<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1997
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or
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission File Number: 1-8029
THE RYLAND GROUP, INC.
----------------------
(Exact name of registrant as specified in its charter)
Maryland 52-0849948
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11000 Broken Land Parkway, Columbia, Maryland 21044
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(Address of principal executive offices) (Zip Code)
(410) 715-7000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
-
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of common stock of The Ryland Group, Inc., outstanding on
August 6, 1997 was 15,028,512.
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THE RYLAND GROUP, INC.
FORM 10-Q
INDEX
Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
June 30, 1997 (unaudited) and
December 31, 1996 1-2
Consolidated Statements of Earnings
for the three and six months ended
June 30, 1997 and 1996 (unaudited) 3
Consolidated Statements of Cash Flows
for the six months ended June 30,
1997 and 1996 (unaudited) 4
Notes to Consolidated Financial
Statements (unaudited) 5-7
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 8-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
INDEX OF EXHIBITS 18
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The Ryland Group, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
June 30, December 31,
1997 1996
---------- ------------
(unaudited)
ASSETS
HOMEBUILDING:
Cash and cash equivalents $ 32,548 $ 27,852
Housing inventories:
Homes under construction 367,648 336,782
Land under development and improved lots 210,287 237,808
--------- ---------
Total inventories 577,935 574,590
Property, plant and equipment 29,782 31,560
Purchase price in excess of net assets acquired 20,027 20,543
Other assets 44,871 40,739
---------- ---------
705,163 695,284
---------- ---------
FINANCIAL SERVICES:
Cash and cash equivalents 3,619 856
Mortgage loans held for sale, net 141,204 180,149
Mortgage-backed securities and
notes receivable, net 165,351 143,508
Mortgage servicing rights, net 10,511 9,903
Other assets 41,333 48,015
---------- ---------
362,018 382,431
---------- ---------
OTHER ASSETS:
Collateral for bonds payable of
limited-purpose subsidiaries 169,391 214,443
Net deferred taxes 30,461 31,806
Other 19,458 14,560
---------- ---------
TOTAL ASSETS $ 1,286,491 $ 1,338,524
============ ===========
See notes to consolidated financial statements.
1
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The Ryland Group, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
June 30, December 31,
1997 1996
------------ ------------
(unaudited)
LIABILITIES
HOMEBUILDING:
Accounts payable and other liabilities $ 87,870 $ 84,651
Long-term debt 375,715 354,267
------------ -----------
463,585 438,918
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FINANCIAL SERVICES:
Accounts payable and other liabilities 16,358 18,754
Short-term notes payable 305,747 325,650
------------ -----------
322,105 344,404
------------ -----------
OTHER LIABILITIES:
Bonds payable of limited-purpose subsidiaries 162,925 206,891
Other 35,093 37,862
------------ -----------
TOTAL LIABILITIES 983,708 1,028,075
STOCKHOLDERS' EQUITY
Convertible preferred stock, $1 par value
Authorized - 1,400,000 shares
Issued - 818,227 shares
(861,741 for 1996) 818 862
Common stock, $1 par value
Authorized - 78,600,000 shares
Issued - 15,070,555 shares
(15,852,729 for 1996) 15,071 15,853
Paid-in capital 103,837 116,652
Retained earnings 186,473 184,678
Net unrealized gain on
mortgage-backed securities 2,521 2,758
Due from RSOP Trust (5,937) (10,354)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 302,783 310,449
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,286,491 $ 1,338,524
=========== ===========
STOCKHOLDERS' EQUITY PER COMMON SHARE $ 19.36 $ 19.00
See notes to consolidated financial statements.
