THE RYLAND GROUP, INC. AND SUBSIDIARIES
Selected Financial Data
(amounts in millions, except share data) unaudited 1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------------------------
ANNUAL RESULTS
Revenues
Homebuilding $ 1,959 $ 1,695 $ 1,557 $ 1,473 $ 1,458
Financial services and limited-purpose subsidiaries 50 70 93 107 127
------- ------- ------- ------- -------
Total 2,009 1,765 1,650 1,580 1,585
Cost of sales-- homebuilding 1 1,633 1,429 1,346 1,277 1,325
Selling, general and administrative expenses 239 216 211 203 211
Interest expense 28 45 57 74 91
------- ------- ------- ------- -------
Earnings (loss) from continuing operations before taxes 109 75 36 26 (42)
Tax expense (benefit) 42 32 14 10 (17)
------- ------- ------- ------- -------
Net earnings (loss) from continuing operations
before extraordinary item 67 43 22 16 (25)
Discontinued operations, net of taxes 2 0 0 0 0 22
Extraordinary item, extinguishment of debt 3 0 (3) 0 0 0
------- ------- ------- ------- -------
Net earnings (loss) $ 67 $ 40 $ 22 $ 16 $ (3)
------------------------------------------------------------------------------------------------------------------
YEAR-END POSITION
Assets
Housing inventories $ 823 $ 642 $ 555 $ 575 $ 538
Mortgage loans, held-for-sale 40 159 200 180 285
Mortgage-backed securities and notes receivable 99 112 153 144 113
Collateral for bonds payable of limited-purpose subsidiaries 40 92 142 214 375
Other assets 246 210 233 226 270
------- ------- ------- ------- -------
Total assets $ 1,248 $ 1,215 $ 1,283 $ 1,339 $ 1,581
------------------------------------------------------------------------------------------------------------------
Liabilities
Long-term debt $ 378 $ 308 $ 310 $ 354 $ 397
Short-term notes payable 157 223 341 326 367
Bonds payable of limited-purpose subsidiaries 37 88 137 207 365
Other liabilities 290 250 190 142 151
------- ------- ------- ------- -------
Total liabilities $ 862 $ 869 $ 978 $ 1,029 $ 1,280
------------------------------------------------------------------------------------------------------------------
Stockholders' equity $ 386 $ 346 $ 305 $ 310 $ 301
------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Basic
Net earnings (loss) from continuing operations
before extraordinary item $ 4.49 $ 2.90 $ 1.33 $ 0.88 $ (1.78)
Net earnings (loss) $ 4.49 $ 2.67 $ 1.33 $ 0.88 $ (0.31)
Diluted
Net earnings (loss) from continuing operations
before extraordinary item $ 4.30 $ 2.79 $ 1.32 $ 0.87 $ (1.78)
Net earnings (loss) $ 4.30 $ 2.58 $ 1.32 $ 0.87 $ (0.31)
Dividends declared $ 0.16 $ 0.16 $ 0.27 $ 0.60 $ 0.60
Stockholders' equity $ 27.22 $ 22.83 $ 20.31 $ 19.00 $ 18.69
------------------------------------------------------------------------------------------------------------------
1. 1995 reflects a $45 million pretax charge related to homebuilding
inventories and investments in unconsolidated joint ventures.
2. The Company sold its institutional mortgage securities administration
business in the second quarter of 1995. Results from discontinued
operations include a second-quarter gain on this sale and the results of
operations for the first half of 1995.
3. The Company reported an extraordinary after-tax charge of $3.3 million in
1998 which was related to a loss on the early extinguishment of debt.
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111
THE RYLAND GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Results of
Operations and Financial Condition
THE COMPANY
Operations of The Ryland Group and its subsidiaries ("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.
RESULTS OF OPERATIONS
Consolidated
The Company reported record consolidated net earnings from operations of $66.7
million, or $4.49 per share ($4.30 per share diluted), for 1999, compared to
consolidated net earnings (before extraordinary item) of $43.6 million, or $2.90
per share ($2.79 per share diluted), for 1998 and consolidated net earnings of
$21.9 million, or $1.33 per share ($1.32 per share diluted), for 1997.
The homebuilding segment reported pretax earnings of $120.8 million for 1999,
compared to pretax earnings of $80.1 million for 1998 and pretax earnings of
$35.2 million for 1997. Homebuilding results in 1999 increased from 1998
primarily due to higher gross profit margins combined with increased closing
volume and lower interest expense. Homebuilding results in 1998 increased from
1997 also due to higher gross profit margins combined with increased closing
volume and lower interest expense.
The financial services segment reported pretax earnings of $11.8 million for
1999, compared to $5.7 million (excluding a $6.1 million gain on the bulk sale
of servicing rights) reported for the full year 1998 and $15.6 million reported
for 1997. The increase in 1999 from 1998, excluding the $6.1 million gain, was
due to cost-reduction initiatives and lower interest expense. The decrease in
1998 from 1997 was primarily attributable to a significant reduction in the
Company's loan servicing operations due to portfolio sales in 1997 and in the
first quarter of 1998.
Corporate expenses represent the costs of corporate functions which support the
business segments. Corporate expenses of $23.3 million for 1999 and $16.7
million for 1998 increased $6.6 million and $2.4 million, respectively, from
prior year levels, primarily resulting from increases in incentive compensation
attributable to higher earnings levels in 1999 and 1998 and charges totaling
$3.4 million in 1999, relating to the relocation of the corporate office to
California.
The Company's limited-purpose subsidiaries no longer issue mortgage-backed
securities and mortgage-participation securities, but they continue to hold
collateral for previously issued mortgage-backed bonds in which the Company
maintains a residual interest. Revenues, expenses and portfolio balances
continue to decline as 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.
HOMEBUILDING SEGMENT
Results of operations for the homebuilding segment are summarized as follows
(amounts in thousands, except average closing price):
1999 1998 1997
-----------------------------------------------------------------
Revenues
Residential $1,937,387 $1,664,267 $1,527,107
Other 21,445 30,238 30,219
---------- ---------- ----------
Total 1,958,832 1,694,505 1,557,326
Gross profit 325,738 265,742 211,185
Selling, general and
administrative expenses 193,193 168,004 152,071
Interest expense 11,715 17,681 23,964
---------- ---------- ----------
Homebuilding pretax
earnings $ 120,830 $ 80,057 $ 35,150
Average closing price $ 190,000 $ 185,000 $ 182,000
-----------------------------------------------------------------
Homebuilding revenues increased 16 percent in 1999, compared to 1998, due to a
13 percent increase in closings and an increase in the average closing price.
The increase in closings in 1999 was due to a higher backlog at the beginning of
the year and an increase in homes sold during the year. Homebuilding revenues
increased 9 percent in 1998, compared to 1997, due to a 7 percent increase in
closings and an increase in the average closing price. Homebuilding results
included pretax gains from land sales of $0.7 million, $1.2 million and $4.8
million in 1999, 1998 and 1997, respectively.
Gross profit margins from home sales averaged 16.8 percent for 1999, an increase
from the 15.9 percent for 1998 and a significant increase from the 13.5 percent
for 1997. The improvement was primarily due to increased closings from newer
communities, which had more profitable land positions and a more cost-effective
product. Sales price increases and Company initiatives to reduce direct
construction costs also contributed to improved margins.
Selling, general and administrative expenses as a percent of revenues were 9.9
percent for 1999 and 1998 and 9.8 percent for 1997. This slight increase from
1997 was primarily due to higher selling costs associated with increased
closings and a higher incentive compensation expense resulting from improved
earnings.
Interest expense decreased $6.0 million, or 34 percent in 1999, compared to
1998, due to lower effective rates paid on borrowings and an increase in the
amount of interest capitalized on land under development. Interest expense
decreased 26 percent in 1998, compared to 1997, due to lower average
homebuilding borrowings, lower effective rates paid on borrowings and an
increase in the amount of interest capitalized on land under development.
