999
10.11 Amendment and Restatement of the Executive and Director Deferred Compensation Plan Effective March 1, 1998 88-109
11 Computation of Per Share Earnings 110
13 Annual Report to Shareholders for the year ended December 31, 1999 111-133
21 Subsidiaries of the Registrant 134
23 Consent of Ernst and Young LLP, Independent Auditors 135
24 Power of Attorney 136
27 Financial Data Schedule 137