2
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The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(amounts in thousands, except share data)
Three months Six months
ended June 30, ended June 30,
1997 1996 1997 1996
-------- -------- -------- -------
REVENUES:
Homebuilding:
Residential revenues $ 376,615 $ 380,832 $ 658,393 $ 675,640
Other revenues 1,397 7,550 25,288 10,417
-------- ----------- ---------- -------
Total homebuilding revenues 378,012 388,382 683,681 686,057
Financial services 17,548 18,335 36,861 40,104
Limited-purpose subsidiaries 4,060 7,537 8,598 15,526
-------- ----------- ---------- - -----
Total revenues 399,620 414,254 729,140 741,687
EXPENSES:
Homebuilding:
Cost of sales 328,261 335,117 591,327 592,160
Selling, general and
administrative 37,162 37,377 71,430 70,874
Interest expense 6,463 6,261 12,399 12,055
-------- ----------- ---------- - -----
Total homebuilding
expenses 371,886 378,755 675,156 675,089
Financial services:
General and administrative 9,780 11,021 21,626 23,763
Interest expense 4,248 4,834 8,145 10,633
-------- ----------- ---------- - -----
Total financial
services expenses 14,028 15,855 29,771 34,396
Limited-purpose subsidiaries
expense 4,060 7,537 8,598 15,526
Corporate expenses 3,195 3,062 6,271 6,066
-------- ----------- ---------- - -----
Total expenses 393,169 405,209 719,796 731,077
Earnings before taxes 6,451 9,045 9,344 10,610
Tax expense 2,581 3,618 3,738 4,244
-------- ----------- ---------- - -----
Net earnings $ 3,870 $ 5,427 $ 5,606 $ 6,366
=========== =========== ======== =========
Preferred dividends $ 452 $ 499 $ 915 $ 1,009
Net earnings available for
common shareholders $ 3,418 $ 4,928 $ 4,691 $ 5,357
NET EARNINGS PER COMMON SHARE:
Primary: $ 0.22 $ 0.31 $ 0.30 $ 0.34
Fully diluted: (1) $ 0.22 $ 0.31 $ 0.30 $ 0.34
AVERAGE COMMON SHARES OUTSTANDING:
PRIMARY 15,772,000 15,955,000 15,886,000 15,949,000
FULLY DILUTED (1) 15,772,000 16,868,000 15,886,000 15,949,000
========== =========== ========== ==========
(1) For the three months ended June 30, 1997 and the six months ended June 30,
1997 and 1996, conversion of preferred shares is not assumed due to an
antidilutive effect.
See notes to consolidated financial statements.
3
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The Ryland Group, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, amounts in thousands)
Six months ended June 30,
1997 1996
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 5,606 $ 6,366
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 12,754 15,882
Gain on sale of mortgage-backed
securities - available-for-sale (75) 0
Increase in inventories (3,345) (55,529)
Net change in other assets, payables
and other liabilities (7,769) (9,864)
Equity in earnings of/distributions
from unconsolidated joint ventures 7 1,746
Decrease in mortgage
loans held for sale 38,945 88,184
---------- ---------
Net cash provided by operating activities 46,123 46,785
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property, plant and equipment (8,282) (10,659)
Principal reduction of mortgage collateral 22,257 41,376
Principal reduction of mortgage-backed
securities - available-for-sale 4,938 15,134
Purchases of mortgage-backed securities
- available-for-sale 0 (8,572)
Sales of mortgage-backed securities-
available-for-sale 2,222 0
Principle reduction of mortgage-backed
securities-held-to-maturity 6,840 11,083
Increase in funds held by trustee (12,494) (9,930)
Other investing activities, net (1,194) (2,963)
---------- ---------
Net cash provided by investing activities 14,287 35,469
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CASH FLOWS FROM FINANCING ACTIVITIES:
Cash proceeds of long-term debt 32,647 58,062
Reduction of long-term debt (11,200) (19,508)
Decrease in short-term notes payable (19,903) (70,896)
Bond principal payments (44,358) (68,155)
Common and preferred stock dividends (3,942) (5,734)
Common stock repurchases (11,331) 0
Other financing activities, net 5,136 3,775
---------- ---------
Net cash used for financing activities (52,951) (102,456)
---------- ---------
Net increase (decrease) in cash
and cash equivalents 7,459 (20,202)
Cash and cash equivalents at beginning of year 28,708 55,992
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 36,167 $ 35,790
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest (net of
capitalized interest) $ 32,598 $ 41,845
Cash paid for income taxes (net of
refunds received) $ 940 $ (2,999)
========== =========
See notes to consolidated financial statements.
4
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The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(amounts in thousands, except for share data, in all notes)
Note 1. Segment Information
Three months ended June 30,
1997 1996
---- ----
Pretax earnings:
Homebuilding $ 6,126 $ 9,627
Financial services 3,520 2,480
Corporate and other (3,195) (3,062)
------ -------
Total $ 6,451 $ 9,045
========= ========
Six months ended June 30,
1997 1996
---- ----
Pretax earnings:
Homebuilding $ 8,525 $ 10,968
Financial services 7,090 5,708
Corporate and other (6,271) (6,066)
-------- --------
Total $ 9,344 $ 10,610
========= ========
5
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The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 2. Consolidated Financial Statements
The consolidated financial statements include the accounts of The Ryland
Group, Inc. and its wholly owned subsidiaries (the "Company"). Intercompany
transactions have been eliminated in consolidation.