22
112
HOMEBUILDING OPERATIONAL DATA
---------------------------------------------------------------
New Orders (Units) % Closings (Units) %
1999 1998 Change 1999 1998 Change
---------------------------------------------------------------
North 2,917 2,776 5 2,801 2,670 5
South 5,235 4,205 25 4,981 3,877 28
West 2,256 2,449 (8) 2,411 2,447 (1)
------ ------ ------ ------ ------ ------
Total 10,408 9,430 10 10,193 8,994 13
---------------------------------------------------------------
Outstanding Contracts Outstanding Contracts
December 31, 1999 December 31, 1998
--------------------------------------------------------------------------------------
Dollars Dollars
% in Average in Average
Units Change Millions Price Units Millions Price
--------------------------------------------------------------------------------------
North 1,211 11 $ 227 $187,000 1,095 $ 213 $194,000
South 2,068 14 361 174,000 1,814 312 172,000
West 388 (29) 103 266,000 543 128 235,000
-------- -------- -------- -------- -------- -------- --------
Total 3,667 6 $ 691 $188,000 3,452 $ 653 $189,000
--------------------------------------------------------------------------------------
New orders increased 10 percent in 1999, compared to 1998. In the West region,
sales were down primarily due to an exit from the Portland and Salt Lake
markets. As of December 31, 1999, the Company had outstanding contracts for
3,667 units, an increase of 6 percent from year-end 1998, due to the increase in
new orders during the year. Outstanding contracts represent the Company's
backlog of sold but not closed homes, which are generally built and closed,
subject to cancellation, over the subsequent two quarters. The $691 million
value of outstanding contracts increased 6 percent from year-end 1998.
FINANCIAL SERVICES SEGMENT
Revenues and expenses of the Company's financial services segment are
summarized as follows (amounts in thousands):
1999 1998 1997
------------------------------------------------------------
Retail revenues:
Interest and
net origination fees $ 5,595 $ 7,524 $ 7,651
Gains on sales of mortgages
and servicing rights 17,598 22,667 21,968
Loan servicing 1,581 7,675 24,464
Title/escrow 9,036 8,723 6,394
------- ------- -------
Total retail revenues 33,810 46,589 60,477
Revenues from investment
operations 9,776 13,796 16,452
------- ------- -------
Total revenues $43,586 $60,385 $76,929
Expenses:
General and administrative 21,905 32,023 43,454
Interest 9,843 16,574 17,890
------- ------- -------
Total expenses 31,748 48,597 61,344
------- ------- -------
Pretax earnings $11,838 $11,788 $15,585
------------------------------------------------------------
Pretax earnings by line of business were as follows
(amounts in thousands):
1999 1998 1997
------------------------------------------------------------
Retail $ 9,180 $ 7,915 $10,093
Investments 2,658 3,873 5,492
------- ------- -------
Total $11,838 $11,788 $15,585
------------------------------------------------------------
FINANCIAL SERVICES OPERATIONAL DATA
1999 1998 1997
-------------------------------------------------------------
Retail operations:
Number of mortgage
originations 7,106 8,412 7,248
Dollars (in millions) $1,100 $1,200 $1,005
Percent of total originations
from Ryland Homes 68% 70% 66%
Investment operations:
Portfolio average
balance (in millions) $ 98 $ 139 $ 153
-------------------------------------------------------------
Revenues and general and administrative expenses for the financial services
segment decreased for the year ended December 31, 1999, compared with 1998. The
decreases were primarily due to a decline in loan servicing operations which
were related to loan servicing portfolio sales in the first quarter of 1998 and
a decrease in originations. An increase in profitability per loan more than
offset the effect of lower originations and reduced servicing income. Revenues
and general and administrative expenses for financial services decreased for
the year ended 1998, compared with 1997, due in part to a decline in loan
servicing operations which were related to loan servicing portfolio sales in
1997 and during the first quarter of 1998.
23
113
Interest expense decreased 41 percent for the year ended December 31, 1999,
compared with 1998, primarily due to a decrease in the warehouse holding period
for mortgage loans before they were sold in the secondary market and a lower
investment portfolio balance. Interest expense decreased 7 per cent for the year
ended 1998, compared with 1997, primarily due to a decrease in the warehouse
holding period for mortgage loans before they were sold in the secondary market.
Retail operations include residential mortgage origination, loan servicing,
title, escrow and homeowners insurance services for retail customers. Retail
operations reported pretax earnings of $9.2 million for 1999, compared with $7.9
million for 1998 and $10.1 million for 1997. 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 originations decreased in 1999 by 16 percent from 1998 primarily due to
a decrease in third-party originations, partially offset by a higher closing
volume from homebuilder originations. The decrease in 1999 from 1998 was
primarily attributable to the Company's decision to exit certain third-party
origination markets. The number of mortgage originations for 1998 increased by
16 percent from 1997 due to a higher closing volume from homebuilder loan
originations and higher refinancing activity.
Investment operations holds 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
$2.7 million for 1999, compared with $3.9 million for 1998 and $5.5 million for
1997. Pretax earnings decreased $1.2 million in 1999, compared with 1998,
primarily due to a lower average portfolio balance which resulted in a decline
in interest and other income. The decline in 1998 was also due to a lower
average portfolio balance which resulted in a decline in interest income, and
due to the fact that 1997 results included $0.8 million of other income related
to the redemption of certain securities.
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 $308 million
as of December 31, 1999 and 1998.
The Company uses its unsecured revolving credit facility to finance increases
in its homebuilding inventory and working capital. In October 1999, the Company
increased its bank revolving credit agreement from $300 million to $375 million.
This new facility will mature in October 2003. There was $70 million in
outstanding borrowings under this facility as of December 31, 1999, and no
outstanding borrowings under this facility as of December 31, 1998. The Company
had letters of credit outstanding under this facility totaling $49 million at
December 31, 1999, and $34 million at December 31, 1998. To finance land
purchases, the Company may also use seller-financed, nonrecourse secured notes
payable. At December 31, 1999 and 1998, there were no material outstanding
seller-financed notes payable.
Housing inventories increased to $823 million as of December 31, 1999, from $642
million as of December 31, 1998. This increase reflects a higher sold inventory,
related to the increase in year-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 renewed its three-year bank credit facility, which provides up
to $200 million for mortgage warehouse funding and matures in May 2002. Other
borrowing arrangements as of December 31, 1999, included repurchase agreement
facilities aggregating $150 million and a $35 million revolving credit facility
used to finance investment portfolio securities. At December 31, 1999 and 1998,
combined borrowings of the financial services segment outstanding under all
agreements were $157 million and $223 million, respectively.
Mortgage loans, notes receivable and mortgage-backed
securities held by the limited-purpose 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 cash received from the mortgage loans, notes
receivable and mortgage-backed securities.
The Ryland Group has not guaranteed the debt of either the financial services
segment or the limited-purpose subsidiaries.
During 1999, the Company repurchased approximately 1,188,000 shares of its
outstanding common stock at a cost of approximately $27 million. As of December
31, 1999, the Company had Board authorization to repurchase up to an additional
770,200 shares of its outstanding common stock. In addition, in February 2000,
the Board of Directors approved the repurchase of up to one million shares of
the Company's outstanding common stock. The Company's stock repurchase program
has been funded through internally generated funds.
24
114
YEAR 2000 READINESS DISCLOSURE
The Company did not experience any disruptions to its systems or business
related to the Year 2000 remediation. The Company completed its Year 2000
remediation efforts, and its business systems are Year 2000 compliant. The costs
of achieving Year 2000 compliance aggregated between $1 to $2 million.
MARKET RISK SUMMARY
The following table provides information about the Company's significant
financial instruments that are sensitive to changes in interest rates. For debt
obligations, the table presents principal cash flows and related
weighted-average interest rates by expected maturity dates. Weighted-average
variable rates are based on implied forward rates as of the reporting date.
INTEREST RATE SENSITIVITY
Principal Amount by Expected Maturity
Fair Value
(dollars in thousands) 2000 2001 2002 2003 2004 THEREAFTER TOTAL 12/31/99
------------------------------------------------------------------------------------------------------------------------------------
HOMEBUILDING
Liabilities
Long-term debt (fixed rate) $ 8,000 $100,000 $ 200,000 $308,000 $295,080
Average interest rate 10.5% 9.6% 9.4% 9.5%
Long-term debt (variable rate) $ 70,000 1 $ 70,000 $ 70,000
Average interest rate Various 2 Various 2
FINANCIAL SERVICES
Assets
Mortgage loans, held-for-sale
(fixed rate) $ 30,913 $ 30,913 $ 31,398
Average interest rate 6.2% 6.2%
Mortgage loans, held-for-sale
(variable rate) $ 9,607 $ 9,607 $ 9,758
Average interest rate 7.2% 7.2%
Mortgage-backed securities,
available-for-sale $ 6,508 $ 4,983 $ 3,824 $ 2,933 $ 2,252 $ 7,617 $ 28,117 $ 29,823
Average interest rate 9.3% 9.4% 9.4% 9.5% 9.5% 9.6% 9.5%
Mortgage-backed securities,
held-to-maturity $ 4,036 $ 2,949 $ 2,158 $ 1,582 $ 1,161 $ 3,248 $ 15,134 $ 15,911
Average interest rate 8.7% 8.7% 8.7% 8.7% 8.8% 8.8% 8.7%
Notes receivable, whole loans
and funds held by trustee $ 13,356 $10,028 $ 7,549 $ 5,689 $ 4,291 $13,379 $ 54,292 $ 57,433
Average interest rate 9.2% 9.2% 9.2% 9.3% 9.3% 9.4% 9.3%
Liabilities
Short-term notes payable
(variable rate) $ 97,234 $ 60,224 3 $157,458 $157,458
Average interest rate Various 2 Various 2 Various 2
Off balance sheet financial
instruments
Forward-delivery contracts:
Notional amount $ 30,000 $ 30,000 $ 298
Average interest rate 7.3% 7.3%
Commitments to originate
mortgage loans:
Notional amount $ 18,880 $ 18,880 $ 3,292
Average interest rate 7.7% 7.7%
------------------------------------------------------------------------------------------------------------------------------------
1. Includes borrowings under the unsecured revolving credit facility, which
expires in 2003. The Company does not represent that such borrowings will
be outstanding until 2003.