The consolidated balance sheet as of June 30, 1997, the consolidated
statements of earnings for the three and six months ended June 30, 1997 and
1996, and the consolidated statements of cash flows for the six months ended
June 30, 1997 and 1996 have been prepared by the Company, without audit. In
the opinion of management, all adjustments, which include normal recurring
adjustments necessary to present fairly the financial position, results of
operations and cash flows at June 30, 1997, and for all periods presented,
have been made. The consolidated balance sheet at December 31, 1996 is taken
from the audited financial statements as of that date. Certain amounts in the
consolidated statements have been reclassified to conform to the 1997
presentation.
Certain information and footnote disclosures normally included in the
financial statements have been condensed or omitted. These financial
statements should be read in conjunction with the financial statements and
related notes included in the Company's 1996 annual report to shareholders.
The results of operations for the three and six months ended June 30, 1997 are
not necessarily indicative of the operating results for the full year.
Assets presented in the financial statements are net of any valuation
allowances.
Primary 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 considering dilutive common
equivalent shares. Common equivalent shares relating to stock options are
computed using the treasury stock method.
Fully diluted net earnings per common share additionally gives effect to the
assumed conversion of the preferred shares held by The Ryland Group, Inc.
Retirement and Stock Ownership Plan Trust (the "RSOP Trust") into common
stock, as well as the amount of the additional RSOP Trust contribution
required to fund the difference between the RSOP Trust's earnings from
preferred share dividends and the RSOP Trust's potential earnings from common
share dividends after an assumed conversion. However, the effect of the RSOP
Trust was not dilutive for the three months ended June 30, 1997 and the six
months ended June 30, 1997 and 1996.
6
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The Ryland Group, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Note 3. New Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 (FASB 125), "Accounting for Transfers
and Servicing of Financial Assets and Extinquishments of Liabilities." The
Company adopted FASB 125 on January 1, 1997. The adoption did not have a
significant impact on the Company's financial statements for the first six
months of 1997.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (FASB 128), "Earnings Per Share," which
is required to be adopted for annual financial statement periods ending after
December 15, 1997. Earlier application is not permitted. FASB 128 requires
companies to change the method currently used to compute earnings per share
and to restate all prior periods. Primary earnings per share will be replaced
with a new calculation called basic EPS. Basic EPS will be calculated by
dividing net income less preferred stock dividends by the weighted average
common shares outstanding, thereby excluding the dilutive effect of common
stock equivalents.
In addition, fully diluted earnings per share will be renamed diluted EPS.
Under diluted EPS, the dilutive effect of options will continue to be
calculated using the treasury stock method. However, the treasury stock
method will be applied using the average market price for the period rather
than the higher of the average market price or the ending market price.
If the provisions of FASB 128 had been applied to the calculation of primary
and fully diluted earnings per share for the quarters and six months ended
June 30, 1997 and June 30, 1996, there would have been no impact on the
reported EPS amounts for those periods. FASB 128 is also not expected to have
a significant impact on earnings per share for the 1997 year.
7
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
CONSOLIDATED
For the second quarter of 1997, the Company reported consolidated net earnings
of $3.9 million, or $.22 per share. This compares with 1996 second quarter
net earnings of $5.4 million, or $.31 per share, which included net gains from
land sales of $2.2 million, or $.14 per share.
The Company's homebuilding segment recorded pretax earnings of $6.1 million
for the second quarter of 1997, compared with pretax earnings of $9.6 million,
including pretax gains of $3.7 million from land sales, for the same period
last year. Excluding land sale gains, pretax earnings increased by $.2
million for the second quarter of 1997 as improved gross profit margins more
than offset the impact of fewer closings.
The Company's financial services segment reported pretax earnings of $3.5
million for the second quarter of 1997, compared with $2.5 million for the
same period in 1996. The improvement over last year's results was
attributable to higher gains from the sale of mortgages and mortgage servicing
rights as well as cost reductions in general and administrative expenses.
For the first six months of 1997, the Company reported consolidated net
earnings of $5.6 million, or $.30 per share, compared with 1996 first half net
earnings of $6.4 million, or $.34 per share. The first half results included
land sale net gains of $2.9 million, or $.18 per share, in the first quarter
of 1997 and $2.2 million, or $.14 per share, in the second quarter of 1996.
The homebuilding segment reported pretax earnings of $8.5 million for the
first six months of 1997 compared with pretax earnings of $11.0 million for
the same period in 1996. The decline in first half results primarily reflects
lower homebuilding closings due to a reduction in new orders in the second
half of 1996. New order volume has improved in the first six months of 1997
resulting in a higher backlog and better prospects for improved homebuilding
earnings for the second half of the year. The financial services segment
reported pretax earnings of $7.1 million for the first six months of 1997,
compared with $5.7 million for the same period in 1996. This improvement is
primarily a result of higher gains from the sale of mortgages and mortgage
servicing rights and reductions in expenses, which more than offset the impact
of the decline in volume of loan originations.
Though the Company's limited-purpose subsidiaries no longer issue mortgage-
backed securities and mortgage-participation securities, they continue to hold
collateral for previously issued mortgage-backed bonds in which the Company
maintains a residual interest. Revenues, expenses, and portfolio balances
continue to decline as the mortgage collateral pledged to secure the bonds
decreases due to scheduled payments, prepayments and exercises of early
redemption provisions.
8
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HOMEBUILDING SEGMENT
The Company's homebuilding segment reported pretax earnings of $6.1 million
for the second quarter of 1997. This compares with pretax earnings of $9.6
million, including $3.7 million in land sale gains, for the same period last
year. For the six months ended June 30, 1997, homebuilding reported pretax
earnings of $8.5 million compared with pretax earnings of $11.0 million for
the first half of 1996. First half results included pretax land sale gains of
$4.8 million in 1997 and $3.7 million in 1996.
Results of operations of the Company's homebuilding segment are summarized as
follows ($ amounts in thousands, except average closing price):
Three months ended Six months ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
Revenues
Residential $376,615 $380,832 $658,393 $675,640
Other 1,397 7,550 25,288 10,417
-------- -------- -------- -------
Total $378,012 $388,382 $683,681 $686,057
Gross profit 49,751 53,265 92,354 93,897
Selling, general and
administrative expenses 37,162 37,377 71,430 70,874
Interest expense 6,463 6,261 12,399 12,055
-------- -------- -------- --------
Pretax earnings $ 6,126 $ 9,627 $ 8,525 $ 10,968
======== ======== ======== ========
Operational Unit Data:
New orders (units) 2,310 2,060 4,784 4,463
Closings (units) 2,072 2,195 3,647 3,928
Outstanding contracts at
June 30,
Units 3,332 3,279
Dollar Value $620,625 $580,753
Average Closing Price $182,000 $173,000 $181,000 $172,000
Homebuilding revenues amounted to $378 million for the second quarter of 1997,
and $684 million for the first half of 1997, down 2.7 percent and .3 percent,
respectively, from the same periods last year as a decrease in closings for
both periods was partially offset by an increase in average closing price.
The decline in closings for both periods reflects the lower backlog at the end
of 1996, caused by weak sales in the latter half of 1996.
The gross profit margin for the second quarter of 1997 was 13.2 percent,
compared with 13.0 percent, excluding land sales, for the second quarter of
1996. Increased closings from newer communities contributed to the 1997
margin improvement. Excluding land sales, the gross margin was 13.2 percent
for the first half of 1997, compared with 13.3 percent for the first half of
1996.
9
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Total homebuilding new orders for the second quarter increased to 2,310 homes,
up 12.1 percent over the second quarter last year, and increased 7.2 percent
for the first six months versus last year's first half. For the quarter, all
regions reported increased new orders, and for the year-to-date, all regions
reported higher new orders after adjusting the Midwest region to exclude 1996
new orders for operations in Columbus, Ohio which closed last year.
Outstanding contracts at June 30, 1997 were 3,332 compared with 3,279 at June
30, 1996 and 2,195 at December 31, 1996. Outstanding contracts represent the
Company's backlog of sold, but not closed homes, which generally are built and
closed, subject to cancellations, over the next two quarters. The value of
outstanding contracts at June 30, 1997 was $620.6 million, an increase of 6.9
percent from June 30, 1996 and an increase of 53.1 percent from December 31,
1996.
Selling, general and administrative expenses were $37.2 million for the second
quarter of 1997, down slightly from $37.4 million for the same period of 1996.
For the six months ended June 30, 1997, selling, general and administrative
expenses were $71.4 million compared with $70.9 million for the same period of
1996. The increase for the first half was primarily related to an increase in
sales and marketing costs.
Interest expense for the second quarter and first half of 1997 increased $.2
million and $.3 million, respectively, compared with the same periods of 1996,
due to a higher cost of funds. The increase in the cost of funds was
partially offset by a decline in average homebuilding borrowings compared with
the periods ending June 30, 1996. The decrease in borrowings was attributable
to a decline in average inventories, primarily due to a decrease in unsold
homes under construction.