2. Variable interest rate available to the Company is based upon LIBOR,
Federal Funds or Prime Rate plus the specified margin over LIBOR, Federal
Funds or Prime Rate.
3. Includes borrowings under the mortgage warehouse facility. The Company does
not represent such borrowings will be outstanding until 2002.
25
115
Interest rate risk is the primary market risk facing the Company. Interest rate
risk not only arises principally in the Company's financial services segment,
but also in respect to the homebuilding segment's long-term debt. The Company
enters into forward-delivery contracts and may, at times, use other hedging
contracts to mitigate its exposure to movements in interest rates on mortgage
loan commitments and mortgage loans held-for-sale. The selection of these
hedging contracts is based upon a marketing strategy which establishes a risk
tolerance level. The major factors influencing the use of hedging contracts
include general market conditions, interest rates, types of mortgages originated
and the percentage of mortgage loan commitments expected to be funded. The
market risk assumed while holding the hedging contracts generally mitigates the
market risk associated with mortgage loan commitments and mortgage loans
held-for-sale. In managing interest rate risk, the Company does not speculate on
the direction of interest rates. Although collateral for bonds payable and bonds
payable of the limited-purpose subsidiaries are subject to interest rate risk,
the Company has not guaranteed nor is otherwise obligated with respect to these
bond issues and, therefore, has no risk of loss.
Note:
Certain statements in this annual report 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, 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, availability and increases in raw material and labor costs,
consumer confidence, government regulations, and general competitive and
industry related factors, all or each of which may cause actual results to
differ materially.
26
116
THE RYLAND GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
Year ended December 31,
(amounts in thousands, except share data) 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------------------
REVENUES
Homebuilding:
Residential revenue $ 1,937,387 $ 1,664,267 $ 1,527,107
Other revenue 21,445 30,238 30,219
------------ ------------ ------------
Total homebuilding revenue 1,958,832 1,694,505 1,557,326
Financial services 43,586 60,385 76,929
Limited-purpose subsidiaries 6,848 10,598 15,551
------------ ------------ ------------
Total revenues 2,009,266 1,765,488 1,649,806
EXPENSES
Homebuilding:
Cost of sales 1,633,094 1,428,763 1,346,141
Selling, general and administrative 193,193 168,004 152,071
Interest 11,715 17,681 23,964
------------ ------------ ------------
Total homebuilding expenses 1,838,002 1,614,448 1,522,176
Financial services:
General and administrative 21,905 32,023 43,454
Interest 9,843 16,574 17,890
------------ ------------ ------------
Total financial services expenses 31,748 48,597 61,344
Limited-purpose subsidiaries 6,848 10,598 15,551
Corporate 23,332 16,687 14,265
------------ ------------ ------------
Total expenses 1,899,930 1,690,330 1,613,336
Earnings before taxes and extraordinary item 109,336 75,158 36,470
Tax expense 42,641 31,566 14,588
------------ ------------ ------------
NET EARNINGS BEFORE EXTRAORDINARY ITEM 66,695 43,592 21,882
Extraordinary item-- loss on early extinguishment
of debt (net of taxes of $2,217) 0 (3,326) 0
------------ ------------ ------------
NET EARNINGS $ 66,695 $ 40,266 $ 21,882
-------------------------------------------------------------------------------------------------------
Preferred dividends $ 831 $ 1,000 $ 1,630
Net earnings applicable to common stockholders $ 65,864 $ 39,266 $ 20,252
NET EARNINGS PER COMMON SHARE
Basic:
Net earnings before extraordinary item $ 4.49 $ 2.90 $ 1.33
Extraordinary item 0 (0.23) 0
------------ ------------ ------------
Net earnings per common share $ 4.49 $ 2.67 $ 1.33
Diluted:
Net earnings before extraordinary item $ 4.30 $ 2.79 $ 1.32
Extraordinary item 0 (0.21) 0
------------ ------------ ------------
Net earnings per common share $ 4.30 $ 2.58 $ 1.32
Average common shares outstanding:
Basic 14,678,925 14,709,404 15,227,829
Diluted 15,505,382 15,603,312 15,405,067
------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
27
117
THE RYLAND GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
(amounts in thousands, except share data) 1999 1998
-----------------------------------------------------------------------------------------
ASSETS
Homebuilding:
Cash and cash equivalents $ 36,297 $ 48,100
Housing inventories:
Homes under construction 432,735 373,012
Land under development and improved lots 389,946 268,750
---------- ----------
Total inventories 822,681 641,762
Property, plant and equipment 26,619 26,818
Purchase price in excess of net assets acquired 21,710 23,473
Other assets 48,064 38,515
---------- ----------
955,371 778,668
Financial Services:
Cash and cash equivalents 33,629 1,684
Mortgage loans, held-for-sale 40,520 158,611
Mortgage-backed securities and notes receivable 99,249 111,654
Other assets 16,326 14,734
---------- ----------
189,724 286,683
Other Assets:
Collateral for bonds payable of limited-purpose subsidiaries 39,633 92,403
Net deferred taxes 32,134 31,384
Other 31,461 26,260
---------- ----------
TOTAL ASSETS $1,248,323 $1,215,398
LIABILITIES
Homebuilding:
Accounts payable and other liabilities $ 208,133 $ 173,370
Long-term debt 378,000 308,152
---------- ----------
586,133 481,522
Financial Services:
Accounts payable and other liabilities 7,211 16,473
Short-term notes payable 157,458 223,058
---------- ----------
164,669 239,531
Other Liabilities:
Bonds payable of limited-purpose subsidiaries 37,339 87,980
Other 73,645 60,082
---------- ----------
TOTAL LIABILITIES 861,786 869,115
---------- ----------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $1 par value:
Authorized-- 1,400,000 shares
Issued-- 350,137 shares (416,744 for 1998) 350 417
Common stock, $1 par value:
Authorized -- 78,600,000 shares
Issued-- 13,850,819 shares (14,751,753 for 1998) 13,851 14,752
Paid-in capital 71,730 93,193
Retained earnings 299,547 236,011
Accumulated other comprehensive income 1,059 1,910
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 386,537 346,283
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,248,323 $1,215,398
-----------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
28
118
THE RYLAND GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
ACCUMULATED
OTHER TOTAL
PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE DUE FROM STOCKHOLDERS'
(amounts in thousands, except share data) STOCK STOCK CAPITAL EARNINGS INCOME RSOP TRUST EQUITY
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1997 $862 $15,853 $116,652 $184,678 $2,758 $(10,354) $310,449
Comprehensive income:
Net earnings 21,882 21,882
Other comprehensive income, net of tax:
Unrealized gains/(losses) on mortgage-
backed securities,
net of taxes of $(184) (276) (276)
Total comprehensive income 21,606
Preferred stock dividends (per share $2.21) (1,630) (1,630)
Common stock dividends (per share $0.27) (4,155) (4,155)
Repurchase of common stock (1,689) (23,824) (25,513)
Conversions of preferred stock (110) 110 (1,474) (1,474)
Retirement of preferred stock and
related RSOP debt (249) (9,293) (1,850) 11,392 0
Reclassification of preferred paid-in capital
and related RSOP receivable 2,400 (6,037) (3,637)
RSOP debt repayments 4,999 4,999
Employee stock plans (248,017 shares) 248 4,041 189 4,478
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 503 14,522 88,502 199,114 2,482 0 305,123
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net earnings 40,266 40,266
Other comprehensive income, net of tax:
Unrealized gains/(losses) on mortgage-
backed securities,
net of taxes of $(381) (572) (572)
Total comprehensive income 39,694
Preferred stock dividends (per share $2.21) (1,000) (1,000)
Common stock dividends (per share $0.16) (2,369) (2,369)
Repurchase of common stock (353) (6,676) (7,029)
Conversions and retirements of
preferred stock (86) 73 (1,446) (1,459)
Reclassification of preferred paid-in capital 3,242 3,242
Employee stock plans (509,580 shares) 510 9,571 10,081
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 417 14,752 93,193 236,011 1,910 0 346,283
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net earnings 66,695 66,695
Other comprehensive income, net of tax:
Unrealized gains/(losses) on mortgage-
backed securities,
net of taxes of $(543) (851) (851)
Total comprehensive income 65,844
Preferred stock dividends (per share $2.21) (831) (831)
Common stock dividends (per share $0.16) (2,328) (2,328)
Repurchase of common stock (1,188) (25,938) (27,126)
Conversions and retirements of
preferred stock (67) 63 (896) (900)
Reclassification of preferred paid-in capital 612 612
Employee stock plans (223,800 shares) 224 4,759 4,983
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $350 $13,851 $ 71,730 $299,547 $1,059 $ 0 $386,537
------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
29
119
THE RYLAND GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended December 31,
(amounts in thousands) 1999 1998 1997
---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 66,695 $ 40,266 $ 21,882
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 28,010 25,586 31,396
Loss on early extinguishment of debt 0 5,543 0
Changes in assets and liabilities, net of effects from acquisition:
(Increase) decrease in inventories (178,590) (67,828) 19,759
Net change in other assets, payables and other liabilities 34,971 95,272 31,657
Decrease (increase) in mortgage loans held-for-sale 118,091 41,246 (19,708)
Other operating activities, net (10,039) 354 (849)
--------- --------- ---------
Net cash provided by operating activities 59,138 140,439 84,137
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property, plant and equipment (29,026) (22,734) (17,568)
Principal reduction of mortgage collateral 28,940 39,887 41,537
Net principal reduction of mortgage-backed securities, available-for-sale 11,629 10,899 11,969
Sales of mortgage-backed securities, available-for-sale 0 10,935 2,222
Net principal reduction of mortgage-backed securities, held-to-maturity 15,689 19,942 15,064
Decrease (increase) in funds held by trustee 7,843 8,796 (6,808)
Acquisition of The Regency Organization 0 (17,885) 0
Other investing activities, net (232) 767 239
--------- --------- ---------
Net cash provided by investing activities 34,843 50,607 46,655
CASH FLOWS FROM FINANCING ACTIVITIES
Cash proceeds of long-term debt 70,000 98,955 2,475
Reduction of long-term debt (152) (106,836) (46,522)
(Decrease) increase in short-term notes payable (65,600) (117,574) 14,982
Bond principal payments (51,883) (50,162) (71,009)
Common and preferred stock dividends (3,249) (3,399) (7,320)
Common stock repurchases (27,126) (7,028) (25,513)
Otherfinancing activities, net 4,171 8,651 9,538
--------- --------- ---------
Net cash used for financing activities (73,839) (177,393) (123,369)
Net increase in cash and cash equivalents 20,142 13,653 7,423
Cash and cash equivalents at beginning of year 49,784 36,131 28,708
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 69,926 $ 49,784 $ 36,131
---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest (net of capitalized interest) $ 53,518 $ 50,866 $ 54,452
Cash paid for income taxes (net of refunds) $ 40,683 $ 19,143 $ 5,887
---------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
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THE RYLAND GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(amounts in thousands, except share data, unless otherwise noted)
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
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. Certain amounts in the consolidated
statements of prior years have been reclassified to conform to the 1999
presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts re ported in the financial statements and accompanying
notes. Actual results could differ from these estimates.
Per Share Data
Basic net earnings per common share is computed by dividing net earnings, after
considering preferred stock dividend requirements, by the weighted-average
number of common shares outstanding.
Diluted net earnings per common share additionally gives effect to dilutive
common stock equivalent shares, including the assumed conversion of preferred
shares held by The Ryland Group Retirement Savings Opportunity Plan Trust ("RSOP
Trust") into common stock. The effect of the RSOP Trust was dilutive for the
years ended December 31, 1999 and 1998. For the year ended December 31, 1997,
the conversion of preferred shares was not assumed due to an anti-dilutive
effect.
Income Taxes
The Company files a consolidated federal income tax return. Certain items of
income and expense are included in one period for financial reporting purposes
and another for income tax purposes. Deferred income taxes are provided in
recognition of these differences. Deferred tax assets and liabilities are
determined based on enacted tax rates and are subsequently adjusted for changes
in these rates. A change in deferred tax assets or liabilities results in a
charge or credit to deferred tax expense.
Homebuilding Revenues
Homebuilding revenues are recognized when home sales are closed and title passes
to the customer.
Service Liabilities
Service and warranty costs are estimated and accrued at the time a home closes.
Housing Inventories
Housing inventories consist principally of homes under construction and land
under development and improved lots.
Inventories to be held and used are stated at cost, unless a community is
determined to be impaired, in which case the impaired inventories are written
down to fair value. Write-downs of impaired inventories to fair value are
recorded as adjustments to the cost basis of the respective inventory.
Inventories to be disposed of are stated at the lower of cost or fair value less
cost to sell and are reported net of valuation reserves. Valuation reserves
related to inventories to be disposed of amounted to $3.6 million at December
31, 1999, and $6.2 million at December 31, 1998. The net carrying value of the
related inventories amounted to $6.0 million and $16.2 million at December 31,
1999 and 1998, respectively.
Costs of inventory include direct costs of land, material acquisition, home
construction and related direct overhead expenses. Interest and taxes are
capitalized during the land development stage. The costs of acquiring and
developing land and constructing certain related amenities are allocated to the
parcels to which these costs relate.
The following table is a summary of capitalized interest:
1999 1998
--------------------------------------------------------------
Capitalized interest as of January 1, $ 21,600 $ 23,644
Interest capitalized 24,397 18,601
Interest amortized to cost of sales (19,027) (20,645)
-------- --------
Capitalized interest as of December 31, $ 26,970 $ 21,600
--------------------------------------------------------------
Property, Plant and Equipment
Property, plant and equipment, which includes model home furnishings, are
carried at cost less accumulated depreciation and amortization. Depreciation is
provided for, principally, by the straight-line method over the estimated useful
lives of the assets. Model home furnishings are amortized over the life of the
community as homes are closed.
Purchase Price in Excess of Net Assets Acquired
Costs in excess of net assets of acquired businesses (goodwill) are being
amortized on a straight-line basis over their estimated useful lives for periods
of up to 30 years. The Company periodically evaluates the businesses to which
goodwill relates, on an undiscounted cash flow method, in order to assess
whether the carrying value of goodwill has not been impaired.
31
121
Mortgage Loans Held-For-Sale
Mortgage loans held-for-sale are reported net of discounts and are valued at the
lower of cost or market determined on an aggregate basis. Any gain or loss on
the sale of the loans is recognized at the time of sale.
Mortgage-Backed Securities
The Company classifies its mortgage-backed securities into two categories:
held-to-maturity and available-for-sale. Management determines the appropriate
classification of these securities at the time of purchase and re-evaluates
such designations as of each balance sheet date.
Mortgage-backed securities are classified as held-to-maturity when the Company
has the positive intent and ability to hold the securities to maturity.
Securities classified as held-to-maturity are stated at amortized cost.
Securities classified as available-for-sale are measured at fair value, with
unrealized gains and losses, net of tax, reflected as accumulated other
comprehensive income in stockholders' equity.
Loan Origination Fees, Costs and Mortgage Discounts
Loan origination fees, net of related direct origination costs, and loan
discount points are deferred as an adjustment to the carrying value of related
mortgage loans held-for-sale and are recognized in income upon the sale of the
mortgage loans.
Hedging Contracts
The Company enters into forward-delivery contracts, options on forward-delivery
contracts, futures contracts and options on futures contracts, as an end user,
for the purpose of minimizing its exposure to movements in interest rates on
mortgage loan commitments and mortgage loans held-for-sale. These contracts
primarily represent commitments or options to purchase or sell mortgages or
securities, generally within 90 days and at a specified price or yield.
Forward-delivery contracts and futures are commitments only and, as such, are
not recorded on the Company's balance sheet or statement of earnings. Option
premiums are deferred when paid and recognized as an adjustment to gains on
sales of mortgages over the lives of the options on a straight-line basis.