FINANCIAL SERVICES
The financial services segment reported pretax earnings of $3.5 million for
the second quarter of 1997 compared with $2.5 million for the second quarter
of 1996, and $7.1 million for the first six months of 1997 compared with $5.7
million for the first half of 1996.
Pretax earnings by line of business were as follows (amounts in thousands):
Three months Six months
ended June 30, ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
Retail $ 2,265 $ 430 $ 3,731 $ 2,292
Investments 1,255 2,050 3,359 3,416
------- -------- -------- -------
Total $ 3,520 $ 2,480 $ 7,090 $ 5,708
======= ======== ======== =======
The increase in retail earnings for the second quarter and first six months of
1997 was primarily due to higher gains from the sale of mortgages and mortgage
servicing rights and a reduction in general and administrative expenses.
Investment earnings for the second quarter of 1997 decreased $.8 million
compared with the second quarter of 1996 which included $.7 million of income
related to the redemption of certain securities. For the six months ended
June 30, 1997, the slight decrease in investment earnings was due to lower
income from the redemption of certain securities offset by a higher net
interest spread on the portfolio.
10
<PAGE>
Revenues and expenses for the financial services segment were as follows:
Three months Six months
ended June 30, ended June 30,
1997 1996 1997 1996
------ ------ ------ -----
Revenues:
Interest and
net origination fees $ 1,628 $ 3,554 $ 3,263 $ 7,752
Net gains on sales of mortgages
and servicing rights 4,045 1,678 9,188 7,229
Loan servicing 6,323 7,461 12,991 14,891
Title/escrow 1,559 1,562 2,812 2,760
--------- --------- ------- --------
Total retail revenues 13,555 14,255 28,254 32,632
Revenues from investment
operations 3,993 4,080 8,607 7,472
--------- --------- --------- -------
Total revenues 17,548 18,335 36,861 40,104
Expenses:
General and administrative 9,780 11,021 21,626 23,763
Interest 4,248 4,834 8,145 10,633
--------- --------- --------- -------
Total expenses 14,028 15,855 29,771 34,396
--------- --------- -------- -------
Pretax earnings $ 3,520 $ 2,480 $ 7,090 $ 5,708
========= ========= ======== =======
Revenues for the financial services segment decreased 4 percent and 9 percent
for the three and six month periods ended June 30, 1997, respectively,
compared with the same periods of 1996. The decreases were primarily due to
decreased origination activity and a decline in servicing revenues, offset by
higher gains from the sale of mortgages and mortgage servicing rights. Loan
servicing revenues declined primarily as a result of a lower portfolio balance
and changes in the portfolio product mix. Investment revenues in the first
half of the year increased primarily due to a higher average portfolio
balance.
General and administrative expenses decreased 11 percent and 9 percent for the
three and six month periods ended June 30, 1997, respectively, compared with
the same periods of 1996. The decreases were due to improved efficiencies in
the mortgage origination process, cost savings related to the disposition of
the Company's wholesale mortgage origination business in 1996 and expense
reductions related to the decrease in origination activity and the decline in
the servicing portfolio.
Interest expense declined 12 percent and 23 percent for the three and six
month periods ended June 30, 1997, respectively, compared with the same
periods of 1996. The declines resulted from reduced warehouse borrowings
required to fund the lower origination volume, offset partially by an increase
in interest expense in the Company's investment operations due to higher
average portfolio balances.
11
<PAGE>
Retail Operations:
- ------------------
Retail operations include mortgage origination, loan servicing and
title/escrow services for retail customers.
A summary of origination activities is as follows:
Three months Six months
ended June 30, ended June 30,
1997 1996 1997 1996
------ ------ ------ ------
Dollar volume of mortgages
originated (in millions) $ 242 $ 393 $ 425 $ 877
Number of mortgages originated 1,741 2,933 3,084 6,717
Percentage of total closings:
Ryland Homes closings 64% 48% 63% 38%
Other closings 36% 52% 37% 62%
------- ------ ------ ------
100% 100% 100% 100%
Mortgage origination volume decreased by 41 percent and 54 percent for the
three and six month periods ended June 30, 1997, respectively, compared with
the same periods last year. These decreases are primarily attributable to the
sale of the wholesale mortgage operations which was completed in May 1996 and
a general decline in retail origination volume, including lower closing volume
from the homebuilding segment and lower refinancing activity.
The Company services loans that it originates as well as loans originated by
others. Loan servicing portfolio balances were as follows at June 30, (in
billions):
1997 1996
------ ------
Originated $1.7 $2.4
Acquired 2.5 3.2
Subserviced 1.2 .2
------ ------
Total portfolio $5.4 $5.8
====== ======
The decrease in the originated and acquired portfolio balances are mainly
attributable to normal mortgage prepayment activity, servicing sales from the
originated portfolio in excess of amounts originated, and the call of an RTC
security and related servicing transfer.
Investment Operations:
- ----------------------
The Company's investment operations hold certain assets, primarily mortgage-
backed securities which were obtained as a result of the exercise of
redemption rights on various mortgage-backed bonds previously owned by the
Company's limited-purpose subsidiaries. Pretax earnings for the three and six
month periods ended June 30, were as follows (in thousands):
12
<PAGE>
Three months Six months
ended June 30, ended June 30,
1997 1996 1997 1996
------ ------ ------ ------
Sale of mortgage-backed securities $ 75 $ 0 $ 75 $ 0
Interest and other income 3,918 4,080 8,532 7,472
-------- ------- -------- -------
Total revenues 3,993 4,080 8,607 7,472
Interest and other expenses 2,738 2,030 5,248 4,056
------- ------ ------- ------
Pretax earnings $ 1,255 $ 2,050 $ 3,359 $ 3,416
======== ======= ======== =======
Interest and other income for the three months ended June 30, 1996 included
$.7 million, and for the six months ended June 30, 1997 and 1996, included $.8
million and $1.3 million, respectively, in gains related to the redemption of
certain securities. Interest income for the three and six months ended June
30, 1997 as compared with the same periods of 1996 was higher due to a higher
average investment portfolio balance.
Significant data concerning the Company's investment operations are as
follows:
Three months Six months
ended June 30, ended June 30,
1997 1996 1997 1996
------- ------ ------ ------
Net interest earned
(in thousands) $ 1,460 $ 1,192 $ 2,968 $ 2,218
Average balance outstanding
(in millions) $ 154 $ 115 $ 149 $ 113
Net interest spread 3.8% 4.1% 4.0% 3.9%
The Company earns a net interest spread on the investment portfolio from the
difference between the interest rates on the mortgage-backed securities and
the related borrowing rates. The increases in net interest earned for the
three and six month periods ended June 30, 1997, were primarily due to
increases in the average investment portfolio balances.
FINANCIAL CONDITION AND LIQUIDITY
The Company generally provides for the cash requirements of the homebuilding
and financial services businesses from outside borrowings and internally
generated funds. The Company believes that its current sources of cash are
sufficient to finance its current requirements.
The homebuilding segment borrowings include senior notes, senior subordinated
notes, an unsecured revolving credit facility, and nonrecourse secured notes
payable. Senior and senior subordinated notes outstanding totaled $308
million as of June 30, 1997 and $318 million as of December 31, 1996. Senior
notes amounting to $10 million matured and were paid off in January 1997. The
Company uses its unsecured revolving credit facility to finance increases in
its homebuilding inventory and changes in working capital. This facility,
which was amended in June 1997 and extended to July 2000, provides for total
borrowings of up to $300 million. The outstanding borrowings as of June 30,
1997 were $65 million, compared with $34 million as of December 31, 1996. In
addition, the Company had letters of credit outstanding under this facility
totaling $17.6 million at June 30, 1997 and $18.3 million at December 31,
1996. To finance land purchases, the Company may also use seller-financed,
non-recourse secured notes payable. At June 30, 1997, such notes payable
outstanding amounted to $2.1 million, compared with $1.5 million at December
31, 1996.
13
<PAGE>
Housing inventories increased to $577.9 million as of June 30, 1997, from
$574.6 million as of the end of 1996. This represents the normal seasonal
increase in sold homes under construction partially offset by a decrease in
unsold homes under construction.
The financial services segment uses cash generated from operations and
borrowing arrangements to finance its operations. A bank credit facility,
which was amended in June 1997 and extended to June 1, 2000, provides up to
$260 million for mortgage warehouse funding and $40 million for working
capital advances. Other borrowing arrangements as of June 30, 1997 included
repurchase agreement facilities aggregating $625 million, a $100 million
revolving credit facility used to finance investment portfolio securities and
a $35 million credit facility used for the short-term financing of optional
bond redemptions. At June 30, 1997 and December 31, 1996, the combined
borrowings of the financial services segment outstanding under all agreements
were $305.7 million and $325.7 million, respectively.