Changes in the fair value of contracts are deferred and included in mortgage
loans held-for-sale. Changes in fair value are recognized in income as an
adjustment to gains on sales of mortgages when the mortgages and securities are
sold.
The Company entered into an interest rate swap and collar agreement to moderate
the interest rate risks inherent in the financing of its investment securities.
During the term of the agreement, net settlements were accrued and recognized as
an adjustment to interest expense. The agreement was not required to be marked
to market and, therefore, was not recorded on the Company's balance sheet.
Mortgage Servicing Rights
Retained mortgage servicing rights on originated loans were capitalized by
allocating the total cost of the mortgage loans between the mortgage servicing
rights and the loans based on their relative fair values. Mortgage servicing
rights are amortized in proportion to and over the period of estimated net
servicing revenue. As of December 31, 1999, the Company no longer services
mortgage loans.
Stock-Based Compensation
The Company has elected to follow the intrinsic value method to account for
compensation expense which is related to the award of stock options and to
furnish the pro forma disclosures required under Statement of Financial
Accounting Standards No. 123 (FAS 123), "Accounting for Stock-based
Compensation." Since stock option awards are granted at prices no less than the
fair-market value of the shares at the date of grant, no compensation expense is
recognized.
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." 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 Com pany's earnings or financial position. The Company currently
expects to adopt FAS 133 on January 1, 2001.
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122
NOTE B: EARNINGS PER SHARE RECONCILIATION
The following table sets forth the computation of basic and diluted earnings per
share before extraordinary item:
1999 1998 1997
------------------------------------------------------------------------------------------------------------------------------------
Numerator:
Net earnings before extraordinary item $ 66,695 $ 43,592 $ 21,882
Preferred stock dividends (831) (1,000) (1,630)
------------ ------------ ------------
Numerator for basic earnings per share-- earnings
before extraordinary item available to
common stockholders 65,864 42,592 20,252
Effect of dilutive securities-- preferred stock dividends 831 1,000 0
------------ ------------ ------------
Numerator for diluted earnings per share-- earnings
before extraordinary item available to
common stockholders $ 66,695 $ 43,592 $ 20,252
Denominator:
Denominator for basic earnings per share--
weighted-average shares 14,678,925 14,709,404 15,227,829
Effect of dilutive securities:
Stock options 292,580 316,640 69,577
Conversion of preferred shares 384,255 463,374 0
Equity incentive plan 149,622 113,894 107,661
------------ ------------ ------------
Dilutive potential common shares 826,457 893,908 177,238
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 15,505,382 15,603,312 15,405,067
BASIC EARNINGS PER COMMON SHARE
Net earnings per share before extraordinary item $ 4.49 $ 2.90 $ 1.33
DILUTED EARNINGS PER COMMON SHARE
Net earnings per share before extraordinary item $ 4.30 $ 2.79 $ 1.32
-----------------------------------------------------------------------------------------------------------
The assumed conversion of preferred shares was dilutive for the years ended
December 31, 1999 and 1998. For the year ended December 31, 1997, the conversion
of preferred shares was not assumed due to an anti-dilutive effect.
NOTE C: SEGMENT INFORMATION
The Company is a leading national homebuilder and
mortgage-relatedfinancial servicesfirm. As one of the
largest single-family on-site homebuilders in the United States, the Company
builds homes in 21 markets. The Company's homebuilding segment specializes in
the sale and construction of single-family attached and detached housing. The
financial services segment provides mortgage-related products and services for
retail customers, including loan origination, title, escrow and homeowners
insurance services, and also conducts investment activities.
The Company evaluates performance and allocates resources based on a number of
factors, including segment pretax earnings. The accounting policies of the
segments are the same as those described in the Summary of Significant
Accounting Policies (see Note A). Certain corporate expenses are allocated to
the homebuilding and financial services segments. In addition, amounts related
to the limited-purpose subsidiaries are combined with corporate expenses and
corporate assets in the following table as "Other."
1999 1998 1997
-----------------------------------------------------------------
Revenues
Homebuilding $ 1,958,832 $ 1,694,505 $ 1,557,326
Financial services 43,586 60,385 76,929
Other 6,848 10,598 15,551
----------- ----------- -----------
Total $ 2,009,266 $ 1,765,488 $ 1,649,806
-----------------------------------------------------------------
Pretax Earnings
Homebuilding $ 120,830 $ 80,057 $ 35,150
Financial services 11,838 11,788 15,585
Corporate and other (23,332) (16,687) (14,265)
----------- ----------- -----------
Total $ 109,336 $ 75,158 $ 36,470
-----------------------------------------------------------------
Depreciation and
Amortization
Homebuilding $ 23,398 $ 23,166 $ 23,479
Financial services 810 895 5,901
Corporate and other 3,802 1,525 2,016
----------- ----------- -----------
Total $ 28,010 $ 25,586 $ 31,396
-----------------------------------------------------------------
Identifiable Assets
Homebuilding $ 955,371 $ 778,668 $ 671,229
Financial services 189,724 286,683 410,902
Corporate and other 103,228 150,047 201,278
----------- ----------- -----------
Total $ 1,248,323 $ 1,215,398 $ 1,283,409
-----------------------------------------------------------------
33
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NOTE D: ASSETS OF FINANCIAL SERVICES AND
LIMITED-PURPOSE SUBSIDIARIES
Financial Services
Mortgage loans held-for-sale consist of loans collateralized by first mortgages
or first deeds of trust on single-family attached or detached homes.
Mortgage-backed securities and notes receivable consist of GNMA certificates,
FNMA mortgage pass-through certificates, FHLMC participation certificates,
notes receivable secured by mortgage-backed securities, whole loans and funds
held by trustee.
During the first quarter of 1998, the Company sold the majority of its loan
servicing portfolio. The Company realized a $6.1 million pre-tax gain, net of
expenses and liabilities, related to the sale of servicing. During 1999, the
Company sold the remaining portion of its loan servicing portfolio. At December
31, 1998, the loan servicing portfolio consisted of approximately 2,500 loans,
with a principal balance of $301 million.
Limited-Purpose Subsidiaries
Collateral for bonds payable consists of mortgage-backed
securities, notes receivable secured by mortgage-backed securities and mortgage
loans, fixed-rate mortgage loans, and funds held by trustee. Mortgage-backed
securities consist of GNMA certificates, FNMA mortgage pass-through
certificates and FHLMC participation certificates. All principal and interest
on collateral is remitted directly to a trustee and is available for payment on
the bonds.
The components of collateral for bonds payable at December 31 are summarized
as follows:
1999 1998
-------------------------------------------------------------
Mortgage-backed securities $27,092 $59,915
Notes receivable 4,019 15,423
Mortgage loans 2,893 4,699
Funds held by trustee 5,838 13,681
Mortgage discounts (209) (1,315)
------- -------
Total $39,633 $92,403
-------------------------------------------------------------
Neither the Company nor its homebuilding and financial services subsidiaries
have guaranteed or are otherwise obligated with respect to these bond issues.
Mortgage-Backed Securities: Unrealized Gains and Losses
Mortgage-backed securities are held by the financial services segment and
reported in the balance sheet caption, "Mortgage-backed securities and notes
receivable." They are also held by the limited-purpose subsidiaries and reported
in the balance sheet caption, "Collateral for bonds payable."
The following is a consolidated summary of mortgage-backed securities
classified as available-for-sale and held-to-maturity as of:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------------------------------------------------------------------
December 31, 1999
Available-for-sale $ 28,962 $ 1,953 $ 215 $ 30,700
Held-to-maturity 41,331 2,352 0 43,683
-------- -------- -------- --------
Total $ 70,293 $ 4,305 $ 215 $ 74,383
December 31, 1998
Available-for-sale $ 40,802 $ 3,299 $ 116 $ 43,985
Held-to-maturity 56,463 4,642 0 61,105
-------- -------- -------- --------
Total $ 97,265 $ 7,941 $ 116 $105,090
----------------------------------------------------------------------
NOTE E: FINANCIAL SERVICES SHORT-TERM NOTES PAYABLE
Financial services had outstanding borrowings at December 31 as follows:
1999 1998
-------------------------------------------------------------
Mortgage warehouse facility $ 60,224 $106,699
Repurchase agreements 77,619 64,320
Revolving credit agreement 19,615 52,039
-------- --------
Total outstanding borrowings $157,458 $223,058
-------------------------------------------------------------
The financial services segment renewed its three-year bank credit facility,
which provides up to $200 million for mortgage warehouse funding and matures in
May 2002. Borrowings outstanding under this bank facility totaling $60,224 at
December 31, 1999, were collateralized by mortgage loans held-for-sale and cash
proceeds from loan sales totaling $72,876. Borrowings outstanding under this
bank facility totaling $106,699 at December 31, 1998, were collateralized by
mortgage loans held-for-sale with outstanding principal balances of $121,079.
The effective interest rates on these borrowings were 3.4 percent, 4.1 percent
and 3.0 percent for 1999, 1998 and 1997, respectively. The agreement contains
certain financial covenants, which the Company met at December 31, 1999.
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The repurchase agreements represent short-term borrowings of $77,619 and $64,320
in 1999 and 1998, respectively, that are collateralized by mortgage loans,
mortgage-backed securities and investments in securities issued by one of the
Company's limited-purpose subsidiaries. The outstanding collateral balances at
December 31, 1999 and 1998 were $78,554 and $64,129, respectively. As of
December 31, 1999, $30 million of the Company's variable-rate short-term
borrowings had been effectively converted by interest rate swap-and-collar
agreements to fixed-rate borrowings. The notional amount of the swap-and-collar
agreements declined to $30 million in 1999 and will expire in October 2000.
Effective interest rates on the repurchase agreements, including the effect of
the interest rate swap-and-collar agreements, were 3.7 percent, 5.9 percent and
6.0 percent for 1999, 1998 and 1997, respectively.
In March 1999, the Company renewed and extended a revolving credit facility used
to finance investment securities in the financial services segment. The
facility, previously $100 million, was renewed at $50 million and was reduced by
$5 million quarterly to a base of $35 million at December 31, 1999. The
agreement extends through March 2000, bears interest at market rates and is
collateralized by investment portfolio securities. Borrowings outstanding under
this facility, totaling $19,615 and $52,039, were collateralized by investment
portfolio securities with principal balances of $20,025 and $52,700 at December
31, 1999 and 1998, respectively.
The weighted-average interest rates at the end of the period on all short-term
borrowings were 5.6 percent and 5.3 percent for 1999 and 1998, respectively. The
weighted-average interest rates during the period on all short-term borrowings
were 3.6 percent, 5.2 percent and 4.6 percent for 1999, 1998 and 1997,
respectively.
NOTE F: OFF-BALANCE SHEET FINANCIAL INSTRUMENTS RELATED TO MORTGAGE LOAN
ORIGINATIONS
The Company is a party to financial instruments in the normal course of
business. The financial services segment uses financial instruments to meet the
financing needs of its customers and reduce its exposure to fluctuations in
interest rates. These instruments involve, to varying degrees, elements of
credit and market risk not recognized in the consolidated balance sheets. The
Company has no derivative financial instruments that are held for trading
purposes.
The contract or notional amounts of these financial instruments as of December
31 were as follows:
1999 1998
-------------------------------------------------------------
Commitments to originate
mortgage loans $18,880 $ 33,859
Hedging contracts:
Forward-delivery contracts $30,000 $163,000
Others 5,000 4,000
-------------------------------------------------------------
In addition, to protect against exposure to interest rate fluctuations on
mortgage loan commitments, the Company contracted with various parties to
deliver $69,286 and $12,308 in adjustable and fixed-rate mortgage loans at
December 31, 1999 and 1998, respectively, for a specified price on a
best-efforts basis.
Commitments to originate mortgage loans represent loan commitments with
customers at market rates up to 120 days before settlement. Loan commitments
have no carrying value on the balance sheet. These commitments expose the
Company to market risk as a result of increases in mortgage interest rates. The
amount of risk is limited to the difference between the contract price and
current market value, and it is mitigated by fees collected from the customer
and by the Company's hedging activities. Loan commitments had interest rates
ranging from 6.5 percent to 12.1 percent as of December 31, 1999, and 6.0
percent to 10.3 percent as of December 31, 1998.
Hedging contracts are regularly entered into by the Company for the purpose of
mitigating its exposure to movements in interest rates on mortgage loan
commitments and mortgage loans held-for-sale. The selection of these hedging
contracts is based upon the Company's secondary marketing strategy, which
establishes a risk tolerance level. The major factors influencing the use of the
various hedging contracts include general market conditions, interest rate,
types of mortgages originated and the percentage of mortgage loan commitments
expected to be funded. The market risk assumed while holding the hedging
contracts generally mitigates the market risk associated with the mortgage loan
commitments and mortgage loans held-for-sale.
The Company is exposed to credit related losses in the event of nonperformance
by counterparties to certain hedging contracts. Credit risk is limited to those
instances where the Company is in a net unrealized gain position. The Company
manages this credit risk by entering into agreements with counterparties meeting
its credit standards and by monitoring position limits.
35
125
NOTE G: FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments, both on and off the balance sheet, are held
for purposes other than trading. The fair values of these financial instruments
are based on quoted market prices, where available, or are estimated using
present value or other valuation techniques. Estimated fair values are
significantly affected by the assumptions used, including the discount rate and
estimates of cash flows. In that regard, derived fair-value estimates cannot be
substantiated by comparison to independent markets and, in many cases, cannot be
realized in immediate settlement of the instruments.
The table below sets forth the carrying values and fair values of the Company's
financial instruments, except for those financial instruments noted below for
which the carrying values approximate fair values at the end of the year. It
excludes non-financial instruments and, accordingly, the aggregate fair-value
amounts presented do not represent the underlying value of the Company.
1999 1998
-----------------------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-----------------------------------------------------------------------------------------------------------
HOMEBUILDING
Liabilities
Senior notes $ 108,000 $ 111,080 $ 108,000 $ 116,140
Senior subordinated notes 200,000 184,000 200,000 197,000
FINANCIAL SERVICES
Assets
Mortgage loans, held-for-sale $ 40,520 $ 41,156 $ 158,611 $ 161,030
Mortgage-backed securities, available-for-sale 29,823 29,823 36,414 36,414
Mortgage-backed securities, held-to-maturity 15,134 15,911 4,826 5,147
Notes receivable, whole loans and funds held by trustee 54,292 57,433 70,414 76,224
Off-balance sheet financial instruments
Commitments to originate mortgage loans -- 3,292 -- 155
Forward-delivery contracts -- 298 -- (441)
Other hedging contracts -- (45) -- (404)
OTHER ASSETS
Collateral for bonds payable of the
limited-purpose subsidiaries $ 39,633 $ 41,605 $ 92,403 $ 98,341
OTHER LIABILITIES
Bonds payable of the limited-purpose subsidiaries $ 37,339 $ 41,045 $ 87,980 $ 97,344
-----------------------------------------------------------------------------------------------------------
The Company used the following methods and assumptions in estimating fair
values:
o Cash and cash equivalents, secured notes payable, loan
servicing receivables, funds held by trustee, revolving credit agreements and
short-term notes payable: The carrying amounts reported in the balance sheet
approximate fair values.
o Senior notes, senior subordinated notes, mortgage loans held-for-sale,
mortgage-backed securities, notes receivable and whole loans, various hedging
contracts if settled on December 31, 1999 and 1998, and mortgage loan com
mitments: The fair values of these financial instruments are based on quoted
market prices for similar financial instruments.
36
126
NOTE H: LIMITED-PURPOSE SUBSIDIARIES'
BONDS PAYABLE
The Company's limited-purpose subsidiaries no longer issue mortgage-backed bonds
and mortgage-participation securities. Previously, they issued mortgage-backed
bonds, and the Com pany retained residual interests in some of these bonds.
Payments are made on the bonds on a scheduled basis in amounts relating to
corresponding payments received on the underlying mortgage collateral.
The following table sets forth information with respect to the limited-purpose
subsidiaries' bonds payable outstanding at December 31:
1999 1998
---------------------------------------------------------------
Bonds payable, net of discounts:
1999--$1,276; 1998--$2,517 $37,339 $87,980
Range of interest rates 7.25%-12.625% 7.25%-12.625%
Stated maturities 2009-2019 2006-2019
---------------------------------------------------------------
NOTE I: LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
1999 1998
-------------------------------------------------------------
Senior subordinated notes $200,000 $200,000
Senior notes 108,000 108,000
Revolving credit facility and other 70,000 152
-------- --------
$378,000 $308,152
-------------------------------------------------------------
During October 1999, the Company increased its unsecured revolving credit
facility from $300 million to $375 million. This new facility will mature in
October 2003. Borrowings under this agreement bear interest at variable
short-term rates. The effective interest rate was 6.8 percent for 1999 and 1998
and 7.1 percent for 1997. At December 31, 1999, the Company had $70 million of
borrowings under the credit agreement at an average rate of 7.7 percent. There
were no amounts outstanding under this agreement at December 31, 1998.