Mortgage loans, notes receivable, and mortgage-backed securities held by the
limited-purpose subsidiaries are pledged as collateral for the issued bonds,
the terms of which provide for the retirement of all bonds from the proceeds
of the collateral. The source of cash for the bond payments is cash received
from the mortgage loans, notes receivable and mortgage-backed securities.
The Ryland Group, Inc. has not guaranteed the debt of the financial services
segment or limited-purpose subsidiaries.
On April 30, 1997, the Company's board of directors authorized the repurchase
of up to 10 percent, or 1.6 million of its outstanding common shares. The
Board also approved a reduction in the quarterly dividend from $.15 per share
to $.04 per share to more closely align the Company's dividend yield with that
of other public homebuilders. The share repurchase program, which is being
funded through a combination of the dividend reduction and internally
generated funds, was initiated to enhance shareholder value and is not
expected to have a material impact on the Company's leverage or balance sheet.
As of July 25, 1997, the Company had repurchased approximately 940,000 shares
of its outstanding common stock in accordance with this program at a cost of
approximately $12.5 million.
Note: Certain statements in Management's Discussion and Analysis of Results
of Operation and Financial Condition may be "forward-looking statements"
within the meaning of the Private Securities Litigation Act of 1995. Forward-
looking statements are based on various factors and assumptions that include
known and unknown risks and uncertainties, changes in economic conditions and
interest rates, increases in raw material and labor costs, and general
competitive factors, that may cause actual results to differ materially.
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company was advised in 1995 that one current and two former officers of a
subsidiary, Ryland Mortgage Company ("RMC") had been notified that they were
targets of a federal grand jury investigation concerning alleged
misappropriation of funds from the Resolution Trust Corporation ("RTC"). The
Company was advised that the investigation related to alleged overpayments to
RMC of approximately $3.5 million under three mortgage servicing contracts
with the RTC. In July 1996, the RTC (acting through its successor, the FDIC)
requested reimbursement from RMC of the alleged overpayments, interest thereon
and additional amounts relating to other mortgage servicing contracts. On May
7, 1997, a federal grand jury in Jacksonville, Florida returned an indictment
against RMC and the three targeted individuals. The indictment charges that
RMC, acting through the three individuals, conspired to defraud approximately
$3.5 million from the RTC in connection with the reconciliation of payments
and disbursements handled by RMC in its capacity as a servicer for certain
mortgage servicing contracts with the RTC. In a court appearance related to
the indictment, the prosecuting assistant United States attorney indicated
that the Company could be responsible for restitution of the amount allegedly
defrauded and, if convicted on all counts, RMC could receive fines of up to
$3.0 million. As a result of the indictment, RMC was notified by the U.S.
Department of Housing and Urban Development's (HUD's) Mortgage Review Board
that it is considering an administrative action and penalties against RMC.
The Board is scheduled to meet during the fall of 1997 to consider this
matter. RMC intends to vigorously defend the allegations contained in the
indictment and any adverse actions by the HUD Mortgage Review Board. No
prediction can be made at this time regarding the results of the indictment or
the HUD administrative proceeding or whether any civil action against the
Company may be initiated by the RTC or its successor.
The Company is party to various other legal proceedings generally incidental
to its businesses. Based on evaluation of these other matters and discussions
with counsel, management believes that liabilities to the Company arising from
these other matters will not have a material adverse effect on the financial
condition of the Company.
15
<PAGE>
PART II. OTHER INFORMATION (con't)
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on April 30, 1997.
Proxies were solicited by the Company pursuant to Regulation 14 under the
Securities Exchange Act of 1934 to elect directors of the Company for the
ensuing year and to approve the appointment of Ernst & Young LLP as
independent public accountants for the Company for 1997.
Proxies representing 14,257,315 shares of stock eligible to vote at the
meeting, or 85.3 percent of the outstanding shares, were voted in connection
with the election of directors. The ten incumbent directors nominated by the
Company were elected with a minimum of 13,652,793 votes. The following is a
separate tabulation with respect to the vote for each nominee:
Name Total Votes For Total Votes Withheld
- ----- --------------- --------------------
R. Chad Dreier 13,657,055 600,200
James A. Flick, Jr. 13,660,720 596,595
Robert J. Gaw 13,661,252 596,063
Leonard M. Harlan 13,658,656 598,659
L.C. Heist 13,661,650 595,665
William L. Jews 13,657,464 599,851
William G. Kagler 13,661,050 596,265
John H. Mullin, III 13,661,456 595,859
Charlotte St. Martin 13,652,793 604,552
John O. Wilson 13,661,080 596,235
Ernst & Young LLP was approved as the independent public accountants for the
Company for 1997 by 99.8 percent of the shares voting. The following is a
breakdown of the vote on such matter:
For Against Abstain
--- ------ -------
14,205,688 24,119 27,510
Page Number
-----------
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
11 Statement Re computation of earnings
per share (filed herewith) 19
27 Financial Data Schedule (filed herewith) 20
B. Reports on Form 8-K
Form 8-K was filed with the Securities and Exchange Commission on April 30,
1997 regarding the authorization of the repurchase of up to 10 percent of the
Company's common stock and the reduction of the common stock dividend from
$0.15 per share to $0.04 per share.