The Company has $100 million of 9.625 percent senior subordi nated notes
outstanding, due June 2004, with interest payable semiannually, which may be
redeemed at the option of the Company, in whole or in part, at any time on or
after December 1, 2000. The Company has $100 million of 8.25 percent senior
subordinated notes, due April 2008, with interest payable semiannually, which
may be redeemed at the option of the Company, in whole or in part, at any time
on or after April 1, 2003. In July 1998, the Company redeemed $100 million of
10.5 percent senior subordinated notes due 2002 at the stated call price of
103.94 percent of par. As a result, the Company recognized an extraordinary loss
on early extinguishment of debt in 1998 of $3.3 million (net of a $2.2 million
income tax benefit). Senior subordinated notes are subordinated to all existing
and future senior debt of the Company.
The Company has $100 million of 10.5 percent senior notes due July 2006, with
interest payable semiannually, which may be redeemed at the option of the
Company, in whole or in part, at any time on or after July 1, 2001. At December
31, 1999, the Company also had $8 million of senior notes bearing a fixed rate
of 10.5 percent which mature in August 2000.
Maturities of long-term debt for the nextfive years are as follows: 2000-$8,000;
2001 through 2002-$0; 2003-$70,000; 2004-$100,000.
The bank credit agreement, senior subordinated indenture agreements and senior
note agreements contain certain financial covenants. Under the loan covenants,
the Company had $93.0 million of retained earnings available for dividends at
December 31, 1999. At December 31, 1999, the Company was in compliance with its
covenants.
NOTE J: INCOME TAXES
The Company's expense for income taxes is summarized as follows:
Years Ended December 31,
1999 1998 1997
-------------------------------------------------------------
Current:
Federal $36,633 $22,453 $14,931
State 6,335 4,491 3,167
------- ------- -------
Total current 42,968 26,944 18,098
Deferred:
Federal (279) 3,852 (2,896)
State (48) 770 (614)
------- ------- -------
Total deferred (327) 4,622 (3,510)
------- ------- -------
Total expense $42,641 $31,566 $14,588
-------------------------------------------------------------
The following table reconciles the statutory federal income tax rate to the
Company's effective income tax rate:
Years Ended December 31,
1999 1998 1997
------------------------------------------------------------
Income taxes at federal
statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal tax 4.0 4.5 4.5
Other, net 0.0 2.5 0.5
---- ---- ----
Effective rate 39.0% 42.0% 40.0%
------------------------------------------------------------
37
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Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities as
of December 31 were as follows:
1999 1998
-------------------------------------------------------------
Deferred tax assets:
Inventory valuation differences,
operating reserves and accruals $34,297 $35,501
Other 1,693 1,863
------- -------
Total deferred tax assets 35,990 37,364
Deferred tax liabilities:
Gross profit from sales reported
on the installment method (1,581) (2,377)
Deferred gains (519) (1,830)
Other (1,756) (1,773)
------- -------
Total deferred tax liabilities (3,856) (5,980)
------- -------
Net deferred tax asset $32,134 $31,384
-------------------------------------------------------------
The Company has determined that no valuation allowance for the deferred tax
asset is required due to tax carrybacks currently available. The Company had a
current tax liability of $11,104 and $9,761 as of December 31, 1999 and 1998,
respectively.
NOTE K: STOCKHOLDERS' EQUITY
Preferred Stock
On August 31, 1989, the Company sold 1,267,327 shares of non-transferable
convertible preferred stock, par value $1.00, to the RSOP Trust for $31.5625 per
share, or an aggregate purchase price of approximately $40,000.
Each share of preferred stock pays an annual cumulative dividend of $2.21.
During 1999, 1998 and 1997, the Company paid $831, $1,000 and $1,630,
respectively, in dividends on the preferred stock. Each share of preferred stock
entitles the holder to a number of votes equal to the shares into which the
stock is convertible, and preferred stockholders generally vote together with
common stockholders on all matters.
Under the RSOP Trust, at the option of the trustee, the Com pany may be
obligated to redeem the preferred stock to satisfy distribution obligations to
or investment elections of its participants. For purposes of these redemptions,
the value of each share of preferred stock is determined monthly by an
independent appraiser, with a minimum guaranteed value of $25.25 per share. The
Company may issue common stock to satisfy this redemption obligation, with any
excess redemption price to be paid in cash. At December 31, 1999 and 1998, the
maximum cash obligation for such redemptions was shown outside of stockholders'
equity as part of other liabilities. This obligation was calculated assuming
that all preferred shares outstanding were submitted for redemption.
Based upon the appraised value of each share of preferred stock ($33.81 and
$39.37) and the market value of each share of common stock ($23.06 and $28.88)
at December 31, 1999 and 1998, respectively, the redemption obligation was
$3,764 and $4,376 at December 31, 1999 and 1998, respectively. During 1999 and
1998, 63,573 and 73,415 shares of preferred stock, respectively, were converted
into shares of common stock, and 3,034 and 12,674 shares of preferred stock,
respectively, were retired (see Note L).
Common Share Purchase Rights
In 1996, the Company adopted a revised shareholder rights
plan under which the Company distributed one common share purchase right for
each share of common stock outstanding on January 13, 1997. Each right entitles
the holder to purchase one share of common stock at an exercise price of $70.
The rights become exercisable 10 business days after any party acquires or
announces an offer to acquire 20 percent or more of the Company's common stock.
The rights expire January 13, 2007, and are redeemable at $0.01 per right at any
time before 10 business days following the time that any party acquires 20
percent or more of the Company's common stock.
In the event that the Company enters into a merger or other business
combination, or if a substantial amount of its assets are sold after the time
that the rights become exercisable, the holder will receive, upon exercise,
shares of the common stock of the surviving or acquiring company having a market
value of twice the exercise price. Until the earlier of the time that the rights
become exercisable, are redeemed or expire, the Company will issue one right
with each new share of common stock issued.
NOTE L: EMPLOYEE INCENTIVE AND STOCK PLANS
Retirement Savings Opportunity Plan (RSOP)
In 1989, the Company established a retirement and employee stock ownership plan
that purchased shares of preferred stock from the Company. The purchase of
preferred stock by the plan was financed by a $40,000 loan from the Company.
The interest rate on the loan was 9.99 percent and through September, 1997, the
loan was being repaid by the plan through dividends received on preferred stock
and Company contributions. On October 1, 1997, the Company purchased 248,881
shares of preferred stock at fair market value from the plan, representing
preferred shares that secured the loan and had not been released for allocation
to participants' accounts. The plan used the proceeds to pay off the related
loan balance and the Company retired the preferred shares. The RSOP Trust
incurred interest on the loan in 1997 of $930. As of December 31, 1999, 350,137
shares of preferred stock were allocated to participants' accounts. As of
January 1, 1998, participants received cash and no longer received preferred
stock in connection with Company matching contributions to their accounts.
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All full-time employees are eligible to participate in the RSOP beginning the
first pay period of the quarter, following 30 days of employment. Pursuant to
Section 401(k) of the Internal Revenue Code, the plan permits deferral of a
portion of a participant's income into a variety of investment options.
Compensation expense reflects the Company's matching contributions to its
employees 401(k) contributions. Total compensation expense related to this plan
amounted to $5,068, $3,549 and $4,039 in 1999, 1998 and 1997, respectively.
Equity Incentive Plan and Other Related Plans
The Company's 1992 Equity Incentive Plan permits it to provide equity incentives
in the form of stock options, stock appreciation rights, performance shares,
restricted stock and other stock-based awards to employees. Under this plan,
options are granted to purchase shares at prices not less than the fair-market
value of the shares at the date of grant. The options are exercisable at various
dates over one- to 10-year periods. Stock options granted during 1999 generally
have a maximum term of 10 years and vest over three years. At the beginning of
each year, 2.5 percent of the number of common shares outstanding at the
beginning of the year are authorized for grants of options and other equity
instruments.
Under the Company's Non-Employee Director Equity Plan, stock options are granted
to directors to purchase shares at prices not less than the fair-market value of
the shares at the date of grant. A maximum of 100,000 shares of common stock has
been reserved for issuance under this plan.