16
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE RYLAND GROUP, INC.
----------------------
Registrant
August 14, 1997 By: /s/ Michael D. Mangan
- -------------- ----------------------
Date Michael D. Mangan,
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
August 14, 1997 By: /s/ Stephen B. Cook
- -------------- --------------------
Date Stephen B. Cook, Vice President
and Corporate Controller
(Principal Accounting Officer)
17
<PAGE>
INDEX OF EXHIBITS
A. Exhibits Page of
Sequentially
Exhibit No. Numbered Pages
- ----------- --------------
11 Statement Re computation of earnings
per share (filed herewith) 19
27 Financial Data Schedule
(filed herewith) 20
18
18
1
<PAGE>
EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS:
(amounts in thousands, except share data)
Three months Six months
ended June 30, ended June 30,
1997 1996 1997 1996
------- -------- ------- -------
PRIMARY:
Net earnings $ 3,870 $ 5,427 $ 5,606 $ 6,366
Adjustment for dividends
on convertible
preferred shares (452) (499) (915) (1,009)
-------- --------- --------- --------
Adjusted net earnings $ 3,418 $ 4,928 $ 4,691 $ 5,357
======== ========= ========= ========
Weighted average common
shares outstanding 15,683,985 15,787,077 15,781,181 15,757,680
Common stock equivalents:
Stock options 274 42,288 768 43,178
Employee incentive plans 87,308 125,514 104,360 147,965
---------- ---------- ---------- ----------
Total 15,771,567 15,954,879 15,886,309 15,948,823
========== ========== ========== ==========
Primary earnings
per common share $ 0.22 $ 0.31 $ 0.30 $ 0.34
========= ======== ======= =======
FULLY-DILUTED:
Net earnings $ 3,870 $ 5,427 $ 5,606 $ 6,366
Adjustment for dividends
on convertible
preferred shares (452) 0 (915) (1,009)
Adjustment for incremental
expense from ocnversion of
convertible preferred stock (1) 0 (220) 0 0
-------- --------- --------- --------
Adjusted net earnings $ 3,418 $ 5,207 $ 4,691 $ 5,357
======== ========= ========= ========
Weighted average common
shares outstanding 15,683,985 15,787,077 15,781,181 15,757,680
Common stock equivalents:
Stock options 274 42,288 768 43,178
Employee incentive plans 87,308 125,514 104,360 147,965
Convertible Preferred Stock (1) 0 913,183 0 0
---------- ---------- ---------- ----------
Total 15,771,567 16,868,062 15,886,309 15,948,823
========== ========== ========== ==========
Primary earnings
per common share $ 0.22 $ 0.31 $ 0.30 $ 0.34
========= ======== ======= =======
(1) For the three months ended June 30, 1997 and the six months ended June
30, 1997 and 1996, no adjustments have been made for incremental dividends on
preferred stock or to common stock equivalents for convertible preferred stock
as these adjustments would be anti-dilutive.
19
1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE RYLAND GROUP INC. FORM 10-Q FOR THE PERIOD ENDED 6/30/97 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 36,167
<SECURITIES> 165,351
<RECEIVABLES> 141,204
<ALLOWANCES> 0
<INVENTORY> 577,935
<CURRENT-ASSETS> 0
<PP&E> 29,782
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,286,491
<CURRENT-LIABILITIES> 0
<BONDS> 468,672
0
818
<COMMON> 15,071
<OTHER-SE> 286,894
<TOTAL-LIABILITY-AND-EQUITY> 1,286,491
<SALES> 683,681
<TOTAL-REVENUES> 729,140
<CGS> 591,327
<TOTAL-COSTS> 684,454
<OTHER-EXPENSES> 6,271
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,071
<INCOME-PRETAX> 9,344
<INCOME-TAX> 3,738
<INCOME-CONTINUING> 5,606
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,606
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