The following is a summary of transactions relating to all stock option plans
for each year ended December 31:
1999 1998 1997
-----------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------------------------------------------------------------------------------------------------------------
Options outstanding at beginning of year 1,840,400 $18.17 1,932,560 $15.71 1,783,738 $16.70
Granted 690,250 24.51 637,000 23.88 619,500 13.49
Exercised (183,725) 17.08 (540,350) 16.13 (211,110) 16.33
Forfeited (108,295) 22.13 (188,810) 18.07 (252,068) 16.47
Expired 0 0 0 0 (7,500) 26.00
---------- ----- ---------- ----- ---------- -----
Options outstanding at end of year 2,238,630 20.02 1,840,400 18.02 1,932,560 15.71
Available for future grant 71,794 320,143 478,309
---------- ----- ---------- ----- ---------- -----
Total shares reserved 2,310,424 2,160,543 2,410,869
Options exercisable at December 31 1,130,805 17.18 864,795 16.61 966,065 17.39
Prices related to options exercised
during the year $11.50-$24.13 $12.88-$24.13 $13.50-$20.75
----------------------------------------------------------------------------------------------------------------------
A summary of stock options outstanding and exercisable as of December 31, 1999,
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------------------------------------------------------
Range of Weighted Weighted Weighted
Exercise Number Average Remaining Average Number Average
Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
----------------------------------------------------------------------------------------------------------------------
$12.75 to $15.00 770,775 6.40 $13.98 633,565 $14.14
$15.25 to $23.50 665,535 6.32 $21.30 422,575 $20.25
$23.88 to $29.94 802,320 9.01 $24.78 74,665 $25.60
----------------------------------------------------------------------------------------------------------------------
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The Company has adopted the disclosure-only provisions of FAS 123. Accordingly,
no compensation expense has been recognized for stock option plans. Had
compensation expense for these plans been determined based on fair value at the
grant date for awards, consistent with the provisions of FAS 123, in 1999, 1998
and 1997, the Company's net earnings and net earnings per share would have been
reduced to the pro-forma amounts indicated in the following table:
1999 1998 1997
-------------------------------------------------------------
Net earnings-- as reported $66,695 $40,266 $21,882
Net earnings-- pro forma $64,471 $38,761 $20,808
Basic net earnings per
share-- as reported $ 4.49 $ 2.67 $ 1.33
Basic net earnings per
share-- pro forma $ 4.34 $ 2.57 $ 1.26
Diluted net earnings per
share-- as reported $ 4.30 $ 2.58 $ 1.32
Diluted net earnings per
share-- pro forma $ 4.20 $ 2.48 $ 1.25
-------------------------------------------------------------
The fair value of each option grant is estimated on the grant dates, using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively: a risk-free
interest rate of 5.2 percent, 5.4 percent and 6.3 percent; an expected
volatility factor for the market price of the Company's common stock of 34
percent, 35 percent and 34 percent; a dividend yield of 0.7 percent, 0.7 percent
and 1.2 percent; and an expected life of 4 years, 5 years and 5 years. The
weighted-average fair value as of the grant date for options granted in 1999,
1998 and 1997 was $7.95, $9.11 and $4.90, respectively.
NOTE M: COMMITMENTS AND CONTINGENCIES
Commitments
In the normal course of business, the Company acquires rights under option
agreements to purchase land for use in future homebuilding operations. As of
December 31, 1999, the Com pany had deposits and letters of credit outstanding
of $43,178 for options and land purchase contracts having a total purchase price
of $624,481.
Rent expense primarily relates to office facilities, model home furniture and
equipment.
1999 1998 1997
---------------------------------------------------------------------
Total rent expense $ 13,581 $ 14,142 $10,634
Less income from subleases (2,149) (1,447) 0
-------- -------- -------
Net rental expense $ 11,432 $ 12,695 $10,634
---------------------------------------------------------------------
Future minimum rental commitments under non-cancelable leases with remaining
terms in excess of one year are as follows:
-------------------------------------------------------------
2000 $10,280
2001 9,982
2002 6,840
2003 3,478
2004 2,434
After 2004 2,044
-------
Subtotal $35,058
Less sublease income (3,385)
-------
Total lease commitments $31,673
-------------------------------------------------------------
Contingencies
Contingent liabilities may arise from obligations incurred in
the ordinary course of business or from the usual obligations of on-site housing
producers for the completion of contracts. Some municipalities require the
Company to issue development bonds or maintain letters of credit to assure
completion of public facilities within a project. Total development bonds at
December 31, 1999, were $209,635, and total deposits and letters of credit at
December 31, 1999, were $28,287.
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 financial condition of the
Company.
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130
THE RYLAND GROUP, INC. AND SUBSIDIARIES
Report of Independent Auditors
BOARD OF DIRECTORS AND STOCKHOLDERS
THE RYLAND GROUP, INC.
We have audited the accompanying consolidated balance sheets of The Ryland
Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. These standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Ryland Group,
Inc. and subsidiaries at December 31, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst and Young LLP
Baltimore, Maryland
January 26, 2000
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131
THE RYLAND GROUP, INC. AND SUBSIDIARIES
Report of Management
Management of the Company is responsible for the integrity and accuracy of the
financial statements and all other annual report information. The financial
statements are prepared in conformity with generally accepted accounting
principles and include amounts based on management's judgments and estimates.
The accounting systems, which record, summarize and report financial
information, are supported by internal control systems, which are designed to
provide reasonable assurance, at an appropriate cost, that the assets are
safeguarded and that transactions recorded in accordance with Company policies
and procedures. Proper selection, training and development of personnel also
contribute to the effectiveness of the internal control systems. These systems
are the responsibility of management and are regularly tested by the Company's
internal auditors. The external auditors also review and test the effectiveness
of these systems to the extent they deem necessary to express an opinion on the
consolidated financial statements.
The Audit Committee of the Board of Directors periodically meets with
management, the internal auditors and the external auditors to review
accounting, auditing and financial matters. Both the internal auditors and the
external auditors have unrestricted access to the Audit Committee.
/s/ David L. Fristoe
David L. Fristoe
Senior Vice President,
Controller and Chief Accounting Officer
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THE RYLAND GROUP, INC. AND SUBSIDIARIES
Quarterly Financial Data and Common Stock Prices and Dividends
(amounts in thousands, 1999 1998
except share data) unaudited Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
-------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED RESULTS
Revenue $595,647 $507,175 $502,405 $404,039 $541,086 $ 462,246 $425,851 $336,305
Earnings before taxes
and extraordinary item 34,153 29,736 28,578 16,869 30,335 22,295 14,711 7,817
Income tax expense 13,320 11,597 10,976 6,748 12,783 9,772 5,884 3,127
-------- -------- -------- -------- -------- --------- -------- --------
Net earnings before
extraordinary item 20,833 18,139 17,602 10,121 17,552 12,523 8,827 4,690
Extraordinary item-- loss on
early extinguishment of debt
(net of taxes of $2,217) 0 0 0 0 0 (3,326) 0 0
-------- -------- -------- -------- -------- --------- -------- --------
Net earnings $ 20,833 $ 18,139 $ 17,602 $ 10,121 $ 17,552 $ 9,197 $ 8,827 $ 4,690
Basic net earnings per
common share $ 1.45 $ 1.21 $ 1.17 $ 0.67 $ 1.18 $ 0.61 $ 0.58 $ 0.30
Diluted net earnings per
common share $ 1.40 $ 1.15 $ 1.12 $ 0.65 $ 1.12 $ 0.59 $ 0.57 $ 0.29
Weighted average common
shares outstanding
Basic 14,198 14,856 14,851 14,810 14,691 14,667 14,758 14,713
Diluted 14,901 15,741 15,762 15,669 15,611 15,521 15,599 15,245
-------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK PRICES AND DIVIDENDS
The Ryland Group lists its common shares on the New York Stock Exchange, trading
under the symbol RYL. The table below presents high and low market prices and
dividend information for the Company. The number of common stockholders of
record as of February 17, 2000, was 13,555,560. (See Note I for dividend restrictions.)
Dividends Dividends
Declared Declared
1999 High Low Per Share 1998 High Low Per Share
----------------------------------------------------------------------------------------------------------------------------
First quarter $28 5/16 $22 5/8 $0.04 First quarter $29 13/16 $21 1/2 $0.04
Second quarter 30 22 7/8 0.04 Second quarter 27 11/16 19 1/2 0.04
Third quarter 30 7/16 22 1/4 0.04 Third quarter 27 5/16 19 3/4 0.04
Fourth quarter 24 1/16 19 15/16 0.04 Fourth quarter 29 1/8 20 7/8 0.04
----------------------------------------------------------------------------------------------------------------------------
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